Accounting for Decision Making
Profit is one of the vital tools used to determine the performance of an investment as the fundamental aim of a business is to make a profit. Shareholders and other stakeholders expect maximum profit in terms of dividends. The management has the role of ensuring that the company realizes a maximum profit. At the same time, the administration has to avoid risks that may cause losses. Ironically, a project with high returns is typically associated with high risk. On the other hand, resources are scarce. The management must use limited resources to realize the maximum profit. This requires skilled financial analysis and decision-making ratios are one of the tools of financial analysis and decision making to help beat the competitors and ensure growth. Thus, Myer needs to consider the following;
Profitability Ratio
The profitability ratio is used by financial analysts and other stakeholders to measure the ability of an entity to deliver profit concerning the capital invested. Some of the ratios used under profitability ratio analysis are;
Gross profit ratio
The ratio is also called the gross margin. It is used to measure the rate of growth of sales when making investment decisions (Birt, Chalmers, & Maloney, 2017). The stakeholders expect managers to calculate and know the profit margins of the entity. Myer recorded a gross profit ratio of 0.49 in 2018 and 0.50 in 2019. The higher the gross margin, the higher the efficiency. The 0.5 ratio means that 50% of the total sales is gross profit. A ratio of 50% is favorable because it ensures a high profit for the company.
Net profit margin
The ratio is widely used in comparisons within the entity. It is challenging to relate to various companies using this ratio. Besides, the ratio shows a company’s pricing style. Myer recorded a ratio of -0.2 in 2018 and a ratio of 0.01 in 2019. Even though there was a slight improvement in profit, the ratio needs to be worked on since it is still too low.
Return on assets
The ratio shows how the company generates returns from the assets it has in place. Myer recorded a negative ratio in 2018, and the ratio increased to 61.65% in 2019. This ratio is good since it is above 5%.
Efficiency Ratios
Inventory turnover
The ratio determines the speed at which an entity sells its stock concerning the industry mean. A low ratio shows slow sales and too much stock (Birt, Chalmers, & Maloney, 2017). This may be a result of too many goods being produced for sale or poor marketing of products. The ratio varies with the industry. A significant value shows agile marketing or a low volume of goods being produced for sale. Myer recorded an inventory turnover ratio of 0.99 in both 2018 and 2019 financial years. The figure shows that every single unit of cash invested in the assets of Myer company produces 0.99 sales. This figure is very low hence showing that Myer company is experiencing poor sales and a decreasing rate of demand for its products.
Days held in inventory; this ratio is sometimes referred to as inventory days of supply. This ratio shows the period by which a company takes to sell its inventory (Zimmerman, 2011). Therefore, this ratio determines the period that the funds remain attached to the stock. The management should do anything possible to keep the ratio as low as possible. Myer company recorded a figure of 367.8 in 2018 and 369.66 in 2019. The company is taking more than a year to sell its inventory. This high figure shows that Myer is holding obsolete products and chances are that the goods are not fresh.
Days held in inventory
The ratio shows the number of days that an entity takes to complete the sale of its inventory. Myer takes more than 365 days to complete the stock. The management needs to improve marketing strategies to enable the stock to move faster.
Liquidity Ratios
Myer’s liquidity ratios
- The company recorded a slight increase in the current ratio from 0.95 in 2018 to 0.96 in 2019
- The company recorded a rise in quick ratios from 0.16 in 2018 to 0.19 in 2019.
Current ratios
The ratio measures the ability of a company to cater to its short-term expenses without necessarily touching the long-term assets. The current ratio rises from 0.95 in 2018 to 0.96 in 2019. Even though the company recorded a rise in current ratios, the company is still not able to meet its short-term liabilities since the ratio is still less than 1.0. Myer is not stable even though the company has recorded a slight improvement in this ratio.
Quick ratio
The ratio determines the ability of a company to settle its short-term debts without necessarily having to sell the inventory. Myer recorded a slight rise in quick ratio from 0.16 in 2018 to 0.19 in 2019. Regardless of the increase in this ratio, the ratio is still less than 1.0; hence the company must sell its inventory to be able to pay its short-term expenses. The management needs to check on this before the business is declared insolvent.
Solvency Ratios: Myer’s Solvency ratio
- Myer recorded a debt ratio of 0.57 in 2018 and a debt ratio of 0.53 in 2019.
- Myer recorded a debt to equity ratio of 1.32 in 2018 and 1.14 in 2019.
- The company also recorded an interest coverage ratio of -5.4 in 2018 and 4.59 in2019.
Debt Ratio
The business recorded a debt ratio of 57% in 2018 and 53% in 2019. This is a slight improvement. The ratio of 53% shows that 53% of the total assets depends on the liabilities for funding. In a case where the company is declared insolvent, the company’s creditors will take 535 of the company’s total assets. The higher the ratio, the higher the insolvency chance and the lower the access to loans from financial institutions and investors (Kimmel, Weygandt, & Kieso, 2018). The management needs to consider doing a debt/equity swap to change this situation. This works by turning creditors to shareholders.
Debt to equity ratio
The ratio is used to gauge the leverage of the company. The ratio is directly proportional to leverage (Kimmel, Weygandt, & Kieso, 2018). Therefore, the ratio must be kept below 0.5 to enable the company to record lower leverage. Myer recorded a ratio of 1.32 in 2018 and 1.14 in 2019. Although there was a slight improvement in an attempt to reduce the ratio, the ratio is still too high. The management needs to work on it to reduce up to a ratio which is below 0.5.
Analysis based recommendations
Myer, like any other entity, is aimed at making a profit. Other motivating factors are growth and outdoing competitors. To achieve these, the management needs to consider the following;
Improve net profit margin-Myer needs to consider improving the profitability by improving the net profit margin. The company should source for more revenue in terms of funds. This is done through increasing sales or raising prices of the goods and services offered. The company should look for cheaper suppliers of raw materials.
Inventory management-the company needs to improve on stock management. The stock stays for long before it is wholly sold. The overstaying inventory is costly in terms of security, storage, and maintenance. The company should increase the cash flow by reviewing their pricing methods to increase demand and save time.
Debt ratio-the company needs to reduce the debt ratio. This is because, the higher the ratio, the riskier it is for the company to be taken over by creditors (Kimmel, Weygandt, & Kieso, 2018). The company, therefore, needs to make sure the ratio drops to below 40%. The company should stop taking more unnecessary debts. As seen in the cash flow statement, the company is making big purchases. The company needs to stop this to avoid using more credit.
Cash flow analysis
Cash flow from operating activities
Cash flow from operating activities increased from 109201 in 2018 to 115079 in 2019. This is a result of a change in the working capital. The slight incremental change in equity has to be reflected in the cash flow statements. The balance sheet statement shows an increase in equity between 2018 and 2019. This has caused a positive change financial year 2018 recorded a higher figure for payment made to suppliers and employees. This has caused an increase in the net cash flow of the year 2019 because the year had a lower figure paid to suppliers and employees.
Operating cash flow ratio
The ratio compares the operating cash flows to the current liabilities of the company.
I.e., OCF ratio=cash flows from operations/current liabilities
2018 OCF ratio= 109201/466312=23.4%
2019 OCF ratio=115079/451119=25.5%
The ratio shows the times by which the company can pay the current debts using cash earned in the same period. Myer company recorded a ratio of 23.4% in 2018, and the ratio increased to 25.5% in 2019. The company’s ability to pay the current debts improved slightly. The cash can pay 25.5% of the current debts without necessarily having to sell the inventory. Even though the ratio has increased, the management needs to make sure the ratio rises to 1.0 or 100% to be able to pay for the short-term obligations without selling the inventory fully. The management needs to conduct customer credit checks. This will help in raising the ratio. The management needs to invest in inventory management and avoid purchasing goods that are slow in terms of the sales period.
Conclusion
The business report paper is essential for the evaluation of various issues and financial analysis regarding Myer company’s performance. The paper uses ratio analysis and vertical analysis to do an arithmetic analysis of the profitability, efficiency, and solvency of Myer company. The report also uses various financial analysis skills to comment on the arithmetic figures. The paper ends by analyzing the cash flow statement. It looks at multiple variances in the cash flow. This is very helpful to the management, shareholders, and potential investors in making investment decisions.
References
Birt, J., Chalmers, K., & Maloney, S. (2017). Accounting: Business reporting for decision making. John Wiley & Sons Australia,
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2018). Financial accounting: Tools for business decision making. John Wiley & Sons.
Zimmerman, J. L. (2011). Accounting for Decision Making and Control Seventh Edition. McGraw-Hill.