Name
Course
Lecturer
Institution
Name
Course
Lecturer
Institution
CASE STUDY
Part 1
Question 1
Financial analysis is fundamental to help financial managers and directors make sound and effective strategic decisions. Strategy formulation involves an organization choosing the most efficient decision to achieve their goals. The goals of financial analysis are vital to helping in the formulation of strategies.
Objectives
The primary objective of financial analysis is to provide with information about the financial position of a company and any change in the position to help the relevant authority to make a sound economic decision (Securities and Exchange Commission of Zimbabwe, n.d).
On the other hand, the financial analysis allows the assessment of current and past data and help in assessing the possible risks. Knowledge about the past performance of a company and the current performance is essential as it indicates future performance. The current performance of a company as well reveals the status quo of a company and any debts to plan effectively.
The assessment of the current profitability of a company and its operational efficiency is critical as it helps management to understand the financial health of the company. Current analysis also involves the assessment of the assets of a company which is vital in making long term decisions.
Another objective of financial analysis is predicting the growth of a company and its profitability. The management uses financial analysis which helps them understand the investment alternatives that they have, to understand prospects. An assessment of financial statements helps to predict the possibility of failure in the business or its profitability (Toppr, n.d).
Question 2
High inventory turnover means that a company is selling its inventory quickly and replacing it quickly as well. Selling many products and at a low price is a strategy used by stores like Walmart and has proven to be profitable. Walmart earns about $486 billion in 2017 which is too much revenue using this strategy (Ugino, 2018). It works because such merchants choose goods which are high in demand and have low costs. When they sell low-cost goods, and frequently, they earn profits at price points. Though the benefit is little per product, selling oftenly leads to much gain. It is unlike the companies which sell high-priced goods. The high priced goods do not sell quickly though they have more revenue.
Question 3
Rolex is a company that specializes in selling luxury watches. Over the years, the prices of the luxury brand have increased. If the company, however, gave discounts on these luxury watches, they could yield more profits than when selling them at high prices. A huge discount on Rolex watches means that the company will experience high inventory turnover. Giving discounts will encourage customers to purchase more; hence the watches will sell very fast. The company will, therefore, sell more and more watches because of the high demand. The more frequently they sell these watches, the more the more they are likely to yield more profits. Though the benefit per watch will be reduced, they will sell more. It is unlike when the company is selling high priced watches. Though the high priced watches yield more profits, they may take longer to sell.
Works Cited
Securities and Exchange Commission of Zimbabwe (n.d). Capital markets highlights. Retrieved from: http://www.seczim.co.zw/downloads/secz%20newspaper%20column%20-%2007%20march%202016%20objectives%20of%20financial%20statement%20analysis.pdf
Ugino, M. (2018). Low-price selling: Is it worth it? Retrieved from: https://www.business2community.com/sales-management/low-price-selling-worth-01990269
Toppr. (n.d). Meaning, significance and objectives of financial analysis. Retrieved from: https://www.toppr.com/guides/accountancy/analysis-of-financial-statements/meaning-significance-objectives-financial-analysis/
Part 2: Tyson case study
Financial Ratio Analysis Worksheet
Your Full Name:
Question 1
2014
2013
Basic Rules
Liquidity
Current Ratio
1.64 (current assets / current liabilities )
1.86
Should be >1.00
Quick Ratio
0.78 (currents assets – inventory / current liabilities)
0.93
Good to see close to 1
Leverage
Debt to total asset ratio
0.34 (total debts / total assets
0.20
Good to see less than 1
Debt to Equity ratio
0.92 (total debt / total stockholder’s equity )
0.39
Smaller is better
Activity
Inventory turnover
(sales / inventory of finishes goods )
11.48
12.202
Higher turnover will be better — Smaller inventory level will increase the turnover!
Fixed asset turnover
sales / fixed assets
7.123
249.087
Higher turnover will be better — Smaller fixed assets level will increase the turnover (Productivity of the fixed assets)!
Profitability
Gross profit margin
Sales – cost of goods sold / sales
2,685,000
2,358,000
Higher is better (Lower cost of goods sold or Higher sales will increase the margin) — Strategic directions (Ex. Focusing on sales quantity or Lean operations)
Operating profit margin
Earnings before interest and taxes EBIT (Operating income) / sales
0.038
0.040
Higher is better – Operational efficiency will be indicated. Better cost structure might increase this margin.
Net profit margin
( Net income / sales )
0.023
0.021
Higher is better. Total profitability (Corporate profitability). Check the interest expense and Discontinued operations.
Return on total Assets (ROA)
( Net income / total assets
0.036
0.064
Higher is better. Consider EBIT and portion of total assets. The total sales for each $1 of total assets.
Your own financial assessment / Analyses / Suggestions:
Liquidity of Tyson:
The liquidity of Tyson was better in 2013 compared to its liquidity in 2014. This means that the financial position of the company was better in 2013 than in 2014. However, the company was in a position to meets its short term financial obligations in both years.
Leverage of Tyson:
Again looking at the leverage of the company, the company had more debts from borrowed money to finance the company assets and investment. Nevertheless, the leverage ratios are reasonable and nothing to worry about.
Activity of Tyson:
The company experienced a high inventory turnover in 2013 as compared to 2014. A higher inventory turnover shows that the company’s products were selling at high rates.
Profitability of Tyson:
The profitability of the company is encouraging. The company made more profits in 2014 than in 2013 which is a positive sign, Looking at the gross profit margin.
(2) Check/analyze the ratios to make your comments on liquidity, leverage, activity, and profitability of Tyson. If you found some issues, please make suggestions to improve or maintain liquidity, leverage, activity, and profitability of Tyson. Do this part as much as you can. This part is more important than “calculation” of the ratios!!!
Liquidity
LiquidityThe liquidity of a company reveals its ability to meet the short term financial obligations. The greater the liquidity of assets compared to the liabilities in the short term the better for the company. The current ratio of the company in 2014 was 1.64 compared to 2013 when it was 1.86. However, the current ratio s for the two years is higher than one which shows that Tyson is in a better position cater for their short term liabilities.
On the other hand, the company’s quick ratio in 2014 was 0.78 which was smaller compared to 0.93 in 2013. The rule has it that this ratio should be higher than one. The proportion has decreased from 2013 to 2014 by a margin of 0.15. For both years the margin is lesser than one which could be an indication that the company is paying their debts very quickly which affects their liquidity.
The company could improve its liquidity by increasing the sales of the company. This can be done by putting into place better strategies to market the products of the company globally. Another suggestion is for the company to collect the accounts receivable and turn them into cash quickly. This will help raise the quick ratio and liquidity as well.
Leverage
The debt to total assets ratio of the company was 0.34 in 2014 as compared to 0.20 in 2013. This is an indication that 34% and 20% of the company’s assets in 2014 and 2013 respectively were financed by creditors. Therefore in 2014, the company had a higher debt borrowed from creditors compared to 2013. However, the percentage is less than 5o% and a ratio of less than one which is an indication that a more significant portion of the assets is financed by the owners. The company should retain the ratio and not exceed 0.5 which will mean greater leverage and risk.
Activity
Inventory Turnover shows how quickly the products of Tyson are selling. A high turnover means that the company does hold inventory for long periods. The inventory ratio of the company was 11.48 and 12.202 in 2014 and 2013 respectively. However, the inventory turnover in 2013 was higher than in 2013. This is because the company’s inventory was high in 2014. This indicates that inventory was selling at a slow rate in 2014. Lowering the prices of the products and better marketing could help attract relevant customers to buy the company’s products. For instance, the backwards strategy that the company has adopted in China will help to gain more customer loyalty due to the production of healthy chicken.
The fixed asset turnover ratio is 7.12 and 249.09 for 2014 and 2013 respectively. A high ratio reveals that a company has succeeded in USing the investment in fixed assets to produce income. There is a huge disparity between that in the two years. In 2013 the company was able to generate high levels of revenue from the fixed assets. The company needs to utilize fixed assets more, to generate income.
Profitability
The gross profit margin of the company is quite high in 2014 which indicates that the company is generating high profits compared to 2013. The net profit margins in 2014 were as well high which reveals that the current practices of the company are working out.
Part 1
Question 1
Financial analysis is fundamental to help financial managers and directors make sound and effective strategic decisions. Strategy formulation involves an organization choosing the most efficient decision to achieve their goals. The goals of financial analysis are vital to helping in the formulation of strategies.
Objectives
The primary objective of financial analysis is to provide with information about the financial position of a company and any change in the position to help the relevant authority to make a sound economic decision (Securities and Exchange Commission of Zimbabwe, n.d).
On the other hand, the financial analysis allows the assessment of current and past data and help in assessing the possible risks. Knowledge about the past performance of a company and the current performance is essential as it indicates future performance. The current performance of a company as well reveals the status quo of a company and any debts to plan effectively.
The assessment of the current profitability of a company and its operational efficiency is critical as it helps management to understand the financial health of the company. Current analysis also involves the assessment of the assets of a company which is vital in making long term decisions.
Another objective of financial analysis is predicting the growth of a company and its profitability. The management uses financial analysis which helps them understand the investment alternatives that they have, to understand prospects. An assessment of financial statements helps to predict the possibility of failure in the business or its profitability (Toppr, n.d).
Question 2
High inventory turnover means that a company is selling its inventory quickly and replacing it quickly as well. Selling many products and at a low price is a strategy used by stores like Walmart and has proven to be profitable. Walmart earns about $486 billion in 2017 which is too much revenue using this strategy (Ugino, 2018). It works because such merchants choose goods which are high in demand and have low costs. When they sell low-cost goods, and frequently, they earn profits at price points. Though the benefit is little per product, selling oftenly leads to much gain. It is unlike the companies which sell high-priced goods. The high priced goods do not sell quickly though they have more revenue.
Question 3
Rolex is a company that specializes in selling luxury watches. Over the years, the prices of the luxury brand have increased. If the company, however, gave discounts on these luxury watches, they could yield more profits than when selling them at high prices. A huge discount on Rolex watches means that the company will experience high inventory turnover. Giving discounts will encourage customers to purchase more; hence the watches will sell very fast. The company will, therefore, sell more and more watches because of the high demand. The more frequently they sell these watches, the more the more they are likely to yield more profits. Though the benefit per watch will be reduced, they will sell more. It is unlike when the company is selling high priced watches. Though the high priced watches yield more profits, they may take longer to sell.
Works Cited
Securities and Exchange Commission of Zimbabwe (n.d). Capital markets highlights. Retrieved from: http://www.seczim.co.zw/downloads/secz%20newspaper%20column%20-%2007%20march%202016%20objectives%20of%20financial%20statement%20analysis.pdf
Ugino, M. (2018). Low-price selling: Is it worth it? Retrieved from: https://www.business2community.com/sales-management/low-price-selling-worth-01990269
Toppr. (n.d). Meaning, significance and objectives of financial analysis. Retrieved from: https://www.toppr.com/guides/accountancy/analysis-of-financial-statements/meaning-significance-objectives-financial-analysis/
Part 2: Tyson case study
Financial Ratio Analysis Worksheet
Your Full Name:
Question 1
2014
2013
Basic Rules
Liquidity
Current Ratio
1.64 (current assets / current liabilities )
1.86
Should be >1.00
Quick Ratio
0.78 (currents assets – inventory / current liabilities)
0.93
Good to see close to 1
Leverage
Debt to total asset ratio
0.34 (total debts / total assets
0.20
Good to see less than 1
Debt to Equity ratio
0.92 (total debt / total stockholder’s equity )
0.39
Smaller is better
Activity
Inventory turnover
(sales / inventory of finishes goods )
11.48
12.202
Higher turnover will be better — Smaller inventory level will increase the turnover!
Fixed asset turnover
sales / fixed assets
7.123
249.087
Higher turnover will be better — Smaller fixed assets level will increase the turnover (Productivity of the fixed assets)!
Profitability
Gross profit margin
Sales – cost of goods sold / sales
2,685,000
2,358,000
Higher is better (Lower cost of goods sold or Higher sales will increase the margin) — Strategic directions (Ex. Focusing on sales quantity or Lean operations)
Operating profit margin
Earnings before interest and taxes EBIT (Operating income) / sales
0.038
0.040
Higher is better – Operational efficiency will be indicated. Better cost structure might increase this margin.
Net profit margin
( Net income / sales )
0.023
0.021
Higher is better. Total profitability (Corporate profitability). Check the interest expense and Discontinued operations.
Return on total Assets (ROA)
( Net income / total assets
0.036
0.064
Higher is better. Consider EBIT and portion of total assets. The total sales for each $1 of total assets.
Your own financial assessment / Analyses / Suggestions:
Liquidity of Tyson:
The liquidity of Tyson was better in 2013 compared to its liquidity in 2014. This means that the financial position of the company was better in 2013 than in 2014. However, the company was in a position to meets its short term financial obligations in both years.
Leverage of Tyson:
Again looking at the leverage of the company, the company had more debts from borrowed money to finance the company assets and investment. Nevertheless, the leverage ratios are reasonable and nothing to worry about.
Activity of Tyson:
The company experienced a high inventory turnover in 2013 as compared to 2014. A higher inventory turnover shows that the company’s products were selling at high rates.
Profitability of Tyson:
The profitability of the company is encouraging. The company made more profits in 2014 than in 2013 which is a positive sign, Looking at the gross profit margin.
(2) Check/analyze the ratios to make your comments on liquidity, leverage, activity, and profitability of Tyson. If you found some issues, please make suggestions to improve or maintain liquidity, leverage, activity, and profitability of Tyson. Do this part as much as you can. This part is more important than “calculation” of the ratios!!!
Liquidity
LiquidityThe liquidity of a company reveals its ability to meet the short term financial obligations. The greater the liquidity of assets compared to the liabilities in the short term the better for the company. The current ratio of the company in 2014 was 1.64 compared to 2013 when it was 1.86. However, the current ratio s for the two years is higher than one which shows that Tyson is in a better position cater for their short term liabilities.
On the other hand, the company’s quick ratio in 2014 was 0.78 which was smaller compared to 0.93 in 2013. The rule has it that this ratio should be higher than one. The proportion has decreased from 2013 to 2014 by a margin of 0.15. For both years the margin is lesser than one which could be an indication that the company is paying their debts very quickly which affects their liquidity.
The company could improve its liquidity by increasing the sales of the company. This can be done by putting into place better strategies to market the products of the company globally. Another suggestion is for the company to collect the accounts receivable and turn them into cash quickly. This will help raise the quick ratio and liquidity as well.
Leverage
The debt to total assets ratio of the company was 0.34 in 2014 as compared to 0.20 in 2013. This is an indication that 34% and 20% of the company’s assets in 2014 and 2013 respectively were financed by creditors. Therefore in 2014, the company had a higher debt borrowed from creditors compared to 2013. However, the percentage is less than 5o% and a ratio of less than one which is an indication that a more significant portion of the assets is financed by the owners. The company should retain the ratio and not exceed 0.5 which will mean greater leverage and risk.
Activity
Inventory Turnover shows how quickly the products of Tyson are selling. A high turnover means that the company does hold inventory for long periods. The inventory ratio of the company was 11.48 and 12.202 in 2014 and 2013 respectively. However, the inventory turnover in 2013 was higher than in 2013. This is because the company’s inventory was high in 2014. This indicates that inventory was selling at a slow rate in 2014. Lowering the prices of the products and better marketing could help attract relevant customers to buy the company’s products. For instance, the backwards strategy that the company has adopted in China will help to gain more customer loyalty due to the production of healthy chicken.
The fixed asset turnover ratio is 7.12 and 249.09 for 2014 and 2013 respectively. A high ratio reveals that a company has succeeded in USing the investment in fixed assets to produce income. There is a huge disparity between that in the two years. In 2013 the company was able to generate high levels of revenue from the fixed assets. The company needs to utilize fixed assets more, to generate income.
Profitability
The gross profit margin of the company is quite high in 2014 which indicates that the company is generating high profits compared to 2013. The net profit margins in 2014 were as well high which reveals that the current practices of the company are working out.