1.a). Current Ratio : Current Assets / Current Liabilities (AccountingTools, 2014).
This ratio helps in analyzing the liquidity potential of a company. It also highlights the fact that how the company is readily available to transform their assets into cash (AccountingTools, 2014).
= $ (180742 / 105064) = 1.72
Quick Ratio: Short term investments + Trade Receivables + Cash and cash equivalents / Current Liabilities (AccountingTools, 2013).
It determines the potential of the company whether the readily convertible assets are sufficient enough to pay off the short term liabilities. It is slightly more conservative when compared to the current ratio as it does not include inventories in it (AccountingTools, 2013).
= $ (0 + 14,591 + 6271) = 0.20
Thus, the data can be summarized as:
|
Particulars |
Industry Average |
Super Cheap Auto Group |
|
Current Ratio |
1.76 |
1.72 |
|
Quick Ratio |
0.78 |
0.20 |
Amongst the firms, companies, and industries, the current ratio being more than 1 is considered to be a favorable position. Data from the above table summarizes the fact that the current ratio of Super Cheap is slightly lower than the industry average. This proves that its other competitors are more liquid in nature in paying off their current liabilities. Currently, the industry considers 1.5 as a favorable current ratio due to prevalent external conditions. Still, many older firms are still following the parameter of 1 as current ratio. As far as the quick ratio is concerned, the higher it is, the better will be the position for a company (BusinessPlanHunt, 2017). The statistics of industry average shows a way better position than Super Cheap Auto Group. The industry average is ahead than Super Cheap by 0.58 basis points (0.78 – 0.20). This reflects the fact that Super Cheap Auto Group is facing difficulties when compared to the industry in meeting off their current liabilities.
b). The data is summarized below :
|
Year |
Particulars |
Cents per share |
|
2006 |
Dividend |
8 |
|
2007 |
Dividend |
10.5 |
From the above data, it can be ascertained that Super Cheap Auto Group has increased their dividend payments by 2.5 cents per share (10.5 – 8). There are two reasons behind such increase in the dividend. Firstly, it is the increase in the level of earnings and secondly, it is the fall in the level of expenditures from 2006 to 2007. This indicates Super Cheap Auto Group’s growth in its course of operations. The level of net profit has also increased when compared from 2006 to 2007. Due to increase in the net profit, the company’s Earnings per share has increased from 15.5 to 21. The quantum of retained earnings has also increased by $ 12,753. Income on borrowings exceeds the expenditure on borrowings by $6934 from 2006 to 2007. From the overall scenario, it can be ascertained that the company is moving ahead to expand its business by adopting the route of long term finance (Forbes, 2017).
c). Inventory Turnover = COS or COGS / Average Inventory (TheBalance, 2017).
Where, COS = Cost of Sales, COGS = Cost of Goods Sold
Average Inventory = (opening stock + closing stock) / 2
= $(135,021 + 159,880) / 2 = $147,450.5
Inventory Turnover = $ 376,733 / $ 147, 450.5 = 2.55 times
Inventory Days = 365 / Inventory Turnover = 365 / 2.55 = 143 days approx.
Thus, it can be concluded from the above calculation that the inventory of Super Cheap Auto Group rotates for 2.55 times a year with 143 inventory days. The reason behind such low level of inventory turnover is the higher level of stock maintained by Super Cheap. The company is getting its funds blocked in its inventory and that is why it is having a lower level of inventory days (TheBalance, 2017).
d) The financial statements of Super Cheap Auto Group reflect the fact that the company is moving ahead towards its growth and expansion at a faster pace. The same can be understood by the increase in the level of funds. Its main focus is on the borrowing of funds and then funding them back into the business by means of retained earnings. From here, the company is able to distribute higher level of dividend and is having higher earnings (Forbes, 2017). Super Cheap Auto Group can place its reliance on its other sources of finance which are less risky like debentures. They can also go for loans from financial institutions which will help them in credit management and maintenance of the debt-equity level. Due to rise in the borrowings, the company has noticed a rise in earnings, profits, and dividends. To be on the safer side, Super Cheap Auto Group should focus on cheaper sources of finance which are easier to repay, less risky and elevates its credit worthiness in the long run (FinanceManagement, 2017).
e) P/E or price earnings ratio portrays the level of a company’s price with respect to its level of earnings.
Price Earnings Ratio = Share price (per share) / Earnings (per share) (MyAccountingCourse, 2017).
= $ 4.5 / $21 = 0.24
Dividend Yield Ratio = Dividend per share / market price * 100 (MyAccountingCourse, 2017).
= (10.5 / 4.5 ) *100 = 233.33 %
To summarize the data,
|
Particulars |
Industry |
Super Cheap Auto Group |
|
Dividend Yield Ratio |
3.7 % |
233.33% |
|
Price Earnings Ratio |
16.7 times |
0.24 times |
The above table displays the fact that Super Cheap Auto Group is at a relatively better position when compared to the statistics of the industry. This is in terms of Dividend yield ratio. This buys the statement that the company’s investments are yielding higher returns to it. The reason behind higher level of dividend is that the company is trying to attract the investors by providing them with the lucrative dividend (MyAccountingCourse, 2017).
For the P/E ratio, Super Cheap is performing way below than the industry. It proves that the shares of Super Cheap are quite undervalued in nature. This can lead to a major threat to its business. For this, it is advisable that the company and its management should determine the cause and effect of Price earnings ratio. The company’s earnings are quite high which makes it quite lucrative to choose. The company is moving towards its growth due to the high payment of a dividend (MyAccountingCourse, 2017).
2.a). The government, management, creditors, and shareholders are four different types of groups who are the general or common users of the financial reports (AccountingSimplified, 2017).
b). Shareholders and management are the two kinds of groups who are always in the need of financial information. The most shared element between both the groups is that they decide their future course of actions based on such financial information. Shareholders require financial information so as to know the financial standing of the company, prospective investments, and returns. Management is in the need of the financial information so that they can make the best economic and long term business decisions for the company’s future. So the utility of these financial information differs for each group but their purpose is more or less the same i.e. the long term profitability (AccountingTools, 2014).
By analyzing the financial information, the management tries to understand the current and the future position of the company in a market. They try to assess its long term growth and other inter related prospectives. It also acts as a barometer for their business. They try to assess their actual condition of financial information with the planned goals and accordingly takes corrective action; if required. Shareholders try to substantiate their ownership control through the financial information. Apart from analyzing investment courses, they determine how to cast their veto in the company’s corporate matter wherever required. They also try to assess and learn the company’s success and profitability in the near future (AccountingTools, 2014).
The role of financial statements is not limited to the investment making decisions. It only tends to interpret their results in the form of numbers. It does not reflect non-financial information which plays a major role in the development of a company. Customer satisfaction levels, pending litigations, change in the management are some important factors which can change the course of a business. This can actually make a shareholder’s decision wrong if not interpreted properly and only relying on the numbers (AccountingTools, 2014).
c).
References
AccountingSimplified, 2017. Purpose of Financial Statements. [Online] Available at: https://accounting-simplified.com/purpose-of-financial-statements.html [Accessed 17 August 2017].
AccountingTools, 2013. Quick Ratio. [Online] Available at: https://accountingexplained.com/financial/ratios/quick-ratio [Accessed 17 August 2017].
AccountingTools, 2014. Current Ratio. [Online] Available at: https://www.accountingtools.com/articles/2017/5/16/current-ratio
[Accessed 17 August 2017].
AccountingTools, 2014. Users of Financial Statements. [Online] Available at: https://www.accountingtools.com/articles/users-of-financial-statements.html [Accessed 17 August 2017].
BusinessPlanHunt, 2017. Ratio Analysis- Comparing Ratios to the Industry. [Online] Available at: https://www.businessplanhut.com/ratios-analysis-comparing-ratios-indusrty[Accessed 17 August 2017].
FinanceManagement, 2017. Sources of Finance. [Online]Available at: https://efinancemanagement.com/sources-of-finance/sources-of-finance [Accessed 17 August 2017].
Forbes, 2017. 12 best sources of finance. [Online] Available at: https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/2010/07/06/best-funding-sources-for-small-business-entrepreneurs-finance-dileep rao.html&refURL=https://www.google.co.in/&referrer=https://www.google.co.in/ [Accessed 17 August 2017].
MyAccountingCourse, 2017. Dividend Yield Ratio. [Online] Available at: https://www.myaccountingcourse.com/financial-ratios/dividend-yield [Accessed 17 August 2017].
MyAccountingCourse, 2017. Price Earnings Ratio. [Online] Available at: https://www.myaccountingcourse.com/financial-ratios/price-earnings-ratio [Accessed 17 August 2017].
TheBalance, 2017. How To Calculate Inventory Turnover/ Turns fromt he Balance Sheet. [Online] Available at: https://www.thebalance.com/calculate-inventory-turnover-357280 [Accessed 17 August 2017].
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