Study of profitability analysis

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Profitability analysis consists of tests used to evaluate an entity's financial performance during the year (Hoggett, 2009, pg1075). This analysis is important for a long-run creditor to know and forecast about the company profitability in order to survive. During 2008, Jitterbug Pty Ltd produced 23.5% in profit before tax is used in investing on goods while in 2009 it increased to 48.9 as well as in 2010, it slightly increased to 49.4%. The increase in rates at the flowing years had a result in increase of the Jitterbug Pty Ltd profit and decrease in investment base. On the other hand, the return on shareholders' equity increased from year 2008 to year 2009, an increase worthy of further investigation. But, these rate are lower than returns calculated on total assets because the company earned a return more on borrow funds than the fixed amount that Jitterbug Pty Ltd have to pay to the creditor and shareholders (Hoggett, 2009, pg1076). This company is doing very well according to returns. Besides, the dividend yield had sudden increase to 32.9% in year 2010. This shows that the return from his investment in other shareholders decreased due to shareholders' business is not doing well. In the dividend payout, in year 2010, it had shown 118.7% while in 2009 it was 120.0%. The low payout might be due to Jitterbug Pty Ltd is reinvesting in other shareholders. Earnings per share showed how many money had Jitterbug Pty Ltd distributed from the shareholders. As the result on Jitterbug Pty Ltd, the money that he received had increased by every year.

In conclusion, the company is making profit and doing very well in the long run even they are paying a high tax for the year 2010. If this company continues doing a better business, they will make more profit.

Liquidity

The liquidity is means the ability of entity to meet the short-term period of liabilities (Hoggett, 2009, pg 938). Based on the liquidity ratio of Jitterbug Pty Ltd. it contains current ratio, quick ratio, debtor ratio, collection periods and inventory turnover and operating cycle. By looking at the current ratio and quick ratio, the company actually is very liquid. It is because it has increase since year 2008 to 2010. Based on the rule of thumb, for current ratio to be sufficient liquid resources, it should be at least 1.5:1 (Hoggett, 2009, pg938). In 2008, the high ratio is considered favorable to the creditors, however, Jitterbug Pty Ltd maybe not contributing to profits due to over invest in current assets. For quick ratio, the rule of thumb is 0.9:1 (Hoggett, 2009, pg938). In year 2008, the quick ratio is high, which is 2.81:1, while in 2010, it had decrease to 1.25:1. This means that entity in year 2010 able to meet its immediate obligations where the entity able to convert from receivable and inventories to cash. Besides, the debtors' turnover remains the same in 2010 and 2009 meanwhile, in 2008 it was decrease to 5.0times. Which means in 2010 and 2009, the time taken for recording a credit sale and collecting the cash is shorter. According to the collection period, during 2010 and 2009, the company collected the average receivable balance 7.3 times. In another words, Jitterbug Pty Ltd used 50 days to collect all the sales. However, during 2008, the collection period is 74 days due to customer do not pay him on the giving time period. It shows a slightly improvement in 2009 and 2010. It maybe because the customers are encouraged to buy more by combination of lowers selling price and generous credit term. This will cause Jitterbug Pty Ltd have a problem in running into cash flow. However, in the industry of inventory turnover, in year 2010, it had increase to 37 days. It shows a bad result as customer delay the payment which might cause Jitterbug Pty Ltd to decrease his profit. In conclusion, the Jitterbug Pty Ltd is a liquidity company.

Financial Stability

According to Hoggett (2009, pg. 1082) financial stability is explain by relating to the entity's ability to continue operations in the long term to satisfy its long term commitments, and still have sufficient working capital left over to operate successfully. Based on the financial stability of Jitterbug Pty Ltd, the debt ratio is increasing from 2008 to 2010. This means that during 2010, Jitterbug Pty Ltd need to pay more debts. Therefore, there's lesser assets protection to the creditors. In another word, there's more debt where it showed that the company is getting worse compare to the previous year. The current liability had exceeded the current assets. From the balance sheet, the total liability in year 2008 is $147, 2009 is $164 and 2010 is $190. It proved that the liability had increase and indirectly the net assets decrease from year 2008 to 2010, a difference of $84. This is because Jitterbug Pty Ltd had made a lot of invest when he started his business maybe due to purchasing equipment. Therefore, Fitzroy Bank has to consider whether to borrow money to Jitterbug Pty Ltd. Meanwhile, the equity ratio is decreasing and cause lower assets protection to creditor. Hoggett stated that, total equity and debt usually expressed as a ratio of 2:1, which is 50% for each (2009, pg. 1083). This company has a higher capital, because this company has more assets than equity. In year 2008, the times interest earned showed 11.6 times per year which means the company is doing badly in the year. A rough rule of thumb is that profits should be three to four times the required finance costs (Hoggett, 2009, pg 1084). In year 2010, the profit before the tax of financial cost was 16.3 times greater than financial costs. According to the asset turnover ratio, it was increasing from year 2008 to 2010. This is related to fixed assets where it helps the business to gain more income and it helps the business to function more efficiently. This company is doing well as the asset turnover in this company is increasing. The higher times for a fixed asset to cover by the sales revenue, the faster to recover the investment in fixed asset. In this case, Shane Long can make a heavy investment in his shop. Overall, the company is doing quite good in this business.

Conclusion

Summarise the main findings of your report:
Base this on your discussion
Do not introduce new information in the conclusion
Do not use direct quotes
Indicate whether the report fulfilled the purpose as stated in the introduction
Conclusion and Recommendation word limit of 250 words in total

Highlight and delete this message.

In a nut shell, the result shows that Jitterbug Pty Ltd. club has doing quite well in the past three operating years. It has a positive performance as stated in the profitability analysis, liquidity analysis, and financial stability analysis. Jitterbug Pty Ltd. is making profit and doing well in the long run even they are paying a high tax for the year 2010. The company will make more profit if they continue doing a better business. Besides, the result has showed Jitterbug Pty Ltd. is following the industry average. Basically, this report can satisfy the purpose of Shane's loan applications as it has analyzed the business. It has enough of analyzed the whole running process and the financing problem that may face by Jitterbug Pty Ltd. Moreover, it could provide certain strategic for allocate the resources and increase the profit as maintain the customer. Therefore, it is possible for Fitzroy Bank to give out the loan to Jitterbug Pty Ltd.

Recommendation

Base these on your conclusion
Do not introduce new information in the recommendation
Present options for resolving the issue (purpose) presented in the introduction
Be brief - use dot points
If relevant, provide further detail regarding:
-implementation
-implications of each option (timing, feasibility etc.)

Highlight and delete this message.

Refer to the report analysis present above, Paul Haines should not purchase The Loose Leaf Pty Ltd book store at the price of $2,000,000 from Jayne. It is because The Loose Leaf Pty Ltd book store has a negative performance which stated in the profitability analysis, liquidity analysis, and financial stability analysis. As the ratio analysis has express the profit of earning is getting low each year, The Loose Leaf Pty Ltd book store does not owns a good liquidity position to manage its inventory and also unable to satisfy its obligation in the short-term and the stability of The Loose Leaf Pty Ltd book store is stable but not earning a high profit we strongly recommend Paul to give up the business. Moreover, this report cannot satisfy the purpose of Paul's business. It is because it not yet complete analyses the running process and the financing problem that may face by The Loose Leaf Pty Ltd book store. As a result, Paul can continue looking for another business but not The Loose Leaf Pty Ltd book store as his option.

Appendix - Part C

Explanation of some of the major shortcomings/disadvantages of basing real world financial decisions solely on the basis of financial statement analysis. What other actions would you take and what other sorts/types of information would you seek in order to improve your analysis?

Not simply a list but an explanation required here please.

This section does is not required to relate specifically to Jitterbug Pty Ltd. 500 words maximum.

Highlight and delete this message.

JITTERBUG PTY LTD.

Financial analysis may give a lot of information for the user about the performance of the company but it do have few limitations. First of all, financial analysis is performed on historical data and mainly for the purpose of forecasting future performance (Hoggett et al 2009 p.1090). By using the historical data, it is not able to forecast the future performance accurately. This is because the historical data is showing the previous data of the company. It is already past. What will happen in future does't mean that will happened in the past. Future is always unpredictable due to many factors, for example internal factors, or the change in policies by management, the changes of economy and others. The measurement base used in calculating the analytical measures is historical cost (Hoggett et al 2009 p.1090). Due to the measurement is based on historical cost; it may be a failure to adjust the inflation or deflation. It will cause that misleading information. Return on total assets is affected as it uses profit in the numerator, which is affected by inaccurate revenue and expense in the current year.

Besides that, lack of disclosure in general- purpose external financial reports may inhibit the extent of analysis (Hoggett et al 2009 p.1091). The trends and ratio that been using we're not be determined. Other than that the entities may not be comparable (Hoggett et al 2009 p.1091). To make the entities comparable, it must be using the same method. However, due to different factors of accounting methods, diversification of the product lines, data, they may cause some error of the comparisons. The comparison will be not so accurate. Last but not least, sometimes the information which contained in the general purpose reports may be subject to modifications, supplementations or qualifications expressed in accompanying documents such as director's reports and auditor reports. (Hoggett et al 2009 p.1091).

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.