accounting assignment for semester 1 of university. Single part of a group assignment.
1. Identify and explain Four (4) key financial attributes of the industry in which both Soda Ltd and Pop Ltd are operating within. (4 Marks) Financial attributes are factors that allow a business to measure their financial progress. These factors can be used by many, such as managers, investors and security analysts in order to judge where the business stands compared to its competitors (Association, 2013). Financial attributes are much like performance indicators in this case. Factors that both Soda Ltd and Pop Ltd can use to measure their financial health can include the following: Market share is a major way for a business to evaluate their financial status in contrast to others in the same industry (Gillian Somers, 2011). Market share bases it’s comparison on the sales revenue of the business and provides a percentage based on how well each company is doing compared to the others. In the case of Soda Ltd and Pop Ltd their market share is 35% combined, which, compared to the other 120 other companies in the soda industry, is quite a high percentage. Another financial attribute that can be used by both Soda Ltd and Pop Ltd is measuring the profitability. Profit is revenue minus expenses; if there is a positive figure, then a profit has been made, and if it is negative, then there has been a loss (Gillian Somers, 2011). This is a key way to measure the success of a business. As seen from the financial information for both of the companies, Pop Ltd has been making a larger profit, and is therefore in this way more successful than Soda Ltd. Both these companies would also most likely measure their own respective profits against that of other beverage companies in order to gain an idea of their success within the industry. The productivity and the rate at which the business’ productivity grows is another financial indicator. By measuring the effectiveness and efficiency of Soda Ltd and Pop Ltd when transferring inputs into outputs, their ability to be efficient with their resources is also being measured (Gillian Somers, 2011). This can be a financial attribute because the more efficient an organisation it is when transferring its resources, the more money that can be saved. Return on the owner’s investment is also a way of measuring performance amongst the companies within an industry (Gillian Somers, 2011). This is usually seen as a percentage, and can be compared like this against a benchmark provided by the average of all the companies within an industry. For example, with both Soda Ltd and Pop Ltd, the “return on equity” industry benchmark is 8.45%, whereas with Soda Ltd, their return on equity is only 8.12%, and 7.01% for Pop Ltd, showing they are both in fact performing poorly compared to the rest of the industry in this case. 2. Write a detailed analytical report contrasting the profitability of each company in the context of the industry benchmarks provided. (12 Marks) Both the Soda Ltd and Pop Ltd companies have varying positive and negative margins in regards to the industry benchmarks that are used to determine the profitability of their companies. A major factor affecting the profitability of these businesses is seen through the ‘other expenses’ columns. While decreasing expenses will often lead to increased profitability, it can also decrease the actual profits. Statistics provided from the
financial information on both companies show that while Soda Ltd is over the industry benchmark (89.3%) with 92.8%, Pop Ltd is in fact under the industry average, with 83.1%. This shows that Soda Ltd needs to majorly reduce this percentage if they want to have a hope of increasing their profitability. By investigating the Working Capital, another way to compare and contrast the profitability between companies can be used. Working Capital is the funds used by a company in its everyday operations. This can be calculated by taking current liabilities away from current assets. Usually, for a company to be constructive they would need to have a Working Capital between 1.2 and 2. Anything lower than one would be considered worrying as it would show that the company is not accomplishing it’s short term operational objectives, which could create issues for the business in the future. From the financial information provided about the two soda companies, we can see that Soda Ltd has a Working Capital of 1.21, which suggests that they are progressing at a satisfactory rate. Pop Ltd has a Working Capital of 1.04, which, while it is not as good as Soda Ltd, is still quite good considering the average for the soda companies is actually at 0.99, which needs to be significantly improved in the future. In the financial information provided, Times Interest Earned is also a factor used to compare and contrast the profitability of the two companies against the industry median. This part provides information on the business’ ability to meet its debt obligations. In the information provided it shows how many time the companies can repay their debts before tax. While the average is 11.76 times through the soda industry, Soda Ltd can cover this only 5.26 times, which is not even half as many times as the average. This could create concern especially in the future if they wish to borrow money and cannot afford to pay back creditors as easily as other companies would, like Pop Ltd, which can cover its expenditures up to 20.97 times, which is nearly double the industry mean. However, by having a ratio as high Pop Ltd, it shows that they may not be spending their money as wisely, and they could be using their money to repay debts quicker when they could in fact be capitalising on other opportunities to make even more profits. Liabilities are another way to measure the company’s performance against each other. A liability is the responsibility of a business to a separate entity due to a previous transaction, which can provide a future economic outflow. While the industry benchmark for long-term liabilities, which are generally from banks and loans, is 10.8%, Soda Ltd is in fact at 19.3%. This is almost double the average, which can greatly decrease the owners’ equity for this organisation. Pop Ltd majorly contrasts in this case, having absolutely no Liabilities whatsoever, which can be both a positive and negative. It can be positive in the sense that it doesn’t have to pay back creditors at all, and reduce owners’ equity, but it also means that money they could have loaned and used for day to day operations has been greatly reduced. Another way to compare and contrast profitability between companies is the amount of days between the debtors turnover. This is the ability of the debtors to pay back the company after acquiring their goods/services, and in how many days. Soda Ltd is 13.73 times in 26 days, while Pop Ltd’s 3.5 times in 102 days is extremely slow when compared to the average of 11.61 times in 31 days. This suggests that Soda Ltd has much tighter credit policies in contrast to Pop Ltd, who are much more relaxed with theirs. Gearing is another financial indicator that can be used to compare the company’s against each other. It is a general term that compares some form of owners’ equity to
borrowed funds. It measures financial leverage, which reveals the degree to which a firm’s activities have been funded by the owner vs. creditor funds. Having a high Gearing ratio is bad, and impacts profitability negatively. Soda Ltd have a Gearing Ratio of 44.9%, which is much higher than the industry benchmark of 37%, showing that they use loans to pay for their operations. Soda Ltd, by continue to operate their business in such a way, can be hit hard if there is a downturn in the business cycle, because they would not be able to shut down due to still having to pay off their loans. Pop Ltd however, have a Gearing Ratio of 24.8%, which is much further below the industry average, showing that they are much wiser, and more conservative with the management of their finances, and will be much more secure if a downturn was ever to occur. 6. Explain why the ‘soft drink’ industry would be regarded as ‘capital intensive’. (1 Mark)
Capital intensive is a business process or industry in which copious amounts of money and other financial resources are required to produce a good or service. A business can be considered capital intensive due to the ratio of the capital required in comparison to the amount of labour that is required (Investopedia, 2013). The soft drink industry could be regarded as capital intensive due to the way the organisation would have set out its operations. Soft drinks would usually be manufactured almost entirely through an assembly line, which would require a large amount of money to create and maintain, but it wouldn’t require much labour as it can run itself almost completely. Therefore the ratio of capital to labour is much higher, therefore branding them as capital intensive.
Association, I. E. P., 2013. International Energy Producers Association. [Online] Available at: http://www.iepa.com/Glossary.asp [Accessed 19 May 2013]. Gillian Somers, J. C. M. J., 2011. Essential VCE Business Management Units 3 & 4. 3rd ed. Victoria: Cambridge University Press. Investopedia, 2013. Investopedia. [Online] Available at: http://www.investopedia.com/terms/c/capitalintensive.asp [Accessed 19 May 2013].