Attention: John Barker
Accountant: James Kelly
Deadline: 5:00pm 15th October 2012
The purpose of this financial report is to analyse the viability of Softas Limited. It will report on the profitability of the company, the liquidity and assets utilisation and the financial structure of the company. This will then be interpreted to discover the strengths and weaknesses of the company, and discover any relationships that may be of significant value. The report should not be taken though as a direct means to look at the financial viability of Softas Limited as there are limitations with financial analysis. The first of which, is that comparing and looking at only the ratios cannot always show what is truly happening within the company. For example, the profitability of a company may be down due to a social change in a perception of their goods, so they have discontinued that product line to implement a new one. The new product is picking up and will have greater sales next year, but are less than what they had with the old product. A profitability ratio will not include this, thus all that can be assumed is that the company is not selling enough products at the right place.
The first ratio to look at is the Sales Growth percentage of Softas Limited. The Sales Growth percentage compares the sales of previous years with that of the previous year of sales; this can be used to compare over time within a single entity or between two different entities. For Softas Limited, the statistic seems stable. In 20210, it showed at 17.52% growth, which then spiked to a 20.46% growth in 2011, only to drop again to 17.21% in 2012. Each year however still shows a growth. This continuance of growth suggests that the sales would be increasing throughout each year; which is proven correct when looking at the income statement which shows that in 2010 the sales were at $5,064,000, 2011 were 6,100,000 and in 2012 they were 7,150,000. This signifies a positive trend of continued growth. The reason for the sudden spike in sale growth in 2011 would be due to the opening of the two stores in Wellington and Auckland; the Auckland store having a greater effect on 2012 with another increase due to it not opening until December 2011, but still having the effect on the 2011 year also. This could serve as an implication as it may lead Softas into a false sense of safety; although there Sales Growth percentage is increasing, it is only due to the opening of two new stores when analysing the situation. If another store is not opened, it is unclear to say if the Sales Growth will keep increasing or if it will become more generalised with little movement.
The Net Profit percentage is another ratio to look at in relation to Softas Limited. The Net Profit percentage compares both the net profit with the net sales (after expenses have been accounted for and met). It shows how effective the entity is at managing costs that they encounter (expenses). A Net Profit percentage that is increasing as the business is operating is a promising sign as it shows that the profitability of the entity is increasing; this is the opposite if it was decreasing. The Net Profit percentage of Softas Limited shows a continuing upward trend; in 2010 there was a 13.56% Net Profit percentage, in 2011 it was 14.98% and it increased again in 2012 to 15.26%. This shows a continuing increase, and a positive figure each year meaning the entity is getting more cost efficient and is increasing in profitability. The reason for this is that although the Net Profit is increasing, the Sales are also increasing. This could mean that although the statistic means they are being more cost effective, the sales are increasing at a rate that the company can be less cost effective. Although when comparing with other expense figures, the Admin and Selling expenses are decreasing, which would indicate greater cost control by...