Analysis and Prospective Liquidity of the Baloon Stuff Pty Ltd - Case Study Example

Baloon N stuff pty Ltd Customer Inserts His/her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name Date Executive summary This business report gives an evaluation and interpretation of the analysis and prospective liquidity, profitability and financial stability of the Baloon N stuff pty Ltd. The company differentiates itself on its quality, design and brand. Generic product that the company dealt with is sourced predominantly from China and the Philippines whilst more unique (and expensive) product is imported from Italy, Spain and France. Baloon N stuff pty Ltd has strong brand awareness and it has its market share across the world. Under its new ownership Baloon N stuff pty Ltd intends to expand through a combination of outlets within its stores, as well as other market places all over the world. Major Customers & Competitors to Baloon N stuff pty Ltd are predominantly fashion-conscious professionals. Baloon N stuff pty Ltd operates stand alone stores and it intend to replace wholesale sales with retail sales in its concession outlets within its extensive market environ. Baloon N stuff pty Ltd competes with a diverse range of up market apparel designers and retailers, as well as other high-end brands within Myer and David Jones. Baloon N stuff pty Ltd supplies to Woolworth’s stores through a wholesale supply arrangement. Baloon N stuff pty Ltd is a discount range vendor of broad commodities products. The markdown variety merchant has around 192 stores in its total network focusing on low down price points, expedient store locations and offering a broad assortment of commodities. Stores are stretch across the major market places and today. The shop sold ‘seconds’ and discontinued lines, hence The Reject Shop name. Today, the company has discontinued this and has adopted a new blueprint for stumpy prices and bargains on the everyday things people use most in their lives. Differentiating Factor TRS offers a broad variety of wide-ranging end user commodities to a wide section of civilization who wants or need to set aside money. Its products are focused on everyday needs such as domestic cleaning products, cosmetics, basic fixtures and kitchenware. Major Customers & Competitors Customers include the general public to various suppliers of goods to the Reject Shop. Its competitors would be other discount-type shops such as goods sold in Asian markets. This report uses methods such as trend, vertical and horizontal analysis as well as ratios such as Quick ratio, Debt ratio and Current ratios. Other interpretation in the report includes rates of return on Shareholders Equity and Total Assets and earnings per share to name a few. Table of content Introduction……………………………………………………………………….5 Body of the analysis……………………………………………………………….6 Profitability………………………………………………………………..6 Efficiency…………………………………………………………………7 Financial stability………………………………………………………….8 Additional information……………………………………………………………9 Limitation…………………………………………………………………………9 Recommendations………………………………………………………………..10 List of references…………………………………………………………………12 Appendix ………………………………………………………………………..13 Introduction Small scale enterprises are doing very well in our country. The sector is dominated by many competitors. The sector is a free market and lot of new investor entered into this market. This report gives analysis Baloon N stuff pty Ltd companies in the industry. Base on the analyzed financial statement given we present a comparative report for the year 2009, 2010 and 2011. The origin of the analyzed data comes from the course instructor which authorized us to prepare the report. The instructor gave this report so that we learn business formal reporting as it is stipulated in the syllabus. The scope of this report is Baloon N stuff pty Ltd companies in the industry and it is like any other report which has a limitation that we encountered in preparing this report. This report is based on data which is prepared by third party and we are not certain whether the analyzed data is authentic (Hinds, 2005). The report therefore is based on assumption that the data given is complete and free from errors. It also important to disclose the fact that the data analyzed is not accompanied with the complete book of accounts that are necessary to be reflected in the report. Another limitation is the shortage of knowledge that was reduces to make this report a better one. The sources of the data for this report were given by the instructor. We ourselves did not collect the annual financial report for the two companies. The method used to analyze the data did not fall within the part of the report since the data use in the report was already done (International Association of Fire Chiefs, National Fire Protection Association, 2009). Body of the analysis Profitability Profitability ratios show Baloon N stuff pty Ltd overall efficiency and performance. Ratios analysis shows Baloon N stuff pty Ltd is able to translate sales dollars into profits at various stages of measurement. The Ratios show the return Baloon N stuff pty Ltd represents the firm's ability to measure the overall efficiency of the firm in generating returns for its shareholders. Baloon N stuff pty Ltd Limited is performing better for the last three years. Gross profit margin results of the year 2009, 2010 and 2011 for the companies are as follows; 58.16% ,58.96% and 58.99 for the year 2009, 2010 and 2011 respectively. Baloon N stuff pty Ltd Limited earns more profit on sale is better able to control the cost of inventory and manufacturing cost in the given three years. The result indicates that Baloon N stuff pty Ltd Limited is efficient in passing its cost to customers and the also indicate growth trend in the three year. There is no much growth on the companies in term of gross profit margin in the year 2011 and 2010 relatively to year 2009. Baloon N stuff pty Ltd Limited gross profit margin decreases by 0.8% 0.81% and 0.82% in the year 2009, 2010 and 2011 (Horngren, Datar, Foster, 2003). Baloon N stuff pty Ltd Limited shows a better net profit proportionate to its sale than in the three years. This is a clear indication that Baloon N stuff pty Ltd Limited is efficient in managing its operating expenses. The net profit margin result for the Baloon N stuff pty Ltd Limited in the year 2010 (6.96%) is better compared to 2009 (6.91%). This is also a clear indication that Baloon N stuff pty Ltd Limited is improving in its management of the operating expenses. The low net profit margin ratio for the Baloon N stuff pty Ltd Limited mean that the company is generating enough sales as indicated by gross profit margin but the company is not keeping operating expenses under control to leave an acceptable net profit. These results mean that Rejected Shop Limited Company is capitalizing on some competitive advantage that provides business with extra capacity and flexibility during transition times. (Horngren, Datar, Foster, 2003). The decreasing in the net profit margin ratio over time for Baloon N stuff pty Ltd Limited indicate cost blowouts that require efficiency improvements in order to avoid need to take on debt to pay its expenses. Efficiency Return on equity is the proportion of profit a company earned to the total amount of equity found on the balance sheet. The analyzed results reveal that the company is generating a decreasing proportionate return on equity. The company shows a better return on equity and this indicates that the company is utilizing shareholders equity well on the competitive environment. In the year 2011 the company uses every shareholder dollar to generate a better return to the shareholders. In the same year the company uses shareholder equity efficiently to gain a better competitive edge than the year 2010 and 2009 (Garrison, 2009). The company has a better asset turn over though it is decreasing. There is a slight improvement in the year 2011 (2.96), 2010 (2.88%) compared to 2009 (2.42%). Similar results are shown by inventory turnover. Inventory turn over is computed for any type of supply and inventory materials used in service delivery or manufacturing, work in progress (WIP), inventory combine, or finished products. The company has a better performance in terms of inventory turnover in 2009 (97) with a slight decline in 2010 (87) and 2011 (86). The inventory turnover in the three year shows that the company is more efficient in selling out stock. This can attributed to ownership of the larger market share. The company is more efficient in term of debt management as reflects in debt turnover. Financial stability The current ratio for the year 2011 is 1.33 which is an increase from 1.11 in the year 2010 and 1.09 in the year 2009. The increase in the ratio indicates an improvement in the performance in that the working capitals that are owed to creditors reduced in 2011 compared to 2010 and 2009. The long term aspect of the company also indicates positive results (Garrison, 2009). The long term liability for the year 2010 was 52.37% which less compared to 88.94% for the year 2009. The Company is undergoing growth both in performance and asset acquisition (Garrison, 2009). The shareholders equity in the year 2011 improved compared with 2010 and 2009. These are good result that shows shareholders equity has increase (Garrison, 2009). The ultimate objective of a shareholders is attain a better result in the year 2010 compared to 2009. The owners of the company maximize outsider's funds in by taking lesser risk of their investment and to increase their earnings (per share) by paying a lower fixed rate of interest to outsiders. This meets the objective of creditors who want the managers to invest and risk their share of proportionate investments. The ratio of 1:1 as reflected in analysis of the company is satisfactory ratio although there cannot be rule of thumb or standard norm for all types of businesses. Theoretically if the owner’s interests are greater than that of creditors, the financial position is highly solvent. In analysis of the long-term financial position it enjoys the same importance as the current ratio in the analysis of the short-term financial position (Weygandt ,Kimmel, & Kieso, 2009). Limitation Although financial statement analysis is highly useful tool, it has two limitations. These two limitations involve the comparability of financial data between companies and the need to look beyond ratios (Ruppel, 2011). Comparison of one company with another can provide valuable clues about the financial health of an organization (Ruppel, 2011). Unfortunately, differences in accounting methods between companies sometimes make it difficult to compare the companies' financial data (Ruppel, 2011). The analyst should keep in mind the lack of comparability of the data before drawing any definite conclusion. Nevertheless, even with this limitation in mind, comparisons of key ratios with other companies and with industry average often suggest avenues for further investigation (Ruppel, 2011). Recommendation From the above analysis it is clear that Baloon N stuff pty Ltd Limited have a potentiality to grow. There is much room in the market that has not been fully exploited (Ruppel, 2011). Baloon N stuff pty Ltd Limited has a good competitive advantage in the market but they need to improve on the cost control (Ruppel, 2011). Reject shop limited enjoy effective control of the cost of production but they have not invest enough in the market share (Ruppel, 2011). An inexperienced analyst may assume that ratios are sufficient in themselves as a basis for judgment about the future (Ruppel, 2011). Nothing could be further from the truth. Conclusions based on ratios analysis must be regarded as tentative (Ruppel, 2011). Ratios should not be viewed as an end, but rather they should be viewed as starting point, as indicators of what to pursue in greater depth. They raise many questions, but they rarely answer any question by themselves (Ruppel, 2011). In addition to ratios, other sources of data should be analyzed in order to make judgment about the future of an organization (Ruppel, 2011). The analyst should look, for example, at industry trends, technological changes, changes in consumer tastes, changes in broad economic factors, and changes within the firm itself (Ruppel, 2011). A recent change in a key management position, for example, might provide a basis for optimization about the future, even though the past performance of the firm (as shown by its ratios) may have been mediocre (Ruppel, 2011). References: Australia Bureau of Statistic (2008), Year Book Australia, Bureau of Statistics. Chapman S, Hopwood G, Shields M (2009), Handbook of management accounting research, Elsevier. Chapman, S., Hopwood, G (2007), Handbook of management accounting research, Elsevier. Drury C, (2006), Cost and management accounting: an introduction, Cengage Learning EMEA. Garrison (2009), Managerial Accounting, Tata McGraw-Hill Education. Hinds, J (2005), The Ferguson guide to resumes and job hunting skills: a step-by-step guide to preparing for your job search, InfoBase. Horngren T, Datar M, Foster G (2003), Cost accounting: a managerial emphasis, Prentice Hall. International Association of Fire Chiefs, National Fire Protection Association (2009), Fire Officer: Principles and Practice, Jones & Bartlett Learning. Needles E, Powers M, Crosson V (2007), Principles of Accounting, Cengage Learning. Ruppel W (2011), Wiley GAAP for Governments: Interpretation and Application of Generally Accepted Accounting Principles for State and Local Governments, John Wiley and Sons. Stegarescu, D (2006), Decentralized government in an integrating world: quantitative studies for OECD countries, Springer Science & Business. Weygandt J ,Kimmel, D & Kieso E (2009), Managerial Accounting: Tools for Business Decision Making, John Wiley and Sons. Wise D (1990), Accounting in Australia, Houghton Mifflin. Zimmerman J (2008), Accounting for Decision Making and Control, McGraw-Hill Irwin. Read More