Accounting report

Accounting report

Thus, indicating an inefficient cost management and a weak pricing strategy adopted by Codex. Liquidity appears to be a challenging issue for Codex and Compass. Both companies, clearly, are undergoing a competition of growth through acquisition of subsidiaries which had a negative impact on the liquidity in both companies. Nevertheless, Codex’s long trade receivables settlement period has even worsen the company’s liquidity. Seeking a better image visit-;-visit its rival Compass, Codex has increased its dividends pay out on the account of its liquidity, thus, relying on borrowing rather than operating activities.

This is explained by the high financial gearing ratio that has not been translated to an increase in the company’s profitability, a short sighted strategy that should be reconsidered by the board. Recommendations: 1. Focus on maximizing profit from operations, 2. Reevaluate the entire trade receivables strategy that appears to be performing inefficiently, 3. Maintain a correlation between the amount dividends pay out and the operating profit margin. 2. INTRODUCTION This report compares Codex’s performance to that of its peer Compass based on the financial ratios, profitability, efficiency, liquidity, financial rearing and investment.

In addition to that, it emphasizes on the areas that appear to be in need of improvement. Appendix 1 gives an overview for all the ratios where Appendix 2 details all the ratio calculations in addition to the assumptions considered to calculate them with highlights on the most relevant ratios to the purpose of this analysis. The report assumes the validity and accuracy of all the financial figures offered in the annual reports offered by Codex and Compass. 3. ANALYSIS The financial ratios provide the evaluation and the quantification metrics to measure the performance of businesses.

Codex and Compass are roughly the same size and have roughly the same geographical split. In this competitive environment, Codex must consider its performance in relation to that of the other firms operating in the same industry where success depends on the ability to achieve a comparable level of performance. 3. 1 PROFITABILITY Codex announced sales revenues of mamma in the 12 months ended August 31, 20102 with about 4% increase in revenues compared to the previous year. The profitability analysis revealed that this revenue has not been translated into ‘real’ profit.

The Return on Capital Employed ratio, that expresses the relationship between the operating profit and the long terms funds (equity and borrowings) invested in the business, has declined for Codex from 13. 89% in 2009 to 12. 4% in 2010, whilst for Compass, the same ratio has increased from 19. 15% 2009 / 19. 6% 2010. Codex has reported a flat profit margin in 2009 and 201 0 (5. 1%), a figure that is almost one-quarter lower than of Compass whose margin has grown from 6. 5% 2009 to 6. 8% 2010.

The operating profit margin measures how much of a company’s revenue is left over, before taxes and other indirect costs, for eying the variable costs of production. The low operating margin indicates an inefficient cost management and a weak pricing strategy adopted by Codex. Its operating expenses increased to 14,mm in 201 0, as compared to 13,mm in 20093. Codex should definitely consider the improvement of its profitability figures in order not to lose investors to its rival Compass that enjoys a much more profitable image. 3. EFFICIENCY The efficiency ratios measure the efficiency by which particular resources are used within the business. Codex’s average settlement period for trade receivables has increased from 7. 82 days in 2009 to 74. 56 days in 2010 where the same figure for its rival Compass has slightly increased from 45. 16 days in 2009 to 46. 17 days 2010. Thus, Codex’s average settlement period for trade receivables is almost 63% higher than that of its peer Compass. It is obvious from those figures that Codex’s is being inefficient In its trade receivables management.

A long trade receivable average settlement period would have a negative impact on the company’s cash flow and decreases its profitability on the long run. The ‘Sales Revenue to Capital Employed’ ratio that relates the sales revenue enervated during a period to the capital employed in the business puts Compass (2. 96 times in 2009 / 2. 88 times in 2010) well ahead of Codex (2. 73 times in 2009 / 2. 52 times in 2010). Aligned with the ‘Return on Capital Employed’ ratio mentioned in the section above, Codex appears to be less efficient. . 3 LIQUIDITY The ‘Acid Test’ ratio measures the ability of a company to use its available cash to retire its current liabilities. The higher the ratio the more the business is considered to be. Both Codex and Compass have maintained an acid test ratio below one in the past two years, thus, creating a worrying situation for heir short term claimants. This liquidity problem could be explained by the fact that both companies have been competing aggressively to acquire more subsidiaries for the sake of organic growth.

The ‘Cash Generated from Operations’ ratio, provides an indication of the ability of the business to meet its maturing obligations. The analysis of this ratio puts Compass in a better position ahead of Codex confirming an alarming decline in the Codex’s ability to meet its obligations from its operating cash flow. 34 FINANCIAL GEARING Codex appears to have a higher financial gearing ratio compared to that of Compass. 201 0, Codex: 54% / Compass: 38. 72%. In effect, this shows that Codex is more dependent in its growth on borrowing than on its shareholders investments, unlike Compass that appears to favor a low leverage for growth.

Please follow and like us:
Haven’t found the essay you want?