Financial Analysis for Management



Financial Analysis for Management

Introduction

The paper attempts to discuss the concept of financial management and feasibility study in a holistic context. The first part of the paper is aimed at comparing the financial ratios of two different companies, which are Morrisons and Shoprite. The paper presents comparative and informative ratio analysis of Morrisons and Shoprite. It also discusses the P/E ratios of the two companies and provides recommendation about whether or not is it a good and suitable option for Shoprite to acquire Morrisons.

The second part of the paper focuses on the concept of investment appraisal. It discusses the techniques of net present value, internal rate of return and payback period. It actually attempts to implement these techniques on the available project for Shoprite and conclude as to whether the project would turn out to be a feasible and profitable option to invest into, or should Shoprite disregard the option.

Case A: Shoprite by Buying the Company

Financial analysis is an integral part of the decision making process. Analyzing the financial stability of the hotel is immensely important to determine as to how effectively is the hotel operating. Financial performance refers to the methodical evaluation of the financial situation of an organization, person or a project. Several methods of financial analysis exist, however, ratio analysis is considered the most efficient in determining the financial position and performance of an organization.

Ratio Analysis of Shoprite

A detailed financial analysis of the company is provided here onwards, which encompasses various aspects of financial information. Financial ratio analysis will cover the profitability, efficiency, liquidity and the leverage of the Shoprite. (Guilding, 2002, pp 64 - 87)

Profitability Ratios

Profitability ratios explain the performance of an organization in terms of the profit it earns. They include return on assets, return on equity, profit margin and gross margin.

Return on Assets = Net income /Total assets

Return on Assets = 2,287,296 / 17,991,697

Return on Assets = 0.127 or 12.7%

Return on equity = Net income / Shareholders' equity

Return on equity = 2,287,296 / 5,972,016

Return on equity = 0.383 or 38.3%

Gross profit margin = Gross Profit / Sales

Gross profit margin = 13,254,592 / 67,402,440

Gross profit margin = 0.196 or 19.6%

Net profit margin = Net income / Sales

Net profit margin = 2,287,296 / 67,402,440

Net profit margin = 0.033 or 3.30%

Efficiency Ratios

Efficiency ratios or activity ratios, explain the performance of an organization. They include inventory turnover and total asset turnover. (Guilding, 2002, pp 64 - 87)

Inventory Turnover = Cost of Goods Sold / Inventory

Inventory Turnover = 54,147,848 / 6,114,538

Inventory Turnover = 8.86 times

Total Asset Turnover = Sales / TA

Total Asset Turnover = 67,402,440 / 17,991,697

Total Asset Turnover = 3.75%

Liquidity Ratios

Liquidity ratios enable the organizational management to analyze their position to meet the day-to-day requirements of the organization and to pay off its short-term debts. These include net working capital, current ratio and quick ratio. (Medlik & Ingram, 2000, pp 137 - 141)

Net Working Capital = Total Current Assets - Total Current Liabilities

Net Working Capital = 10,416,433 - 10,985,656

Net Working Capital = ...