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Based on the case study, we can know that Shane Long purchase a large Jazz & Jive club called “Jitterbug”. Shane would like to upgrade the club to improve the profitability of his business such as repaint the building, buy new fixture and fitting and other more. However this will cost him around $ 600,000. He would like to apply loan from Fitzroy bank to upgrade his club. He provided the financial statement of Jitterbug Pty Ltd to Fitzroy bank so that bank will decide whether can approve the loan based on the financial statement given. I will separate into three part performance of the company which is profitability, liquidity and financial stability to analysis the performance of the company and decide the loan application.
First of all, Return on total assets is an attempt to measure the rate of earned by management through normal business activities and is determined by dividing profit before tax and finance cost by average total assets for the year (Hoggett. J, Edward. L, Medlin. J & Tilling. M, 2009, pg 1076). We can know that the figure of year 2009 is 48.9%. It is increase if compare to year 2008 which is 23.5%. As we can see that the operating profit before tax of the year 2008 is low as $149,000, it is affect the return of total asset and result will come out as a small amount. However, there are slightly increase from year 2008 to year 2009 which is 48.9% to 49.4%. It is a good significant to Jitterbug Pty Ltd because they are generating more profit with a small amount of assets.
Secondly, return on shareholders' equity is one of the important factors that can affect company's profit because the main goal of the company is “Maximize shareholder wealth”. It is measure the return earned by management on the funds contributed by the ordinary shareholders (Hoggett. J, Edward. L, Medlin. J & Tilling. M, 2009, pg 1076). Because of the entity's use of gearing or leverage, the return to the ordinary shareholders may be more or less than the return of total assets. As we can see that the return of shareholders' equity is 19%, 41.9% and 44.3% in the year 2008, 2009 and 2010 respectively. It show that there are increasing in every year which means that the club is earning profit every year. It is good for Shane. Other than that, return of shareholders' equity is less than the return on total assets, is means that it is leverage.
Last but not least, EPS (Earning per Share) serves as an indicator of company's profitability. Earnings per share are generally considered to be the single mostimportant variable in determining a share's price.It is also a major component used to calculate the price-to-earnings valuation ratio.As the ratio report shown, the weighted average number of shares of the company from 2008 to 2010 are 19.0%, 41.9%, and 44.3%. It is an excellent growth rate for the company that the average was increasing every year.
The liquidity is focus on the two main ratios which are current ratio and quick ratio. The current ratio is measure of the entity's ability to satisfy its obligations in the short term, measure a margin of safety to the creditors (Hoggett. J, Edward. L, Medlin. J & Tilling. M, 2009, pg 1079). Base on the rule, the ratio should be at least 1.5: 1. From the ratio summary sheet, the current ratio of the Club are 4.1: 1, 3.1: 1 and 2: 1 in the year of 2008, 2009 and 2010 respectively. The ratio is not very good because it is keep decreasing from year 2008 to year 2010. The reason may be the current asset of the company is decreasing every year while the current liability is increasing every year. Overall, although the ratio is decreasing, the company still didn't meet any short-term debts, it is a good signal for Shane's company.
Besides, the second main ratio is quick ratio; it also can call as acid test ratio. Quick ratio is one of the limitations of the current ratio is that is includes inventory and prepaid assets in the numerator (Hoggett. J, Edward. L, Medlin. J & Tilling. M, 2009, pg 1080). The rule of the ratios should be at least 0.9: 1. The results of these three years based on the summary sheet are 2.8: 1, 2.0: 1 and 1.2: 1 respectively. It shows that the decreasing in the continuous years. As we know, the higher the ratio, the better the position of company. In year 2008, the company has the highest quick ratio because the company has more cash to do investment or pay liabilities. However, the ratio is decreasing in year 2009 and 2010. It is because the cash is keep decreasing while the liabilities are increasing in the continuous years. Fortunately, the company is still liquid and can afford to pay all the debts.
Financial stability is consisted debts ratio, equity ratio, capitalization ratio and times interest earned. Debts ratio is the proportion of total assets financed by creditors is important to long-term investors since the creditors have first claim to assets in the event of liquidation (Accounting). The lower the ratio is state that the greater the protection to the creditors. The ratio is 21.2%, 24.6% and 29.1% from year 2008 until year 2010 respectively. The increase of the ratio shows that the protection to the creditor lower because the liabilities are increasing whiles the assets is decreasing.
Equity ratio that evaluate long term-term stability and is sometimes used in place of debt ratio the equity ratio. It's also mean that a company has been aggressive in financing its growth with the debt. The higher the equity ratio, the greater the asset protection to creditors.
The ratio is 78.8%, 75.4% and 70.9% from year 2008, 2009 and 2010 respectively. The decrease of the company showed. Other than that, the capitalization ratio just slightly increases from year 2008 to year 2010 which is 1.3, 1.3 and 1.4 respectively.
Last but not least, asset turnover ratio is useful to determine the amount of sales that are generated from each dollar of assets. As the ratio shown, 2008 is 3.1, 2009 and 2010 have the same average ratio of 3.4. The most reason of the increasing of ration is company has to cutthroat and competitive pricing as well.
As the conclusion, Shane Long's Jitterbug Pty Ltd has achieved the requirement of the Fitzroy bank. So the Fitzroy bank approves the loan that he requested. As a loan evaluation officer, I am approving the loan for Shane Long's Jitterbug Pty Ltd. Based on the analysis, the profitability of the company is very good because the company is earn money every year and the business can go well. About the liquidity, the current ratio and quick ratio shows that the Shane's company has enough liquid for operate the business in the future. No matter expenses or debts, Shane also has enough money to pay for it. Lastly, the financial stability of Jitterbug Pty Ltd has a better rate in debts ratio and equity ratio. Equity ratio is more than debt ratio so can make the company is very stable to continue operate the business and go well. The decision of Fitzroy Bank is decide to make a loan for Jitterbug Pty Ltd.
As my own recommendation, I will agree that the Fitzroy Bank should approve the loan for Jitterbug Pty Ltd. It is because we can see that Jitterbug Pty Ltd is doing well in his business from the financial statement. I believe Shane's company will expand his business better and better after upgrade his club. Based on the analysis of the financial statement, the company may get the loan from the bank. It is because the company has enough liquid and the profit they earn is increasing from year 2008 to year 2010. The performance of the company will help Shane to get the loan.
Appendix - Part B
Although the financial statement analysis is very useful for us to make a decision, but it will also have some disadvantages of the financial statement analysis. Firstly, financial statement analysis is generally an outdated post-mortem of what has already happened because of historical cost basis for the purpose of forecasting future performance. In the other words, all the measurement is using historical cost basis to analysis. They do not think about the some figure will change during inflation or deflation and will providing a misleading information to us. One of the disadvantages by using financial statement analysis is prices. The prices will be changes again and again during inflation or deflation. If the company the last record, they will not be accurate in the analysis. It is because the purchasing power will be different during inflation and will cause the amount not accurate and not reliable.
Financial analysis is useful, but analysis should be aware of this problem and can go to other analysis to make the analysis more accurate and easy to make a decision. First of the way is to use SWOT analysis which can be reviewing business and determine the how is the business going in the future. SWOT analysis is involved in an analysis of strengths, weaknesses, opportunities and threats. We cannot only depend on the financial statement analysis; we can use this marketing SWOT analysis to help us to get more information of the company. For example, Strength and weakness is to observe the internal of the company. However, Opportunities and threats is external factor to business. Not only that, market research is to collect and analysis the information about the consumer and competitor. Business can be analysis what the consumer needs and wants to get more profit. If a bank wants to analysis the performance of the company who are request for a loan, they can use these few way to get accurate information and make a decision except analysis the financial statement.