Investment

The finding of the analysis is that Tesco is a sustainable company with comfortable level of liquidity, huge fixed assets base and is generating excellent profits from its consistently increasing revenue. The company holds sufficient resources and access to market funds to fund its on going expansion programmes. The present competition condition is in favour of the company, positively contributed by some of the most important factors “its size”, great bargaining power, huge market share and Sainsbury’s weaker position which was one of its major competitors.

The company’s shares has started out performing in the stock market due to its fundamentally strong position based on excellent financial results and positive news about its plans ahead. Reason for choice of topic Being a professional accountancy student and an active investor in stock market back home in Pakistan, it was my usual practice to perform tests on the financial data of the different companies in order to analyse their financial health for the investment purposes , although I have left my country for the studies , but still my inside investor is still keen to look at and analyse things as an investor’s point and the professional accountant inside me gives me the opportunity to make use of my knowledge, which I have gained during my studies, in this analysis process. Therefore I preferred this topic over others.

The purpose of the research is review and synthesis existing knowledge and investigate existing situation s and problems , (Collis and Hussey 2003) This project will be focusing on analysis of the financial situation, and investigations of the irresistible driving force behind Tesco’s growth . 1.2 Objectives The supermarket industry in UK is a fiercely competitive market, dominated by three large supermarket groups, Tesco, Sainsbury and ASDA. The chasing pack of second Rank super markets (Wait rose , Morrison’s ,marks and Spencer’s) could only challenge the big three if they joined forces and get some foreign investment backing. However the competition commission does not encourage such practices in UK.

Tesco has been a success story for the past decade. The company which was founded in 1919 as a small grocery stall has now grown up to the largest UK food retail chain. The company now runs more than 2,460 supermarkets, hypermarkets and convenience stores in The UK, Ireland, central Europe and Asia. Its operations include different format stores consisting of Tesco express (petrol stations), Tesco metro (small Urban), Tesco extra (hypermarket), Tesco direct (catalogue) and Tesco.com Tesco also owns 35 % stake in Us grocery Chain Safeway Grocer works. (Extracts from Eastlondonhistory.com/Tesco)

1.2.2 Competition The main competitors of Tesco (30.5% ) include ASDA( 16.7%), Safeway/Morrison’s and Sainsbury(15.7%). Source TNS. Out of these three Sainsbury ranks as the biggest competitor of the company in respect of the turnover and lines of businesses, ASDA is American owned and not listed while Morrison’s have a relative small market share.
When analysing the retail industry sales on year on year basis, there is a need to focus on the growth rate of sales from the existing stores rather than looking at the new store acquisitions, this way of comparison gives us the more accurate picture of the revenue. So actually this is the way of comparing identical sales with the identical sales, But the Tesco does not publish the identical sales figure, and it only publishes the Like for Like sales figures, which normally include many stores which have undergone an expansion .

Total Revenues have grown from FY 02/03 (26,004 million) to FY 003/04 (30814 Million) by 18.49% and by a further 10.2% in the following year (FY 04/05 – 33,974Million), in absolute terms. All the revenue figures are net of value added tax and excluding share of Joint ventures. ( See Appendix A) Increase in turn over reflects, growth from UK operations mostly, as in 2004 a new sales area of about 1,778,000 sq ft was opened and out of the total 18.49% increase 7.5% came from the new stores, so leaving behind about 11% sales growth on Like for Like basis.

While in 2005 new area of 1,519,000 sq ft was opened only contributing 2.9% to the sales not as much as new area did in 2004 on per Sq ft basis, But the Like for Like sales showed a growth of about 10.52%. We should also consider 53rd week trading factor in FY 04/05 as compared to previous year which contributed about 2.2 % in the UK sales.

As per the present condition of the global economy, there is no doubt the world is experiencing a major financial crisis near the worst since the first global financial depression as seen observable in the United States’ early fiscal slump. With the businesses and industries from around the globe filing their own versions of bankruptcy, it is then considered as a strong indication of current downturn in the global economy as well as the worldwide financial slump in stock market.

In this regard, it has come to the awareness of many people, more especially among the investors, that investing in stock market is facing a great challenge that would test the strength and competitiveness of the stock market over the current global financial crisis. More so, there are numerous financial and economic experts that mainly believe stock market is now becoming more volatile and risky for many of the investors around the globe, as there are various reasons and events that could take place in any moment, which could directly affect the behavior of stock market.

In a sense, there are different reasons and factors that could be considered as responsible in dictating the movement and/or the behavior of today’s stock market. Examples of these driving factors include the ever changing price of crude oil in the global market, the occurrence of war and violence in different countries abroad and the current economic downturn of major industrial countries in the world like the United States and other major economic players in Europe. With this notion, this research paper would primarily concentrate on the topic of analyzing the present behavior of stock market.

Moreover, this research would as well focus in determining the fundamentals of investing in stock market and the major factors that have direct impact to its performance. More so, this paper would take the opportunity of assessing the key strategies that could possibly be utilized in creating a well-diversified stock portfolio. With the fact that there are numerous modern ways that could be used as reliable research engine in analyzing the stock market, this paper would then work in naming the major benefits of using online financial tools like yahoo finance & investopedia in performing the said assignment.

Nonetheless, this research paper holds on to the objective of enlightening the significance of analyzing the stock market from the investors’ point of view, as seen essential in deciding to place investment in the stock market. Thus, with the use of various businesses, this paper will render brief analysis and stock ratings of these companies. The following will be discussed: • Significance of Owning and Investing in the Stock Market • Fundamentals of Investing in the Stock Market • Outlook of Economy in Stock Market • Major Factors that Affect the Behavior of Stock Market

• Key Strategies in Developing a Well Diversified Stock Portfolio • Benefits of Using Online Financial Tools • Brief Company Analysis and Stock Rating I. Wal-Mart Sores II. Arcelor Mittal III. Suncor Energy Inc. IV. Dell Inc. V. Johnson & Johnson VI. Pfizer Inc. VII. Comcast Corporation VIII. PF Chang’s China Bistro Towards the end of the paper, this research intends to draw definite illustration as to how the stock market is behaving and performing for the past several years, knowing all the facts and latest developments in the global financial crisis.

This paper would render specific explanations regarding the significance of basic fundamentals before investing in the stock market. More so, this would exemplify the proper ways and the most positive approach of investing in the stock market through the use of key strategies and examination of different stock ratings of the companies stated above. Significance of Owning and Investing in the Stock Market A stock is a proof that an individual or investor owns a small or major fraction of the company (“The Stock Market,” n. d).

Investing in stock would also mean that an investor would shoulder an equal or small proportion of everything that the company possesses like properties, office equipment and other machineries needed for the company’s operation (“The Stock Market,” n. d). More so, stock is regarded as the representation of exact partition or share in the company that an individual or investor owns (“The Stock Market,” n. d). There are various benefits associated in investing and owning a stock. One of this is that whenever the company profits, the investor which hold for a particular stock in that company would profit as well (“The Stock Market,” n.

d). For instance, an investor bought a stock in Nike and that company has just released a new line of footwear, which has been an instant massive profit success with many people buying that product and let the company profit well successfully, the investor would get an equal share of that great revenue accordingly. More so, owning a stock also renders the investor’s right to have a voice in the decision making that could directly influence the performance of the entire company (“The Stock Market,” n. d).

However, apart from these positive accounts of owning and investing to stock market, the probability of losing tremendous amount of money is always a reality, more specially when the basic methods of investing in the stock market is overlooked. Fundamentals of Investing in the Stock Market In any given instance of investing, there are specific questions that the investor or individual must answer first to be able to achieve the focus of such investment scheme accordingly. These basic questions include: • What type of investment return does an investor anticipate to achieve?

• How much money does an investor is willing to invest? • How does inflation may possibly impact this investment? • How much risk does an investor is willing to take? • What are the consequences of this investment decisions? In a sense, it is observable that these questions portray essential grounds in planning for investment in the stock market. As the fundamentals of investing in the market involve basic analysis of the market and of prospected business, these questions may possibly be useful as a steady guide in thoroughly analyzing investment in the stock market.

Investing and buying a stock in the market can only be done among the companies that are publicly held and not set to private (“The Stock Market,” n. d. ). In this regard, investors can not invest or buy a stock in the companies that are privately managed. However, most of the bigger businesses around the globe are held publicly and that serious investors can buy their own stocks among these business. Before investing in the stock market, the investor and/or the concerned party must first determine the company as well as the industry to invest their money.

Investors must then consider that thought and make sure that they are investing in a strong industry and ensure that the company of which they are investing their money is strong and growing (“The Stock Market,” n. d. ). Choosing for a company and industry to invest is not an easy task to be done (“The Stock Market,” n. d. ). This requires critical thinking and major decision making to be able to ensure the profitability of investment (“The Stock Market,” n. d. ).

Thus, Fundamental analysis on the methods that could be utilized in investing in the stock market is necessary, which mainly study the basic elements of investing in the stock market such as assessing the company’s current management and place in the market (“The Stock Market,” n. d. ). Fundamental analysis of investing in the stock market involves the background check of the company and/or the history of stock that an investor intends to invest in. This may include the review of company’s performance in the stock market for the last the years that have passed (“eHow Personal Finance Editor,” n. d. ).

For instance, comparing the quarterly growth of the company using percentages is one of the better means to do it. Whenever a company has increased its overall sales from $1 per share to $1. 10 last year, then there is a better possibility that this year, it will rise by more than $. 10 per share and persist increasing at the same rate, which serve as a clear indication of ideal stock investment (“eHow Personal Finance Editor,” n. d. ). Another fundamental step of investing in the stock market is to look and study the public financial information of the company, which the investor intends to buy a stock of (“eHow Personal Finance Editor,” n.

d. ). For instance, if the said company has not proven a strong and competitive profitability for the past years, the probability is that the company may possibly profit in lesser terms compared to those which did well. In this case, the notion of investing in this stock may seem to be a bad idea, more especially that the company has failed to profit significantly to be able to ensure the competitiveness of its business (“eHow Personal Finance Editor,” n. d. ).

On the other hand, whenever the company has drawn a sturdy growth of fruitful profit, it is then considered to make an investment in its stock since there are better chances that the company’s prolific profit may continue to rise, which accordingly serve as probable indication of greater profits for the investor as well (“eHow Personal Finance Editor,” n. d. ). Moreover, determining the marketability of the company’s product and/or services is also one of the basics of investing in the stock market (“eHow Personal Finance Editor,” n. d. ).

The investor must then create a well informed background of the company’s position in the market, as it is important to invest in a business that has products or services, which have greater market demand (“eHow Personal Finance Editor,” n. d. ). For instance, if the company is making exceptional products and rendering superb services, with higher market patronage, the tendency of investing in this stock would mean greater profit for the investor, since there are large amount of people who wants more of its product or services that render loads of profit for the company (“eHow Personal Finance Editor,” n. d. ).

Lastly, examining the monetary edge and strength of two or more companies to invest with is a part of the fundamentals of investing in the stock market. Going down through the balance sheets would determine the likeliness of the companies, which have the greatest potential to choose for the stock investment with greater return of profits for the investor (“eHow Personal Finance Editor,” n. d. ). More so, knowing more about the financial stability of companies is as well considered as valuable information for the investors that could be very well helpful in terms of choosing the stock to invest with (“eHow Personal Finance Editor,” n.

d. ). Outlook on the Current Economy The economy today, after the different business fiascos, have led to the crisis that has been experienced particularly by the US and other related countries. The impact of the financial scandals of the different key players in the stock market has led people to reconsider the investments that has been made into stocks and led to the decline in the progress initially made before the different issues that have risen because of wrongful decisions and fraudulent behavior.

With the new presidency, there are the related expectations that the economy will be better after gaining a better level of confidence in terms of the capability of businesses to gain their strength in the financial market. More so, the expected increase in the performance of the economy would lead the stocks to have more value and have its respective impact on the performance of the stock market. Major Factors that Affect the Behavior of Stock Market Most of the people may have common interest in knowing the particular reasons and factors as to why the stock market behavior goes up and down.

In simple thoughts, these fluctuations in stock market could possibly regarded as normal reactions according to the performance businesses in whether the companies are making money and losing in their overall profit. Thus, if a given company is performing exceptionally well and is making tremendous amount of money or profit, it can affect the stock market in such a way that there stock value increases with more and more willing investors that are all willing to invest their money in buying the company’s growing stocks. More so, there are various factors and reasons that affect the value and behavior of stock market.

One of this is the aspect of interest rate and/or how much interest the bank could give the investors to keep their huge deposit in the bank. With this notion, if the interest rate of banks is high, it is more likely the prices of stock market to go down. This is mainly because inventors no longer seek or consider the risk of investing in the stock market when they could actually make decent amount of money in keeping their deposits in the bank and through the higher interest rate. The condition of the economy, the season, and the popularity of a particular product has a corresponding impact on the stock market.

If the availability of the money in the market is high, which means there is an abundant supply of money in the market, there is the greater tendency that this brings in more money to the companies and that the prices of these stocks would increase. Conversely, the opposite also becomes true when the level of money supply is low. The time of the year would also determine whether or not the stock would be high where the products or services rendered by the company selling the stock would only have a specific time in the year where they are deemed necessary.

For example, it is not all year round that Christmas decorations are needed so the prices for the stocks of companies which deal with seasonal, which in this case is Christmas, would only depend on the demand of the people during that particular time of the year. On the other hand, the stock prices for companies who produce something which is needed all-year round would be higher. For example, the prices of stocks for oil companies would be relatively higher and would not vary in anytime of the year because the demand is continuous.

There are other factors which affect its prices and are outside the realm of seasons. Lastly, the publicity or the image of the company would also affect their ability to sell their stocks at a higher price. For example, an insurance company fails to adhere to the standards of transparency and is accused of deceiving their clients because of unpaid premiums. Thus, there would be a greater tendency that people would lose their trust in the company and they would have to pull out their investments for the purpose of transferring it to other companies which has a more stable and sturdy reputation.

There is also the fear of companies losing in terms of profit and filing for a bankruptcy once it loses it clients due to a bad reputation. With the lower demand from clients and a decreased potential for attracting more customers, there is the greater likelihood for the investors to refrain from taking chances on the stocks of this company and find better alternatives where they can invest their money in. Benefits of Using Online Financial Tools

Definitely, the field of business is among the areas which have been touched upon by the advancements in information and communication technology. There are different modern technologies that allow for the rapid transfer of information from one side of the world to another without the added costs due to the time differences and the geographic barriers. Among the tools which are made available to investors that will enhance their investing activities are the online financial tools such as Yahoo! Finance and Investopedia simulations which allow for the investors to do several tasks online.

These online financial tools allow the investors to be able to track the daily quotes of the different stocks available in the stock market especially those areas which require further evaluation (Paulson & Huber, 2000). There are different means to get this kind of information but the availability of the said data in the internet allows the investors and other business professionals to readily see the data whether they are at their homes, in the office, or in travel with a simple click in their computers.

The Internet has enhanced the interface where the prices are shown and there are even websites which are meant to be user-friendly. In addition to this, the online financial tools also allow for the users to process data for analysis (Rasmussen, Goldy, & Solli, 2002). The number of investors who are relying on the internet to be able to manage their stocks is also increasing (Khosrowpour, 2000) More so, the availability of the data of stocks in the Internet has given the ordinary people the chance to have access to these also (Cagan & O’Connell 2005).

Therefore, the people who are planning to invest are given the chance to observe the behavior of the stocks and be able to decide where they would want to put their money in without having to take the risk on uninformed investments. The Internet has actually given the chance to ordinary entities, individual or organizations alike to produce the data they need and have access even to the analysis of the different aspects of investing in stocks (Cagan & O’Connell, 2005). In relation to this, the students studying business, finance, and other related courses could easily study the practical side of stocks.

The students and the people from the finance and business courses in the academe are given the chance to be spectators in the different happenings in the stock market and they are even allowed to learn from the experiences of the different players of the stock market whether these may be in the form of failures or successes. While this may not give the assurance that these students would be able to become expert investors, they would have the chance to get a preview of the practical side of investing and learn from what has happened in the past to get through the intricacies of stock investments.

Lastly, there are important and related information which are contained in the online financial tools which include the discussions of the different people from all over the world regarding the stock prices. Moreover, there are news and advisories given which are also related to the investment of stock prices that lead the investors to have a better view of the stocks aside from the numbers which are presented to them in the form of prices.

To a certain extent, the discussions and the news presented in the websites of the online financial tools allow for interaction and information to be presented, especially the analysis of the stocks and the vulnerabilities of the market in the future. These are the perceived advantages of using online financial tools. There are more innovations which are meant to enhance the usability of these and are expected to come to the investors in the near future. However, the security and the privacy of information remain to be a consideration for the online investors.

There are still remaining loopholes in the security aspect of the online financial tools and improvements are expected on this side. Company and Stock Analysis There are different private organizations whose stock and company experience has become important in the analysis of such. The companies which will be reviewed here include Walmart Stores, Arcelormittal, Suncor Energy, Dell, Johnson & Johnson, Pfizer, Apple , Comcast, PF Changs China Bistro. Walmart has a reputation in the USA which has become problematic because of the perceived lack of sensitivity of the company in adhering to fair and appropriate business practices (Reuters, 2008).

The company shows that there have been increase in their sales and they do not believe that they are losing money despite the blatant reputation crisis that has hit the company. Nonetheless, its stock shows to be pretty strong with an annual range of 46. 25 to 63. 85 (Wal-Mart Stores, Inc. , n. d. ). ArcelorMittal is a producer of steel with a wide array of different products which are meant for the use of different consumers. The stocks of this particular company in the US have been considered to be quite low compared to that of the first company considered.

There is a considerable inactivity when it comes to the trading and the update of quotes available online. Nonetheless, there is a very wide range found for the value of the stocks for this product. Upon evaluation of Suncor Energy, Inc. , a sustainable energy company, it is found that the range for the price of its stock over the year is quite wide which shows that the lowest value of its stock has dropped very low in a particular time of the year. As of the present, the stock price is in the middle.

In consideration of the range and the current price, this stock is vulnerable for changes in its price over the year. As for Dell, Inc. , the prices of its stock is performing well in the stock prices but remains at a relatively low price. The range of the value of the stocks also poses a positive performance as it does not go towards far ends of the pole. More so, with the company being rested on the electronic field means that there is a greater chance for them to get through the crisis because of the inevitable demand for electronic products that are made available today in the market.

Johnson & Johnson, as one of the leading companies that manufactures and market quality healthcare products around the globe, has recently recorded one of its worst stock performance as compared to the previous quarter that the company had. JNJ has recorded numerous drops in figures with the company revenue falling of about 7% from $15. 47 billion to $15 billion and the net income fell from $3. 6 billion to $3. 5 billion. Sales for JNJ, on the other hand, have also dropped with consumer sales decreases from $4. 96 billion to $3. 71 billion, more especially with the prescription drug sales recording slump from $6.

43 billion to $5. 78 billion. This enormous changes and alarming drop in JNJ sales is said to have originated from the problems in company supply and issues that directly concerns of the safety of some other drugs that the company have and manufactures. Nonetheless, JNJ, though experiencing drop in sales, still remains as a sturdy (Johnson & Johnson Sales Fall, 2009). For Pfizer, Inc. , the prices of the stock is pretty much stable and is a safe investment for those who desire to have their investments safe from the vulnerabilities of the market. The 52-week range of this particular stock has remained between 11.

62 and 20. 29 without much change in the values that has become quite shocking (Pfizer, Inc. , n. d. ). In contrast, Apple, Inc. , has experienced erratic changes in the prices with a wide range of prices in a p of 52 weeks. The big difference between the low and the high values in the range shows that there is the tendency for the stocks to go down at a very low point or go up to a considerable average. For the investors who are seeking for greater profits, it is wise to observe the behavior of the stocks first before investing as it is quite a risky decision to do it with this company.

Another company which has a relatively stable stock price is that of Comcast Corp. where the range of prices has remained at 47. 850 to 72. 150 (Comcast Corp. Cl. A. , n. d. ). However, trade of this stock is not active as compared to that of the other companies which have been previously reviewed. Lastly, the stocks for P. F. Chang’s China Bistro, Inc. have plummeted to a low value and are observed to be quite low for the presented trading days. The range, however, is quite big but is not threatening for investors yet.

However, the relatively low market capacity shows that this stock is yet to improve and has not been able to encourage or open itself fully to stock players.

Reference

1. Cagan, M. & O’Connell, B. (2005). The everything investing book: Make money, plan ahead, and secure your financial future! (2nd Ed. ).
2. Avon, MA: Adams Media. Comcast Corp. CL. A. (n. d. ). Retrieved May 10, 2009, from http://finance. yahoo. com/q? s=CMCS. BA eHow Personal Finance Editor. (n. d. ). How to Analyze the Stock Market. Retrieved May 8, 2009, from http://www.ehow. com/how_2053527_analyze-stock-market. html
3. Johnson & Johnson Sales Fall, but Company is not Ailing. (2009). Retrieved May 10, 2009, from http://www. investorguide. com/stock-archives. cgi? date=041409
4. Khowsrowpour, M. (2000). Challenges of information technology management in the 21st century. London, UK: The Idea Group Publishing.
5. Paulson, E. & Huber, C. (2000). The technology M&A guidebook.
6. Hoboken, NJ: John Wiley & Sons. Pfizer, Inc. (n. d. ). Retrieved May 10, 2009, from http://finance. yahoo. com/q? s=PFE.
7. Rasmussen, N., Goldy, P. , & Solli, P. (2002). Financial business intelligence: Trends, technology, software selection, and implementation.
8. Hoboken, NJ: John Wiley & Sons. Reuters. (2008). Walt-Mart’s reputation problems continue, says Wal-Mart watch. Retrieved May 10, 2009, from http://www. reuters. com/article/pressRelease/idUS96423+21-Jul-2008+PRN20080721.
9. The Stock Market. (n. d). Retrieved May 8, 2009, from http://library. thinkquest. org/3088/stockmarket/whatisastock. html
10. Wal-Mart Stores, Inc. (n. d. ). Retrieved May 10, 2009, from http://fin

Financial statement analysis

1. Introduction

       This paper seeks to decide which of the companies — Qantas or Virgin Blue — is the better investment option by doing an analysis of their stability- both short term and long term. The paper will also include appropriate justification based on the analysis and limitation of the analysis that the investor should consider.

2.  Financial stability analysis

     To conduct a financial stability analysis of the companies there is a need to compare their relevant ratios as shown in Table A below.

Comparative Ratios[1]

          Financial stability may be viewed in terms of liquidity and solvency. Liquidity connotes being able to meet a company’s currently maturing obligations. It is measured using the current ratio and the quick asset ratio.  The current ratio gets computed by dividing current assets current liabilities while quick assets ratio assumes almost the same computation except that the inventory and prepaid expenses are being removed from the current assets to have a new numerator called quick assets and then dividing this figure to the same the denominator as in the current ratio computation. On the other,  solvency refers to the company’s long-term capacity to keep up its stability over the long term. It can be measured by the debt to asset ratio with the formula of having the total debt of the company divided by its total assets.[2]

           As applied to both companies, Qantas is less liquid than  Virgin blue because had lower current ratios of 0.87 and 0.74  for the years  2007 and 2008 respectively, or an average of 0.81 as against Virgin  Blue’s 1.1 and 0.88  for the years  2007 and 2008 respectively or an average of 0.99.  The same liquidity position may be said in terms of quick ratios for Qantas with 0.84 and 0.71 or an average of 0.78, and Virgin Blue’s 1.1 and0.87 or an average of 0.99.   The higher the current ratio and quick ratio, the better it would be for a company. Hence,  Virgin Blue is more liquid See Table A above. The debt to the asset of Qantas is 71.1% and 70.9%, or the years 2007 and 2008 respectively, or an average of 71.0%. on the other hand, Virgin Blue’s debt to asset ratios is 72.3% and 67.8% or the years 2007 and 2008 respectively, or an average of 70.0%. The lower the debt asset ratio, the better it would be for a company, hence Virgin Blue is still more solvent than Qantas. See Table A above. Combining better liquidity and solvency ratios of the two,  Virgin Blue is more financially stable.

3. Limitation, Conclusions, and Recommendations

          The limitation of the analysis made based on financial ratios to evaluate financial stability is the assumption that happened in the past may not necessarily happen in the future. There is no 100% guarantee that past records will continue in the future. The best example as found above is the sudden decrease in the interest coverage for the two companies. For Qantas the decrease was from positive to negative ratio and for Virgin Blue, the decrease was about a  difference of more than 10%. Generally, however, it is easier to believe a presently stable company would still be stable next year than one that does not have any information on the matter.[3]

         Given such limitation, therefore, there is still a basis to choose Virgin Blue as the more financially stable company between the two because of higher liquidity and solvency position than Qantas. This finding is supported in terms of higher current ratio and quick ratio both on a per-year basis for 2007 and 2008 and even on their averages for two years.  The higher solvency is proven by the lower debt to asset ratio since a lower ratio means lower risks to bankruptcy. Based on the above conclusion and given the limitation as presented, this paper recommends investing with the stock of Virgin Blue if a choice between the two is to be made. At the rate the economy is going, however, the present ROE for Qantas may still qualify for good investment but its liquidity is becoming uncertain because of the decrease in 2008 from 2007 and that both liquidity ratios are below 1.0.

Reference

1. Helfert, E. Techniques for Financial Analysis, IRWIN, Sydney, Australia, 1994
2. http://www.qantas.com.au/info/about/investors/annualReports, Accessed May 5, 2009
3. http://www.virginblue.com.au/AboutUs/Virginbluecorporateinformation/Investorinformation/AnnualReports/index.htm,  Accessed May 5, 2009
4. http://www.virginblue.com.au/AboutUs/Virginbluecorporateinformation/Investorinformation/Annualeports/index.htm
5. http://www.qantas.com.au/info/about/investors/annualReports, Accessed May 5, 2009
6. [2] Helfert, E. Techniques for Financial Analysis, IRWIN, Sydney, Australia, 1994
   [3] Helfert, E. Techniques for Financial Analysis, IRWIN, Sydney, Australia, 1994

The company’s has a dividend per share as 20 cents which is double the dividend per share of its competitor Pemberton.

•  The company has ploughed back only [ 11,150,000 – 10,000,000 = 1,150,000 ] as a reserve because 10M it has paid out to its investors .
• If the DPS of Orrell can be compared with its Competitor then investing in ORRELL will give a higher return as compare to if they invest in Pemberton .
• At the same time if Orrell is not retaining too much from the profit, it may doesn’t have any intentions to expand its business, which for a long term investor is not very satisfactory.

And if at any point of time Orrell wants to expand its business then it will have to contact the bank or any financing firm for the money . 2. Dividend cover : Dividend cover is the ratio of how much the company is paying in the form of dividends from its earning of the year. = Earning Per Share (EPS) Dividend per Share (DPS) = 22. 3 20 = 1. 115 times

• The Dividend Cover of Orrell is 1. 115 times as compare to its Competitor Pemberton which has 5 times dividend cover.
• A Dividend cover of 1. 115 of Orrell as compare to 5 of Pemberton shows that the company is not reserving much money. Whereas 5 time dividends cover of Pemberton suggest that the company is just giving $1 from its earning of $ 5.
• Pemberton higher dividend cover suggest that the company wants to retain as much profit as It can . It can be for many reasons such as it has expansion plans in future or it may wants to maintain the same level of dividend pay out if in any year the company makes less earning
• But at the same time we have to look at how the earning fluctuates for Orrell and Pemberton ,If the earning of Orrell is somewhat similar in all the years then it doesn’t need to retain much profit for itself , the high dividend cover ratio is suitable or recommended to those companies whose earning fluctuates heavily from year to year
• A long term investor generally go for a company whose dividend pay out is somewhat the same and because of that they pick companies like Pemberton to invest in as they know that this company will be able to pay out dividend at a regular interval and similar rate .
• According to the above point , if the objective of the Upholland Plc management is to invest in Orrell for more years then they should keep a very close eye on its year to year earning and its dividend cover ratio .

3. Earnings per share (EPS) Earning per share is the amount of earning allocated to each outstanding share holder. The more the EPS the more earning each outstanding shareholder has earned. Net Income – Dividend on Preferred shares Average Outstanding Shares = 11,150,000-050,000,000 = 22. 3 Cents

The Earning Per share of Orrell is slightly higher than its competitor Pemberton which means that every shareholder of Orrell has earned more bucks as compare to any shareholder of Pemberton.

A higher Earning per share doesn’t suggest that the company is very good, but we should also look at the number of outstanding shares the company has.

 A lower earning per share of Pemberton may be because the company has a higher outstanding share as company to Orrell.

 By looking at the EPS we can also predict about the future earning of the company, so if the earning of Orrell is high as compare to Pemberton then the management of Upholding should invest in Orrell. Given that the outstanding share of Orrell remains the same throughout.

4. Price earnings ratio (PE ratio) PE ratio compares the Market price of the share with its earning, the more the Market price the higher the PE ratio there will be. Market Price per share Earning Per share = 1. 5 . 223 = 6. 73

As the definition suggests the higher the Market price the higher the PE ratio.

•  Companies with same EPS and different Marker Price per share can have Different P/E Ratios.
• Orrell’s P/E ratio is almost half as compare to Pemberton but it is because of high Market Price per share of Pemberton.
• The management of Upholding should not only make any decision by just seeing the P/E ratio of Orrell but they should also look at the EPS of Pemberton which is lower than Orrell as well as the Market price per share of Pemberton should be seen that may have risen because of speculation .

Moreover a higher Earning ratio also happens because investors expects that the Earning of the company will be higher in the following years as with the case of Pemberton. Investors are keen to invest in the shares of Pemberton because they also see that the company is retaining its earning most probably for expansion.

5. Debt/equity ratio This ratio measures the amount of total liability with the total shareholder’s equity to find out how much of business is financed by debt and how much is financed by the shareholder’s own equity.

The higher the ratio the more risky the business is because if the Debt to Equity ratio is high it means that the company has more liabilities as compare to its own shareholder’s equity. Total Liability Common shareholders’ equity = 2,480,000 x 100 25,000,000 = 9. 92 %

• Orrell’s Debt to Equity Ratio is way less than its competitor Pemberton.
• A debt to equity ratio such as of Orrell suggests that the company is not risky to invest in, as well as the creditors will be keen to loan them the money because of there lower debt amount.
• At the same time A lower Debt to equity ratio may also not be good for the company because a lower debt to equity ratio means that the company is not taking loans to expand its business.
• It should be noted here that the debt to equity ratio of Pemberton is also not very high and therefore there is also no risk of bankruptcy in it just like Orrell.

6. Interest cover This ratio tells about how many times the business can pay off its interest of loan from its EBIT . The higher it is the less risky it is for the creditors / banks to give the company loan.

• Earning Before Interest and Tax Interest Expense = 12,715,000 50,000 = 254. 3 times
• Orrell’s Interest Cover ratio is way high as company to its Competitor, Pemberton.
• As company to Pemberton, Orrell is less risky to invest in, and also the banks and other creditors will be keener to loan money to Orrell as compare to Pemberton.
• A higher Interest cover is also not very suitable for the company, because a higher interest cover means the company can take other loans too but it is not taking it.
• Orrell Interest Cover is 254.

3 which mean that the company can finance its interest 254. 3 times from its earnings whereas Pemberton will only be able to pay its interest 100 times from its earnings.

• Upholding should also see how stable the earning or Orrell is before driving any conclusion about the interest cover of Orrell because may be the interest cover of Orrell is high due to its unstable earning in different years. PART B a) Explain the main purposes of the International Accounting Standards Board’s ‘Framework for the Preparation and Presentation of Financial Statements’.

International Accounting Standard Board has laid out a framework know as ‘Framework for the Preparation and Presentation of Financial Statements’ which main purpose is to assist wide range of financial accounts users in getting the information about the financial performance, position and about the changes that occurs in the entity in the most useful manner as that stakeholders/users can make well informed and smart decisions.

The IASB’s ‘Framework for the Preparation and Presentation of Financial Statements’ purpose is also to describe the concept which the accountants or the prepares of the financial statements should follow when making the financial statements of a entity. The Framework has different sections what guides in developing financial statements according to the accounting standards but has also some guidelines regarding the conflicts in accounting issues that International Accounting Standard has not addressed directly .

To fulfill its purpose of assisting financial users the Framework is divided into sections or parts that are mentioned below:

1. Purpose and status
2. Scope
3. Objective
4. Underlying assumptions
5. Qualitative characteristics of financial statements
6. Elements of financial statements
7.  Recognition of elements of financial statements
8. Measurement of the elements of financial statements

Objective

The Framework lays down the objective of the financial statement that it is that statement which provide useful informational about the performance and position of the entity in question.

Underlying assumptions The two assumptions that must be kept in mind when making financial accounts are , Accrual basis – The transactions should only be recognized when it occurs and not when the cash is actually paid or received . Going concern – When making financial statements it should be assumed that the entity has a going concern and it will continue to operate in the future also. Qualitative characteristics of financial statements The Framework purpose is also to inform the preparers of the financial statements of the following,

• Understandability – The statement should be easily understandable , it should not be complex to read
• Relevance – Information provided in the financial statement should be so relevant that can influence the economic decision made by the users. It should provide them with the evaluation of the past, present and future, and it can be used to evaluate the past decision made by the users.
• Reliability – The information contained in the financial statement should not be bias and the user can make decision by their own judgment and not by how the financial results are stated in the statement.
• Comparability. – The financial statement should be in such a way that allows comparisons with the past result of the entity and between different entities also . For comparing, disclosure of accounting policies is important. Elements of financial statements The Framework has also set some guidelines about the use of Different Accounts in the balance sheet and income statement which are Assets – Any thing that the entity possesses Liabilities – An obligation that the entity has to pay which maturity is in the current year or after any time

Equity – This is the owner’s share in the business . Income – Revenue earned by the entity Expenses – Cost incurred by the entity which generating income or revenue. Recognition of elements of financial statements The Framework states that in the financial statements those items should be recognized that have the chances of flowing economic to or from an entity and items which costs can be measure with reliability. Measurement of the elements of financial statements All those items should be recorded in the financial statement that have some monetary value .

The Framework acknowledges that there are different varieties of measuring techniques used today in reporting of financial statements. Moreover the Framework has not included any guidelines about which type of measuring techniques should be used in different circumstances .

The Different Measurement Techniques are

• Historical cost
• Current cost
• Net realizable (settlement) value
• Present value (discounted)

The IASB’s Framework for the Preparation and Presentation of Financial Statements purpose is to guide people who prepare the financial statements for the entities .

It covers almost all the important points that are important for making the financial statement readable and easily understandable by the interested parties. b) Identify any four user groups of financial statements and explain what information they are likely to want from them. The financial statement is a very useful tool as it is a published document which illustrates the fiscal health of the organization. It consists of the balance sheet, income statement and the cash flow statement. These statements are published on periodic bases.

The users of these statements include managers, lenders, investors, competitors, employees, government officials etc Investors can be of two types either existing or prospective; moreover investors include individual shareholders, financial institutions investing in a corporation such as mutual funds, banks and insurance companies. Investors can either be interested in the company for long or short time periods. These can include companies who are concerned with the dividends a company is paying to its investors or a financer who is just looking at opportunities for day to day trading.

Investors are more interested to look at the income statement of the company as their main objective is towards profitability. For the investors they are usually interested in earnings of a company and the earning per share ratio which shows the profit associated with each share. The debt to equity ratio to see how the firm is financed, if the company is financed more by debt and less by equity investors will be reluctant to invest in the company. Additionally the dividend yield of a company will be a point of attention for the long term investors as they are looking forward to the dividends paid by the company.

The price earning ratio is important especially for the investors who trade on a daily basis as it shows how the company is valued by its investors the greater the price earning ratio it signifies that the investors value the company very high and believe that the company has bright prospects hence the share price of the company will increase and investors can benefit through capital gains. Managers use financial statements to make decisions regarding the financial aspects of the company.

The managers use these statements to gather key financial information about the performance of the company . Also to formulate companies funding and operating decisions. For this purpose the companies management uses the current assets and the current liability form its balance sheet part to measure the company’s liquidity position. Also the managers can calculate the interest coverage ratio to calculate how much further then can attain debt for financing purpose while managing to pay the interest expense for it.

Managers want the company to function well that is why they are interested in the efficient running of the company. Hence they will see that there is sufficient cash to administer the daily operations, the asset turnover ratio, inventory turnover ratio and the receivable turnover ratio of the company. Managers are usually interested to see the complete picture of the financial information rather than focusing on some parts of it.

Lenders fully analyze a company’s financial statement before deciding to provide loan to a company their focus is more towards the balance sheet and cash flows. They provide loans for short or long time durations, the lenders are more willing to lend money to more stable and profitable companies. A bank is an example of a lender if a company goes to a bank to get a loan the bank will see the earnings of the company and calculate its profitability ratios such as the profit margin ratio, return on equity and earning per share ratios.

Moreover lenders will be interested to see how much percentage the firm is tied up in debt already, a lender will be hesitant to provide leverage to a company who has already borrowed a great deal. Additionally the lender will want to calculate the interest coverage ratio to see for how long the company can pay the interest payments to the lenders. Liquidity of the company will also affect the investors as that will signify if the investors can pay the interest charges to the lenders on time.

Competitors are also keen to analyze competitors financial statement as the ratios of an efficient and profitable company serves as a benchmark for the others. The main focus of attention of the competitor lays in calculating almost all the financial ratios of a company. The liquidity, profitability, efficiency, leverage and market analysis ratios of the company are compared by the competitor to his company’s ratios. These ratios calculated from the financial statements act to serve as a comparative basis to examine the running of the company.

In addition to that these ratios help to predict trends amongst the industry which acts as a guide for the competitors to evaluate if they are better or worse of than their competitors.

Bibliography

1. Bragg , Steven M. ; E. James Burton , Accounting and Finance for Your Small Business , 2 edition , Wiley,2006
2. Graham , Benjamin ; Spencer B. Meredith , The Interpretation of Financial Statements , New Ed edition , Collins; 1998
3. Groppelli , A. A. ; Eshan Nikbakht , Finance (Barron’s Business Review Series), 5 edition , Barron’s Educational Series,2006
4. IASB- International Accounting Standards , International Financial Reporting Standards IFRS 2008 ,
5. International Accounting Standards Board , 2008
6. International Accounting Standards Committee ,International Accounting Standards Explained , 1 edition , Wiley; 2000
7. Kimmel , Paul D. , Jerry J. Weygandt ; Donald E. Kieso , Financial Accounting: Tools for Business Decision Making , 4 edition , Wiley; 2006
8. Lester , E. W. Bud ; James R. Hickman , , Warren, Gorham ; Lamont , 1997
9. Sanzo , Richard , Ratio Analysis for Small Busine

Summary of the main points covered in my essay. How did the dotcom bubble burst contribute to the economic crisis of the 2008? Could we expect the similar crisis and how can it be prevented? What are the lessons that should have been learned from the dotcom crisis?

When the global financial crisis occurred in 2008, both experts and general public started heated discussion as everyone was eager to identify the reasons for such a calamity. It is clear that nothing happens with no reason at all. Let’s consider the famous speech1 of Ben Bernanke, who is the Chairman of the Federal Reserve System.

In that testimony he tried to explain the causes of the recent financial and economic crisis to the Financial Crisis Inquiry Commission, highlighting the vulnerabilities in different sectors of economics. The idea of inadequate risk-measurement that he focused on is very important for us, as this particular issue makes the recent crisis akin to the dotcom bubble we are about to examine in detail. (The same idea is one of the major issues of the next Ben Bernanke’s speeches, where he underlines the importance of reasonable risk management and possible destructive effects of being too optimistic about the future of the economic system).

To sum up, experts claim that flaws in evaluating the perspectives of new technologies in the 90ies caused the dotcom bubble burst in 2000, while the inadequate risk-measurement of the financial instruments connected to mortgages led to the global financial and economic crisis in 2008. Could we have predicted the economic disaster coming in 2008 and which lessons could have been gathered from the dotcom crisis? These are the questions that make the topic urgent and exciting to examine. To begin with, let’s define the key term. What is a dotcom?

Dotcom is a firm conducting its business mainly over the Internet. They usually possess a Web site intended for business use. The term is based on the “com” that forms the last part of the address for most commercial Web-sites. Now, what were the reasons for the dotcom bubble burst and what actually happened? (We should mention that this phenomenon is also referred as the Internet bubble and the Information Technology Bubble in many articles). It all started during the mid 1990i??s. The Internet was extremely popular those days and the Stock Market soared on technology and Internet stocks.

Stock prices were rising and it seemed there was to limit for their value to expand. The masses believed there was a new world coming and the Internet was for sure to become the future of business. The steady confidence took place that the e-companies would turn future profits and there is no limit for technologies development. These expectations were reflected in the NASDAQ composite index. The NASDAQ composite is a stock market index of the common stocks and similar securities, which are listed on the NASDAQ stock market. The index reflects the performance of stocks of technology companies and growth companies.

From January 1994 to February 2000, the it rose from 776. 80 to 4,696. 69, a 605% increase, and was influenced mainly by prices of high-technology stocks. But these expectations turned out to be far too positive. The market became overvalued. The Stock Market crashed. The culmination happened on March 10, 2000, with the NASDAQ peaking at 5132. 52 in intraday trading before closing at 5048. 62. (see the graph 1) Graph 1. NASDAQ composite dynamics2 The period when the bubble expanded rapidly was marked by the founding of many new small Internet-based companies commonly referred to as dotcoms.

Many of them failed in 2000. A very specific phenomenon could be noticed at that time – the way for a new unknown company to become prosperous was just to add an “e-” prefix to their name or a “. com” to the end. One of the authors called it “prefix investing”3, as the result of this simple renaming was the incredible growth of stock prices. I suppose that was one of the first indicators that something was wrong and the calamity was coming. But everyone considered it the steady development of the market that has big future.

Alan Greenp (an American economist, the Chairman of the Fed in 1987-2006) in 2005 said, that “this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent”4. However, the situation isn’t unique and appeared to happen again. When in 2003 nanotechnology became the “hot” thing, everyone started to add a “nano” prefix in their name. It seems that the lessons that should have been learned from the dotcom bubble burst were forgotten.

Let’s turn to the term itself in its theoretical sense. What is the bubble in financial markets? In a word, we say that a stock market bubble occurs when there is a rise or boom in the share prices of stocks of a particular industry. Meanwhile, the rise in prices usually bears little relation to the intrinsic value of the asset. The term “bubble” may be used with certainty only in retrospect when share prices have since crashed, as it happened in our case. An important basic characteristic of a bubble is the suspension of disbelief by most market participants during the “bubble phase.

They fail to recognize that all of them are engaged in a speculative activity. That characteristic describes the dotcom crisis as well, as we already found out. It would be interesting to mention that financial bubbles have existed for centuries and one of the earliest crises of the type in known as the Dutch tulip mania. In the 17th century prices for tulip bulbs rose and finally reached extraordinarily high levels and then collapsed in the blink of an eye. The same happened to the stock of e-companies in the late 90ies. I suppose we can refer to this case as to “the dotcom mania”.

The speculators who represent all the people in the economy that what to get high profits very fast, note the fast increase in value and decide to buy stock in anticipation of further rises, not taking into account that the shares are overvalued. Consequently the rise happens responding to the high demand for stock and many companies thus become grossly overvalued. When the bubble “bursts”, the share prices fall dramatically, and many companies are forced to leave the business. In order to be more precise, we can name five stages of any financial bubble5: First. Displacement.

When people, especially investors, get enamored by a new paradigm, such as an innovative new technology or dotcom companies, as in our case, displacement occurs. That is the first stage of a financial bubble. Second. Boom. At this stage prices rise slowly at first, following a displacement, but then they gain momentum. More and more participants enter the market. All of them are determined to get prosperous as soon as possible. In case of dotcoms, a huge amount of small companies appeared on the market. The low interest rates in 1998-99 helped to increase the start-up capital amounts.

Not all of them possessed innovative ideas, but they were sure that in the wave of e-companies they must succeed. No wonder they all had the same business plan of monopolizing their respective sectors through network effects. However it was clear that all of them wouldn’t become successful as the competition was tough. For many of them the “get big fast” plan would fail. During this phase, investors become even more enamored by the asset, considering it once-in-a-lifetime opportunity that increases speculation even more. Mass media also played its role.

American respected business publications such as Forbes and the Wall Street Journal, encouraged the public to invest in risky companies in the wave of the wide-spread euphoria. As the result, many “ordinary” people became investors, some of them even gave up their job to become fill-time traders. Third. Euphoria. During this phase investors as well as the whole financial system forgets about prudence and asset prices skyrocket. During the dotcom bubble, the euphoria stage took place in the beginning of March 2000, when NASDAQ composite reached its top at 5132. 2 in intraday trading before closing at 5048. 62. This and the previous stages can be clearly revealed from the NASDAQ dynamics (see graph 1). Fourth. Profit taking. By this time the warning signs of coming debacle can be seen.

This is the point when smart investors can make fortunes by selling out positions and taking profits. However, it is obvious that it’s very difficult to estimate the exact time when a bubble is due to collapse. John Maynard Keynes once mentioned that “the markets can stay irrational longer than you can stay solvent. As for the dotcoms founders, few of them made vast fortunes when their companies were bought out before the collapse. Fifth. Panic. In the panic stage, asset prices change direction and descend as rapidly as they had ascended. Investors and speculators are faced with margin calls, which are “demands on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin”6, and the value of their holding plunge. Consequently, they want to liquidate them at any price.

The supply overwhelms demand, and asset prices slide sharply. In 2000 the market index fell by almost 11% and NASDAQ fell by about 41%7. To explain the bubble applying the tools of mathematics, we’ll apply the most common concept that shows the existence of bubbles8. Considering the most simple case of price of a single share, the mathematical definition of an asset price bubble uses the fair price of a financial asset as its starting point.

The price of an asset is the present value of the future cash flows, generated by the asset. pt =Et(dt+1+pt+1)/(1+r), here dt is dividend, pt is the price of the asset at a certain time t, and Et(i??) is the expected value of the expression in the brackets based on the information available at t time. If the interest rate (r) is held constant during the whole period, then share price at t time (pt) in a general form can be given as follows: The first part of the sum on the right, which is the discounted present value of dividends, is the fundamental value of the share (pt * ). The remainder (bt) is a deterministic or the stochastic component satisfying the condition bt = Et(bt+1) /(1 + r), which is the asset price bubble itself.

So, if the price of an asset is formed as following: pt =p t*+bt, and if p =? p*, then in the mathematical sense an asset price the bubble is formed. To continue our analysis, let’s describe the consequences of the dotcom bubble burst in 2000. Many small companies and some of the largest ones were forced to file for bankruptcy. Some of them ran out of capital, some of them were acquired, some were convicted of fraud in their financial statements. WorldCom, which was one of the leaders in the market was found practicing fraudulent accounting practices to exaggerate its profits every year.

As it was revealed, it’s stock price fell dramatically, and finally the company filed for bankruptcy. Other examples include NorthPoint Communications, Global Crossing, JDS Uniphase and many others. However, some of the e-companies managed to survive the calamity. Large companies, for example, Amazon. com and eBay, are quite successful nowadays. Google also survived the turmoil and became one of the market leaders. As many economists predicted, harsh recession began from 2001.

The crash on the stock market of 2000-2002 caused the loss of $5 trillion in the market value of companies from March 2000 to October 2002: the market value of NASDAQ companies peaked at $6. 7 trillion in March 2000 and bottomed out at $1. 6 trillion in October 20029. The economic bottom was the followed by 9/11 terrorist attacks of the World Trade Center’s Twin Towers. CONCLUSION After the case of dotcom crisis the word “dotcom” started to be used with unfavourable inflecton. It is frequently used to refer to a poorly thought-out unsuccessful businesses.

Experts claim that dotcom crisis was one of the events that preceded the global financial crisis in 2008. It was kind of a “rehearsal”, as the global crisis also contained a speculative bubble, though it embraced a much wider variety of securities. Luckily, the recession following the bubble burst of 2000-2001 was not as deep as it could have been thanks to very aggressive interest rates lowering. However, a deeper downturn in the financial activity is much harder to overcome. The Internet bubble is also similar to the recent downturn because they were both preceded by inadequate risk-measurement and agents’ overconfidence.

The financial and economic crisis of 2008 could have been predicted, if everyone was more prudent and learned a lesson from the 2000 dotcom case. In conclusion, I’d like to address the issue of a new Internet crisis that is predicted by some economists. Nowadays World Web companies place their stock at unbelievably high prices. Can a successful Internet project cost more than a huge transnational oil company? The common sense says definitely no, but investors have their own specific point of view.

For example, the shares of Groupon, a famous discount service, we evaluated at $12,7 trillions, despite the company’s loss of $400 trillions the previous year and gross debt equal to $420 millions. This estimation is not reasonable and very far from reality. Meanwhile, the expected IPO of social network Facebook is evaluated at $100 trillions. It can be the beginning of the Dotcom Crisis 2. 0. On the other hand investors are optimistic about e-companies, as they survived the recent global crisis, unlike huge interconnected firms in other fields, such as financial, machinery and so on.

However, if the case of Groupon is not unique (which is so, judging by the investors’ optimistic mood) the crisis can occur once again. The most important thing in preventing the possible debacle is being prudent. Investors shouldn’t be too optimistic and should be sensible when acquiring assets. PR and advertising can be astonishing, however being reasonable means evaluating the real business indicators to make rational decisions. Risk-management is the field that shouldn’t be ignored if we want to avoid new crises.

A firm can opt for four directions to achieve growth and these four options are market penetration, market development, product development, and diversification. In this paper I would be focusing on the fourth option a firm can opt for growth i. e. diversification and the four different types of diversification identified by Ansoff that are mentioned below.

1. Horizontal diversification.
2. Vertical diversification.
3. Concentric diversification.
4. Conglomerate diversification.

Conglomerate diversification takes place when a firm diversifies with another company that manufactures totally unrelated goods or services. There is nothing in common between the two companies that have not merged nor do the two have any strategy in common. Moreover, both companies have totally different target market and competitive advantages as well as objectives. Although diversification results in a reduction in the risk of investment, it has disadvantages and other advantages as well.

One of the most important advantages of opting for conglomerate diversification is that if a particular market is down or it fails, profits can be generated from the other company that operates in a totally different market. (Cipher-sys. com, n. d. ). However, the synergies of such diversifications can be misleading and it can further increase the costs of management. Moreover, it becomes more complex for the investors and the other stakeholders to analyze the information related to the company.

Every company has their own corporate culture and values and when two different companies merge, their cultures might clash with each other and this averts development of innovation and reduces focus of the employees that reduces their efficiency and effectiveness. Dell, Hewlett-Packard, Johnson & Johnson, Wal-Mart and Unilever are some of the best examples of companies that have undergone conglomerate diversification.

References

• Cipher-sys. com. (n. d. ). Diversification. June 21st, 2009. Retrieved from: http://cipher- sys. com/hofhelp/ansoff/model_use_and_applicability. htm

However, according to Hu and Plant (2001) cited in Sam Lubbe, discovered that there was no increase in the level of financial performance. Rather, it is the other way round – increased financial performance lead to increased IT investment. However, the study conducted by Emre Berk, Kamran Moinzadeh, Kar Yan Tam on the impact of IT capital on business performance of four newly-industrialized economies (NIEs) during the period 1983 and 1991 and found that the following observations- ‘first, IT investment is not correlated with shareholder’s return.

Second, there is little evidence that the level of computerization is valued by the market in developed and newly-developed countries. Third, there is no consistent measurement of IT investment as indicated by the mixed results across different performance ratios. ” The organization may face a sudden raise of need for new investment, which in many cases is very vaguely calculated in terms of money, as the IT interment involves multiple factors to consider. The Costing models of IT projects vary and show different outputs and hence the figures are not always constant.

There are additional costing emerges from time to like, infrastructure and training costs that emerge very quickly than other segments due to high depreciation, innovation and high attrition rates in IT sector. However the following two examples shows a value improvement and direct ROI as a result of IT investment. Eg – 1: “Mitre Corporation, in 1995, launched a collaborative component to their intranet, called Mitre Information Infrastructure.

To date, Mitre has invested $7. 2 million in the MII, netting an ROI of $62.1 million in reduced operating costs and improved productivity. ” (Source: usabilityfirst. com) Eg-2: “Diamond Bullet, a Foraker company, redesigned the architecture of a state government portal site that increased users’ success at finding information from 72% to 95%, reduced their time in finding information by 62%, and resulted in significantly higher user satisfaction ratings. This led to an estimated savings of at least $1. 2 million per year for the citizens of the state and increased revenue for the state estimated to be at least $552,000.”

(Source: usabilityfirst. com) Importance of infrastructure: The performance gain from the investment in IT is measured in the quantifiable terms like ROI. But ROI of IT depends on infrastructure which includes human resource, capital availability, telecommunication network and power supply. According to Mike Martin, most of the IT budget goes on to applications which merely keep the organization in line with the rest of the industry, or offer a temporary, but easily replicable advantage.

Related to this article: 

 which of the following best describes the purpose of angel capital

The maintenance of the applications requires infrastructure. The presence of satisfactory infrastructure is related to the ROI in IT because the adoption of IT requires supporting network of electricity, telecommunications and skilled people. In the field of information technology, infrastructure is a very crucial component. Implementing a cost effective IT Infrastructure that aligns with organization’s business strategy is essential to ensure the success of the Information Technology (Peter Weill, 1992).