Premier Investment Limited’s Financial Analysis

Introduction

Premier Investment Limited is a limited company that is based in Australia. The company is listed on the Australian Securities Exchange. It was first established as an investment company to enhance return to shareholders’ capital. The company invests mainly in listed securities and money markets for both long-term and short-term benefits. Its main business area is retailing, importing, and distributing.

David Jones Limited is also a company based in Australia and mainly operates department stores and it is a leading upmarket retailer in Australia. Approximately, it has thirty-five department stores and two warehouse outlets. Its stores offer various products that are available in its online shopping facilities. The company provides financial services through a partnership with American Express.

Financial analysis is a process by which finance identifies the company’s financial performances by comparing the entities in the balance sheet and those in the profit and loss account (Bonner 1999). This analysis is important to various parties with a financial stake in the company including shareholders, creditors, long-term lenders, management of the companies, and potential investors.

Profitability

It is evident that the profitability of any firm is measured by the use of profitability ratios. This ratio indicates the performance of the firm in relation to its ability to derive returns or profit from investment or from the sale of goods (Bazerman 1990).

Profitability can thus be measured in relation to sales and in relation to investment. Profitability in relation to sales indicates the ability of the firm to control its cost of sales, operating, and financing expenses. In relation to investments, it indicates the ability of the firm to return profit from investments made (Leopold 1993).

The profitability of Premier Investment limited over the two years was measured using gross profit margin, net profit margin, return on equity and return on asset. The profitability of David Jones limited was also measured by the same ratios as in Premier Investment Limited. The gross profit margin of premier investment limited was higher in the year 2011 as indicated by 59.51%, while for David Jones limited was higher in the year 2010 with 39.73%. However, the gross profit margin of Premier Investment Limited is higher than that of David Jones Limited as indicated by a consolidated percentage of 59.3%.

The net profit margin for Premier Investment was higher in the year 2010 with 16.11% while David Jones was higher in the year 2011 with 12.62%. The net profit margin for Premier Investment Limited as compared to David Jones Limited is higher in the year 2010 by 16.11% but lower in the year 2011 by 9.54. However, the consolidated percentage indicates that Premier Investment Limited had a better net profit margin indicated by a 12.83% as opposed to David Jones Limited, which is indicated by a 12.37%.

Return on equity for both Premier Investment Limited and David Jones is higher in the year 2010 by 9.24 and 22.91 respectively. However, the return on equity for David Jones Limited is higher than Premier Investment Limited in both the years 2010 and 2011, which is indicated, by 22.91% and 21.45 respectively. The consolidated percentage of the two companies does indicate that David Jones Limited had a better return on equity of 22.18% as opposed to Premier Investment Limited which had a 6.79%.

Return on the asset for both Premier Investment Limited and David Jones Limited is higher in the year 2010 by 9.81% and 20.81% respectively. However, the return on assets for David Jones Limited is higher compared to Premier Investment Limited in both the two years as indicated by 20.81% and 20.39% respectively. The consolidated figure also shows that David Jones Limited has a good return on assets as indicated by a 20.86%.

The last ratio from profitability is asset turnover that is the number of sales generated for every dollar’s worth of assets. David Jones Ltd decrease from 1.72times in the year 2010 to 1.62 times in the year 2011, but Premier Investments Ltd only got 0.61 times in both years 2010 and 2011. That indicates David Jones Ltd uses its assets in generating sales more effectively as well as good pricing decisions. David Jones Ltd with low-profit margins tends to have high asset turnover, while Premier Investments Ltd with high-profit margins has low asset turnover.

Additional Information

There are crucial factors, which are considered in arriving or determining ratio analysis. These factors are described as follows. The company’s past performance is used to measure or gauge the company’s performance and in particular, the change in performance whether good, better, same or even worse than the past. Such comparison is then used to interpret the company’s performance bearing in mind the factors that influenced the present and past performances (Beaver 1998).

The average industry ratio is another factor, which is useful as it indicates the average performance of various companies in a given industry i.e. it, gives the minimum performance of a number of companies in a given industry. These ratios are useful in so far as to enable the analyst to make a reasonable comparison of the company’s performance vis-à-vis other companies in the same industry. However, for this yardstick to be useful the term average should include those companies, which are not extremely very strong or very weak.

The ratio of successful companies is another useful factor. It is useful if the company can get figures of competitors who are leading in the market to enable it to gauge its performance against better performance. However, this information is difficult to obtain and sometimes it calls for private investigators e.g. Private Eyes Ltd.

References

Amershi, A, Demski, J & Fellingham, J 1985, Sequential Bayesian Analysis in Accounting, Contemporary Accounting Research, Australia.

Bazerman, M 1990, Judgment in Managerial Decision Making, Wiley, New York.

Beaver, W 1998, Financial Reporting: An Accounting Revolution, Prentice-Hall, New York.

Bonner, S 1999, Judgment and Decision-Making Research in Accounting, Accounting Horizons, Australia.

Leopold, B 1993, Financial Statement Analysis, Irwin, Australia.

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