Financial Analysis: Assignment
7 Pages1745 Words74 Views
Added on 2020-03-23
Financial Analysis: Assignment
Added on 2020-03-23
ShareRelated Documents
IntroductionFinancial analysis is critical in the context of evaluating the financial performance. One ofthe key tools that is deployed to carry this analysis is known as ratio analysis. This tends tocompute the underlying ratios that tend to highlight the various aspects of the working of thecompany so that the respective strengths and weaknesses of the given entity can be identified.In this background, the objective of this report is to carry out an analysis of a company namedGelato Industries based on the respective financial statements provided for 2014 and 2015.Additionally, to facilitate performance benchmarking, the respective industry averages havealso been provided. The report presents the observations in this regards. Further, the reportalso highlights certain key aspects about Warren Buffet as an investor.Analysisa)The financial ratios for the company in 2015 and 2014 are highlighted below.Ratios20152014Current ratio0.901.84Quick ratio0.240.78Average collection period 18.9830.42Inventory turnover 4.063.10Debt ratio61.30%50.00%Interest coverage ratio4.623.15Operating profit margin10.50%9.60%Total asset turnover 2.051.33Fixed asset turnover 3.502.42Return on asset 11.74%6.11%Return on equity 30.32%12.23%b)The evaluation of the performance of the firm on various parameters in comparison with the industry is carried out below.LiquidityIt is apparent that in terms of liquidity, the performance of the company is far inferior tothe peers. This is because the current ratio in both the years is lesser than the industryaverage of 2 which is especially true for 2015. A similar trend is noticed in the context of
the quick ratio. As a result, it would be fair to conclude that the company needs to takemeasures to improve the liquidity or it could face potential cash crunch especially in theshort term (Arnold, 2005).Capital StructureThe debt ratio is indicative of the capital structure of the company. While in 2014, the debtlevel seems to be fine, but in 2015, the leveraging of the balance sheet seems to haveincreased due to which the use of debt is higher than the industry average. Also, a key riskis with related to the interest payment default and hence interpretation of interest coverageratio becomes essential. The interest coverage ratio has undergone improvement in 2015when compared to corresponding value in 2014. The value in 2015 is clearly superior thanthe industry average which augers well for the company with regards to availing debtfunding (Berk et. al., 2013).Asset ManagementThese ratios essentially capture the extent to which the assets are used efficiently for salesgeneration. The asset management ratios i.e. fixed asset turnover and total asset turnoverboth are superior to the industry average in both the years. Further, this reflects thesuperior ability of the company to generate sales from the available assets which providesthis a competitive edge over the peer group companies (Damodaran, 2010).EfficiencyThe efficiency ratios tend to reflect the operational efficiency particularly in relation to themanagement of the cash cycle. It is apparent that the efficiency ratios of the company aresuperior in comparison to the industry average. This is true for both average collectionperiod and also inventory turnover. Hence, the company is able to covert inventory intosales in a quicker manner as compared to peers. A similar conclusion can also be drawn inrelation to the ability of converting sales into cash as the collection period for company islower than the industry average. Both these aspects tend to contribute to a lower cashcycle for the company which limits the working capital requirements (Lasher, 2007).
ProfitabilityThe profitability ratios of the company tend to suggest that the performance of thecompany in this regards in 2015 is superior to the industry. This is true for return on asset,return on equity along with operating profit margin. However, certain profitability ratiossuch as operating profit margin and return on asset were lower for the company than theindustry average in 2014. However, the company seems to have improved the businessoperations and underlying strategy which has led to better margins and higher profits onaccount of top line growth (Beck et. al., 2013).c)Price of each share at the end of 2015 = $ 15Number of outstanding shares = 5000i)Earnings per share = (Net profit /Number of outstanding shares) = (22884/5000) = $ 4.58ii)Price-earnings ratio = Price per share/ Earnings per share = 15/4.58 = 3.28iii) Market to Book Value = (Market Value/Book Value) = (5000*15)/ (195000-119535) =0.99d)On the basis of the above, it can be concluded that while the balance sheet of the companyseems a little higher in leverage and also the liquidity ratios pose some concern, theperformance of the company in other aspects is superior to the industry average. Also, it isnoteworthy that in the year 2015, the profitability, asset management, efficiency ratioshave seen significant improvement which is very positive for the shareholders. However,considering the improvement seen by the company (Damodaran, 2010). in 2015, the shareprices of the company seems grossly undervalued especially seen the low P/E. Also, thebook value of the company is slightly higher than the market value which indicates thatthe market believes that the management is not generating any value which is notsupported by the 2015 financial statements. It seems that in the near future, the stock priceof the company would improve especially if the management could replicate theperformance level at 2015 standards (Arnold, 2005).e)(i) Some of the interesting facts in relation to Warren Buffet are highlighted below(Kirkham, 2014)
End of preview
Want to access all the pages? Upload your documents or become a member.
Related Documents
Assignment on Finance (PDF)lg...
|13
|1516
|62
FINC20018 Accounting for Managers | Ratioslg...
|7
|1703
|145
Ratio Analysis Of Gelato Industries | Reportlg...
|6
|1615
|76
Evaluating an Organizations Financial Positionlg...
|10
|2671
|279
HI6026 | Audit and Assurancelg...
|11
|2655
|53
(PDF) Financial Analysis of Primark Stores Ltdlg...
|14
|4061
|1117