Introduction
In this report, I intend to conduct a financial statement analysis of Coles group and its competitor, Metcash group, for the four years from 2018 to 2021. The main reason for this analysis is to determine the most profitable company based on their figures. For an investor who decides to use his capital in one of these firms, it is appropriate to assess their profitability before such investment plans. Various financial ratios would evaluate and assess the firms’ performances to perform the analysis.
Ratio Analysis
Profitability ratios
These ratios provide business insights on the degree of achievement of the core purpose, and they assess the company’s ability to generate earnings relative to revenue, cost, assets, and equity.
Table 1: Comparative profitability ratios.
These ratios help provide more insights into how much profits the company would generate in a financial year for investment decisions. When the profitability ratios are higher than the industry averages, it indicates that a firm can achieve its profit and net earnings within a short period. The investors, therefore, choose firms with high profitability ratios since they have confidence in their returns. Using the key ratios presented above, the profitability ratios of the Coles group perform relatively better than the recommended market industrial averages since most of these ratios are greater than 1. When the ratios are compared with the competing firm’s ratios, the Coles group performs better than Metcash in its profitability, indicating that it is more profitable than the competing firm.
Efficiency ratios
These ratios measure the company’s short-term performance based on its ability to manage the available resources.
Table 2: Comparative efficiency ratios.
When the efficiency ratios are low, the company’s ability to manage its debts is strong, and it uses its resources effectively for its operations. Based on the ratios presented above, the Coles group performed slightly better in the market industrial averages since it has low days debtor’s ratio and days inventory ratios. Hence, investing in the Coles group would likely generate income for an investor since the company manages its resources effectively to boost its operations. The efficiency ratios in the Coles group are slightly lower than its competing company, Metcash, indicating that the Coles group can manage its resources better than the Metcash company within a financial year.
Liquidity ratios
The liquidity ratios assist the business in determining its ability to cover its short-term financial obligations and cash flows.
Table 3: Comparative liquidity ratios.
When these ratios are higher than the industrial averages, it indicates that a company can manage its financial obligations more effectively. Based on the ratios above, Coles group performs low in its liquidity since the values are slightly lower than one indicating that it has a weak ability to manage its short-term debts to meet its targets. Compared to its competing firm, the liquidity ratios in the Coles group are relatively lower, reflecting that Metcash company has a stronger ability to manage its short-term obligations than the Coles group. Therefore, choosing Metcash company would be more advantageous for an investor than Coles group since they are likely to achieve their cash flows within the shortest investment period.
Stability/leverage ratios
The stability ratios assist the company in investigating the level of debts it can support and whether there exists a balance between company debts and its equity.
Table 4: Comparative stability ratios.
When these ratios are slightly lower than the industrial averages, a company has a good balance between its equity and debts and effectively manages its debts. For an investor, therefore, low stability ratios indicate that the company performs better in balancing its shareholders’ equity with its debts. Based on the results, the Coles group performs slightly above the market values since the stability ratios are slightly higher; hence the company has a manageable balance between its equity and debts. Compared to its competitor, the stability ratios in the Coles group are slightly lower than Metcash company, indicating that Metcash depends mostly on its debts to finance its activities.
Investment ratios
The investment ratios show the performance rate of invested shares from a particular company which assists the shareholders in identifying the most marketable shares of a given company.
Table 5: Comparative investment ratios.
When these ratios are higher than industrial averages, a company performs better in shares than the industrial market values. From the results presented above, the Coles group performs better in the market since its investment ratios are higher than one, reflecting that it has the most performing shares. Therefore, choosing the Coles group would be a better option for an investor since its investment ratios are slightly higher than the averages. Compared to its competing company, the Coles group has strong investment ratios than the Metcash company, indicating that the shares in the Metcash company are slightly weaker than the Coles group.
Cash/Solvency ratios
These ratios assist the company in determining its working capital and the available funds to manage its regular business operations. The cash ratios also evaluate a company’s strength in achieving the net cash flows from the activities within the company.
Table 6: Comparative cash ratios.
When the cash ratios are higher than industrial averages, it indicates that a company has a strong ability to manage its cash flows during the year. For an investor, choosing a performing company in terms of its net cash flows from the operations is likely to boost their confidence in generating higher returns from their invested capital. When compared to its competing firm, Coles group has higher cash flows from its operating activities than Metcash company showing that the net cash flows in Coles group are relatively higher than the competing firm.
Changes in Financial Statements due to Changes in Accounting Treatments and Methods
The estimated key items included inventories, leases, and impairment of non-financial assets. In addition, the key judgments involved determining lease terms and evaluating the significant influence of equity investments while preparing the income statement and balance sheet (Eisner and Nadiri, 2020). In case of changes in the methods of treating these items in their respective financial statements, there would be a negative change in the figures at the end of the financial period (Eklund, 2020). When changes in accounting rules and policies also occur, there would be a likelihood of decreased values in each item at the end of a financial period.
For example, the Coles group used net realizable value in assuming their inventories at the end of the year. However, when they change the method of assuming ten closing inventories to calculation and estimation method rather than assumption, there would be a more accurate figure that can reflect the company’s financial position at the end of that period (Frank and Alan, 2019). Therefore, changing the policies and methods of accounting treatments would have provided more reliable figures that reflect these two companies’ conditions, which may have produced a lower figure than the ones presented in their financial statements.
The Usefulness of Information Provided
The two companies prepared their financial statements in adherence to the Australian Accounting Standards Board and the Corporations Act 2001. In addition, the items presented in each financial statement also complied with the International Financial Reporting Standards (Saleemi, 2019). For example, the notes provided after each item presented in an income statement, balance sheet, and cash flow statements were comparable, verifiable, understandable, and provided information that their parties could depend on while reviewing the two companies (Ayuninghemi and Mudzakir, 2018). In addition, the accounting policies followed the management and the stakeholder recommendation and presented clear and useful information that all parties concerned would rely on their analysis.
Limitations of Financial Statement Analysis (FS)
The ratios used are based on the financial statements presented, and the results of these ratios depend on the quality of the financial statements. The key limitations of these ratios include; the use of historical data, lack of information/disclosure, non-typical end years, lack of comparability of data, and hidden supplementary information. When one company has not disclosed vital information on a specific statement in its preparation, it will affect the financial ratio calculated (Saleemi, 2019, para. 3). In addition, the management and other stakeholders would exclusively rely on the ratios calculated, which may provide a misleading figure that can mislead the firm’s overall decisions due to the avoidance of some vital information that the accountants ignore in the preparation of financial statements.
The financial years in various companies also change, and there is no standard measure of a given year. Therefore, the changes in the operating years of each company limit the use of ratio analysis since each company provides statements differently from the others. Finally, the ratios are also misleading since they depend on historical data and not on the future values of the company’s performance (Prasanna, 2018). The use of historical data in comparing the performance of various companies limit proper financial decisions since a given company would have been involved in different condition of operations, and the methods used in presenting the items in financial statements are also different.
Conclusion
The report contains the financial ratios analysis of the two companies, the analysis of changes in accounting methods, the usefulness of the information provided by each company, and the limitations of using ratio analysis in decision-making. The results show that Coles group ratios perform better than the ratios from Metcash company over the four years of comparison. In addition, the financial results indicate that the two companies generally suffered poor growth in 2020 and 2021 compared to their initial performance in 2018 and 2019. The implication of these ratios shows that there was stagnant growth in the two companies’ operations during the Covid-19 period, which generally affected their activities. Therefore, future researchers should focus on trend analysis for long periods.
Reference List
Ayuninghemi, R., Mudzakir, M. and Muliawan, A. (2018) ‘The impact of capital structure on liquidity and investment growth opportunity in Tehran stock exchange market.’ Journal of Basic and Applied science Research, Vol. 3(4): pp. 463-470.
Eisner, R. and Nadiri, M. I. (2020) ‘Investment behavior and neoclassical theory.’ Review of Economics and Statistics, Volume 50 (3), pp. 369-382.
Eklund, J. E. (2020) ‘Q-theory of investment and earnings retentions – evidence from Scandinavia.’ Empirical Economics, Volume 39, pp. 793-813.
Frank, W. and Alan, S. (2019) Business Accounting 2 (16th edition). Prentice-Hall.
Prasanna, C. (2018) Investment analysis and portfolio management: risks associated with investment decisions. MacMillan Books, pp. 55-60.
Saleemi, A. N. (2019) Financial accounting & reporting. Newyork Publishers.