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ACC10707 - Accounting for Business Ratio Analysis

   

Added on  2020-03-02

7 Pages1772 Words98 Views
Ratio AnalysisComparison between Kathmandu Limited andOrotonGroup

IntroductionKathmandu Limited is a New Zealand based company involved in designing, marketing and selling of clothing and equipment for travel and adventure. The company has a network of about 161[CITATION Yah17 \l 16393 ] stores which includes 47 in New Zealand and 114 in Australia.Our competitor, OrotonGroup Limited is a company based in Australia. It is in the business of leather goods, fashion apparel and accessories which it designs, develops, markets and alsoretails. The company has 63 Oroton stores [CITATION Fin17 \l 16393 ] The company also operates another brand called GAP under which it sells fashion apparel. There are 7 GAP stores. The company has its presence in Australia, New Zealand and Asia.Financial AnalysisA financial analysis of the above two companies was conducted and the financial performance of Kathmandu Limited has been compared to OrotonGroup. Ratios under all categories including profitability, liquidity, solvency and activity have been calculated and compared to determine the overall financial performance of both the companies.Kathmandu LimitedOroton LimitedYear201420152016201420152016Profitability RatioNet profit margin10.7%5.0%7.9%6.6%2%2.5%Activity RatioAsset turnover1.000.981.012.031.882.04Liquidity RatioCurrent ratio2.642.901.792.092.863.02Quick ratio0.250.420.20.750.950.72Cash conversion cycle176.6days169.1days113.2days118.8days185.9days159.4daysCapital Structure RatioDebt ratio0.150.160.110.000.100.00Net Profit Margin

It is the profit which is left after deducting all business related expenses from sales. This profit is available to shareholders.The net profit margin has decreased from 2014 to 2016. This is because of huge costs incurred in inventory clearance in 2015 [ CITATION Kat15 \l 16393 ]This led to lower margin sales and also increased operating costs further declined the profits. However, the margin has improved in 2016 with an increase in sales due to product newness and better promotional activity. Also the operating costs decreased leading to a strong result.Kathmandu Limited has far better margin as compared to OrotonGroup in all the three years. The profits of Oroton have decreased significantly in 2015 owing to increased purchasing costs due to weak Australian dollar and also opening of lower margins GAP stores [ CITATION Oro15 \l 16393 ]In spite of weak Australian dollar, Kathmandu Ltd has higher margins.Asset TurnoverThe ratio measures the efficiency with which the company is utilizing its assets to generate sales.The ratio has remained more or less constant in all the years for Kathmandu Limited. The ratio is nearly 1 which means the company is generating 1 dollar revenue for every dollar invested in assets.Oroton has better asset turnover ratio of around 2 in all the three years. This means it is utilizing its assets in a more efficient way to generate sales. The efficiency can be said to be twice than that of Kathmandu.Current RatioIt is the ability of the company to pay for its short term obligations from its current assets. It is a liquidity measure of the company.The current ratio was higher than 2 in 2014 and 2015; however it has fallen below 2 in 2016 for Kathmandu. This is because of a decrease in current assets owing to a decrease in inventory. The company has implemented a demand planning software due to which the levels of inventory have reduced.

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