Financial Condition of Robert’s Appliances

Question: The objective of the report is to understand the financial condition of Roberts appliances and compare it with the industry standards to understand the performance of Roberts appliances. Answer: Introduction Objective: The objective of the report is to understand the financial condition of Roberts appliances and compare it with the industry standards to understand the performance of Roberts appliances. Purpose of financial analysis: The Purpose of financial analysis is To examine the past and current financial status of Roberts appliances To evaluate the performance of Roberts appliances Take necessary steps to improve the profitability for the shareholders. Structure: The report contains the detailed financial analysis of the various activity ratios, liquidity ratios and profitability ratios. The report then compares the various ratios with the industry ratio of the competitor companies and a comparison is made between them to understand the performance of Roberts appliances. Financial Analysis Gross Profit %: It is defined as the ratio of Gross profit to sales of the company for that accounting period. It is given by Gross Profit % = Gross profit/ sales where Gross profit = Sales Cost of sales Thus for year 2014, Gross Profit % = 166980/ 276000 = 60.5% Similarly, Gross Profit % for 2015 = 64.1 % Gross Profit % for 2016 = 68.1% Thus it can be seen that the gross profit of Roberts appliances has been increasing since 2014 and the company has started improving its profitability by increase in sales. Net Profit %: It is defined as the ratio of Net profit to sales of the company for that accounting period. It is given by Net Profit % = Net profit/ sales where Net profit = Gross profit Selling Expenses Admin Expenses Financial Expenses. Thus for year 2014, Net Profit % = -8280/ 276000 = -3.0 % Similarly, Net Profit % for 2015 = 16.3 % Net Profit % for 2016 = 25.5 % Thus it can be seen that the net profit of Roberts appliances has been increasing since 2014 and Roberts appliances has started improving its profitability by reduction of unnecessary expenses with increasing sales. Return on Equity %: It measures the ability of the company to generate profits using the investments by the shareholders. It is given by Return on Equity % = Net Profit/ Shareholders Equity Thus for year 2014, Return on Equity % = -8280/ 481620 = -2.0 % Similarly, Return on Equity % for 2015 = 19.0 % Return on Equity % for 2016 = 49.8 % With the increase in Net profit and decrease in capital the return on equity of Roberts appliances has increased and have delivered a better return for the investments. Current Ratio: It measures the ability of the company to pay all its current liabilities using current assets. It is given by, Current Ratio = Current assets/ current liabilities Thus for year 2014, Current ratio = 42780/ 22080 = 1.93 Similarly, Current ratio for 2015 = 1.33 Current ratio for 2016 = 1.19 The current ratio of Roberts appliances has decreased since 2014 and it will not be able to pay its current liabilities using current assets Liquidity ratio: It measures the ability of the company to pay all its current liabilities using current assets. It is given by, Liquidity ratio = Quick cash/ current liabilities Thus for year 2014, Liquidity ratio = 34500/ 22080 = 1.56 Similarly, Liquidity ratio for 2015 = 0.952 Liquidity ratio for 2016 = 0.748 The liquidity ratio of Roberts appliances has decreased and it does not have sufficient cash and cash convertibles to pay all its current liabilities. Equity Ratio: It is an indicator of leverage of the company. It is given by, Equity Ratio = Total Equity/ Total assets Thus for year 2014, Equity Ratio = 481620/ 523020 = 0.786 Similarly, Equity ratio for 2015 = 0.67 Equity ratio for 2016 = 0.50 The equity ratio of Roberts appliances has decreased and the capital invested by the shareholders is decreasing. Inventory turnover ratio: It shows how many times a company was able to sell its inventory and get it replaced in a given period. It is given by Inventory turnover ratio = Cost of goods sold/ Average Inventory Thus for year 2014, Inventory turnover ratio = 109020/ ((6900+8280)/2) = 14.36 Similarly, Inventory turnover ratio for 2015 = 9.11 Inventory turnover ratio for 2016 = 4 The inventory turnover ratio of Roberts appliances has decreased with the increase in sales the inventory has gone up. Inventory turnover days: It is defined as the number of days it takes to sell the complete inventory in hand. It is given by Inventory turnover days = 365/ Inventory turnover ratio Thus for year 2014, Inventory turnover days = 365/ 14.36 = 25.41 days Similarly, Inventory turnover days for 2015 = 40.06 days Inventory turnover days for 2016 = 91.25 days The inventory turnover days of Roberts appliances has increased and it is not able to completely rotate its inventory quickly. Accounts receivable turnover: This ratio helps in measuring the efficiency of the firm in using the assets it has. It is given by Accounts receivable turnover = Net Credit Sales/ Average account receivables Thus for year 2014, Accounts receivable turnover = 276000/ (27600 + 71760)/ 2 =5.56 Similarly, Accounts receivable turnover for 2015 = 13.34 Accounts receivable turnover for 2016 = 6.67 The account receivable turnover ratio of Roberts appliances has decreased with the increase in sales. Accounts receivable turnover days: It is defined as the number of days it takes to collect all the amount that is to be received from the customers as credit sales. It is given by Accounts receivable turnover days = 365/ Accounts receivable turnover ratio Thus for year 2014, Accounts receivable turnover days = 365/ 5.56 = 65.7 days Similarly, Accounts receivable turnover days for 2015 = 27.37 days Accounts receivable turnover days for 2016 = 54.75 days The account receivable turnover days of Roberts appliances has increased. Thus they require more time to collect the credit sales. 2014 2015 2016 Gross profit margin 60.5% 64.1% 68.0% Net Profit margin -3.0% 16.3% 25.5% Return on Equity -2.0% 19.0% 49.8% Current ratio 1.9375 1.333333 1.198128 Liquidity ratio 1.5625 0.952381 0.74883 Equity ratio 0.78628 0.66911 0.503268 Inventory Turnover 14.36364 9.111111 4 Inventory Turnover days 25.41139 40.06098 91.25 Account receivable turnover 5.555556 13.33333 6.666667 Account receivable turnover days 65.7 27.375 54.75 Business profitability: The gross profit and the net profit of Roberts appliances has been increasing since 2014. Thus it is performing better than the previous years. The gross profit % of Roberts appliances has increased from 60.5 % in 2014 to 68.0 % in 2016. It has been able to improve profitability in the 2 years. The net profit % of Roberts appliances has increased from -3 % in 2014 to 25.5 % in 2016. Thus it reduced the expenses to increase net profits. The return on equity of Roberts appliances has increased from -2 % in 2014 to 49.8 % in 2016. Thus it is performing better than the previous years and have delivered a better return for the investments. The net profit is greater than the industry standards which 20.68 %. Thus it is performing better than the competitors. The profitability of Roberts appliances is greater than the industry standards which is 65.0 %. It has better future growth than the competitors. The net profit is greater than the industry standards which 38.98 %. Thus it is performing better than the competitors. Thus Roberts appliances has started improving its profitability by reduction of unnecessary expense and increase in sales and keep it more than the industry average. Business financial stability The current ratio, liquidity ratio and equity ratio of Roberts appliances has decreased since 2014. Thus it is performance has decreased than the previous years. The current ratio of Roberts appliances has decreased from 1.93 to 1.19 in 2016. It will not be able to pay its current liabilities using current assets The liquidity ratio of Roberts appliances has decreased from 1.56 to 0.74 in 2016. The company does not have sufficient cash and cash convertibles to pay all its current liabilities. The equity ratio of Roberts appliances has decreased from 78.6 % to 50.3 % in 2016. The company needs to improve its financial stability to gain more confidence of investors. The current ratio, of Roberts appliances is less than the industry standards which is 1.80:1 respectively. The other players have an edge over it in utilizing assets. The liquidity ratio of Roberts appliances is less than the industry standards which is 1.05:1. The competitors have a better cash management than Roberts appliances. The equity ratio of Roberts appliances is less than the industry standards which is 58.3 %. Thus it is performance has decreased than the competitors. The financial stability of Roberts appliances has decreased and is below the industry standards. Thus with the expansion of business in the last two years Roberts appliances has increased its debt and thus it has more liabilities than it had in 2014. Thus its stability has decreased. Business asset utilization The account receivable turnover ratio of Roberts appliances has decreased since 2014. Thus it is performance has decreased than the previous years The time it takes to collect the outstanding accounts has decreased to 54.75 days from 65.7 in 2014. They are unable to quickly collect the amount due to credit sales The inventory turnover days of Roberts appliances has increased from 25.4 days to 91 days in 2016. The company is not able to completely replenish its inventory as it used t do earlier The account receivable turnover days of the industry are 45 days. Thus it is performance has decreased than the competitors. The inventory turnover days of the industry are 60 days. The other players have an edge over it in utilizing assets. Roberts appliances has utilized its increase in assets to increase the sales. The increase in assets is mostly due to credit sales which has increased the account receivables of Roberts appliances. Thus the asset utilization of Roberts appliances has improved but they need to focus to improve it further with as per the industry standards. Recommendations Roberts appliances should focus on improving its financial stability as the sales of the business increases. It can be seen that the current ratio and liquidity ratios have greatly declined Roberts appliances should increase its current and liquidity ratio to be able to cover its short term liabilities. The higher ratios will help shareholders be more confident about the plan of the company The inventory turnover days of Roberts appliances in 2016 is far away from the industry standards Roberts appliances should bring this at par with the industry standards. Roberts appliances should reduce the credit sales or increase the account receivable turnover ratio to have faster collection rate. Roberts appliances should get more investment from the shareholders to increase the equity ratio of Roberts appliances in accordance with the industry to reduce the risk factor. The increase in profitability by Roberts appliances will result in a positive response by the shareholders and Roberts appliances should be continue to reduce the unnecessary expense and keep profitability higher than the industry. Conclusion Thus it can be seen that the sales and profitability of Roberts appliances has increased over the past three years and the net profit increase has helped Roberts appliances to attract more investors and thus helped them in the growth of Roberts appliances. However Roberts appliances should focus on improving its financial stability and increase its current and quick assets to fulfill the current liabilities. Limitations The financial analysis conclusions depends on the method how the financial statements are produced. If there is a change in method used to state various accounts then the financial analysis may be misleading. It also does not account for qualitative aspect of Roberts appliances affair which are also equally important. The financial analysis determines the health of the company but the investment in other qualitative activities may lead to future growth which cannot be accounted currently. The financial analysis does not take into account the planning of Roberts appliances which may have affected the values. If they have a plan to achieve tehn the company may not be currently focusing on great financial figures but with the achievement of task they can refocus on improving the financial stability. References Profitability Ratios. (n.d.). Liquidity ratios. (n.d.). Activity ratios. (n.d.). Limitations Of Financial Statement Analysis. (n.d.).