Leisure Group Ratio

Question: What is driving or causing your firms economic profit over the past four years to be at the levels it is? Answer: Ratio Analysis The ratios of the company All Leisure Group have been calculated for four consecutive years in order to understand the financial condition of the firm. In this assignment, the profitability ratios, efficiency ratios, liquidity ratios, financial structure ratios and market ratios have been calculated. All the calculations of the mentioned ratios for the years 2012, 2013, 2014 and 2015 have been shown in the appendix and in the excel worksheet. From the calculation itself, it can be said that under the profitability ratios, the net profit margin ratios and return on assets ratios have been calculated in order to understand the profitability of the particular firm in detail. From the chart in the appendix, it can be said that the net profit margin ratio has increased from 0.008 in the year 2012 to 0.203 in the year 2013. However, it constantly decreased from 0.203 in 2013 to 0.053 in the year 2014 and to 0.004 in the year 2015. In a similar manner, the return on assets of the firm also increased initially from 0.004 in the year 2012 to 0.144 in the year 2013, but all of a sudden it reduced to 0.093 in the year 2015 and it get further decreased to 0.007 in the year 2015. The efficiency ratios or the asset management ratios that have been calculated for the particular firm include days of inventory and total asset turnover ratio (Watson and Head 2013). It has been found that the days of inventory has reduced from 0.025 in the year 2012 to 0 in the year 2015. On the other hand, the total asset turnover ratio has increased from 0.554 in the year 2012 to 0.709 in the year 2013 and then it increased to 1.731 in the year 2014 and finally it increased to 1.779 in the year 2015. Among the liquidity ratios, the current ratio has been calculated for the company All Leisure Group for the years 2012, 2013, 2014 and 2015. The calculation is shown in the excel worksheet and the table has been shown in the appendix. This calculation indicates that with the passage of time, the c urrent assets of the firm have started to decreased and on the other hand the liabilities of the particular firm have increased. This has resulted into negative current ratio. This indicates that the financial condition of the particular firm is not stable. There are various types of financial structure ratios, but among all the two most suitable ratios have been calculated for the company All Leisure Group in the excel worksheet and the values have been shown in the chart that has been provided in the appendix. The two financial structure ratios that have been calculated are debt by equity ratio and the equity ratio. Both these stated financial structure ratios indicate that the debt of the particular company has increased with the passage of time and in a similar manner the total assets of the firm have increased in comparison to the equity of the company (Taillard 2013). Thus, it can be found that with the passage of time, the debt to equity ratio has increased from 0.413 in the year 2012 to 0.543 in the year 2013 to 0.719 in the year 2013 and finally to 0.791 in the year 2015. This indicates the increased debt of the company and thus represents the weak financial condition of the firm. Similarly, the equity ratio also started to decline from 0.289 in the year 2012 to 0.207 in the year 2013 to 0.164 in the year 2015. This indicates that the equity of the firm has started to decline. This also indicates the weakness of the firm All Leisure Group in its financial scenario. The market ratios of the firm All Leisure Group have also been calculated in order to compare and to understand the financial condition of the firm with the present market. The market ratios that have been calculated for the company All Leisure Group include the earnings per share (EPS), Dividends per share (DPS) and the price earnings ratio (Ross 2012). For the earnings per share, it has been found that the EPS increased in the year 2013 to 21.734 from 0.809 in the year 2012, but it sudden ly started to decrease from the year 2013 to 2014 to 12.128 and it further decreased to 0.88 in the year 2015. This indicates the financial condition of the particular firm is very weak. Nevertheless, it has been found that the particular company maintained or retained its amount of distribution of dividend for the entire 4 years starting from 2012 to 2015. The dividend amount was constant that is 21.63. This indicates that in order to retain the goodwill and the shareholders of the company, the management of the firm decided to maintain the percentage of dividend amount throughout the years though the profit percentage of the firm has reduced (Parrino, Kidwell and Bates 2012). On the other hand, it has been found that the price earnings ratio of the firm has increased with time. This indicates that the market price per share increased with time but the earnings per share by the company started to reduce with the passage of time. therefore, it can be said by analyzing the values of all the types of ratios of the firm All Leisure Group for the years 2012, 2013, 2014 and 2015 that the financial condition of the firm is not well, it is not well performing and the management of the firm should look into the matter regarding the weak financial condition of the firm (Brewer, Garrison and Noreen 2013). As proper steps by the financial manager can only help to recover the negativities of the firm and can make the financial condition stronger (Firer 2012). Economic Profit For better understanding of the economic profit, the return on equity ratio, return on net operating assets, net borrowing cost, profit margin and asset turnover have been calculated for the years 2012, 2013, 2014 and 2015. From the calculation that has been shown in the excel worksheet, it can be said that the return on equity of the firm has increased with the passage of time. On the other hand, the return on net operating assets has decreased with the passage of time. It has been found that the net borrowing cost of the particular firm All Leisure Group has been increased and simultaneously, the profit margin of the firm has been decreased with the passage of time. Moreover, the asset turnover ratio has been increased for the company from the year 2012 to the year 2015 (Brealey, Myers and Marcus 2012). Lastly, the economic profit of the firm All Leisure Group has been found to be decreased with the passage of time. Thus, it can be concluded that the financial condition of the firm is much weak and the management have to take remedial steps in order to strengthen the financial position of the particular firm. For analyzing the net present value (NPV), two projects, Project 1 and Project 2 have been considered. Each of the project has a life time of 5 years and the cost of capital is 10 %. The initial outflow of cash for the project 1 is $ (1000000) and for the project 2, the initial investment is $(500000). Based on the cash inflows of both the project the NPV has been calculated for both the projects. The mathematical formula of calculating NPV is net cash inflows Net cash outflows (Berk 2013). By using this formula, it has been found that the NPV of the project 1 is negative and on the other hand, the NPV of the project 2 is positive. Therefore, as per the thumb rule, the project having positive value will be accepted that is the Project 2 and the project having negative value will be rejected (Berk, DeMarzo and Harford 2012). On the other hand, by calculating the IRR (Internal Rate of Return), it has been found that the project 2 is acceptable as the rate is positive and it is 14 %, whereas, the rate of return for the project 1 is negative that is 24 %. Lastly, the payback period of both the projects have been calculated that indicates that the project 2 has lesser value of payback period than the payback period of the project 1 (Braun and Tietz 2013). Thus, it can be concluded that the investor should select the Project 2 for investment. References Berk, J. (2013).Fundamentals of corporate finance. Toronto: Pearson. Berk, J., DeMarzo, P. and Harford, J. (2012).Fundamentals of corporate finance. Boston: Prentice Hall. Braun, K. and Tietz, W. (2013).Managerial accounting. Boston: Pearson. Brealey, R., Myers, S. and Marcus, A. (2012).Fundamentals of corporate finance. New York: McGraw-Hill/Irwin. Brewer, P., Garrison, R. and Noreen, E. (2013).Introduction to managerial accounting. New York: McGraw-Hill/Irwin. Firer, C. (2012).Fundamentals of corporate finance. London: McGraw-Hill Higher Education. Parrino, R., Kidwell, D. and Bates, T. (2012).Fundamentals of corporate finance. Hoboken, NJ: Wiley. Ross, S. (2012).Fundamentals of corporate finance. New York: McGraw-Hill. Taillard, M. (2013).Corporate finance for dummies. Hoboken, N.J.: John Wiley Sons, Inc. Watson, D. and Head, A. (2013).Corporate finance. Harlow, England: Pearson.