The current report is based on the assessing the financial performance of the two companies namely the Site Group International Ltd and National Storage Australia. The primary reason for considering the ratio is to determine the overall performance of both the organization. The profitability ratio, liquidity ratios, asset efficiency ratio and capital structure ratio will be calculated along with the horizontal and vertical analysis will be carried out to summarize the overall conditions of the organizations. The report will be evidently putting forward the profit and loss situations to express the present state of affairs.
National storage Australia is considered as one of the leading self-storage providers of Australian and New Zealand having more than 110 centres offering solutions of storage to more than 35,000 residential and commercial customers throughout both the nations (nationalstorage.com.au, 2018). During the year 2013 the national storage Australia was listed on the Australian stock exchange and the company was better known as Storage Reit. On the other hand, the site group international limited offers training, education and workforce services to the government, corporate and individual clients in Australia and across the world (site.edu.au, 2018). The company functions in a segmental manner and assess candidates in the areas of mining, processing, etc through the site institute.
The profitability ratio helps in measuring the overall profitability situation of the organization for a certain period (Williams, 2014). The profitability ratio is based on the assessment of the gross profit margin, net profit margin and return on equity. An organization profitability situation or the in sufficient liquidity helps in determining whether the firm can obtain sufficient amount of debt and equity t finance its business and maintain the position of liquidity. The return on equity represents the measurement of the profitability, which determines the amount of profit generated from one unit of equity. The return on equity helps in reflecting every dollar of sales represented by its profit and the same is computed by dividing the operating income from net revenue (Deegan, 2016). As evident from the computation the return on equity for Site group International represents the negative trend as the company reported the net equity of 24% during the year 2016 which subsequently stood negatively in 2017 to -186%. Hence, for investors making an investment in this firm could turn out to be risky since the company has posted a fluctuating trend of return on equity.
On the other hand, National Storage Australia reported a positive return on equity of 14.1 in 2017. Though the company reported a negative profit in the year 2015 of -6% however, it gained strength in 2017 as it reported a gross profit of 6%. A marginal fall in profitability does not creates large impact on the return on equity since National storage Australia is making sufficient amount of profit to provide return to its shareholders.
The profit margin represents the measure of value of every dollar of sales that results in profit. The proportion of higher net profit generated by a firm represents that the firm has been sufficiently its sales in profit (Warren & Jones, 2018). The gross profit margin of Site group international ltd represented a positive trend however, the gross profit margin in the year 2017 declined from 87.8% to 75.2%. On the other hand, National storage Australia represented a better trend of profit margin with the gross profit margin reported stood 85.6% in 2017. Overall, it can be stated that even though National Storage Australia reported a marginally declining return on equity but the company reported a better profit than Site Group International.
The asset efficiency ratio is regarded as the ratio that helps in determining the organizations ability in converting its assets in to the assets and simultaneously converting the sales in cash (Bushman, 2014). The asset efficiency ratio generally varies industry wise since it is relative to the investment made by an organization in its current and fixed assets. Following the detailed analysis, the asset turnover ratio for Site group represented a strong trend with the ratio standing 0.97 in 2016. However, the ratio declined in 2017 to 0.48 but the company has been successful in making an efficient use of its assets.
The national storage Australia on the other hand represented that the company has been generating sales from its assets but the ratio stood relatively lower as the asset turnover ratio for National Storage Australia stood 0.1 in 2017. The inventory turnover ratio determines how quickly an organization convert its inventory into sales. Similarly, the inventory turnover for Site group international reported an inventory turnover of 175.65 and 156.1 in 2016 and 2017 respectively. While National Storage Australia reported a lower inventory turnover of 25.91 and 29.0 respectively. It can be said that National Storage has better inventory conversion rate than Site Group international.
The receivables turnover places emphasis on how quickly and efficiently an organization converts its accounts receivable in cash (Henderson et al., 2015). The receivables turnover helps in determining the efficiency of the relative strategy of an organization to debt. The accounts receivables generally arises from the credit sales made by an organization and requires greater attention since it is directly related to the cash flow. The receivables turnover for Site group international reported during 2016 and 2017 stood 140.92 and 340.86 respectively. This represents that the company has not be effective in collecting cash from its customers and consequently resulting in lower inflow of cash.
National Storage Australia reported a better accounts receivable turnover of 25.91 and 29.0 in 2016 and 2017 respectively. This represents that the National storage Australia has better collection period than Site group International. Based on the analysis a conclusive evidence suggest that Site Group International has better asset turnover but have not reported better receivables turnover. Whereas, National Storage Australia has better accounts receivable turnover with moderate asset turnover.
The liquidity analysis measures the organizations ability in paying its short-term debt obligations and meeting the uncertain need of cash (Pratt, 2016). Focus of liquidity analysis is on the working capital of a firm representing the excess value of current assets and current liabilities. Current ratio, quick ratio and cash flow ratio is regarded as important tool in determining the liquidity position of an origination. The firm prefers a higher current ratio but a much higher current ratio will not be considered efficient since it represents the pile of unprofitable assets, receivables or inventory (Macve, 2015). The current ratio for Site group international for the year 2016 and 2017 stood 1.29 and 0.42 representing a falling trend of current ratio. The quick ratio too represented a falling trend as the quick ratio reported by the firm stood 1.28 and 0.38 respectively.
On the other hand, the current ratio for National Storage Australia for the year 2016 stood 0.68 and 0.88 respectively with the company showing a positive trend of growth. The quick ratio too represented a similar trend of growth with ratio standing 0.59 and 0.67 respectively. Considering the cash flow ratio Site group International reported an inferior cash flow ratio of 0.10 and 0.11 respectively for 2016 and 2017. National Storage simultaneously reported a higher cash flow ratio of 59.53 and 54.37 respectively for the same period. Overall, a conclusion can be drawn from the trend that National Storage Australia has better operating cycle efficiency and adequate cash to meet its short term debt obligations than Site Group as the company is presently experiencing poor operating cycle.
Gearing represents an organizations measurement of the capital structure that helps in describing the quantity of debt in respect of the equity financing and states whether an organization assets are evenly distributed among the shareholders and the lenders (Marshall, 2016). In order to determine the long-term survival of an organization the capital structure ratio helps in providing better information to the investors. The debt ratio for Site Group International Ltd during the year 2016 stood 46% while it subsequently increased to 76% in the recently concluded year of 2017. This represents that the company is higher proportion of debt than its assets. The equity ratio on the other hand stood 54% and 24% for Site International Group.
By examining the cash flow of the firm, it is noticed that the liabilities have significantly increased resulting in higher debt ratio (Barth, 2015). National Storage reported a lower debt ratio of 14% and 10% during 2016 and 2017. The debt to asset ratio remained lower with 66% and 60% for 2016 and 2017 respectively. Overall, from the analysis it can be stated that National Storage Australia is better placed than Site International Group.
The disadvantages or the limitations of the ratio analysis must be taken into the considerations at the time of interpreting and depending upon the ratios to create an opinion regarding an organizations financial health, both the in terms of the past, present and future aspects of the firm (Hoskin et al., 2014). The companies that is covered in this analysis is dealing in the different areas having different standards. An important assertion in this regard is that comparing between the two companies is only viable given that both the organizations are connected in the identical industry.
At times difficulties arises in determining the variations that takes place without having the complete information of the organization (Warren, 2016). The lack of information makes difficult in judging the overall performance of the organization. The two companies undertaken in this analysis might make use of the different factors namely the different method of bookkeeping, size of the origination, accounting principles followed and the different lines of product dealt by them. With such kind of variations, the data obtained might fail provide an expressive conclusion.
An organization might eventually alter its organizational structure and the ratio that is computed years before may provide an expression that may entirely change the perspective opinion of an organization among the investors (Wild, 2015). There are often disclosure of financial reports that eventually makes it hard for the investors in determining whether the investors could rely on the data or the given set of information. The qualitative aspects of the information derived might not be sufficient for appropriate disclosure of detailed financial statements or the accounting policies undertaken. In addition to this limitation, financial data obtained of an organization cannot be considered adequate to ascertain the present financial health (Gassen, 2014). Ratio analysis ignores the qualitative aspects of the information since it requires wide-ranging assessment, evaluation of competitors and current economic scenarios.
Ratio analysis usually deals with the general data of the organization. Ratio analysis ignores the concept of inflation since the inflationary market conditions might force an organization to change its value and such changes might make it difficult for investors in making the investment decision. The difficulty in investment decision usually arises because of the insufficient information regarding the organizational policy or information about its competitors (Williams, 2016). Conclusively, ratio analysis ignores qualitative aspects of an organization. However, it can be useful for investors obtaining the present financial health of the firm but the analysis overlooks the economic aspects of the study.
Conclusion:
A conclusion can be drawn by stating that National Storage Australia has reported a better profitability, liquidity, asset efficiency and gearing than Site International Group. National Storage Australia has posted a better asset efficiency figure representing that the firm has better return on its assets than other firms and the profitability situations reflects that the firm can better meet its short term obligations than Site Group. Conclusively, National Australia Group is proved to be better firm in regulating its profit margin with better current and quick ratio.
From an investors perspective it is recommended that they should make investment in National Storage Australia instead of investing in Site International Group. This is because the evidence presented from the ratio analysis has stated that the organization is making profit with stable return on equity.
Reference List:
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Bushman, R. M. (2014). Thoughts on financial accounting and the banking industry. Journal of Accounting and Economics, 58(2), 384-395.
Deegan, C. (2016). Financial accounting. McGraw-Hill Education Australia.
Gassen, J. (2014). Causal inference in empirical archival financial accounting research. Accounting, Organizations and Society, 39(7), 535-544.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.
Hoskin, R. E., Fizzell, M. R., & Cherry, D. C. (2014). Financial Accounting: a user perspective. Wiley Global Education.
Macve, R. (2015). A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
Marshall, D. (2016). Accounting: What the numbers mean. McGraw-Hill Higher Education.
Pratt, J. (2016). Financial accounting in an economic context. John Wiley & Sons.
Site Group International Ltd | ASX:SIT. (2018). Site. Retrieved 14 January 2018, from https://www.site.edu.au/
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Warren, C. S., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.
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