1. Analyse the sources of finance for each of the two companies in 2017 as compared to 2016. Use two capital structure ratios to support your answer and provide an explanation regarding the changes in the composition of the sources of finance for each enterprise. Note: ensure that you analyse in this question, not just describe the ratio values.
Interest coverage ratio.
• Both Capilano Honey Limited and Select harvest limited have various sources of finance and a thorough analysis of them provides us with a good understanding of the changes in the composition of the sources of finance for each enterprise in 2017 as compared to 2016.
• Initially, through looking at Capilano Honey Limited’s Interest coverage ratio (ICR) for 2017 which is 0.48, it is clear that the company’s current earnings are insufficient to service the company’s current outstanding debt and because of this the company is at risk of falling into bankruptcy as it is barely managing to cover its interest costs. Comparing the 2017 ICR to the 2016 figure of 0.52 it is clear that a pattern of decline is present which suggests that the company is not in good financial health furthermore emphasising a major danger sign of financial difficulty. This pattern of low interest coverage ratio also is a definite red flag for investors as it can be an early warning signal of impending bankruptcy.
• Comparing Capilano Honey Limited’s and Select harvest Limited interest coverage ratios for 2017 in relation to the 2016, it is clearly evident that Select Harvest Limited is in better financial health as the ICR ratio for 2017 is 3.1 as compared to 2016 which was 1.5. This high ratio indicates that the company has made major changes or improvements in their operating fields, the ICR further suggests that the company is now more capable of meeting its interest obligations from operating earnings 3.1 times. This ratio also indicates that Select Harvest Limited is extremely liquid and shouldn’t have problem getting a loan to expand as Analysts prefer to see a coverage ratio of 3 or better.
Debt ratio
• Also, through comparing Capilano Honey Limited (CHL) and Select harvest limited (SHL) Debt ratios for 2017 in contrast to 2016 we can understand the changes in the composition of the sources of finance for each enterprise.
• Initially, Capilano Honey Limited has a Debt ratio of 0.48% in 2017, this high ratio implies that the company is more leveraged, suggesting greater financial risk. Comparing this figure to the 2016 Debt ratio of 0.52% it seems that CHL has paid off some of its debt, online essay help experts for your coursework which is good as a high debt ratio relative to its peers would find it expensive to borrow and could as a result find itself gone if circumstances change.
• On the other hand, Select Harvest Limited has a Debt ratio of 35.3% this is great as it implies that the business is stable with the potential of longevity because the business has a lower ratio it also means that it has a lower overall debt. Comparing the debt ratio of SHL to the 2016 figure of 44.1% it is clear that like CHL the business paid off some debt which is great as it means that the company liabilities are only 30 percent of its total assets. Furthermore a low Debt ratio is also a positive factor for a business as investors look for companies to have a debt ratio between 0.3 and 0.5.
2. For each of the two companies, analyse their ability to successfully manage each of their categories of expenses in 2017 as compared to 2016. Use three margin ratios to support your answer and explain any change in the ability of each company to control costs. Note: ensure that you analyse in this question, not just describe the ratio values.
1. 1. Capilano Honey Limited –
• The operating expenses of 2017 compared to 2016 were extreme similar at respective rates of 11.9% ($158,472,26/$133,056,097×100) and 12.1% ($161,870,25/$133,429,924×100), a slight yet unalarming decrease, exhibiting their continued appropriate management of operating expenses.
• The operating profit remained the same for both years at a rate of 10.7%, ($143,168,82/$133,429,924×100 & $142,482,70/$133,056,097×100) showing that CHL has succeeded at efficiently managing their operations, maintaining a stable, steady rate through both years.
• Finally, the overall net profit margin for 2017 had slightly improved to a rating of 7.8% ($103,348,10/$133,056,097×100) from the previous percentage of 7.1% ($948,3463/$133,429,924×100), showing they learnt and improved from their previous lower rate of net profit, maintaining a steadily increasing percentage.
Select Harvests Limited –
• In 2017; SHL’s ability to increase their operating revenue while managing their operating expenses was not a successful venture as the gross profit margin came to a 13.3% ($318,740,00/$239,998,000×100) that year whereas the prior year had a 21.9% gross profit ($628,090,00/$285,917,000×100) due to their poor management of their operating expenses caused by excessive inventory purchases.
• In 2017, their operating profit came to 7.1% ($170,080,00/$239,981,000×100) which compared to the previous amount of 17.6% ($502,100,00/$285,917,000×100) was a great downfall caused by the excessive purchase of inventories did turned a lower profit than expected, a distinct miscalculation.
• The annual net profit for 2017 was at a low of 3.6% ($924,9000/$239,981,000×100) exhibiting their poor expense management throughout the year whereas their 2016 net profit was a solid 12% ($341,770,00/$285,917,000×100), quadruple the 2017 amount. Overall, their ability to manage expenses in 2017 compared to 2016 has changed in every aspect as profits lessened and expenses grew.
• Both companies compared, CHL had better profit management skills.
Question 3
Capilano Honey Limited have increased their efficiency in using their assets to generate sales which can be seen through the increase of their asset turnover ratio from 1.34 to 1.38. The increase in the ratio shows that even though Capilano have falling sales, their ability in using their assets to generate sales effectively has increased. The increase in the ratio is due to the increase of non-current assets such as investments and receivables, investments increasing from $109,397.00 to $2,511,148.00 in one year whilst receivables increased from $0 to $2,500,000.00. The increase in receivables can also contribute to the fall in sales as Capilano has not received the money that they are owed, therefore the money is recorded as an asset on the balance sheet rather than sales on the income statement.
Capilano has also increased their fixed asset turnover from generating $6.21 for every $1 of property, plant and equipment in 2016, in 2017 they were able to increase their ability to use their assets to be able to generate $6.27 in sales for every $1 in property, plant and equipment. Which is due to the fall in sales, which is caused by the increase in receivables. Best Dissertation Writers in UK Capilano has increased their ability in managing their assets which can be seen through the increase of both the total asset turnover ratio and the fixed asset turnover ratio.
Selects Harvest limited have decreased their efficiency in their ability to utilise their assets to generate sales, which can be seen through the decrease in both the turnover asset ratio from 0.64 to 0.5 and the fixed asset turnover ratio from 1.2 to 0.85, from 2016 to 2017. This is largely due to the high fall in sales from 2016 to 2017 and the increase in assets such as property plant and equipment which Selects Harvest failed to utilise to generate sales. Selects Harvest management have failed to utilise their increase in assets to generate sales, rather their increase in assets have led to a decrease in sales, therefore their management has failed.
• Sentence on which is better.
Question 4
Analyse the for each of the two companies in 2016 as compared to 2017. Based on your calculations and your answers to questions 2 and 3, explain the main reason(s) for the change in the profitability for each company over the two years.
