Analysis Of Financial Performance

Executive summary

This part of the business report analysis the financial performance of the Packett Packaging Pty Ltd. here we are using both quantitative as well as qualitative method to measure the actual financial movement of said firm.  it is always essential to identify the flow of economic growth of the firm to make a strategic planning and expansion strategy. Here we are using financial ratios to measure the financial performance of firm along with this a logical argument to support the recommendations and conclusion made at end of this financial analysis report.   The financial ratios show the actual performance of the firm at end of 2011, while analysis made from the financial statement show the performance of said firm from 2008 to 2011.

Ratios Analysis

1 Current Ratio

 

Formula                    Current Assets

Current liability

 

Computation             $ 130596

$ 83896

Result                         1.55

Comment      :    the current ratio show the liquidity position of the firm, the stander and healthy current ratio is more than 1. Any firm having a current ratio less than 1 indicate that the firm may facing an issue to meet their short term obligation. Many firm may operate with the capital lower than 1 but this fact always indicate risk for the investors and other interested stakeholder. In current case the current ratio of selected firm were more than 1 which simply means that the firm is in position to meet its short term obligation without much difficulties.  In our case the current liabilities are less than the current assets which is a good since from the firm prosperity points of view.

2 Quick Ratio

 

Formula                Cash + Receivable  + Marketable security

Current liability

Calculation                $ 92 907

$83896

Result                         1.11

Comment

Similar to the current assets, the quick or Acid take ratio also indicate the liquidity position of the firm, this ratio consider the current assets which can be immediately converted into the cash. The ratio show the firm ability to meet the current obligation by immediately converting the current assets into the cash. The stander quick assets ratio is more than 0.50. In current case the quick ratio is more than 1 which simply indicate high liquidity position of the firm. Our selected firm can pay its short term liabilities without much difficulties.

1.3 Working capital

 

Formula                                 Current Assets Less Current liability

 

Computation                         $ 130596 – 83896

 

Result                                       $ 46700

 

Comments

The working capital is a summary of all above stated ratios. Similar to the current assets and quick ratio the working capital also show the liquidity condition of firm. from the above computation one thing is clear that our firm has a sound liquidity condition and it were doing well through out the year.

1.4 Account Receivable Turnover Ratio

 

 

 

Formula                                             Net Credit Sales

Average of Account Receivable

Computation                                                 $ 260000

$ 23000

Result                         11.30

 

Comments

The account receivable ratio, also known as the debtor turnover ratio.  The ratio is known as the efficiency ratio which measure the firm efficiency’s in collecting the account receivable over the given period of time. The short period is most suitable for firm efficiency’s and in measurement of firm ability to convert the bock fund into the liquid and usable funds. In current case the liquidity ratio of the selected firm were 11 days. Which is very much reasonable and affordable.

1.5 Leverage Equity Ratio / Debt to Equity Ratio

 

Formula                                 Short term + Long term + other fixed payment

Share holders Equity

 

Computation                                                 $ 60000

$ 114 568

0.52

Comment

The debt to equity ratio show the firm capital structure, the proportion of debt and equity capital in the capital structure of the firm. in current case firm were using more owner capital than the debt financial. Which is a good singe from firm prosperity points of view.

Analysis of financial performance from 2008 to 2011

Assets1

The major portion of the firm assets are divided into the two categories, namely the current assets and the fixed assists the current assets are those which used in the daily operating activities of the firm and which show the financial liquidity and the usage of working capital. The major portion of current assets are from used of working capital like debtor, receivable and other short term investments. While on another hand the investment in capital assets are land building, plant and equipment and vehicles.While analysing the total assets of the said firm it can measure that the total assets of the firm were increased year after year. The growth in the total assets indicate the prosperity of the firm. as compare to 2008-9 the total assets of the firm during 2010-11 were almost double which clearly indicate the growth and expansion of operation.

Liability -2

As like the total assets the liabilities are also bifurcated among the two categories, like current liability and long term liability, while reviewing the current liability of the firm it can be judge that the current liability for 2010-11 were income with double capacity as compare to last two years.  From the given data it can be judge that the firm had improved its performance during 2010-11 by investing excess capital to the business and by hiring more fund from the various source the actual inflow of cash were increase in term of loan from the bank and financial institutions. In reality such growth in liability indicate the expansion of business.

Income -3

The income of the selected firm were drive from the three source, the major source of income are from the sales of goods and service, and other sales, where the minor to nominal income were received from the interest.  while analysing the income statement of last three years, it can be observed that the income of the firm from all three source were increased year after year. This facts indicate the growth of the firm, the sales of the firm were increased by nearly 20 to 25 percent from 2008-9 to 2010-11. Such level of positive improvement in sale show the singe of prosperity of firm.

Expenses

The expenses are categories among the two division, such as direct expenses as well as indirect expenses. The direct expenses are those which are directly engaged with the production and sales. The major portion of the direct expenses are the material, labour and the direct overhead. These expenses increased with the increase in the sales and inform of the firm, it is very much natural that these direct expenses increased with the increase in the sales and with the growth of the firm. While on another hand the indirect expenses are those which are related with the administrative and promotional activities of the firm. the indirect expense increase with the expansion strategy of the firm, while analysing the financial statement of the firm it can be judge that the indirect expenses increase with nominal variation, which can be found in every business and operating activities. the growth in direct and indirect expenses indicates the growth of the firm.

Equity

Equity is a source of funds used by the promoters to start up the business. In some sophisticated terms equity is an owner’s capital.  There are mainly two major source of fund to financial any project and to start new venture, like the equity share capital and the debt capital. The equity capitals are invested by the promoters and other directly interested groups, while the debt capital are a fixed financial obligatory funds. This type of funds required the commitment from the borrower to discharge the financial obligation on timely bases. The capital structure of selected company consisting of both equity as well as debt capital, and both the source of capital were increased year after year. Borrowing from bank were increased from $ 33600 to $ 60000 from 2008 to 2011, similarly equity capital were increased from $ 8960 to $ 16000 from 2008 to 2011. Such consistence growth in the capital indicates the growth in the business and continues requirement of capital to financial the operation and the business activities. the owner capital consisting the retain earning as well as drawing. The retain earning increased the capital of the firm while the drawing capital reduces the owners capital.

Analysis of financial performance

To measure the financial performance of any firm it is always essential to check both financial statement as well as notes to account, the notes to accounts consisting of accounting assumption and the accounting policy that were adopted and other things. here we are analysis the financial performance of the firm by reviewing the income statement and

Total income and expenses

As we know the income of the firm were bifurcated among the three heading namely income from the sales of goods and services, secondly other income and lastly interested income. On depth study of income statement it can be judge that from 2008 to 2010 the gross income of the selected corporation were continues increased. This may be on account of adopting of aggressive strategy to control a direct cost, however after 2010 the gross profit of the firm were reduced by achieving the top highest level of past three years. The profitability of firm were reduced from $ 160000 to $ 140000 the reduction in gross earnings by $ 20000 such reduction invites the possible risk factors for the firm.

After 2010 the direct expenses were increased as compare to past few years, as a result of which the earning of the gross earning of firm were lower than 2010.  While analysing the indirect expenses of the firm, the positive growth were noted, bust such growth were override by the overall growth in the net income of the firm. year by year the gross and the net income of the firm were increased. This fact indicate about the prosperity of the firm and about the possible opportunity to maximise the wealth for the investors and associated groups.

Cost of Sales

The cost of goods sold are the direct expenses associated with the production and sales of the firm.  The cost of goods sold cover the major portion of expenditures, on an average the cost of goods sold were 40 to 42 percentage of the sales of goods and service. Over the year these expenses were increased with the increased in the sales and the production of the firm. The major portion of the cost of goods sold consisting of material, labour and direct overhead. Which change with the change in the production and with increased in demand.   From 2008-09 the cost of good sold were 38 percent of the sales, which were increased by two percentage and reached at 40 percent and same growth were noted during 2011, which result into the cost of good sold were 42 percentage of the sales price.

Cash flow Statements Analysis

The cash flow statement show the firm liquidity position. the statement mainly bifurcated the activities among the three categories namely operation, financial and investing. The operating activities show the inflow and outflow of cash  form the operation of business, while the investment activities shows the inflow and outflow of cash from the short and long term investment. In various investment instrument like stock, property, bonds etc. while financial activities show the inflow and outflow of case through and from the various source like equity instrument debt instrument, integral source etc.

Analysis the cash flow statement form 2010 and 2011

Operating

the major inflow in the operating activities are from the sales of good, collection of GST, realisation from creditors and amount received from the bank. While compering the inflow of cash with the expenditure the major out flow under the operating activities are from blockage in stock, (Stock in hand) and investment in debtors. The current assets increased the working capital which the operating liability helps in managing the requirement for working capital. The debtors and stock increased the requirement of working capital while the creditors reduces the requirement of working capital.

Investing

During 2011 there is no inflow and out flow of cash from the investment activities, this indicate that the firm were not used the available free cash for investing in securities or the similar instrument to generate additional inflow of cash. Even not liquidated any investment instruments.

Financial

During the income year 2010-11 the said firm had generated addition capital from owners’ equity, from the cash flow statement we can judge that firm had invited the shareholders for subscription of additional capital. Total 16000 were rise from owner capital. Similarly company had invested addition from the retain earning by $ 70684 this retain earning is a internal source to financial the operation of firm. actual drowning from the financial activities are $ 35195 which is nearly 50 percentage of the retain earning. Still the cash flow from the financial activities are positive and total inflow from the financial activities were $ 68907 during the year ended on 2011.

Recordation

To increase the profitability for next year, firm are supposed to focus over direct expenditure and cost of goods sold. The continues increment in cost of goods sold create a risk for the reduction in gross profit and the earning capacity of the firm.  so the key priority to increase the profit would be controlling the direct cost of production and increasing the sales.

Excessive blockage in the stock and debtors, show the weakness of the firm to predict about the demand and manage the sales of the firm. In such a situation, firm are suppose to work over the internal control system of the sales predication, investor management and reduction in working capital requirement. The positive working capital indicate blockage of fund in operating activities. which is a negative singe for proper utilisation of available fund. Hence second priority would be established a suitable system over the working capital management and predication of demand

Conclusion

After reviewing the financial structure and analysis the ratios it can be concluded that the selected firm were continuously doing well. Since last 3 years the firm were in position to manage their earning and liquidation condition. From the above ratio and on depth study of the financial statement we can concluded, selected firm is required to work over the working capital requirement and it required to established a sound system for prediction of demand and for measurement of sales. From investors points of view the selected firm gives a best opportunity to growth in the investment and earning opportunity.

References

Aaii.com. (2018). 16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses. Available at: https://www.aaii.com/journal/article/16-financial-ratios-for-analyzing-a-companys-strengths-and-weaknesses.touch [Accessed 12 Nov. 2018].

accountingverse.com. (2018). Financial Ratio Analysis – List of Financial Ratios. Available at: https://www.accountingverse.com/managerial-accounting/fs-analysis/financial-ratios.html [Accessed 12 Nov. 2018].

Corporate Finance Institute. (2018). Analysis of Financial Statements – Free Financial Analysis Guide. Available at: https://corporatefinanceinstitute.com/resources/knowledge/finance/analysis-of-financial-statements/ [Accessed 12 Nov. 2018].

Momoh, O. (2018). Ratio Analysis. Investopedia. Available at: https://www.investopedia.com/terms/r/ratioanalysis.asp [Accessed 12 Nov. 2018].

The Balance Small Business. (2018). Four Financial Statement Analysis Techniques. Available at: https://www.thebalancesmb.com/how-do-you-do-financial-statement-analysis-393235 [Accessed 12 Nov. 2018].

Zionsbank.com. (2018). Available at: https://www.zionsbank.com/pdfs/biz_resources_book-6.pdf [Accessed 12 Nov. 2018].

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