Overall performance of business compared to competitors
Return on sales
Return on sale refers to the ratio between the total earnings of a company and the total sales presented as a percentage. It is an indication of the amount of profit a company is getting from its sales. A high percentage indicates the sustainable sales levels. This ratio is mostly used to determine the performance of the company. In the first round, Andrews was performing poorly in the market as indicated by the negative returns on sale. The competitors were way ahead. The most possible reason behind this could be that Andrew’s had a low share in the market, hence the low sales levels.
In the second round, the return on sales for Andrews Company went up at an alarming rate. However, all the companies experienced an increase in the level of sales though not as high as that of Andrews. This general increase in the sales level could be as a result of increased demand for the product while Andrews could have taken advantage of the increased demand and launched advertising campaigns that led to an increase in the market share. In the subsequent rounds, fluctuations are experienced in all the companies. This is an indication of stiff competition, resulting in fluctuations in the market share hence, the sales level and return on sales (Fridson & Alvarez, 2002).
Return on assets
Return on assets indicates the profitability of a company relative to the amount of assets it owns. It is an indication of management efficiency in generating earnings with the available assets. This is also known as return on investment. In the first round, the return on assets of Andrew’s company is extremely low compared to its competitors. This is an indication of inefficiency in investment decisions in this company, which could be as a result of mismanagement and misappropriation of resources. In the subsequent rounds, this value seems to increase, and the reason behind this increase could be assumed to be a change in the management team (Fridson & Alvarez, 2002).
However, the fact that all companies are experiencing an increase in this value could be an indication of good economic performance characterized by reduced rates of inflation. In round three and four, this value is relatively stable, but Andrews Company loses it again in round 5 where the value decreases once again. The best explanation for this, therefore, is not to blame the entire company but to question the management of the company.
Return on Equity
Return on equity refers to the measure of the shareholders equity in relation to the net income. In other terms, it is the amount of profit that has been generated from the shareholder’s investments. Andrew’s company financial statements indicate that the return on equity in the first round was a negative value which means that the amount of money invested by the shareholders had not yet yielded any profits. The other companies seemed to be performing well, but Andrew’s caught up with the competition in round 2. In the subsequent rounds, this value seemed to be reducing steadily, and this could be as a result of poor investment decisions.
The other companies have been performing well throughout the period, and this means that the poor performance in Andrew’s is not an industry problem, but a problem in the company’s internal management system. The low return on equity is an indication of a not so good performance since the amount of profits to be remitted to the share holders as dividends will be low. This is the main concern of equity shareholders in the performance of a company.
Sales
Sales refer to the amount of goods or services sold, and this value is a direct indication of the amount of market share held by a company. Andrew’s company has been performing well in terms of sales as compared to the other companies, which could be as a result of effective advertisement campaigns and product’s reputation which has ensured that many people prefer its products to those of the other companies. This amount, however, has been declining from around five and this could be as a result of competitive efforts from the other companies. A reduction in market share means that the products from that the company will be bought in less quantity hence the decline in sales level (Rodgers & Chartered Institute of Management Accountants, 2008).
An increase in the sales level could be an indication of an improvement in the entire market. The other possible reason behind this good performance could be investments made with anticipations of creating better efficiencies. Besides these, the other reason could be a reduction in prices which leads to an increase in the number of customers who may end up increasing their purchases, hence the increase in sales.
Profits
In the first round, Andrew’s incurred a loss while the competing companies were operating on profit. The profits however, escalated at an alarming rate in the second round. The reason behind this could be stabilization of the company’s operations as most of investments and expenses were incurred within the first round. These profits experienced up and down fluctuations in the subsequent rounds, and though the other companies seemed to be performing better than Andrew’s in most cases, it was not at the bottom. Baldwin Company has been performing at a lower level than Andrew’s. Profit making is usually the main aim of a business and one of the most common measures of performance.
However, a fluctuation in this is common owing to the market forces that are beyond the control of the management such as aggregate demand. Andrew’s company can therefore, be classified as a company that is performing well in the industry but still struggling to overcome the market forces.
The reason why the company never made profits in the first round could be as a result of the low returns on sales, assets and equity, and this is an indication of poor performance. The improvement in the subsequent rounds could have resulted from an increase in sales as a result of price adjustments to reasonable levels. Price levels affect demand inversely as indicated in the law of demand. An increase in prices leads to a decrease in demand, and a decrease in prices increases demand. Another reason behind the increase in profit levels is customer satisfaction in terms of money value. It is also possible that the company worked towards cost minimization to maximize profits.
Financial standing of the company
Cash flow statement
A cash flow statement indicates the total amount of money flowing into the company as revenues against the total amount of money flowing out as expenses hence the availability of cash to carry on with its operations. In Andrew’s cash flow statement, the amount of the closing cash is increasing exponentially and this is an indication of better performance each step of the way. Different factors are responsible for this increase, and one of them is the increase in stock issue. When stock is sold out, the funds obtained from this sale are invested in the company, and this improves on its financial situation. The decrease in the amount of cash from financing is also the other factor that has led to the improvement of the cash balance. This is an indication that the company has been in a position to raise its funds hence the reduction in the quantity of financing from outside sources.
Balance sheet
A balance sheet is used to show the amount of both short term and long term assets and liabilities in the company. “It is a report of the company’s resources and is useful when evaluating the ability of a company to meet its long term obligations” (Rodgers & Chartered Institute of Management Accountants, 2008). The increase in the total equity and the total liability in Andrew’s company balance sheet is an indication that the financial position of the company is improving at a steady rate. The most probable reason behind this is the steady in the amount of assets and a decrease in the amount of liabilities. The current assets are increasing meaning that the liquidity position of the company is improving.
This shows that the company can meet its long term and short term financial needs and is also better placed to withstand any possible economic shocks. With time, the performance seems to be improving at an escalating rate through changes in round eight, where a decline is experienced. The explanation for this could be that the company reached its optimal level of performance in the seventh round and no effort could improve the performance beyond this point. The only possible solution to curb this decrease in the future is to change the strategies that have been used in the past since they seem not be effective anymore.
Income Statements
Income statement indicates the results of the operations of a company in a given period of time say one year. In the simplest terms, it is the difference between the revenue and expenses in a specified period of time. It indicates the specific incomes and expenditure that account for the revenue earned by the company. The income statement of Andrew’s company indicates that the level of income is higher than the expenditure hence a positive value of revenue. The most important source of income in this case is sales revenue and according to the income statement, the sales have been on the rise except for the last round where a slight decrease was experienced. This could be because of the market imperfections or general market failure.
All the expenses shown in the income statement are incurred to earn the respective income. Some of such expenses in relation to sales are returns on sales and sales discounts. When these values are deducted from sales, the amount arrived at is the net sales, and to obtain the net revenues, operating expenses are deducted from the net sales (Rodgers & Chartered Institute of Management Accountants, 2008).
In Andrew’s company, the operating expenses include direct labor, direct material, inventory transportation, research and development, promotion and administrative expenses among others.
Besides these, other deductions that have been made to arrive at the net profit figure includes tax, the short term and long term debts interest, and the amount of profit shared among the shareholders as dividends. The net profit represents the total amount of revenue obtained from the company’s operations in the whole period after deducting the relevant expenses. Apart from the first round, Andrew’s Company has been making profits in the other rounds. The losses in the first round could be explained by the fact that the company was still making investments hence the expenses were more than the income.
Analyze the Company’s Stock Price
The stock price of a company is the total worth of the company. Stocks are the source of the dividends paid to the shareholders of the company either in terms of cash or increasing their number of shares. The profitability of a company is directly related to its stock prices since it is what determines the shareholders value (Fridson & Alvarez, 2002). There is a possibility that the stock prices in the first round are negative owing to the losses incurred. At that point, the company had not yet started to gain any profits hence the low prices in the stocks. In the subsequent years, however, the company seemed to be performing well in terms of profitability and this means that the stock prices are escalating.
Another angle of assessment is in terms of the returns on equity. The profits could be high, yet the stock prices remain low owing to the fact that these profits have to be distributed across a large amount of equity. Since the return on equity in Andrew’s company is increasing, this means that the stock prices are proportionate to the profit levels. The intrinsic value of Andrew’s company is high owing to its performance in terms of sales, profitability and equity values. This, alongside the liquidation capacity, has contributed to the increasing value of the company’s stock (Rodgers & Chartered Institute of Management Accountants, 2008).
References
Fridson, M. S., & Alvarez, F. (2002). Financial Statement Analysis: A Practitioner’s Guide. New York: John Wiley & Sons.
Rodgers, P., & Chartered Institute of Management Accountants. (2008). Financial Analysis. Oxford: CIMA.