Financial Analysis This Report Will Term Paper

  • Length: 8 pages
  • Subject: Economics
  • Type: Term Paper
  • Paper: #93675121

Excerpt from Term Paper :

5 times the actual value of equity.

The return on investment is calculated by dividing the total net profits by the total assets value and shows the "overall effectiveness to generate profits from total investment in assets." At the Colorado Group, the return on investment amounted to 20.4% in 2006 and 21.5% in 2005. The small decrease from 2005 to 2006 can be explained by the fact that that the net profits decreased significantly during this period of time and that the decrease of the total assets value was by no means similar in value.

The gross profit margin is calculated by dividing the net sales minus the cost of goods sold by the net sales value and shows the "profitability of a company's sales after the cost of sales has been deducted." In this case, in 2006 this ratio was equal to 54.4%, as compared to 55.9% in 2005. As we can see, the value slightly declined, but this is not necessarily something that would point out towards the fact that the company is less profitable.

III. Overall Analysis

Following the calculation, evaluation and analysis of different financial ratios, we are able to draw conclusions both on the financial situation at the company, including the main characteristics of its sources of finance, and on its profitability and operational characteristics over the 2005-2006 period.

First of all, we should point out towards the fact that the Colorado Group uses almost exclusively stock as the source of finance. We have seen that the debt and debt to equity ratios have very small values and that they practically show the company almost doesn't use credit or interest-based instruments for financing. The financial leverage is very low. A stock - based financing scheme provides several advantages, such as the fact that debt - related costs, including interest, do not exist in this case. On the other hand, all stockholders will probably have a say in the way the company is run and dividends will have to be paid out at the end of each year.

Second of all, still in the financial sector, 2005 and 2006 have consolidated the belief that the company follows a very prudent policy in its financial liabilities. The previous paragraph, related to debt, showed this, but we should also mention the fact that the current ratio and the quick test were very conservative in value, with values around 2.5 and even higher. This shows the adversity of the Group's management towards contracting liabilities that cannot be immediately paid out of the company's current assets.

Third of all, the company has obtained very good scores in terms of asset management and asset utilization, which is very encouraging in showing that the company is doing an excellent job in producing net sales with the assets it currently holds. It also shows that it is selling at high speed and that its inventory is quickly sold, despite its large proportion in the current assets value. The value obtained for the inventory turnover was again very encouraging.

On the other hand, the profitability indices and ratios have shown a slight decrease or, in any case, not a growth compared to the previous year (2005). This was mentioned in the initial foreword from the company's chairman and CEO, Bill Gibson, who states that the period 2005-2006 was the first year since the company was quoted on the Australian Stock Exchange in 1999 that the organization failed to deliver double digit profit and top line sales growth. This was accounted for by the difficult retail conditions during this period of time rather than problems within the company itself.

In my opinion, this is a sound conclusion, as none of the other financial indicators we have used have pointed a finger in this direction. The asset management and asset utilization ratios were all high and even growing from the previous year, so we can't really justify this small decrease in profitability figures than by the macroeconomic environment and external factors. In any case, the company seems fit to adjust these values in the next period of time, due to solid fundamentals.

As such, the figures and the trends would impose a strong conclusion to invest in the Colorado Group in the future as well. The company is bound to have a solid development in the future as well and to increase its profits based on solid ratios and figures. The only thing an investor would need to pay attention to would be related factors such as the choice of a new CEO (on the way according to the report) or external factors that may influence the share price…

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