This report tends to analyze two organizations working in different industries. The purpose of this report is to conduct a ratio analysis of the two companies, and evaluate which of them is in a better and more stable financial position. For this purpose, the report focuses on several profitability, efficiency and liquidity ratios. The ratios will be analyzed on the basis of a comparison between the two companies and their past performance. This would reveal significant insight into the trends prevailing in the two companies. The first company is Premier Investments Limited, which is a company based in Australia. It is a publically listed company that is limited by shares. Established on 15 December 1987, Premier Investments Ltd. is an investment company that intends to maximize the capital returns to the shareholders by acquiring controlling shares in leading Australian companies. Premier particularly focuses on companies from the import, retail and distribution industries. The second company is David Jones Limited, which is also called DJs. David Jones is a premier chain of Australian department stores. It was established back in 1838 and is one of the oldest running department stores that still operate under their original name. David Jones is one of the most popular brand names in Australia. In 2006 the logo of David Jones was listed amongst the top ten favorite trademarks of Australia. David Jones has well-established department stores in all the major cities of Australia, with the exception of just Darwin and Hobart.
Profitability ratios are one of the most important ratios from the point of view of all the major stakeholders (Edwards & Hermanson 2007). The investors are concerned about the profitability because they want a safe return of their investment and a worthwhile return on it, too (Garrison, Noreen & Brewer 2010). The management is concerned about the profitability because the entire operations and the management bonuses are all tied to the profitability of the company. The creditors are interested in profitability because they do not want to lend money to a company that is likely to go bankrupt because of poor financial performance (Smith 2007).
Gross Profit Margin
Gross Profit Margin reflects the spread that the company earns by charging a price higher than the cost that it had incurred during the production process (Vance 2003). Premier Investment’s Gross Profit Margin has increased slightly from 59.09% in 2010 to 59.51% in 2011. The increase is not huge, but the margin is pretty good, and it reflects that the company keeps the cost under control. On the other hand, the Gross Profit Margin for David Jones has decreased from 39.73% in 2010 to 39.11% in 2011. This decrease is not very huge, but the overall figure reflects not a very profitable condition. These margins are well below the profitability of Premier Investments. This means that David Jones has relatively poor cost control.
Net Profit Margin
The Net Profit Margin is a more refined measure of profitability. Gross Margin reflects half of the costs and does not include the effect of operating costs. However, the net profit margin includes the operating costs, as well (Vance 2003). Premier Investments’ Net Profit Margin has decreased from 16.11% in 2010 to 9.54% in 2011. This is a significant decrease in profitability since the net margin has decreased by over 5%. It reflects that the company is unable to control its operating expenses. David Jones Limited, on the other hand, had a Net Profit Margin of 12.11% in 2010, which increased to 12.62% in 2011. The increase is not very huge, but the overall Net Profit Margin is greater for David Jones than Premier Investments. This means that from the point of view of investors, David Jones Limited is a better opportunity because the profits are high.
Return on Equity
Return on equity is another measure of profitability, it measures how much return a company can generate by using its equity (Garrison, Noreen & Brewer 2010). Premier Investments’ ROE has decreased from 9.24% in 2010 to 4.35% in 2011. This is a large decrease in the ROE. It means that the investors are likely to get a return of only 4.35% by investing in their company, which is very poor keeping in mind their own historical performance, and the performance of David Jones Limited, as well. David Jones Limited earned an ROE of 22.91% last year, and 2021.45% this year. There has been a slight decline in the return, but overall the return is very good and far better than Premier Investments’ return.
Return on Assets
ROA is also a profitability ratio; it reflects the efficient usage of assets by the management. It represents the number of returns that the company is capable of generating by utilizing its assets (Garrison, Noreen & Brewer 2010). Premier Investments had a ROA of 9.81% in 2010 and 5.72% in 2011. This shows a significant decline in the capability of Premier Investments to generate returns by using its assets. On the other hand, David Jones limited had a ROA of 20.81% in 2010, which has now decreased to 20.39%. This is a very small decrease, and overall the return is very good.
Edwards, JD & Hermanson, RH 2007, Accounting Principles: A Business Perspective., Prentice Hall, New York.
Garrison, RH, Noreen, EW & Brewer, PC 2010, Managerial Accounting, McGraw-Hill, New York.
Smith, J 2007, Handbook Of Management Accounting, 4th edn, CIMA publication, Oxford.
Vance, D 2003, Financial Analysis & Decision Making: Tools and Techniques to Solve Management Problems and Make Effective Business Decisions, 4th edn, McGraw Hill., New York.