BU1002: ACCOUNTING FOR DECISION MAKING | COLLEGE OF BUSINESS, LAW & GOVERNANCE |LATEST UPDATE

Introduction The purpose of this response is to conduct a comparative analysis of 4 companies, namely K & S Corporation Ltd (KSC), Orbital Corporation Limited (OCE), Tamawood Limited (TWD) and Yowie Group Limited (YOW) based on their profitability, liquidity, asset efficiency and capital structure. This response will compare these companies and recommend the company that provides the best investment opportunity. K & S Corporation Ltd (KSC): Kain & Shelton (“K&S”) was formed in 1945 and operated for many years supporting Mt Gambier and Victorian based businesses. In 1978, K&S expanded into national rail freight. K&S’ core business is in the management of complex supply chains where line haul and local transport, export, wharf cartage, bulk transport and storage play key roles. Orbital Corporation Limited (OCE): Orbital Corporation Limited was first founded in 1972 and operates solely within Australia based in Balcatta. The main business of the company is to deliver precision UAV propulsion systems and flight critical components. Tamawood Limited (TWD): Tamawood Limited commenced their first operation in July 1989 in hopes to lead an age-old industry with a new-age vision. The core business of the company is construction. This includes housing design, project management and contract construction through Dixon Homes, as well as generating and trading renewable energy certificates covering technologies including solar panels and solar hot water systems. The company operates predominantly in Australia and later on, it operates internationally. Yowie Group Limited (YOW): Yowie Group Ltd has been running over 20 years when it was first launched in ANZ market in 1995. Initially, confectionery manufacturing is the core business of the company. As time goes by, Yowie started to develop in various industries such as the gaming industry as well as the merchandise industry, selling books, stuffed animals, apparel and other products. It operates in several countries; Australia, New Zealand, Singapore, Japan and the United Kingdom. 2. Body: Comparative Ratio Analysis a. Profitability Analysis: A company's profitability ratio allows investors and the company itself to keep tabs on it's overall ability to generate profits and minimise loss. This too, similarly is measured by five ratio calculations as follows: Return on Equity, Return on Assets, Net Profit Margin, Gross Profit Margin and Cash Flow Ratio. To begin, YOW has had the worst run of things by putting up the lowest numbers for profitability by incurring negative percentages in most if not all ratio calculations which does not bode well for its future prospects in terms of investments. However, YOW does seem to do a rather efficient job in utilising its resources to its potential which allows it to keep up a decent gross profit margin which may give it some leeway. TWD is the complete opposite in terms of profitability as it is generating the highest numbers of the four companies doing well across the board on all the ratios. TWD has successfully been able to have very high profit margins while maintaining a relatively low 1 BU1002: ACCOUNTING FOR DECISION MAKING gross profit margin all the while successfully maintaining a healthy cash balance as well. KSC showed a good ROE but there was a substantial loss. They were capable of maintaining a relative similar ROE in 2017 compared to 2015. KSC generated positive ROA even though it is not the highest among the companies, which gave a profitable return to the shareholders. However, KSC still suffered from losses with their negative profit margin. OCE faced a fluctuating profit margin and ended up with a negative outcome. Out of the four companies, TWD made the highest profitability with positive percentages in most ratio calculations which could increase investments from investors. b. Liquidity Analysis: “Liquidity refers to a company’s ability to convert its assets to cash in order to pay its liabilities when they are due” (Averkamp, 2018). “As you evaluate investments, and consider your overall financial situation, liquidity can be an important factor” (Marquit, 2012). Liquidity can be measured by cash asset ratio, current ratio and quick ratio. Look back to the current ratio of the last three years, the ratio of YOW is the highest when compared to other 3 companies. The ratios of TWD and OCE are situated in the same level which is nearly 4 times less than YOW. For the KSC, the ratio is around 1 which is the best ratio for that company when measured with others 3 company ratios. As for the quick asset ratio, there are similar results for TWD and KSC. The liquidity of KSC did not change and the position of the figures are still highest that the character of their business does not go around inventory. The quick ratio of KSC is set in positive ratio. Moreover, the cash flow of YOW is resulted in negative situation that means it runs in loss and it cannot pay enough cash for the short-terms debts. For the past three years, the TWD is revolved with the best cash flow ratio with nearly 1. c. Asset Efficiency Analysis: “Efficiency ratios measure a company’s ability to use its assets and manage its liabilities effectively” (Nickolas, 2018). The inventory turnover ratio, asset turnover ratio and receivables turnover ratio are included in efficiency ratios. After analyzing the outcome of asset turnover ratio for four companies of the last 3 years, it is obvious to say that the best asset turnover ratio was belonged by TWD so they can collect their debts successfully and sell inventory powerfully. The result of asset turnover ratio cannot be disappointed for KSC and is still great for company. In the past three years, not only YOW but also OCE belongs many assets but they are not utilizing their assets into revenues as successfully as TWD and KSC. “The higher the inventory turnover, the better since a high inventory turnover typically means a company is selling goods very quickly and that there’s demand for their product” (Fuhrmann, 2018). Looking for around BU1002: ACCOUNTING FOR DECISION MAKING these four companies, it is good to see that KSC would be satisfied with this result, the lowest inventory turnover showing that they are paid in time by their debtors. TWD can reflect good effect for inventory turnover. YOW is standing a position of holding many inventories but cannot be sold its inventories. For the OCE, it possessed the highest inventory that make their debtors to worry. According to bad debts, the considerable risk of losses can be increased. Analysis of receivables turnover, TWD can show the best performance with its results. Furthermore, KSC and YOW are keep selling their inventories with their stable receivables turnover. With a bad luck, OCE is holding a lot of inventories in its industry. If they want to survive their company for many years, their credit policies should be revised. d. Gearing Analysis: A gearing ratio is a financial ratio that is used by companies and investors alike to compare Debt in a Company versus different financial metrics. There are five ratios being used which are named: Debt to Equity Ratio, Debt Ratio, Equity Ratio, Interest Coverage Ratio and Debt Coverage Ratio. KSC seems to be following a pattern of good gearing throughout with a minute but steady increase in the ratio as the years go by. The profits it makes are utilized efficiently and does the best in terms of covering any underlying or overlying debt in the company. YOW's gearing ratio however is the least efficient of all the companies in question as its debt to assets and debt to equity are at comparable lows which shows that it is unable to cover the overall debts present in the company nor can it keep up with the interest expenses occurred by the company. OCE is similar to KSC in that it also does a fair job in covering the company's debts and interest expenses regardless of its very high and unreliable debt to equity ratio and trend which might be due to the fact that the company must purchase the majority of its assets in order to function which would make the case for its upward but fluctuating debt to equity. TWD lastly is focused heavily on the sole development of the business and is using its funds and upward trending gearing to allow the purchasing assets vital to growth and development. 3. Limitations of analysis: “The limitations of financial statements are those factors that a. user should be aware of before relying on them to an excessive extent” (Bragg, 2015). At first, all four companies are not in the same industry and providing the unique products. Moreover, they are huge companies, the company, the structure of the companies may be different. So, that is a bit inconvenience to measure the accounting information within the same situation. To gain a general understanding of the results which is a business’s financial position and cash flows, using ratio analysis can compare information. Unless contrast to either trend data or industry data, ratios are no significance. The limitation was analyzed if we did not have essential factors like economic climate, performance of competitors and management structures, etc. Rising and falling of inflation can affect the values that would lead to wrong information. That is why investors should know the accurate data from the credible sources. BU1002: ACCOUNTING FOR DECISION MAKING 4. Conclusion: In conclusion, it is of vital important for any and all future and current investors to consider all the above stated methods for Financial Analysis when considering and securing a healthy investment for the future. Profitability which is measured using the 5 ratios: Return on Equity, Net Profit Margin, Cash Flow Ratio Return on Assets and Gross Profit Margin. This allows the investor to attain information regarding the company’s ability to provide either high or low ROIs (Returns on Investment) and whether or not profits are generated effectively and consistently which is of vital importance when considering any moderate to large investment. Liquidity which is also vital in making a firm decision helps determine the overall sustainability of the company in question and helps determine the very real possibility of having to lose one’s investments/returns. Every company also runs the risk of being liquidated and so liquidity informs investors on potential risks regarding bankruptcy. Capital structure helps decide and point out the financial risks a Business faces and whether or not the company prefers their development to be done via equity or debt and how much of it is owned by the company’s investors. Finally, asset efficiency is a tool used to decide how effectively a company uses its own assets when it comes to generating profits or in certain cases how it pertains to loss. It allows companies and investors alike to maximize and generate full profits. With these four analytical tools and the information taken from each allows the investor to focus on two main aspects, Profits and Equity. This allows the investor to make educated decisions on how they are able to maximize profits or allow the company to grow to its fullest potential in order to receive a viable set of returns on their investments. 5. Recommendation The team has discussed and concluded that there is not a single best company as they all have faults from different aspects. Hence, the team recommend that only the most stable company should be looked at as they are the most secure investment, with calculated, minimal risk. Hence, the team have decided that TWD would be the best company to invest in as it is the most profitable company of among all four. The company is also moderately liquid in terms to cover short term debts, the assets are able to generate profits efficiently and their gearing is favourable for investors. This shows that it is a secure, calculated investment with the least amount of risk. BU1002: ACCOUNTING FOR DECISION MAKING Reference List Averkamp, H. (2018). What is liquidity? Retrieved from Bragg, M. (2015). Limitations of financial statements. Retrieved from Fuhrmann, R. C. (2018). How To Calculate The Inventory Turnover Ratio? Retrieved from K & S Corporation Ltd (2015). 2015 Annual Report. Retrieved from K & S Corporation Ltd (2016). 2016 Annual Report. Retrieved from K & S Corporation Ltd (2017). 2017 Annual Report. Retrieved from Marquit, M. (2012). Investing Basics: Why Liquidity Matters. Retrieved from Nickolas, S. (2018). What Do Efficiency Ratios Measure? Retrieved from Orbital Corporation Limited (2015). 2015 Annual Report. Retrieved from Orbital Corporation Limited (2016). 2016 Annual Report. Retrieved from Orbital Corporation Limited (2017). 2017 Annual Report. Retrieved from Tamawood Limited (2015). 2015 Annual Report. Retrieved from // %20Information/Tamawood-2015%20Annual%20R Tamawood Limited (2016). 2016 Annual Report. Retrieved from %20Information/Tamawood-2016%20Annual%20R Tamawood Limited (2017). 2017 Annual Report. Retrieved from %20Information/Tamawood-2017%20Annual%20R BU1002: ACCOUNTING FOR DECISION MAKING Yowie Group Limited (2015). 2015 Annual Report. Retrieved from port_FINAL_Signed_for_L Yowie Group Limited (2016). 2016 Annual Report. Retrieved from _30_June_2016__Final_.pdf Yowie Group Limited (2017). 2017 Annual Report. Retrieved from _30_June_ BU1002: ACCOUNTING FOR DECISION MAKING Appendices Appendix A: Profitability Ratios -60.00% -40.00% -20.00% 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% Return On Equity KSC OCE TWD YOW ROE KSC 3.04% -30.05% 2.13% OCE -22.00% 4.57% -48.57% TWD 76.40% 83.28% 79.44% YOW -22.33% -29.15% -19.59% -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% Return on Assets KSC OCE TWD YOW ROA KSC 3.17% 1.74% 2.27% OCE 1.51% 0.26% -15.48% TWD 50.30% 49.90% 52.19% YOW -20.21% -24.72% -20.70% BU1002: ACCOUNTING FOR DECISION MAKING -140.00% -120.00% -100.00% -80.00% -60.00% -40.00% -20.00% 0.00% 20.00% Profi t Margin KSC OCE TWD YOW Profit Margin KSC -40.90% -81.82% -26.08% OCE -49.50% 10.45% -85.94% TWD 6.91% 8.03% 7.41% YOW -132.67% -57.40% -37.47% 2015.0 2016.0 2017.0 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00% Gross Profi t Margin KSC OCE TWD YOW Gross Profit Margin KSC 91.86% 90.25% 89.79% OCE 2.33% 42.99% 17.02% TWD 22.04% 22.16% 20.38% YOW 53.59% 51.54% 54.87% BU1002: ACCOUNTING FOR DECISION MAKING -140.00% -120.00% -100.00% -80.00% -60.00% -40.00% -20.00% 0.00% 20.00% Cash Flow to Sales Ratio KSC OCE TWD YOW Cash Flow to Sales Ratio KSC 6.89% 5.97% 6.54% OCE -35.40% -43.68% -34.04% TWD 4.21% 6.07% 6.68% YOW -297.38% -1.03% -26.04% BU1002: ACCOUNTING FOR DECISION MAKING Appendix B: Liquidity Ratios Current Ratio KSC 0.85 0.74 0.8 OCE 2.04 3.81 3.07 TWD 2.48 2.56 2.47 YOW 9.05 13.23 11.92 The current ratio has changed over three years but not obviously. As for real, it is low outcome for the company due to the fact that not only current asset and current liabilities have been increased for every year although the current ratio for these three years are nearly the same. 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 Quick Asset Ratio KSC OCE TMW YOW KSC 0.82 0.71 0.77 OCE 1.99 3.36 2.73 TMW 1.02 0.92 1.02 YOW 5.74 12.81 10.58 For quick ratio, the ratios are fluctuated in this three years. Looking to YOW and OCE, their ratios are ascended in 2016 and 2017. Over this three years, the ratios of KSC and TMW remains the same so we can say that it is stable. BU1002: ACCOUNTING FOR DECISION MAKING Cash Flow Ratio KSC 0.3853 0.3465 0.3398 OCE -0.4238 -0.5289 -0.5046 TMW 0.5474 0.7227 0.7846 YOW -3.818 -0.0489 -1.8153 The cash flow (to current liabilities) ratio has increased over past three years. That would be great consequences for all companies. The cash flows of KSC and TMW possessed better results compared to the ratios of OCE and YOW. BU1002: ACCOUNTING FOR DECISION MAKING Appendix C: Asset Efficiency Ratios Asset Turnover Ratio KSC 2.61 3.10 3.09 OCE 0.22 0.24 0.33 TMW 5.15 4.75 4.86 YOW 0.15 0.47 0.49 Asset turnover ratio can measure a company which can generate sales and revenue from its assets. TMW can manage successfully its asset more than the other companies. The ratio of KSC still can operate well. The ratios of OCE and YOW are not applied correctly compared to the TMW and KSC. Inventory Turnover (Days) KSC 12.70 11.49 11.48 OCE 3042.8 169.25 566.31 TMW 45.43 56.61 54.26 YOW 1430.82 180.47 101.66 BU1002: ACCOUNTING FOR DECISION MAKING Inventory turnover can measure how many times a company’s inventory is sold and replaced during these three years. To sell their inventories, KSC only take around 10 days. For TMW, it takes a little longer compared to KSC. On the other hand, OCE and YOW take so long to sell their inventories that seems they cannot manage well inventory turnover. Inventory Turnover (Times p.a) KSC -28.73 -31.77 -31.80 OCE 0.12 2.16 0.64 TMW -8.03 -6.45 -6.73 YOW -0.26 -2.02 -3.59 BU1002: ACCOUNTING FOR DECISION MAKING The receivables turnover ratio can measure how efficiently a firm uses its assets in recent three years. TMW did not take 20 days to receives the cash into their accounts for their company that means TMW has great efficiency ratios. Furthermore, the results of KSC is nearly equal to the TMW. When YOW compared to the TMW and KSC, it took a bit longer. But, for the company OCE, it takes more longer than other companies that say that it has some problems in their account receivables. Receivable Turnover (Days) KSC 23.06 18.06 21.65 OCE 230.73 194.58 152.62 TMW 12.94 16.56 18.55 YOW 33.98 23.17 27.15 Receivable Turnover (Times p.a) KSC 15.83 20.21 16.86 OCE 1.58 1.88 2.39 TMW 28.21 22.04 19.68 YOW 10.74 15.76 13.45 BU1002: ACCOUNTING FOR DECISION MAKING Appendix D: Capital Structure/Gearing Ratios Debt to Equity Ratio KSC 82.05% 123.18% 137.97%