This report has been made to evaluate the financial performance of the Mountainarious sporting company for the owner to connect a meeting with the bank for future sanctioning loan. This report offers an assessment and investigation of the present and future profitability’ liquidity and financial stability of ltd. Procedures of study comprise trend of vertical and horizontal analysis as well as ratios such as debt, current and quick ratios. Remaining calculations includes rates of return on shareholders’ equity, total assets and earnings per share to name a few .All calculations have been shown in the appendices. Results of data analysed explains that the ratios are below industry averages .In particular, comparative performance is poor in the areas of profit margins, liquidity credit control and inventory management. This report finds the prospects of the company in its current position are not positive .The major areas of weakness require further investigation and changes by the management.
Mountanarious Sporting Co. a well-reputed store owned by a sole-owner Steve Donne that has been a high-end specialty seller of branded, exclusive sporting goods and merchandise for the past 11 years. Steven Donnie had always been a fanatic in the field of sports. Donnie as an owner is well-versed in customer-service and product knowledge, expertise in setting his store according to the latest needs and had a great personality. The MSC has always been a popular store at Barron, Ontario and also with the local sports community and organizations, local gyms coaches and running clubs by promoting the merchandise available in the store by Donnie.
With the emergence of new stores like big-box retailers, specialty/boutique and online services the competition increased and hence soft goods were introduced to maintain profitability in the business. Customers frequented the store therefore, Donnie is keen for an expansion of the existing store which will be an exclusive merchandising for both sporting equipment and soft goods. Donnie wants to terminate the leased portion of the store to create a new store with a separate staff, headed by Donnie’s wife Allison who previously worked as part-time at his store and also possess some retail experience in hardware and flower shop.
Body of Report
“ Financial Statement Analysis is an information processing system designed to provide data for decision making models, such as the portfolio selection model, bank lending decision models, and corporate financial management models.” (Dr. Jawaharlal,2009,p.536)
Financial statement analysis or information are not used in a vacuum; there are the part of vast array of information available to investors , creditors, managers and others to assess the past performance, current position, growth prospects and also used by financial institutions or banks to make a sound loan or credit decision.( Trotman & Gibbins,2005)
Here we are making a business report which evaluates the performance of Mountainarious Sporting Co. to take loan from Canadian Commercial Bank. With the given basic financial reports by the company we have used few methods of analysis which includes horizontal, vertical and trend analysis as well as ratios such as Debt, Current, Acid Test and Asset Turnover ratios. We also used other ratios such as Return of Total Assets, Return on Equity , net profit margin and so forth.
Horizontal and vertical analysis
The Financial Statement analyses how sales are increasing and whether the sales are reasonable for the company.
The company’s sales and gross profit positively grew from the year 2003 to 2007 with a slight decrease of 15.6% in sales in the year 2005. The gross profit continuously increased with the introduction of soft goods in the store although the merchandise found in the store next door affected his sales considerably. Company’s gross profit was 28.73% of net-sales in 2003 and it increased by 3.12% of net sales in 2007 which is a sign of good financial health and company is able to pay its operating and other expenses and build for future.
The company’s total operating expenses continuously raised at a slow rate from 2004-2007 except in 2005 which express company is not maintaining its expenses properly and its vertical analysis also shows operation expenses were highest that were 29.68 %of the total sales in 2006 comparatively other 3 years.
The company faced net loss instead of income in the year 2003 and 2004 due to the fire accident and the re-establishment of his store in the new location. Net Income hiked in 2005 and 2006 as Donnie introduced soft goods and promoted them with the local gyms and running clubs. There was a loss again in 2007 Net Income as the company required a new strategy to develop the sales of soft goods as there were strong competitors. The company faced Net Loss of 4.92% of the total sales in 2004 but it gained net income of 2.60% of the total assets in 2007. Here, the overall situation is that company is not so much profitable over the years.
Retained earnings company’s beginning retained earnings records fluctuations in all years, after added net income and subtracted net loss it shows increasing trend from 2004 to 2007 which seems company reinvest its retained earning where it can creates growth opportunities.that is a positive sign for companies good financial health.
Total current assets continuously move upward from 2005 to 2007. it was lowest in 2005 as there was superior competition in the market with the emergence of Big-Box Retailers, Speciality Stores and Online Sales and company needed more assets to fund day to day operations. After 2005 there is a slight increase in the TCA and a sharp increase visible in 2007 by 38%. In 2004 the TCA were 49.09% of the total assets and dropped to 47.50% of the total assets in 2007.
The Net Fixed Assets reflects similarities in all the years whereas Total assets were raised from 2005 to 2007 which indicates the positive value of firm’s operations. The Net Fixed Assets were 43.12% of total assets in 2004 and 44.50% of total assets in 2007.
The Total Current Liabilities increased in all the years and in 2005 there is a noticeable drop of 101.13% as the online sales increased. The introduction of the soft goods decreased the expenses as the company availed a good deal with better purchasing discounts and longer terms of payments in 2005. The TCL were 56.92% in 2004 and 36.45% in 2007 of the Total Liabilities and Equity of the company.
The total long-term liabilities of the company increased due to the fire accident and the re-establishment of the new store in 2003. In 2005 the TLT Liabilities increased due to the shareholder’s loan. In 2007 the TLT Liabilities increased as the owner had taken loan from some family members which was unsecured loan. The TLT Liabilities were 30.50% in 2004 and 31.23% in 2007 of the Total Liabilities and Equity. The Total Liabilities and Equity increased in 2004, decreased in 2005 and gradually increased thereafter.
Gross Profit Margin –
The gross profit margin of the company witnesses a significant increment from 2004 to 2006. Predominantly, the Company’s Gross profit produced 26% in 2004 to 32.6% and 36.9% in 2005 and 2006 of net sales growth respectively. On the other hand this ratio experiences a visible fall in 2007 with 31.9%. Hence the situation of the company indicates a rise in cost of goods as there is unplanned purchase management.
Net Profit Margin – The Net Profit Margin experiences a drastic fall in 2003 and 2004 i.e. -0.8% and -4.9% respectively and there was increment in the next two years 3.8% to 6.1%. This increasing ratio shows company has better control over its costs. However, in 2007 it again loosed its net profit due to the higher cost of goods sold which create negative image of company. As the Gross Profit Margin dropped so as the Net Profit Margin witnessed a fall.
Return on Equity-
Mountainarious Sporting Co.’s return on equity was increased in 2005 to 2006 by 34.2% and 40.7% respectively that is the indicator of how much profit company generates with the money shareholders invested. But in 2007 company generated only 15% on the shareholders’ investment which was 25.7% less than the previous year.
Return on Average Assets-
The return on assets was -8.11% in 2004 then it climbed continuously next two years from 5.7% in 2005 to 10.7% in 2006 which demonstrates that assets had made more benefits and company utilized its assets more effectively. Nonetheless, the company encountered a fall in 2007 to 4.7%. It seems company is not able to handle its assets in a planned manner.
Liquidity is a measure of the firm’s cash position and it keeps a company in business in the short run.
Acid test/ quick ratio-
This ratio indicates whether current liabilities could be paid without having to sell inventory. Generally acid test ratio of 1:1 is considered satisfactory as a firm can easily meet all current claims. But in Mountainarious Sporting Co’s case quick ratio from 2003 to 2007 is less than the standard ratio. It seems company would find it difficult to pay its current liabilities.
the current ratio which measures the company’s ability to pay current liabilities from its current assets. Current ratio is greater than 1 ( current assets exceeds current liabilities) in all years from 2003 to 2007 but less than industry ratio that is 1.9 . In particularly, company’s current ratio is acceptable when it is more then industry ratio. Therefore, its working capital and financial position is not strong to lower the risk for creditors and owner
“The debt ratio tells the proportion of a business assets that it has financed with debt.” (Horngren, Charles T.,7th ed.) Mountainarious sporting co’s highest debt ratio was recorded 87.42% in 2004 which indicates in 2004 company faced more financial risks. Then it started to decline from 2005 to 2007 by 78.53% to 67.69%. It seems now company’s leverage goes downward and financial risk is also decline.
Cash Debt Coverage Ratio –
cash debt coverage ratio was -11.41% in 2003 while it increased to 26.35% in 2005 which reveals company’s better ability to carry total debts. Nonetheless it dropped to .035% till 2007 which means now company’s ability is not sound to cover total debts with its yearly cash flow from operations.
The following recommendations have been made in order to the performance of the Mountainarious sporting Co.
Mountainarious sporting Co. should review their pricing strategy and effectiveness of any advertising campaigns, including scaling back the level of advertising in the short run to minimise costs and improve profit margins. Stricter employment policies can also improve productivity and reduce employee absenteeism without any increase in costs.
If labour productivity does not lead to the operation of idle assets, it would be wise for Mountainarious to sell all idle assets to free up cash whilst and from not sacrificing profits. Along with selling its idle assets, Mountainarious have to buy back excess shares from inventors. It should be noted that this decision would likely turn current investors away and encourage them to sell leading to as much larger than intended fall in equity. This could pose financing future investments.
Adopting a ‘just in time’ approach for stocking shelves to reduce inventory costs and the risk of attaining unusable stock. A short term solution to free up cash flow would be to sell idle assets as discussed earlier, however with less assets, revenue and profits are limited. Alternatively Mountainarious can choose to no longer offer store credit, however it must be noted that this conservative approach may limit sales and net profits. Tighten customer credit policies such that the maximum receivable settlement period is at least the duration of the shortest payable settlement period agreed to with suppliers.
Review product marketing strategy and pricing in order to achieve price premiums and boost sales and profits, reducing their reliance on debt for finance. Sell idle assets to free up cash flow and pay off a portion of current liabilities to improve attractiveness and solvency to a potential lender.
From the above analysis horizontal and vertical, we can conclude that the companies performance as compare to the industries average is below par and the current ratio, quick ratio shows that the current assets are not managed properly which further deepen the problem of repayment of the liabilities, secondly there is no cash in flow from the financing activities as shown in cash flow analysis and more over the assets were increasing in 2007 but they were not utilized in the manner so as to maximize the profits.
The sales over the five fiscal years were showing the increasing trends still the profits were not as it is expected reason being the cost of good sold is too high and the inventory level is also high of the company, thus to conclude as the company do not have the repayment potential as evident from the above ratios, hence it won’t be a wise decision to grant loan in the present scenario.
Dr. Jawahar Lal, P2009, Accounting Theory and Practice,Himalaya Publishing House PVT.LTD., Mumbai, India.
Horngren, Charles T.,7th edition,Financial accounting, Pearson, Australia
Ken Trotman & Michael Gibbins,3rd edition, Thomson, Australia.