Executive Summary
The report is commissioned to analyze the financial condition of JakelBerhard after the takeover by the new director, Mr. Michael. In order to achieve our objective, we unearthed the financial trends using the tool of ratio analysis using multiple ratio sections of Liquidity, Profitability and Efficiency. Our comprehensive analysis indicated that with the arrival of new director, the company’s position has rather deteriorated with decreased liquidity, declining profit margins and weak efficiency position.
In addition to the ratio analysis section, we have also discussed the importance of accounting information for a company like JakelBerhard and have also assisted our colleagues in understand the difference between revenue expenditure and capital expenditure.
Ratio Analysis
In this section, we will be unearthing the financial trends of the company for the past two years, using various multiples of ratio analysis. The details and calculations are as follows:
Liquidity Ratios:
i)Current Ratio: Current Assets/ Current Liabilities
2013: 4926/1508= 3.26
2014: 7700/5174= 1.48
ii) Acid Ratio: (Cash+ Receivables)/Current Liabilities
2013: (0+2540)/1508= 1.68
2014: (0+4280)5174= 0.82
Referring to the above calculations, we can see that over the year, the liquidity position of the entity has been badly struck. Beginning with the current ratio, during 2013, the current ratio of the company was 3.26, which plummeted down to 1.42, amid 243% increase in the current liabilities while the current assets could only manage an increase of 56.31%. We even tested the liquidity position using the stringent measure of acid ratio. Here also we witnessed a depressing trend as the multiple fell from 1.68 to 0.82, thus confirming deteriorated liquidity position of the company in an year time.
Profitability Ratios:
i)Operating Margin: Operating profit/ Revenue
2013: 914/9482= 9.64%
2014: 1042/11365= 9.16%
ii)Net Income Margin: Net Income/ Revenue
2013: 534/9482= 5.63%
2014: 575/11365= 5.06%
iii) Return on Equity: Net Income/ Total Equity
2013: 534/9813= 5.44%
2014: 575/10268= 5.60%
As noted from the above calculations, we can witness that during the year, the profitability trend of the company was not very encouraging, rather it was on a depressing trend. As for the operating profit margin, the multiple soared down from 9.64% to 9.16%. The decline was sourced from higher proportion increase in the revenue figures as the company failed to reap higher proportionate increase in the operating income, an indirect indication for increase in operating expenses this year. Similar was the trend with the net income margin, which also tumbled from 5.63% to 5.06% during 2014.
Finally, we concluded the profitability section with our calculation of ROE multiple, which we found to be surging from 5.44% to 5.60%. This may be a bit of relief for the equity holders of the company as the trend indicated increased profitability margins on their equity investments.
Efficiency Ratios:
i) Days of Inventory: (365*Inventory)/Revenue
2013: (365*2386)/9482= 92 Days
2014: (365*3420)/11365= 110 Days
ii) Days of Receivables: (365*Receivables)/Revenue
2013: (365*2540)/9482= 97 Days
2014: (365*4280)/11365= 137 Days
iii) Asset Turnover: Revenue/ Total Assets
2013: 9482/12541= 0.75
2014: 11365/ 19117= 0.59
Next, we analyzed the efficiency ratios of the company to access the ability of the management to use the asset base of the company. We began our analysis using the days of inventory, and found that over the year, the time period has increased from 92 days to 110 days, indicating that this year it took more time for the company to sell its inventory and the capital was tied up in inventory levels for an increased period of time.We continued our analysis and calculated the days of receivables. Our calculation revealed that during 2014, the debtors of the company paid their bills in 137 days, a significant increase relative to 97 days in the previous year. This can also be considered as a set back to the cash liquidity of the company and also causes an extension to cash conversion cycle.
Further, our calculation of Asset Turnover Ratio confirmed the analysis related to weak efficiency of the management, as the multiple declined from 0.75 to 0.59, indicating that the management is unable to use the asset base efficiently to generate the revenue figures.
Conclusion
Courtesy our comprehensive calculation about the liquidity, profitability and the efficiency ratio of the company, we can assert that though after the takeover of the company’s position by Michael, the revenue figures have increased, but overall, the company has lost its liquidity, profitability and efficiency strength with all the ratios indicating a negative trend relative to previous year.
Relevance of Accounting Information
Accounting relevance is related with the usefulness of the accounting information presented in the financial statements of the company. In other words, accounting is a measuring stick through which a company can measure its operational performance and how well it is functioning against its competitors. In addition to the internal management, the accounting information can also be useful to the other end users such as employees, shareholders and creditors.
Important to note, once the company reveals its accounting information through raw financial figures in its financial statements, the entity can use multiple analysis tools such as ratio analysis, common size statement analysis, and many other techniques to come up with the refined outcome of the accounting information which can then be used for making prudent decisions to ensure smooth financial stimulus of the company.
Difference between Revenue Expenditure and Capital Expenditure
Capital Expenditure:
Capital expenditure are those expenses of the company that involves significant amount of investment. The purpose of this category of expenditure is related to the acquisition of the long-term capital assets which are targeted to yield future benefits for the multiple years. Moreover, since these assets provide income generating value to the company for a period of years, the entities are not involved to deduct the full cost of the capital asset in the year the expense is incurred. In contrast, the amount of capital asset is deducted on year-by-year basis by claiming the depreciation expenses over the useful life of the asset. Some of the examples of capital expenditures of the company are Acquisition of land, purchase of machinery and equipments, investment in projects, et cetera.
Revenue Expenditure
Revenue expenses are those expenses which are targeted to meet the ongoing working capital expense of the company. In other words, since these expenses cover the operations of the company, they are also cited as operating expenses. However, unlike the capital expenditures, companies can claim these expenses during the year they are incurred. Another point which differentiates revenue expenditure from the capital expenditure is that the former are recurring in nature in contrast to the one-off nature of the later.
References
Capital Expenditure. (n.d.). Retrieved July 7, 2015, from http://www.accountingcoach.com/blog/capital-expenditure-revenue-expenditure
The Relevance of Accounting Information. (n.d.). Retrieved July 7, 2015, from http://smallbusiness.chron.com/relevance-accounting-information-3948.html
What is the difference between a capital expenditure and a revenue expenditure? (n.d.). Retrieved July 7, 2015, from Investopedia: http://www.investopedia.com/ask/answers/021115/what-difference-between-capital-expenditure-and-revenue-expenditure.asp
