Financial Analysis Of Triple Rock Ltd For Investment Purpose

Trend Analysis

The success of a business entity largely depends on its effective financial management practices. The financial management of an entity depends on effective management of the finances to promote its long-term growth and development. As such, this report is developed for analyzing and examining the financial position of ‘Triple Rock Ltd’ for investment purpose.

The company is established by Mr. Jackson after he mastered the art of making vodka in Auckland. Mr. Jackson has initially tied up with liquor shops and brewery for formulation of vodka on commercial basis. However, the company being a new entrant in the market has to pay huge money to the liquor shops and brewery as liquor is an excisable item. The company as such is in the need of capital for supporting the expansion of its business plans. Mr. Jackson is also not able to gain capital from the banks and financial institutions due to lack of securities.

As such, he is in search for investors to invest $300,000 against an equity holding of 30% for a period of minimum of five year. As given in the case study, Mr. Jackson is looking for investment from Mr. Lee from China who is willing to invest in startup businesses in New Zealand. In this context, the preset business report is developed from the perspective of a financial advisor to assess the financial performance and position of Triple Rock Ltd. The analysis of the financial performance of the company is undertaken in the report through the use of trend and ratio analysis. The analysis is carried out in the report will help in providing recommendations to Mr. Lee for investing in the company  on the basis of results obtained from its financial analysis over the last three years.

Trend Analysis

Trend Analysis of the financial statements means carrying out the horizontal analysis of the financial statements. Horizontal analysis provides the trend in the financial items over the years. It compares the financial statements figures of current year with the previous year (Horngren, 2012). Trend analysis of the Triple Rock Limited has been shown in Appendix I and its analysis has been done below.

The trend analysis of the income statement shows that there was a positive increase in sales revenue in past three years and it has been constant as per the same amount of increment in cost of goods sold. So it can be said that there has been increase in gross profit over the years but high amount of operating expenses has left the loss over the years. Depreciation is although not a cash flow expenses but it has been marked as expense in profit and loss account and there has been no taxes paid due to loss in all last three years.

So it can be said that there has been positive trend in profit and loss account but there are losses in all years to due to high operating expenses. Trend Analysis of balance sheet shows that equity has increasing year to year but cash flow statement clearly shows that there has been issue of capital regularly to offset the losses in each year. So it can be said that financial position of the Triple Rock Limited was not favorable in past three years. Triple Rock Limited has been able to keep positive working capital in past three years.

Ratio Analysis

Calculation of the financial ratios for last three years

Ratio Calculation is shown in Appendix II

Working capital in dollar terms: The working capital provides a measure of the overall efficiency of company in meeting its short-term liquidity. The formula for calculating the working capital for the company for year 2016 is as follows:

Working Capital=Current Assets-Current Liabilities

Current Ratio: This ratio also provides a measure of the liquidity position of a company through assessing its ability to pay both short and long-term obligations. The ratio will help in providing a measurement of the current assets of the company in comparison to the current liabilities. It can be calculated through the use of following formula:

Current Ratio=Current Assets/Current Liabilities

Liquidity Ratio: The ratio provides a measurement of the ability of a company to meet its debt obligations through examining the cash flow adequacy. It will help in mainly examining the ability of the company to meet its current financial obligations. It can be calculated through the use of formula:

Liquidity Ratio= (Cash equivalents + marketable securities + accounts receivables)/Current Liabilities

Gross Profit Ratio: The ratio will depict the profitability position of the company through examining the relationship between the gross profit and the net sales. It can be calculated through the use of following formula:

Gross Profit ratio= Net Sales – Cost of Goods Sold

Net Profit Ratio: The net profit ratio also helps in determining the profit position of the company realized after meeting all the operating expenses such as taxes, interest and dividends.  The formula for its calculation is as follows:

Net Profit Ratio= Net Sales – All Expenses

Stock Turnover: The stock turnover ratio will help in assessing the efficiency of the company to sell the inventory and is calculated through the formula:

Stock Turnover=Sales/ Average Inventory

Return on fixed assets: The ratio will provide an analysis of the operating performance of a company through depicting its ability to generate sales from fixed assets. It is calculated through the use of formula:

Return on fixed assets: Net sales/Fixed assets

Increase in sales % from 2014 and 2015: It will helps in depicting the increase in revenue generation of the company over the past two years.

Analysis of Financial Ratios

The financial ratio analysis provides an overall assessment of the financial performance of the company over the last three years. It can be stated from the financial ratio analysis carried out that there is significant increase in the working capital, current ratio, liquidity position and gross profitability. The significant increase in the ratios over the past three years indicates that there is a large increase in the current assets of the company in comparison to the current liabilities. The working capital has increased due to large increase in the current assets that indicates that there is greater utilization of cash by the company. This is also causing an increasing in the current and liquidity ratio of the company. The larger increase in the cash utilization is not good for the company as it is not able to gain finances from the external sources (Weil, Schipper & Francis, 2013).

Working Capital

Therefore, it should limit its capacity of cash utilization and should realize on other methods of increasing the working capital and liquidity position such as improving its earning capacity. The gross profitability of the company have also shown an increasing trend over the past three years due to greater sales realized by the company in comparison to the cost of goods sold. However, the decline in the net profitability position indicates that it is not realizing earnings as compared to its overall operating expenses. It indicates that its net sales are less in comparison to its overall expenditures and therefore a major threat for the sustainability of the company.

The stock turnover ratio has positive trend in last three years that was clearly depicted through the increase in sales but due to high amount of operating expenses has left company with losses in all the years. The same results are depicted from the return on fixed assets ratio analysis of the company. The ratio clearly indicates that the company operating performance is very weak as it is not able to generate profits in comparison to the utilization of its fixed assets (Horngren, 2012).  Therefore, it can be said that the company profitability position is on decline and it is using its cash resources quickly that will further result in the downfall of its performance. As such, it is required that the company should gain finance from the external sources to meet its operating expenses properly and as such improving its revenue generation.

Recommendations to Mr. Lee and comparison of Financial Ratios with the industry Benchmark

As there is no industry averages has been provided for calculation purpose and in order to provide the report with best possible solution, the industry average has been assumed for one of the famous alcohol retailer company in New Zealand, The Foodstuff. Foodstuff has been in same business for many years and has it’s headquarter in Auckland (About Us, 2017). For this purpose the financial ratios of Triple Rock and the assumed industry average will be compared to arrive at the proper recommendations.

(Annual report 2015 and 2016)

On the basis of overall analysis of the company performance and its comparison with the industry average, it is highly recommended to Mr. Lee to make investment in the company due to many reasons. It has been reviewed that in year 2016, there has been remarkable improvement in the profitability position of the Triple Rock Limited as in year 2015 the net profit ratio has been negative 50% and it has reduced to 20% in year 2016. It indicates that company has slowly started showing progress and there are high chances that company can earn higher returns .

if expansion plans will be introduced. On comparing with industry average it can be said that profitability position of Triple Rock Limited was very weak but industry average also shows decreasing trend in net profit ratio. In year 2016, gross profit ratio was greater than the industry. Current Ratio and Quick Ratio of the Company is far better than the industry average that clearly indicates that liquidity position of the company is very strong as compare to the other players in this industry. Company fails to provide good returns to on the fixed assets as company has been making continuously loss over last three years but it can be overcome once the company able to cross the breakeven and start making good profits (Besley & Brigham, 2014).

So, lastly it is advised to Mr. Lee to become the 30 % equity partner of the company and provide $300000 capital so that Mr. Jackson can make proper expansions and introduced his products in new market also.

Comment on the projection made by Mr. Jackson on the basis of some other Vodka Market leader

On the basis of research there are many retailers who are engaged in selling of vodka in home country as well as in international market and are involved in expansion plan. The main difference I saw was that there are huge difference in market investment of Mr. Jackson and Other retailer that have invested over $100 million in this market. So making projections without making proper adjustments and also reviewing the new market is like throwing the arrow in dark.

There are some projections like appointment of new sales personals for North Island and South Island is good decision but appointing senior employees without proper requirement is totally adding fixed expenses every month with no excess returns. The Sales can prove to right but without proper estimations it cannot be 100% sure about it. So it can be said that projections made by the Mr. Jackson on the basis of some other marker leader is not correct and are needed to be reviewed again on the basis of part year trend analysis (Brigham & Ehrhardt, 2007).

Conclusion

The financial analysis of the Triple Rock Limited has depicted that the company has not been profitable in last three years. However, it is expected that the company profitability position will improve in future years on gaining funds from the investors. The significant investment from Mr. Lee would help in expansion of the business in the new market of China and thus realizing revenue from the foreign markets. This is because the significant expertise achieved by the company in manufacturing of liquor. As such, Mr. Lee is recommended to make investment in the Triple Rock Limited.

 References

About Us. 2017. Foodstuff. Retrieved 5 December, 2017, from https://www.foodstuffs.co.nz/about-foodstuffs/who-we-are/ 

Annual report 2015. Foodstuff. Retrieved 5 December, 2017, from https://www.foodstuffs.co.nz/media/135101/32307895_foodstuffsplussouthplusislandplusannualplusreportplus2015plussmcompressed.pdf 

Annual report 2016. Foodstuff. Retrieved 5 December, 2017, from https://www.foodstuffs.co.nz/media/146652/foodstuffs-south-island-limited-annual-report-2016-opt2.pdf 

Besley, S. & Brigham, E. 2014. Principles of Finance. Cengage Learning.

Brigham, E. & Ehrhardt, M. 2007. Financial Management: Theory & Practice. Cengage Learning.

Horngren, C.  2012. Financial Accounting. Pearson Higher Education AU.

Horngren, C. et al. 2012. Financial Accounting. Pearson Higher Education AU.

Weil, R., Schipper, K. & Francis, J. 2013. Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning.

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