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Financial Statement Analysis Assignment On Mcpherson Limited

Question

Task:
Reformatted Financial Statements and Financial Analysis: Based on the same company chosen in the group assignment, reformat the company’s financial statements for the past five years in an excel spreadsheet. Produce an individual professional report where ratio and cash flow analysis is performed to evaluate the current and past performance of the company and its sustainability in the future. The report should discuss in details what happened and why the ratios/cash flows changed. Specifically, the report should include the following discussions:

Reformatting

  • Present detailed past five years’ reformatted financial statements as an appendix in the report.

Ratio analysis:

  • Calculate and discuss key ratios such as ROE, RNOA, PM, ATO, FLEV and NBC.
  • Break down and analyse PM and ATO ratios in further details. Identify and discuss three significant expense items that have caused major changes in profit margin. Identify and discuss three major assets or liabilities whose turnover ratios have contributed to the overall change in assets efficiency.
  • Briefly describe the ratios trend. The analysis should elaborate on the economic, industry and business factors that drive the changes in ratios. The discussion should consistently reflect the same firm fundamentals identified in the group report.

Cash flow analysis:

  • Calculate liquidity, solvency and cash flow ratios.
  • Analyse financial risk and cash flow management of the company based on ratios.

Answer

Introduction
Efficiency and effectiveness of business management is totally dependent on analysis of operational and financial aspects of business organisation. Organisation cannot operate without identifying its standing in market and overall efficiency. This type of analysis in this financial statement analysis assignment will help a business organisation to understand the problem areas and opportunities that can be used for growth and development in future (Kaplan and Atkinson, 2015). Identification of a problem areas will also help management to make sure that these problem areas are eliminated as soon as possible. Main focus of this financial statement analysis assignment will be on conducting financial analysis of McPherson's Limited McPherson's Limited is a business organisation operating in Australia which focuses on production and supply of health beauty and wellness products. Overall financial position of this organisation in this financial statement analysis assignment can be evaluated with the help of trend analysis in accordance with the data provider in last five financial reports.

Ratio analysis
Return on equity ratio: This ratio is helpful in identifying relationship between a returns generated by a business organisation and total investment made in form of equity. Owners of a business organization are considered as equity shareholders as they hold direct investment in organisation and this ratio helps in identifying the returns available to equity shareholder for their investment in business. Basically it can be said that this ratio will be evaluated by equity shareholders for deciding whether to keep their investment intact or invest in other organisation by divesting from a particular business.

Return on equity ratio

Return on equity ratio of this organisation has been -18.98%, 2.58, 3.51, -3.23 and 2.38 in 2014, 2015, 2016, 2017 and 2018 respectively. It can be said that to financial performance of the company is not been very steady in in all the financial year under consideration (Robinson et.al, 2015). Management is required to ensure that the net profitability ratio reaches at least 5 to 8% in next three financial years otherwise there is a probability that investors will retrieve their investment.

Return on operating asset ratio: Operating assets can be defined as the assets used by business organisation for production of final goods and services. Being a manufacturing organisation capital assets are very important to format McPherson Limited. This financial statement analysis ratios will help in identifying the use and efficiency of operating assets to generate profit.

McPherson Return on operating asset ratio

Return on equity ratio of this organisation has been -1116.67%, 150.00%, 183.33%, -180.00% and 166.67% in 2014, 2015, 2016, 2017 and 2018 respectively. One problem that can be identified in popularity of this company is that there is no stability. Specific operational rules and regulations are required to be developed by business organisation to ensure that stability in profit and revenue can be maintained in a next financial years.

Profitability margin ratio

McPherson Profitability margin ratio

McPherson operating profit ratio

Net profitability ratio and gross profitability ratio will be described in this financial statement analysis assignment and these financial statement analysis ratios represents overall profitability and profitability from business operations respectively (Brigham et.al, 2016). Operating profit ratio in the year 2014 2015 was 13.03 10.89 whereas operational loss has been generated by business organisation in the year 2016, 2017 and 2018 i.e. -47.60%, -45.16%, and -41.90%. It can be said that to financial performance of business organisation for generation of revenue from core business activities has not been very impressive. Net profitability of this organisation has also not being very significant as it has generated the net profit margin of -18.98%, 2.58%, 3.51%, -3.23% and 2.38 in last five financial years.

Three factors that are contributing to financial loss of this organisation are as follows-

Advertisement and promotion activities- It can be identified that overall sales of the organisation has a decreasing significantly over the period of time which is not a good sign for a business organisation that has been operating in a particular sector for more than hundred years (Macve, 2015). Advertisement and promotional activities of company are not been able to effectively boost sales of the company. External advertisement and public relationship consultants should be hired by business organisation for amending their marketing practices.

Relationship with suppliers- It can be said that McPherson Limited has been operating in retail sector and the level of competition in this market is very high that results in higher bargaining power of suppliers (Cao, Chychyla and Stewart, 2015). In such situations in management is required to maintain long term relationships with supplier in order to get raw material at reasonable prices. High operating losses of this organisation in last three financial year clearly shows that cost of sales for product and services of this organisation is very high.

Lack of cost controlling strategies- Controlling indirect cost is one of the primary factor that is considered in competitive strategy of business organisations operating in retail sector. Marginal net profits of this organisation shows that either management has not implemented any cost controlling strategies or they are very weak.

Asset turnover ratio: Total assets in a business organisation is a combination of current assets and non-current assets. It is important that management of the company is optimising these assets in order to generate profit for the organisation. Asset turnover ratio shows efficiency of Management for conversion of assets into profitability.

McPherson Asset turnover ratio

Due to lower profits and losses in all the financial year under consideration, asset turnover ratio generated by organisation in last financial year are -25.19%, 3.18%, 4.42%, -4.31% and 3.21%. Management of the company is required to conduct overall analysis of capital assets acquired by the company so that efficiency of these assets can be analysed. Any unproductive assets identified during such process should be sold out immediately and it should be replaced by new assets (Gaynor et.al, 2016).

Assets that has contributed to decreasing asset turnover ratio in last five financial year are-

Operating assets- On the basis of data provided in financial statements it can be identified that overall value of badminton machinery in last three financial year has not increased. Therefore it can be said that management has been not updated the machine trees that helps in production process. On the basis of this analysis it can be said that efficiency of fixed asset has been decreasing significantly that has resulted in decreased asset turnover ratio.

Current assets of this organisation or also decreasing in last five financial year. Total current assets in last five financial year has been $166 million, $171 million, $122 million, $106 million and $79 million. This is decreased current assets will definitely have negative impact on asset turnover ratio and liquidity position of McPherson Limited (Collier, 2015).

Financial leverage: Total amount of debt capital raised by a business organisation for purchase of capital assets for business operations can be examined with the help of financial leverage. Financial leverage should know to increase significantly about a period of time as management would not be able to pay interest and principal amount with limited amount of profitability.

McPherson Financial leverage ratio

Financial leverage of this organisation has been around to in all the financial year therefore it can be said that to management is not financing its capital assets through debt capital on regular basis.

Net borrowing cost ratio

McPherson Net borrowing cost ratio

Net borrowing cost to represents the total interest paid by a business organisation on long-term debt and capital. Net borrowing cost of McPherson limited has been increasing constantly in last five financial years except in 2018 where management has paid off all the long term debt (Hemmer and Labro, 2016). On the basis of this analysis can be said that this borrowing cost would not be a problem for management in future as on balance sheet date there has been no long term debt on company.

Cash flow analysis
Liquidity ratios: Liquidity of a company can be defined as the amount of assets of available within business organisation for payment of debt in next 12 financial years. Quick Assets and current assets are used for calculation of liquidity ratio because these assets will be realised by the company in next 12 financial year and amount realised from search results can be used for payment of current liability.

McPherson Liquidity ratios

Current ratio of this organisation has been strong in the first two financial year i.e. 1.93 and 2.01 as it shows that management has double the amount of current liabilities available in form of current assets. Similar trend can be identified in case of which ratio in first two financial year as quick ratio in 2014 and 2015 was 1.407 and 1.329. Over the period of next three financial years both the liquidity ratios has it decreased but company still have sufficient current assets for payment of current liabilities which shows that liquidity position of the company is stable (Easton and Sommers, 2018).

On an average it is considered to that and business organisation should have current ratio of 2 and quick ratio of 1. This optimum leverage ratio has not been achieved by the organisation in last three financial year and they should to try to improve their debtor collection strategies to increase the amount of cash and cash equivalents at the end of financial year.

Solvency position: Effectiveness of capital structure in a particular business organisation is evaluated with the help of solvency ratios. One of the primary solvency ratio that helps in identifying the balance between debt and equity capital is debt to equity ratio. Generally it is considered that the debt to equity ratio should be 1.5 or 2. It means that the total amount of debt in a business organisation should be 1.5 or 2 times of the equity capital.

McPherson Debt equity ratio

Debt to equity ratio of 0.800, 0.889, 0.471, 0.284 and 0.000 is last five financial year shows that this organisation is becoming equity oriented organisation. Optimum debt to equity ratio should be around 1.5 or 2 but this strategy would be more appropriate in current business situation as management of the company has not been able to generate sufficient profits for payment of interest. Non-payment of interest on fixed loan can have significant negative impact on business operations (Pratt, 2016). Debt component in capital structure should be increased once the business organisation starts to generate sufficient profits.

Cash flow ratio

McPherson Cash flow ratio

Cash flow ratios helps in identifying the efficiency of cash controlling strategies used by management of the company. Operating cash flow growth ratio helps in identifying the use of cash in day to day business operations as majority of cash in business organisation is used in day to day operation. It is important to that growth rate of operating cash inflow should be increasing as it shows efficiency of day to day cash management practices (Warren and Jones, 2018). Operating cash flow growth rate has been decreasing in last three financial years which clearly shows that management is required to strengthen their cash management practices.

Conclusion
On an overall analysis in this financial statement analysis assignment it can be said that the business practices undertaken by this organisation has not been very effective. Different aspects of McPherson Limited has been analysed in this financial statement analysis assignment with the combination of ratio analysis and trend analysis. On the basis of such analysis in this ratio and financial statement analysis it can be said that apart from liquidity all the other aspects of this organisation has been decreasing in a last five financial years. Main focus of this organisation should be on improving overall revenue and net profit generation capability in next two to three financial year. Other aspects of business management will automatically improve if management is able to attract customers for purchasing product and services of the company. Financial statement analysis assignments are being prepared by our finance assignment help experts from top universities which let us to provide you a reliable assignment help Australia service.

References
Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment: Theory and Practice, Canadian Edition. Nelson Education.

Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement audits. Accounting Horizons, 29(2), pp.423-429. https://www.aaajournals.org/doi/abs/10.2308/acch-51068

Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons. https://books.google.co.in/books?hl=en&lr=&id=7AdhBgAAQBAJ&oi=fnd&pg=PP17&dq=Accounting+for+managers:+Interpreting+accounting +information+for+decision+making.&ots=cPGYeilVcM&sig=6slaC5e1RiByDchC-MTi3XscdGM#v=onepage&q=Accounting%20for%20managers%3A%20Interpreting%20accounting %20information%20for%20decision%20making.&f=false

Easton, M. and Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e. https://business.camden.rutgers.edu/files/53-010-565-90-P7-Financial-Statement-Analysis-KIM.pdf

Gaynor, L.M., Kelton, A.S., Mercer, M. and Yohn, T.L., 2016. Understanding the relation between financial reporting quality and audit quality. Auditing: A Journal of Practice & Theory, 35(4), pp.1-22. https://www.aaajournals.org/doi/abs/10.2308/ajpt-51453

Hemmer, T. and Labro, E., 2016. Productions and Operations Management & Management Accounting. https://onlinelibrary.wiley.com/doi/full/10.1111/1475-679X.12249

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning. http://115.127.115.77:8080/xmlui/handle/123456789/494

Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, or Threat? Routledge. https://content.taylorfrancis.com/books/download?dac=C2006-0-05368-4&isbn=9781317842781&format=googlePreviewPdf.

Pratt, J., 2016. Financial accounting in an economic context. John Wiley & Sons. https://books.google.co.in/books?hl=en&lr=&id=brA4DwAAQBAJ&oi=fnd&pg=PA1&dq=Financial+accounting+in+an+economic+context .+John+Wiley+%26+Sons&ots=H_rJnXobvI&sig=Aby81T5UeDbC0ngij2TeHD8brX0#v=onepage&q= Financial%20accounting%20in%20an%20economic%20context.%20John%20Wiley%20%26%20Sons&f=false

Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial statement analysis. John Wiley & Sons. https://books.google.co.in/books?hl=en&lr=&id=4vswBgAAQBAJ&oi=fnd&pg=PR17&dq=International+financial+statement+analysis.+John +Wiley+%26+Sons&ots=2VqEWSF_PU&sig=wpfHlCUjbg6HEO8rjt9pM_WHGyE#v=onepage&q=International %20financial%20statement%20analysis.%20John%20Wiley%20%26%20Sons&f=false

Appendix
Ratio analysis

Particulars

2014($m)

2015($m)

2016($m)

2017($m)

2018($m)

Sales (A)

353.00

349.00

313.00

279.00

210.00

Equity (B)

95.00

99.00

104.00

88.00

90.00

Operating assets- (C)

6.00

6.00

6.00

5.00

3.00

Net profit (D)

-67.00

9.00

11.00

-9.00

5.00

Gross profit E

46.00

38.00

-149.00

-126.00

-88.00

Total assets (F)

266.00

283.00

249.00

209.00

156.00

Total debt (G)

76.00

88.00

49.00

25.00

0.00

Total interest (H)

7.00

8.00

7.00

6.00

4.00

Net borrowing cost

9.21

9.09

14.29

24.00

0.00

Financial leverage ratio

2.82

2.87

2.39

2.36

1.73

Return on equity ratio

-18.98

2.58

3.51

-3.23

2.38

Return on operating assets ratio

-1116.67

150.00

183.33

-180.00

166.67

Net profit ratio

-18.98

2.58

3.51

-3.23

2.38

Operating profit ratio

13.03

10.89

-47.60

-45.16

-41.90

Asset turnover ratio

-25.19

3.18

4.42

-4.31

3.21

Cash flow ratio

Particulars

2014($m)

2015($m)

2016($m)

2017($m)

2018($m)

Current assets

166.000

171.000

122.000

106.000

79.000

Inventory

45.000

58.000

60.000

59.000

38.000

Prepaid assets

0.000

0.000

0.000

0.000

0.000

Quick assets

121.000

113.000

62.000

47.000

41.000

Current liabilities

86.000

85.000

79.000

82.000

56.000

Total debt

76.000

88.000

49.000

25.000

0.000

Total equity

95.000

99.000

104.000

88.000

90.000

Operating cash flow growth

0.571

-0.700

2.587

-0.029

-0.715

Current ratio (CA/CL)

1.930

2.012

1.544

1.293

1.411

Quick ratio (QA/CL)

1.407

1.329

0.785

0.573

0.732

Debt to equity ratio

0.800

0.889

0.471

0.284

0.000

 

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