Gazal corporation, limited: A financial report Essay

Executive Summary

Gazal Corporation is one of the largest publicly listed companies in Australia. It is based in Sydney and is listed on the Australian Stock Exchange. The firm focuses in developing domestic and global brands in the apparel and fashion accessories industry.

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Gazal Corporation is a large and promising company based in Australia and its financial performance is decent enough and also quite healthy as a company. However, the company in all of the financial indicators in terms of profitability, investment attractiveness, financing viability, and market and per share growth rates had fallen below industry standards.

Also, in most of the comparisons of financial indicators with the Sector and S&P 500, the company did not meet their standards.

According to financial analysis, on average, Gazal Corporation experiences decreasing profitability (except return on Equity), declining liquidity (both current and quick ratios), and increasing long-term solvency (long-term debt to equity, total debt to equity, and interest coverage ratio)

Introduction and Purpose of Analysis

This paper performs financial analysis Gazal Corporation within five-year period (2003 to 2007).

The analysis composes of profitability, liquidity, and long-term solvency. Each of the analysis indicators will be presented in 5-year graphical format (Appendix A) to simplify the analysis in addition to examples of calculation (Appendix B).

Prior to the analysis, we will present the company ad industry background to give insight about current competition in clothing manufacturing industry in Australia.

Company and Industry Background

Company

Gazal Corporation is one of the largest publicly listed companies in Australia. It is based in Sydney and is listed on the Australian Stock Exchange. The firm focuses in developing domestic and global brands in the apparel and fashion accessories industry.

The company is a leading apparel supplier of surf and casual wear, men’s business shirts, intimate apparel and school wear sold under such brand names as Mambo, Maui & Sons, Nautica, Kenneth Cole, Trent Nathan, Van Heusen, Calvin Klein, Lovable, Oroton, Crystelle, Playboy, Morrissey, Kookai, Body Nancy, Ganz, Bisley, Midford, Davenport, Bracks, and SMP.

The company is positioned as one of the leading apparel branded companies in Australia and this year it garnered total revenue of $231 million. Its total assets stand at $159 million with total group employees of approximately 1000 people.

In the late 1990s and the early 2000s, the Gazal Group made key strategic moves by acquiring the Lovable trademarks in Australasia, the Nautica license for Australasia, the Mambo brand globally, the Trent Nathan brand and the Davenport Group which included the distribution rights for Calvin Klein underwear in Australasia.

The firm was originally founded by the late Joe Gazal in Sydney in 1958 as a small company manufacturing men’s shirts and pyjamas. The business grew fast and generated an excellent reputation as a reliable supplier with growing capacity.

Industry

Clothing becomes one of fast-growing industry n Australia since models, price, and quality of products are vast, spawning many market segmentation that customers can choose from. The situation suggests that Gazal Corporation faces many direct and non-direct competitors such as Levi Strauss (Australia) Pty Ltd, Lowes-Manhattan Pty Ltd, Roskill Flash Pty Ltd, and Pretty Girl Fashion Group Pty Ltd, to name a few.

The competition in Australian clothing industry has driven the clothing manufacturing companies to develop clothing products that combine the quality at affordable price (CPA Australia Ltd, 2007).

Due to the fierce competition that the company encounters, Gazal Corporation experiences declining net profits with 5-year average only reach 4.76%. Meanwhile, their competitors record 5-year average about 11.69%.

Analysis of Financial Report Data

Profitability and Efficiency of Operations

Return on Assets (ROA)

Table 2 (Appendix A)

The company’s current on assets (see Table 2) which is 6.34 is much lower than the industry standard index which is 14.52. It also fell below the sector figure which is 9.87 and with S&P 500 with an index of 8.39. The five year average for the return of assets for the firm is 6.80 while the average industry standard for five years is 16.57. The firm’s average return on assets fell below its sector which is 9.98 and also with S&P 500 which has an average index of 7.10.

Return on Equity (ROE)

Table 2 (Appendix A)

The company’s return on equity currently has a good ratio which is 14.58. However, in comparison with industry standard which is 21.89, it is much lower. Also, its return on equity is lower than sector and S&P 500 with an index of 17.29 and 21.40 respectively.

The five year average return on investment of the company is 12.64 which is already a fair return but in comparison again with the industry which has an average index of 24.25, it again fails against it. Furthermore, its average return on equity slightly fell below the average sector standard and the average S&P 500 index with 16.13 and 18.51 respectively.

Return on Investment (ROI)

Table 2 (Appendix A)

The Gazal Group’s current return on investment is 9.27. However, in comparison with industry standard which is 17.99, it has to improve its efficiency in relation to its investments. Furthermore, its return on assets is slightly lower than the sector standard which is 12.91 and also with S&P 500 which has 12.39.

The company’s five year average return on investment is again a satisfactory 9.25. On the one hand, this average return of the company is below the industry standard which is 22.15. Also, it is slightly lower than its sector average index which is 13.30 and with S&P 500 with an average index of 10.66.

Gross Margin Ratio

Table 1 (Appendix A)

The company’s profitability analysis (see Table 1) is compared with the industry, sector, and Standard and Poor’s (S&P) index. The current gross margin ratio of the company is 48.21 which is quite a good performance.

However, if we compare this with the industry standard which is 54.35, it is lower but in comparison to its sector which is 31.41 and S&P 500 which is 44.85, it is higher. In terms of the five year average gross margin ratio, the firm’s average is 48.61 which is again lower compared to industry which is 52.33 but again higher than sector which is 35.50 and S&P 500 which is 43.99.

EBITD Margin Ratio

Table 1 (Appendix A)

The earnings before income tax deduction (EBITD) margin ratio for the current year is 9.00 which is lower compared to industry which has a 22.12 ratio. Also, in comparison with the sector index which has 11.62 and the S&P 500 index which is 23.16, it is also lower.

In terms of the five-year average, the firm has a ratio of 10.10 which is again much lower than industry standard which is 20.05. Furthermore, it is again lower in the five year average ratio in comparison with sector with an index of 15.28 and also with S&P 500 with an average index of 21.38.

Operating Margin Ratio

Table 1 (Appendix A)

Gazal Corporation’s operating margin ratio for the year 2007 is 5.59 while in comparison with the industry standard which is 19.57, it is much below it. Comparing it with the sector index which is11.66 again it is below it and again comparing the firms’s ratio with S&P 500 index which is 19.65, it is very much below the measure.

The five year average for the firm’s operating margin ratio is only 6.90 while the industry standard is 18.16. As such, it is much below it, and the story is the same again if it is compared with the sector index which is 11.60 and also with S&P 500 with a respective ratio of 19.2

Pre-Tax Margin Ratio

Table 1 (Appendix A)

The firm’s current pre-tax margin ratio is 5.59 and it is below with industry standard which has a much higher index of 18.16. The firm’ ratio is also below the sector ratio which is 11.42 and with S&P 500 which is 19.65.

The five year average pre-tax margin ratio of the company is 6.90 and again it is below industry standard which has a much higher ratio of 17.58. Furthermore, the company’s five year ratio for pre-tax margin is below the sector index which is 11.59 and S&P 500 which is 18.00.

Net Profit Margin Ratio

Table 1 (Appendix A)

The company’s present net profit margin ratio is 4.15 and in comparison with industry standard which is 11.95, it does not pass it. In addition, the firm’s net profit margin ratio in relation with its sector with a ratio of 8.40 and S&P 500 which has 13.61 is also not encouraging to compare.

The net margin profit ratio of the company for the five year average is 4.76 but the industry standard ratio for the five year period is again a much higher figure which is 11.69. The firm’s average ratio again failed in comparison with the average sector index which is a higher 7.92 ratio and with S&P 500 with an average ratio of 12.46.

Liquidity – Short-Term

Current Ratio

Table 3 (Appendix A)

The measurement of liquidity is also measured through its current ratio which is 1.52 which is again lower than the industry index which is 3.29. Also, its current ratio fell below in comparison with the sector and S&P 500 with an index of 2.64 and 1.77 respectively.

Quick Ratio

Table 3 (Appendix A)

The company’ liquidity (see Table 3) can be measured through the quick ratio and currently it is 0.60. The ratio for the company is quite low in comparison with industry standard which is 1.99. In addition, its quick ratio is lower than its sector’s standard and S&P 500 with an index of 1.62 and 1.25 respectively.

Long-Term Solvency

Long-Term Debt to Equity

Table 3 (Appendix A)

The company’s long-term debt to equity ratio at present is 0.56. In comparison with the standard of the industry which is 1.00, then it fails it. If we compare the company’s ratio with its sector which is 0.44, the company’s ratio is not also better with sector and S&P 500 which has 0.44 and 0.60 respectively.

Total Debt to Equity

Table 3 (Appendix A)

The company’s total debt ratio as of 1997 is 0.81 while it fells below the industry standard which is 1.05. However, this ratio is not better in comparison with sector and S&P 500 with an index of 0.49 and 0.79 respectively.

Interest Coverage Ratio

Table 3 (Appendix A)

The current interest coverage ratio of the firm is 4.35 and again it is lower compared to industry, sector, and S&P 500 with ratio of 13.71, 49.91, and 13.07 respectively.

ASSESSMENT OF OTHER, RELEVANT INFORMATION

·         Profitability – The Company is profitable as can be shown in the profitability analysis section of the report. However, in comparison with industry, sector, and S&P 500, it fell below their standards. The five year average net profit margin of the company is 4.76 while industry, sector, and S&P 500 average return are 11.69, 7.92, and 12.46 respectively.

·         Investments –The Company’s average return on investments for five years is 9.25%. This is a fair return, however, if we compare this with industry, sector, and S&P 500, their average return are 22.15, 13.30, and 10.66 respectively which are all higher returns compared with the firm.

·         Financing – The firm’s debt to equity ratio of 0.81 is not good if we compare this with industry which is 1.05, sector with 0.49 and S&P 500 with 0.79.

·         Market and Per Share Growth – The five year average sales growth of the company is 6.81% is low compared with industry’s 17.48% average growth rate, sector’s 13.48% average growth rate, and  S&P 500 average growth rate at 13.75%.

      The five year average EPS growth rate of the company is very low at 1.23%

Compared with the average growth rate of industry at 28.14%, sector with 17.35%, and S&P 500 with 23.14%.

EVALUATION OF MARKET PERFORMANCE

Figure 1          5-year Profitability Analysis of Gazal Corporation (2002 – 2007)

Figure 2          5-year Investment Ratio Analysis of Gazal Corporation (2002 – 2007)

Figure 3          5-Years Financing Ratio Analysis of Gazal Corporation (2002 – 2007)

SUMMARY AND CONCLUSION

Gazal Corporation is a large and promising company based in Australia and its financial performance is decent enough and also quite healthy as a company. However, the company in all of the financial indicators in terms of profitability, investment attractiveness, financing viability, and market and per share growth rates had fallen below industry standards. Also, in most of the comparisons of financial indicators with the Sector and S&P 500, the company did not meet their standards.

Thus, although Gazal Corporation, Limited is fundamentally sound financially, it can be concluded that in terms of industry, sector and S&P 500 standards, the company did not meet its financial and market performance expectations.

APPENDIX A – Profitability and Efficiency of Operations Ratios

Table 1   Profitability Ratios

Table 2 Investment Ratio Analysis

Table 3 Financing Ratio Analysis

APPENDIX B – Manual Calculations of Specific Ratios

Profitability

Return on Assets

            Net income/total assets                                  =          8,371/169,049

                                                                                  =          4.95%

Return on Shareholders’ Equity

            Net income/Avg. Shareholders’ Equity        =          8,371/71,525

                                                                                  =          11.70%

Gross Profit Margin

            Operating income/Revenue                           =          13,989/250,405

                                                                                  =          5.59%

Net Profit Margin

            Net income/Revenue                                     =          8,371/250,405

                                                                                  =          3.34%

investment ratio

Current Ratio

            Current Assets/Current liabilities                  =          75,104/49,401

                                                                                  =          152.03%

Quick Ratio

            (Current Assets – Inventories)/Current liabilities      =  (75,104 – 45,699)/49,401

                                                                                              = 59.52%

long-term solvency

Long-term Debt to Equity

            Long term Debt/Equity                                  =          40,000/71,525

                                                                                  =          55.92%

Total Debt to Equity

            Total Debt/Equity                                          =          58,172/71,525

                                                                                  =          81.33%

others

Long-term Debt to Equity

            Long term Debt/Equity                                  =          40,000/71,525

                                                                                  =          55.92%

Long-term asset turnover

            Operating revenue/non-current assets                       =          250,405/89,941

                                                                                  =          2.78

Inventory turnover

            Operating revenue/current inventory             =          250,405/45,699

                                                                                  =          5.47

Profit margin on sales (before interest & tax)

            EBIT/operating revenue                                =          13,989/250,405

                                                                                  =          5.59%

Quick asset

            (current assets – current inventory)/              =          (75,104 – 45,699)/49,401

            current liabilities

                                                                                  =          0.595

Sources

Anthony, Robert N. & Dearden, John. 1976, Management Control Systems. Illinois: Richard D. Irwin, Inc.

Anthony, Robert N., Reece, James S. & Hertenstein, Julie S. 1995, Accounting: Text and Cases Illinois: Richard D. Irwin, Inc.

CPA Australia Ltd. 2007, ‘Gazal Corporation Limited’, Retrieved September 30, 2007 from https://www.cpaaustralia.com.au/apps/ibisworld/company.aspx?c=572

Harvard Business School. 1985, Techniques of Financial Analysis Handbook, Boston, Massachusetts

Horne, James Van. 2005, Fundamentals of Financial Management, 12th ed. Englewood Cliffs,

       N.J.: Prentice Hall, Inc.

—. 2001, Financial Management and Policy, 12th ed. Englewood Cliffs, N.J.:

       Prentice Hall, Inc

 

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