Investment Analysis about two companies.-Pratt Ltd and Dana Ltd. Essay

According to a detail investment analysis by assessing performance, efficiency and fiscal stability between two companies, we may find a company that is fitting for investment. During the period of analysis, accounting ratios atomic number 18 utilized to direct the discussion. However, there are some limitation relates to ratio analysis, which can be addressed further. At last, a company would be recommended by combining discussion of many factors. entrePotential shareholder faces two options about whether investing in Pratt Ltd or Dana Ltd. According to detail information from financial statements, we can use accounting ratios to break a better prediction and analysis about potential advantages and drawbacks in investing in one of these companies. Through interpretation of accounting ratios, we can calculate closely at the financial state of two companies-profitability, efficiency, and financial stability, and then decide which company to invest in.ProfitabilityProfitability rel ates to companies past and future performance, concord to Jacklin.et.al(2007), performance is great , not only because it determines investment returns, but also the analysis of performance may provide a good indicator of the find of bankruptcy. There are a number of ratios that assist in predicting performance. The first one is gross profit margin, which is represented by net sales dissever by gross profit. The ratio calculated in Pratt Ltd is 31.2%, while 37% in Dona LTD, which reveals that every dollar sales of returns 0.37$ in Dona is better than 0.31$ in Pratt, by and by deducting the cost of goods sold. The second ratio is selling expense ratio, which can be represented by sales divided by selling expense. This peckers the relative greatness of various expenses in the earning of profit by comparing them to the sales for the period. The will is 3.6% in Pratt, compared with 3.9% in Dana, which indicates higher sales revenue involves higher expenses in Dana than in Pratt. The next one is net profit margin, which measures net sales divided by earnings after interest tax. This reflects final return to shareholders, the dissolver got is 8.9% in Pratt, 10.5% in Dona. Dona achieves a better return for shareholders. The quality of income ratio focus more on cash generated, it is a measure of everywheresights efficiency. The result got is 43.5% in Pratt, 4.1%in Dana, which indicates that a lower quality of income occurs in Dana, which relates to the level of income in the form of cash flow.The next one is asset turnover ratio, which measures the birth of sales to total assets. It indicates how effective it is in generating sales from total investment in assets. The result got is 4.86% in Pratt, compared with 4.28% in Dana, which beyond the industry average level. presume valuation used the alike for each company, the ratio reveals that for every dollar of investment in assets, Pratt produced more sales than Dana. The next ratio is return on assets, w hich shows earnings from using the total investment in assets results from net profit margin and asset turnover we can compare firms on their performance in generating profit from their investment in assets.The result is 57.75%% in Dana, which is higher than Pratts 56.76%. Both ratios indicate good operating performance, compared with industry averages 54.39%. However, it is fire that Dana produce more profit than Pratt. Given their low asset turn over rate, Dana has a higher return on sales, because both them are the same type of furniture store. The last ratio to evaluate operating performance is return on equity, which combines the impacts of performance and financial social organisation. Jackling.et.al(2004) indicates the success or failure of management in using leverage to improve owners returns, when compared with ROA. Dana produces 79.87% in ROE, while Pratt brings 78.35%. Both firms experiences better performance than industry average. However, it is wise to chose Dana be cause more returns can be achieved by the use of leverage.EfficiencyJacking et.al. (2007) indicates that operating efficiency relates to capabilities of firms to manage its assets so that maximum return can be obtained for the lowest level of assets. The first ratio to measure efficiency is muniment turnover. The result got in Pratt is32 days, which is less than 34 in industry average, 36 in Dana. This ratio indicates that Dana takes more time to turn over into sales, compared with Pratt. Inventory levels are higher in relation to sales and may imply poor enumeration management in Dana, which results in high inventory holding costs and obsolete stocks that is difficult to sell. However, in Pratt, although it may indicate good management, it also indicates inadequate stock levels, causing lost sales and profuse restocking costs.Therefore, there is no applied bar to justify whether the higher inventory turnover rate, the more efficiency it can achieve. All what we need is a trust worthy comparable figure, which represents the overall perfect situation. The next ratio is accounts receivable turnover, usually expressed as the average number of days credit customers take to present their debt to the firm. Generally, a rapid turnover of accounts receivable is desirable, however, it should not be so rapid to require credit terms that deter prospective customers. The maximum allowed conventionality credit period is 30 days, which is thirster than 23 in Pratt, 27 in Dona. Pratt takes fewer days to collect cash perhaps due to wish of credit sales. Besides, it may indicate poor control over accounts receivable in Dana.This may result in some liquidity difficulties and finally, extensive writes-offs of naughtiness debts. The last ratio to measure efficiency is accounts take overable turnover, which represent the average number of days the firm takes to pay debts to suppliers of goods and services. Usually, more days firm takes to pay debt, a worse reputation can be established, which may lead to difficulties in gaining pay from suppliers and financiers in the future. The result got is 32 days in Dona, which is longer than 29 in industry average, 25 in Pratt. This indicates Donas debt repayment is less efficient than Pratt perhaps a large amount of leverage finance is used to promote sales. As well as we know, operating performance in Dona is clearly better than Pratt. The financial structure in Dona is complicated, which needs to be reorganized. Inefficiency in Dona may result in discounts for early payment being missed. this would cause larger amount of expenses in Dona.Financial StabilityShort-termJackling.et.al (2007) indicates that short solvency can be assessed by liquidity ratios, these ratios reveal whether the entity has managed its liquidity or cash flows accurately, they can also measure the entitys ability to repay its short-term debts. The first ratio used is current ratio, it indicates that the percentage of debts arising wi thin the next 12 months that can be met by assets expected to be liquidated within the same period. The result got in Dana is 170%, compared with 150% in Pratt.This reveals that Dana has excessive current asset holding, perhaps due to a poor turnover of inventory or accounts receivable. The efficiency achieved in Pratt is better than Dana. However, liabilities are more likely to be repaid within one year in Dana. Another ratio used is dissolute asset ratio, which excluding the less liquid current assets and the less pressing current liabilities, the result got is 0.64 in Dana and 0.60 in Pratt. Although there is more lasting financial structure in Dana, it is not significant if inventory cannot be sold and debtors will not pay. The ideal ratio may depend on how readily inventory and debtors can be converted into cash and how rapidly sales can be converted to a cash flow into the organization.Long-termJacking et al. (2007) indicates that the main destruction of financial managemen t is to chemical equilibrium the maturity structure of assets and liabilities. Debt to assets ratio and debt to equity ratio can be used. Both of the result got in Pratt is 45%.81%, compared with 43%, 76% in Dana. This result indicates that Pratt has higher leverage of the entity, it may result in increase in the cost of finance relating to interest payments and in the seek of bankruptcy. Pratt is less likely to repay all debts because proceeds from liquidation will be insufficient. Moreover, Pratt may be likely to have difficulty borrowing finances or at the least, may accept higher interest charges. The creditors are more likely to take action to appoint an official receiver or liquidate the organization, if it defaults in payment of debenture interest. Another ratio is used, which measures the safety margin of profit over interest payments, is called times interest earned ratio. The result got in Dana is 5.3, which is better than 4.7 in Pratt. It is safer in Dana that interest charges are well covered by EBIT.LimitationTiming problemsThe analysis is a static one, the ratios produced from the balance sheet show financial position at a point in time. The income summary cannot reveal any trend during the period.The information baseThe important information is frequently not disclosed, the data that is disclosed lacks detail. The comparison is difficult because of length of time an asset has been held or different valuation policies adopted by entities.End useRatios use information from the past and they are not good indicators of the future. No evaluation can take place until some standard for evaluation has been established. The use of ratios arises when some ratios appear satisfactory and some appear unsatisfactory.RecommendationBased on my analysis from three areas of profitability, efficiency, financial stability, Dana is more suitable company to be invested in. Operating performance in Dona is clearly better than Dana. Although operating efficiency in P ratt is better than Dana, it reversely reflects that Dana has a more stable financial structure the credit risk is lower in Dona. There are some limitations for analysis, but for both of two companies, their encountered impact is certain.Reference keyJackling, B, Raar, J, Williams, B& Wines, G2007, Financial Statement Analysis, Luisa Cecotti, North Ryde.