Financial analysis refers to the commercial behaviors of judging the feasibility, stability and profitability of certain projects and business models. The main procedures comprise the utilization of definitive ratios which are established via accessible financial information and other related statements. (Edirisinghe NCP, etc 2007) These statements construct the foundation of operational and financial decisions. The major purpose of this report is to offer proper financial analysis of chosen operating information and commercial date associated with the aim of providing recommendations upon the issue of investment choices and solvency ability. Few indices are introduced in this report and the financial information gathered contains both current fiscal period and historical performances. These statements are conducive to ascertain the firm's health status and paralleling comparison with other familiar industrial rival associated with industrial trend are also conducted. These auxiliary behaviors serve to reinforce the financial decisions and operational choices. (Samaras GD, 2008) Many derivative methods are based and developed on the basis of financial analysis. (Panagiotis Xidonasa, 2009)In order to illustrate the process of analyzing company's operational and financial capacity, Myer Holding Ltd is cited as one paragon in demonstrating the utilization of financial indices and corresponding analysis results.
2.0 Introduction
As one of the large non-discount department store chains around the world, Myer Holdings Ltd operates over 60 stores and chains which cover most regions of Australia. As one leading brand of retailing industry, it provides various services that retail a broad range of merchandise including clothing, footwear and accessories for diverse age ranges, cosmetics, electrical, furniture and other daily consumptions. The total categories of cargos possess over 600000 production lines and 11 classes of products. Within the whole commodities, clothing, fashionable design, and intimate apparel occupy major business scale of the company. Myer still plans to expand its services network into the international surroundings and gets itself to be more qualified and competitive comparing with its rivals. Via introducing the financial analytic methods and company's fiscal statements, proper conclusion about the financial status, potential investment opportunity and financial situation can be obtained for the outer report users or inner managers to adjust operational decision or investment choices. The aim is to ascertain the investment worthiness for latent investors and creditors. In respect of the information which attracts most investors, the firm's profitability is the primary factor that draws most external attention. Profit is the retained revenue which can be either paid to investors as dividend or reinvested to fulfill the need of other potential projects. It can be quantified and characterized via financial calibration ratios and established analytic methods, it emphasizes the possible retained amount paid to shareholders. Another analytic factor concerns toward operational efficiency which verifies the maintenance capacity and managerial effectiveness. Operational performances directly influence cargo prices, the turnover extent of inventory or other liquid assets and liabilities. For creditors, profitability and solvency ability are two main elements they tend to concentrate. Since profit margin underlies the foundation of solvency capacity that guarantees timely payment of existing debts and loans. Aside from the solvency ability, outer users of the financial statements also concerns about the quantity of debts which determines the firm's payment pressure. Too much external debts may indicate that the financial structure is not properly established and render the business under the financial risk. Financial data serves as reflection of creditworthiness and potential solvency risk. The core analysis of discrepant industries is not confined with fixed pattern, it fits the rule of appropriate combination of different financial factors and accessory indices; it should fit the requirement of laconic description and reduced redundancies.
3.0 Financial Analysis
3.1 Profitability Analysis
General methods to measure the extent or degree of certain indices are to use percentage ratio. (Kieso, D. E etc 2007). For Myer, the degree of the increase of revenue achieves about 26.1% date from fiscal year 2008 to 2009. This growth is largely due to market expansion and wide acceptance of products' and services' quality. However, the gross profit margin which measures the relationship between gross profit and sales revenue decreases from 50.51% in 2008 to 45.54% in 2009. It is an index of the coverage of costs of goods sold by the revenue. (Berman, Karen, 2006) The net profit margin increases form 19.02% in 2008 to 22.33% in 2009; this is realized by a corresponding reduction of miscellaneous fees and disbursements. The Total expense for 2008 and 2009 are 668.70 million and 621.60 million respectively, the selling expenses and the administration expenditures are reduced dramatically date from 2008 to 2009, and it is probably derived from a more strictly controlled policy toward the managerial and sales payout.
Another index used is the Cash flow ratio, under many occasions it signifies an accurate calibration of stock's price. It stands for the ability of generating cash flow and examines how the cash flow is yielded which in turn serves as a repercussion of firm's financial status. It mainly identifies whether one specific stock is over or under-estimated. The Cash flow ratio's change from 11.98% in 2008 to 16.21% in 2009 suggests an amelioration of cash generation ability.
The return on assets describes the ability of one company's assets in generating income. It depicts how many revenues are generated from the assets possessed. (Fairfield PM, Yohn TL, 2001) This index is especially useful for comparison between competing enterprises in similar industry. According to the calculation result, the ROA ratio rises from 2008 to 2009 by 4.97% which means more income is generated through assets possessed.
The interest coverage ratio measures the degree of how many incomes are available to suit the demand interest expenditures. A low interest coverage ratio means fettered amount of earnings are prepared to pay off the interest occurred by external debts and loans. This will render the firm more vulnerable to timely liability payment and thus get the firm itself involved in the dilemma of financial risk. This ratio in 2009 has decreased by 4.08% which means that the firm's financial risk is reduced slightly.
In total, the profitability is improved in 2009 compared with 2008. This amelioration mainly relies on the reduction of expenses and increase of income.
3.2 Efficiency Analysis
Return on Equity counts the rate of return on the amount of equity. It is an efficiency index that measures the ability of profit generation stemmed from net assets. ROE manifests the capacity of using investment funds to increase revenue growth. Too much external debts will incur higher risk premium, then the ROE will be reduced. (Peterson Pamela, 1999) However a high value of ROE does not guarantee a good financial structure. Generally, ROE is used to compare firms within the identical industry. (Groppelli 2000) The value of ROE during 2009 has decreased by 8.6%.
Asset turnover quantifies the efficiency of using assets in yielding profit. (Bodie, Zane etc 2004) A low turnover value may suggest overstocking or deficiencies in production effort. (Kenneth R. Pirok) Nevertheless, it is not always a high value secure a better performance.
Accounts receivable turnover also measures the efficiency via the ratio between income and account receivable and measures the possibility of reinvesting for next period of production. A decrease of this value gives hint that the collection efficiency is improved. It is usually combined with accounts payable turnover value in order to gain a schematic overview of the cash utilization. For Myer, AR turnover increases from 2008 to 2009 while AP turnover decreases from 2008 to 2009.
3.3 Stability Analysis
The current ratio measures the ability to pay the debts with firm's possessed resources. It is the ratio between current assets and current liabilities. This ratio is an indicator of asset liquidity and capacity to fit creditors' demand and thus it is always used as one index of short-term financial strength. Generally, current ratio keeps around 2 is considered as one widely accepted norm but the ratios vary from industry to industry. If the ratio amounts too high, the company may not efficiently use its current assets which mean that excessive assets are not properly invested in order to generate operational or non-operational income. By contrast, a Low value indicates that the firm is in a difficult financial situation which makes the firm with limited liquid resources to implementation current liabilities.
Debt to Assets ratio is used to ascertain company's solvency ability. It measures the ratio between total liabilities and total assets. Its formula resembles the equation of current ratio. The higher the value, the greater risk will be associated. It draws most creditors and investors' concentration because it represents the amount of debts one firm is willing to hold to incur the function of leverage rather than introducing equity. It is also not can be said that this ratio should be kept as high as possible. Especially for specific industries such as banks, a high value of debt to assets ratio may causes the risk of deviation.
The Gearing ratio equates the value of total debt to shareholders' equity which both aims to finance assets. This ratio is used to calibrate one firm's ability to assume long term debts and loans which commonly hold a relatively high risk because of fixed interest payment. (T Adriana, HS Shin, 2010) (HS Shin, 2009) For Myer, the debt burden is relieved which in turn justifies an improved situation of financial status for the gearing value decreases from 7.85 in 2008 to 5.97 in 2009.
Cash interest coverage measures the amount of cash which is available to make interest payments after eliminating non operating revenues and expenses. This ratio is regarded as one important measurement of a firm's creditworthiness in that it represents the ability to use the cash to meet fixed interest obligations. The information shown implies an alleviation of burden of interest payments.
3.4 Comparison
Another competitive company Madison is also cited in order to compare the difference between two distinct performances within the same industry. The table below lists some financial indices.
Item
Year 2009
　
Myer
Madison
Gross Profit Margin
0.4554
0.4377
Net Profit Margin
0.2233
0.037
Return on Equity
0.3674
0.1021
Asset Turnover(Times)
1.45
0.293
Return on Assets
0.0527
0.0655
Inventory Turnover
4.69
1.52
AR Turnover(Times)
1.1
1.06
AP Turnover(Times)
3.39
1.13
Debt Asset Ratio
0.8566
0.623
Cash Interest Coverage
1.87
4.74
To sum up, within 2009 fiscal period, Myer may suffer from a serious financial difficulty, particularly for the amount of selling expenses which occupies a large amount of costs. It can be seen from the rate of gross profit margin and net profit margin. The company endures the negative effect imposed by the cost increasing. A high inventory turnover will lead to extra fees payment and AP turnover suggests a low capacity to delay payments and the cash interest coverage indicates that Myer's available amount of cash is relatively less to cover the interest fees when compared with Madison. Debt asset ratio also exhibits a flinty occasion of involvement in huge amount of liabilities. In total, Myer's financial performance renders a potential financial risk and expresses a low investment value and creditworthiness comparing with Madison.
4.0 Conclusions
Although the financial indices help to demonstrate and explain the gross status of one firm, they cannot fully cover all aspects of one company, especially on the occasion that external economic surroundings are vulnerable to policy changes or irreversible forces. Most ratios are not highly meaningful and illustrative and can only be used as accessory indices. Additionally, the inner financial and operational structure and virtue of statements determine that the characteristic of historical data review is less illustrative than the future deduction which stresses more on the proper forecast. Fiscal statement sometimes is not representative and is subject to accounting assumptions and treatment methods. Financial indices also omit some uncertainties and risks during operational procedures. On the premise of neglected information, investor may draw some deviated investment choices.
Associated with the financial information and analysis provided, Madison by contrast possesses both more feasible solvency capacity and more prospective developing future. The financial ratios mentioned before conspicuously verify the worthiness toward the investment opportunity. The income related ratios exhibit a feeble future profit generating ability, especially for the amount of expenses incurred. Comprehensively, Madison is more acceptable and profitable for investments than Myer.
