Investment Decision: Financial Analysis of Jomel Trading

This report provides a financial analysis of Jomel Trading for Ms. Fan Liu to assess its investment potential, comparing the company's performance in 2018 with 2017 and industry standards. The analysis focuses on profitability, using metrics like profit margin, gross profit percentage, return on total assets, and return on owner’s equity, revealing a decline in profitability compared to the previous year and industry benchmarks. Additionally, the report examines resource usage through inventory turnover, days in selling period, account receivable turnover, and days in collection period, indicating improvements from 2017 but still falling short of industry averages. The report concludes that while Jomel Trading meets the net profit expectation, its declining profitability and inefficient resource usage compared to industry standards raise concerns. It recommends further investigation into a specific investment reflected in the balance sheet before making a final investment decision.

accounting for business
ASSIGNMENT
DATE: 28TH SEPTEMBER 2018

Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................2
Profitability of the business.........................................................................................................................2
Resource usage............................................................................................................................................3
Conclusion and recommendation.................................................................................................................4
Conclusion...............................................................................................................................................4
Recommendation.....................................................................................................................................4
Reference.....................................................................................................................................................5
Appendix C.................................................................................................................................................7
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Executive Summary
This report is an analysis of the financial operations and performance of Jomel Trading for the
period of 2018 and doing a comparison with 2017. Also, a comparison of the 2018 is done with
those in the same industry as Jomel Trading. This is done to be able to assist Ms. Fan Liu in
deciding whether to invest in Jomel trading. But on doing analysis on the profitability of the
business and resource usage we can conclude that though they are making a net profit as per her
expectation there is decline in profitability in 2018 compared to 2017 and what others are doing
in the industry. On further analysis of the resource usage there is an improvement from 2017 to
2018 but still it is not as per the industry standards. On examining the balance sheet there was an
investment that was done more information should be sort on the same and its effect on the
future of the business and then from there a decision can be made but at the look of the
information provided Ms. Fan liu should not invest in Jomel trading
Introduction
Ms. Fan Liu wants to decide on whether to invest in Jomel trading or not. So, in helping her
make this decision an analysis will be done on the profitability of the business in the current year
of 2018 and compare it with 2017 and those in the same industry. A further analysis will be done
on the resource usage and after this analysis are done a conclusion will be drawn whether Ms
Fan Liu should invest in Jomel Trading or not.
Profitability of the business
In determining the business ability to generate profit we shall be looking at the following;
Profit margin
This helps to determine the overall efficiency of the business operations. From our analysis the
profit margin for 2018 is 4.8% this is a decline from 7.2 % in the year of 2017 and also below
industry level so there is a reduced efficiency in the operating the business.
Gross Profit Percentage
This ratio measures the extent of gain in the sales, the higher the gross profit percentage the
better it is for a business. The gross profit percentage is 18.8% which is sufficient to cover
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operating expenses and other expenses. But when you compare it with 2017 it is on a decline and
those in the same industry it is lower which gross profit margin declining and lower than industry
target.
Return on total assets
This measures the overall profitability of a business. It is got by comparing the profit earned and
the asset employed to earn it. It measures how efficient the asset is being used to generate profit.
The return on total asset for 2018 is 13.3% but when you compare it with the one for 2017 it is
on a decline which means it is less inefficient compared to 2017 in using its assets to generate
profit. When you compare it to industry level of 15% it is less efficient in using its asset to
generate profit.
Return on Owner’s Equity
This is a measure of how able a business is to make profit from what has been contributed by the
owners.it also an indicator on how management is effective in using equity to fund the operation
and growth of the business. The ratio for 2018 is 16.3%, but when you compare it to that of 2017
it is on a decline and when you compare it to others in the industry it is at a lower efficiency.
In conclusion to the profitability of the business using the four ratios it is on a decline for Jomel
trading. From observing the income statement and the balance sheet the profitability of the
business is on a decline it may have been as a result of bad investment decision or an investment
that increases in its cashflow as times goes by. From the income statement though, there is an
increase in sales there is an increase in interest and an increase in depreciation this is supported
by increase in loan and increase in owner’s equity as shown in the balance sheet.
Resource usage
We will also examine in this report how well the business is using the resources at its disposal.
And in this report, we will analyze the following ratios;
Inventory turnover
This ratio measures the efficient use of stock. A business is expected to have a high stock
turnover. The inventory turnover for 2018 is 3.49 which is an increase from 2017. But still when
you compare it to others in the industry of 5 it is below.
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Days in selling period
This is the measurement of receivable. This is where a business tries to do much of the sales for
cash. The days in selling period is 104 day which is a reduction from the one for 2017 which was
113 days but it is still way below the industry rate of 73 days.
Account receivable turnover
This in this ratio we check efficiency of debt correction from debtors. The account receivable
turnover for 6.8 times which is an improvement from 2017 which was 5.8 times. But comparing
it from that of the same industry it is still below the industry mark.
Days in collection period
This ratio shows how long it takes for credit customers to pay. From the calculation in 2018 it
takes an average of 54 days for credit sales to be paid which is an improvement from 2017 which
was 63 days. But when you compare it with that of the industry it should take an average of 45
days so they time taken to collect debt is more than that in the industry.
Conclusion and recommendation
Conclusion
Ms Fan Liu wants to invest in a business that makes a net profit of around $160,000 to $ 200,000
on looking at just the net profit of Jomel it may look ideal business for investment but when you
do a ratio analysis it proves otherwise. When we check on the profitability of the business in
2018 and comparing it with that of 2017 we see in all profitability ratios that the profitability of
the business is on the decline and when we compare it with others in same industry it is not
doing well as compared to its competitors.
Further when we check on the usage of resources it has shown an improvement in 2018
compared to 2018. But when you compare it with those in same industry Jomel trading is using
more resources to generate income.
Recommendation
We can ask for further information about the investment done as it appears in the balance sheet
and its effect on the future of the business because it is seen that from the resource usage ratio
there is an improvement which may favor the profitability of the Jomel Trading in the future. So,
with the further information acquired a conclusive decision can be made.
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Reference
Chandra, P. (2011). Financial management. (8th ed.) Tata McGraw-Hill Education.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2010). Financial accounting: tools for business
decision making. (6th ed) John Wiley & Sons.
Fabozzi, F. J., Drake, P. P., & Polimeni, R. S. (2008). The complete CFO handbook: From
accounting to accountability. John Wiley & Sons.
Gibson, C. H. (2012). Financial reporting and analysis. (6th ed.) Nelson Education.
Chandra, P. (2017). Investment analysis and portfolio management. (3rd ed.) McGraw-Hill
Education.
Jurczenko, E. (2017). Factor Investing: From Traditional to Alternative Risk Premia. Elsevier.
Peterson, p. (2018, September 30) Financial Ratio Analysis Retrieved from
http://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf
Zhengfei G. (2018, September30). ratio analysis, financial planning and financial analysis
retrieved from https://msu.edu/course/aec/853/chapter5.pdf
Shodhganga (2018, September 30) Ratio analysis. Retrieved from
http://shodhganga.inflibnet.ac.in/bitstream/10603/37639/12/12_chapter%205.pdf
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Appendix C
: ANALYSIS RATIOS TO BE COMPLETED
2018 2017 Industry
1 Profit Margin 4.8% 7.2% 7%
2 Gross Profit Percentage 18.8% 21.1% 20%
3 Return on Total Assets 13.3% 15.3% 15%
4 Return on Owner’s Equity 22.4% 20%
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16.3%
5 Inventory Turnover 3.49x 3.23x 5x
6 Days in selling period 104 days 113 days 73 days
7 Accounts receivable Turnover 6.8x 5.8x 8.11x
8 Days in collection period 63 days 45 days
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54 days
1. Profit Margin = (164000x100) / 3420000 = 4.8%
2. Gross Profit Percentage = (644000x100) / 3420000 = 18.8%
3. Return on Total Assets = ((164000+84000)x100) /
{[(1468000+524000)+(1336000+412000)]/2} = 13.3%
4. Return on Owner’s Equity = (164000x100) / [(1028000+980000)/2] = 16.3%
5. Inventory Turnover = 2776000 / ((860000+728000)/2) = 3.49x
6. Days in selling period = 365 / 3.49 =104 days
7. Accounts receivable Turnover = 3420,000 / [(528000+484000)/2)]= 6.8x
8. Days in collection period = 365 / 6.8 = 54 days
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