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From the analysis of the data provide, we can know that the return on total asset ratio of 2005 is 37.36%, but in 2007 is 26.06%, the ratio has decreased by 11.3%.This means that the company become less profit. The return on ordinary shareholders’ equity ratio also decreased from 32.82% of 2005 to 24.17% of 2007, this ratio measures the return earned on assets provided by owners, and the decreased ratio indicates the company using the shareholder’s equity low efficient. These two ratios indicate that the business is making less profitable return on their borrowed money during 2005 to 2007. From the horizontal analysis which begins with the monetary amount change, we can see that compared to 2006, in 2007 net sales decreased by 2.21%, which leads directly to gross profit dropping by 4.35%.And the ratio also shows that although the profit after tax has increased from 2005 to 2006, and then decreased in 2007. As the dividend payout ratio measures the percentage of profits paid out to ordinary shareholders, a 148% dividend payout ratio in 2007 indicates the business paid more than one time of its profit as dividends and it has not enough big power for growing. So according to these ratios Tick-Tock is making a decreasing and not satisfactory profit during 2005 to 2007.
The current ratio of Tick Tock Pty Ltd from 18.83 in 2005 decrease to 7.41 in 2006 and then decline to 4.81 in 2007. It indicates this company has the ability to meet its short-term debt from its current. Maybe due to this company had many assents on hand, they used the assets to do some investments and other stuff so that reduced the assets and they wanted to make current assents more efficient and make more money.
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We will focus on solvency ratios. The debt ratio has increased from 28.02% in 2005 to 39.57% in 2007. It means during these years, the company used more liability in its operation. So the percentage of assets which provided by creditors became higher and increase the burden of company. But everything has two aspects, if this company can controlled this in a reasonable situation; it is help to company, the decrease position on equity ratio, from 71.98% in 2005 to 60.43% in 2007. This ratio examines the relationship between total equity and total assets, the higher the equity ratio, the greater the asset protection to creditors. In this case, there does existence the risk of the business (Hogget, J, Edwards, L, & Medlin, J, 2006, p, 1068). And the capitalization ratio is similar equity ratio which is also providing useful information regarding long-term stability and the degree of risk. The asset turnover ratio is considered which measures the effectiveness of an entity in using its assets during the period, the data was all in the vicinity of 2.95 times. So we accept this situation. This company also has ability to meet its interest payment on borrowing out of current profits, though they decease from 9.7 times (2005) to 6.1 times (2007). From these solvency ratios, we can know this company has the ability to meet its long-term expenses and run the business stable and healthy.
With the explanations of related ratios on profitability, liquidity and solvency, we study the basic financial position and have a fundamental command of business activities of the Tick-Tock From the analysis of profitability, liquidity and financial, we fulfill the tasks in the introduction and have a deeper understanding of relationship between financial ratio and various financial abilities. We can know that Tick-Tock has ability to its obligations and daily operation is in a good situation, and also have the ability to meet its long-term expenses and run the business stable and healthy. But on the other hand Tick –Tock is making a decreasing profit with not stable profit from 2005 to 2007.As we all know profit is very important for a company. A company in the perfect competitive market decreasing and unstable profit means in the future with no good manager to manage this company, finally it will into bankruptcy. So these limitations would have big influence on the final decision, with the not ultimate satisfaction of the financial performance, we recommend David Davis do not purchase Tick-Tock for $275,000.
1. In term of importance of gross profits on return on invested capital, we should consider bringing the related ratios up in two respect. One is to enhance the net sales, which is fundamental source of profits. The other is to cut down the cost of sales, which needs to improve the daily management and take control of every detail in the production.
2. As we know increasing net sales often is accompanied by receivable accounts up. However receivable accounts have the potential to bad debts. It will lead profits down directly. So it’s a good way to reduce the amounts of selling on credit.
3. Cash is very important for an company ,during 2005 to 2007 the cash at bank of Tick-Tock doubled, but there was no increase from 2006 to 2007, To improve the ability to meet current liabilities the company should augment cash at bank.
Hogget, Edwards & Medlin 2007, Accounting: Analysis and interpretation of financial statements, 6th end p1057-1069.
Hoffman 2003, ‘Accounting and Accounting analysis for business, Economic Review,Issue 2, pp. 5-28.