You are on page 1of 6

3.

0 Compare the strength and weaknesses of this deal with the Boat Builders Pty
Ltd deal. In your opinion, which is the stronger of two deals? Explain
Table 1: The comparisons of the strength and weaknesses
Boat Builders Pty Ltd
Strengths

Weaknesses

-Provide detailed
analysis which consists
of financial position,
financial performance
and cash flow budget.

Veterinary Clinic Pty


Ltd
- Provide major area of
the analysis on cash
flow budget and three
years financial
performance.

- Easier to determine
whether acceptable to
get loan or not by the
ratio analysis.

-Security position is
positive where total
asset exceed total
liability.

- Have more securities


compare to Veterinary
Clinic Pty Ltd.

-Closing bank balance


increase every month.

-Closing bank balances


at cash flow is deficit.

-Did not prepare proper


full of set financial
statements of the
company.

-The accounts in
financial statement
have not been audited
and constitute special
purpose financial
statement.

-Difficult to make the


decision on giving loan
-Did not undertake the
sensitivity analysis.
- Accountant only
referred to the history of
the financial statements
-Depending on
information from clients.
- Frequently
miscalculate of the cash
flow budget by the
accountant.

From the table 1 above, we agreed that the Boat Builders Pty Ltd deal is stronger
compare to Veterinary Pty Ltd. This is because as we can see, Boat Builders Pty Ltd
can provide the detail of the analysis which consists of statements of financial
position, statements of financial performance and also the statements of cash flow.
This is because financial statements that also known as financial reports, record
the financial activities of a business in short and long term (Adil, 2010). Besides
that, a companys financial statements provide various financial information that
investors and creditors use to evaluate a companys financial performance (Ward,
2012). Financial statements are also important to a companys managers because
by publishing financial statements, management can communicate with interested
outside parties about its accomplishment running the company (Lingesiya, 2008).
Different financial statements focus on different areas of financial performances.
The other reasons why we agreed that Boat Builders Pty Ltd deal is stronger is
because with the existed financial statements, we can determine whether the
company is capable to get loan from bank or not. In order to determine whether
the company is capable or not, need to determine by the ratio analysis. Ratio
analysis is a widely used tool of financial analysis. It is defined as the systematic
use of ratio to interpret the financial statements so that the strength and
weaknesses of a fi rm as well as its historical performance and current
fi nancial condition can be determined (Halyal, 2009). The term ratio
refers to the numerical or quantitative relationship between two variables. The
significance or importance of ratio analysis can be classified as in helping
evaluating the firm performance. For instance, determine whether the
management has utilized the firms assets correctly and to increase the investors
wealth. It ensures a fair return to its owners and secures optimum utilization of
firms assets.
Besides that, ratio analysis helps in inter-firm comparison by providing necessary
data which can be compared, studied and analyzed. These ratios provide sound
footing for future prospectus and also serve as a basic for preparing budgeting
future line of action. Based on the case study 1, we have prepared the ratios

calculation of the Boat Builder Pty Ltd as in the table 2. From the table 2, ratios are
classified into four broad categories which are Liquidity ratio, Leverage ratio,
Profitability ratio, and Efficiency ratio.

From the above table 1, Boat Builders Pty Ltd deal stronger because Veterinary Pty
Ltd comes with more weakness rather than the strength. There are several ways of
mitigating risks. From the weaknesses of Veterinary Clinic, first, they did not
undertake the sensitivity analysis. Sensitivity test is the fifth stage of analyzing the
cash flow statement projections. In the future, the client, Linda and John need to do
sensitivity analysis because it can help their company to understand their business
position better and also use deviation from expected values before making a
decision.
Next, the accountant only referred to past financial statements and information
from clients. Linda and John should present all financial analysis. It is important
because cannot only depends on the three years of statements of financial
performance based on the existing business done by Mr Cliff Costello. The
accountant frequently doing the same mistake by miscalculated the bank balance
and not be professional in handling their clients financials. With this, it is difficult
for the lender of loan to process their clients application. Because of this, Linda
and John need to be more careful in whom they choose to analyze their financial.
They need to appoint someone who has the expertise in doing accounts.
As a Relationship Manager in the Business Lending Division of Excel Bank, a loan
covenant should be applied to all customers. A business loan covenant is a
condition that the borrower must comply in order to adhere to the terms in the
loan agreement. If the borrower does not act in accordance with the covenants, the

loan can be considered in default and the bank as lender has the right to demand
full payment. Some relevant covenant for Linda and John are the life insurance of
the owner because without the owner, the company could not continue. Next,
borrower needs to keep on track of their expenses such as taxes and fees. Other
than that, Linda and John need to agree to submit financial statements for the
continuing assessment by the bank. Financial statements are usually submitted
yearly. Last but not least, the borrower is required to maintain a certain level in key
financial ratios such as liquidity ratio, profitability ratio, and leverage ratio.

RATIO
Current Asset
=CA/CL
Quick Ratio
=(CA-Inventory)/CL
Net Working Capital
=CA-CL
Inventories Turnover
=COGS/Inventory
Fixed Assets Turnover
=Sales/FA
Total Assets Turnover
=Sales/TA
Debt Ratio
=TD/TA
Debt Equity Ratio
=LTD/TE
Times Interest Earned
=EBIT/Interest
Gross Profit Margin
=GP/Sales *100
Operation Profit Margin
=EBIT/Sales*100
Net Profit Margin
=EAT/Sales
Return on Equity
=EAT/TE
Return on Assets
=EAT/TA

Last Year
$134,085/$102,031
=1.314x
($134,085-$30,000)/
$102,031
=1.020x
$134,085-$102,031
=$32,054
$257,514/$102,031
=$2.524
$418,829/$136,560
=$3.067
$418,829/$270,645
=$1.548
$270,540/$270,645
=1.000
$168,509/$105
=1604.85
*No times interest Earned
$161,314/$418,829*100
=38.52%
$103,325/$418,829*100
=24.670%
$67,644/$$418,829*100
=16.151%
$67,644/$105
=644.29
$67,644/$270,645
=0.250

Current Year
$107,717/$219,781
=0.490x
($107,717-$30,000)/
$219,781
=0.354x
$107,717-$219,781
=($112,064)
$1,405,299/$219,781
=$6.394
$1,692,538/$249,641
=$6.780
$1,692,538/$357,178
=$4.739
$343,241/$357,178
=0.961
$123,460/$13,937
=8.858
$144,665/$838
=$176.63
$287,239/$1,692,538*100
=16.97%
$144,665/$1,692,538*100
=8.547%
$130,464/$1,692,538*100
=7.708%
$130,464/$13,937
=9.361
$130,464/357,178
=0.365

Table 2: Financial Ratio Calculation based on Boat Builder Pty Ltd financial
statements

Reference
Adil, N. (2010). Importance Of Financial Statements. Retrieved May 15, 2012, from OP
Papers.com: http://www.oppapers.com/essays/Importance-Of-FinancialStatements/447941
Halyal, N. M. (2009). Ratio Analysis. Retrieved May 16, 2012, from Scribd:
http://www.scribd.com/doc/7731135/Ratio-analysis
Lingesiya, Y. (2008). Importance of Financial Statements Analysis.
Ward, S. (2012). Business Finance Makeover. Retrieved May 15, 2012, from About.com:
http://sbinfocanada.about.com/od/management/a/businessfinancesm.htm