Financial Analysis Of Bradley Stores And Tri-Star Management Pty Ltd
Liquidity, business activity, debt position, profitability, market comparability ratios for Bradley Stores
|
Particulars |
Industry Average |
Company |
|
Net profit margin |
6.40% |
2% |
|
Average collection period (365 days) |
30 days |
24.33 |
|
Debt ratio |
50% |
154% |
|
P/E ratio |
23 |
15000.00 |
|
Inventory turnover ratio |
12 |
13.33 |
|
ROE |
18% |
9% |
|
Average payment period (365 days) |
20 days |
18.25 |
|
Times interest earned ratio |
8.5 |
0.25 |
|
Total asset turnover |
1.4 |
0.67 |
|
Current ratio |
1.5 |
1.86 |
|
Assets-to-equity ratio |
2 |
3.08 |
|
ROA |
9% |
150% |
|
Quick ratio |
1.25 |
0.71 |
|
Fixed asset turnover ratio |
1.8 |
0.45 |
As per the tables and the comparison in contrast to the industry the current ratio of the company is 1.86 and when compared it the industry average the current ratio is 1.5. Therefore the company is performing in an outstanding manner and better than the average of the industry. The current ratio depicts how efficiently the company can realise the assets and pay off the current debts. Liquidity of the organisation can also be depicted by the analysis of the Quick ratio and the quick ratio of the company is 0.71 which is low as compared it the industry average which is 1.25. The company is negative in this case unlike that of the current asset. The probable reasons for increase in the assets is the increase in the cash in hand however, since the quick ratio is down the possibility is that the accounts receivable are taking to pay back the funds (González, 2015).
The activity ratios depict the ability of the company to convert the assets into the cash quickly. As it can be 0bserved from the table of the calculation the average collection period has improved and recorded at 24.33, though the industry average provides a leeway of 30 days, the company performed positively and the Bradley Stores is readily collecting cash from the debtors in the nominal time thereby improving the cash conversion cycle of the company. Moreover, when compared to average payment period of the Bradley Stores the company is performing better and positively again in comparison to the industry benchmarks. The Bradley Stores is able to return the payment amount in 18.25 days whereas the average of the industry is 20 days and henceforth, the company is performing consistently
The company has outsourced the funds through the debenture holders more in comparison to the equity. The debts are $100000 and the equity is $65000 which has two perspectives. The first perspective is that the debt is favourable when computing the tax factor and the same has been unfavourable from the point of view of the shareholders as they will not get the enough return. Moreover when compared to the industry average the company should minimise the debt and introduce the equity factor (Borgonovo, 2017).
The profitability of the company can be determined by the net profit margin of the company and the same is very low as compared to the industry average and the same needs to be improved in order to survive in the competitive. The profit of the company is 2% and the industry average is 6.40%. The company is performing low and needs to revamp its situation. The cost of goods sold shall also be reduced in order to process the efforts of the users (Tracy, 2012). The Return on assets is another perspective is to determine the profitability of the company and same when compared to the industry standards, the Bradley Company has a ratio of 67% which can be concluded that the return on assets has gave the company in all together new form (Daunfeldt & Hartwig, 2014). This ratio basically is used to determine the ability of the company, how by utilising the assets the company can generate enough sales.
Expected rate of return, beta, portfolio beta analysis for Tri-Star Management Pty Ltd
The market position of the company by measuring the EPS of the company or the P/E ratio of the company and the same is compared with the average industry ratio. The P/E ratio of the company is 15 which are low as compared to the industry average ratio. This affects negatively to the company and therefore the company need to look after the policies and the form new strategies to come up with new ideas on how to increase the market share. The EPS is 0.6 of the Bradley Company and the same needs to be improved and hence the market share can be improved of the company (Gotze, Northcott and Schuster, 2016)
The overall financial position of the company is better in comparison to the industry average except few areas which need to be improve and those are quick ratio, fixed assets turnover ratio, market performance and the net margin. These ratios are major and therefore the focus of the company is on the revamping of the position and henceforth the cost f goods sold shall be cut down to get back to the basics (Shapiro, 2008).
|
Q-1: Expected rate of return |
|||
|
Probability |
Tech.com |
Expected return |
|
|
0.30 |
-0.20 |
-6% |
|
|
0.20 |
0.15 |
3% |
|
|
0.35 |
0.30 |
11% |
|
|
0.15 |
0.50 |
8% |
|
|
15% |
|||
|
Probability |
Sam’s Grocery |
Expected return |
|
|
0.30 |
5% |
2% |
|
|
0.20 |
6% |
1% |
|
|
0.35 |
8% |
3% |
|
|
0.15 |
10% |
2% |
|
|
7% |
|||
|
Probability |
ASX 200 |
Expected return |
|
|
0.30 |
-4% |
-1% |
|
|
0.20 |
11% |
2% |
|
|
0.35 |
17% |
6% |
|
|
0.15 |
27% |
4% |
|
|
11% |
|
Q-2: standard deviations of the estimated rates |
|||
|
Tech.com |
Sam’s Grocery |
ASX 200 |
|
|
Standard deviation |
14.34% |
1.92% |
6.60% |
The risk compared is in the different ways and same shall be considered. Under the first point the standard deviation is of the Tech.com and the Sam’s Grocery is 1.92% and the ASX 6.60%. The beta is used to calculate the individual risk whereas the standard deviation covers the overall deviation (Vogel, 2014).
|
Q-4 |
Beta |
Return |
|
|
Tech.com |
1.68 |
15% |
25% |
|
Sam’s Grocery |
0.52 |
7% |
4% |
|
Expected rate of return |
|||
The future expected rate of the return and 25% and the 4%.
|
Port-A |
Port-B |
|||||||
|
Tech.com |
30000 |
Tech.com |
70000 |
|||||
|
Sam’s Grocery |
70000 |
Sam’s Grocery |
30000 |
|||||
|
Beta |
Weights |
Product |
Beta |
Weights |
Product |
|||
|
Tech.com |
1.68 |
0.3 |
0.504 |
Tech.com |
1.68 |
0.7 |
1.176 |
|
|
Sam’s Grocery |
0.52 |
0.7 |
0.364 |
Sam’s Grocery |
0.52 |
0.3 |
0.156 |
|
|
Portfolio beta |
0.868 |
Portfolio beta |
1.332 |
|||||
|
Expected rate of return of portfolio |
Expected rate of return of portfolio |
|||||||
|
Rate of Return |
Weights |
Product |
Rate of Return |
Weights |
Product |
|||
|
Tech.com |
15% |
0.3 |
0.045 |
Tech.com |
15% |
0.7 |
0.105 |
|
|
Sam’s Grocery |
7% |
0.7 |
0.049 |
Sam’s Grocery |
7% |
0.3 |
0.021 |
|
|
Expected rate of return of portfolio |
9% |
Expected rate of return of portfolio |
13% |
The two portfolios are presented above and after analysing it can be observed that the beta value of the Portfolio B is 1.332 and that of the portfolio is Beta 0.868 which can indicate that the portfolio A is better as the risk is low in terms of the beta, however when the analysis is done on the basis of the Expected rate of return the Portfolio A showcases the 9% return and the Portfolio B showcases the return of the 13% which determines that the Portfolio B is better in terms of the Expected rate of return but to come at the comparable position the coefficient of variation will help to settle down the thought. Therefore the coefficient of variation of both the portfolios is 9.2 and 10.6 hence the Portfolio B is better and shall be adopted (Warren & Jones, 2018).
|
Particulars |
Renovate |
Cumulative Cash flows |
|
Years |
||
|
0 |
-9000000 |
-9000000 |
|
1 |
3000000 |
-6000000 |
|
2 |
3000000 |
-3000000 |
|
3 |
3000000 |
0 |
|
4 |
3000000 |
3000000 |
|
5 |
3000000 |
6000000 |
|
Payback period |
2 |
|
Particulars |
Replace |
Cumulative Cash flows |
|
Years |
||
|
0 |
-2400000 |
-2400000 |
|
1 |
2000000 |
-400000 |
|
2 |
800000 |
400000 |
|
3 |
200000 |
600000 |
|
4 |
200000 |
800000 |
|
5 |
200000 |
1000000 |
|
Payback period |
1.5 |
The payback period of the Replace is 1.5 and payback period of the Renovate is 2 therefore the replace project is accepted. The payback period of the project determines the feasibility and the longevity of the project and how much time the project will return the investment efforts made on it (Warren, Reeve & Duchac, 2011).
|
Years |
Renovate |
Rate 15% |
NPV |
|
0 |
-9000000 |
1 |
-9000000 |
|
1 |
3000000 |
0.870 |
2608696 |
|
2 |
3000000 |
0.756 |
2268431 |
|
3 |
3000000 |
0.658 |
1972549 |
|
4 |
3000000 |
0.572 |
1715260 |
|
5 |
3000000 |
0.497 |
1491530 |
|
1056465 |
|||
|
Years |
Replace |
Rate 15% |
NPV |
|
0 |
-2400000 |
1 |
-2400000 |
|
1 |
2000000 |
0.870 |
1739130 |
|
2 |
800000 |
0.756 |
604915 |
|
3 |
200000 |
0.658 |
131503 |
|
4 |
200000 |
0.572 |
114351 |
|
5 |
200000 |
0.497 |
99435 |
|
289335 |
The project Renovate shall be accepted as it has NPV of 1056465 in comparison to Replace Project which has lower NPV in comparison at 289335. The net present value of the company indicates the profitability of the project and after applying the discounting factor the NPV determines how much value the project is going to give in the present through the annual cash flows (Venkatesh & Gugloth, 2017).
|
Renovate |
Replace |
|
|
-9000000 |
-2400000 |
|
|
3000000 |
2000000 |
|
|
3000000 |
800000 |
|
|
3000000 |
200000 |
|
|
3000000 |
200000 |
|
|
3000000 |
200000 |
|
|
IRR |
20% |
24% |
The project Replace shall be accepted as it has higher rate of return which is 24% in comparison to the Renovate Project which is 20%. A higher internal rate of return indicates the capacity of the project to return the efforts taken on them (Penman, Reggiani, Richardson & Tuna, 2017).
|
Profitability Index |
NPV+Initial Inevstment |
|
|
Initial Investment |
||
|
Renovate |
Replace |
|
|
-7943535 |
-2110665 |
|
|
-9000000 |
-2400000 |
|
|
88.26% |
88.94% |
The profitability index of the Replace project is almost equal in comparison to the Renovate Project and therefore the company shall adopt the Replace project as it is operating profitability and hence it will provide the profitability in the long run to the company. The profitability index is also calculated to determine how much funds are invested per dollar (Saleem & Rehman, 2011).
Based on the calculations on the basis of the NPV, IRR, Payback period and the Profitability index the conclusion is based on the four criteria and according to this the Replace project shall be considered in terms of all the three arguments except the pay-back period as it is low. However, the pay back being 2 is also giving the NPV greater than the Renovate project henceforth, renovate project shall be accepted (Penman, Reggiani, Richardson & Tuna, 2017).
Payback: Renovate
NPV: Replace
IRR: Replace
Profitability Index: Replace
|
Years |
Renovate |
Rate 15% |
NPV |
|
0 |
-9000000 |
1 |
-9000000 |
|
1 |
3000000 |
0.870 |
2608696 |
|
2 |
3000000 |
0.756 |
2268431 |
|
3 |
3000000 |
0.658 |
1972549 |
|
4 |
3000000 |
0.572 |
1715260 |
|
5 |
3000000 |
0.497 |
1491530 |
|
1056465 |
|||
|
Years |
Replace |
Rate 15% |
NPV |
|
0 |
-2400000 |
1 |
-2400000 |
|
1 |
2000000 |
0.870 |
1739130 |
|
2 |
800000 |
0.756 |
604915 |
|
3 |
200000 |
0.658 |
131503 |
|
4 |
200000 |
0.572 |
114351 |
|
5 |
200000 |
0.497 |
99435 |
|
289335 |
The venture Renovate will be acknowledged when the WACC is 15% and this is on the grounds that the NPV is certain and higher and besides the positive NPV mirrors the income is cycle of the organization is working and performing extraordinarily (Saleem & Rehman, 2011). While considering the fleeting the wage will be created progressively and the organization can use the assets either in the bank or put the cash into the potential organizations with the end goal of the more noteworthy returns.
|
Years |
Renovate |
Rate 25% |
NPV |
|
0 |
-9000000 |
1.000 |
-9000000 |
|
1 |
3000000 |
0.800 |
2400000 |
|
2 |
3000000 |
0.640 |
1920000 |
|
3 |
3000000 |
0.512 |
1536000 |
|
4 |
3000000 |
0.410 |
1228800 |
|
5 |
3000000 |
0.328 |
983040 |
|
-932160 |
|||
|
Years |
Replace |
Rate 25% |
NPV |
|
0 |
-2400000 |
1 |
-2400000 |
|
1 |
200000 |
0.800 |
160000 |
|
2 |
800000 |
0.640 |
512000 |
|
3 |
200000 |
0.512 |
102400 |
|
4 |
200000 |
0.410 |
81920 |
|
5 |
200000 |
0.328 |
65536 |
|
-1478144 |
The most important elements which are to be taken into consideration are the IRR, NPV and the profitability index of the project. The positive NPV of the company will reflect the income trend and the IRR will determine the cost of return and lastly the profitability index will determine the amount invested and its return to the company in the long run (Borgonovo, 2017).
|
Rate 12% |
NPV |
|||
|
New investment in fixed capital |
$ -1,60,000.00 |
1 |
$ -1,60,000.00 |
|
|
Additions to inventories at outset of project $32,000 |
$ 32,000.00 |
0.892857143 |
$ 28,571.43 |
|
|
Additions to trade accounts receivable at outset of project $24,000 |
$ 24,000.00 |
0.797193878 |
$ 19,132.65 |
|
|
Additions to trade accounts payable at outset of project $26,000 |
$ 26,000.00 |
0.711780248 |
$ 18,506.29 |
|
|
Annual additions to sales revenue $154,000 |
$ 1,54,000.00 |
0.635518078 |
$ 97,869.78 |
|
|
Annual additions to cash operating costs $64,000 |
$ 64,000.00 |
0.567426856 |
$ 36,315.32 |
|
|
Expected pre-tax salvage value $10,000 |
$ 10,000.00 |
0.567426856 |
$ 5,674.27 |
|
|
IRR |
20% |
$ 46,069.74 |
||
The project shall be accepted by analysing the Net present Value and IRR of the project. The analysis shows NPV at $46069.74 and IRR at 20%. The NPV is positive and high which indicates that the profitability of the company therefore it will generate the positive future cash flows and it will help the cycle of the cash flows to be better. Also the IRR rate of return is more in comparison to the normal rate of return and therefore it will generate more cash flows (Salunke & Bagad, 2009). Therefore it can be concluded that the better media can adpt the project as it will only provide the better future cash flows to the company and a higher IRR will also generate more returns.
References
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Daunfeldt, S.O. & Hartwig, F. (2014). What determines the use of capital budgeting methods?: Evidence from Swedish listed companies. Journal of Finance and Economics, 2(4),101-112.
González, I. R. R., Lima, B. C., Pincheira, P. I., Brum, A. A., Macêdo, A. M., Vasconcelos, G. L., & Kashyap, R. (2017). Turbulence hierarchy in a random fibre laser. Nature Communications, 8, 15731.
Gotze, U., Northcott, D. & Schuster, P. (2016). INVESTMENT APPRAISAL. (2nd ed.). New York: Springer.
Penman, S.H., Reggiani, F., Richardson, S.A. & Tuna, A. (2017). A Framework for Identifying Accounting Characteristics for Asset Pricing Models, with an Evaluation of Book-To-Price.
Saleem, Q. & Rehman, R.U. (2011). Impacts of liquidity ratios on profitability. Interdisciplinary Journal of Research in Business, 1(7), pp.95-98.
Salunke, M., & Bagad, A. (2009). Humanities and Social Sciences. India: Technical Publications.
Shapiro, A. C. (2008). Capital budgeting and investment analysis. India: Pearson Education.
Simon, R. (2015). Sensitivity, specificity, PPV, and NPV for predictive biomarkers. JNCI: Journal of the National Cancer Institute, 107(8).
Tracy, A. (2012). Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet. RatioAnalysis. United States: John Wiley & Sons.
Venkatesh, M., & Gugloth, D. (2017). A Review of Capital Budgeting Techniques. International Journal of Economics and Management Studies (Retrieved from https://www.internationaljournalssrg.org/IJEMS/2017/Special-Issues/ICEEMST/IJEMS-ICEEMST-P102.pdf
Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis. New York: Cambridge University Press.
Warren, C. S., & Jones, J. (2018). Corporate financial accounting. USA: Cengage Learning.
Warren, C. S., Reeve, J. M., & Duchac, J. (2011). Accounting. USA: Nelson Education