Profitability Analysis

Discuss about the Analysis of Financial Ratios Measuring Performance.

The overall assessment mainly helps in identifying the overall financial viability of Maple Builders Ltd and Alpine construction. In addition, relevant recommendation is mainly conducted to BC Ltd for improv their financial performance and minimises the negative impact from declining sales revenue. Relevant suggestion is mainly stated in the assessment for improving the business conduction of BC Ltd. The solvency test is mainly conducted on dividend payment, which helps in detecting the financial performance of the company. Lastly, adequate recommendations are conducted for BC Ltd for improving the level of returns from investment.

The evaluation of the ratio mainly indicates that financial performance of Maple Builders Ltd is relatively higher than Alpine Construction Ltd, as both gross profit and net profit margin is relatively high in 2016 of the company. The financial performance of Maple Builders Ltd has relevantly declined over the period from 67.5% to 64%, which is relevantly higher than the value of Alpine Construction Ltd 59.7%. The net profit margin is also higher of Maple Builders Ltd 20.4% in comparison to Alpine Construction Ltd 17.85%. This relevantly indicates that financial performance of Maple Builders Ltd is relatively higher than Alpine Construction Ltd. The return on assets of Alpine Construction Ltd is higher than Maple Builders Ltd, which does not indicate the profitability progress of the company (Buchman, Harris & Liu, 2016). The gross profit margin of Maple Builders Ltd and Alpine Construction Ltd relevantly declined, which is due to the high cost of sales incurred by the company. On the other hand, Alpine Construction Ltd net profit margin inclined, due to the occurrence of low administrative cost, which increased return on assets of the company. The net profit margin has mainly declined for Maple Builders Ltd, due to the increment in administrative cost, which has declined its overall return on assets.

The evaluation of current ratio and quick ratio mainly helps in depicting the financial stability of the company. In addition, both quick and current ratio is relatively higher of Alpine Construction Ltd in comparison with Maple Builders Ltd. Moreover, the current ration of the company has mainly declined from 2.81 to 2.79, while it is relatively higher than the current value of Maple Builders Ltd, which is at the levels of 1.92. This indicates that financial stability of Alpine Construction Ltd is relatively higher, as the current ratio is higher than standard value of 2. The current ratio and quick ratio of Alpine Construction Ltd has mainly declined due to the accumulation of higher current liabilities than current assets. On the other hand, both current ratio and quick ratio of Maple Builders Ltd has relevantly increased, due to the accumulation of current assets in comparison to current liabilities. The quick ratio value of Alpine Construction Ltd is at the levels of 1.52, while Maple Builders Ltd lies at 1.31. This indicates that financial stability of Alpine Construction Ltd is relatively higher than Maple Builders Ltd, as the standard value of quick ratio is relatively higher than 1.

Solvency Position

According to the utilization ratio, inventory days and A/C receivable days are mainly evaluated, where Alpine Construction Ltd has the highest value. This indicates that management of Alpine Construction Ltd is effectively using its resources and generating high level of cash flow. The inventory days of Maple Builders Ltd is relatively high at the 76 days, while Alpine Construction Ltd has the level of 58, which indicates that Alpine Construction Ltd has higher utilisation of inventory level. On the other hand, the changes in A/C receivables days is relatively at the same level, which indicates that asset utilisation ratio of Alpine Construction Ltd is relevantly high (Caro, Guardiola & Ortiz, 2018).

EPS is earnings per share, which is obtained by dividing number of shares with net income, while dividend per share is obtained by dividing the dividend amount with number of shares. The market performance of both companies is mainly evaluated with the above figure, where Alpine construction ltd is relatively providing high EPS and DPS. This relevantly indicates that return and dividend performance of the company is relevant high, which depicts the market stability of Alpine construction ltd in comparison with Maple Builders Ltd. The EPS value of Alpine construction ltd is mainly at the levels of 3.68, while Maple Builders Ltd value is at 3.21. This indicates that market performance of Alpine construction is relatively high in comparison with Maple Builders Ltd. In addition, DPS is relatively at the levels of 2.57. which is high for Alpine construction in comparison to Maple Builders Ltd. These number mainly indicate that market position of Alpine construction ltd is relatively high in comparison to its competitor (Ferrer & Tang, 2016). The results relevantly implies that EPS of Alpine construction ltd and Maple Builders Ltd is relevantly high due to the net income generate by the company. However, the DPS of Alpine construction ltd has relevantly improved due to the increment in dividends payment. On the other hand, Maple Builders Ltd DPS mainly declined due to the low dividends paid by the company.

The solvency position of both the company from the evaluation could be detected, which might help in understanding its overall financial status. The high value of debt to assets and debt equity indicates the insolvency position that is been achieved by the company. Hence, from the evaluation it could be detected that the solvency condition of Maple Builders Ltd is relatively high, while the financial status of Alpine construction has deteriorated over the fiscal year. The debt to asset of Alpine construction has increased from 0.63 to 0.73, while debt to equity has increased from 1.28 to 1.88. this indicates that the company has been accumulating high debt for conducting its operations. However, Maple Builders Ltd has relatively declined its overall debt accumulation, which indicate its financial strength and positive solvency position.

Particulars	Industry standard	Maple Builders Ltd 2016	Alpine Construction 2016
Gross Profit %	60%	64.00%	59.70%
Net Profit %	20%	20.40%	17.85%
Rate of Return on Assets	0.36:1	0.56:1	0.68:1
Current Ratio	2.00:1	1.92:1	2.79:1
Debt to Equity Ratio	80%	121%	188%
Inventory Turnover	68 days	76 days	58 days
Accounts Receivable (days)	42 days	15 days	15 days
EPS	$ 2.28	$ 3.21	$ 3.68
Dividends per Share	$ 1.40	$ 1.88	$ 2.57

From the evaluation of above table Maple Builders has the highest financial stability and complies with the industry standard. Maximum of the Maple Builders ratios evaluated in the above table complies with the industry standard, leaving current ratio, and inventory turnover and debt to equity ratio. On the other hand, three ratios of Alpine Construction have not complied with the industry standard, which is not related to its financial stability. Therefore, from the relevant evaluation of industry level financial position of Maple Builders Ltd can be detected and is considered the most favourable within the industry (Goyal & Bhatia, 2016).

Market Performance

The evaluation of financial ratios mainly allows investors in detect financial health and position of both the companies. In addition, the evaluation of financial position mainly helps in detecting the relevant conditions, while making investment decisions. The financial position of Maple Builders Ltd is relatively high in comparison with Alpine construction, as the company is providing high end profits. Maple Builders Ltd has relatively increased the number of profits, which could be generated from operations, which is detected from relevant ratios. From the evaluation of ratios and comparisons from industry averages both the companies have been providing adequate return (Johri & Maheshwari, 2015). However, the evaluation of solvency position mainly helps in depicting the overall financial position of Maple Builders Ltd over Alpine construction. This relevant high-end profit generated by Maple Builders Ltd and its improving solvency position relevantly states the financial health and position of the company in comparison with Alpine construction.

The evaluation of both the companies mainly helps in understanding their financial position, which could help in detecting its ability to divest. The financial position of Maple Builders Ltd is detected to have the most viable financial position in comparison with Alpine construction. The financial ratios such as profitability, solvency and financial market ratios mainly indicate the performance of Maple Builders Ltd, which might help in generating high level of income from investment. Therefore, from the evaluation BC Ltd should divest from with Alpine construction, as the financial position of the company is not increasing over the period of two fiscal years.

There are three ways in which relevant improvements of Maple Builders Ltd needs to be steered, which might decline the deficiencies in its ratios.

• The asset utilisation of relevant operations of the company needs to improve by reducing the lag in inventory sales, which is derived from inventory ratios. The supply of inventory needs to be improved by the organisation.
• The increment in current ratio and quick ratio also needs to be conducted by the company by reducing the current liability or increasing current assets.
• Lastly, the increment in return on assets needs to increase, which is only possible by effectively raising the level of revenue and net income of the organisation, which is conducted by reducing the cost of sales and administrative expenses.

The relevant solvency test mainly allows directors of the company to evaluate the financial position of the company. In addition, the Companies Act 1993 mainly focuses in evaluating solvency test, which needs to be portrayed to its shareholder before making any decisions. The solvency test mainly needs balance sheet limb, cash flow test to determine the solvency position of the company. Moreover, the solvency test mainly requires section 4 of the companies Act 1993, where both solvency limb and balance sheet limb need to be evaluated. The liquidity limb and balance sheet limb mainly evaluate debt position of the company, which might help in understanding its financial position. The value of company’s assets is mainly conducted with the help of balance sheet limb, where assets is higher than liabilities (Khan & Khokhar 2015).

Particulars	Alpine Construction Ltd 2016	Maple Builders Ltd 2016
Equity	236,650	283,300
Dividend payment	25,000	10,500
Total assets	814,500	851,500
Solvency test	29.97%	33.69%

The above table states the solvency test for Alpine Constrictions and Maple Builders, where it relevantly indicates the viability of both companies to pay the dividend amount to its shareholders. The solvency test relatively indicates that financial position of both companies is adequate and the dividend payment would not affect their cash position and financial health. Therefore, it could be assumed that Alpine Constrictions could effectively pay the dividend of $25,000 and Maple Builders could pay $10,500 to their investors.

The major limitation that could be identified from the financial analysis is the limited level of ratios, which is used in evaluating their financial condition.

• The number of ratios used in the evaluation process does not help in identifying the health of both organisations.
• The materiality misstatement of the financial report could also increase the limitations of the ratios, as it is dependents on the data provided by the company.
• The comparability of the financial position is mainly based on limited number of years, which will not depict its actual condition.

Recommendations for Improvement

There are some variations that is currently present with the existing report, as report has details, which is needed by BC Ltd. In addition, the variation of limited time frame evaluation and minimum ratios could be one the major drawback that is presented in the report. the limited depiction of financial data is one of the major variation that might occur within the report.

Conclusion:

After evaluating the outcomes generated from the above decisions it could be identified that Alpine construction needs to be divested by BC Ltd, which might help improving the level of return from investment. In addition, the analysis based on ratios calculated and analysis, which helped in understanding the level of progress, which could be generated form investment over time. In addition, the solvency test resulted that both companies could pay dividends, as it depicts their financial position. Hence, BC Ltd for improving the level of profits from its operation could divest Alpine construction and generate adequate cash to support its business, which improving its competitive edge.

Reference:

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