David Jones Limited and Premier Investments Limited are Australian companies. Both companies are listed on the Australian Securities Exchange (ASX). Premier Investment has been listed on the Australian Securities Exchange since 1987. Premier Investment Limited mission was to “maximize growth in capital returns to shareholders through the acquisition of controlling or strategic shareholding in premier Australian companies with a particular concentration on the areas of retailing, importing and distributing” (Premier Investment Limited 2012b). The company has been successful in achieving this mission. It has successfully acquired ownership in renowned companies in the world such as “brands Just Jeans, Jay Jeans, Portmans, Jacqui E, Peter Alexander, Coles Myer Limited, and Just Group” (Premier Investment Limited 2012b). The company operates in the fashion industry. Besides, it invests in listed securities and money market deposits. It has a heavy presence in Australia and New Zealand (Premier Investment Limited 2012a).
The mission of David Jones Limited is to “sell the best and most exclusive goods and to carry a stock that embraces the everyday wants of mankind at large” (David Jones Limited 2012a). The company trades in a number of services such as insurance, gift cards, food hall, interior decorating, flowers and the rose clinic among others (David Jones Limited 2012b). This treatise compares the financial statements of the two companies which are in the same industry.
Comparison of financial performance
It is a mandatory requirement for all companies to publish their financial statements. This is necessary so as to provide the stakeholders with information regarding the performance of an entity. However, published financial statements do not give the stakeholders a clear view of the performance of the company. Therefore, it is necessary to carry out a financial analysis. Financial analysis entails reviewing an entity’s financial records such as budgets, projects and financial statements so as to establish its solvency, liquidity, stability and profitability. A commonly used tool for financial analysis is ratio analysis (Choi 2003).
Ratio analysis makes use of ratios to analyze the financial performance of an entity. Ratios computed are compared with industry averages, ratios of other businesses, or ideal ratios so as to gauge the performance of the business. Ratios for a company can also be computed and compared over time so as to establish the trend of performance of an entity (Bragg 2006). This section uses ratio analysis to compare the financial performance of Premier Investment Limited and David Jones using ratio analysis for a two-year period.
Profitability ratios give an indication of the earning capacity of an entity. The ratios measure the effectiveness of a company in meeting the profit objectives both in the long run and short run. The ratios show how well a company employs its resources to generate returns. Commonly used profitability ratios comprise gross profit margin, operating profit margin, net profit margin, the return on asset ratio, and the return on equity (Gibson 2010). The table below summarizes profitability ratios for Premier Investment Limited and David Jones Limited.
Table 1.0 Profitability ratios
|Premier Investment Limited||David Jones Limited|
|1||Gross profit margin = Gross profit/net sales||59.09%||59.51%||39.73%||39.11%|
|2||Net profit margin = Net profit/net sales||16.11%||9.54%||12.11%||12.62%|
|3||Return on equity = net income/shareholders equity||9.24%||4.35%||22.91%||21.45%|
|4||Return on assets = net income/ total assets||9.81%||5.72%||20.81%||20.39%|
The table above lists down four profitability ratios these are, gross profit margin, net profit margin, return on equity and return on assets. Profitability margin shows the relationship between income and net sales. A financial analyst uses profit margin to evaluate the efficiency of a company in controlling costs and expenses in relation to sales. Net profit margin is the ratio of net profit (after excluding all expenses) to net sales. There is no ideal range for a profit margin because they vary from one industry to the other. A company is in a favorable position with high-profit margins. From the table above, in 2010, Premier Investment had a higher net profit margin than David Jones. However, in 2011 it reversed and David Jones had a higher net profit margin than Premier Investment Limited. It is also clear that the net profit margin for David Jones is comparatively steady than that of Premier Investment Limited. Return on equity measures the return that shareholders get from their investments. Investors expect high returns from high-risk companies. David Jones gave a high return of 22.91% in 2010 to its investors than Premier Investments limited which offered 9.24%. Both declined in 2011 to 21.45 for David Jones and 4.35% for Premier Investment.
Return on assets indicates how effectively a company uses its economic resources. David Jones has a higher return on assets than Premier Investment Limited. A higher return on equity than the return on assets indicates positive financial leverage. Therefore, David Jones could be having favorable leverage. This is because it has a higher return on equity than the return on assets. The weakness with return on assets and returns on equity is that they do not consider the current value of capital invested and assets. This is because the historical data and not the prevailing market prices are used to prepare the financial statements. Also, when comparing the return on assets for companies, it is necessary to take into consideration the age of the assets. This is because fully depreciated assets could give a high return on assets (Khan & Jain 2006). Comparisons above indicate that David Jones is more profitable than Premier Investment.
Efficiency ratios provide an indication of how a company employs short-term resources to generate sales and income. Further, turnover ratios show the level of activity. The table below summarizes efficiency ratios.
|Premier Investment Limited||David Jones Limited|
|1||Asset turnover = Net sales/total assets||0.61||0.60||1.72||1.62|
|2||Inventory turnover (Days) = Sales /inventory||73 days||75 days||83 days||88 days|
|3||Debtors turnover (days) = Net credit sales/ average accounts receivable||4 days||3 days||1.5 days||2 days|
|4||Creditors turnover (days) = Total purchases/average accounts payable||31 days||24 days||35 days||30 days|
The table above summarizes four efficiency ratios. Asset turnover measures the utilization an entity obtains from investing in fixed assets. A high figure could show that an entity is efficient at utilizing its assets. David Jones had a higher asset turnover than Premier Investment. However, asset turnover for both companies decreased over the two-year period. Inventory turnover gives the frequency with which a company buys and sells the stock. Stock turnover (in days) shows the number of days that stock is held awaiting sales. A high turnover means a faster release of stock. This leads to a high movement of cash and an increase in profits. It results in reduced stock holding costs and minimizes the risk of obsolescence (Gibson 2010). David Jones had a high stock turnover than Premier Investment.
Debtors’ collection period denotes the number of days which debtors of an entity take to pay the amount owing from them. A ratio greater than 30 days should be investigated because it indicates that debtors do not pay the debt on time. A low ratio is favorable because it shows that the debtors are prompt in paying the debt. On the other hand, a low number of days indicate that a firm is efficient at collecting its debts (Bragg 2006). Debtors’ ratios above indicate that both firms are efficient at collecting their debts. They are all below five. However, David Jones is more efficient than Premier Investment Limited. Therefore, in summary, David Jones is more efficient and profitable than Premier Investment Limited.
Bragg, S 2006, Financial analysis: a controller’s guide, John Wiley & Sons, Inc., New Jersey.
Choi, F 2003, International finance and accounting handbook, John Wiley & Sons, Inc., New Jersey.
David Jones Limited 2012, Annual Report 2011, Web.
Gibson, C 2010, Financial reporting and analysis: using financial accounting information, South-Western Cengage Learning, United States of America.
Khan, M & Jain, P 2006, Management accounting, McGraw-Hill Companies Publishing Company, New Delhi.
Premier Investment Limited 2012a, Annual report 2011, Web.
Premier Investment Limited 2012b, Home, Web.