Good Example Of Essay On Financial Ratio Analysis

The objective with which the report is being prepared is the financial analysis of the books of accounts and the ratios of Specialty Fashion Group, which has been listed in the Stock Exchange as a fashion house in Australia. The attempt made will be examination of necessary ratios that explain all kinds of profitability, efficiency, long term solvency, short-term solvency and the returns on shareholder’s investments (Accountingedu.org, 2016). A comparative analysis is to be made between ratios of different years to understand the rising trends and to track performance indicators. The conclusion should then bring out whether there is an improvement in the overall performance of the firm, along with recommendations to improve.

Profitability Ratios

The ability of a firm in the management of assets is reflected by the profitability ratios. In this regard, profitability would mean the revenue proportions which are remained after incurring all expenses. These ratios indicate overall business profits and give way for comparison between consecutive years so that the performance of the Company can be judged. The following ratios may be used for the analysis.

The Gross Profit Margin

The gross profit for the Company has decreased from 59% in 2014 to 58% in 2015, which is a U-turn to its decreasing trend and is not a good sign.

The Net Profit Margin

The net profit is facing a decrease with 1.83% in 2014 to -0.56% in 2015. This is also not a good sign since the Company seems to be returning to its past.

The Return on Capital Employed

Maximum degradation has been denoted by this ratio. The ratio which was negative in 2012 was now positive and thriving at 25% in 2013. In 2014, it was still on a rise at 17%, and then suddenly again it has gone to negative in 2015.

Efficiency Ratios:

The ability for management of current assets is given by efficiency ratios. The ratios that can be considered in this light are:

The Debtor Days Ratio

There is gradual increase in the debtors’ days which is not a good sign since it is best for the Company if receivables time can be decreased. In 2014 it was 2 days and in 2015 too, it is almost the same, rather in increasing trend.

The Creditor Days Ratio

There is gradual decrease in the creditors’ days which is not a good sign since it is best for the Company if payables time can be delayed. In 2014 it was 41 days and in 2015, it stood at 24 days. It can still be increased with proper management strategies.

The Stock Days Ratio

Increase in stock days from 86 days in 2014 to 99 days in 2015 is not a good sign for the Company’s inventory management.
The two ratios related to debtors and creditors focus on the trade amount and the allowed credit to and from the Company. They assess whether the time length taken by debtors in paying their obligations is favourable and whether the credit period to the Company is favourable. This way, cash flow problems in the Company can be traced early. The last ratio of stock measures how adequate the stock levels are, the turnover time of the stock and the selling period taken by the stock.

Short Term Solvency Ratios:

For the short term solvency test of the Company, two ratios are considered:
The Current Ratio
The Quick Assets Ratio
Liquidity is what these ratios calculate and position of the Company regarding improvement is what they evaluate. Towards the end of 2015, there has been an improvement in the current ratio from 2014. In 2014, the figure was 1.12 whereas at the end of 2015, it is 1.15. This means that the cash and liquidity position of the Company is safe to pay its liabilities. Nevertheless, when we move to the quick assets ratio, there is a negative value, though the value is increasing year by year. Even when that is the case, continuous cash generation in all its transactions is a saving grace for the Company and should keep it away from short term financial troubles. The position of cash is positive in 2015, like the previous year. The generation of cash is high with good management of capital and strength of balance sheet which gives cash reserves amounting to $38.6 million (Admin, 2016).

Long Term Solvency:

The gearing of the Company is low and there is absence of any external debt. Equity capital thus becomes the sole source of financing. Another strong point in the financial position is that there is absence of any form of fixed payments for capital structure financing. In case there are needs of expansion in future, the Company will not have much trouble in reaching the loan capital sector in situations where share issue and reserve capital fall short. The current financial steadiness is to be maintained.

Shareholders’ Investment Ratios:

It is necessary that the Company function information is given to the shareholders on a yearly basis. These ratios related to shareholder investments provide them with indications on the performance of the company against the share prices and other issues of common interest like dividend payments and issue of shares. Earnings per share or EPS is the ratio that summarizes this situation.
The major concern of investors in a Company is whether they will be able to get sufficient returns from their capital investment in the Company. The decision to invest is a derivative of many data which can aptly be received from financial analysis. Companies which have a strong financial base and secure future returns to investors will have higher capital inflow through loans and equity. Sadly, these favourable aspects cannot all be achieved in case of Specialty Fashion Group Limited. Making a turn from past losses and not giving out dividends in past years to increasing bit by bit (six cents per share in 2014, three cents per share in 2015) the investor belief in the Company is growing but is not sufficient. The Company needs to be able to maintain the current state of investor confidence; otherwise the share prices are definite to go down.

Recommendations:

It has been argued many times by various finance analysts that a business should focus its strategies on maximizing stockholder values which is reflected in the common stock market prices.
Specialty Fashion should also focus on some things or aspects which will help it in the maintenance of the momentum that it started to create. These recommendations are necessary so as to refrain from resulting in a negative revenue circumstances.
For the improvement of profitability position, the Company could use cost controlling techniques or revenue increasing programs. Marketing and online media promotion could be the ways to sell aggressively and divert high resources in this area.
Higher efforts should be put into the identification and promotion of leases and agreements of rent which help ease the monitoring and evaluation functions of online and stores that are performing less than others.
There are many evolving opportunities in the market that should be correctly identified by the Company and invested, by finding ways to cut costs.
The working capital needs to be strengthened so that the generation of cash gets continuity. The cash that is generated in excess can be invested for other avenues of the business for getting short-term cash benefits.
For improving efficiency in the Company operations, the main focus should be on close monitoring of receivables (Canadian Entrepreneur Training, 2016). The main point of origin for those is lay-byes. There needs to be apt supervision on the collection period for debtors. There can also be payable management by slowing down the supplier payment so that interest can be increased. Inventory management also needs to check by indulging in aggressive marketing. This is also the time for the Company to experiment with proven techniques like Just in time management; however the management should be impeccable.
The leverage position of the Company is strong and this will be a favourable case for obtaining loan capital in the future. However, for securing this advantage for long term expansion plans, the sustainability of this gearing position is necessary. This will also be a boon for improving the foreign exchange situation (Phillips, C. and Phillips, C. 2015).
For effective management of reserves, the excess cash flow or the surplus in any revenue unit should be credited to reserves so that dividend and other capital investments can be well managed in future.

Conclusion:

When ratios are used, the analysis of data becomes more credible. Audited financial statements provide maximum authenticity of transparency and performance. The present scenario of Specialty Fashion Group represents a Company that is in favourable financial conditions and is growing. This is reflected in the calculated ratios. In the past, the Company had seen some losses, which should always be considered in being careful that the growth does not decline. Comparison has also been facilitated by ratio analysis. Through the ratio analysis, we could see the areas where the Company needs to integrate efforts and improve the metrics. The extent and nature of management strategies needed are well reflected in the ratio analysis and Specialty Fashion Group is not an exception. Areas of short term liquidity and cost management could be looked upon with greater vision and carefulness. Receivable and payable management also needs some consideration.

References

Accountingedu.org, (2016). Accounting Ratios | Financial Ratios | Types of Ratios for Analyzing Financial Statements. [online] Available at: http://www.accountingedu.org/accounting-ratios.html [Accessed 14 Jan. 2016].
Admin, S. (2016). ANNUAL REPORTS. [online] Specialtyfashiongroup.com.au. Available at: http://www.specialtyfashiongroup.com.au/index.php/investor-centre/annual-reports [Accessed 14 Jan. 2016].
Canadian Entrepreneur Training, (2016). How to manage small business accounts receivable and accounts payable. [online] Available at: http://canadianentrepreneurtraining.com/how-to-manage-your-small-business-accounts-receivable-and-accounts-payable/ [Accessed 14 Jan. 2016].
Elvis Picardo, C. (2006). Ratio Analysis Definition | Investopedia. [online] Investopedia. Available at: http://www.investopedia.com/terms/r/ratioanalysis.asp [Accessed 14 Jan. 2016].
Phillips, C. and Phillips, C. (2015). Differentiation, Omnichannel Improves Specialty Fashion Group Profits. [online] Power Retail. Available at: http://www.powerretail.com.au/news/specialty-fashion-group-first-half-profits-triple/ [Accessed 14 Jan. 2016].
Specialtyfashiongroup.com.au, (2016). Specialty Fashion Group. [online] Available at: http://www.specialtyfashiongroup.com.au/ [Accessed 14 Jan. 2016].
Appendix 1:
All figures are in AUS dollars except the no. of shares.
Calculation of Ratios:
Profitability Ratios:
1.1: Gross Profit Margin; 2015: 2014
462 406
790 = 58.5% 683 =59.5%
1.2: Net Profit Margin: 2015 2014
(4) 12
790 = -0.56% 683 = 1.83%
1.3: Return on Capital Employed: 2015 2014
(4) 12
65= -0.82% 67 = 16.28%
Efficiency Ratios:
2.1 Debtor Days: 2015 2014
6 x 365 4 x 365
790 1 = 2.35 days 683 1 = 2.55 days
2.2: Creditor Days: 2015 2014
17 x 365 25 x 365
790 1 = 23.76 days 683 1 = 40.99 days
2.3: Stock Days: 2015 2014
89 x 365 90 x 365
790 1 = 99 days 683 1 = 86.44 days
Short Term Solvency Ratios:
3.1: Current Ratio: 2015 2014
115 116
100 = 1.15: 1 103 = 1.12: 1
3.2: Quick Assets Ratio:
115-89 116-90
100 = .21: 1 103 = .20: 1
Shareholders’ Investment Ratios:
4.1: Earnings Per Share:
(4) 12
192= -0.02 192 = 0.07