Trend of Sales, Gross and Net Profit Margin Return on Assets and Equity, Cash Flow Statement - Assignment Example

1. Trend of sales   2010 2009 2008 2007 Revenue 1742393 1959786 2116640 1820737 Percentage Change -11 -7.41 16.25 12.05 The trend for the sales of Pacific Brands shows that the sales have grown in 2007 over 2006 and this trend continues till 2008. After that the sales has fallen which is resulted by a dip in the percentage change which shows that the revenue have fallen continuously for both 2009 and 2010. This is also evident in the graph below The above graph shows that after 2008 the revenues have seen a dip as seen from the graph and the dip has been substantial raising fear and alarms regarding the future revenues of the company. 2. Gross & Net Profit Margin Ratios Formulas 2010 2009 2008 2007 Gross Profit Margin Gross Profit / Sales * 100 722,821 / 1,742,393 * 100 = 41.48 815,565 / 1,959,786 * 100 = 41.61 940,426 / 2,116,640 * 100 = 44.43 758,634 / 1,820,737 * 100 = 41.67 Net Profit Margin Net Profit / Sales * 100 53,195 / 1,742,393 * 100 = 3.05 (234,291) / 1,959,786 * 100 = (11.95) 117,126 / 2,116,640 * 100 = 5.53 106,136 / 1,820,737 * 100 = 5.82 The above chart shows that the gross profit margin has grown in 2008 over 2007 but then a dip in gross profit is seen. The dip is not substantial thereby not raising much fears. A look at the net profit margin shows that the net profit margin has grown till 2009 and after that a dip is seen which is substantial. Another important finding from this ratio is that the organization has incurred a lot of indirect expenses which has resulted in the net profit to be very low when compared to the gross profit margin. 3. Return on Assets & Equity Ratios Formulas 2010 2009 2008 2007 Return on Assets Net Income / Total Assets * 100 112,940 / 2,088,610 * 100 = 5.40 (272,281) / 2,225,495 * 100 = (12.23) 117,126 / 2,486,392 * 100 = 4.71 106,136 / 2,555,518 * 100 = 4.15 Return on Equity Net Income / Equity * 100 112,940 / 1,379,457 * 100 = 8.18 (272,281) / 1,266,690 * 100 = (21.49) 117,126 / 1,330,088 * 100 = 8.80 106,136 / 1,319,374 * 100 = 8.04 Return on assets and return on equity highlights similar trends for the organization. A difference between both the ratios is that the return on assets helps to find out the effectiveness in the use of assets whereas return on equity helps to find out the profit that accrues to the equity contributed by the shareholders. Both this ratio helps to find out the effectiveness the organization has and the manner they have been able to use their assets and equity (Ryan, 1996). The ratios show that return on assets has improved over the years except in 2009 where the return is negative due to the loss incurred by the organization. The organization has then been able to garner profits which has resulted in the return on assets to be positive and has shown an improvement in trend. The return on equity shows that apart from 2009 the return for the shareholder has been positive. The reason for a negative return on shareholder is attributed to the fact that the company had a negative profit i.e. loss in 2009. The trend shows that there is consistency in the return for shareholder stating that the return for the shareholder is stagnant and the company needs to devise a policy to ensure that the return improves. 4. Cash Flow Statement The cash flow statement for all the four years reflect the following Ratios Formulas 2010 2009 2008 2007 Net Cash from Operating Activities   135276 103707 182510 138295 Net Cash from Financing Activities   -119937 -64441 -183635 239248 Net Cash from Investing Activities   8620 -22022 -24838 -331141 The above findings show that the organization has been able to ensure cash from its regular operations for all the four years from 2007 to 2010. The cash flow has seen an increase in 2008 but then the cash from operating activities has seen a dip. This is seen in the graph below The above graph shows widespread movements in the net cash flow due to different activities. It is seen that the cash from finance activities have been negative for all the years except for 2007. This is due to the reason that the organization has invested into different financing activities to ensure that the business is able to grow (Solawu, 2006). The cash from investing activity shows similar results and is seen that the organization has been investing in different projects apart from 2010 where it is positive. This signifies the fact that the organization is investing in different projects which will ensure better earning opportunity for the future. 5. Current & Quick Ratio Ratios Formulas 2010 2009 2008 2007 Current Ratio Current Assets / Current Liabilities 633,539 / 235,599 = 2.68 699,115 / 361,790 = 1.93 748,364 / 290,649 = 2.57 812,766 / 272,996 = 2.97 Quick Ratio (Current Assets – Inventories) / Current Liabilities (633,539 - 241,274) / 235,599 = 1.66 (699,115 - 311,445 )/ 361,790 = 1.07 (748,364 - 356,970) / 290,649 = 1.34 (812,766 - 361,524) / 272,996 = 1.65 The current ratio shows that the organization has very high liquidity and the current assets for the firm are twice its current liabilities. There has been a slight dip in the ratio for 2009 but still the organization has twice the current assets as compared to current liabilities. The quick ratio also seems sound as it shows that after removing stock (which takes time to be converted into cash) the firm is still able to meet its current obligation. The ratio also sows that there is a big dip in the quick ratio as compared to current ratio signifying the fact that the organization has huge assets. This is an area to watch out and the company needs to look towards reducing the stock in hand so that the chances of stock becoming obsolete are reduced. Overall the ratio is sound but the organization can look forward towards reducing the current assets and ensuring that the ratio reaches around 2 so that the investment can be diverted elsewhere (Howorth & Westhead, 2003). 6. Interest Cover ratio Ratios Formula 2010 2009 2008 2007 Total Liabilities over Assets total liabilities / total assets 709,153 / 2,088,610 = 0.34 958,805 / 2,225,495 = 0.43 1,156,304 / 2,486,392 = 0.46 1,236,144 / 2,555,518= 0.48 Interest Cover Ratio EBIT / Net Finance Expenses 79,356 / (50,601) = 1.56 241,490 / (65,643) = 3.67 160,927 / (68,608) = 2.34 145,618 / (50,016) = 2.91 The above ratio shows that the organization has reduced its liabilities over its assets from 2007 to 2010. An interesting fact to note here are that the liabilities of the organization has been less than 50% for all the years and this ratio has continuously increased. This demonstrates the fact that the proportion of holding for equity shareholder have increased. This highlights better management and the ability of the company to reduce its external liabilities to a large extent. The interest cover ratio signifies that the organization has been continuously paying interest on the borrowed funds. This has decreased in 2010 after an increase seen in 2008. This ratio signifies that the organization has been able to save on taxes due to the fact that it has borrowed funds and paying interest on it is acting as a weapon to save on taxes. The ratio shows efficiency and the ability of the organization to be able to control its expenses. 7. Dividend Yield & Earnings per Share Ratios Formula 2010 2009 2008 2007 Dividend Yield Dividend Per Share / Market Price of Share * 100 8.5/ 107 * 100 = 7.94% 8.5/ 104 * 100 = 8.17% 0 0 Earnings per Share Net Income / Outstanding shares 5.7 cents (39.9) cents 23.2 cents 21.1 cents The analysis of dividend yield shows that the dividend yield for the organization is fluctuating. This is due to the fact that the company didn’t declare any dividend in 2007 and 2008 which resulted in the dividend yield to be zero. The company declared dividend in 2009 which made them have a dividend yield to grow which again fell due to the fact that the organization paid the same dividend and the share price increased. An interesting fact to note in the earning per share is that the earning per share has decreased for the organization. This is due to falling profits which was due to the economic recession which affected the organization. The organization has ensured that whenever it is able to earn handy profits the earnings per share for the shareholders improve so that they are able to keep themselves associated with the organization (Solawu, 2006). 8. Performance The performance of Pacific Brands Limited has seen widespread fluctuations. Taking the price of the share on July 1, 2010 to be as 1.02 the share market has seen widespread fluctuation and the share prices has fallen to a large extent and is seen to be as 0.8 on 23rd August 2011. This highlights the fact that Pacific Brands has been affected by the recession which has engulfed the world and has resulted in the share prices to fall. This makes the company risky as there are chances that the investor is unable to garner the investment made in the organization. This is seen below This has been further substantiated by the statement of the CEO who says that the sales have gone down by 11.1% and EBDITA is down by 11.7% (PBG, 2010). This has made the organization bear the brunt as seen by the decrease in share prices. This has made the EPS of the share to stand at 9.7 cents which shows that the returns for the shareholders have been very low in 2011 (PBG, 2011). Even the analysis of earnings per share of the previous years show that the company has not been able to provide the same return on investment which has made investors stay away from the company. The inability of the company to be able to demonstrate the same trend and growth that ensures that better return for the investor has resulted in the prices of share to be very low. This has been further substantiated by the fact that the company has sold its Sleepmaker & Dunlop Foams as it reported a loss of A$ 131.5 million (Herald, 2011). This highlights the inefficiency of the organization to be able to garner the same business. This resulted in the bottom lines to be very low which had finally taken a toll on the investors. Another factor which highlights the reason for this is that the world economies is under recession which has made all players in the market suffer. This has resulted in sales to fall and made investor feel unsure about the return on investment. The overall present financial condition of the business makes it a risky company to invest in as the shares are continuously showing a downward trend and it will take time before the market recovers so that the investor are able to receive the same return on investment which they are looking for. References Howorth, C., & Westhead, P. 2003. The focus of working capital management in UK small firms. Management Accounting Research 14, 94-111 Herald. 2011. $166 million loss for Pacific Brands after weaker sales. Retrieved on August 24, 2011 from http://article.wn.com/view/2011/08/24/166m_loss_for_Pacific_Brands_after_weaker_sales/ PBG. 2011. Chairman & CEO Address to Shareholders. Retrieved on August 24, 2011 from https://www.nzx.com/companies/PBG/announcements/201408 Ryan, H. 1996. The Use of Financial Ratios as Measures of Risk in the Determination of the Bid-Ask Spread. Journal of Financial & Strategic Decisions, 9 (2), 33-41 Solawu, R. O. 2006. Industry Practice and Aggressive Conservative Working Capital Policies in Nigeria. European Journal of Scientific Research, 13(3) Read More