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The paper 'Financial Ratio Analysis for David Jones and Myer " is an outstanding example of a finance and accounting case study. Financial ratios form the toolbox used to perform financial analysis of companies. Ratios are easy to understand and interpret to potential investors considering that the final statements of accounts are not easy to interpret. This report is focused on the financial analysis of two main retail companies operating in Australia. The companies are David Jones and Myer for two reporting periods, 2011 and 2012 (Steven, 2012). Ratio Formula David Jones Myer Current ratio 323,249/306,298 = 1.06 times 441,472/502,869 = 0.88 times Quick ratio (323,249-279,099)/306,298 = 0.14 times (441,472-385,702)/502,869 = 0.11 times Inventory turnover 1,167,987/279,099 = 4.15 times 1,464,574/385,702 = 3.80 times Average collection 365/113.97 = 3.20 days 365/152.15 = 2.40 days Total asset turnover 1,867,817/1,240,897 = 1.51 times 2,612,700/1,918,193 = 1.36 times Debt/equity - 421,193/877,680 = 0.48 times Times interest earned 154,760/10,938 = 14.15 times 234,632/34,263 = 6.85 times Gross profit margin 699,830/1,867,817 = 0.3747*100 = 37.47% 1,288,421/2,612,700 = 0.4931*100 = 49.31% Net profit margin 101,103/1,867,817 = 0.0541*100 = 5.41% 141,067/2,612,700 = 0.0540*100 = 5.40% Return on Assets 101,103/1,240,897 = 0.0815*100 = 8.15% 141,067/1,918,193 = 0.0735*100 = 7.35% Return on equity 101,103/547,028 = 0.1848*100 = 18.48% 141,067/519,776 = 0.2714*100 = 27.14% Price/earnings 2.44/0.194 = 12.59 1.62/0.239 = 6.78 2011 Ratio Formula David Jones Myer Current ratio 327,101/266,133 = 1.23 times 442,920/584,360 = 0.76 times Quick ratio (327,101-288,850)/266,133 = 0.14 times (442,920 – 381,161)/584,360 = 0.11 times Inventory turnover 1,194,474/288,850 = 4.14 times 1,551,112/381,161 = 4.07 times Average collection 365/99.90 = 3.65 days 365/109.36 = 3.34 days Total asset turnover 1,961,744/1,214,550 = 1.62 times 2,666,083/1,974,132 = 1.35 times Debt/equity - 419,951/861,330 = 0.49 times Times interest earned 247,111/7,789 = 31.73 times 260,138/38,747 = 6.71 times Gross profit margin 767,270/1,961,744 = 0.3911*100 = 39.11% 1,271,630/2,666,803 = 0.4768*100 = 47.68% Net profit margin 168,139/1,961,744 = 0.0857*100 = 8.57% 159,665/2,666,803 = 0.0599*100 = 5.99% Return on Assets 168,139/1,214,550 = 0.1384*100 = 13.84% 159,665/1,974,132 = 0.0809*100 = 8.09% Return on equity 168,139/525,105 = 0.3202*100 = 32.02% 159,665/519,479 = 0.3074*100 = 30.74% Price/earnings 3.05/0.33 = 9.24 2.64/0.274 = 9.64 Year-on-Year Trend Analysis (2012 vs.

2011) Ratios David Jones Year 2011 Myer Year 2012 Liquidity ratios Current ratio 1.23 1.06 Went down by 0.17 points 0.88 0.76 Declined by 0.12 points Quick ratio 0.14 0.14 No change 0.11 0.11 No change Activity ratios Inventory turnover 4.15 4.14 Declined by 0.01 points 3.80 4.07 Went up by 0.27 points Average collection 3.20 3.65 Went up by 0.45 days 2.40 3.34 Went up by 0.94 days Total asset turnover 1.51 1.62 Went up by 0.11 points 1.36 1.35 Declined by 0.01 points Debt ratios Debt/equity - - No borrowings reported 0.48 0.49 Went up by 0.01 points Times interest earned 14.15 31.73 Went up by 17.58 points 6.85 6.71 Declined by 0.14 points Profitability ratios Gross profit margin 37.47 39.11 Went up by 1.64 points 49.31 47.68 Declined by 1.63 points Net profit margin 5.41 8.57 Went up by 3.16 points 5.40 5.99 Went up by 0.59 points Return on assets 8.15 13.84 Went up by 5.69 points 7.35 8.09 Went up by 0.74 points Return on equity 18.48 32.02 Went up by 13.54 points 27.14 30.74 Went up by 3.60 points Market ratios Price/earnings 12.59 9.24 Declined by 3.35 points 6.78 9.64 Went up by 2.86 points 2012 Financial Ratios Comparison Liquidity ratios Ratio David Jones 2012 Myer 2012 Interpretation Current ratio 1.06 0.76 David Jones performed better Quick ratio 0.14 0.11 David Jones performed better Activity ratios Ratio David Jones 2012 Myer 2012 Interpretation Inventory turnover 4.14 4.07 David Jones performed better Average collection 3.65 3.34 Myer performed better Total asset turnover 1.62 1.35 David Jones performed better Debt ratios Ratio David Jones 2012 Myer 2012 Interpretation Debt/equity - 0.49 David Jones had no borrowings Times interest earned 31.73 6.71 David Jones performed better Profitability ratios Ratio David Jones 2012 Myer 2012 Interpretation Gross profit margin 39.11 47.68 Myer performed better Net profit margin 8.57 5.99 David Jones performed better Return on assets 13.84 8.09 David Jones performed better Return on equity 32.02 30.74 David Jones performed better Market ratios Ratio David Jones 2012 Myer 2012 Interpretation Price/earnings 9.24 9.64 Myer performed better Question 2: Risk and Return Calculate the expected return over the four year period for each of the three alternatives Alternative 1: 100% of asset F Formula used: = 0.175 Alternative 2: 50% of asset F and 50% of asset G Formula used: 0.175 = 0.155 = 0.165 Alternative 3: 50% of asset F and 50% of asset H Formula used: 0.175 = 0.155 = 0.165 Calculate the standard deviation of the returns over the four year period for each of the three alternatives Alternative 1: 100% of asset F Variance F = (0.16 – 0.175)2 + (0.17 – 0.175)2 + (0.18 – 0.175)2 + (0.19 – 0.175)2 = 0.000225 + 0.000025 + 0.000025 + 0.000225 = 0.005 Standard deviation = = 0.07 Alternative 2: 50% of asset F and 50% of asset G Variance FG = [(0.16 – 0.165)2 + (0.17 – 0.165)2 + (0.18 – 0.165)2 + (0.19 – 0.165)2]*0.5 + [(0.17 – 0.165)2 + (0.16 – 0.165)2 + (0.15 – 0.165)2 + (0.14 – 0.165)2]*0.5 = [0.000025 + 0.000025 + 0.000225 + 0.000625]*0.5 + [0.000025+ 0.000025 + 0.000225 + 0.000625]*0.5 = 0.0009 Standard deviation = = 0.03 Alternative 3: 50% of asset F and 50% of asset H Variance FH = [(0.16 – 0.165)2 + (0.17 – 0.165)2 + (0.18 – 0.165)2 + (0.19 – 0.165)2]*0.5 + [(0.14 – 0.165)2 + (0.15 – 0.165)2 + (0.16 – 0.165)2 + (0.17 – 0.165)2]*0.5 = [0.000025 + 0.000025 + 0.000225 + 0.000625]*0.5 + [0.000625+ 0.000225 + 0.000025 + 0.000025]*0.5 = 0.0009 Standard deviation = = 0.03 Use your findings in parts a) and b) to calculate the coefficient of variation for each of the three alternatives. Formula used: Coefficient of variation = standard deviation / expected return Alternative 1: 100% of asset F Coefficient of variation = 0.07/0.175 = 0.40 Alternative 2: 50% of asset F and 50% of asset G Coefficient of variation = 0.03/0.165 = 0.18 Alternative 3: 50% of asset F and 50% of asset H Coefficient of variation = 0.03/0.165 = 0.18 Based on your findings above, which of the three investment alternatives would you recommend?

Why? The coefficient of variation indicates the risk per unit of return, and it offers a very significant base for evaluation at the time the expected returns on two alternatives are not equal.

The smaller the coefficient of variation, the lower risk factor, therefore alternatives II and III are preferable than alternative I. Alternative I has a higher coefficient of variation than alternatives II and III whose coefficient of variation is identical. Question 3: Capital Budgeting and Cash Flow Principles Calculate the initial investment associated with each alternative Alternative 1 Item Value ($) Selling price 20,000 Book value (0) Book profit 20,000 Tax on profit (6000) Net cash flow from the sale 14,000 Item Value ($) Machine renewal cost (90,000) Net cash flow from the sale 14,000 Initial cash flow (76,000) Alternative 2 Item Value ($) Selling price 20,000 Book value (0) Book profit 20,000 Tax on profit (6000) Net cash flow from the sale 14,000 Item Value ($) Machine renewal cost (100,000) Installation costs (10,000) Net cash flow from the sale 14,000 Initial cash flow (96,000) Calculate the incremental operating cash inflows associated with each alternative Alternative 1 Yearly depreciation = 90,000/5 = 18000 Year 1 Year 2 Year 3 Year 4 Year 5 Revenue 1,000,000 1,175,000 1,300,000 1,425,000 1,550,000 Expenses before depreciation 801,500 884,200 918,100 943,100 986,100 Depreciation 18,000 18,000 18,000 18,000 18,000 Net profit before tax 180500 272,800 363,900 463,900 545,900 Tax 54,150 81,840 109,170 139,170 163,770 Net profit after tax 126,350 190,960 254,730 324,730 382,130 Operating cash flow 144,350 208,960 272,730 342,730 400,130

References

Martin, S.F and Fernando, A., Financial Statement Analysis: A Practitioner’s Guide,

2002, John Wiley & Sons

Steven, M.B., Business Ratios and Formulas: A Comprehensive Guide, 2012, 3rd edn, Wiley

Steven, M.B., Financial Analysis: A Controller’s Guide, 2006, 2nd edn, Wiley

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