Get n Go Pty Limited Business Strategies - Case Study Example

Accounting Author’s Name: Instructor’s Name: Course Name: Due Date: Executive summary Get n Go Pty Limited is a business similar to family mart business that belongs to Michael parents. All along, Michael has worked well with his parents in family mart business and now he has an opportunity to purchase 100% of the Get n Go Pty Limited Company’s shares. But before considering this option, Michael wants an analysis of the company’s ratios to determine if the business is profitable or not. This is because, if he finds out that the business is not profitable, he has an alternative of depositing the amount that could be used in purchasing the business in a bank. Therefore, this report gives the various ratio analysis and the advices given to Michael concerning the business. Table of Contents Executive summary 2 Table of Contents 3 Introduction 4 Discussion 5 Profitability 5 Ratio analysis 5 Liquidity 6 Financial stability 7 Disadvantages of financial statement analysis 8 Conclusion 10 Recommendation 10 Appendix 11 References 12 Introduction Background: Financial statement analysis refers to a way of identifying the financial strengths and weaknesses by establishing a proper relationship between the items in the profit and loss statement and the balance sheet (Besley and Brigham, 2007, p.9). Once relationship is established one goes ahead to write a report about a business. In this paper, Michael Graham interested investor wants to use information from financial statement analysis to make a decision of buying a business or not. This is because; he has experience in operating such business, and enough money to purchase the company. Therefore, it is necessary to have an analysis and interpretation of the statements to ensure making of quality decisions. Purpose: In many business organizations, reports aim at meeting obligations of the external environment. In addition, reports are prepared to ensure that the uses of the report can make suitable decisions. In this case, information from the report is for Michael’s in decision on whether to invest in Get n Go Pty limited or not. Scope: Despite the fact that the report in most cases help in decision-making, information provided in the financial statement alone is not conclusive. As a result, decision-making is possible once an individual is trough with analysis and interpretation of various financial statements. Discussion Profitability Ratio analysis Profitability ratio measures the business operations results to determine the overall performance and effectiveness of a business. The profitability ratios of Get n Go Pty limited has no definite trend for the past three years. For instance, retained earnings moved from 100% to 56% to 83% over the three years. However, many factors affect these ratios. These include expenses, and prices thus determining the trend. Return on assets: There exists indefinite trend in the total assets of 100% to 90% to 2009 to 93% from 2009 to 2011. This means that both assets, and liabilities together with the capital invested in the business is increasing. The profit and loss statement has no definite trend, because operating profit moves from 100% to 88% to 96% from 2009 to 2011. Price Earnings ratio and Dividend ratios: Price earnings ratio measures of the amount paid per share as compared with the amount of profit per share earned by a business. While dividend earnings ratio shows the amount of dividend paid annually as compared with the prices charged. This ratio shows the substitutability of the different measures of earning. The high price earnings ratio and the dividend ratios show the ability of the business to pay dividend. Sub conclusion of profitability On looking at the profitability ratios of this company, it is worth nothing that there is no definite trend, at times, the profits are high, and at times, they are low. Therefore, this is not a good investment as it may lead to loss of funds. In this case, Michael should consider alternative options of investing his money. Liquidity Liquidity ratios measures how solvent a business is in the short term. Calculation of this ratio aims at determining the ability of a business to meet current or short-term obligations (Brigham and Houston, 2009, p.10). Current and quick ratios: This refers to the ability of a company to meet both the long-term and short-term obligations. In the case of Get n Go Pty limited, there exists an upward trend; this means that the business is sound and able to meet these obligations. Therefore, this is a good action by the company as it shows that through its assets, it can be able to settle debts and get some profits left. Inventory turnover: It is the number of times stock is circulated in a year. At Get n Go Pty Limited, there are no specific trends as it is increasing and declining. In addition, these turnovers are far much below the required industry average. Therefore, it means that the company may not be able to utilize its assets well. It is then important that Michael consider alternative option of investing his funds. Accounts receivable: This refers to the length of time that the company take to get repayments from its debtors and the length of time which the company takes to pay is creditors. The debtors turnover records an upward trend. This means that the debts in the company are settled very first. Therefore, it is worth nothing that, due to this the company is able to have debts resettled. This is a good move for the company. Sub conclusion of liquidity ratio In most cases, companies require some degree of liquidity to be able to settle debts. In mature companies, liquidity ratio that is shows that management is poor or there is need to add more capital to the business. However, over years, this ratio can vary due to economic conditions, season, and time for making the sales. At Get, n Go Pty limited there is no definite trend as the ratios keep increasing and decreasing through from 209 to 2011. This could be due to any of the earlier stated factors that have an effect on the liquidity ratios. Therefore, Michael should not purchase the investment his money on this business. Financial stability These ratios aim at determining the health of a business in the long term for instance, the effect of the finance or capital structure of the business (Besley and Brigham, 2008, p.89). Debt to equity ratio: This is used to determine the level or amount of debts and equity used to finance the business. These ratios do not have a specific trend. This means that the business has no good management financially as the business at times gets funds from debt sources and at times from owners’ equity. Therefore, this is not a good business to acquire. Capitalization ratio: These ratios do not have a specific trend. It keeps falling and increasing therefore, we can note that the business has no strong capital base. Interest earned ratio: This recorded an upward trend. In addition, they are at the highest points. This shows that the company is doing well and is able to repay its debts as expected from them Asset turnover ratio: Over the years, the asset turnover of the company has been on a rise, this means that the company’s assets have been utilized well. This is what might have lead to the upward trend as far as asset utilization is a concern. Sub conclusion of financial stability ratios Generally, the financial stability ratios of this company are high. If ratios responsible for financial stability are high then it means that there is a high-risk exposure of business. This is because business might not be able to settle debts. At Get n Go Pty limited this ratios are high showing that the business is likely to suffer from bankruptcy. Therefore, Michael should not go ahead to invest his money in this business as it might be risky. Disadvantages of financial statement analysis Some of the main disadvantages of financial statement analysis include financial data comparability and the need for one to look beyond ratios. In the case of Get n Go Pty limited the need to look beyond ratios is a challenge. This is because ratios do not make decisions to a person but rather provide one with information to make decision. As a result, one has to look at the results from calculation of ratios and make a decision. In addition, some of the information that are at times used in the calculation of ratios are not exhaustive. For instance, in the computation of the asset turnover, at times the figures used are not subject to depreciation. As a result, this will lead one to getting answers that are not true and finally coming up with a wrong analysis of the company’s performance. Furthermore, at times companies use wrong figures in the computation of these ratios to avoid the possibility of company comparisons. This will lead to a wrong analysis of the company. This at times is referred to the use of creative accounts so that they can create an impression that the company is financial sound when in the real sense this might not be true (Ehrhardt and Brigham, 2008, p.100). In most cases, ratios do not act as the real measure of the company or business performance. Therefore, it follows that there is the need to come up with careful interpretations of the ratio outcome. This call for the need to have a financial analyst who can be able to read the rend and come up with a concrete analysis of the business performance. In addition, most of the time, the data or figures used in ratio analysis are old and outdated. This then might not show the real and current financial position of the business. When calculating the costs most of the time the figures used is historical. This information will therefore be miss leading and may not be suitable for decision-making (Brigham and Ehrhardt, 2008, p.78). In most cases, during ratio analysis, most of the information used are summarized. In the process of summarizing this information some vital information are ignored. This information might have been very important in decision making by investors, shareholder, or users of these information. During interpretation of ratios, it may be difficult to generalize some ratios as to whether they are bad or good. Therefore, it may be a challenge to come up with a good and concrete analysis of these ratios. The variation in the trend of the ratios may have been subject to technological adjustments, price variations, changes in accounting policies and standards, and seasonal trading. In ratio analysis, not all this factors are considered. Instead, the final outcome of the ratio after computation is what matters. In this case, a financial analyst may be quick to say that a business is not performing well without considering some of the factors that might have contributed to such. The idea of comparing a company’s ratio with those of the industry may not be good. This is because it is difficult to have two companies having similar ratio, because varying companies have varying priorities of using their resources. Conclusion Ratio analysis is a good approach of analyzing a company’s performance. This is because, it is easy to understand how an analyst might have come up with the final decision. In the case of Get n Go Pty Limited, it is worth nothing that we can conclude that the business is not financially sound. As a result, Michael should not invest his money in such a business, as he is likely to incur losses. It is better that he considers an alternative option of investing his money and be able to avoid the chances of incurring a loss. Despite the fact that some aspects in the company such as some of the liquidity ratios are recording good performances, financial stability ratios record poor performances. This may drive the business to incur a loss. Recommendation Some of the areas that need close examination incase the business need to make profits and record ratios that are in line with the industry performance include: 1. Asset investment or use; the company should try ensuring that the assets are well utilized or invests so that they are able to generate high return thus enabling them to record an upward trend of ratios. 2. Out of the returns generated by the business, the company such directs some of them to the business capital. This will help in ensuring that debt sources of funds to the business are avoided. As a result, the financial stability ratios will be moderated. 3. Current ratios should be closely monitored so that it can be increased thus enabling the business to meet its short term and long term obligations. Appendix The financial statement analysis of Get n Go Pty Ltd shows a trend that is not definite. This is so because it keeps varying over years and can be difficult to conclude that the business is financially sound or not. The financial analysis does not consider the changes that result from inflation. Furthermore, most of the factors that influence the various elements used in financial statement analysis are not considered. Some of this factors that are not considered include impact of technology, change in expenses, and income level. In financial statement analysis, it may not be possible to compare two separate companies. This is because different companies have varying priorities. References Besley, S. & Brigham, EF. 2007. Essentials of Managerial Finance. Kansas: Cengage Learning Publishers. Besley, S. & Brigham, EF. 2008. Principles of Finance. Boston: Cengage Learning Publishers. Brigham, EF. & Houston, JF. 2009. Fundamentals of Financial Management. Boston: South western cangage learning. Brigham, EF. &. Ehrhardt, MC. 2008. Financial management: theory and practice. Kansas: Cengage Learning Publishers. Ehrhardt, MC. & Brigham, EF. 2008. Corporate Finance: A Focused Approach. Boston: Cengage Learning Publishers. Read More