Financial Ratio Analysis Of Bradley Stores

Balance Sheet and Income Statement

1. Liquidity Ratio exhibits potential of the company for meeting up the short-term obligations it owes (Biddle, Ma & Song, 2016).

Current Ratio: Current Assets/Current Liabilities.

The current ratio of Bradley stores for the period 2016 was around 1.86 times which in comparison to the Industry average of 1.50 times represents better liquidity ratio for the company (Tosi & Paidar, 2015).

Quick Ratio: (Cash + Trade Receivables)/ Current Liabilities.

The quick ratio for the company was 0.71 times in the year 2016 where the industry average was around 1.25 times which shows that inventory plays a major role in the composition of the current assets of the company. The company might face liquidity crisis (Demerjian, Donovan & Larson, 2016).

1. Activity ratio of Bradley stores

The activity ratio shows the efficiency of the company in the operations part of a company (Mansourian et al., 2016).

Inventory Turnover Ratio: Cost of goods sold/Inventory.

The ratio for Bradley Company is around 12.50 times which when compared to the industry is of around 12 times. This shows that the inventory rotation in the company is much smoother than the industry average. Generally, a higher ratio is preferred (Ferrer & Ferrer, 2016).

Average collection Period: Accounts Receivable/ (Net sales/365).

The ratio for the company was around 24.33 days which compare to the industry average was around 30 days. This shows that the company is able to realize amount from the debtors in a given stipulated time than the industry average collection period time (Setiyanto & Aji, 2018).

Sales to Total Assets Turnover Ratio: Sales/ Total Assets.

The ratio for the company is around 1.50 times in the year 2016 which when compared to the industry average of 1.40 times is still better which represents that the management of the company is utilizing the assets of the company properly when compared to the industry average. 

Sales to Fixed Assets Turnover Ratio: Sales/Net Fixed Assets

The ratio for Bradley is around 2.22 times where the industry average for the same period was around 1.80 times. This shows that the company is utilizing the fixed assets of the company efficiently as compared to the industry and sector competitors (Grant, 2016).

Average payment period: (Creditors + Bills Payable)/ Average Daily Purchases.

The ratio for the company is around 60.83 days which when compared to the industry average is around 20 days. It implies that the company takes a much longer period to pay off its liabilities, which is good but prolonged period of delay in payments could affect the credibility and goodwill of the company.

1. Coverage Ratio

Industry Averages for Key Ratios

Debt to Total Assets Ratio: The debt to total assets for the company is around 50% that is similar to the industry average of 50%. The company should try to focus on reducing the debt, as it would be able to reduce the financial risk associated with such type of financing.

Interest Coverage Ratio: Earnings before interest and taxes/Interest.

The ratio for the company is around 1.25 times which when compared to the industry coverage ratio is around 8.50 times. This shows that the company spends a huge amount in the payment of interest and the exposure of debt is significant 

Assets to Equity Ratio: Total Assets/ Total Equity.

The ratio for the company is around 3.08 times whereas the industry average is around 2.0 times.

1. Profitability Ratio

Net Profit Margin Ratio: The ratio for the company is around 2.0% which when compared to the industry average is around 6.40%. It shows that the profitability of the company does not represent a better picture when compared to the sectorial competitors (Tayeh, Al-Jarrah & Tarhini, 2015).

Percentage Return on Equity: Net Income/ Share Capital

The ratio for the company is around 15.38% which is not better than the industry average of 18%.

Price to earnings ratio: Share Price/Earnings per share

The price to earnings ratio for the company is around 15 times while the industry average for the same is about 23 times. A lower amount of this ratio is preferred.

Return on Total Assets: Net Income/ Total Assets

The ratio for the company is around 5% while the industry has been able to deliver returns of around 9%. This shows on the net part the company is not able to utilize best of its total assets and deliver superior return as compared to the industry performance.

Du Point Analysis: The analysis shows the breakdown of the Return on Equity (Crowther, 2018). The analysis is also referred by the formula:

Return on Equity: Profit after tax/ Net worth.

The breakdown for the same is as (Profit after tax/sales)*(Sales/Total assets)*(Total assets/Net worth)

Du Point Analysis
ROE =(Profit after tax/ sales)*(Sales/Total assets)*(Total assets/Net worth)
Return on Equity =	Profit Margin*Asset Turnover*Financial Leverage
Profit Margin	Asset Turnover	Financial Leverage
(Profit after tax/ sales)	(Sales/Total assets)	(Total assets/Net worth)
2.00%	1.50	3.08
Return on Equity =	9.23%

Financial Analysis of Bradley store:

The company’s overall liquidity position shows a better picture than the industry average but the company’s heavy dependent on inventory is not a good source of financial dependency. The company should focus on increasing its working capital. The average turnover ratio for the company is also good against the industry average. The company’s activity ratio is also better as compared to the industry average. The company should focus on reducing the debt as the company has 50% of debt in compare to the total assets of the company.

Guidelines for Ratio Analysis

One of the key weakness of the company is the payment time it takes to pay off its creditors is far more than the industry average which shows that the credibility and goodwill of the firm may get affected. The company share price valuation is cheap as compared to the industry average. The profitability and return on equity is not in line with the industry average (Gitman, Juchau & Flanagan, 2015).

1. Overall the company’s position is average in terms of financial the company stand point is below average but the company’s operation is stable related to its competitors. Since the company is already debt laden and major of the assets of the company’s assets are financed by the debt holders it would not be suitable for granting the loan to the company. The financial risk and business risk could act as a double edge sword for the company.
2. Response to Question 2.

1. Probabilistic approach for return on market = Probability Factor * Expected Return.

Economy	Probability	Tech.com	Exp. Return	Sam Grocery	Exp. Return	ASX 200	Exp. Return
Recession	30%	-20%	-6%	5%	1.500%	-4%	-1%
Average	20%	15%	3.00%	6%	1.200%	11%	2%
Expansion	35%	30%	10.50%	8%	2.800%	17%	6%
Boom	15%	50%	7.50%	10%	1.500%	27%	4%
Expected Rate of Return	15.00%		7.00%		11%

Estimated Rate of Return
Economy	Probability	Tech.com	Sam’s Grocery	ASX 200
Recession	30%	-20%	5%	-4%
Average	20%	15%	6%	11%
Expansion	35%	30%	8%	17%
Boom	15%	50%	10%	27%
Standard Deviation	0.30	0.02	0.13

Beta is a much accurate measure for calculation of risk for Tech.om and Sam’s Grocery rather than standard deviation. Standard deviation shows dispersion of stock at a certain period of time with respect to stock itself. Beta calculates stock specific risk with respect to the benchmark or the economy in which the stock operates. Beta shows the sensitivity of stock with respect to economy. It says that if economy changes by one then by what times the stock will respond or change (Alp & Bilir, 2015).

1. Based on the beta the expected return for the ordinary share is as follow:

Expected Return= Real rate of return + (Return on Market-Real rate of return)*Beta

Calculation of Expected Rate of Return
Economy	Tech.com	Sam’s Grocery	ASX 200
Real Return	5%	5%	5%
Probabilistic Return	15%	7%	15.30%
Beta	1.68	0.52	1
Expected Return	21.80%	6.04%	15.30%

For calculation of beta and expected return of the portfolio, it is necessary to know the weightage of each stocks in the portfolio. The weights are 30% and 70% in Tech.com & Sam’s Grocery respectively (Damodaran, 2016). The expected return for the portfolio = Weight of Stock*Return from Stock.

The beta of portfolio = Weight of Stock*Beta of stock.

Portfolio 1
Economy	Tech.com	Sam’s Grocery
Real Return	5%	5%
Probabilistic Return	15%	7%
Beta	1.68	0.52
Expected Return from Stocks	21.80%	6.04%
Investment	30,000	70,000
Return from Portfolio	6.54%	4.23%
Total Return from Portfolio	10.77%
Beta of Portfolio	0.504	0.364
Total Beta of Portfolio	0.87

For calculation of beta for Portfolio 2 the same procedure will be followed. The weights of the stocks in Portfolio 2 differ from the first one. The weights of the stocks are 70% and 30% in Tech.com & Sam’s Grocery respectively.

Portfolio 2
Economy	Tech.com	Sam’s Grocery
Real Return	5%	5%
Probabilistic Return	15%	7%
Beta	1.68	0.52
Expected Return from stocks	21.80%	6.04%
Investment	70,000	30,000
Return	15.26%	1.81%
Total Return from Portfolio	17.07%
Beta of Portfolio	1.176	0.156
Total Beta of Portfolio	1.33

For selection of a portfolio among the two, we need to check and calculate the return with per unit of risk from the portfolio. The higher the better is preferred it shows the return an investor gets while taking a unit of risk. Portfolio 2 provides a better risk return reward as shown below. It is calculated as Risk/Return. The lower the better is preferred; it shows value creation and delivering better returns for taking per unit of risk.

Portfolio 1
Economy	Tech.com	Sam’s Grocery
Total Return from Portfolio 1	10.77%
Beta of Portfolio	0.504	0.364
Total Beta of Portfolio	0.87
Return per unit of Risk	0.080779944

Portfolio 2
Economy	Tech.com	Sam’s Grocery
Total Return from Portfolio 2	17.07%
Beta of Portfolio	1.176	0.156
Total Beta of Portfolio	1.33
Return per unit of Risk	0.07791447

Response to Question 3.

Year	Renovate	Replace
0	–$9,000,000	–$2,400,000
1	3,000,000	2,000,000
2	3,000,000	800,000
3	3,000,000	200,000
4	3,000,000	200,000
5	3,000,000	200,000
NPV	$10,056,465	$2,689,335
IRR	19.86%	23.69%
Profitability Index	1.12	1.12
Payback Period	3 years	1.5 years

The payback period for the project, calculation shows amount recoverable in the project life period. The replacement project is recommended as it takes 1.5 years for returning the initial investment whereas the renovate project has 3 year of period time (Gorshkov et.al 2014).

1. The NPV for Project Renovate is much higher than the replacement project; hence, will be accepted for creating wealth for the investors.
2. The IRR for project Replacement is 23.69% much higher and will be accepted than the renovate project which has 19.86% of IRR.
3. The profitability Index is almost equal as 1.12 for both the projects.
4. We find various conflicting recommendations because NPV is in favor of larger projects and fails to recognize the actual return percentage from the project while IRR calculates the actual expected return from a project (Magni & Martin, 2017).
5. NPV Profile Analysis.

1. Based on the NPV profile analysis project renovate should be undertaken, as it will create more wealth for the company.
2. Based on the NPV profile and assuming the WACC of 25% none of the project could be undertaken as the projects has return of 19.86% and 23.69% respectively.
3. Response to Question 4.

Calculation of Cash Flows
Particulars	1	2	3
Sales Revenue	1,54,000	1,54,000	1,54,000
Less: Costs	64,000	64,000	64,000
Less: Depreciation	53,333	53,333	53,333
Earnings Before Tax	36,667	36,667	36,667
Tax @ 30%	11,000	11,000	11,000
After Tax Cash Flows	25,667	25,667	25,667
Add: Depreciation	53,333	53,333	53,333
Cash Flows	79,000	79,000	79,000
Add: Salvage Value	–	–	10,000
Less: Depreciation	–	–	3,000
Total Cash Flow	79,000	79,000	86,000
Add: Recovery of Working Capital	–	–	30,000
Terminal Cash Flow	79,000	79,000	1,16,000
Present Value of Cash Flows @ 12%	70535	62978	82566
Total PV of Cash Flows	216080
Less: Initial Investment	190000
NPV	26080
IRR	19.31%

Working Capital
Add: Inventory	32,000
Add: Trade Accounts Receivable	24,000
Less: Trade Accounts Payable	26,000
Working Capital	30,000
Initial Investment
Initial Outlay	160000
Add: Working Capital	30,000
Total Initial Outflow	1,90,000

Yes the project should be undertaken into consideration as both the NPV and IRR approaches would create the wealth of the investors and since IRR is greater than the discount of capital the project should be accepted (Magni & Martin, 2017).

References

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