strategic fianacne issues assignment

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STRATEGIC FINANCE ISSUES Page 1 of 20

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MBA assignment on strategic finance issues.

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ASSIGNMENT COVER SHEET

STRATEGIC FINANCE ISSUES

Table of Contents

51.Executive Summary

52.Introduction

63.Ratio Analysis

63.1Profitability

73.2Efficiency

73.3Short-term solvency

83.4Long-term solvency

94.Recommendations

105.References

11A. Profitability ratios

11B. Efficiency ratio

11C. Short-term solvency ratios

12D. Long-term solvency ratios

13E. Consolidated statements for the year ended 30 June 2014

1. Executive SummaryThis is an analysis of the information contained in the latest (2014) Annual Report and Financial Statements of Gale Pacific Limited, commenting on the strengths and weaknesses of the company over two years by applying ratio analysis financial statement analysis.

We will look into profitability, efficiency, short-term solvency, long-term solvency, and market based ratios of Gale Pacific Limited by studying the financial statements such as the balance sheet, income statement and cash flow statement, to derive the necessary data for this analysis.

This analysis will tell us where the company stands, how efficiently the managers are operating the company, the overall health of the company, how close or how close it may not be to financial distress and finally give recommendations to improve their financial position in the future.

2. Introduction

Gale Pacific Limited is an Australia-based company engaged in marketing, sales, manufacture and distribution of screening, shading and home improvement products to global markets (Pacific Gale, 2015).

The Company operates in one business segment, being the branded shading, screening and home improvement products (Pacific Gale, 2015). The Company products are sold to consumer and industrial markets including the retail and home furnishing, architectural, construction, and agribusiness markets.

The Company manufactures sources and markets advanced durable knitted and woven polymer fabrics and structures made from these fabrics. The Company's retail products are marketed under the Coolaroo brand. The Company's retail product lines include items such as shade fabrics, exterior window furnishings, gazebos, shade sails and a range of pet products. The Company sells its products in Australia, the Unites States, Europe, the Middle East, New Zealand and a number of other export markets (Pacific Gale, 2015).3. Ratio Analysis

Financial ratios provide a primary foundation for evaluating business performance and adapts to every business. There isn't just one best method for evaluating business performance. Every business may differ slightly in operation, environment and methodology, which leaves many trial and error opportunities. Here the analysis is based on 2 year comparison hence current years (2014) figures are commented upon by taking the previous years (2013) figure as base value 3.1 Profitability

To determine the profitability of a company or business, we will use 3 Profitability ratios; the net profit margin, the gross profit margin, and the return on assets.

The net profit margin is typically expressed as a percentage, that shows how much of each dollar earned by the company is translated into profits, and is used to measure the ability of the business to make a profit, and also to answer the question, "Is the business as profitable as it should be?". A higher the ratio indicates a better financial standing of the company (Sihler, Crawford and Davis, 2004). The net profit margin of Gale Pacific Limited according to their financial statements is 6%, in 2014, compared to 8% in 2013 (appendix A). This is a decrease of 2%

Gross profit margin ratio indicates the efficiency of the management, in turning over the companys goods at a profit. The gross margin of Gale Pacific Limited, in 2013, was 38%, while in 2013, it is 41% ie; in 2014, GPL has earned 0.380 cents in profit from every dollar, having spent 0.620 as cost to make it, while in 2013, they have spent 0.4111 cents to make a profit of 0.589 cents (appendix A). This is a high cost of 62% compared to a mere 38% profit from every dollar. This indicates that Gale Pacific has huge cost in manufacturing or providing services to customers, which has further gone up, even though marginally, in 2014.

Return on assets for 2014 is 9% while it was 10% in 2013 (in appendix A). This ratio measures how effectively a company's assets are being used to generate profits. It is one of the most important ratios when evaluating the success of a business. A higher number reflects a well-managed company with a healthy return on assets. Heavily depreciated assets, a large number of intangible assets, or any unusual income or expenses can easily distort this calculation. The percent rate of return on assets for Pacific gale is 3.74% in 2014, which compared to the 2013 baseline of 10% indicates there is a need for improvement in this area to ensure the company can remain competitive and continue to operate successfully.

3.2 Efficiency

Efficiency ratios analyse how effectively a company uses its assets and liabilities internally. Inventory turnover ratio shows how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days." A low turnover implies poor sales and, therefore, excess inventory, which results in inefficiency. Inventory turnover for Gale Pacific in 2014 is 2.71 and an inventory turnover day is equal to 134 (appendix B). In 2013 inventory turnover was 2.70 and an inventory turnover day was 135 (appendix B). Even though very slight improvement is seen in 2014, the high inventory levels in 2 consecutive years are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.

3.3 Short-term solvency

Short-term solvency or liquidity ratios measure a companys ability to meet its maturing short-term obligations (Boguslauskas, Mileris and Adlyti, 2011). In other words, can a company quickly convert its assets to cash without a loss in value if necessary to meet its short-term obligations? Favorable liquidity ratios are critical to a company and its creditors within a business or industry that does not provide a steady and predictable cash flow. They are also a key predictor of a companys ability to make timely payments to creditors and to continue to meet obligations to lenders when faced with an unforeseen event. The current ratio in 2014 for Pacific Gale is 1.78, which compared to the baseline in 2013 of 2.09 indicates the company's ability to service short-term obligations is not satisfactory (appendix C).Current ratio reflects the number of times short-term assets cover short-term liabilities and is a fairly accurate indication of a company's ability to service its current obligations (Kneevi, Rakoevi and uri, 2011). A higher number is preferred because it indicates a strong ability to service short-term obligations. According to Dunagploy and Gray (2005), the composition of current assets is a key factor in the evaluation of this ratio. Depending on the type of business or industry, current assets may include slow-moving inventories that could potentially affect analysis of a company's liquidity how long could it potentially take to convert raw materials and inventory into finished products? For this reason, the quick ratio may be preferable to the current ratio because it eliminates inventory and prepaid expenses from this ratio for a more accurate gauge of a company's liquidity and ability to meet short-term obligations.

Quick ratio, also known as the acid test ratio, measures immediate liquidity - the number of times cash, accounts receivable, and marketable securities cover short-term obligations (Kallunki, Martikainen and Perttunen, 1996). A higher number is preferred because it suggests a company has a strong ability to service short-term obligations. This ratio is a more reliable variation of the Current ratio because inventory, prepaid expenses, and other less liquid current assets are removed from the calculation. The quick ratio for Pacific Gale is 0.81in 2014, which compared to the baseline of 1.04 in 2013 indicates the company's ability to service short-term obligations is unfavorable (appendix C).3.4 Long-term solvency

According to Bujaki and Durocher (2012), coverage ratios assess a companys ability to meet its long-term obligations, remain solvent, and avoid bankruptcy. It measures how well a companys cash flow covers its short-term financial obligations (Gupta and Huefner, 1972). Lenders evaluate coverage ratios to determine the degree to which a company could become vulnerable when faced with economic downturns. A company with a high level of debt poses a higher risk to long-term creditors and investors.According to Bell (2000), debt to total assets ratio measures what proportion of debt a company is carrying relative to its assets. A ratio value greater than 1 indicates a company has more debt than assets. Naturally, companies and creditors prefer a lower number (Malkov and Brabec, 2012). The debt to total assets ratio for Pacific Gale in 2014 is 0.37, which compared to 2013 of 0.27 indicates the company should be able to withstand losses without harming creditor interests or could obtain additional financing if desired (appendix D).Debt to equity ratio measures the financial leverage of a company by indicating what proportion of debt and equity a company is using to finance its assets (Mankin and Jewell, 2014). According to Evans (1993), a lower number suggests there is both a lower risk involved for creditors and strong, long-term, financial security for a company. The debt to equity ratio for Pacific Gale is 0.58 in 2014, which compared to the baseline of 0.42 in 2013 indicates means that Pacific is using high leverage and has a weaker equity position (appendix D).According to Andrijasevic and Pasic (2014), leverage ratio measures the extent to which a company uses debt to finance its assets. The higher the number is, the more a company is relying on debt to finance its assets. The equity multiplier for Pacific Gale is 1.58 in 2014, which compared to the baseline of 1.42 in 2013indicates a reasonable portion of the company's assets are financed versus owned (appendix D).4. Recommendations

The following list includes several suggestions Pacific Gale should consider to improve the financial ratios: Prepare thorough cash forecasts and evaluate the company's ability to meet goals on a regular basis.

Consider paying off short-term obligations if the cash position of the company is favorable.

Consider converting short-term debt to long-term debt.

Reduce levels of non-moving inventory.

Examine the companys debt to uncover areas needing improvement and create a long range action plan to address these areas and pay down debt.

Increase equity by increasing earnings.

Minimize the overall amount of debt to decrease interest expenses.

Reduce interest payments by evaluating financing alternatives and possibly refinancing existing debt.

5. ReferencesAndrijasevic, M, & Pasic, V 2014, 'A blueprint of ratio analysis as information basis of corporation financial management', Problems of Management in the 21st Century, vol. 9, no. 2, pp. 117-123.

Bell, J 2000, 'Chapter 2: The Financial Statement', in Finance for Shopping Center Nonfinancial Professionals, International Council of Shopping Centers, pp. 25-38.

Boguslauskas, V, Mileris, R, & Adlyti, R 2011, 'The selection of financial ratios as independent variables for credit risk assessment', Economics & Management, vol. 16, pp. 1032-1038.

Bujaki, M, & Durocher, S 2012, 'Industry Identification through Ratio Analysis Industry Identification through Ratio Analysis', Accounting Perspectives, vol. 11, no. 4, pp. 315-322. Available from: 10.1111/1911-3838.12003. [18 January 2015].

Dunagploy, O, & Gray, D 2005, 'International Accounting Harmonization Impact Compared: Illustration of United States and Japan Financial Statement Ratio Analysis', Journal of American Academy of Business, Cambridge, vol. 6, no. 1, pp. 225-230.

Evans, FC 1993, 'Analyzing a financial statement', Management Review, vol. 82, no. 11, p. 52.

Gupta, MC, & Huefner, RJ 1972, 'A Cluster Analysis Study of Financial Ratios and Industry Characteristics', Journal of Accounting Research, vol. 10, no. 1, pp. 77-95.

Kallunki, J, Martikainen, T, & Perttunen, J 1996, 'The proportionality of financial ratios: implications for ratio classifications', Applied Financial Economics, vol. 6, no. 6, pp. 535-541. Available from: 10.1080/096031096333999. [18 January 2015].

Kneevi, S, Rakoevi, SB, & uri, D 2011, 'Implementation and Restraints of Ratio Analysis of Financial Reports in Financial Decision Making', Management (1820-0222), no. 61, pp. 24-31.

Malkov, O, & Brabec, Z 2012, 'The influence of a different accounting system on informative value of selected financial ratios', Technological & Economic Development of Economy, vol. 18, no. 1, pp. 149-163. Available from: 10.3846/20294913.2012.661193. [18 January 2015].

Mankin, JA, & Jewell, JJ 2014, 'A sorry state of affairs: the problems with financial ratio education', Academy of Educational Leadership Journal, vol. 18, no. 4, pp. 195-219.

Pacific Gale 2015. Annual reports. Available from: http://www.galepacific.com/annual-reports. [15 January 2015].Sihler, WW, Crawford, RD, & Davis, HA 2004, 'Chapter 3: Ratios as analytical tools', in Smart Financial Management, American Management Association International, pp. 45-72.

6. AppendicesA. Profitability ratiosRatioComponents2014

2013

1. Net Profit Margin

net profit

6%

8%

sales

2. Gross profit margin

net sales - cost of goods sold38%41%

net sales

3. Return on assets

net profit + after tax interest cost9%10%

average total assets

B. Efficiency ratio

RatioComponents20142013

1. Inventory turnovercost of goods sold 2.71 2.70

2. Inventory turnover in days

average inventory

days in year 134 135

inventory turnover

C. Short-term solvency ratiosRatioComponents2014

2013

1. Current Ratiocurrent assets 1.78 2.09

current liabilities

2. Quick Ratio

quick assetscurrent liabilities

0.81

1.04

D. Long-term solvency ratios

RatioComponents2014

2013

1. Debt to equitytotal liabilities 0.58 0.42

total shareholder's equity

2. Debt to total assets

total liabilities 0.37 0.29

total assets

3. Leverage ratiototal assets 1.58 1.42

total shareholder's equity

E. Consolidated statements for the year ended 30 June 2014 Consolidated Statements of Financial Position

Consolidated Statement of Profit or Loss

Consolidated Statement of Comprehensive Income

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

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