BIZ201 Accounting for Decision Making

Executive Summary
Myer Holdings Limited is a departmental chain store in Australia, operating 61 stores

across the country selling a variety of products. The company has been facing extreme

pressure from competitors in recent years as well as the expansion of online shopping. It has,

therefore, called for a thorough examination of the financial data of the company for the last

five years to devise new ways for the company enhancement through making proper

decisions. A financial analysis of the annual report of the company will be done through

vertical analysis of the balance sheet worksheet for the year 2019 and 2018. Ratio analysis

through calculations of various significant ratios for the same period will also be carried out.

Problems will be identified, and recommendations will be made to solve them. Proposals of

new methods for enhancing growth and profitability will be made. A further cash flow

analysis will be done to ascertain the reasons for the increase in net cash and cash

equivalents.
BIZ201 Accounting for Decision Making

Table of Contents
Introduction..............................................................................................................................1

Analysis.....................................................................................................................................1

Liquidity ratios.....................................................................................................................1

Profitability ratios................................................................................................................2

Efficiency ratios....................................................................................................................3

Solvency ratios......................................................................................................................3

Recommendations....................................................................................................................4

Cash flow statement review.....................................................................................................5

Conclusion.................................................................................................................................6

References.................................................................................................................................7
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Introduction

It is always essential for a company to carry out periodic financial analysis to

determine its performance. The annual reports are analyzed and interpreted accordingly,

which is fundamental in gauging the health of any business (Griffin, 2015). The methods and

processes used in analyzing a company are very critical to provide appropriate evaluation and

assessment of the viability of the business. Information will be presented on this report with

regards to the profitability and liquidity of Myer Holdings Ltd, including its financial stability

acquired through ratio analysis with a particular interest in the years 2018 and 2019. Specific

attention will be given to its earning capacity, cash control and credit, inventory, and debt

administration. Strengths and weaknesses will be mentioned, and explanations for observed

changes.  An outlook of the company will be stated, including the various recommendations

that will improve its performance. This report will also review the cash flow statements and

explain the reasons for the multiple changes observed.

Analysis

The company has been evaluated using ratio analysis of the annual reports for the last

two years. The ratios covered four different aspects which are highlighted below:

Liquidity ratios

These ratios help to assess a firm's financial health and viability and show the strength

of the company to convert its assets to raise cash (Stittle & Wearing, 2015). The ratios

computed are explained below:

Myer Holdings Ltd's current ratio of 0.95 and 0.96 for 2018 and 2019 is below one. It

is an indication that the business is not liquidated enough to finance its short-term liabilities.

A ratio of between 1.5 to 2 is considered to be the best, as it shows that the current assets of a

company are more than commitments to pay its debts.

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The company's quick ratio over the two years was 0.13 and 0.16, which is way below

the required limit of 1. This signifies the inability of the firm to pay its debt commitments in

the short term. Higher ratios are considered to be the best.

The cash ratio of 0.09 and 0.11 for 2018 and 2019, respectively, is also meager.

Therefore the firm's cash and cash equivalents cannot pay its short term liabilities. It, thus,

indicates that the business is not keeping enough cash to fund its operations.

Profitability ratios

The company with a higher profit margin will help to sell at a higher price with lower

expenses (Friedlob & Schleifer, 2012). Such businesses more attract investors. Such ratios

are the net profit and gross profit margin and the return on equity.

The net profit margin shows how profitable a company is after taking into account all

expenses. The company's net profit for 2018 was a massive loss resulting in a negative 18.9%

net profit margin. It was due to high operating expenses sustained. The margin for 2019

slightly increased to 0.98% due to profits generated. An excellent net profit margin is one

between 10% to 20%, which indicates that a company is making enough profits to support its

operations.

The gross profit margin indicates the financial soundness of a business. The margin of

45.2% for 2018 and 47.4% for 2019 is stable, which is over and above the required limit. A

higher margin is a reflection of healthy profits.

The return on equity measures the net profit relative to stockholder's capital, which is

mostly observed by investors and stock analysts. The company ROE for 2018 was a minus

58.7% due to the massive loss suffered; hence the shareholders were not able to get a return

on their investments. ROE for 2019 improved slightly to 4.13%, which was still way below

the recommended rate, but the shareholders did get a small return on their investments.
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Efficiency ratios

Efficiency ratios calculate a firm's capability to handle its assets and control its

liabilities productively. The ratios calculated are explained below:

Inventory turnover ratio gauges the ability of a business to supervise its inventory

successfully and provides an understanding of business revenues. The company inventory

turnover was 3.72 and 3.89 for 2018 and 2019, respectively, which is within the

recommended ratio of 3 to 6.

The accounts receivable ratio measures how effective a company is in offering credits

as well as collecting debts. The ratio was 170.87 for 2018 and decreased slightly to 156.75 in

2019. It shows how structured the company is for accounts receivable collection.

Days in accounts receivable is the period that a customer invoice is outstanding before

it is collected. The preferred days usually are between 40 to 50 days, which stipulates that

fewer days are taken for the collection of accounts receivable. The firm has 2.14 days for

2018 and 2.33 days for 2019, which indicates that it does not have high outstanding amounts

with clients.

Solvency ratios

These are used to estimate the capacity of a business to meet its debt obligations and

often used by prospective lenders. The lower the ratio, the higher the chances that it will

default on its debt obligations and vice versa (Palepu & Healy, 2018). The ratios calculated

are expounded below:

The time's interest earned ratio indicates whether a firm's income can meet its

repayments. A higher ratio is favorable because it means the company has high earnings to

meet the payments. The firm ratio of 3.81 for 2018 was healthy, unlike in 2019, where it had

a minus 51.29 due to the high loss incurred.

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The debt to asset ratio evaluates a firm's assets financed by liabilities instead of its

equity. A lower ratio of 0.4 and below is considered to suggest a secure financial

composition, while a higher one indicates a high risk. The company has a high ratio of 0.57

and 0.53 for 2018 and 2019, which is appropriate.

The debt to equity ratio stipulates the share of shareholder's equity and debt used to

finance business assets and is used to evaluate its financial leverage. A good ratio falls

between 1 and 2. The company has a ratio of 1.32 for 2018 and 1.14 for 2019, which

decreased slightly. It shows that it has an optimal balance about its financing between equity

and debt.

Recommendations

Below are the recommendations derived to improve areas that have significant issues

and methods to enhance growth, profit share, and competitiveness:

1. The company should strengthen its liquidity position. The company should

have more liquid assets that it can quickly convert into cash. This can be

achieved by controlling its overhead expenses and getting rid of non-

performing assets.

2. The company should consider investing more in marketing and promotion

activities. It will make the company generate more sales to record high profits.

This will only be possible if the company puts more money and market its

products and services to the potential and existing customers. This will be the

best avenue for the company to raise the sales revenue, thus boosting the

profitability ratios.
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3. Further investigations need to be done on the sales revenue of the company to

determine its classification. It has not been indicated whether there are credit

sales. It will help in better evaluation of the company's performance.

4. The company should focus on improving it's earnings before tax and interest

to have a stable interest coverage ratio. It will allow the company to fulfill its

debt commitments comfortably without struggling.

5. The company should focus on maintaining an optimal structure by creating a

balance between debt and equity financing of its assets. It will give the firm

more borrowing power at a later date at no considerable risk and hence focus

on growth.

6. The company should consider investing more money in the area of global

research, innovation, and development of its products and services. This will

enable it to deliver the best to its customers, have a more significant market

share, be more competitive, and hence meets its profit targets.

Cash flow statement review

The objective of the statement is to present all the cash produced by a company, that

is, all the cash coming in and how the cash is being spent over a specific period (Robinson et

al., 2020). It uses cash basis accounting, and it is composed of cash flows from operating,

investing, and finance activities.

An increase in cash and cash equivalents in the year 2018 was noted from the

statement. It was due to a decrease in cash flows from financing activities where dividends

paid out to equity holders were minimal. Also, there was a decrease in cash flows from

investing activities, where the purchase of assets was less.

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There was a decrease in cash and cash equivalents in the year 2019, as per the

statement. This was due to an increase in cash flows from financing activities through the

settlement of borrowings, which was more than the previous year.

Conclusion

The discussion has demonstrated the importance of financial analysis on a company's

books of account to make crucial decisions with regards to the company's performance. The

financial ratio analysis has helped in evaluating and understanding the overall health of Myer

Holdings Limited. The strengths and weaknesses of the company have been identified and

recommendations made for the best recourse to take for the company to improve its growth,

increase profit levels, and enhance its competitiveness in the market. Various methods have

been pointed out to make the company expand its customer base hence reaching new profit

targets as well as diversifying its risks. The cash flow analysis and review has also helped in

identifying the various sources of funds and the way they are being used in business

operations, investments, and financing activities. A company must carry out periodic

financial analysis as it is a monitoring tool for managing its finances.

References
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Friedlob, G. T., & Schleifer, L. L. F. (2003). Essentials of financial analysis. Hoboken, N.J:

John Wiley & Sons.

Griffin, M. P. (2015). How to read and interpret financial statements: A guide to

understanding what the numbers really mean.

Palepu, K. G., & Healy, P. M. (2018). Business analysis & valuation: Using financial

statements.

Robinson, T. R., Henry, E., & Broihahn, M. A. (2020). International financial statement

analysis. Hoboken, New Jersey: John Wiley & Sons.

Stittle, J., & Wearing, R. T. (2015). Financial accounting. Place of publication not identified:

SAGE Publications Ltd.