Ratio Analysis – PETS PARADISE PTY LTD | Assignment Help
Ratio Analysis
Looking at the ratios of the company, it can be inferred that the performance of the company when it comes to liquidity is not enough for the financial year 2019. The profitability ratios are in negative which is a really bad indicator. We are going to discuss the ratios accordingly.
Return on Equity
The return on equity is negative in the first year and it is around 18 percent while the industry average of the country is around 8%. There is almost a 10 percent difference if we look at the comparison. However, looking at the retained earnings from previous year, we can assume that the last year was extremely profitable and this situation is mostly because of an unknown event. The return on equity has decreased however in this period to almost 8 percent. Return on equity in 2020 is almost 10%.
Net Profit Margin
Looking at the net profit margin, it is positive at 8 percent this means that in 2019, the company did really well compared to the industry. However, the situation became quite favorable as the situation in 2020 got a little better with a ratio of 9%. The industry average is around 7% and the performance of the company is far ahead than other industries
Current Ratio
Looking at the current ratio of the company, it has been able to perform really well compared to the averages of the industry and we can easily assume that the performance is keep going to get better. Current ratio is currently 3.65% in the financial year 2019 and it is 10 in 2020. The company should be able to better allocate these resources and the current ratio above 2 indicates that the company is not utilizing its current assets in a proper manner. The industry average is 2:1 which is good enough. Looking at the current ratio in 2020, it can be assumed that the performance of the company isn’t well as they are not allocating their resources accordingly.
Debt to Assets
Debt to Assets of the company are 27% which is extremely good for the company. This means that the equity of the company is around 74%. This also means the company is financed by equity. The industry average revolves around 35% and the situation of Pets Paradise is much better compared to the industry. However, it further decreased to almost 9 percent this means the company was able to increase their equity levels even further.
Average Collection Period
Average collection period of Pets Paradise is 30 days. This means that the company would take 30 days to get back the revenue that they made on sales. This is comparatively much more time than the average of the industry. For the average industry it only takes 15 days for them to get back their credit sales. However, in 2020, the company was able to get back on track and it got almost 12 days for the credit sales to come back into the accounts of the company.
Recommendations
Looking at the situation of the company, I would ask my friend to seriously reconsider his choice of investing in pets paradise limited. The reason for that is the profitability situation of the company is quite well but the allocation of resources isn’t being done well as the current ratio is too high. There is also a bright side to it as the liquidity and efficiency situation of the company is really well and this means that they have enough resources available to invest in reasonable opportunities. There should be a proper trend research and the company should look at the trend result as well as to in which direction the company is really going. I would suggest my find to invest in the company as their performance is going to increase only while looking at the liquidity position of the company. Hardly any company ever has that much of assets at their disposal to use. I believe that my friend would get the required return on investment he likes and this is going to be extremely profitable for him.
Industry Averages
The averages of the industry are obtained by different institutions after they have extensively collected data from every company in the industry. It can be said that they collect data from each and every company to come close to a particular average. The reason that the industry averages cannot be used as a standard for comparison is because each company is performing at their own pace. Some are much ahead than the averages and some are way far. This is the main reason that their performance can never be evaluated according to the market but their own previous performance. This is one of the main reason that the companies prefer trend analysis and analyze their performance based on their previous years.
