Financial Analysis Of Robert’s Appliances: Industry Comparison

Objective

Question:

The objective of the report is to understand the financial condition of Robert’s appliances and compare it with the industry standards to understand the performance of Robert’s appliances. 

Objective: The objective of the report is to understand the financial condition of Robert’s appliances and compare it with the industry standards to understand the performance of Robert’s appliances.

Purpose of financial analysis: The Purpose of financial analysis is

1. To examine the past and current financial status of Robert’s appliances
2. To evaluate the performance of Robert’s appliances
3. Take necessary steps to improve the profitability for the shareholders.

Structure: The report contains the detailed financial analysis of the various activity ratios, liquidity ratios and profitability ratios. The report then compares the various ratios with the industry ratio of the competitor companies and a comparison is made between them to understand the performance of Robert’s appliances. 

Gross Profit %: It is defined as the ratio of Gross profit to sales of the company for that accounting period. It is given by Gross Profit % = Gross profit/ sales where Gross profit = Sales – Cost of sales

Thus for year 2014, Gross Profit % = 166980/ 276000 = 60.5%

Similarly, Gross Profit % for 2015 = 64.1 %

Gross Profit % for 2016 = 68.1%

Thus it can be seen that the gross profit of Robert’s appliances has been increasing since 2014 and the company has started improving its profitability by increase in sales.

Net Profit %: It is defined as the ratio of Net profit to sales of the company for that accounting period. It is given by Net Profit % = Net profit/ sales where Net profit = Gross profit – Selling Expenses – Admin Expenses – Financial Expenses.

Thus for year 2014, Net Profit % = -8280/ 276000 = -3.0 %

Similarly, Net Profit % for 2015 = 16.3 %

Net Profit % for 2016 = 25.5 %

Thus it can be seen that the net profit of Robert’s appliances has been increasing since 2014 and Robert’s appliances has started improving its profitability by reduction of unnecessary expenses with increasing sales.

Return on Equity %: It measures the ability of the company to generate profits using the investments by the shareholders. It is given by

Return on Equity % = Net Profit/ Shareholder’s Equity

Thus for year 2014, Return on Equity % = -8280/ 481620 = -2.0 %

Similarly, Return on Equity % for 2015 = 19.0 %

Return on Equity % for 2016 = 49.8 %

With the increase in Net profit and decrease in capital the return on equity of Robert’s appliances has increased and have delivered a better return for the investments. 

Current Ratio: It measures the ability of the company to pay all its current liabilities using current assets. It is given by,

Current Ratio = Current assets/ current liabilities

Thus for year 2014, Current ratio = 42780/ 22080 = 1.93

Similarly, Current ratio for 2015 = 1.33

Current ratio for 2016 = 1.19

The current ratio of Robert’s appliances has decreased since 2014 and it will not be able to pay its current liabilities using current assets

Purpose of Financial Analysis

Liquidity ratio: It measures the ability of the company to pay all its current liabilities using current assets. It is given by,

Liquidity ratio = Quick cash/ current liabilities

Thus for year 2014, Liquidity ratio = 34500/ 22080 = 1.56

Similarly, Liquidity ratio for 2015 = 0.952

Liquidity ratio for 2016 = 0.748

The liquidity ratio of Robert’s appliances has decreased and it does not have sufficient cash and cash convertibles to pay all its current liabilities.

Equity Ratio: It is an indicator of leverage of the company. It is given by,

Equity Ratio = Total Equity/ Total assets

Thus for year 2014, Equity Ratio = 481620/ 523020 = 0.786

Similarly, Equity ratio for 2015 = 0.67

Equity ratio for 2016 = 0.50

The equity ratio of Robert’s appliances has decreased and the capital invested by the shareholders is decreasing.

Inventory turnover ratio: It shows how many times a company was able to sell its inventory and get it replaced in a given period. It is given by

Inventory turnover ratio = Cost of goods sold/ Average Inventory

Thus for year 2014, Inventory turnover ratio = 109020/ ((6900+8280)/2) = 14.36

Similarly, Inventory turnover ratio for 2015 = 9.11

Inventory turnover ratio for 2016 = 4

The inventory turnover ratio of Robert’s appliances has decreased with the increase in sales the inventory has gone up.

Inventory turnover days: It is defined as the number of days it takes to sell the complete inventory in hand. It is given by

Inventory turnover days = 365/ Inventory turnover ratio

Thus for year 2014, Inventory turnover days = 365/ 14.36 = 25.41 days

Similarly, Inventory turnover days for 2015 = 40.06 days

Inventory turnover days for 2016 = 91.25 days

The inventory turnover days of Robert’s appliances has increased and it is not able to completely rotate its inventory quickly. 

Accounts receivable turnover: This ratio helps in measuring the efficiency of the firm in using the assets it has. It is given by

Accounts receivable turnover = Net Credit Sales/ Average account receivables

Thus for year 2014, Accounts receivable turnover = 276000/ (27600 + 71760)/ 2 =5.56

Similarly, Accounts receivable turnover for 2015 = 13.34

Accounts receivable turnover for 2016 = 6.67

The account receivable turnover ratio of Robert’s appliances has decreased with the increase in sales.

Accounts receivable turnover days: It is defined as the number of days it takes to collect all the amount that is to be received from the customers as credit sales. It is given by

Accounts receivable turnover days = 365/ Accounts receivable turnover ratio

Thus for year 2014, Accounts receivable turnover days = 365/ 5.56 = 65.7 days

Similarly, Accounts receivable turnover days for 2015 = 27.37 days

Accounts receivable turnover days for 2016 = 54.75 days

The account receivable turnover days of Robert’s appliances has increased. Thus they require more time to collect the credit sales.

1. The gross profit and the net profit of Robert’s appliances has been increasing since 2014. Thus it is performing better than the previous years.
2. The gross profit % of Robert’s appliances has increased from 60.5 % in 2014 to 68.0 % in 2016. It has been able to improve profitability in the 2 years.
3. The net profit % of Robert’s appliances has increased from -3 % in 2014 to 25.5 % in 2016. Thus it reduced the expenses to increase net profits.
4. The return on equity of Robert’s appliances has increased from -2 % in 2014 to 49.8 % in 2016. Thus it is performing better than the previous years and have delivered a better return for the investments.
5. The net profit is greater than the industry standards which 20.68 %. Thus it is performing better than the competitors.
6. The profitability of Robert’s appliances is greater than the industry standards which is 65.0 %. It has better future growth than the competitors.
7. The net profit is greater than the industry standards which 38.98 %. Thus it is performing better than the competitors.
8. Thus Robert’s appliances has started improving its profitability by reduction of unnecessary expense and increase in sales and keep it more than the industry average.

1. The current ratio, liquidity ratio and equity ratio of Robert’s appliances has decreased since 2014. Thus it is performance has decreased than the previous years.
2. The current ratio of Robert’s appliances has decreased from 1.93 to 1.19 in 2016. It will not be able to pay its current liabilities using current assets
3. The liquidity ratio of Robert’s appliances has decreased from 1.56 to 0.74 in 2016. The company does not have sufficient cash and cash convertibles to pay all its current liabilities.
4. The equity ratio of Robert’s appliances has decreased from 78.6 % to 50.3 % in 2016. The company needs to improve its financial stability to gain more confidence of investors.
5. The current ratio, of Robert’s appliances is less than the industry standards which is 1.80:1 respectively. The other players have an edge over it in utilizing assets.
6. The liquidity ratio of Robert’s appliances is less than the industry standards which is 1.05:1. The competitors have a better cash management than Robert’s appliances.
7. The equity ratio of Robert’s appliances is less than the industry standards which is 58.3 %. Thus it is performance has decreased than the competitors.
8. The financial stability of Robert’s appliances has decreased and is below the industry standards. Thus with the expansion of business in the last two years Robert’s appliances has increased its debt and thus it has more liabilities than it had in 2014. Thus its stability has decreased. 

1. The account receivable turnover ratio of Robert’s appliances has decreased since 2014. Thus it is performance has decreased than the previous years
2. The time it takes to collect the outstanding accounts has decreased to 54.75 days from 65.7 in 2014. They are unable to quickly collect the amount due to credit sales
3. The inventory turnover days of Robert’s appliances has increased from 25.4 days to 91 days in 2016. The company is not able to completely replenish its inventory as it used t do earlier
4. The account receivable turnover days of the industry are 45 days. Thus it is performance has decreased than the competitors.
5. The inventory turnover days of the industry are 60 days. The other players have an edge over it in utilizing assets.
6. Robert’s appliances has utilized its increase in assets to increase the sales.
7. The increase in assets is mostly due to credit sales which has increased the account receivables of Robert’s appliances.
8. Thus the asset utilization of Robert’s appliances has improved but they need to focus to improve it further with as per the industry standards.

1. Robert’s appliances should focus on improving its financial stability as the sales of the business increases. It can be seen that the current ratio and liquidity ratios have greatly declined
2. Robert’s appliances should increase its current and liquidity ratio to be able to cover its short term liabilities. The higher ratios will help shareholders be more confident about the plan of the company
3. The inventory turnover days of Robert’s appliances in 2016 is far away from the industry standards Robert’s appliances should bring this at par with the industry standards.
4. Robert’s appliances should reduce the credit sales or increase the account receivable turnover ratio to have faster collection rate.
5. Robert’s appliances should get more investment from the shareholders to increase the equity ratio of Robert’s appliances in accordance with the industry to reduce the risk factor.
6. The increase in profitability by Robert’s appliances will result in a positive response by the shareholders and Robert’s appliances should be continue to reduce the unnecessary expense and keep profitability higher than the industry. 

Conclusion

Thus it can be seen that the sales and profitability of Robert’s appliances has increased over the past three years and the net profit increase has helped Robert’s appliances to attract more investors and thus helped them in the growth of Robert’s appliances. However Robert’s appliances should focus on improving its financial stability and increase its current and quick assets to fulfill the current liabilities.

1. Limitations
2. The financial analysis conclusions depends on the method how the financial statements are produced. If there is a change in method used to state various accounts then the financial analysis may be misleading.
3. It also does not account for qualitative aspect of Robert’s appliances affair which are also equally important. The financial analysis determines the health of the company but the investment in other qualitative activities may lead to future growth which cannot be accounted currently.
4. The financial analysis does not take into account the planning of Robert’s appliances which may have affected the values. If they have a plan to achieve tehn the company may not be currently focusing on great financial figures but with the achievement of task they can refocus on improving the financial stability.  

References

Profitability Ratios. (n.d.). 

Liquidity ratios. (n.d.). 

Activity ratios. (n.d.).

Limitations Of Financial Statement Analysis. (n.d.).

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