Solution
Harshit answered on
Jun 22 2021
EVALUATE BUSINESS PERFORMACE
TABLE OF CONTENT
Sl. No.
Contents
Page No.
1.
Assessment Task 1
3 - 11
2.
Assessment Task 2
12 - 14
3.
Assessment Task 3
15-21
4.
Assessment Task 4
22
5.
References
23
ASSESSMENT TASK 1
PART A
The financial data of the company Nick Scali Limited is provided from 2012-2014. The company has two
ands Nick Scali and Sofa2Go. The company is also listed in the Australian stock exchange. Based on the annual reports a small trend analysis and assessment of the company's performance is ca
ied out in following the areas as discussed below:
Trend Analysis: Trend analysis is a technique that is used to collect information related to the past and analyze a trend or pattern in performance to predict the future performance of the company and its likely impact. It helps in determining the future share prices of the company (Zeff, S.A.). It refers to the comparison of data of one period with the other so that a pattern can be determined to identify future activities. For Nick Scali Limited trend analysis is conducted in the following areas:
· Evaluation of assets and liabilities from the balance sheet: The table below shows the trend in assets and liabilities from the information obtained in the annual report. The base is taken as 2012 and calculation of increase or decrease is All figures in the table are expressed in '000 $.
2012
2013
2014
Total assets
53,906
74,164
80,426
% increase/(decrease)
-
37.58%
49.20%
Total Liabilities
26,459
37,830
40,926
% increase/(decrease)
-
42.97%
53.67%
The company assets and liabilities have increased by 12% from 2013 to 2014 taking 2012 base year. This indicates that the company is unwilling to pay its debtor is unable to pay its debt, which indicates that there will be default in the future. The company would not be able to clear off its debts. The liabilities of the company are increased indicating that they are not paid off on time.
· Cash Flow Analysis: Next, we will identify the trend in the cash flows under the three different heads i.e. operating, investing, and financial. The cash flow statements show the cash spend and received by the company and analyzing trend on this is done to check whether the cash flows has increased or decreased. Here also the base year is taken as 2012. The figures are in ‘000 $.
2012
2013
2014
Cash flows from operating activities
12,853
19,703
22,416
% increase/decrease
-
53.29%
74.40%
Cash flows from investing activities
(2,203)
(9,268)
(2,933)
% increase/decrease
-
320.70%
33.13%
Cash flows from financing activities
(7,511)
(4,685)
(10,021)
% increase/decrease
-
(37.62%)
33.41%
The cash flow from operating activities has a positive result. Also, the % change in cash flows for 2014 is more than 2013 when compared to 2012. This indicates that core activities or activities which are operative in nature are doing good. The inflow of cash is increasing when compared to outflow. The cash flow from investing activities give a negative trend. The results are negative and in 2013 it is highest. This indicates that many assets have been purchased in 2013 as compared to any other year. There is also a negative result for cash flow from financing activities. This indicates that the company has repaid its debt more that there has been inflow which will lead to a decrease in the assets of the company.
· Sales and Cost Analysis:
Sales and cost analysis are done to determine whether there is growth in the company or whether the company can control and manage its cost. The trend analysis is conducted to see the increase or decrease keeping the year 2012 as the base year. All figures are expressed in ‘000 $.
2012
2013
2014
Revenue/sales
1,09,931
1,27,431
1,41,442
% Increase/(decrease)
-
15.92%
28.66%
Cost of goods sold
42,883
49,925
56,019
% Increase/(decrease)
-
16.42%
30.63%
Other Indirect expenses
54,930
61,071
66,349
% Increase/(decrease)
-
11.18%
20.79%
The sales
evenue has increased for both the years as compared to the base year. This indicates that there is a growth prospect for the company. But the % change in the cost of goods sold is more than the change in sales. This implies that the overall change in the gross profits will decrease. The cost of goods sold is also increasing as the revenue is increasing. Hence, costs should be taken care of, so that the gross profit ratio is maintained. Also, we see that the indirect expenses are increasing as compared to base year on an average of 10%. To improve this adequate cost-cutting measures should be taken.
· Analysis of creditors and debtors:
An analysis of the trend in debtors and creditors will help in determining whether the company is making credit sales or purchases, whether the company can collect the revenues in time or pay its creditors on time. The trend analysis is shown below:
2012
2013
2014
Total Debtors
747
549
101
% Increase/(decrease)
-
-26.51%
-86.48%
Total Creditors
4,528
5,548
6,138
% Increase/(decrease)
-
22.52%
35.56%
The trend analysis taking 2012 as a base shows that the debtors are decreasing each year implying that there is no capital block. All sales are done on a cash basis and steps are taken to avoid credit sales. The total creditors are increasing from the base year meaning thereby that the purchases are made on a credit basis. This means the financial position of the company is not good. Steps have to be taken to improve the same.
· Analysis of the Director's Report: The analysis of the director's report shows that sales revenue has increased in 2014 because there has been the establishment of new stores and also sales growth in those stores. The company opened two new stores at the yearend 30th June 2014. Both the stores were performing within expectations. The gross profit remained the same. There has been increasing in operating costs due to new stores opening. The motive of the company is to expand its business, earn more revenue, and reduce costs.
Thus, the various conclusions drawn by ca
ying out the trend analysis will help determine and set achievable, realistic, etc. targets and develop Key Performance Indicators under various heads.
PART B: RATIO ANALYSIS
Ratio analysis is an important tool to identify the financial health and the cu
ent performance of the organization. It helps in making various decisions related to the organization. There are various categories of ratio which are shown below:
Now, based on the financial statements from the year 2012-2014 of Nick Scali Furniture as provided, we will analyze some of these ratios and draw some interpretations from that:
1. Debt to equity ratio: This is a financial ratio that is used to calculate the debt and shareholders equity that are used to finance a company's assets. It indicates how much a company bo
ows and how much it uses its fund. An ideal debt to equity ratio of 1 or 1.5 is considered. For the company, it is as given in the table:
Debt-to-equity Ratio = Total Liabilities
Total Shareholder’s Equity
2012
2013
2014
Total liabilities in ‘000 $ (A)
26,459
37,830
40,296
Total Shareholder’s Equity in ‘000 $ (B)
27,353
36,334
40,130
Debt-to-equity
(A/B)
0.97
1.04
1.01
The company's debt-equity ratio is good. There is less risk involved as the company raises almost equal funds through both i.e. debts and its capital.
2. Cu
ent Ratio
This ratio is used by the creditors to access the financial position of the company to repay its debts or the ability to pay short-term debts. An ideal ratio of 2:1 is considered ideal. The formula for the cu
ent ratio is:
Cu
ent Ratio = Cu
ent Assets
Cu
ent Liabilities
For the company, the cu
ent ratio is given below:
2012
2013
2014
Cu
ent assets in’000$ (A)
35,657
48,545
55,180
Cu
ent liabilities in’000$ (B)
20,526
28,478
31,153
Cu
ent Ratio (A/B)
1.74
1.70
1.77
The company’s cu
ent ratio is not satisfactory. This implies that the financial position is not enough to pay off the liabilities and short-term bo
owings. The ratios are 1.74, 1.70, and 1.77. The liquid position of the company is not good to pay liabilities i.e. the cu
ent assets are not enough to pay cu
ent liabilities.
3. Return on Equity
It is the ratio used to examine the profitability of the company (Meng, J. and Berger, B.K.). It shows how much profit the company can earn from the money invested. Investors can know the return on their investments. Generally. ROE on 15-20% is considered good:
Return on Equity = Net income * 100
Shareholder’s Equity
2012
2013
2014
Net income in ‘000 $ (
9,024
16,002
14,236
Shareholder’s Equity in ‘000 $
27,353
36,334
40,130
ROE (A/B*100)
32.99%
44.04%
35.47%
The company has a good return on investments. This means the company is earning good and investors are getting a sufficient amount on their investments. Higher ROE indicates the higher profitability of the company.
4. Liquidity Ratio:
These ratios are used to determine the liquid position of the company. The two major liquidity ratios are the Cu
ent Ratio and Quick Ratio. Cu
ent ratio formula and analysis is already done above. Now, we will analyze the liquid ratio:
Quick Ratio = Cu
ent Assets – Inventories
Cu
ent Liabilities
2012
2013
2014
Cu
ent assets in’000$ (A)
35,657
48,545
55,180
Inventories in ‘000$ (B)
13,649
14,569
19,013
Quick Assets (A-B)
22,008
33,976
36,167
Cu
ent liabilities in’000$ (C )
20,526
28,478
31,153
Quick Ratio (A-B)/C
1.07
1.19
1.16
The company’s liquid ratio is not good. This indicated that the company does not have enough cu
ent assets to pay off its cu
ent liabilities. The company needs to improve this ratio so that it becomes 2:1 i.e. cu
ent assets are two times the cu
ent liabilities.
5. Debt Ratio: It is the financial ratio that indicates what amount of a company's assets are bought using debts. A debt ratio of 0.4 and lower is...