Ac3059 : Financial Management : Assessment Answers
Question
EC Given the following information for Console Manufacturing and the corresponding industry averages, perform a trend analysis on the components of the return on investment and return on stockholders’ equity. Discuss the underlying causes of the following trend.
| 2012 | 2013 | 2014 | 2015 | 2016 | |
|
Console Manufacturing
Net profit margin
Total asset turnover
Equity Multiplier
|
6%
1.8
1.7
|
6%
1.6
1.5
|
7%
2.2
1.5
|
7.8%
2.3
1.3
|
8.5%
2.6
1.2
|
|
Industry Average Net profit margin
Total asset turnover
Equity Multiplier
|
5.5%
1.7
2.1
|
5.8%
1.8
2.0
|
6.2%
2.3
2.1
|
6.5%
2.4
2.2
|
7%
2.8
1.9
|
Answer
Console Manufacturing Analysis
Net profit
The net profit of the company is 6% in the financial year 2012, whereas it increased consistently from 2012 to 2016. This seems that company has performed better and managed the operating costs very well. The probable reasons for increase is due to decrease in fixed costs. The company is performing in an outstanding manner as compared to the other companies in the industry.
Total asset Turnover Ratio
The analysis reflects the total asset turnover ratio in the year 2012 was 1.8 and reached to almost 2.6 in the year 2016, due to continuous use of the existing assets and limiting the purchasing of inventory.
Equity Multiplier
The equity multiplier of the company is 1.7 in the year 2012 and it reduced to 1.2 in the current year. From the point of view of the solvency the Equity multiplier of the Console Manufacturing is sound but from the point of view of profitability, the company will have a lower benefit in account of the tax component.
Industry Analysis
Net profit
The net profit of the industry is 5.5% in the year 2012 and the same have been evolving over the period of five years. The probable reason of the slow growth in the profit margin is the slow increase in the overall cost of goods sold.
Total asset Turnover Ratio
If we look at the industry the total asset turnover ratio is 1.7 in the year 2012 and it reached to 2.8 over the period of five years. The increase in the total assets of the industry indicates that the companies in the industry have the ability to generate assets through the cumulative sales.
Equity Multiplier
The equity multiplier of the industry is 2.1 in the year 2012 and it remained consistent till year 2015. However in the year 2016, the equity multiplier decreased due to the companies in the industry are mostly outsourcing the finance.
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