Wednesday, May 6, 2020

Ratio Analysis of Kathmandu Limited-Free-Samples for Students

Question: Compare between Kathmandu Limited and OrotonGroup. Answer: Introduction Kathmandu Limited is a New Zealand based company involved in designing, marketing and selling of clothing and equipment for travel and adventure. The company has a network of about 161(Finance.Yahoo, Yahoo Finance) stores which includes 47 in New Zealand and 114 in Australia. Our competitor, OrotonGroup Limited is a company based in Australia. It is in the business of leather goods, fashion apparel and accessories which it designs, develops, markets and also retails. The company has 63 Oroton stores (Finance.Yahoo) The company also operates another brand called GAP under which it sells fashion apparel. There are 7 GAP stores. The company has its presence in Australia, New Zealand and Asia. Financial Analysis A financial analysis of the above two companies was conducted and the financial performance of Kathmandu Limited has been compared to OrotonGroup. Ratios under all categories including profitability, liquidity, solvency and activity have been calculated and compared to determine the overall financial performance of both the companies. Kathmandu Limited Oroton Limited Year 2014 2015 2016 2014 2015 2016 Profitability Ratio Net profit margin 10.7% 5.0% 7.9% 6.6% 2% 2.5% Activity Ratio Asset turnover 1.00 0.98 1.01 2.03 1.88 2.04 Liquidity Ratio Current ratio 2.64 2.90 1.79 2.09 2.86 3.02 Quick ratio 0.25 0.42 0.2 0.75 0.95 0.72 Cash conversion cycle 176.6 days 169.1 days 113.2 days 118.8 days 185.9 days 159.4 days Capital Structure Ratio Debt ratio 0.15 0.16 0.11 0.00 0.10 0.00 Net Profit Margin It is the profit which is left after deducting all business related expenses from sales. This profit is available to shareholders. The net profit margin has decreased from 2014 to 2016. This is because of huge costs incurred in inventory clearance in 2015 (Limited, 2015) This led to lower margin sales and also increased operating costs further declined the profits. However, the margin has improved in 2016 with an increase in sales due to product newness and better promotional activity. Also the operating costs decreased leading to a strong result. Kathmandu Limited has far better margin as compared to OrotonGroup in all the three years. The profits of Oroton have decreased significantly in 2015 owing to increased purchasing costs due to weak Australian dollar and also opening of lower margins GAP stores (OrotonGroup, OrotonGroup Annual Report 2015, 2015) In spite of weak Australian dollar, Kathmandu Ltd has higher margins. Asset Turnover The ratio measures the efficiency with which the company is utilizing its assets to generate sales. The ratio has remained more or less constant in all the years for Kathmandu Limited. The ratio is nearly 1 which means the company is generating 1 dollar revenue for every dollar invested in assets. Oroton has better asset turnover ratio of around 2 in all the three years. This means it is utilizing its assets in a more efficient way to generate sales. The efficiency can be said to be twice than that of Kathmandu. Current Ratio It is the ability of the company to pay for its short term obligations from its current assets. It is a liquidity measure of the company. The current ratio was higher than 2 in 2014 and 2015; however it has fallen below 2 in 2016 for Kathmandu. This is because of a decrease in current assets owing to a decrease in inventory. The company has implemented a demand planning software due to which the levels of inventory have reduced. The current ratio of Kathmandu is lower as compared to Oroton and the ratio has increased over the years for Oroton. Oroton has fewer liabilities as there is no short term borrowing and also the inventory levels have decreased in 2016. Quick Ratio Quick ratio is the ability of the company to pay for its current liabilities from its quick assets which can be converted into cash within 90 days. Kathmandu limited has very low quick ratio and the ratio has reached its lowest in 2016 as liabilities have increased more than assets. This is because inventory comprises of most of the current assets. The quick assets are very low as compared to current liabilities and hence render the company low on liquidity. Oroton has a better quick ratio throughout which shows its stronger liquidity position. Debt Ratio The ratio measures the percentage of companys assets that have been financed by debt. The debt ratio of Kathmandu has decreased over the three years. The debt levels of the company reduced in 2016. Most of the companys assets are financed through equity. However, the debt ratio of Kathmandu is higher as compared to Oroton. Oroton has not debt at all in 2014 and 2016. All assets are financed through equity. Though this makes the company stable but as a result the company is not leveraged. Cash Conversion Cycle It is the time taken to convert purchase into sales and is comprised of days inventory outstanding, days sales outstanding and days payables outstanding. The cash conversion cycle of Kathmandu has decreased over the period. This is because of decrease in inventory levels owing to the demand planning software. Also the days payables have increased leading to a lower cash cycle. The company has low sales outstanding which means it recovers its debts very quickly. In comparison to Kathmandu, Oroton has a longer cash conversion cycle basically because of higher days sales outstanding. Also the days payables outstanding have decreased. Recommendations Based on the above ratios, we see that Kathmandu has higher profitability. In terms of liquidity and capital structure, Oroton has better solvency both short term and long term. Also Oroton has better asset utilization capacities. However, Kathmandu has a better working capital management as it has a lower cash conversion cycle and its implementation of the demand planning software will further improve the working capital. It is recommended that a potential investor should go for Kathmandu Limited because of better profit margins and also it is expected that the company will improve its liquidity with low inventory. The debt ratio of Oroton looks better but no debt deprives the company of tax benefits related to interest. Thus, Kathmandu is highly recommended. Bibliography Finance.Yahoo. (n.d.). Retrieved August 24, 2017, from https://finance.yahoo.com/quote/ORL.AX/profile/ Finance.Yahoo. (n.d.). Yahoo Finance. Retrieved August 22, 2017, from https://finance.yahoo.com/quote/KMD.NZ/profile?p=KMD.NZ Kathmandu. (2016). Kathmandu 2016 Annual Report. New Zealand. Limited, K. (2015). Kathmandu Annual Report 2015. New Zealand: Kathmandu Limited. OrotonGroup. (2015). OrotonGroup Annual Report 2015. Australia. OrotonGroup. (2016). OrotonGroup Annual Report 2016. Australia

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