This report analyses the financial performance of Pro Diver for current year based on their profitability, financial stability and liquidity. Methodology applied is the ratio analysis and compared the same with the ATO industry benchmarks available.
Results shows that all ratios are within industry averages. The report finds the prospects of the company in its current position are positive. All calculations are available under the appendices. Report also includes the discussion around the two possibilities for the future expansion of the business. Recommendations covers:Increasing earnings to eventually increase equity. Debt minimization and subsequently decrease the interest expenses.
Ensure maintenance of all assets and evaluate its effectiveness within operations at least once a yearThe report also considers the fact that the analysis conducted has limitations. Some of the limitations includeUnavailability of Projecting figures.Data limitations as not enough information is provided like statement of cash flows.Results are based on present performance onlyThis report reflects the profitability, liquidity and financial stability of Pro Diver for the year 2017 using information attained through ratio analysis of financial statements like Balance sheet and Income statements. The report will be focused around the earning power, debt management and liquidity of Pro Diver and will highlight major strengths and weaknesses. The report will comment on the prospects of the company and make recommendations that would improve Pro Divers current performance.
These observations do have limitations which will be noted.Current ratio and quick ratio are two of the key reflectors of short term liquidity position of a company but they are not the perfect barometer. To measure the overall liquidity, the current ratios and quick ratios are analysed in conjunction with receivable turnover. The current ratio is at 1.28:1 and the quick ratio is 0.
64:1. The rule of thumb says that the entity should maintain $1.50 of current assets for every dollar of current liabilities. Similarly, for quick ratio, the ideal indicator is 0.9:1. Current ratio of pro diver can be improved by slightly increasing the current assets and decreasing the current liabilities. Assuming credit terms of 60 days, the average collection period of 17.
3 days is a very good indication that the current credit policy is effective and pro diver is not burdened by excessive amount of bad debts. Debt ratio is at 59% which is the measure for percentage of pro diver’s assets provided by creditors and the equity ratio is at 41% which in general is the measure of percentage of assets provided by shareholders, in case of pro divers it would be the percentage of assets provided by the Owner Sam Mackee. This reflects Pro Diver will have the ability to endure operations in the long run and fulfil all its long-term commitments. Pro divers working capital is very positive at $3,236.83.
Positive working capital shows the amount of cash available for daily operations. However, the asset turnover ratio of pro diver is 0.40 times which shows that pro diver is generating $0.40 of sales for every dollar invested in assets. To improve the asset turnover ratio the firm needs to efficiently deploy its assets to generate higher revenue. To survive in the long run any entity must operate at a satisfactory profit. Return on assets of pro diver is 12% which is the rate of return earned through normal business activities.
In other words, $0.12 in profit is generated by each $1.00 invested in assets. Return on equity is at 30% i.e. $0.30 in profit generated on owners’ equity.
Return on assets and Return on equity is a healthy indicator of Pro Diver’s ability to use equity financing in the most efficient manner. High RoE can attract many investors in future to invest in Pro Divers and eventually will lead the company to grow further.Looking at the profit margin for 2017, each dollar of sales revenue produced $0.30 (30 cents) in profit. Reasonable profit margins of Pro divers imply that all the expenses are in line. Another way to look at this is to look at the Expense Turnover Ratio.
As per the sports & physical recreation industry’s numbers published under Australia Taxation office website, the key benchmark range of Total expenses/turnover is 65%-80% for firms with turnover of $150,0001-$600,000. Pro Divers sales for this year were recorded at $157,988.09 and the total expense turnover ratio is 70% which falls under the bracket of 65%-80% and is very close to the average total expenses benchmark of 73%.