Accounting For Decision Making - Essay Example

? Accounting for decision making 0 Executive summary This is a financial report that focuses its analysis on two companies; Fantastic holdings limited and super retail group which previously was called Super cheap auto group limited. The report analyses the performance of the two companies over time and tries to evaluate which company between the two has good economic performance. To do this, we had to conduct research on the two companies’ performance over the years and analyzed the data using financial ratios and statistical graphs. From our findings we found out that fantastic holdings has good gross profit margins but has higher expenses rates which reduces the net profit margin (Whiteside 2007). It was also evident that fantastic holdings has good profits in comparison to the input as given by the investors and has also good use of its assets to make high sales. Fantastic holdings limited were also noted to have good debtors and creditors turnovers. This is a good indication that the company has good strategies of dealing with debtors and offsetting their debts to creditors. On the other hand, super retail group company shows high liquidity in terms of offsetting short term debts (Whiteside 2007). From the analysis, it is recommended to an investor to invest in fantastic holdings limited. Those in need of loans from the companies are advised to consult super retail group company. These findings are discussed in details in the sections below. Table of contents 1.0 Executive Summary ....................................................................................2 2.0 Introduction ................................................................................................. 4 3.0 Profitability ................................................................................................ ..4 4.0 Efficiency .................................................................................................... 5 5.0 Financial Stability ....................................................................................... .7 5.1 Short Term .......................................................................................... 7 5.2 Long Term ........................................................................................... 7 6.0 Limitations ....................................................................................................8 7.0 Recommendations .......................................................................................10 8.0 List of References .........................................................................................11 9.0 Appendices ...................................................................................................12 10.0 Assignment Planner ................................................................................ ..14 11.0 Mark Sheet ............................................................................ ...................16 2.0 Introduction This report analyzes two big companies; fantastic holdings limited and super retail group limited. Fantastic holdings limited is a big company dealing in manufacturing and sale of furniture. It manages over 125 retail stores running in five different chains of goods. The chains include; Le Cornu, original mattress factory, FHL, national retailers fantastic furniture and push and Dare gallery. It is also a major manufacturer of mattresses and sofas (Plunkett & Plunkett Research 2008). On the other hand, super retail group is a leading company having eight groups. This includes; super cheap auto and super retail commercial, rebel, ray’s outdoors, FCO fishing camping outdoors, gold cross cycles, BCF boating camping fishing and Amart sports. The company has specialized in the retail of sporting, automotive goods and leisure equipment (Madaan 2009). This report tries to analyze the progress of the two companies financially in regard to profits gained over certain periods of time, sales returns and profitability of the two companies. The report then compares the different financial ratios of the two companies to ascertain which company is good for investment and borrowing purposes. The report looks at the long term and the short term efficiency of the two companies and compares them. The report covers the liquidity aspect of the businesses, profitability of the businesses and their debt and credit management. This report is basically meant for investors and individuals in need of urgent loans from the companies. This report gives the facts and reasons as to which of the two companies is successful and efficient in its operations. 3.0 Profitability The prime reason for setting up any business venture is the profitability aspect. Considering the two companies, fantastic holdings limited is seen to have better profitability when compared to super retail group. Looking at the gross profit margin and the net profit margin, fantastic holdings has higher percentage profits as compared to super retail group. This shows that fantastic holdings it has good profits over the production costs in comparison to super retail group. Fantastic holdings is also seen to have an increase in its profits from the year 2011 to 2012 (Plunkett & Plunkett Research 2008). According to statistics, this increase has been observed from the year 2006. This is however not the case with super retail group as it shows a downward trend of the gross profits. The downward trend in fantastic profit ratios is basically caused by the increase in the expenditures. The company needs to reduce on its expenses so that the profits can have an upward trend (Madaan 2009). Considering the returns of the companies to equity, fantastic holdings limited has high ratios compared to super retail group (Plunkett & Plunkett Research 2008). Over the two years, both companies showed a downward trend in the ratios though super retail group had a very large drop margin. This is a show of lack of stability in the gain of its profits. This may have been caused by a reduction on the sales volume of the goods. Having high ratios of the returns on equity shows that fantastic holdings limited has good margins of profit in comparison to the shareholders input in the business. This is healthy for any business and is mainly due to good sales of the products and the reduction of expenses (Whiteside 2007). The return on assets is also another ratio that determines a lot the profitability of a business. In this case, fantastic holdings limited is seen to have high ratios as compared to super retail group. High ratios show that a company is making good sales and in that case good profits in relation to its assets (Plunkett & Plunkett Research 2008). Fantastic holdings limited is seen to have an upward trend in the ratios while super retail group has a downward trend. The downward trend may be due to a reduction in the sales volume and in that case the profits or an increase in the assets volume. Considering the profitability aspect of the two companies in question, fantastic holdings limited is seen to have good profitability as compared to the super retail group. It is therefore a better investment option as compared to the other company (Madaan 2009). 4.0 Efficiency Efficiency of a company is a core value that helps it to solve issues easily and gain more profits (Whiteside 2007). Considering the two companies, fantastic holdings limited is seen to have high asset turnover ratio. Over the two years, there is an overall downward trend in the ratios of the two companies (Whiteside 2007). The downward trend may be caused by an increase in taxes or a change in the market stability. The ratio simply shows how a company is efficient in using its assets to make more sales. It therefore shows that fantastic holdings limited is more efficient in this perspective as compared to super retail group (Whiteside 2007). Looking at the debtor’s turnover ratio, fantastic holdings limited is seen to have low ratios as compared to super retail group. This ratio basically shows a company’s efficiency in collecting its debts from debtors. The small ratio of fantastic holdings limited therefore shows that the company is more efficient in debts collection as it takes only two days in comparison to super retail group which has four days and three days respectively over the two years. Both companies show a reduction in the ratios in the two years. This is a good sign of improving in the efficiency. The reduction may be due to an improvement in the strategies of following up of debtors (Madaan 2009). In terms of creditor’s turnover ratio, fantastic holdings limited is seen to have low figures of the ratios. The ratio simply shows the efficiency of the company to pay off its debts to the creditors (Plunkett & Plunkett Research 2008). A company with low ratios shows that it is more efficient in paying off its debts. In this case, fantastic holdings limited is seen to be very efficient. Over the years, fantastic holdings limited shows a downward trend of the ratio while super retail group shows an upward trend. An upward trend shows a reduction in the level of efficiency. This may be due to a delay in the payment of debts by their debtors or slow sales of the goods. Between the two companies, super retail group is seen to be lacking its own assets and equipment to use in its operations. This is evident from the debt to asset ratio which is too high (Sullivan 2009). High ratios show that a company is using borrowed assets and equipment in its operations. Over the years the ration is seen to increase. This shows that it even increased the amount of borrowing of the assets. This is not good for a company that is targeting stability. Fantastic holdings has a better ratio but still, it is high for a company that is targeting stability. Over the year, it has shown a downward trend which is good improvement (Madaan 2009). 5.0 Financial stability 5.1 Short term In terms of financial stability, super retail group is seen to be more stable in the short run as it has high current ratios. This is however a concern as it shows the existence of high amounts of cash at their disposal instead of investing the amount (Plunkett & Plunkett Research 2008). On the other hand, fantastic holdings limited has favorable ratios which are acceptable. They however do not have much cash at their disposal in comparison to super retail group that can help them to offset their debts in the short run. Both companies show a downward trend in the ratios. This means that there was a reduction in the cash held in hand for any emergencies (Sullivan 2009). 5.2 Long term In the long run the two companies are seen to have quick ratios of less than one. This is an indication that the companies may not be in a position to offset their liabilities and debts easily. They thus are not very stable companies in the long run. Fantastic holdings limited is seen to have better ratios which are higher than those of super retail group company (Madaan 2009). Over the years, super retail group is seen to maintain its ratios while fantastic holdings limited increased its ratio. This is a good show as it shows that the company will now be able to offset its debts in time. fantastic holdings limited is thus a better company in terms of financial stability (Sullivan 2009). 6.0 Limitations One of the limitations of relying on this analysis is that, financial ratios do not put into consideration some things like donations, management quality, charities and goodwill of the business (Madaan 2009). Ignoring such things from inclusion in the final financial calculations causes errors. There is also the need to analyze each company’s process models. If a business is well organized, the process models will show automatically. It can disclose many more factors to consider before deciding which company has good operating process that will lead to good profits (Sullivan 2009). The report is also not reliable because of accounting policies that allow companies to decide on their own policies while preparing financial ratios (Plunkett & Plunkett Research 2008). This can lead to the use of false information during the actual calculation of the financial ratios. On the same margin, companies can decide to use creative accounting and give results that have inflation on revenues and reduced liabilities. This scenario tricks investors into believing that the company is performing efficiently when it is not. Some financial ratios were also calculated from merely approximated data. This can give very wrong information from the calculation of the financial ratios which will lead to wrong conclusions (Roth 2013). Another factor that might cause this report not to be reliable is that the financial ratios might have been taken at a time when there is inflation in the economy (Plunkett & Plunkett Research 2008). Considering super cheap group which has branches in different countries, it can be challenged by inflation in the different countries. This will affect the financial calculations. Inflation cause revenues and profits to go high but when there is no sufficient sales, it can show heavy losses. Some of the financial ratios have also been calculated from merely approximated figures. This is a major cause of errors in the final conclusion drawn from the results (Roth 2013). Another factor to consider is that the different companies have different risk profiles (Roth 2013). The differences in governmental interferences, market risks, financial risks, types of market and competitive intensity have not been considered during the calculation of the financial ratios. All these factors affect a business in many ways and need to be considered in each financial calculation. In this case they have not been considered hence resulting into erroneous results (Roth 2013). 7.0 Recommendations From the analysis above, fantastic holdings limited is seen to be a better company as compared to super retail group. This is basically because fantastic holdings limited is seen to be a more stable company as compared to super retail group. Fantastic holdings limited is also seen to be having more assets for their work as compared to super retail group. All these show that fantastic holdings limited is a better company as compared to super retail group. In the short run, super retail group is seen to be a better company to invest in as compared to super retail group. This is basically because it has more cash at its disposal in the short run as compared to fantastic holdings limited as seen from the current ratio calculations. On the other hand, fantastic holdings limited is seen to be more stable in the long run as compared to super retail group. This is evident from the calculation of quick ratio which showed that fantastic holdings limited had higher cash at its disposal as compared to super retail group in the long run. All these companies are good investment options. This is evident from the fact that they have closely related financial calculation ratios. This puts them in the same class of companies. Investors are thus to decide on which company to invest in as per the discussion above. 8.0 References -6 Madaan, K. V. , 2009, Fundamentals of retailing, New Delhi ,Tata McGraw Hill Education Private Limited . Plunkett, J. W., & Plunkett Research, L. , 2008, Plunkett's retail industry almanac 2009 , Houston, Tex, Plunkett Research Ltd. Roth, M. , 2013, Top stocks 2013 , a sharebuyer's guide to leading Australian companies, Milton, Qld, Wrightbooks. Sullivan, L. ,2009, Who's who in Australia 2009, North Melbourne, Crown Content. Whiteside, G. &. ,2007, Major companies of Asia and Australasia. London, U.K., Graham & Whiteside. 9.0 Appendix: Financial ratio calculations i. Gross profit margin = gross profit/revenue It is a measure of how much gross profit exceeds production costs. ii. Net profit margin = profit (after tax)/revenue It is a measure of the profit gained after all the expenses have been calculated. iii. Return on equity = net income after tax/shareholder’s equity It is a measure of the profit gained in comparison to the total shareholder’s equity. iv. Asset turnover (times) = revenue/average total asset or In days = 365/asset turnover It is a measure of the efficiency of a company’s use of its assets to produce sales. v. Return on assets = net income after tax/total assets (average total assets) It is a measure of the profit earned by a company in relation to its total assets. vi. Inventory turnover (days) = cost of goods sold/average inventory It is a measure of the inventory quality and shows the number of times the inventory is sold over a given period of time. vii. Debtors turnover (days) = net credit sales/average trade debtors It is a measure of the speed of debt collection. It shows the number of times the debtors are turned over during a specific period of time. viii. Creditors turnover (days) = net credit annual purchases/average trade creditors It is a measure of the average payment period the creditors are to expect payment. ix. Current ratio = current assets/current liabilities It measures a company’s ability to meet short term debt obligations. x. Quick ratio = (cash and cash equivalent + marketable securities + accounts receivable) /current liabilities It measures a company’s ability to offset its current liabilities using the most available liquid assets. xi. Debt to asset ratio (total debt) = total debt/total assets It is a measure of the company’s assets that were obtained through debts. xii. Debt equity ratio (total debt) = total liabilities/shareholders’ equity It is a measure of the proportion of debt and equity the company is using to finance its assets. xiii. Times interest earned (times) = earnings before interest and tax/interest expense It is a measure of the business’ ability to pay off its debts. 10.0 Assignment planner MAA103/MAAP103 Assignment Planner – Trimester 1, 2013 STUDENT GROUP NAMES: (Assignment CAN NOT be completed with students from other accounting classes) ID No.: Class Time/Day: 1. 2. 3. Lecturer’s Name: SECTION B: DATE: BRIEF DETAILS OF HOW YOU INTEND TO PROCEED TO COMPLETE REPORT: NAME OF STUDENT(S) COMPLETING SECTION(S): References Madaan, K. V. , 2009, Fundamentals of retailing, New Delhi ,Tata McGraw Hill Education Private Limited . Plunkett, J. W., & Plunkett Research, L. , 2008, Plunkett's retail industry almanac 2009 , Houston, Tex, Plunkett Research Ltd. Roth, M. , 2013, Top stocks 2013 , a sharebuyer's guide to leading Australian companies, Milton, Qld, Wrightbooks. Sullivan, L. ,2009, Who's who in Australia 2009, North Melbourne, Crown Content. Whiteside, G. &. ,2007, Major companies of Asia and Australasia. London, U.K., Graham & Whiteside. Read More