Australia Funghi Importers Ptd Ltd Analysis - Case Study Example

Name Tutor Course Date Executive summary This report indent to give evaluation and analysis of the current subject matter and prospective liquidity, profitability and financial stability of Australia Funghi Importers Ptd Ltd. Analysis methods includes vertical and horizontal as well as ratios such as quick and current ratio. Other calculation that I will use includes earning per share, total asset and rate of return on shareholders equity. All the working can be found in the appendixes. From the analysis of the data given for Australia Funghi Importers, there is a clear indication that the company is operating below industry average. Comparative performance particularly is poor in areas of credit control, liquidity, profit margin and inventory management. According to this report, the prospect of the company is not positive in its current position and conclusion. There is need therefore for the management to look into major areas of weakness and carry out father investigation. Recommendation discussed in this report includes improvement of collection period for the account receivable, improvement of inventory turnover, increasing inventory level, and reducing prepayment. Analysis has limitation and this report further carry out investigation on that accounts. Among the limitation that are identified in this report includes, foretasted figures not provided, the current economic condition and the nature of the company is not known. The information from the data given is not enough i.e. monthly details of the business and the results are based on the past performance not the present. Table of content Introduction...........................................................................................................................3 Body................................................................... Conclusions....................................................... Recommendations.................................................. Limitation......................................................... References........................................................ Appendixes...................................................... Introduction This report gives a con-size interpretation of the data through ratio analysis regarding liquidity, profitability and financial stability of Australia Funghi Importers Ptd Ltd for the years 2010-2012. The report give attention particularly to credit management and liquidity, earning power, outline of debt management, inventory management, highlight of major weakness and the strength of the company and explanation for observed changes. The report will also make recommendation that will improve the Australia Funghi Importers Ptd Ltd and comment on the prospect of the company current performance. The limitation on the observation will be noted and given adequate concern. The explanation of how prospectus and cash flow statement could enhance analysis will also be provided in the report (Gitman &McDaniel, 2008). Profitability Australia Funghi Importers Ptd Ltd in the three year period of analysis is very Satisfactory as its average is 7.24 which is much higher than 3.85, grand industry average, which is taken as standard. This is a sign of strong sales. Coefficient of variation of inventory-turnover ratio of Australia Funghi Importers Ptd Ltd is 27.10%, which shows less consistency in the three year period because coefficient of variation of industry as a whole is 12.47%. Greater variability in the Inventory-turnover ratio indicates improper or inefficient management of inventory (Gitman &McDaniel, 2008). The trend of operating profit after tax is positive and that reflect satisfactory in both performance and growth. In the data provided, the analysis show that the return on total asset of year 2011 is 37.36%, but in 2012 is 26.06%, the ratio has decreased by 11.3%. This indicate that the company has become less profitable. The shareholder return on equity ratio has also decreased from 32.82% of 2011 to 24.17% of 2012. The ratio measure earnings is generated from the asset provided by the owners. It indicates that the company is using the shareholders equity inefficiently. Business is making low profit return on the money borrowed during the year 2011 and 2012 (Gitman &McDaniel, 2008). The horizontal analysis that begin with monetary amount change show a decrease in 2011 and 2012 by 2.21%, which leads directly to gross profit dropping by 4.35%. The ratio also indicates that although there is an increase in profit after tax from 2010 to 2011, there was a decrease in 2012. The 148% dividends payout ratio in 2007 is an indication of business paying more than one time of its profit as dividend, and it has no big power for growing. As per the ratio analysis, Australia Funghi Importers Ptd Ltd is making a decrease in profit during 2010, 2011 and 2012, this is not satisfactory to the company (Gitman &McDaniel, 2008). . Liquidity The liquidity position of Australian Funghi Importers Ptd Ltd is fair to satisfactory. However it is important to note that current ratio is below the industry norm. Quick ratio on the other hand is satisfactory and it indicates that Australian Funghi Importers Ptd Ltd probably have sufficient liquidity to meet maturing obligation. The firm asset structure is not generating sufficient sales revenue. Nonetheless, the company asset management ratio indicates that the firm is investing too much in inventory, receivable, as well as plant property and equipment relative to sale volume generated (Siegel & Shim, 2006). Australian Funghi Importers Ptd Ltd financial leverage ratio indicates that the firm is significantly using more debt to finance operations than the average firm in the industry. Because of its poor coverage ratios, the company is likely to have difficulty in obtaining financing for further asset addition. Bearing in mind economic slowdown, the Australian Funghi Importers Ptd Ltd is less likely to make in borrowing to be in a position of being awarded the funds. The market-base ratio confirms the analysis performance using Australian Funghi Importers Pty Ltd financial statement, and the dividend policy ratio indicates that the firm may have low growth prospect (Gitman &McDaniel, 2008). The Australian Funghi Importers Ptd Ltd is using more debt and investing more in inventories and receivable than average firm in the industry. If the company could reduce its investment in inventory and receivable, and start using the release fund to lower the debt, both the management ratios and financial leverage ratio would be closer to the industry averages (Moyer, McGuigan &Kretlow, 2008). Financial stability The financial stability of the company can be deduced through solvency ratios. The ratio of the debt has increased from 28.02% in 2010 to 39.57% in 2012. This shows that the company uses more of its liability in its operation. The burden of the company is increased by the higher percentage of the asset provided by the creditor. There is two aspect of this situation, the company can control to its reasonable situation and can decrease its position in the equity ratio from 71.98% in 2011 to 60.43% in 2012. This ratio examines the total assets and the relationship between total equity such that the higher the ratio of equity, the greater the asset of protection to creditors. In this case, the risk of business exist (Moyer, McGuigan, & Kretlow, 2008). Conclusions The financial position of Australia Funghi Importers Ptd Ltd is not secure. For the company to survive and grow, there is a need for improvement in many areas. The key areas that need agent reform are liquidity, financial stability, quality and quantity of working capital, and profitability. For the company to overcome the present poor records, the management must address those areas mentioned simultaneously (Gitman &McDaniel, 2008). It is important to note that this analysis is limited and a greater dept of evaluation and understanding can only occur with the utilization of resource such as comparison of change in financial statement and budget forecast. It is only this process that can fully appreciate the company possible future and current situation (Moyer, McGuigan &Kretlow, 2008). Recommendations The performance of the company can be enhanced through improvement of the average collection period for the account receivable. The company should not extent credit to slow payer to minimize on the cost of debt collection and bad debt provision. There is also a greater need for the company to decrease on the credit terms that put the company in risk profile. They should improve on the effort to collect debt by hiring a debt collector agency. They should also use strategy such as discount to early payers to motivate them to pay on time (Gitman &McDaniel, 2008). The Australian Funghi Importers Ptd Ltd should consider implementing more stringent credit and collection policies as well as inventory control. The firm should also evaluate its investment in plant, equipment and property to determine whether reduction could be made without impairing operation (Gitman &McDaniel, 2008). Limitation There are many limitations that are inherent in ratio analysis. In many cases, it is not easy to identify the industry group that a company belongs. It is a problem therefore to make comparison among the companies in order to deduce their performance. The application of GAAP among various companies varies. This diversity results in distorted ratios and comparison. A good example is a company using LIFO while others use FIFO to value inventory (Gitman &McDaniel, 2008). The industry norms that are often published are only approximation. It is therefore difficult to ascertain the exact position of a given company. Assessment of the company performance may be done perfectly but on wrong approximation and this will lead to distortion of actual fact regarding a company. The value of an asset in many times is not true due to difference between historical cost and current value of an asset, a good example is land (Moyer, McGuigan &Kretlow, 2008). The components of ratio are not revealed in the analysis. For example, the current ratio may be high but inventory may be composed of obsolete merchandise and receivables may include accounts owed from a politically unstable foreign country. So during analysis, one may not be in a position to tell the risk that the company may find itself in the long run. The company can window dress and make itself look better than it is in real. A good example is a company paying off current debt with cash just prior to year-end to artificially increase its current ratio. This situation is not easy to deduce during analysis (Siegel & Shim, 2006). The companies can easily understate its liabilities from analytical sense. For example, an inadequate provision for lawsuits may exist. Literally, it will appear genuine during analysis but it can also be mischievous. Overstatement of liabilities can also easily happen. For example, a convertible bond having attractive conversion privilege where expectation is that it will be converted to stock and not paid. This kind of situation can escape an eye of inexperienced analyst (Gitman &McDaniel, 2008). References Gitman, L. J. and McDaniel, C., 2008, the Future of Business: The Essentials, Cengage Learning, New York. Moyer, R. C., McGuigan, J. R. and Kretlow, W. J., 2008, Contemporary Financial Management, Cengage Learning, New York. Siegel, G. and Shim, K., 2006, Accounting Handbook, Barron's Educational Series, New York Appendix Australian Funghi Importers Pty Ltd. Comparative Income Statement for the years ended 30th June 2012, 2011 and 2010. (in thousands of $'s) 2012 2011 2010 Net Sales 1,194 1,059 955 Cost of Sales 503 493 432 Gross Profit 691 566 523 Operating Expenses 441 424 408 Operating Profit before Tax 250 142 115 Income tax expense 75 43 34 Operating Profit after Tax $175 $99 $ 81 Australian Funghi Importers Pty Ltd. Comparative Balance Sheet as at 30th June 2012, 2011 and 2010 (in thousands of $'s) 2012 2011 2010 Assets: Cash at Bank 81 92 86 Accounts Receivable (net) 135 86 74 Inventory 137 107 93 Prepaid Expenses 37 38 29 Property, Plant and Equipment (net) 624 611 609 Total Assets $1,014 $934 $891 Liabilities: Current Liabilities 116 69 58 Non-Current Liabilities* 325 325 325 Total Liabilities 441 394 383 NET ASSETS $573 $540 $508 Equity: Share Capital 480 480 480 Retained Profits 93 60 28 $573 $540 $508 Read More