The fall of the interest cover ratio in year 2016 might because of the increase in bank overdraft by 8% and Jupiter Bertha (Jupiter) is issuing large mount of bonds to public which both will rise up the interest expenses by 20%. (c) Inventory days The inventory days question a company’s strength in turning inventories into sales. It is related to a company’s inventory and cost of sales. It presents a company’s performance about how long it takes them to turn their inventories into sales which related to cash (Investigated, 2015) .
Generally lower value of inventory days are better than higher value of inventory days because lower days define the company is efficiency in selling off their inventories which occurs cash inflow (Accounting’s, 2015). Besides that, the company is also having a low storage cost and the inventory is also carrying a low risk of getting spoiled, breaking, being stolen or simply going out of style (Ozarks, 2015). From the calculation in (i) (c), it shows that inventory days in the year 2016 (22. 08 or 22 days) is lower than year 2015 (39. 1 or 39 days).
The lower value in year 2016 indicates that Jupiter Bertha (Jupiter) is holding a low level of average inventory in relation of sales. The possible reasons of increasing in inventory days in year 2015 are poor marketing and sales strategy which impact the sales to rope by 50% and also overstocking of the company which increases the closing inventories by 8%. (d) Receivable days Accounts receivable days is the number of days that a customer invoice is outstanding before it is collected (Accounting’s, 2015). This is calculated using trade receivables divided by annual credit of sales.
The purpose of this ratio is to measure the company’s strength in receiving back whatever short- term payments that is owed by the customers (WOOS, 2006). A company with low receivable days means that the company takes fewer days to collect back its debt. While a high receivable days indicates that company is selling on credit and it takes longer days to receive money (Investigated, 2015). According to the calculation of (i) (d), Jupiter Bertha (Jupiter) has only 1 20 receivable days for year 2015 which is lower than year 2016 that has 158 days.
This pointed out that Jupiter Bertha (Jupiter) is able in collecting back their debt in year 2015 more faster than year 2016. Possible reasons that cause the increasing of receivable days in year 2016 are Jupiter Bertha (Jupiter) might be providing too much credit sales that cause increase of in sales’ figure and also relax credit logic for customers that result in an increase of in receivables. (e) Payable days is the number of days that a company takes to pay its suppliers (Accounting’s, 2015).
The payable days is related with the trade payable account and the annual cost of sales of a company. The implications of the calculate ratios of payable days is to show how efficient is the company at paying their short-term payment to the suppliers. When a company is having low payable days, it is not quite a good condition because the company will need to pay all of its debt in a short period and also it cannot keep its cash for longer period. According to the calculation (i)(e), Jupiter Bertha (Jupiter) is having 180 days in year 2015 while 182 days for year 2016.
This indicates that, in 201 6, Jupiter Bertha (Jupiter) is having a longer period of 182 days to clean its debt payment to suppliers. In other condition, if the payable days keep on increasing, it could also mean that the company is finding it difficult to make payments. The possible reason for declining of payable days in year 2015 are tight payment policy which occur a decrease 65% of the payable and also buying in cash term which lead to a drop 63% of cost of sales.
Suggestions
From the commentary (a), the low value of operating profit margin might due to discretionary spending and buying carelessly.
Jupiter Bertha (Jupiter) should eliminate discretionary spending which cause increase of 20% in operating expenses. Jupiter Bertha (Jupiter) should only spend on expense which is essential for assisting the company to gain profit. In contrast, it will be a waste for Jupiter Bertha (Jupiter) to spend on unnecessary expenses, such as painting building or buying new furniture that is not much help in developing the company (Laurence, 2015). Therefore, Jupiter Bertha Pitter) should reconsider he expenses that had been spent.
Besides that, Jupiter Bertha (Jupiter) should buy materials more carefully in order to control the amount of cost of sales which increases Jupiter Bertha (Jupiter) can either buy in smaller quantities or negotiate with suppliers for lower prices. By buying in smaller quantities, the company can lower down the amount of purchase. Moreover, the company should choose suppliers that are willing to provide lower prices at large quantity (Laurence, 2015). Thus, Jupiter Bertha (Jupiter) should reevaluate the things that had been bought and also current suppliers’ price. (b) Interest cover
From the commentary of (b), the low value of interest cover in year 2016 might cause by increase in bank overdraft and issuing large amount of bonds to public. Jupiter Bertha Pitter) should reduce its amount of bank overdraft. The amount of bank overdraft may vary on daily basis and it’s a limit of borrowing on a bank current account which will be charge interest. Therefore, Jupiter Bertha (Jupiter) should control their borrowing and thus reduce their interest expenses (Riley, 2015). Furthermore, Jupiter Bertha (Jupiter) should recalculate the number of bonds issued to public because bonds are compensated with interest rate.
The more the company issue bonds, the more the company will need to pay for the interest. Moreover, there is an inverse relationship between bonds and interest rate. If the bonds’ interest rate is higher than market interest rate, company will suffer lose (Wellsfargoadvantagefunds, 2015). Hence, Jupiter Bertha (Jupiter) should control the bonds that being issue in order to control the amount of interest expense. (c) Inventory days From the commentary of (c), the high value of inventory days in year 2015 might due to poor marketing and sales and overstocking of the company. For Jupiter
Bertha (Jupiter), a good marketing and sales strategy is necessary for Jupiter Bertha (Jupiter) because it can make customers to be aware of its products which is electrical appliances and influence them to purchase. A half percentage drop of sales occurred in year 2015 compared with year 2016 which prove that Jupiter Bertha (Jupiter) is doing poor in presenting its products for sale (Compeller, 2015). Hence, Jupiter Bertha (Jupiter) should discuss with marketing and sales department about their strategy and develop an efficient and effective strategy to sell out their products.
Besides that, Jupiter Bertha Pitter) might also be having excess inventories buying that causes overstocking. Jupiter Bertha (Jupiter) is poor in planning or overestimated their customer’s demand thus causing excess inventory in the end of the period which is shown with a higher value of inventories of REARM,000 (Compeller, 2015). Consequently, Jupiter Bertha (Jupiter) will need a good planning and also calculated estimation of customer demands’ in order to prevent discount or even throw away expired or perished items. Receivable days According to the commentary (b), a higher receivable days in year 2016 which eight due to provide too much credit sales and relax credit policy To prevent late payment, Jupiter Bertha (Jupiter) should tighten the credit sales term, because Jupiter Bertha is providing too much credit sales which it did not set the days of payment for its customers. Jupiter Bertha can decide to install some collections software to increase the efficiency so it will be easier for customers to pay, such as credit card and online payment method (Accounting’s, 2015).
Furthermore, for Jupiter Bertha (Jupiter) to reduce customer’s owing, it should review its credit policy and making it more strict for customers who always pay late. Jupiter Bertha Pitter) can also offer incentives or discount for customers to attract them to make early payment. In addition, it should reconsider to extend credit for those customers who are more generous in making payment in order to prevent cash flow drop to risky level (Beginnings, 2012). (e) Payable days From the commentary of (f), a low value of payable days in year 2015 which might cause by tight payment policy and buying on cash term.
Jupiter Bertha (Jupiter) should loosen up its payment policy by taking advantage of credit facilities. By observing amount of ARM,790,000 in year 201 5, it is paying its suppliers fast and causing cash outflows quickly. If the company is given a longer period to owe, it might not use this benefit provided by suppliers (Financier, 2015). Therefore, Jupiter Bertha (Jupiter) should reconsider a loose and suitable payment policy to avoid cash outflows so quickly. Besides that, Jupiter Bertha (Jupiter) might also is purchasing on cash term which occurred cash outflows.
Purchase on credit term not fully a bad thing for the company because it can allows company to have longer period to keep its cash for further development but if this credit term didn’t be use wisely, the company might be full of debts (Financier, 015) . Thus, Jupiter Bertha (Jupiter) should reconsider to buy on credit term with suitable amount. Section B In general, discuss five limitations of using financial ratios for an organization. Ratio analysis can provide organization a lot of useful information concerning a company’s operations and financial condition but it also contains limitations and making imperfect tools for the job.
The seasonal factors are events that can be predict and common for a particular business or industry. It can affect the interpretation of financial data and distort ratio analysis because revenue achieved and expenses spent will be different according to different event (Seasons, 2015). For example, during Hair Ray, many Muslim customers will want to bake various of cookies or cakes for their family and relatives which required electrical appliances, such as, oven. Therefore, sales of Jupiter Bertha (Jupiter) which increase by 50% mostly might because of the high sales in July.
Companies can also use window dressing to manipulate their financial statements. Window dressing is some of performance which done by a company at the end of its fiscal year causes impact on its financial statements which make hem look better. This will then be taken care as the new fiscal year starts (Palaver, 2015). For example, the amount of sales in year 2016 might be a result of window dressing which indicates that Jupiter Bertha Pitter) is efficient in selling out their products. Moreover, a business conditions might also disfigure the ratio analysis.
Business condition is the general business environment. When a company is calculating its financial ratio analysis, it didn’t take business conditions into consideration because ratio maybe a ‘good’ or ‘bad’ according to different business environment (Accounting’s, 2015). For example, a 158 days of receivable days might seem poor performance in a period whereby sales are growing fast but this might be different if the business condition is during economic contraction whereby customers are in harsh financial condition.
Another limitation is different company uses different accounting practices which will not be present in the calculation of ratio analysis. This can bring a huge different when comparing 2 companies (Palaver, 2015). For example, by using LIFO (Last-Len, First-Out) and FIFO (First-In, First Out), it can provides different results for a firm. If Jupiter Bertha (Jupiter) is using LIFO to value their inventory, it will creates an inflated profit margin which is not a fact but this had been ignored by ratio analysis. Lastly, companies’ balance sheets are distorted by inflation.
