Financial Performance of WaveRider: Ratio Analysis and Recommendations
Verified
Added on 2023/04/20
|8
|1613
|483
AI Summary
The report focuses on the financial performance of WaveRider, a small business in the Australian sports and recreation industry. It includes a ratio analysis of profitability, liquidity, and financial stability, along with recommendations to enhance profitability.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
Running head: INTRODUCTION TO ACCOUNTING Introduction to accounting Name of the student Name of the university Student ID Author note
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
1INTRODUCTION TO ACCOUNTING Executive summary The report will focus on the financial performance of WaveRider, a small business that provides services through hiring wetsuits and surf equipments and arranging the surfing lessons. The report will focus on the performances through computing various ratios like profitability ratio, liquidity ratio and financial stability ratio. It will also focus on additional business scenario regarding Australian sports and recreation industry. Finally based on the analysis, the report will provide recommendation to enhance the profitability.
2INTRODUCTION TO ACCOUNTING Table of Contents Introduction..........................................................................................................................................3 Financial statement analysis.................................................................................................................3 Additional business scenario................................................................................................................4 Limitation of ratio analysis...................................................................................................................4 Conclusion and recommendation.........................................................................................................5 References............................................................................................................................................6 Appendix..............................................................................................................................................7
3INTRODUCTION TO ACCOUNTING Introduction The main objective of the report is to focus on the financial performance s of WaveRider for the current financial year. Various ratios those will be considered for focussing on the performance of the entity are the profitability ratios including net profit margin, return on assets and return on equity, liquidity ratio including the current ratio and financial stability ratio including the debt ratio and debt equity ratio. Based on the analysis strategies will be identified and recommended to Daniel for improving the overall profitability and performance of the business(Hu, 2016). Financial statement analysis It is the procedure of reviewing and evaluating the financial statement of the entity for making better economic decisions. One of the widely used methods for analysing the financial statement is ratio analysis. It is the quantitative analysis of the information included in the financial statement of the entity(Easton, 2018). Ratio analysis is used for analysing different aspects of the entity’s operating as well as financial performances including profitability, liquidity and financial stability. Profitability ratios – it is used for evaluating the ability of the entity to generate the income as compared to the expenses and various other costs related to income generation during specific period under consideration. Net profit margin that determines the profit left with the company from revenue after paying all the expenses. From the calculation table it can be identified that the net profit margin of the company is 30.27%. Return on assets indicates how profitable the entity as compared to the total asset is. It gives an idea regarding how the assets are deployed by the entity for generating earnings. Return on assets of the company is 0.12 that indicates that the company is generating $ 0.12 of sales for each $ 1 of asset. Return on equity is used to measure the earning earned by the shareholders on their holdings. In other words, it measures the firm’s ability in generating profit from the shareholder’s investment. Return on equity of WaveRider at 0.30 is indicating that for each dollar of investment shareholders are earning $ 0.30(Brigham, 2016). Liquidity ratio – liquidity ratios are used for measuring the ability of the entity to meet its debt obligation in short term scenario. Current ratio is one of the widely used liquidity ratio that measures whether the current assets of the entity are sufficient to meet its short term obligations. It can be identified that the current ratio of the company is 1.28. It is indicating that the current assets of the company are sufficient to meet its short term obligations (Young, 2017).
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
4INTRODUCTION TO ACCOUNTING Financial stability ratio – stability is long term counterpart of the liquidity. Analysis of stability determines how much of debt is raised by the entity and whether the equity and debt component of capital structure is balanced. Most common stability ratios used for analysing the financial stability of the entity is debt ratio and debt to equity ratio. Debt ratio is the stability ratio used to measure the total liabilities of the firm as the percentage aspect of the total assets. It indicates the ability of the company to pay off the liabilities with the assets(Uechi, 2015).The debt ratio of WaveRider at 0.59 is indicating that it has sufficient assets to meet its debt obligation and the company will not have any issue in paying its debt. On the other hand, debt to equity ratio determines the percentage of the firm’s asset financed through debt and the percentage that is financed through equity. it is a long term solvency ratio used to determine the soundness of the entity’s long term financial solvency.A debt equity ratio of 0.5 indicates that the assets of the entity are funded 2 to 1 by the investors to creditors. However, from the given scenario it can be observed that the debt equity ratio of the company is 1.44 that is indicating that significantly large proportion of the assets of the entity is financed though debt and small proportion is financed through equity. Hence, the company is highly leveraged(Skillsiq.com.au). Additional business scenario Australian sports and recreation industry is extremely popular with the consumers and caters to wide range of tastes and demographics. Consumers prefer services targeted to their particular requirements that leads to offering of increased range of activities in fitness and gym facilities. In accordance with ‘Sport and Recreation 2018 IRC Skills Forecast and Proposed Schedule of Work’ economic contribution of this sector is equal to 2-3% of the GDP and it employs more than 220,000 people that attracts 1.8 million of volunteers. However, a sole trader like Wave Rider is exposed to high level of competition. This competition has arisen due to affordability that is the prices of gym membership fell across the industry and full service gyms became more flexible with changing themselves as per the requirement of the customers. However, the strong profitability and liquidity condition of the company is indicating that it will be sustainable for the long term(Report, 2019). Limitation of ratio analysis Though ratio analysis is an important tool to analyse the performance of any company it has some limitations as follows – All the information used by this technique are from historical results and does not state anything regarding the future performance
5INTRODUCTION TO ACCOUNTING It does not consider the important factors like industry performance, economic condition of the country and rate of inflation Different entities use different policies for reporting the accounting transaction. It makes comparing the ratios with other entity difficult(Penman, 2015). Conclusion and recommendation From the above discussion it can be concluded that the company is performing well in profitability and liquidity aspect. However, if the stability context is considered it can be stated that the company is highly leveraged as the debt portion is significantly high as compared to equity. Hence, it is suggested to raise further requirement of fund trough equity rather than debt to balance the debt and equity. Further, to enhance the profitability WaveRider shall modify itself as per the customer’s requirements and minimise the expenses wherever possible.
6INTRODUCTION TO ACCOUNTING Bibliography Brigham, E. F. (2016). Financial Managment: Theory And Practice, Canadian Edition. Nelson Education. In E. F. Brigham,Financial Managment: Theory And Practice, Canadian Edition. Nelson Education. Easton, M. &. (2018). Financial Statement Analysis & Valuation. In M. &. Easton,Financial Statement Analysis & Valuation. Hu, K. H. (2016). Evaluating the improvement of sustainability of sports industry policy based on MADM. Sustainability,. Penman, S. H. (2015). Financial Ratios and Equity Valuation.Wiley Encyclopedia of Management. In S. H. Penman,Financial Ratios and Equity Valuation.Wiley Encyclopedia of Management(pp. 1-7). Report, N. I. (2019).Sport, Fitness and Recreation. Retrieved January 9, 2019, from National IndustryInsightsReport:https://nationalindustryinsights.aisc.net.au/industries/sport-fitness-and- recreation Skillsiq.com.au.(n.d.).RetrievedJanuary9,2019,from https://www.skillsiq.com.au/site/DefaultSite/filesystem/documents/Industry-Skills-Forecasts- June2017/2018%20Drafts/Sport%20and%20Recreation%20Draft%202018%20Industry%20Skills %20Forecast%20for%20Public%20Consultation.pdf Uechi, L. A. (2015). Sector dominance ratio analysis of financial markets. InPhysica A: Statistical Mechanics and its Applications(pp. 488-509). Young, T. S. (2017). In T. S. Young,Educating managers for equity and social justice: Integrating Indigenous knowledges and perspectives in Australian sport, recreation and event management curricula. Journal of Hospitality, Leisure, Sport & Tourism Education(pp. 135-143).
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
7INTRODUCTION TO ACCOUNTING Appendix Ratio calculation RatioFormulaResult Profitability ratio Net profit marginNet profit/revenue30.20% Return on assetsNet profit/total assets0.12 Return on equityNet profit/Shareholder's equity0.30 Liquidity ratio Current ratioCurrent assets/current liabilities1.28 Financial stability ratio Debt ratioTotal liabilities/total assets0.59 Debt equity ratioTotal liabilities/total equity1.44