Financial Analysis Kadabra Ltd. Executive Summary Ever since the start of the current global recession banks have been hesitant to lend money because a credit crunch affected the money markets in the United States and abroad. Kadabra Ltd is a gallery that currently seeks to expand its operations. The firm is looking to acquire $1.8 million dollars in order to revamp its operations. The firm believes that it can expand its customer base if it makes improvement to its infrastructure. The purpose of the case study is to determine the viability of the loan request from the bank’s perspective.
A financial analysis of Kadabra Ltd was performed taking into consideration trend analysis and ratio analysis. The ratio analysis included profitability, solvency, leverage, and financial stability ratios. Based on the results of the financial analysis I will make a recommendation for the bank on whether to accept or reject the loan request. The Kadabra Ltd generated revenues of $10,800,000 in 2009. The sales total of the company in 2009 increased by 4.3% in comparison with 2008. The revenue growth between 2008 and 2007 was 2.3%.
The metric of higher earnings in 2009 is a positive sign for the enterprise. The net margin of Kadabra in 2009 was 5.9%. The company’s net margin the previous year was 5.96%, which means the firm’s profitability decreased by a marginal amount of 0.06%. Kadabra was not able to duplicate its profitability in 2009 like it did in 2008. In 2008 the firm increased its net income by $258,000 in comparison with 2007. One of the reasons Kadabra was able to increase its income in 2009 was because it was able to lower its commission expense.
The company was able to decrease its commission expense by 3.66% in comparison with the previous year. The gallery industry average for net margin is 8%. This implies that Kadabra Ltd. is underperforming in comparison with the industry. The gross margin of the firm in 2009 was 52.77%. The gross margin of the enterprise is a little below the industry norm of 55%. The return on asset of Kadabra in 2009 was 29.77%. The return on equity of the firm in 2009 was 41.08%.
Both these numbers show that the company is generating a profit from both its assets and equity. The return on equity of the company is outstanding. To better measure how well these the analyst would need data about the industry norm. In 2009 Kadabra Ltd had a total debt of $588,000. The firm’s total debt position increased by 19.51% in comparison with the previous year. The increase in debt by Kadabra is a recurring pattern because in 2008 the total increased by 12.32%. A ratio that provides information regarding a company’s ability to pay off its total debt is the debt ratio.
The debt ratio of Kadabra in 2009 was 3.63. The general rule is for a debt ratio to be above 1.0. The enterprise is in a great position to pay off its total debt. A ratio that tests the ability of the company to pay of its short term debt is the current ratio. The current ratio is calculated dividing current assets by current liabilities. The current ratio of the enterprise in 2009 was 2.72.
The same rule of having a 1.0 applies as a preferable position. The company’s current ratio is adequate which means the company is capable of paying its short term debt. Another ratio that tests the liquidity of the company is the acid ratio or quick ratio. The quick ratio is calculated the same way as the current ratio except in the denominator the inventory is subtracted. The quick ratio of the enterprise in 2009 was 1.65. A final metric that measures a company’s ability to pay off its short term debt is the working capital total.
This is calculated by subtracting current assets minus current liabilities. The working capital of Kadabra is $600,000. A good position to have in working capital is a positive balance. The debt to equity ratio of Kadabra Ltd. in 2009 was 0.38. The gallery industry debt to equity ratio is 0.65. The company’s debt to equity ratio is below the industry average. This metric is an advantageous position because the company has a low debt to equity ratio. Having a low debt to equity ratio is advantageous because it leaves room for the company to grow by engaging in debt financing in the future.
The asset turnover ratio of the business in 2009 was 9.09. The gallery industry average is 4.2. A high metric is a favorable position. Kadabra Ltd is doing better in terms of asset turnover ratio than the industry. The inventory turnover of the company in 2009 was 13.71. This metric implies that the company is able to turn or sell its entire inventory 13.71 times per year. The average sales period of Kadabra is 26.62 days.
The industry average in the gallery industry is 27.0. Due to the fact that the company’s average sales collection period is lower than the industry the company is in a favorable position. Conclusion / Recommendation The Kadabra Ltd had a good financial year in 2009. The firm was able to increase its revenues by 4.3%. The enterprise has had a growing revenue total during the past three years. The profitability of the enterprise was nice. The net margin of the company in 2009 was 5.9%. The most important aspect of profitability when evaluating a company is for the company to achieve a positive net income.
The return on equity and return on assets of the firm were both outstanding at 29.77% and 41.08% respectively. I did not like the fact that the administrative expenses of the company increased by 1.69% in 2009. The net margin of the enterprise was reduced by very small margin of 0.06%. The debt to equity position of the company is lower than the industry average by 0.27. This metric provides me good insight because it implies that the company has room to acquire debt due to its low usage of the debt mechanism in the past.
The debt ratio and the current ratio established that the company is in a good position to pay off its long and short term debt. The company has good cash reserves. The solvency tests proved the firm does not have any type of debt problems. Based on the total analysis performed of the financial of the company my recommendation for the bank would be to accept the bank loan.
The company has track record of good profits and low liabilities. Appendix A: Qualitative Analysis When making decisions concerning whether to give a bank loan to an enterprise it is important to take into considerations other factors other than the financial analysis. An important factor that must be considered is the current state of the economy. In bad economic times the demand for items goes down. In the case of Kadabra Ltd the fact that the company offers luxury products means that type of business is affected more by recessionary movement than other types of businesses.
A factor that must always be considered is the quality of the human resources of a company. Human capital is the most valuable asset a company has. It is good to find workers in companies that are highly trained. Training and development initiatives improve the quality of the human resources of a company. In terms of human resources it is imperative to evaluate the effectiveness of the managerial staff of a company. Managers are responsible for the well being of an enterprise. The ability of a company to implement its sales target depends on the marketing plan of the business.
A good marketing plan has detail processes of how the plan is going to be implemented. The marketing budget must be adequate to achieve the sales goal. In terms of customer it is essential to evaluate the customer portfolio of the company. Is the company dependent on a few customers for its revenue or does the enterprise have plenty of customers? It is more favorable to have the distribution of income across a high number of customers.
When a company is too dependent on a few clients it has a higher business risk. The law of supply and demand can affect the price determination of the company. If the firm lowers its price it will be able to achieve a higher volume of sales. The product or service offered by the company must be evaluated to determine if the company is offering a product that is in demand in the marketplace. In the case of Kadabra Ltd. the company believes that it can exploit the marketplace for luxury dinning and expensive wine drinking.
This is a profitable marketplace, but it is important to learn more about the customers taste in order to better exploit this business model. Performing an independent study of the product can provide better insight about its ability to penetrate the marketplace. A factor that has become very important in the 21st century is technology. The firm has to determine how it can best take advantage of technology to improve its operations. The use of a corporate website can help raise awareness about a product and it also can be use as a point of sale mechanism.
E-commerce has become a growing trend across the globe. The use of technology can help improve the productivity of the enterprise. A good way to let your customer know about sales events is by sending them a text or email. Appendix B: Calculations 2009 net margin = 636 / 10800 = 5.9% 2008 net margin = 618 / 10356 = 5.96% 2007 net margin = 360 / 10128 = 3.56% % sales increase 2009 = (10800 – 10356) / 10356 = 4.3% % sales increase 2008 = (10356 – 10128) / 10128 = 2.3% 2009 gross margin = 52.77% 2009 return on assets = 636 / 2136 = 29.77% 2009 return on equity =636 / 1548 = 41.08% 2009 debt ratio = 2136 / 588 = 3.63 2009 current ratio = 948 / 348 = 2.72 2009 quick ratio = (948-372) / 348 = 1.65 2009 debt to equity ratio = 0.38 2009 Asset turnover ratio = 10800 / 1188 = 9.09 2009 inventory turnover = 5100 / 372 = 13.71 2009 average sales period = 26.62