Fantastic Holdings and Harvey Norman Holdings Financial Analysis - Assignment Example

Executive Summary Fantastic Holdings and Harvey Norman Holdings is a furniture giant dealing in a variety of furniture. With their establishment in Australia both of them has shown improvement. The financial analysis for 2008 and 2009 demonstrates the performance for both the company. The different ratios like profitability, efficiency and financial stability ratios reveal special features for both this companies. The limitations present areas where the financial data doesn’t work. The recommendations presents the different areas both this companies need to work upon to improve their performance. Thus, the overall ratio analysis highlights the area where both the companies are strong and areas where they need to work on. Content Introduction 3 Financial Analysis 3 Profitability Ratios 3 Efficiency Ratios 5 Financial Stability Ratio 7 Limitations 8 Conclusion 8 Recommendations 9 References 10 Appendix 11 Introduction Fantastic Holdings is a furniture retail, manufacturer and importer of it. The company has a huge presence and deals in “home improvement, office supplies, and other products”. (Fantastic Holdings Website, 2010) The fact that the company deals in so many products and huge reach has given a wide market. The company has a presence in supermarkets, malls, departmental stores and provide the basic necessities for people thereby enabling them to grow. Harvey Norman Holdings Ltd is also a furniture giant. The company deals in “different furniture and home improvements”. (Harvey Norman Holdings Website, 2010) The wide range of product and dispersion has made it a huge success. The company with their policy to satisfy customers has grown and is able to capture a good market. The financial statement of both the companies reveals so. Even the share prices shows improvement. With more consumers moving towards supermarkets gives an opportunity to expand in overseas. Financial Analysis Financial analysis is very important for all business. Analyzing the statement helps in “planning, budgeting, monitoring, forecasting and improving the financial performance by taking vital decision”. (Micro Strategy, 2010) Proper analysing helps a long way to “understand the financial health”. (Micro Strategy, 2010) It helps to identify trends and compare with competitors and industry to gain advantage. The following is the ratios for Fantastic Holdings Ltd and Harvey Norman Holdings Ltd Profitability Ratios Profitability ratios form a very vital part of financial analysis. This ratios help to understand the profit which can be attributed to the different factors which work in tandem to achieve the desired results. The profitability ratios are as follows Gross Profit Margin: “It is defined as the profit generated after deducting cost of goods sold and before the indirect expenses are accounted for and considers only the direct expenses”. (Kennon, 2010) Gross profit helps to find out the actual profit that is attributed directly to the product. It is calculated as– “Gross Profit / Sales X 100”. The ratio for both the companies are The ratio indicates consistency for Fantastic and Harvey Norman. Fantastic Holdings has a higher gross profit indicating soundness in manufacturing process. It also shows that the strategies are well managed. Harvey Norman Holdings on the other hand needs to improve its performance. Net Profit Margin: “It is defined as the profit generated per dollar of sales and is calculated after all the direct and indirect expense has been considered”. (Kennon, 2010) Organisations prefer this to be high. It is calculated as “Earning before Interest and taxes (EBIT) / Sales X 100”. The ratios for both the companies are as It is seen that the net profit has decreased for Fantastic Holdings Ltd. This is a worrying factor and reflects inefficiency to maintain the indirect expense. When we compare it to the gross profit margin it shows a huge dip signifying the amount of indirect expenses like marketing, distribution and other expenses the company incurs. Return on Assets: “It is defined as the amount of profit generated for per dollar of asset”. (Joseph, 2010) It helps to identify whether the assets are utilized properly or underutilized. It is calculated as “Earning before Interest and Taxes (EBIT) / Average assets X 100). The ratios for both the companies are as Here we see that the return on assets for both have decreased in 2009 as compared to 2008. The worrying factors for Fantastic Holdings & Harvey Norman Holdings as their assets are underutilized. This has resulted in having more assets that warranted. Fantastic Holdings Ltd on the other hand has a better return showing proper utilization of assets. Return on Equity: “It is defined as the profit earned as compared to the equity shareholders i.e. earning per dollar of equity”. (Joseph, 2010) It is calculated as “Net Profit available to ordinary shareholders / Average Equity (excluding minority interest and preference capital) X 100”. The ratios for both the companies are as follows We see that Fantastic Holdings Ltd has a very high return on equity as compared to Harvey Norman Holdings Ltd. The returns for both have decreased. This is a worrying factor and shows the strategies and policies implemented hasn’t been successful. The return for Harvey Norman is very low which might lead to shareholders moving out to other companies or investing in risk free securities. Efficiency Ratios Operating ratios forms a very important part as it helps to “show the efficiency of the management and also indicates the company’s efficiency to manage its capital”. (Joseph, 2010) The following ratio helps to calculate the operating efficiency. They are as Asset Turnover Ratio: It is defined as “the total sales generated per revenue of assets”. (Joseph, 2010) It is calculated as “365/ (Sales Revenue / Average Total Assets)”. The ratios for both the companies are as follows The ratio both has decreased. Fantastic Holdings has been able to use its assets better in 2009. This has made the ratio to improve. Harvey Norman Holdings on the other hand has shown poor use of assets. It needs to improve. Receivable Turnover Ratio: “It is defined as the number of times the company is able to recover the dues from the customer”. (Kennon, 2010) The higher it is the better it is. It is calculated as “365/ (Credit Sales / Average Receivable)”. The ratio for both the companies are Here we see that Fantastic Holdings has a very good rate and it recovers its chances of bad debts to be less. Fantastic Holdings has also shows consistency and is a good sign. Harvey Norman Holdings on the other hand has a poor receivable rate. The bad sign for Harvey Norman Holdings is that it has decreased drastically in 2009 as compared to 2008. The company needs to improve it then it would be a good sign and reduce the chances of debts. Payable Turnover Ratio: “It is defined as the number of times the creditor is paid in the year and companies generally prefer to maintain it good so that reputation is good”. (Kennon, 2010) It is calculated as “365/ (Cost of good sold / Average payable)”. The ratios for both the companies are as follows It is seen that Fantastic Holdings has improved its turnover ratio drastically. This is a good sign and shows that the reputation has improved with the suppliers and also ensures steady supplies. Harvey Norman Holdings needs to improve it. This will help to earn a good reputation for the future. Inventory Turnover Ratio: “It is defined as the number of times inventory is rolled over during a year”. (Joseph, 2010) Companies prefer it to be high. It is calculated as “Cost of Goods Sold / Average Inventory”. The ratios for both the companies are as The above ratio indicates that Harvey Norman has revolved its inventory more compared to Fantastic Holdings. Both the companies’ performance has decreased in 2009. The company needs to be replicated so that the inventory levels come down. This will ensure less money in inventory and help to ensure that the funds are not blocked. Financial Stability Ratios This ratio looks into both the short and long term financial stability and helps to find the prospective growth opportunity for the company. The ratios which include both the short and long term financial stability are provided below Current Ratio: “It measures the ability to pay the short term liabilities out of short term assets”. (Financial Modelling Guide, 2010) This ratio helps creditors, suppliers and investor to identify the liquid position. It is calculated as “Current Assets / Current Liabilities”. The current ratios for both the companies are as (appendix) The ratio shows that Fantastic Holdings Ltd has a better liquidity position as compared to Harvey Norman Holdings Ltd. Harvey Norman Holdings need to improve the ratio as it is a concern as the short term obligations are higher. This might make investors and suppliers stay away. Fantastic Holdings on the other hand is in a better position but still needs to take it slightly up. Quick Ratio: It is also known as acid test ratio. “It measures the ability of the firm to meet its short term obligation when inventories are removed as inventories take some time to be converted into cash”. (Financial Modelling Guide, 2010) It is calculated as “(Current Assets – Inventories) / Current Liabilities”. The ratios for both the companies are as The ratio also indicates that Harvey Norman Holdings Ltd is better positioned as compared to Fantastic Holdings. The ratio indicates the inefficiency of the company to meet its immediate debt. Fantastic Holdings need to improve this as it is a concern and presenting a bleak picture. Debt to Equity Ratio: “It determines the proportion of long term debt in relation to the shareholders fund and long term debt”. (Transtutor, 2010) This ratio helps to identify the financial soundness. It is calculated as “Long Term Debts / Equity X 100”. The ratios for both the companies are as The ratio indicates soundness on the part of both the companies. It shows that the company has a scope for more investment through debts. This is a good sign and shows the company has a space for future projects. As both the companies work in a type of market where to grow large debt is needed so the ratio seems to be sound. Limitations Inflation and changes in price has not been accounted for which might be misleading Historical cost has been considered which might not be true in the present scenario as value changes with time Changes in technology for production, distribution, marketing has not been accounted for which might give different result Conclusion Wesfarmers Limited and Woolworths Limited both have been performing on similar lines and have been successful. The financial statement even highlights similar facts. Both the companies can improve with better strategy. The financial ratios of both the companies show some demarcating things and also highlight the different strategies taken by each. This even highlights that companies similar in nature use different strategies and improve their performance. Both this companies have room for improvement and with the growth this sector is showing it gives them opportunity to capture a good market and grow. Recommendations Norman Harvey Holdings Ltd needs to improve its current ratio so that it reflects soundness in its policies and strategies Both the companies need to reduce the amount held in inventories as it is high leading to a lot of money being invested Both the companies need to take more debt especially long term so that they are able to save on the taxes Norman Harvey Holdings Ltd needs to improve its operating ratios so that it can match its competitor Fantastic Holdings Ltd needs to reduce its indirect cost, improve efficiency, bring down assets and improve their management References Financial Modelling Guide, 2010, “Liquidity ratios”, retrieved on April 27, 2010 from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios/ Fantastic Holdings Website, 2010, “Fantastic Holdings Website”, retrieved on April 27, 2010 from http://www.fantasticfurniture.com.au Harvey Norman Website, 2010, “Harvey Norman Holdings Website”, retrieved on April 27, 2010 from http://www.harveynorman.com.au/ Joshua K, 2010, “Analyzing an income statement: Return on Assets”, about.com guide, The New York Times Company retrieved on April 27, 2010 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/return-on-assets-roa-income-statement.htm Joshua K, 2010, “Analyzing an income statement: Return on Equity”, about.com guide, The New York Times Company retrieved on April 27, 2010 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/understanding-return-on-equity.htm Joshua K, 2010, “Analyzing an income statement: Inventory Turnover”, about.com guide, The New York Times Company retrieved on April 27, 2010 from http://beginnersinvest.about.com/od/analyzingabalancesheet/a/inventory-turns.htm Kennon J, 2010, “Analyzing an income statement: Gross Profit”, about.com guide, The New York Times Company retrieved on April 27, 2010 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/gross-profit.htm Kennon J, 2010, “Analyzing an income statement: Net Profit Margin”, about.com guide, The New York Times Company retrieved on April 27, 2010 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/net-profit-margin.htm Kennon J, 2010, “Analyzing an income statement: Receivable Turnover”, about.com guide, The New York Times Company retrieved on April 27, 2010 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/receivable-turnover.htm Micro Strategy, 2010, “Financial Analysis”, retrieved on April 27, 2010 from http://www.microstrategy.com/financial-analysis/ Transtutor, 2010, “Capital Structure Ratios”, retrieved on April 27, 2010 from http://www.transtutors.com/finance-homework-help/dividend-decisions-and-tools-of-financial-planning/Capital-Structure-Ratios.aspx Appendix 1. Calculation of Current Ratio for Fantastic Holdings Limited Current Ratio for 2008 = Current Assets / Current Liabilities = 2.40 Current Ratio for 2009 = Current Assets / Current Liabilities = 1.79 2. Calculation of Current Ratio for Norman Harvey Holdings Limited Current Ratio for 2008 = Current Assets / Current Liabilities = 1.24 Current Ratio for 2009 = Current Assets / Current Liabilities = 1.11 3. Calculation of Quick Ratio for Fantastic Holdings Limited Quick ratio for 2008 = (Current Assets – Inventories) / Current Liabilities = 0.48 Quick ratio for 2009 = (Current Assets – Inventories) / Current Liabilities = 0.36 4. Calculation of Quick Ratio for Norman Harvey Holdings Limited Quick ratio for 2008 = (Current Assets – Inventories) / Current Liabilities = 1.10 Quick ratio for 2009 = (Current Assets – Inventories) / Current Liabilities = 0.98 5. Calculation of Debt to Equity for Fantastic Holdings Limited Debt to Equity Ratio for 2008 = Long Term Debts / Equity = 68.3% Debt to Equity Ratio for 2009 = Long Term Debts / Equity = 84% 6. Calculation of Debt to Equity for Norman Harvey Holdings Limited Debt to Equity Ratio for 2008 = Long Term Debts / Equity = 72.8% Debt to Equity Ratio for 2009 = Long Term Debts / Equity = 77.5% 7. Calculation of Gross Profit Margin for Fantastic Holdings Limited Gross Profit Margin for 2008 = Gross Profit / Sales * 100 = 43.53% Gross Profit Margin for 2009 = Gross Profit / Sales * 100 = 44.94% 8. Calculation of Gross Profit Margin for Norman Harvey Holdings Limited Gross Profit Margin for 2008 = Gross Profit / Sales * 100 = 26.74% Gross Profit Margin for 2009 = Gross Profit / Sales * 100 = 27.58% 9. Calculation of Net Profit Margin for Fantastic Holdings Limited Net Profit Margin for 2008 = Net Profit / Sales * 100 = 8.76% Net Profit Margin for 2009 = Net Profit / Sales * 100 = 6.38% 10. Calculation of Net Profit Margin for Norman Harvey Holdings Limited Net Profit Margin for 2008 = Net Profit / Sales * 100 = 36.53% Net Profit Margin for 2009 = Net Profit / Sales * 100 = 24.17% 11. Calculation of Return on Assets for Fantastic Holdings Limited Return on Assets for 2008 = Net Income / Total Assets * 100 = 25.77% Return on Assets for 2009 = Net Income / Total Assets * 100 = 17.75% 12. Calculation of Return on Assets for Norman Harvey Holdings Limited Return on Assets for 2008 = Net Income / Total Assets * 100 = 15.51% Return on Assets for 2009 = Net Income / Total Assets * 100 = 9.52% 13. Calculation of Return on Equity for Fantastic Holdings Limited Return on Equity for 2008 = Net Income / Equity * 100 = 30.15% Return on Equity for 2009 = Net Income / Equity * 100 = 23.37% 14. Calculation of Return on Equity for Norman Harvey Holdings Limited Return on Equity for 2008 = Net Income / Equity * 100 = 18.66% Return on Equity for 2009 = Net Income / Equity * 100 = 10.65% 15. Calculation of Receivable Turnover Ratio for Fantastic Holdings Limited Receivable Turnover Ratio for 2008 = 365/ (Sales / Average Receivable) = 8 days Receivable Turnover Ratio for 2009 = 365/ (Sales / Average Receivable) = 7 days 16. Calculation of Receivable Turnover Ratio for Norman Harvey Holdings Limited Receivable Turnover Ratio for 2008 = 365/ (Sales / Average Receivable) = 255 days Receivable Turnover Ratio for 2009 = 365/ (Sales / Average Receivable) = 272 days 17. Calculation of Payable Turnover Ratio for Fantastic Holdings Limited Payable Turnover Ratio for 2008 = 365 / (Cost of Goods Sold / Average Payable) = 37 days Payable Turnover Ratio for 2009 = 365/ (Cost of Goods Sold / Average Payable) = 51 days 18. Calculation of Payable Turnover Ratio for Norman Harvey Holdings Limited Payable Turnover Ratio for 2008 = 365 / (Cost of Goods Sold / Average Payable) = 209 days Payable Turnover Ratio for 2009 = 365/ (Cost of Goods Sold / Average Payable) = 258 days 19. Calculation of Inventory Turnover Ratio for Fantastic Holdings Limited Inventory Turnover Ratio for 2008 = 365 / (Cost of Goods Sold / Average Inventory) = 119 days Inventory Turnover Ratio for 2009 = 365/ (Cost of Goods Sold / Average Inventory) = 130 days 20. Calculation of Inventory Turnover Ratio for Norman Harvey Holdings Limited Inventory Turnover Ratio for 2008 = 365/ (Cost of Goods Sold / Average Inventory) = 79 days Inventory Turnover Ratio for 2009 = 365/ (Cost of Goods Sold / Average Inventory) = 91 days 21. Calculation of Asset Turnover Ratio for Fantastic Holdings Limited Asset Turnover Ratio for 2008 = Sales Revenue / Average Total Assets = 2.94 Asset Turnover Ratio for 2009 = Sales Revenue / Average Total Assets = 2.74 22. Calculation of Asset Turnover Ratio for Norman Harvey Holdings Limited Asset Turnover Ratio for 2008 = Sales Revenue / Average Total Assets = 0.42 Asset Turnover Ratio for 2009 = Sales Revenue / Average Total Assets = 0.39 Read More