Performance Analysis Of Entities: Lessons Learned About Business Decision Making
Reflection on lessons learned about business decision making
In order to conduct performance analysis of different entities individually and comparatively, it is essential to have relevant data about their performance for a particular period (Reboredo and Ugolini, 2016). Based on the financial information about the entities performance and position as on a particular date, a detailed analysis of their performance individually, i.e. how the entity has performed over the years. In case of comparative performance analysis, the performances of different entities are compared to find out who has performed better comparatively (Ballings et. al. 2015).
The continuous growth in sales has been achieved by Digby and Ferris by strategic decision and planning. In every rounds the strategic decision and planning in Digby and Ferris has helped in improving the gross revenue of sales (Karadag, 2015).
|
Sales |
Digby |
Ferris |
|
Round 1 |
$107,554,315 |
$105,202,572 |
|
Round 2 |
$131,543,842 |
$118,336,818 |
|
Round 3 |
$142,201,856 |
$151,865,779 |
|
Round 4 |
$175,975,078 |
$168,647,730 |
|
Round 5 |
$176,762,648 |
$179,540,251 |
|
Round 6 |
$247,004,901 |
$191,865,068 |
|
Round 7 |
$296,998,811 |
$219,063,683 |
|
Round 8 |
$328,583,225 |
$244,835,312 |
Emphasis on improving profitability:
The ability of the management to make effective and efficient use of resources in business will be evaluated from the profit of such business (Lin et. al. 2015). Management always expect to improve its profitability. The decision to make effective utilization of non-current assets by Baldwin and Digby has resulted in continuous improvement in overall profit. The table below will clearly indicate how the profits have increased in every round (Li et. al. 2014).
|
Profit |
Baldwin |
Digby |
|
Round 1 |
$5,465,847 |
$2,965,928 |
|
Round 2 |
$2,485,403 |
$4,999,426 |
|
Round 3 |
$4,169,946 |
$1,308,851 |
|
Round 4 |
$5,540,112 |
$7,623,100 |
|
Round 5 |
$9,509,598 |
$2,390,086 |
|
Round 6 |
$10,366,732 |
$12,176,582 |
|
Round 7 |
$20,872,908 |
$14,554,237 |
|
Round 8 |
$27,029,539 |
$25,846,171 |
Utilization of assets in business can be measured with the help of asset turnover ratio. It is always a motivation to keep on improving the ability of an organization to turnover its assets. The higher the turnover ration the better it is for an organization (Thomas et. al. 2017).
The sales in Andrews, Baldwin, Chester and Erie have not been managed properly as the sales have in these entities have not followed the growth pattern. Thus, growth in sales in these entities have not been managed properly (Drake, Quinn and Thornock, 2017).
|
Sales |
Andrews |
Baldwin |
Chester |
Erie |
|
Round 1 |
154971887 |
115949254 |
109437745 |
$103,219,821 |
|
Round 2 |
189189384 |
104208939 |
127580838 |
$103,688,717 |
|
Round 3 |
176847323 |
137739828 |
120738609 |
$116,860,921 |
|
Round 4 |
162314378 |
169870606 |
147420012 |
$131,802,791 |
|
Round 5 |
204244793 |
184387278 |
162339566 |
$148,983,771 |
|
Round 6 |
201371352 |
221542889 |
127098174 |
$181,978,210 |
|
Round 7 |
174852348 |
254604812 |
194070802 |
$157,144,646 |
|
Round 8 |
191706649 |
257756876 |
210788899 |
$198,657,273 |
Inability to improve asset turnover ratio will lead to erosion of business efficiency:
The inability to have a stable asset management policy is clear from the data provided below. None of the entities have been able to achieve a constant growth in asset turnover ratio. All have experienced growth as well as deterioration in asset turnover rations in different periods during the course of 8 rounds.
|
Sales |
Andrews |
Baldwin |
Chester |
Digby |
Erie |
Ferris |
|
Round 1 |
1.29 |
0.99 |
1.07 |
0.96 |
0.93 |
1.19 |
|
Round 2 |
1.22 |
0.89 |
1.16 |
0.98 |
0.88 |
1.21 |
|
Round 3 |
0.99 |
1.24 |
1.09 |
1.03 |
0.99 |
1.42 |
|
Round 4 |
0.85 |
1.07 |
1.16 |
1.07 |
0.89 |
1.24 |
|
Round 5 |
0.86 |
1 |
1.16 |
0.94 |
0.88 |
1.09 |
|
Round 6 |
0.47 |
1.02 |
1.16 |
1.07 |
0.71 |
1.1 |
|
Round 7 |
0.47 |
1.02 |
1.16 |
1.07 |
0.71 |
1.1 |
|
Round 8 |
0.5 |
1.07 |
1.32 |
1.18 |
0.9 |
1.26 |
Inefficient fund management is a clear indication of immediate change needed in business strategy:
The inefficient cash flow management by Andrews and Chester influenced its profitability and business. Both struggled to maintain its revenue and profit. Initially, Andrews was the supreme leader in the market, both from gross revenue and profitability. However, improper strategy and decision in managing its cash resources led to the downfall of business in Andrews. Chester was also similar as it failed to maintain any particular tempo to earn revenue and profit. The following table shall be helpful in understanding how the profits in Andrews and Chester have fluctuated in different periods.
|
Profit |
Andrews |
Chester |
|
Round 1 |
$3,102,381 |
$2,713,316 |
|
Round 2 |
$9,475,354 |
$7,315,432 |
|
Round 3 |
$5,054,683 |
$3,069,160 |
|
Round 4 |
$12,668,419 |
$10,518,893 |
|
Round 5 |
$27,300,474 |
$9,403,889 |
|
Round 6 |
$14,830,800 |
($2,250,447) |
|
Round 7 |
($1,276,665) |
$21,581,728 |
|
Round 8 |
$4,731,787 |
$28,778,655 |
Management of free cash flows is equally important as that of business profit:
The free cash flows often considered one of the most important yardsticks to evaluate the performance of an organization is shown below.
Importance of continuous growth in sales and revenue
Except Andrews and Erie all other entities have been able to earn significant amount of free cash flows from business operations. Andrews however, has a negative free cash flow of $13,756,507 in the period is a cause of concern until unless it has invested huge amount of cash to expand its operations. Free cash flows from business of Erie is also not very attractive as compared to the other four entities in round 1.
The performance and stock price movement of entities are very much in alignment with each other. The stock price movement of the six entities over the 8 rounds will help us to put in place the performance of these entities with the movement in the stock prices.
|
Andrews |
Baldwin |
Chester |
Digby |
Erie |
Ferris |
|
|
Round 1 |
$36.44 |
$41.17 |
$36.04 |
$33.84 |
$37.04 |
$38.00 |
|
Round 2 |
$47.60 |
$36.19 |
$42.08 |
$36.26 |
$37.71 |
$41.79 |
|
Round 3 |
$43.28 |
$36.12 |
$40.66 |
$32.03 |
$33.70 |
$42.38 |
|
Round 4 |
$63.21 |
$41.41 |
$51.83 |
$40.56 |
$37.09 |
$47.92 |
|
Round 5 |
$92.18 |
$50.24 |
$60.19 |
$41.27 |
$53.12 |
$44.40 |
|
Round 6 |
$74.80 |
$58.44 |
$40.40 |
$52.02 |
$79.99 |
$41.43 |
|
Round 7 |
$8.99 |
$80.37 |
$70.89 |
$67.11 |
$88.39 |
$58.90 |
|
Round 8 |
$2.95 |
$103.46 |
$110.65 |
$86.94 |
$115.99 |
$75.88 |
On the basis of the above data about the stock prices of the six entities at the end of different periods let’s develop a graph to indicate how the stock prices have changed over the entire duration of 8 rounds (Phillips, 2016).
The six entities have experienced number of ups and downs during the entire course of 8 rounds. The fortunes of these entities have changed completely over the entire course. As can be seen in the graph above, that Andrews has been the biggest loser when it comes to its stock prices over the course of 8 rounds with Erie being the top gainer with stock trading at $115.99 at the end of round 8. The complete turnaround in fortune of the two companies are completely due to the changes in the performance of these companies.
Andrews till round three was the clear leader in the market however, its inability to maintain a sustainable growth in business led to its huge drop in its performance as well as its stock prices during the 8 rounds (Rani, Yadav and Jain, 2015). Out of the six entities, i.e. Andrews, Baldwin, Chester, Digby, Erie and Ferris, though Andrews achieved the highest amount of sales but when it comes to profit, Return on Sales and Return on Equity (ROE), it is Baldwin who outperformed the other five in the period (Bennett, M James and Klinkers, 2017). In terms of return on assets (ROA), Ferris outperformed all including Baldwin with 5.26% as compared to Baldwin who was second best with 4.66% (Saeidi et. al. 2015).
Thus, it is important to have a strategy to achieve sustainable growth in business. This will help entities to improve their profile in the market. The stock prices of an entity reflects how it is perceived by the investors. The stock prices of Andrews have taken the most beating during the 8 rounds simply because it failed miserably to maintain sustainable growth in business.
Having an effective strategy to manage cash in the business:
Cash management is one of the most important aspects of any business. In case an entity does not have an effective cash management strategy then it will struggle to achieve its objectives both in the short run as well as in the long run. Andrews and Chester are two prime examples of this. Despite having significant amount of revenue initially, both due to inability of managing its cash have suffered significant loss of market share and profitability during the course of 8 rounds.
Emphasis on improving profitability
Managing the working capital is again a key aspect of running an organization successfully. The day to day affairs within an organization will be hampered if the management does not have a suitable working capital management strategy. One of the biggest reasons behind the continuous growth of Digby and Ferris is the efficient working management strategy in both. Whereas the downfall of Andrews over the last two rounds is also to a large extent is due to the inability of the management to maintain a proper working capital and cash resources. The emergency loan taken by Andrews resulted in huge loss in round 7 (Warren Jr, Moffitt and Byrnes, 2015).
Entities operate in an environment which is uncertain thus, the performance of an entity changes from period to period. As can be seen in previous period where Andrews performed exceptionally well compared to its performance in earlier period. However, in the latest period (round 3) again there has been changes in performances of the entities (DeFusco et. al. 2015). It is of utmost importance for an entity to be flexible with the changes in circumstance. The management should react to changes in circumstances by responding accordingly. Flexibility is essential to ensure prompt action with changing circumstances (Weygandt, Kimmel and Kieso, 2015).
References:
Ballings, M., Van den Poel, D., Hespeels, N. and Gryp, R., 2015. Evaluating multiple classifiers for stock price direction prediction. Expert Systems with Applications, 42(20), pp.7046-7056.
Bennett, M., James, P. and Klinkers, L. eds., 2017. Sustainable measures: Evaluation and reporting of environmental and social performance. Routledge.
DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E., 2015. Quantitative investment analysis. John Wiley & Sons.
Drake, M.S., Quinn, P.J. and Thornock, J.R., 2017. Who uses financial statements? a demographic analysis of financial statement downloads from edgar. Accounting Horizons, 31(3), pp.55-68. [Online] Available at: https://www.aaajournals.org/doi/abs/10.2308/acch-51736 [Accessed 3 October 2018]
Fazzini, M., 2018. Financial Statement Analysis. In Business Valuation (pp. 39-76). Palgrave Macmillan, Cham. [Online] Available at: https://link.springer.com/chapter/10.1007/978-3-319-89494-2_3 [Accessed 3 October 2018]
Jans, M., Alles, M.G. and Vasarhelyi, M.A., 2014. A field study on the use of process mining of event logs as an analytical procedure in auditing. The Accounting Review, 89(5), pp.1751-1773. [Online] Available from: https://www.aaajournals.org/doi/abs/10.2308/accr-50807?code=aaan-site [Accessed 3 October 2018]
Karadag, H., 2015. Financial management challenges in small and medium-sized enterprises: A strategic management approach. EMAJ: Emerging Markets Journal, 5(1), pp.26-40. [Online] Available at: https://emaj.pitt.edu/ojs/index.php/emaj/article/view/67 [Accessed 3 October 2018]
Laboissiere, L.A., Fernandes, R.A. and Lage, G.G., 2015. Maximum and minimum stock price forecasting of Brazilian power distribution companies based on artificial neural networks. Applied Soft Computing, 35, pp.66-74.
Lee, H., Surdeanu, M., MacCartney, B. and Jurafsky, D., 2014, May. On the Importance of Text Analysis for Stock Price Prediction. In LREC (pp. 1170-1175). [Online] Available at: https://www.lrec-conf.org/proceedings/lrec2014/pdf/1065_Paper.pdf [Accessed 3 October 2018]
Li, X., Xie, H., Chen, L., Wang, J. and Deng, X., 2014. News impact on stock price return via sentiment analysis. Knowledge-Based Systems, 69, pp.14-23.
Lin, C.C., Chiu, A.A., Huang, S.Y. and Yen, D.C., 2015. Detecting the financial statement fraud: The analysis of the differences between data mining techniques and experts’ judgments. Knowledge-Based Systems, 89, pp.459-470.
Mohanram, P., Saiy, S. and Vyas, D., 2018. Fundamental analysis of banks: the use of financial statement information to screen winners from losers. Review of Accounting Studies, 23(1), pp.200-233.
Mohanram, P., Saiy, S. and Vyas, D., 2018. Fundamental analysis of banks: the use of financial statement information to screen winners from losers. Review of Accounting Studies, 23(1), pp.200-233.
Nguyen, T.H., Shirai, K. and Velcin, J., 2015. Sentiment analysis on social media for stock movement prediction. Expert Systems with Applications, 42(24), pp.9603-9611.
Papanastasopoulos, G.A., 2018. JM WahlenS. P. BaginskiM. BradshawReview of Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective9th ed. 2018Cengage Learning978-1337614689 (995 pp., $228.25). [Online] Available at: https://www.sciencedirect.com/science/article/pii/S0020706318301286 [Accessed 3 October 2018]
Patel, J., Shah, S., Thakkar, P. and Kotecha, K., 2015. Predicting stock and stock price index movement using trend deterministic data preparation and machine learning techniques. Expert Systems with Applications, 42(1), pp.259-268.
Phillips, F., 2016. Withholding Financial Statement Analysis Formulas When Instructing and Testing: A Desirable Difficulty. [Online] Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2835694 [Accessed 3 October 2018]
Ragin, C.C., 2014. The comparative method: Moving beyond qualitative and quantitative strategies. Univ of California Press.
Rani, N., Yadav, S.S. and Jain, P.K., 2015. Financial performance analysis of mergers and acquisitions: evidence from India. International Journal of Commerce and Management, 25(4), pp.402-423.
Reboredo, J.C. and Ugolini, A., 2016. Quantile dependence of oil price movements and stock returns. Energy economics, 54, pp.33-49.
Saeidi, S.P., Sofian, S., Saeidi, P., Saeidi, S.P. and Saaeidi, S.A., 2015. How does corporate social responsibility contribute to firm financial performance? The mediating role of competitive advantage, reputation, and customer satisfaction. Journal of business research, 68(2), pp.341-350.
Thomas, R.R., Van Greuning, H., Henry, E. and Michael, A.B., 2016. International financial statement analysis.
Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education.
Warren Jr, J.D., Moffitt, K.C. and Byrnes, P., 2015. How Big Data will change accounting. Accounting Horizons, 29(2), pp.397-407.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.