Business Analysis - Financial Management Assessment Answers

January 11, 2018
Author : Julia Miles

Solution Code: 1AEDH


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Small Business Analysis 1:

a.. the entity’s earning ability; (4 ratios are required)

Return on equity = Net Income/total equity = 75000/232935 = 0.321 cents


Return on assets= Net Income/ total assets = 75000/420675 = 0.178


Profit Margin = net income/sales

= 75000/462500 = 0.162


Earnings per share = net income/number of common share outstanding = 75000/126000 = 0.595


  1. the extent to which internal sources have been used to finance asset acquisitions; (1 ratio is required)

CapitalAcquisition Ratio = (cash flow from operations - dividends) / cash paid for acquisitions.

= Cash Flow from operations = (sales revenue – cost of sale) = 155000

Dividends = 1890+12600 = 14490

Cash Paid for acquisition = 285075

Capital Acquisition ratio = 0.492


  1. the rapidity with which accounts receivable are collected; (1 ratio is required)

Average collection period for receivables = (Days*AR)/Credit Sale

= Days -= 365

AR(Average amount of accounts receivable) = (143325+149625)/2 = 146475

Credit sale or net credit = 462500

Avg. Collection period of receivables = 115.59 days


  1. the ability of the entity to meet unexpected demands for working capital

Quick ratio = (Current assets – inventories)/current liabilities = Current assets = 285075

Inventories = 126000

Current liabilities = 156240

Quick ratio = 1.01


  1. the length of time taken by the entity to sell its inventories.

Average Turnover Period = 365/Inventory turnover

Inventory turnover = cost of goods sold/ Average Inventory

= Cost of goods sold = 307500

Average inventory = (126000+110250)/2 = 118125

Inventory turnover = 2.603

Avg. Turnover period = 140 days

Small Business Analysis 2:

Liquidity: - the current ratio and the acid test ratio indicate the liquidity position of the company which means the amount of assets that the company has which can be liquidated in the short term to meet short term liabilities (EE and I, 2015). The liquidity ratio shows that the company has more than double amount of liquid assets compared to the current liabilities and this has improved in the last one year. It also indicates that the company has increased its current assets in 2013 compared to 2012 by way of sale revenues or retained profits or otherwise increasing cash deposits with the company.

Asset efficiency: the asset efficiency ratios are days inventory at hand and days debtor outstanding ratios. The first ratio indicates the number of days that are taken to by the company to completely sell the products that is in its inventory. This shows how fast a company can sell the products. The company has improved in the number of days it can sell its complete inventory from the year earlier. The days debtor outstanding ratio indicates the average number of days that a customer takes to pay the bills. It indicates the days it takes to collects debts form customers (Swink and Schoenherr, 2014). The company has slowed down in debt collection from customers in 2-13 compared to 2014.

Profitability: the net profit margin is a profitability ratio that shows the net percentage of revenues that remain with a company after all the operating expenses, any interest and taxes and preferred stock dividends are paid out by the company from the gross revenue earned. This is the percentage of revenues that the company would have at hand to be distributed as dividends among common stockholders (Penner and Saini, 2015).

Small Business Analysis 3:Case Study Analysis:

Profitability: the EBIT margin is indicative of the operating profitability of the companies when calculated in percentage of the total revenues. This ratio is calculated before accounting for interest, tax and depreciation. The operating profitability of a company is shown by this and this is the amount that the company has at hand to give away to shareholders after deduction of certain amounts. It also gives an indication of the cash flow situation in the company (Revenue and EBIT gains for BWT, 2010). In this context Qantas Airways has a lower percentage of its revenues post deduction of operating expenses compared to Virgin. Since the two companies operate in the same industry which can be presumed to have the same rates of taxes etc., it can be concluded that Virgin would be able to pay more money to its shareholders compared to Qantas.

Net Profit margin is another profitability ratio and it indicates the profits that are available with the company to be shared among common shareholders after having been accounted for all other expenses (Berman, Knight and Case, 2006). This indicates the actual amount of cash a company has in hand at the end of a year to pay the common dividends. The figures show that in this aspect also, Virgin fares better than Qantas.

The other profitability ratios include ROE and ROA. ROE is the % return that the company generates at the end of every year against each one equity share while ROA is the % return on assets. This indicates the revenue generated by the company with respect to the equity it has and the value of assets it has. This is important because the company uses these to do business (Gill, Chatton and Osgood, 2009). Again in both the ratios, Virgin does much better than Qantas showing the former has better used it assets and equity available to run the business and generate revenues.

Efficiency: the efficiency ratios are calculated to show how efficiently a company is managing itself. There are many aspects that can be included in measuring the efficiency of a company from financial records such as asset utilization, speed of outstanding debt collection form customers, or time taken to convert the inventory into cash or sale (Cole, Branson and Breesch, 2009). These ratios help outside investors to gauge how well a company is run and get an idea about the efficiency of the management of the company. Efficiency ratios are viewed together with profitability ratios since it has been noticed that in most cases, when companies are efficient, they generate more revenue and reduce costs to clock better net profits. Some of the efficiency ratio includes accounts receivable turnover, working capital ratio, asset turnover ratio, total asset turnover ratio, inventory turnover and days’ sales in inventory (Marsh, 2012).

In this case we consider the debt to equity ratio for comparison. Every company requires money to function. Money is required for the daily day to day activities as well as for big projects. Companies can raise this money in three ways – by retaining profits in a year, by selling more shares of the company among the investors to generate money or by taking short term and long term debts or credits. The debt to equity ratio gives an indication of the debts taken against equity in the company (Ormiston and Fraser, 2013). It indicates at a glance whether the company has more debt or equity. It is preferred that companies have more of equity than debt as debt is the money that has to be repaid with interest. In the case at hand both the companies have a high debt to equity ratio. This means that the company have more debt than equities. Virgin has incurred far more debt compared to Qantas. Hence at a glance it can be concluded that Qantas is a better managed company than Virgin.

Liquidity – the ability of a company to pay off the short term debts and its current liabilities – mostly in the next year, and as long term liabilities become current liabilities are measured by the amount of liquidity that exists in a company (Domowitz and Wang, n.d.). Or in other words the state of liquidity of the company is the ability of a company to transform assets in to cash to pay off liabilities and certain other current obligations. Essentially liquidity of the company is not a measure of how much cash it has. But it is the measure of the ability of the company to quickly transform all of its assets into cash at a fast rate to make near term payments possible. Some of the assets that have the property of being able to converted to cash quickly include accounts receivable, inventory and trading securities since they are relatively easy to convert to cash by the company at a short notice. In this case we consider the liquidity of the companies with the current ratio. This ratio essentially indicates the company’s ability to pay off current liabilities with the current assets only. Long term asset that can be liquidated are not considered. Since short term liabilities are due within the next year, current ratio assumes importance (Vause, n.d.).

The current ratio indicates the ability of the company to make arrangements for cash from its current or short term assets in cases when it has a limited period of time to raise the funds for payment of liabilities. Some of the current assets include cash and cash equivalents and marketable securities which have the property of being easily converted into cash in a short time period.

The higher the ratio - the better is the company position. Well managed companies tend to have this ratio near one. Here Qantas certainly has a better liquidity position compared to Virgin which means that the former has more convertible current assets to pay off current liabilities.

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