Accounting A User Perspective Paper

Accounting: A User Perspective
Assignment 2
April 2014

Prepared by Marcelo De la cruz Plejo
Student ID, z3479895
Master of Business and Technology
GBAT9120 Accounting: A User Perspective – Semester 1 - 2014
Facilitator, Ken Trottman

1. Question 1 [14 marks]

Ratio
2014 Calculations
Results
2013 Calculations
Results
1. Return on Equity
(2425 / 78018)x100
3.10%
3752/50319
7.46%
2. Alternative Return on Assets
(6985 / 216899)x100
3.22%
(9150 / 198522)x100
4.61%
3. Alternative Profit Margin
(6985 / 43014)x100
16.24%
(9150 / 59860)x100
15.28%
4. Gross Margin
(43014 – 24656) / 43014
42.68%
(59860 – 38577) / 59860
35.55
5. Price-Earnings Ratio
$0.95 / $0.084
11.31 times
$0.98 / $0.068
14.41 times
6. Dividend Payout Ratio
($0.03 / $0.084)x100
35.75%
($0.04 / $0.068)x100
58.82%
7. Total Asset Turnover
43014 / 216899
0.20 times
59860 / 198522
0.30 times
8. Days in Inventory
365 / (24656 / (61000+41659)/2 )
760.42 days
365 / (38577 / (41659+18436)/2 )
285.16 days
9. Days in Debtors
365 / ( 43014 / (13603+21984)/2 )
150.83 days
365 / (59860 / (21984+5123)/2 )
82.58 days
10. Current Ratio
79802 / 53789
1.48 : 1
64530 / 62035
1.04 : 1
11. Quick Ratio
(79802 - 61000) / 53789
0.35 : 1
(64530 - 41659) / 62035
0.37 : 1
12. Interest Coverage Ratio
6985 / 3255
2.14 times
9150 / 3165
2.89 times
13. Debt to Equity Ratio
(138881/78018)x100
178.01%
(148203/ 50319)x100
294.53%
14. Debt to Assets Ratio
(138881/216899)x100
64.03%
(148203/198522)x100
238.90%

2. Question 2 [16 marks]
NoCarb Limited Ratio Analysis will cover four ratio groups: Liquidity, Profitability, Activity and Financial structure ratios, in order to have a better understanding of company financial position.
Liquidity ratios
Measure the organization ability to satisfy its requirements for cash to meet its obligations based in its current assets. Cash is very important to keep company’s operations running. A failure to do that could lead the company to major problems, even a risk of bankruptcy.
Nocarb current ratio has improved in 0.44 (1.48 – 1.04) from previous year (2013), this is basically due to the increase of inventory levels and the conversion of receivables to cash.
Quick ratio has decrease only in 0.02 (0.37 – 0.35); not a significant variation. Quick ratio does not consider “Inventory”, which in this case is not a good idea to omit it, because we do not know how much divers are Nocarb’s products. We only certain about inventory being made up of soft drinks.
Profitability ratios
To measure profitability performance, we are going to analyse profit margin and ROA ratios. Alternative Profit margin indicates the percentage of profit we get from each dollar of sales. In the case of Nocarb has increased in 0.96% (16.24 – 15.28) with respect to 2013. Soft drink industry profitability depends more from the volume of sales rather than the high profit earn from each unit. This industry is completely different from, for example High Tech industry, where volume of sales is small but with a high rentability per unit or service.
There is a significant decline of 1.22% (4.61-3.22) in the ROA ratio (also known as ROI). This value indicates that Nocarb is losing efficiency at the moment to generate profit. We need to analyse activities ratios to have a better picture of Nocarb financial position.
Activity (turnover) ratios
From Note 2 we can see that Inventory level s have constantly increased since 2012. It is not a surprise that “days in inventory” has increased from 285 days to 760 days. This indicates that Nocarb have serious problems with the associated cost of keeping high level of inventory like insurances, obsolescence, handing and warehouse renting cost. This is also reflected in the drop of sales from 59860 in 2013 to 43014 for this year.
Nocarb sales on credit.
Therefore is important to analyse “days in debtor” indicator, which indicate how long it takes for Nocarb’s customers to pay their debts. We can see that it is taking longer for customers to pay their bills from 285 days in 2013 to 760 days this year. If this becomes a tendency Nocarb can be in risk of running out of cash, necessary for daily operations. This also indicate that Nocarb it is over financing its customers
Financial structure ratio
After analysing Nocarb’s liquidity and activity ratios, which indicates a poor performance, we need to measure the borrowing level of Nocarb. “Debt to Equity” will help us to see how risky this company is. Debt to Equity ratio has significantly decreased from 294.53% in 2013 to 178% this year but it is still a high level. A ratio of 178% indicates that Nocarb assets are financed mostly with debt, making Nocarb more vulnerable to any fluctuation of interest rates.
Conclusion
Soft drink industry is a mass production industry. We assumed Nocarb does not have a unique product as most of its counterparts. This industry relays in high levels of sales, maximum inventory turnover and minimal levels of inventory to reduce
costs.
Profit margin ratio is not a good indicator for Nocarb due to the low profit margin per unit; usual for mass production industries. Nocarb has serious problems with high levels of inventory and its associated additional costs. This situation is a result of the decline of sales and the increase of inventory, more probably financed by debt as “debt to equity” ratio indicate.
Nocarb need to redesign its Sales and Marketing strategies. Review its supply chain and inventory strategies. Review its Credit Policies and promote Cash sales. Also needs to be very care full with its borrowing/debt level.