Question 1:
Difference between capital expenditure and revenue expenditure:
Capital expenditure of an entity represents about the expenses on the fixed assets which is expected to improve the productivity of an asset for a long time whereas the revenue expenditure of an entity is the total cost which is associated to particular revenue transaction such as cost of goods sold or maintenance expenses (Lord, 2007). The main difference in both the type of expenditure has been given below:
Timing:
Capital expenditure is generally charged in the income statement as depreciation and it is charged for a long term period whereas the revenue expenditure is charged to the operating expenses of the business for a short time period (Robson, 2015).
Consumption:
It is assumed that the capital expenditure would be consumed in the life time period of assets whereas the revenue expenditure is assumed by the businesses to consume within the short period of time (Higgins, 2012).
Size:
It is one of the crucial differences among the revenue expenditure and capital expenditure. It depicts that the capital expenditure rend to involve in huge amount of money than the revenue expenditure of the business. This is because of the fact that the expenditure is only classified as revenue expenditure of they exceed to a particular limit. If this does not exceed the limit then it is considered as revenue expenditure (Wheelen and Hunger, 2011). However, some of the time, large amount is also classified as revenue expenditure but only if they are associated with any kind of sale transaction or the period cost.
Question 2:
Cabben Fashion Limited has just announced its interim report and announced that it has 135 receivable turnover days. The receivable turnover days could be reduced by the business through implementing few changes into the policies of the business:
Increase collection efficiency:
The business should focus on the collection efficiency of the business and must make regular changes in the policies of the business. Business must make it easy for the customers to pay on time through using the ore authorised cheques, lockbox services or automating clearing house. This will reduce the accounts turnover days of the business (Horngren, 2009).
Reward efficient payment:
Business should offer some reward and incentive pay to the customers so that they could be motivated to pay the debtor amount on time. Free shipping, small discount and delivery gift item etc are few examples through which the customers could be motivated to pay on time (Hillier, Grinblatt and Titman, 2011). These methods improve the likelihood of early payment in the business and it results in higher accounts receivable turnover, more efficient business and Bette cash flow in the business.
Revise credit collection:
Improvement in the accounts receivable turnover days through changing in the credit terms in also one of the best strategies which improve the overall position and the performance of the business. Reduce the time frame to a customers in order to repay the amount must be reduced so that they could pay the amount frequently and lesser amount is required to business to run the business (Madura, 2014). Diligent follow-up on accounts collection receivable is required for the business which would results in higher accounts receivable turnover, more efficient business and Bette cash flow in the business.
Calculate the ART ratios:
Improvement in the ART assists the business to operate the business more effectively and efficiently with smoother run and cash flow. calculations of ART days through dividing the credit sales by accounts receivable at the end of year explains the total turnover period of the company. On the basis of which it could be decided by the business that through changing in which variable, the collection period of the business would be improved and it would make the position of the business more efficient (Schlichting, 2013).
Part D:
Ratio calculations:
|
|
|
7-eleven Malaysia Holdings Berhad |
|
|
Ratio Calculations |
2017 |
2017 |
|
|
Profitability Ratios: |
2017 |
2017 |
|
|
Return on Capital employed |
|
|
|
|
Operating profit / |
79,438,000 |
29,175,000 |
|
|
Capital employed (total assets – current liabilities) |
83,181,000 |
250,631,000 |
|
|
Answer: |
% |
95.50% |
11.64% |
|
Net profit margin % |
|
|
|
|
Net profit / |
50,107,000 |
24,021,000 |
|
|
Sales Revenue |
% |
2,186,812,000 |
327,598,000 |
|
Answer: |
2.29% |
7.33% |
|
|
Working Capital ratios |
|
2017 |
2017 |
|
Creditors turnover days |
|
|
|
|
Accounts payable/ |
392,617,000 |
23,022,000 |
|
|
Cost of sales |
1,495,772,000 |
206,948,000 |
|
|
Answer: (note the above needs to be x 365) |
# days |
95.81 |
40.60 |
|
Stock Turnover (days) |
|
|
|
|
Average Inventory / |
221,957,000 |
31,726,000 |
|
|
Cost of Sales |
# days |
1,495,772,000 |
206,948,000 |
|
Answer: (note the above needs to be x 365) |
54.16 |
55.96 |
|
|
Liquidity Ratios |
|
2017 |
2017 |
|
Current Ratio |
|
|
|
|
Current Assets / |
408,865,000 |
203,808,000 |
|
|
Current liabilities |
651,698,000 |
39,197,000 |
|
|
Answer: |
0.63 |
5.20 |
|
|
Quick ratio |
|
|
|
|
Current Assets – Inventory / |
186,908,000 |
172,082,000 |
|
|
Current Liabilities |
651,698,000 |
39,197,000 |
|
|
Answer: |
0.29 |
4.39 |
|
|
Capital Structure Ratios |
|
2017 |
2017 |
|
Gearing ratio |
|
|
|
|
Total debt / |
69,236,000 |
9,000,000 |
|
|
Total assets |
794,968,000 |
289,828,000 |
|
|
Answer: |
% |
0.087 |
0.031 |
|
Interest Coverage Ratio |
|
|
|
|
EBIT / |
79,438,000 |
29,175,000 |
|
|
Net Finance Costs (used net interest expense) |
9,232,000 |
420,000 |
|
|
Answer: |
times p.a |
8.60 |
69.46 |
(Gapenski, 2008)
Comparison of ratio analysis:
Ratio analysis is a process which evaluates the final financial statement of an entity on various bases in order to make conclusion about the performance and investment in the company. The above table represents the ratio analysis of 7-eleven Malaysia Holdings Berhad and MYNEWS Holdings Berhad. On the basis of the above calculations, it has been found that the financial position and performance of both the companies are quite different than each other.
In terms of profitability analysis, return on capital employed and net profit margin analysis has been done on both the companies and it has been found that the ROCE position of 7-eleven is better than MYNEWS holdings whereas in terms of net profit margin, it has been found that the 7-eleven has succeed to manage 2.29% net profit margin whereas the margin of MYNEWS is 7.33%. It explains that the operating profit of 7- eleven is higher but the net profitability level has been maintained by MYNEWS Holdings.
Further, the Working capital ratios on both the companies represent that the creditor’s turnover days and stock turnover days of 7-eleven is 95.81 days and 54.16 days whereas in case of MYNEWS Hording limited, it is 40-60 days and 55.96 days. This depicts that the working capital management policies of 7-eleven is way better than MYNEWS as 7-eleven is able to manage the overall performance of the business in less working capital (Lumby and Jones, 2007).
Further, the liquidity ratios on both the companies represent that the current liquidity ratio and quick liquidity ratio of 7-eleven is 0.63 and 0.29 whereas in case of MYNEWS Hording limited, it is 5.20 and 4.39. This depicts that the huge current assets are holding by the MYNEWS limited which is not even required in the business and it imposes more cost to the business (Krantz, 2016). Thus, it has been concluded that the liquidity position of 7-eleven is better in the industry.
Lastly, the capital structure ratios on both the companies represent that the creditors gearing ratio and interest coverage ratio of 7-eleven is 0.087 and 8.60 whereas in case of MYNEWS Hording limited, it is 0.031 and 69.46. This depicts that the optimal capital structure ratio of both the companies are not good (Kinsky, 2011). However, in terms of overall performance 7-eleven is performing better than MYNEWS hording.
The above study has been done on two companies, 7-eleven and MYNEWS hording in order to identify the overall performance of the business and the investment position of both the companies. Through the study, it has been recommended that the profitability position of MYNEWS is better. However, the working capital level and liquidity position of 7- eleven is better in the industry. In terms of capital structure, both the companies are dong average in the market.
Through the entire analysis and different level of the financial information of both the companies, it is recommended to the business to invest in the MYNEWS hording in order to improve the overall return and reduce the risk level of the investment. The investment into MYNEWS limited is better for short term as well as long term. However, in case of 7-eleven, the investment is better for long term only.
However, there are few limitations of the ratio analysis. Some of them are as follows:
References:
Gapenski, L.C., 2008. Healthcare finance: an introduction to accounting and financial management. Health Administration Press.
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy. McGraw Hill.
Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.
Kinsky, R. 2011. Charting Made Simple: A Beginner’s Guide to Technical Analysis. John Wiley & Sons.
Krantz, M. 2016. Fundamental Analysis for Dummies. London: John Wiley & Sons.
Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3.
Lumby,S and Jones,C,.2007. Corporate finance theory & practice, 7th edition, Thomson, London
Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.
Robson, W., 2015. Strategic management and information systems. Pearson Higher Ed.
Schlichting, T. 2013. Fundamental Analysis, Behavioral Finance and Technical Analysis on the Stock Market. GRIN Verlag.
Wheelen, T.L. and Hunger, J.D., 2011. Concepts in strategic management and business policy. Pearson Education India.
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