Good Essay About Accounting Analysis
Calculations prove to show that no major change in ratios is noticed to occur between the years 2005-2006. The organization’s current status remains the same in its financial structure, as well as the profitability rations.
The DFIH balance sheet disclosed solid financial indicators for the FY 2006. Current the company’s ratio is at 0.87x, compared to 0.82x in 2005, which means the company may be able to use assets to protect the current liabilities. Unfortunately the quick ratio indicates an increasing pattern to reach 0.51x in 2006, which is not good for the investors who will see the data as a sign of high current liabilities from the information showing in the accounts payable.
In 2006 the company shows positive performance in efficiency ratios for the year. The company’s collection is completed every 13 days based on the fact that the slight increase in 2006 compared to 2005 still delivered lower figures. Additionally, the 45 day inventory period is also a lower figure. The data is supported by the fact that the high number of payable days in 2006 that were 117 days long. These reports are excellent news for the company who seems to be engaged in positive relationships with the suppliers providing high credit periods.
Solvency ratios stabilized much more in 2006 compared to what they were in the previous year of 2005. An obvious indication of the company’s reliance on liabilities versus owner’s equity is evident. The conclusion for this information is found in the organizations structure which reported 5x total liabilities over total equities in 2006. The high credit period is beneficial for the company as the delay allows the company to tend to current liabilities with the freed up liquidity that would have otherwise been delivered to the suppliers. The company also reported a low debt/asset ratio of 0.2, as well as secures operating cash flow to debt range.
The past two years has proved to show stability in the asset management ratios. Initial observation provides data that shows the ratios are reasonable and portray suitable efficiency indicators for the company on the utilization of its assets.
In 2006 profitability ratios are also stable in comparison to 2005, with a gross margin of 30% in 2006 showing evidence that the company has managed the COGS quite appropriately. The operating profit margins indicate that the company’s selling and administrative expenses have increased because of the report on the operating profit margin that has dropped to 4% in 2006, from 5% in 2005. Luckily, the ROE continues to increase in 2006, reaching 77%, which means the company’s performance with satisfying the investors is evident primarily because of the high debt structure.
Return on investors
Share price data for 2006 and 2005 were not found; however, the report showed the EPS was more stable in 2006 versus 2005. Without comparing the numbers of industry competitors, the ratios by themselves cannot provide conclusive evidence for the efficiency of the company. That information will be provided further down the report.
Common-size Financial Statements
(A) Common-size Balance sheet
The common size balance sheet, allows us to see how the company supports its liquidity through sustaining a high percentage of cash and investments from total assets of approximately 21%. The highest contribution of current assets is shown, which the industry needs most. The company’s strength in generating sales comes from the non-current assets of 47%.
Total liabilities reported 85% of capital structure in 2006, with accounts payable of about 57% from the liabilities and owner’s equity perspective anyhow. This allows the capital structure to expand but the risk of defaulting from high obligations is elevated.
(B) Common-size Income statement
In 2006 a high gross margin of approximately 30% , similar to the previous year was what the company reported. Operating income, on the other hand, reported about 4% only of total sales in 2006, almost the same as previous year. Employee benefit expenses reported at 35% of the operating expenses, and 30% operating lease, which is responsible for the high percentage of selling, general and administrative expense of 26%. This led to a drop in profit margin from 4.32% in 2005 to 4.07% in 2006.
The overall findings of the data on the company’s ratios and growth rates showed minimal change over the two year period. In order to properly understand how the company is performing, the numbers must be compared to the numbers of a competitor’s financials.
Du Pont Analysis
Du Pont was used for an analysis to better gauge the performance of the company’s ROE. The spread sheet shows that DuPont also maintained negligible differences in ratio for 2005 and 2006. The equity multiplier (leverage) increased 40% in the year 2006 reaching 7x in comparison to the 5x in 2005. For this reason, ROE in 2006 reached a high 77% compared to 62% The equity multiplier is a measurement of a company’s financial leverage which heavily depends on the amount of debt and creditors help to increase the company’s ROE.
According to data for the company’s ratio analysis and common-size financial statements one can see that the company seems to be performing fairly well. One of the disadvantages of the high leverage of the company makes company a high risk for lack of repayment of debt in a timely manner. Higher profit margins are possible from the high gross margin of 30% if operating expenses could be managed. The company seems to have a successful future ahead with competitors in the market.
Comparison with competitors
A comparison of Tesco PLC and Sobeys INC show that the companies both have larger balance sheet sizes, based on total assets, with Tesco in the lead. The position and performance differences of the companies display a different capital structure than Dairy Farm’s which almost 50% liabilities to equity is, showing evidence of the lack of dependence on debt for operating as much as Dairy Farm relies on their debt.
Liquidity and Solvency ratios
Of all three companies, Dairy Farm is moving along industry average regardless of its smaller size, this is concluded after examination of the liquidity and solvency ratios of the 3 companies. The high days of payable that Dairy Farm had compared to the competition are the reason for its liquidity. Yet Dairy Farm does rely on debt more than the two competing companies when looking at the numbers for the total debt to capital ratios.
Asset Management Ratios
Dairy Farm is obviously utilizing its assets to generate sales regardless of its limited size as an organization in comparison to the other two companies.
Dairy Farm’s higher gross margin because of low COGS does not take away from the excessive selling and administrative expenses that are much higher at 26% low 2% that were reported for both companies in 2006. This may be crucial information to investigate because the ROA ratio is well above industry average, as well as ROE ratio showing a big gap compared to competitors even when profit margin is almost equal to Tesco, the higher ROE ratio is mainly due to the capital structure of Dairy Farm.
Du Pont analysis
ROE for Dairy Farm reported a higher ratio than the other two companies of about 77% in 2006 compared to 18% for Tesco and 2% for Sobeys. These numbers are because of the high dependency of the company on the debts and creditors which makes the equity multiplier higher than the other two companies.
If one were to look at just the financial statements for Dairy the real performance of the company would not seem that good ;however, when comparing them with competitors in the industry, the company is clearly performing well and capable of keeping up with new competitors entering the same market.
Dairy Farm’s Annual Report
Formatting and layout of the company’s annual report is nicely done, showing tables, graphs and figures as it impresses investors with the pleasant aesthetics.
Company table of contents shows the annual report mentioning every aspect of the company, starting from highlights about the company, a statement from the chairman, and ending with a brief about the management and offices of the company.
There is a “Milestone” section in the annual report providing a message to the investors about the company’s history as well as the current position of the company.
Emphasis of prioritizing corporate governance is also a long section included to explain it and promote it.
No negative information could be found upon reviewing the annual, as it clearly shows the history of the company, the present and also the future direction of it. Moreover, the notes of the financial clearly explain the details of the figures, the regions and products. The company’s risks and mitigates are also included in the annual report.
International differences affect performance comparison between companies even if they are operating in the same industry. These differences affect performance because of the regulations in the country of operation, as well as the economy and the country’s risks. For an example, the high credit period that Dairy Farm enjoys from its suppliers could be a result of the country’s regulations. Another example is the currency risk; a company in one part of the world could do better than another company in the other part of the world because of the economic factors that could increase or decrease the prices of raw material or prices of finished products.