MOD003347 Case Study Report Level 6

Introduction

Financial management is required so that business may be able to finance its activities in effectual manner. In the current times, with the motive attain synergy in the operations or getting economies of scale company lays emphasis on exploring business operations and functions using merger & acquisition tool. Moreover, when business unit performs activities at large level then it attains cost benefits and high margin.

Present report deals with Myer Ltd, which is engaged in department store business and is facing financial problems as profits had come down. Moreover, proposed merger with David Jones also did not take place. Financial ratios have been calculated for five years of company to assess performance. Moreover, external factors in merger and acquisitions are discussed. Impact of political competitive environment is taken into account. An ethical consideration in case of insolvency is explained.

Analysing financial statements and applying ratio analysis

In order to analyze financial statements of the business, ratio analysis tool has been applied. Ratio analysis technique is highly effectual which in turn helps in evaluating business performance from several perspectives such as profitability, liquidity, solvency and efficiency. This technique enables a business unit as well as its stakeholders in making evaluation of financial performance over the years and thereby helping in taking suitable decisions. In addition to this, such technique also assists company in comparing its own performance in against to the rival firms.

Ratio analysis of Myers Ltd from the period of 2013 to 2017 is enumerated below:

Particulars

Formula

2017

2016

2015

2014

2013

Profitability ratios

           

Gross profit ratio

Gross profit / Net sales * 100

45.80%

45.10%

46.10%

46.70%

47.00%

Net profit ratio

Net profit / Net sales * 100

0.46%

2.18%

1.08%

3.61%

4.65%

             

Return on Equity (ROE)

Net income / Shareholders' Equity

1.10%

6.14%

3.40%

11.01%

14.42%

             

Liquidity ratios

           

Current ratio

Current assets / Current Liabilities

0.88 : 1

0.92: 1

01:01:00

0.91: 1

0.92: 1

Quick ratio

Liquid assets / Current Liabilities

0.1: 1

0.14: 1

0.14: 1

0.17: 1

0.18: 1

             

Efficiency ratios

           

Debtors Turnover ratio

Net credit sales / Average accounts receivable

305.92

350.22

573.34

562.06

571.04

Stock Turnover ratio

COGS / Average inventory

3.7

3.93

3.94

3.93

3.87

Creditors Turnover ratio

Total suppliers purchases / Average accounts payable

47.56

45.43

48.33

49.33

49.19

             

Solvency ratios

           

Debt Equity ratio

Debt / Equity

0.13

0.13

0.51

0.47

0.47

Debt to assets ratio

Debt / Assets

0.17

0.13

0.29

0.26

0.26

             

Investment ratios

           

Dividend payout ratio

Dividend / Net profit

96.5

390.1

119.4

148.2

133.4

Earnings Per Share

Net profit / Shares outstanding

0.01

0.07

0.05

0.17

0.17

It can be interpreted from the above ratios that financial performance of Myer Ltd is decreased in terms of profitability. This is evident from the gross profit which was 47 % in 2013 financial year that decreased in 2014 to 46.7 %. It further reduced to 46.1 % in next year. In 2017, it came to 45.8 % that shows that operational expenditures had increased causing decrease in profits (Zietlow, Hankin, Seidner and O'Brien, 2018). On the other hand, net profit is decreased as well. It was 4.65 % in the financial year 2013 which reduced to 0.46 % in 2017. It clearly implies that expenses need to be controlled so that desired profit may be gathered. Return on Equity is drastically decreased as it was 14.42 % in 2013 which decreased to 1.10 % in 2017. This clearly shows that shareholders' investment is not effectively being used by Myer Ltd to generate sales in the best possible manner.

Liquidity position of company is not good up to a high extent. In this regard, current ratio was 0.92 in 2013 which went to 0.91 and 1.0 in 2014 and 2015 respectively. It decreased again in 2016 by 0.92 and 0.88 in 2017. It implies that ratio is around 1.0 which is less than ideal ratio of 2:1. Quick ratio was 0.18 in 2013 year and decreased to 0.1 in 2017 and as such, liquid assets are less to pay-off extreme short-term liabilities. Efficiency position of company is good as debtors turnover ratio was 571.04 in 2013 and reduced to 562.06 in next period. While, it decreased to 350.22 in 2016 and 305.22 in recent year. It shows that Myer Ltd is able to collect timely payments from credit customers and as such, ratio is reduced up to a high extent.

Stock turnover ratio is 3.7 in 2017 which was 3.87 in 2013 year which means that firm is able to replenish stock quite quickly. Creditor’s turnover ratio is decreased and the same implies that firm is making payments to suppliers in an effective manner (Engel and et.al, 2018). Moreover, debt equity ratio was 0.47 in 2013 and decreased to 0.13. This means that low debt financing is incorporated in the capital structure. It is required that more of debt should be utilised to take advantage of it. Debt to asset ratio is also low which means that there is less risk and solvency of company is good. On the other hand, investment ratio such as dividend payout ratio is decreased which means that firm is paying fewer dividends to shareholders as earnings are low.

Arguing about organisation’s future success

Myer Ltd is engaged in the departmental store sector and as such, it is required to perform well. It can be analysed from above calculated financial ratios that organisation has poor performance. This is evident from the fact that profitability position of firm is not good. Gross profit ratio is declined as it was 47 % in 2013 and went on decreasing to 45.80 % in 2017 financial year. Moreover, net profit ratio has significantly gone down which means that it is unable to reduce its expenses. In order to succeed in the future, it is required that company should eradicate expenditures up to a high extent. This would help firm to enhance its net earnings in the best possible way (Ellis and Underwood, 2018). Furthermore, well-structured strategies need to be implemented so that business may perform well and higher profits can be generated. Moreover, shareholders' investment should be utilised in a better way so that sales may be injected. It is required that business may succeed in the future by financing more of the debt as it is cheaper source of finance in comparison to equity. Thus, there should be optimum mix of both finance in order to take advantage of the sources and as such, capital structure can be balanced with much ease. Thus, Myer Ltd may succeed in the future by implementing strategies to earn more profits and attain good market share.

For enhancing business performance Myer Ltd needs to undertake following measures such as:

  • Myers Ltd should make focus on undertaking budgetary control tools and techniques. In accordance with such tool, by doing comparison of actual performance with standards firm would become able to assess deviations timely and thereby take strategic measure for improvement. Further, for sales maximization focus should be placed on undertaking promotional tools and techniques.
  • In addition to this, for improving solvency position company should focus on issuing 2 equities against to 1 debt. This in turn helps in developing optimal and balancing capital structure to a great extent.
  • Along with this, for making improvement in liquidity position, Myers Ltd should focus on controlling current assets such as cash etc in accordance with the level of short-term obligations. For the purpose of effectual working management Myers Ltd should make focus on undertaking competent stock and credit policies.

Hence, by taking all the above-depicted measures Myers Ltd would become able to attain the desired level of outcome or success.

Impact of political competitive environment

The impact of political factors has influence on the company. It includes following factors-

  1. Taxation policy

The taxes which are increased by the government have an influence on Myer Ltd. This can be observed from the fact that if rate of taxes are increased, impact will be seen on the business and as such, more taxes would be required to pay by the company that will lower down net earnings. Thus, it is required that Myer Ltd should implement well-structured strategies so that income may be maximised as net profit is low.

  1. Political instability

This is another factor which is due to the political instability directly impacting business. When there is no political stability, operations of the business is impacted up to a high extent. This leads to riots, looting and other situations which adversely impact the organisation. Moreover, operations of the business becomes disruptive and as such, major smash is seen on the organisation which leads to instability and have adverse effect on overall financial performance of the firm.

  1. Trade Regulations

The trade regulations also impacts business. This is evident from the fact that if organisation wishes to expand its operations in abroad, then it has to face foreign trade regulations impacting business. In relation to this, taxation policies are controlled by the government which imposes restriction on certain industries based on particular regions. Due to such trade restriction, business may not be able to expand its operations. Thus, business faces such restriction due to the effect of political environment (Political Factors Affect Business Environment. 2018).

Discussing ethical considerations when firm become insolvent

From assessment, it has been identified that business unit becomes bankrupt when debt level is higher as compared. In other words, company can said to be insolvent when it is not able to meet debt obligations. On the basis of ethical aspects, it is the accountability business unit to first repay the amount of debt owed. Thereafter, business unit needs to make payment to preference shareholders and then equity investors. Along with this, ethics present that company should disclose fair view of financial performance in the company’s annual report. Moreover, considering and making evaluation of financial report stakeholders take investment decision. Thus, Myer Ltd requires to present fair view of information in the company’s annual report.

External factors to be taken into consideration in merger or acquisition

The external factors that are required to be undertaken and likelihood of merger or acquisition are listed below-

  1. Strategic fit

This is one of the important factors to be taken into account when acquiring business by Myer Ltd. As it is operating in department store sector, it is required to analyse other company in the same sector so that alignment can be made in relation to leadership style, strategies and organisational culture of the acquiring firm. This helps a company to effectively merge with another company such as David Jones which could not be made as per the proposal. Thus, strategic fit will ease off merger process (Lie and Liu, 2018.).

  1. Market share

Market share and branding is another factor to be undertaken in merger process. This is required as business should analyse market share of the competitor and as such, it can help business to attain profits by acquiring or merging with another firm that has a greater market share in an effective manner. Thus, merger can be executed in the best possible manner and as such, other considerations also needed to be taken such as how customer will perceive newly formed entity, loyalty will be maintained or not.

  1. Analysing strengths and weaknesses

This is another important factor for analysing strengths and weaknesses that are essential for any business to determine viability of mergers (Stanton and Wallace, 2018). Myer Ltd is required to assess weaknesses and strengths of other companies and make decisions in an effectual manner.

Recommendation whether to invest in the company or not

From financial statement analysis, it has been identified that profitability position of Myer Ltd decreased over the time frame. Gross and net profit as well as return on equity measure declined over the years significantly. This is not considered as a good indicator because main motive behind making investments include earning higher returns. Further, liquidity assessment also presents that Myer Ltd was not highly capable in relation to meeting obligations from current assets. In addition to this, solvency position of Myer Ltd was also very far from ideal ratio such as 5:1. Further, investment ratio also shows that company offered less returns to the investors or shareholders Thus, it can be depicted, from an investment perspective, that position of the company is not good. Hence, higher management team of the firm is advised to focus on other profitable investment option or opportunity.

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Conclusion

By summing up this report, it can be concluded that financial position and performance of Myer Ltd got deteriorated over the time frame. It can be seen in the report that due to high expense level business unit failed to generate high profitability in the current times. Along with this, it has been articulated that for attaining success in the near future Myer Ltd needs to make modifications in the existing strategic and policy framework. It can be summarized from the report that competition level and products or services offered by the rival firm have a significant impact on the profitability as well as success of Myer Ltd. Further, it can be depicted that Myers Ltd should keep in mind all the factors while taking decision in relation to merger and acquisition. Referring the results of financial statement analysis Myers Ltd is not recommended from investment perspectives.

References

  • Ellis, J. A. and Underwood, S., 2018. The Only Fund in Town? Geographic Segmentation in the US Mutual Fund Industry.Financial Management.
  • Engel, L and et.al, 2018. Systematic review of measurement property evidence for eight financial management instruments in populations with acquired cognitive impairment.Archives of physical medicine and rehabilitation.
  • Lie, E. and Liu, Y., 2018. Corporate Cash Holdings and Acquisitions.Financial Management.47(1). pp.159-173.
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