Executive SummaryIn arriving at an informed decision, it is imperative for Simon Wright to be informed about a financial analysis of Otter Enterprises Pty Ltd that he is considering to acquire. He also needs to be informed of interest rates paid on short-term bank deposits. Information on the above investment options is imperative in choosing the best investment option since Simon is considering investing in either of the two options. Financial statement analysis entails analyzing the profitability, liquidity and financial stability. Profitability is the sole target of any business operation.
Business entities survive on profitability. Profitability is measured by the amounts of incomes generated by the business and expenses incurred in the process of generating income. A critical analysis of past and present profitability as well as future projections offers a clear picture of the businesses position. Liquidity is the ability to respect debts payments when they become due for payment. Financial stability is represented by a stable financial system. A business is financially stable when it is able to honor its contractual duties without relying on outside assistance (Gotthilf 1980; Alawode and Sadek 2008). Financial statement analysis is based on two very important financial statements; the income statement and the balance sheet.
The analysis is done by the use of ratios. They simplify the information portrayed by financial statements. They are easy to understand and interpret. They save effort and time in making a decision. IntroductionBusiness analysis is all about problem solving. The analysis opens out strengths and weaknesses of a business. This offers guidance about areas that need changes and improvements for future prosperity. It is essential to conduct this analysis when faced with a myriad of investment opportunities to identify the most feasible and lucrative option.
Business analysis enhances decision making (Gotthilf 1980). The objective of this report is to conduct a financial analysis Otter Enterprises Pty Ltd taking into account the past three years. The report shall also touch on interest rates on bank deposits. This is to provide in depth information to Simon Wright to arrive at an informed decision on the best investment strategy between taking over the bookshop enterprises and investing his $850, 000 in a 3 – 5 year bank term deposit.
The report shall cover three basic areas of financial statement analysis. These are profitability, liquidity and financial stability as regards to Otter Enterprises Pty Ltd. Further, the report shall cover interest payments on short-term bank deposits. OverviewThere are numerous ratios that can be used in financial statement analysis. To analyze profitability, liquidity and financial stability separately, however, the analysis focuses on two most important ratios to analyze each of these items. It is may be reckless to consider all ratios. There is no criterion used to arrive at the ratios considered.
The ratios chosen are based on common practice. Vertical analysis, horizontal analysis as well as trend analysis of the financial statements is conducted. ProfitabilityRatio analysisThe main ratios analyzed are return on assets (ROA) and return on equity (ROE). The ROA for 2012, 2011 and 2010 is 53.83, 61.47 and 65.89 respectively. The ROA for 2012 declined by 12.4% from that of 2011 while the ROA for 2011 declined by 6.7% from that of 2010. The ratios are declining at an increasing rate. The ratios are high indicating high returns on the assets.
Despite an annual increase in total assets the ROA is declining perhaps owing to declining profit levels (Sakolski 1923).