Accounting for Decision Making Premier Investments Ltd. and David Jones Ltd. Report

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Profitability Ratios

Gross profit margin is a ratio that shows how much a company makes out of its total revenue. In 2010, out of the total revenue realized by Premier Investments Ltd, 59.09% were profits. This has increased to 59.51% in 2011, which makes it interesting to invest as compared to David Jones Ltd, which shows a diminishing margin from 39.73% to 39.11% in 2010 and 2011 respectively. Based on this, it is therefore prudent to invest in Premier Investments Ltd because it is profitable now and promises more profitability in future. Net Profit Margin shows how much a company can keep as reserves out of its total Revenue. If a company makes $100 worth of sales and retains $20 then its Net profit margin is 20/100=20%. This means that for every sales amounting to $100, Premier Investments makes $16.11 and $5.94 in 2010 and 2011 respectively (Das, Markowitz & Scheid 2010, p. 320). David Jones keeps $16.97 in 2010 and $12.62 in 2011.Both companies show a downward trend with Premier Investment showing a decline of 10.17% and a 4.35% for David Jones. In this case, David Jones is worth investing in since it gives an investor some hope for wealth optimization. Though it has low gross profit margins, it takes more than expected for Premier Investment Ltd to retained earnings. Based on the profitability, the investor would be advised to invest in David Jones Ltd since it portrays a company whose overheads are properly controlled.

Efficiency Ratios

The operations of a company can be used to assess whether it’s worth investing in or not. Efficiency ratios will always measure how well a company manages its assets, both fixed and current, as well as its short term liabilities. These ratios show how well debtors, creditors and the inventory of the company are managed. Asset Turnover ratio shows how the company has used its assets to generate revenue. This is expressed as the Total revenue divided by the total assets. Premier Investment shows that for every $1 of its assets, it generates $0.61 and $0.60 in 2010 and 2011 respectively. The decrease would be being $0.01 from 2010 to 2011. David Jones Ltd made $1.72 and $1.62 in 2010 and 2011 respectively. This is a decrease of $0.10 in 2011. Based on this, David Jones Ltd looks risky. Return on Assets is the relationship between the company’s profits and its average total assets. It is usually expressed as a percentage. The higher the percentage the more efficient is the management of that company in employing its assets in profit making. Both companies show a reduction in return on assets by 6.25% and 8.77%. David Jones Ltd looks a bit risky compared to premier Investment Ltd. Inventory Turnover shows the number of times a company takes to replenish its inventory. Premier Investment Ltd had 73 and 75 days respectively in 2010 and 2011 while David Jones Ltd took 83 and 88 days in 2010 and 2011 respectively. David Jones Ltd looks viable for the fact that its variations from 2010 to 2011 raised questions. Debtors Turnover shows the number of times a company takes to collect its debts. It is normally an expression of credit sales divided by the average debtors. In case the ration is high, the company would be performing well. Premier Investment took 4 days in 2010 and 3 days in 2011 (Reilly & Brown 2007, p. 65). This shows a decline of one day which raises efficiency issues. David Jones on the other hand moved up from 1.5 to 2 days. David Jones improved in terms of debt collection. Creditors Turnover is the number of times a company takes to pay its creditors. The company would be performing better in case the period is longer (Liu & Wang 2010, p. 80). Both companies show efficiency by showing a reduction in the number of days they take to pay their creditors. This shows a good cash flow for both companies. Looking at efficiency, it would be recommended that an investor ventures his or her capital in Premier Investment Ltd since it shows steady variations in all efficiency ratios.

Financial stability

These are ratios that show how well a company is able to pay off its debts as at a particular time should it face liquidation. Investors use these ratios to make decisions as regards to investment. The Current Ratio shows how well a company can meet its short-term liabilities when they fall due. Both companies have Current ratios of more than 100%, which show that both companies are able to meet their short-term liabilities when they fall due (Wittner 2003, p. 21). Premier Investment had bigger current ratios in 2010 and 2011 compared to David Jones Ltd. Premier Investment Ltd therefore looks less risky. Quick Ratio shows how well a company can meet its short-term obligations with its most current assets that is, without considering stock since most companies have challenges related to changing stock into cash. A quick ratio of 1 or 100% is normally recommended. In this case, Premier Investment Ltd passes the test with ratios of 351.29% and 140.07% in 2010 and 2011 respectively. Debt Asset Ratio shows how a company’s assets are used to secure debts. The Lower the percentage the better off the company is. In this case, Premier Ltd shows low advantage though increasing from 15.96% to 18.35% in 2010 and 2011 respectively. David Jones shows high figures though declining in 2011 (Bodie, Kane & Marcus 2008, p. 12). In this case, David Jones looks a bit risky compared to Premier Investments. Debt Equity Ratio shows how much a company has used external sources over its common stock to finance itself. In this case, lower percentages are recommended. In the case at hand, Premier Investment has very low figures at 18.99% in 2010 and 22.47% in 2011 as compared to David Jones’ 60.56% and 54.63% in 2010 and 2011 respectively. This makes David Jones a high-risk company since for every $100 it had as capital; $60.56 was debt in 2010.

Share ratios

These ratios show the return on investment by an investor. The higher the number the better the investment is. Times Interest Earned shows the number of times the company is able to pay its debts. In this case, David Jones Ltd is a low risk company since it is able to pay interests many times that is, 49.33 times in 2010 and 31.79 times in 2011, as compared to Premier Investment’s 17.99 times and 5.41 times in 2010 and 2011 respectively (Elton, Gruber & Brown 2006, p. 91). Therefore, David Jones is an investment opportunity for risk takers while Premier investments Ltd is meant for the risk averse investors. In the end, I would advise an investor to venture in Premier Investments Ltd and advise short-term investors to venture in David Jones Ltd.

List of References

Bodie, Z, Kane A, & Marcus A 2008, Investments, McGraw-Hill Irwin, New York.

Das, S, Markowitz, H & Scheid J 2010, “Portfolio Optimization with Mental Accounts”, Journal of Financial and Quantitative Analysis, Vol. 45, no. 1, pp 311-334.

Elton, E, Gruber, M & Brown S 2006, Modern Portfolio Theory and Investment Analysis, John Wiley, New York.

Liu, Z & Wang J 2010, “Value, Growth, and Style Rotation strategies in the long- run”, Journal of Financial Service Professional, Vol. 4, no. 1, pp 67-90.

Reilly, K &Brown, C 2007, Investment Analysis and Portfolio Management, Southwestern Thomson.

Wittner, P 2003, The European Generics Outlook: A Country-by-Country Analysis of Developing Market Opportunities and Revenue Defense Strategies, Datamonitor, London.

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