Financial Statement And Security Valuation â€Myassignmenthelp.Com

Question: Discuss About The Financial Statement And Security Valuation? Answer: Introduction WaveRider is a small business which provides services in the physical recreation and Sports section. There is a seasonal variation in the business and at the peak season time some casual staffs are recruited by the organisation. Current year performance of the business is looking good. In the current financial year the business is having a profit of $57950.35. Under this current situation the owner Daniel Simons is thinking of two alternative new investment options to increase the revenue and profit level in the business. The current report would properly analysis the business financial situation to provide correct recommendation for the alternative business investments. Findings and discussion The expense section of the profit and loss account is heavy otherwise the profit would have been much better. Some of the large size expense is the interest expense, depreciation, superannuation, salaries and surf instruction charges. The higher expense for interest shows that the company relies too much on the debt instrument for its financing of the business (Shapiro, 2008).Surf instruction charges are an expense that the business cannot avoid to provide better services to the customers. On the together hand the large section of depreciation cost ($38368) means there is a large section of cost which is non cash expenses and that means a significant amount of expense is not causing any cash outflow from the business. This high amount of depreciation is the result of the large asset acquisition in the business. Superannuation, salaries and wages purpose expense combines $22098. So it can be seen that the fixed cost of running the business is high and that is the major cause of this l ower profit in the business (Shapiro, 2008).Now reducing this fixed cost part of the business would be last option. Instead the business needs to improve its revenue to offset this problem. The profitability and the liquidity level of the business need to be analysed also. The organisation is showing a net profit in the business and that is why the profitability ratio like profit margin ratio and the return on asset ratio is in the positive figures (Penman and Penman, 2007).The high depreciation level in the business shows high investment in the asset classes but the positive return on asset figures shows that the business is able to manage its asset classed for profitability (Higgins, 2012). Another important profitability ratio that is ROCE is showing positive figure. This shows that the business is able to use its employed capital effectively to earn positive revenue in the business. Here the operating profit of the business came as high positive figure because of the large section of the non cash expenses in the business. Positive ROCE is good indication for the longer financing perspective from the investors side (Healy and Palepu, 2012).The liquidity position of t he business is shown by the current ratio. The ratio is positive at 0.26. This shows that the current asset position of the company is positive but the company will not be able to meet its obligation in the short term as the liability is higher. So for the shorter term the organisation needs to make some fund arrangements. The benchmark performance figures of the physical recreation and Sports sector is gathered from the ATO websites. All of these figures and ratios are based on the annual turnover. The total expense to turn over ratio of the business is 68%. Considering the total turnover of the company, it falls in the second bracket which ranges from 65% to 80%. The organisation falls under the lower side of the range and that is good as per the industrial standard. The labour turnover ratios of the company are around 13% which falls below the range of 22% to 35%. So the company is performing efficiently in this section by following the casual staffs recruitment policy for the seasonal demand the motor vehicle to turnover ratio falls below the second bracket range at 2% in the business. So considering this industry benchmark the company performs appropriately (Healy and Palepu, 2012). Recommendation The organisation has two options in the business for the investments. For the first investment proposal the expense for kite surfing is $23000. There is an alternative option in this part also where the charges for the training is in per hour basis. But there is an uncertainty in this part ((Brigham and Houston, 2012).This is a new segment of business in the market and has good potential. So the business needs to cash that as quickly as possible. The business is in the growth phase and that is why the investment in the asset and service enhancement is required to open newer source of income. For funding this new venture there is two source of fund. That is business internal fund and the borrowed funds. The unused fund of the business is at $23431. But using this fund completely for the new venture would not be appropriate and for this reason the debt instrument needs to be used again. This time the business would take the load for long term. The positive ROCE would provide the positi ve perspective to the investor and the business would get the fund (Sinha, 2012).The recommendation would be to use 2/3 fund from the internal source and rest from the debt fund. This would keep the interest burden of the company low. One of the recommendations prior taking this new venture would be to forecast the business volume and calculate the business projected cash flow (Brigham and Ehrhardt, 2013).The equipment would wear out within 5 years and for that reason this project needs to be profitable before this period. The business is not using the alternative project because it is only adding value to the previous business but the first alternative would provide new sources of income and its matches the growth potential. Conclusion The business situation shows that the profit level and the liquidity level are good. The business is in the growth phase. The comparison with the industrial benchmark indices shows that the business is within in the level. Considering this the business would invest in the first proposal as that has much more potential because of the recent popularity of the kite surfing (Brigham and Houston, 2012).To cash that prospect the new investment would be appropriate by using the business internal and external sources of fund. Reference Brigham, E. F., Ehrhardt, M. C. (2013).Financial management: Theory practice. Cengage Learning. Brigham, E. F., Houston, J. F. (2012).Fundamentals of financial management. Cengage Learning. Healy, P. M., Palepu, K. G. (2012).Business analysis valuation: Using financial statements. Cengage Learning. Higgins, R. C. (2012).Analysis for financial management. McGraw-Hill/Irwin. Penman, S. H., and Penman, S. H. (2007).Financial statement analysis and security valuation(p. 476). New York: McGraw-Hill. Shapiro, A. C. (2008).Multinational financial management. John Wiley Sons. Sinha, G. (2012).Financial statement analysis. PHI Learning Pvt. Ltd..