Finance

What can managers do to control the cash cycle? What are the tradeoffs In shortening the cash cycle? Know how to calculate: Elements of the cash cycle and the operating cycle Managing the Working Capital Cycle (Chi. L) For what aspects of working capital does financial management have responsibility? What are the two key areas of working capital policy set by financial management? What are the objectives In setting working capital asset policy? What Is the difference between temporary current assets and permanent current assets? In what ways can working capital assets be balanced? What is spontaneous financing of working capital assets?

How is the amount to be used determined? What should be considered in choosing between short-term and permanent financing sources for funding working capital assets? What are the tradeoffs? How can the lifetime of assets be matched to the maturity of funding sources (I. E. , what Is a restrictive working capital financing strategy)? How can working capital assets be financed more flexibly than with a restrictive strategy? How can they be financed more aggressively? Cash Management (Chi. L & Chi. 2) What is the focus of short-term financial planning? What are the steps of the short-term financial planning process?

How are cash collections forecast? How are cash disbursements forecast? What are the elements of a typical cash budget? Why is short-term debt appropriate for covering short-term cash deficits? What are the typical sources of short-term funds? What Is a line of credit? What are the tradeoffs in cash? What is “cash”? How are borrowing reserves and marketable securities like cash? What is float? What types of float exist? Why do we care about float? How do we deal with float? What tools can we use to manage float? What is a locker arrangement? How do we compare costs and benefits of a locker?

How does using a locker help us to manage risk? Elements of a cash budget Float time, float balances; Costs and benefits of lockers Credit and Inventory Management Managing Accounts Receivable/Setting Credit Policy (Chi. 3) What are the elements of a receivables management program? What are the components of a credit policy? What are the tradeoffs in setting credit policy terms? How does competition affect the optimization of credit policy terms? How can a vendor have a lending cost advantage over other banks and finance companies? Why might a vendor be able to charge a higher price for goods and services by offering reedit?

When might a vendor find it necessary to offer credit in order to establish reputation? What are the advantages/disadvantages of open account billing over invoice billing? What factors affect the ideal credit period? What factors determine whether or not credit (early payment) discounts should be offered? What are the five Co’s of credit? What tools are used to monitor receivables? How is the impersonal nature of collection agencies both good and bad? In what forms can credit be offered to customers? How does a firm offering credit to customers finance its own receivables? What is acting of receivables?

What are the advantages/disadvantages of factoring? What elements of a credit policy decision can be quantified? How may a change in credit policy affect the costs associated with inventories? How may a change in credit policy affect the costs associated with receivables? In what two ways can projected bad debt losses be affected by a change in credit policy? What are the costs/benefits of offering discounts? Annual percentage costs of credit discounts Costs, benefits, and net benefit of a change in credit policy Break-even probabilities and percentages for a change in credit policy

I.Statement of Financial Problem

Should Continental Carriers, Inc. use debt or equity to finance the acquisition of Midland Freight in 1988, either by selling $50 million in bonds at a 10% interest rate to a California insurance company with a maturity of 15 years, or by issuing 3 million in common stock at $17.75 per share with a dividend rate of $1.50 per share?

II.Financial Framework

The outcomes of various financial alternatives can be examined through an EPS-EBIT analysis, where EPS is calculated for each alternative form of financing. Earnings per share represent the amount of income common stockholders are entitled to receive per share of stock owned. This income can be paid out in the form of dividends, retained earnings, or a combination of both. Earnings before interest and taxes (EBIT) is the amount of income after subtracting operating expenses from gross sales, also called net operating income. The EPS-EBIT approach determines the best capital structure by considering various funding sources to maximize earnings per share (EPS) over the firm’s expected range of earnings before taxes and interest (EBIT).

III.Application of Financial Framework

A measure of EPS against EBIT, showing how change in the capital structure affects EPS, can be seen in Exhibit C. Given a possible recession, financial investors perceive that the firm’s EBIT will be $20 million. If the firm has no leverage with only outstanding shares of 7.5 million the EPS is $1.60. However, with a leveraged situation with an interest of $5 million of shares of 4.5 million the EPS is $2. The EPS of $1.60 and $2 during the proposed recession represents the number of dollars earned during the period on behalf of each outstanding share of common stock. However, the proposition for the issue of bonds, excluding the account for the sinking fund is more attractive, as shareholders earn $0.40 more than in the case of no leverage.

Exhibit A presents the 1988 estimates when the firm still has not acquired Midland Freight and doesn’t choose a method of financing. Given the income before tax of $25.6 million and the proposed additional $8.4 million EBIT with the acquisition, Continental Carriers projected EBIT is $34 million. With this increase in EBIT, the EPS for each capital structure changes. When the acquisition is financed through the bond issue, the EPS is $3.87. When the proceeds from the issue of additional stock are used the finance the acquisition the EPS is $2.72.

IV.Assumptions and Special Circumstances

Continental Carriers assumes an increase in EBIT of $8.4 million with the acquisition of Midland Freight, for a total projected EBIT of $34 million in 1988; given a possible recession, the EBIT will be $20 million.

V.Conclusions and Recommendations

It is suggested that the acquisition of Midland Freight be financed through long term debt via the sale of $50 million in bonds to the California insurance company. By choosing the debt alternative Continental Carriers will benefits from higher earnings per share. As seen in Exhibit 3, once the company has earnings before interest and tax of $12.5 million and above, they are in a position to allow long term debt since the EPS would be greater than $1.00. If the firm had issued common stock instead, EPS would be lower at $2.72 as compared to $3.87. As suggested by Ms Thorpe, the stock at $16.75 per share and a dividend of $1.50 per share would cost CCI nearly 9% whereas the bond’s after tax rate of interest was only 6%. Issuing stock is therefore more expensive than the bond alternative and there is also the risk of management’s voting control being diluted by the issuing of the common stock.

With $12.5 million outstanding at expiration date, Continental Carriers can either settle this by a short term loan or by issuing common stock. Issuing common stock may be a viable option as much less shares will be needed as compared to 3 million as before. Assuming that the market price remains the same, only 704,226 shares would have to be issued.

Cochlear Limited (Cochlear) operates in the implantable hearing device industry. Its products include cochlear implant system, Baha system, freedom accessories, speech processor upgrades and nucleus freedom implant. Nucleus Freedom is the next generation of Cochlear’s technology, including SmartSound 2, which brings clarity to everyday hearing. Its bone conduction implant, the Baha system, helps people with conductive hearing loss, mixed hearing loss, as well as Single Sided Deafness (SSD). The Company has also introduced Nucleus Freedom speech processor technology to all of its Nucleus implant recipients.

Cochlear’s Nucleus Freedom implant with Contour Advance electrode and Nucleus Freedom implant with Straight electrode features an electronics platform with a microchip. During the fiscal year ended June 30, 2009, Cochlear acquired Percutis AB, a Swedish company. ( Cochlear official website (2010)) INTRINSIC VALUE DCF methodology was used to calculate the intrinsic value of the company’s share. Initially trends were studied of the net operating profit after tax and then forecasting was done by taking the average of the trends. Then free cash flow to the firm was calculated using the above explained DCF methodology.

(Reuters 2010) Assumptions Trend of operating profit has been found out and then average of it has been taken to forecast future operating profits. In this case we have found out the average to be 15%. Increase in capital expenditure has been taken to be 500,000 AUD per year. Even this has been the trend of the last four years. Market premium has been taken to be 5. 8% which is the average of the last 100 years. Long term growth has been assumed to be 3. 5%. This has been found out taking into consideration the life cycle in which the company is currently present and the sector outlook for future.

The table below shows the weighted average cost of capital calculations. Risk free return is got from the yield on 10 year bonds issued by the Australian government. Beta is taken from the Reuters database and market premium is found out by taking average returns for the past years. Cost of debt has been calculated from the interest charges paid by the company divided by the total debt. CSL Limited is a biopharmaceutical company engaged in the research, development, manufacture, marketing and distribution of biopharmaceutical and allied products.

It operates in three segments: CSL Behring, which is engaged in manufacturing, marketing and developing plasma products; Intellectual Property Licensing, which is engaged in licensing to unrelated third parties of intellectual property generated by the Company, and Other Human Health, which comprises CSL Bioplasma and CSL Biotherapies. These businesses manufacture and distribute biotherapeutic products. It operates in Australia, United States, Switzerland and Germany. (CSL Limited official website ,2010)

Current Financial Performance For the six months ended 31 December 2009, CSL Limited’s revenues increased 2% to A$2.41B. Net income increased 23% to A$617. 4M. Revenues reflect an increase in income from Other Human Health segment of the group. Net income also reflects a decrease in research ; development expense, lower selling ; marketing expenses and a decrease in finance costs. CSL Limited is engaged in the development and manufacture of vaccines. (Reuters, 2010) Intrinsic value DCF methodology was used to calculate the intrinsic value of the company’s share. Initially trends were studied of the net operating profit after tax and then forecasting was done by taking the average of the trends.

Then free cash flow to the firm was calculated using the above explained DCF methodology. Assumptions Trend of operating profit has been found out and then average of it has been taken to forecast future operating profits. In this case we have found out the average to be 17%. Increase in capital expenditure has been taken to be 2,250,000 AUD per year. Even this has been the trend of the last four years. Market premium has been taken to be 5. 8% which is the average of the last 100 years. Long term growth has been assumed to be 4%.

This has been found out taking into consideration the life cycle in which the company is currently present and the sector outlook for future. The table below shows the weighted average cost of capital calculations. Risk free return is got from the yield on 10 year bonds issued by the Australian government. Beta is taken from the Reuters database and market premium is found out by taking average returns for the past years. Cost of debt has been calculated from the interest charges paid by the company divided by the total debt. The table below shows the ratio analysis of Cochlear Limited.

The following are the analysis based on the ratios There has been no increase in the Gross profit margin. This might mean that either the sales have not increased or costs have increased. The company needs to seriously work on it and find out the reason for it. If its due to higher cost then it has to reduce its operating cost and if its due to reduced sales then increase the marketing budget. There has been a reduction in the net profit margin. This is not a good sign for the company. It might be due to stagnant sales or improper tax planning. Current Ratio has increased steadily.

This leads to increase in the current assets. For the short term the company is good in handling its operations . This internally affects the net working capital required by the company. This effects the valuation calculation. Average receivables haven’t changed significantly. This means that the company is getting the cash from the customers at the same rate as it was used to getting earlier. This leads to poor cash management. Due to this the company might be required to take additional loan from outside parties leading to increased cost of capital.

Inventory turnover had reduced and now it has reached back to the condition what it was 4 years before. Company needs to work on it because higher inventory turnover will mean the goods are moving at a faster rate. Company needs to work on its demand forecasting methods so that only optimum inventory can be kept and this will lead to lower inventory carrying cost. Debt to equity ratio is at optimum level. This means the company is looking for expansion. This is a good sign as the money will get invested in projects and they might generate higher returns leading to better profitability.

Per your request, our group conducted research to determine whether costs or potential costs of the provisions of Big Bear Power’s lease of Goliath Co’s combustion turbine should be included in its minimum lease payments. We have provided a summary of the facts, our conclusion, the basis for our conclusion, and an analysis of possible alternatives to our conclusion as requested. Summary of the Facts Big Bear Power (the Company), a public utility company, is leasing a combustion turbine from Goliath Co. for a 10-year, non-cancelable term.

The lease agreement was signed on December 15, 2004, and the company’s right to use the turbine starts on January 1, 2005. Big Bear Power has been financially strong for a number of years, has positive cash flow, and is in accordance with all of its debt covenants. The lease agreement contains three provisions, each of which has associated costs that may potentially need to be included in the calculation of minimum lease payments. The issue at hand is determining whether the costs in these provisions should, in fact, be included in minimum lease payments

Conclusion Provision 1 Big Bear Power should not include the $500,000 negotiation fee in its minimum lease payments because, by definition, it is not an obligatory payment to be made toward the asset. On the other hand, the Company should include the $1 million legal fee in minimum lease payments since it is considered an initial direct cost made in connection with the leased property. Provision 2 The lease agreement includes a provision requiring a penalty payment if Big Bear’s bank declares it in default under its primary credit arrangement.

This potential cost should be included in calculating minimum lease payments since a lack of predetermined criteria exists to determine default. Provision 3 The lease agreement stipulates Big Bear’s annual lease amount to be increased by the percentage increase in the Consumer Price Index (CPI). Because the lease payments depend on the index, it must be included in the calculation of the minimum lease payment at the inception of the lease agreement. Basis for Conclusion Provision 1

In the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 840-10-25-5, minimum lease payments are “the payments that the lessee is obligated to make or can be required to make in connection with the leased property,” excluding contingent rentals, any guarantees of the lessor’s debt, and executory costs. Although negotiating fees incurred by Big Bear Power are not executory costs, the fees toward its external legal counsel are considered non-obligatory in nature and should be expensed. In contrast, legal fees paid by Big Bear Power on behalf of Goliath Co. an be categorized as initial direct costs under Statement of Financial Accounting Standards (SFAS) 91. Being defined as such, they can be included in the general description of payments they are obligated to make in connection with the lease agreement. Provision 2 Big Bear Power is subject to default if there is a “material adverse change” in its financial condition. FASB ASC 840-10-25-14 provides guidance for default covenants relating to nonperformance and provides four conditions as follows: a. The default covenant provision is customary in leasing arrangements. b.

The occurrence of the event of default is objectively determinable. c. Predefined criteria, related solely to the lessee and its operations, has been established for the determination of the event of default. d. It is reasonable to assume, based on the facts and circumstances that exist at lease inception, that the event of default will not occur. In applying this condition, it is expected that entities would consider recent trends in the lessee’s operations. The Codification states that if the lease agreement fails to meet all of these conditions, Big Bear Power must include the penalty in its minimum lease payments.

As already stated in the information provided, condition (a) is met. Upon further analysis, condition (b) and (d) are also met—Big Bear’s bank is an objective third-party that will determine an occurrence of default, and Big Bear Power is financially strong with remote likelihood of default. While the facts imply that “material adverse change” is a predefined criterion to determine default, it is our contention that the lack of definition in the documents is sufficient evidence to not fulfill the third condition.

Furthermore, the absence of a definition implies a lack of objectivity within the criteria; the phrase “material adverse change” provides no verifiable benchmark to which Big Bear Power can be examined through its operations, as mandated by the condition. Consequently, Big Bear Power should add the maximum amount of the penalty to the minimum lease payments. Provision 3 According to FASB ASC 840-10-25-4, the portion of lease payments that depends on an index, such as the Consumer Price Index(CPI), should be included in calculating minimum lease payments at lease inception.

Big Bear’s lease payments are contingent on increases in the CPI, therefore it must follow this rule. The lease agreement states that Big Bear will pay $1 million per year, and the lease amount will change at each year-end by the increase in the index rate. Only the most recent CPI increase at inception will be included in minimum lease payments. Future increases in the index will not be included as they are considered a contingent rental. Analysis of Alternatives Provision 1 Alternative A debate of Provision 1 suggests that Big Bear Power should not include the $1 million in legal fees toward minimum lease payments.

Initial direct costs may be considered transactions separate from the lease itself with benefits being realized at the time of exchange (International Accounting Standards Board [IASB], 2009). Their recognition as assets would be erroneous under this premise, and instead would require an immediate expense to the income statement. Still, it remains our team’s recommendation that the $1 million legal fees be treated as described, in accordance with the FASB’s logic behind fees closely-tied to a lease agreement. Provision 2 Alternative

It can be contended that the required penalty payment under a declaration of default should not be included in the minimum lease payments. As stated, FASB ASC 840-10-25-14 provides four conditions, which, if all fulfilled, would not include the penalty in minimum lease payments. Based on those facts provided, and regardless of the definition behind “material adverse change”, it is arguable that a sufficient criterion exists to determine default. Furthermore, the criterion is established by a third-party with no relation to Goliath Company.

This would fulfill condition (c). Provision 3 Alternative Alternative treatment of this provision would adjust minimum lease payments annually after 2005 for the annual increase in the Consumer Price Index. For example, if the lease payment in 2005 is $1 million and the most recent CPI increases by 4%, the lease payment would increase to $1,040,000 in 2006, and $1,081,600 in 2007. The reasoning for this approach is to more accurately measure the lease agreement for financial reporting.

However, this method is not in agreement with FASB ASC 840-10-25-4, which states a lease dependent on an index should only include the index existing at lease inception when calculating minimum lease payments. References Financial Accounting Standards Board. (n. d. ). Accounting standards codification. Norwalk, CT: Financial Accounting Standards Board. Retrieved February 8, 2010. International Accounting Standards Board. (2009). IASB staff paper: leases – initial direct costs. London, United Kingdom: International Accounting Standards Board. Retrieved February 8, 2010.

Dixons Group plc is Europe’s largest specialist retailer of consumer electronics. The Group has more than 1,370 stores across the UK, the Republic of Ireland, and the Nordic countries, France, Spain, Italy, Hungary and the Czech Republic. The Group specialises in the sale of high technology consumer electronics, personal computers, domestic appliances, photographic equipment, communications products and related financial and after sales services through Dixons, Currys, PC World and The Link in the UK, Elkj�p in the Nordic region, PC City in Spain, France and Italy, UniEuro in Italy and Electro World in Hungary and the Czech Republic.

Display 1: Graph to disclose the concern of poor performance. As it can be seen from the diagram above company’s performance was declining onwards from year 1999. Approaching 2003 the share price has fallen to its five years low. This gives us the base for analysing the historical performance in order to prove that it needs to undergo some change to improve its financial performance.

Value Based Management We shall start our financial analysis based on Value Based Management principles and Ratio Analysis. VBM demonstrates how every decision that company’s management team makes can consistently create shareholder value. There are three steps to value based management:

1. Mission statement must state value for shareholders at its core.
2. Measuring shareholder value consistently for the entire Dixons Group to be productive.
3. Actively managing to create shareholder value – Requires: identifying and understanding the sources of value, target setting, allocating resources, measuring performance constantly, developing reward systems and cultivating a suitable shareholder value generating culture throughout the company.

Therefore, the first approach to measure shareholder value from the perspective of a quoted company is total shareholder return (TSR) that is, share price appreciation plus dividends. It can be calculated using the following formula: D1 + (P1 – P0) TSR= P0 TSR represents the change in capital value of a company over a one-year period, plus dividends, expressed as a plus or minus percentage of the opening value. Rappaport considers a company’s stock price as the clearest measure of market expectations of its performance.

Wheatfield’s Limited is a private Limited company. This means that it is in the private sector of the economy owned by individuals (shareholders) who want to make a profit, therefore the business is not owned by the government. The main aims of the business will include making a profit, survival and possibly expanding. Limited companies are more expensive to set up but they do carry less of a financial risk. The business is owned by shareholders, these are people who have invested their money into the business.

They could be ordinary shareholders and have a vote in how the company is run at the Annual General Meeting or preference share holders who have no vote in the AGM but are paid their dividend before other shareholders. In this case the shareholders must be members of the family. The business has an Articles and memorandum of Association. These are legal documents required with setting up a company and they must be registered with the Registrar of Companies. They contain details of the company’s planned activities and internal organisation.

It has a certificate of incorporation which is a legal document that allows the business to trade legally. The Wheatfield’s Ltd Company has limited liability which means the owners will not risk their personal possessions if the business runs into financial difficulty for example bankruptcy. Shareholders will lose their investment but cannot be asked to contribute to other business debts. Being an incorporated business means they have a separate legal identity for the business.

Advantages of a business such as Wheatfield’s are that it has limited liability and it is incorporated, the shareholders are not putting themselves and any of their personal possessions at any risk. Having shareholders owning a company is also an advantage of this type of business. As shares are sold it is a lot easier to raise liquid capital. Disadvantages of Wheatfield’s are the fact that all the profit made within in the company has to be shared between the shareholders. It is very difficult to set up this type of business because of all the legal documentation that has to be processed; it takes up a lot of money and time.

Also a company by law must publish its accounts. This isn’t the case with sole traders and partnerships The main objectives of a business such as Wheatfield’s Ltd are to make a profit, survive, expand and get a good reputation. The business was founded in 1936 which is 67 years in business and it was then a main aim to survive, it has done so successfully by 1968. This was when the primary industry diversified and expanded. This is usually a short term objective as they do not want to lose business in the first few years.

If things were bad then they would have a higher competition from similar businesses or a health scare such as BSE. In order to make a profit they needed to expand, which is what they done successfully, diversifying. They made 1 farm to become 4 which they can grow crops on to increase their income and also they opened up a local restaurant and other activities within their community to not only make a profit but to expand the business too. Wheatfield’s needed to create a good reputation, and to be well known in the area.

There is evidence of this by them organising annual charity events, local tes, providing jobs for people and housing for workers. They also have good links with the local agricultural college. Wheatfield’s is mainly a primary industry in the primary sector because it is involved in the extraction of raw materials. These are jobs such as mining and farming. These jobs are generally hard work, boring and don’t earn a lot of money. Modern industry has found alternatives to natural resources, causing loss of jobs in this industry. The U. K have been importing goods from other countries, making the demand lower for these natural resources in our country.

Wheatfield’s is involved in arable farming and the production of powdered milk. In the U. K there are other sectors that are more popular than the primary industry. These are secondary and tertiary industries. In the secondary industry people work manufacturing, building and providing components. These are jobs such as construction and engineering. These jobs are not as popular as they used to be because of automation. Machines are replacing a lot of people; also the demand for foreign goods is often higher than that of U. K goods.

People tend to go for more pleasant jobs, in the tertiary sector, working in places like cinemas, hospitals etc. these jobs tend to pay a higher salary and work in better environments. More people are working in this sector and they are receiving a higher disposable income and can afford to spend their money in shops, cinemas and restaurants. The primary industries have declined because many natural resources have become scarce.

Natural resources are often imported into the U. K from overseas. Modern industry has found alternatives to natural resources e. g. nuclear energy. Wheatfield’s has a much better chance of continuing in business than a coal mine because farming provides the bare necessities like crops, dairy products for the population and now coal is being substituted by other natural resources that are easier to use like gas and electricity. Wheatfield’s has diversified since they began to trade because they want to offer products to the community such as a restaurant, a museum, car boot sales, caravan rallies and more. This will not only give them a better reputation but will also increase their profit.

The business wants to move from the primary sector, because it is declining, into the tertiary where jobs are more popular and people are making more profit. This will help expand the business, providing better services to the local community. When deciding on a location for the farm the farmer would take into account several factors. When buying land for a farm, it needs to be at a reasonable price in a prime area. The farmer will settle for good land, which is suitable for his farming and is available within his budget. He will try to buy for a little as possible.

The land the farmer will want to buy should be of a high standard, with rich, fertile soils that are suitable for growing crops on and/or keeping animals. The farmer will want the suppliers to be quite near to the farm, preferably within driving distance. As long as he can drive to them, it should be suitable. He will need suppliers that sell fertilisers, animal feed, machinery and other products. The farmer will need nearby roads for getting in and out of the area, getting to and from suppliers, or suppliers delivering to him.

He won’t want to be too far from the town centre, factories to process crops and animal markets either, from potential customers if he wants to sell his crops and/or animals. The land should be of a suitable infrastructure, stable enough for growing crops, building accommodation, partitioning off for controlled growth of plants/vegetables/fruits. All businesses have two types of stakeholders. A stakeholder is and individual or a group who affects or is affected by the business activity. Internal stakeholders are people or groups involved with the business, whereas external stakeholders are people or groups outside of the business.

The internal stakeholders of Wheatfield’s are the Munro family and the business employees. The external stakeholders are the local community, business suppliers, customers, and the farmers union The Munro family have an obvious interest in the business for it to expand and make a profit. The business employees have an interest in the business, to earn as much money as possible and to provide a good service to the community. They acquire accommodation and financial support for house purchase. The local community have an interest in the business because the new farm would be a source of employment.

The suppliers have an interest in the farm for it to expand, so that they can make more money from their customer. Customers have an interest in the farm. They need to be able to trust the Munro family to meet deadlines for deliveries. Meeting the customer’s expectations will keep them in business. Within most businesses, there is conflict between internal and external stakeholders. In this case there would be several conflicts, some of which are; The Munro family and the business employees.

They will want to make as much profit for themselves as possible, but the employees will want higher salaries, if there is more money coming into the business. Also the Munro family will want to buy the cheapest stock for his business, the business suppliers will be losing money. If Wheatfield’s was to go bankrupt then the suppliers would lose a customer, leading to them losing money. One final example would be the fact that The Munro family and the local community will have a conflict about the fact that the farmers may be using chemical fertilizers. They could damage the local environment.

All three ratios portray that in three years the company is profitable in comparison to the market ratios. In three the profitability has also increased. This increase is due to the increase in the assets of the company as well as the increase in sales revenue. Another reason can be due to the decrease in shareholder equity. Profitability is always a good sign for a well-growing company (Bringham, E, F, 2008). b) Liquidity Both current and quick ratios have decreased. This decrease is due to an increase in liabilities.

The decrease is not a good sign as it has gone below the market level even and it will be difficult for the company if its gears up to further and consequences might lead to bankruptcy even. It will be difficult to pay back to the creditors and other concerned parties if the money is stuck up (Helfert, E, 2001). c) Asset efficiency Asset turnover ratio of the company has increased over the three years while the debtor days have decreased which is a good indication that the cash cycle would be decreased and there can be better opportunities to invest money elsewhere even.

Inventory turnover days fluctuated in 2009 which can be due to the increase in demand. The company has food asset management as it’s all relevant ratios are well above that of the market ratio. Therefore it is a better indication of good company (Higgins, R. C, 2008). d) Capital structure The debt ratio increased in 2009 and then decreased back in 2010. But if we compare the company’s ratio with the market ratio it is still below it. It means that there is a tendency for the company to gear up a little bit more.

An increase in 2009 can be due to the increase in liabilities and decrease the inequity of the shareholder. While in 2010 both liabilities and equity almost remained the same with a very little increase (Peterson. P. P, Fabozzi. F. J, 1999). e) Overall recommendation Overall the performance of the company in three years is quite good. All the ratios are better than that of the market. Therefore it is a good decision to invest in the company whose profitability is growing over the years while maintaining a certain level of debt even.

References:

1. Peterson. P. P, Fabozzi. F. J. (1999), Analysis of Financial Statements, 2 edition, Wiley.
2. Helfert, E. (2001), Financial Analysis Tools and Techniques: A Guide for Managers, 1 edition. McGraw-Hill.
3. Higgins, R. C, (2008), Analysis for Financial Management, 8 edition, McGrar Education -Aw-Hill Highe.
4. Bringham, E, F, (2008), Financial Management: Theory and Practice, 12 edition, South Western College.