This report is providing an analysis and evaluation of the current and previous profitability, liquidity and financial stability of Elite Textile Importers Pty Ltd for the years 2010 – 2012, it also given the information about trend, horizontal and vertical analyses, it also provides all calculations about this business and all the calculation can be found in AFB assign calculation. the business is have trouble with funding growth, and debtor keep increasing for that 3 years period and a business has a relatively poor rate of return on asset.
The current and quick ratio was decreased in 2012 to 5,02 times and 2,66 time but the business still be able to pay its debt, there is a problem with account receivable because the business still difficult to collect the money from debtor which caused the percentage still increasing and it hard for business to freeing inventory The business is considered good, because low amount of debt, the increasing in time interest earned that help the business to pay off its interest and debt, the asset turnover is improved but still lower than the industry standard which mean a business is not work efficiency.
The results show that the entire ratio is below the industry averages. In particular, the performance is poor in comparison to field profitability, liquidity, financial stability. The report finds out that the current position of the business is not positive. The recommendations for the business are, must improve the average collection period for debtor, and increase the inventory turnover, increase the asset turn over. Contents Executive Summaryi Contentsii Introduction1 Profitability2
Liquidity3 Financial Stability4 Conclusion5 Recommendation6 Reference List7 Introduction This report provides information obtained through ratio analysis, related to the Profitability, liquidity and financial stability of Elite Textile Importers Pty Ltd for the years 2010 – 2012. This report will focus on the earning power, business’s ability, inventory management and debt management. However, this report will also show the strengths and weaknesses of Elite Textile Importers Pty Ltd.
The reports will comment on the information of the company and give a recommendation that can improves Elite Textile Importers Pty Ltd. Profitability This report show the trend of Elite Textile Pty Ltd is moved upward, it means that company have a high profit and it easy for company to trade with this trend. Horizontal analysis is the comparison of previous financial information, it show that the company have a excellent increased in the following years 2010- 2011 (60,8%) and a small increase from 2011 to 2012 27,7%) in the Income Statement for the Profit. But the related balance sheet show the total asset also increase but not much which are 8,6% in 2010-1011 and 7,9% in 2011 – 2012, however the total liability is also increases 8,2% in 2010-2011 and 10,1% in 2011- 2012, it mean the company have trouble with funding growth. Vertical analysis is an analysis of the ratio of financial statements in which each item in the financial statements are listed as a percentage of other items.
According to the income statement, the companies have a good performance as the COS and Expenses is decreased by 41,3% to 36,7% and 40,8% to 34,6% in the following years 2010- 2012. However, the balance sheet show that we have in trouble with decreased in cash and increased in debtor. According to the excel report, we can see that the price earnings ratio is 4,8 times which mean the ordinary shares of business to be selling for 4,81 current profits in 2012. This show that the company is more stable as the price earnings ratio is low to the avenger about (19%).
However, the dividend keep increasing from 645,000 to 1,415,000 during 2010-2012 and the high dividend payout (75% -80,1%) which show that the business has a relatively poor rate of return on asset. This allows shareholders are opportunity to invest their money in more profitable project. In brief, the business is have trouble with funding growth, and debtor keep increasing for that 3 years period and a business has a relatively poor rate of return on asset.
Liquidity Current and quick ratio is given a ideas that a business‘s ability to pay back it short-term debt, the higher ratio, the better position of the business. In 2012, the current ratio at 5,02 times and quick ratio at 2,66 times compare to 2010 , the current ratio is 8,23 times and quick ratio is 4,91, Thereby, we see that liquidity is not improved, the both ratio is decreasing but it not affect to the business to pay for its debt.
The percentage analysis of Current Assets is still higher than the Current liability, so the business doesn’t have any trouble to pay for its debt. Accounts receivable is the money that the customer owed to a business for products and services, Account receivable keep increasing from 2010 to 2012 (from 14,8% to 17,4% in vertical analysis, up to 137% in trend analysis) which mean the business have trouble with collecting the money from debtors. The inventory turnover ratio show how many time the inventory show and replaced over a period.
In 2010 the inventory turnover was 3,8 times same as 95 days comparing to 2011 which is decreased to 3,7 times same as 97days and 3,0 time same as 122days in 2012, this ratio is higher than the industry standard (87 days) which mean that the company had difficulty in freeing inventory. In brief, the current and quick ratio was decreased in 2012 to 5,02 times and 2,66 time but the business still be able to pay its debt, there is a problem with account receivable because the business still difficult to collect the money from debtor which caused the percentage still increasing and it hard for business to freeing inventory
Financial Stability The debt ratio is a solvency ratio and measures the assets of a business are financed through debt. The debt ratio is decreased from 40,6% to 39,6 % is generally considered good, because the business has a low amount of debt, and is therefore exposed to less risk in terms of interest rate increases. However, the equity ratio is increased from 59,4% to 60,4% and it’s higher than the industry standard by 6,4%. The capitalization ratio is not much change during 3 years period.
Time interest earned is the ratio of profit before interest and tax (EBIT) of a business to its borrowing costs in a given time. It’s a solvency ratio measuring the ability of a business to pay debts. Time interest earned highly increased from 8,1 times to 12,9 times which is favorable meaning greater ability of a business to pay off its interest and debt Asset turnover ratio is the ratio of a company’s sale to its asset, this ratio tell us how successfully the company use it asset to increase their revenue.
The asset turnover is improving from 1, 26 in 2010 to 1, 42 in 2012, but is still way below industry standard 2. 90 which mean the business is not work efficiency In brief, the business is considered good, because low amount of debt, the increasing in time interest earned that help the business to pay off its interest and debt, the asset turnover is improved but still lower than the industry standard which mean a business is not work efficiency.
Conclusion In conclusion, the profitability of the business is not quite good, because the debtor keep increasing and a poor rate return of asset. The liquidity show the current and quick ratio was decreased in 2012 to 5,02 times and 2,66 time but the business still be able to pay its debt and because of the inventory turnover is too high in 2012, therefore it hard for business to freeing inventory.
In financial stability, the business is consider good, because the low amount of debt, however, the business is not working efficiency due to the asset turnover still lower than the industry standard Recommendation The business should • Find a ways to decrease debtor • Increase the inventory turnover • Increase asset turnover Reference List CFOVIET 2011, Total asset turnover, viewed 6 May 2013, http://cfoviet. com/so-vong-quay-tong-tai-san-total-asset-turnover-la-gi/ CFOVIET 2011, equity asset ratio, viewed 6 May 2013, ttp://cfoviet. com/ty-le-von-co-dong-equityasset-ratio-la-gi/ Hogget J, Medlin J, Edwards L,Tilling M and Hogg e 2012, Accounting 8th edition, Australia Irfanullah Jan 2011, Accounting Explained , Inventory Turnover Ratio, viewed in 6 May 2013, http://accountingexplained. com/financial/ratios/inventory-turnover Motley Fool staff, The Motley Fool, how to read a balance sheet: Current and Quick Ratios, Viewed in 6 May 2013, http://www. fool. com/investing/beginning/how-to-value-stocks-how-to-read-a-balance-sheet-cu. aspx