Ms Fan Liu is looking to invest in a business in a small town in New Zealand with a net income of around $160,000 to $200,000. She has been given a report on Jomel Trading which is a wholesale business currently on the market with a net income within her desired range. Ms Fan Liu has asked me, as an independent third party to analyse the financial statements provided. It is noted that Jomel Trading has seen a decline in net profit from 2017 to 2018 and fail to meet industry standards in relation to analysis ratios, and while the net profits currently meet Ms Fan Liu’s ideal conditions for investment, it would prove unwise to invest given the conclusions from the financial statements provided.The limitations of this report are that Jomel Trading has only provided financial statements from 2017 and 2018, with additional financial statements it would be easier to provide a more detailed analysis(e.g. Identifying outliers) of Jomel Trading’s potential as an investment decision.
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Analysing the Financial Statements for the year ended 31 March 2018. In 2017, Jomel Trading had a profit margin exceeding the industry standard at 7.2% to 7.0% but declined to a profit margin of 4.8% this could indicate a decline in sales. However, the income statement shows that Jomel Trading is struggling to keep its expenses low, this is most likely due to poor management decisions.Jomel Trading’s Gross Profit Percentage in 2017 stayed above the Industry Standard of 20% for a total of 21.1%. However, in 2018 that number dropped to 18.8%, this is a trend in the declined profit and an indication of increasing cost factors that have not been put onto consumers (through a rise in price) to maintain sales.A decrease in the return on owner’s equity can happen when something out of the ordinary occurs, requiring an investment from the owner to invest equity in replacing assets. In 2017 Jomel Trading had a Return on Owner’s Equity of 22.4%, (2.4% above the industry standard) but in 2018 that number dropped to 16.3%. It is likely that an unforeseen circumstance occurred during 2018 that required an investment of the Owner’s Equity.
The average rate of inventory turnover in Jomel Trading’s industry is 5x meaning the complete investment into inventory is sold 5 times a year. Jomel Trading however had a low rate of 3.23x in 2017 and a slightly better but still lower than average rate of 3.5x. This low rate of inventory turnover could be caused by a low number of sales and, excess inventory.Jomel Trading has a very high Days in selling period compared to the Industry. Jomel Trading went from 113 in 2017 to 104 days in 2018 but in comparison, the industry average is 73 days.
Jomel Trading’s high number of days in selling would indicate a low number of sales and mismanagement of resources.A high accounts receivable turnover ratio indicates an efficient collection of accounts receivable, Jomel Trading has an increased turnover ratio from 2017 (5.8x to 6.75x) to 2018 but still falls below the industry average. The Accounts receivable turnover ratio increasing may mean the company is gaining a higher proportion of quality customers and in following years will continue to grow, surpassing the industry average of 8.11x.3.
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