Small Business Analysis and Interpretation

Question: Discuss about theSmall Business Analysis and Interpretation. Answer: Introduction: The report analyzes the small-medium enterprises, which are TEDA Pvt. Ltd., TUST Pvt. Ltd., Quantas Airway Ltd., and Virgin Australia Holding Ltd in terms of financial and non-financial performance. The financial performance of these small medium enterprises has been analyzed by the ratio analysis of the financial statements of these companies to determine their liquidity, efficiency, profitability, solvency and market performance. Along with this, the report incorporates the comparison of two companies Quantas Airway Ltd. and Virgin Australia Holding Ltd in the same industry to determine the one best performing in the market. Small Business Analysis 1 a) Entity Earning Ability of TEDA Ltd (Profitability Ratios) Profitability ratios of TEDA Ltd (2015) Calculations 1) Return on equity ratio = Net income/Total equity (Study, 2016) Hereby, Net income = $75,000 Total equity = $ 232935 $75,000/232935 = 32.19% 2) Profit margin ratio = Net Income/ Sales Hereby, Net income = $ 75000 Sales = $ 462500 $75000/$462500 = 16.21% 3) Return on assets ratio = Net income/Average total assets Hereby, Net income = $ 75000 Average of total assets = 420,675 + 387,500/2 = $404087.5 $75000/404087.5 = 18.56% 4) Gross profit margin ratio = Gross profit/Total sales (Thebalance, 2016) Hereby, Gross profit = $ 1,55,000 Total sales = $ 4,62,500 $1,55,000/4,62,500 = 33.51% b) Debt to Asset Ratio Debt to asset ratio of TEDA Ltd Calculation Total liabilities/Total assets (Accountingtools, 2016) Hereby, Total Liabilities = $187740 Total assets = $420675 $187740/420675 = 44.62% c) Accounts Receivable Turnover Tatio Accounts receivable turnover ratio Calculation Net sales/Accounts receivable (Evans, 2016) Hereby, Net sales = $4,62,500 Accounts receivable = 1,49,625 + 157500 Average = 307125/2 = 153562.5 $4,62,500/153562.5 = 3.01% d) Current Ratio Current ratio Calculation Current assets/Current Liabilities Hereby, Current assets = 285075 Current Liabilities = 156240 $285075/$156240 = 1.82:1 E) Inventory Turnover Ratio Inventory turnover ratio Calculation COGS/Average inventory (Nelson, 2015) Hereby, Cost of goods sold = $307500 Average inventory = 126000+110250/2=118125 $307500/118125 = 2.60 Small Business Analysis 2: Trust Pty Ltd Liquidity ratio Tells us the ability of the company to pay its short-term debts or obligations. As per the current ratio of the company is increased from 2.1:1 to 2.6 : 1 in 2013 that means that the company stock is increased as compared to the last year. It indicates that the company is not effectively using its current inventories and short-term financial obligations. Current ratio shows the liquidity strength of the company. But in the case of Tust pty limited companys stock is idle as compared to previous year, It means that the company unable to sale its material due to poor supply chain management policies and low demand in the market (Cetorelli and Goldberg, 2012). The company should improve supply chain management and increase the customer base in the market. Similarly, companys quick ratio is increased from previous year it means that the company has enough cash to pay its short-term liabilities. Efficiency ratio: It indicates that the how company uses their assets to generate liquidity. This ratio gives us the idea of the time period to collect the cash from their customers and also determines the time period where the company gets turn their inventory into cash. From the given figures of the company days in inventory figure increased from 122 to 127, it means that the company took the average number of days to convert its stock into cash. As per the growth in inventory figures from last year, it indicates that the company inventory is increased with respect to its sales (creditmanagementworld, 2016). It means that the company faces a dilemma to sell its stock in the market. Effective measures and good marketing strategy should adopt by the company to sell their stocks quickly in the market. Similarly, Debtors outstanding days figure increased from 30 to 46.It means that the company takes a maximum time to collect the cash from its credit sales. The company should collect th e outstanding from the customers quickly and frame effective credit policies to reduce the impact on working capital. Profitability ratio: It indicates the efficiency of the company to turns business activity into profits. The net profit margin of the company is increased from 1.36% to 2.23% is given in the table. It means that the company follows the effective pricing strategies and cost structure. So that the company net profit margin is increased as compared to last year (Readyratios, 2016). The company extracts the sufficient profits from its total sales due to the good customer base and effective marketing strategies. The figure depicts that the company is capable of turning its revenues into profits. It is recommended that the company should minimize the cost and use right product strategies to earn the good profits in the long term. Small Business Analysis 3: Case Study Qantas Airways Limited Virgin Australia Holdings Limited EBIT margin 1.85% 3.50% ROE 3.38% 8.40% ROA 2.12% 3.29% Debt to Equity 111.21% 180.07% Current Ratio 0.77 0.65 Net profit margin 1.36% 2.23% Profitability ratio: It indicates the overall efficiency and performance of two airlines companies related to its sales, investments, and assets. Different types of profitability ratio assess the companys sales and assets of the company with respect to its investments in the resources (Ehow, 2016). The different type of profitability ratios, which is given in the above table, indicates the efficiency of the operations of the company. These ratios include EBIT, return on equity, return on assets and net profit margin. EBIT Margin: It indicates the companys profitability on sales over a particular period. It does not include any taxes and interest. It represents the firms earnings from the ongoing operations over the particular period. This indicator tells us the companys earnings capacity. As per the above figure, it gives the EBIT margin of both the airline companies. Qantas airways have a 1.85% of EBIT margin as compared to Virgin Australia holdings limited (Pignataro, 2013). It means that the Qantas Airways Limited has a lower EBIT margin due to high-cost structure, low productivity, and lower revenue. On the other side, Virgin Australia Holdings Limited maintain effective cost management system as compared to Qantas Airways. It means that every dollar company is generating in revenue results in 1.85% of profits before all taxes and interest that is comparatively low with the Virgin Australia holdings Limited. Therefore, the Quantas Airways should increase the EBIT margin by maintaining effecti ve cost structure and higher the productivity. Return on Equity: It measures that how both companies managed their investor's fund to generate sufficient profits. This ratio indicates the net profits earned by the company to shareholders fund. It analyzed that how both companies smartly managed the each rupee of shareholders investment. As per the given figure, it indicates that the Qantas Airways ROE is 3.38% and Virgin Australia Holdings Limited is 8.40% which is comparatively low due to lower profit margins and poor financial policies. Hence it is suggested that the Qantas Airways should pay low taxes. Paying high taxes also impacts on ROE. The company should increase its profit margins by increasing their return on sales (Porter and Norton, 2012). Operating cost should also improve by the company so that the company gets good returns on sales. Financial leverage rate should increase by the company to get a good return on equity. Financial leverage means the amount of debt holds by the company. If the company increases its deb ts, it gets the good return on equity. Therefore, these are the basic financial techniques, which should adopt by the Qantas Airways to increase the return on equity as compared to Virgin Australia Holdings Limited. Return on assets: It indicates the relation of companys profitability into its total assets. It evaluates the companys profitability in relation to the per dollar of its assets that shows the capability of the company to earn profits before any leverage. It measures the business earnings through its creditors and investors. It gives an indication of the capital intensity of the company, which depend on the industry. The airline industry is a capital-intensive industry will yield a low return on assets because they put the major assets into the business (Financeformulaes, 2016). As per the given data of both the companies it indicated that the ROA of Qantas Airways Limited is 2.12% and Virgin Australia Limited is 3.29% in 2012.It depicts that the Qantas Airways Limited is not effectively managed their total assets to make a profit. The company yields the lower return on its total assets. On the other hand, Virgin Australia Holdings Limited is effectively managing their resources to ge nerate higher returns. So it is recommended that the Qantas Airways should boost its profit margin or effectively use its assets to increase its revenues. Net profit margin: It is also a part of profitability ratio that derived by deducting all operating expenses, interest, and taxes from the revenue left after deducting gross profit. It is a very important ratio for shareholders because they closely observe that how the company turns its revenues into profits available for shareholders. As per the given table above, it is interpreted that the net profit margin ratio of Qantas Airways Limited is 1.36%, and Virgin Australia Limited is 2.23%. It shows the declining net profit margin of Qantas Airways Limited in 2012 due to poor customer experience, decline in sales and services of companys hospitality and inadequate expense management (Parker, Guthrie and Linacre, 2011). Whereas Virgin Australia Limited Holdings Limited improves its services and sales in hospitality, reduced costs and offers more discounts and promotional schemes to customers to remain competitive in the market. So it is recommended that the Qantas Airways Limited should improve the hospitality services for its customers, Offer discounts, and special promotional schemes to enhance the revenue and net profit margin of the company. Liquidity ratio- It represents the companys capacity to pay its short-term debts or obligations. The current ratio of the both the companys tells us the companys ability to pay off its debts or obligations in future. As per the given table, that shows the current ratio of both the companies. The current ratio of Qantas Limited is 0.77% and Virgin Australia Limited is 0.65%. It indicates that the high current ratio of Qantas Limited is not good for the company because it refers that inefficient use of resources tied up with working capital that its impact the other areas of operations (Kraft, 2014). Efficiency ratio- Measures the capacity to use its assets and manage their liabilities efficiently .It indicates that how company manages its liabilities in the long term. As per the above table, debt equity ratio of the Qantas Airways Limited is 111.21% that is low as compared to Virgin Australia Holdings Limited that is 180.07%. Low debt to equity ratio of the company indicates that the companys financial condition is stable because the company has low debts as comparison to its assets and it enables more financing options for the company in the market due to low debt and good creditworthiness in the market. On the other hand, Virgin Australia Holdings Limited has high debt ratio to its assets. The company has not invested in new operations and it is difficult to finance from the market because of high debt. So that the Virgin Australia Limited Holdings should maintain their debts in comparison to its assets by framing effective credit policies (Kaplan and Atkinson, 2015). Conclusion: From the above report, it can be concluded that the liquidity position of the TEDA Ltd. is poor. Nonetheless, it earns profit to the good extent. Along with this, the TUST Pvt. Ltd. has not performed well however, its profitability has increased in 2013 over the previous year. The Virgin Australia Holding Ltd performed better tha Quantas Limited in terms of profitability, liquidity, net profit, return on assets, return to equity and EBIT. References Accountingtools (2016) Debt to Assets Ratio.[Online].Available at: https://www.accountingtools.com/debt-to-assets-ratio (Accessed by: 24th September 2016) Cetorelli, N. and Goldberg, L.S., (2012) Liquidity management of US global banks: Internal capital markets in the great recession.Journal of International Economics,88(2), pp.299-311. Creditmanagementworld (2016) Efficiency ratios.[Online].Available at https://www.creditmanagementworld.com/ratios/efficiency.html (Accessed by: 24th September 2016) Ehow (2016) What Does a Low Percentage Return on Assets Mean?.[Online].Available at: https://www.ehow.com/info_8664505_low-percentage-return-assets-mean.html (Accessed by: 24th September 2016) Evans (2016) Accounts receivable ratios.[Online].Available at: https://www.exinfm.com/board/accounts_receivable_ratios.htm (Accessed by: 24th September 2016) Financeformulaes (2016) Return on Assets.[Online].Available at: https://www.financeformulas.net/Return_on_Assets.html (Accessed by: 24th September 2016) Kaplan, R. S., and Atkinson, A. A. (2015) Advanced management accounting. USA: PHI Learning. Kraft, P. (2014) Rating agency adjustments to GAAP financial statements and their effect on ratings and credit spreads,The Accounting Review,90(2), pp. 641-674. Nelson, L. S. (2015) QuickBooks 2016 All-in-One for Dummies.USA: John Wiley Sons Parker, L, Guthrie, J and Linacre, S (2011) 'The relationship between academic accounting research and professional practice', Accounting, Auditing and Accountability Journal, 24 (1), pp. 5-14. Pignataro, P. (2013) Leveraged Buyouts, + Website: A Practical Guide to Investment Banking and Private Equity.USA: John Wiley Sons. Porter, A. G., and Norton L. C. (2012) Using Financial Accounting Information: The Alternative to Debits and Credits.USA: Cengage Learning Readyratios (2016) Profitability ratios.[Online].Available at: https://www.readyratios.com/reference/profitability/ (Accessed by: 24th September 2016) Study (2016) Profitability Ratio: Definition, Formula, Analysis Example.[Online].Available at: https://study.com/academy/lesson/profitability-ratio-definition-formula-analysis-example.html (Accessed by: 24 September 2016) Thebalance (2016) Profitability Ratio Analysis.[Online].Available at: https://www.creditmanagementworld.com/clipart/pageHeaders/stripes_brown_tan_beige.gifhttps://www.thebalance.com/profitability-ratio-analysis-393185 (Accessed by: 24th September 2016)