527252_Investment Ratios and Forecasting Assignment 1

docx

School

Kenyatta University *

*We aren’t endorsed by this school

Course

MISC

Subject

Business

Date

Nov 24, 2024

Type

docx

Pages

Uploaded by AmbassadorGoose3053

1 Investment Ratios and Forecasting Assignment Student’s Name Institution Affiliation Date

2 Investment Ratios and Forecasting Assignment Part 1 Ratio Analysis Calculate the Indicated Ratios for XYZ Current Ratio Current ratio is Computed as Current Asset/ Current Liability =500,000/350,000 =1.43X Quick Ratio Calculated as: (Current Assets-Inventory)/Current Liability = (500,000-125,000)/350,000 = 1.07X Days Sales Outstanding Calculated as: (Average Accounts Receivables/Average credit sales) * 365 days Average Accounts Receivables= ( 300,000+0)/2= 150000 Average credit sales= (1,607,500+0)/2= 803750 =(150000/ 803750)*365 = 68 days Inventory Turnover

3 Calculated as: Total Sales/ Inventory =1607500/125000 =12.86X Total Asset Turnover Calculated as the: Total Sales/ Total Assets =1607500/1000000 =1.607 Profit Margin Calculates as; Net profit / Sales *100 = 27300/1607500*100 = 1.692% ROA Computed by dividing a firm's net income by the average of its total assets =27300/1000000*100 =2.73% ROE Computed by dividing the company's net income by its average shareholders' equity =27300/400000

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

4 = 6.285% Construct the DuPont Equation for Both XYZ and the Industry For XYZ ROI= [(net profit/sales) *(sales/total assets)] =(27300/1607500)*( 1607500/1000000) = 2.7% For The Industry ROI= [(net profit/sales) *(sales/total assets)] =Profit Margin* Asset Turn over ROI = 1.2% x 3 = 0.036 = 3.6% Analysis of XYZ’s Strengths and weaknesses Strengths The strength of XYZ is presented by its profit margin as it surpasses the industry ratio. From the computation, the profit margin for the company is at .692% whereas the industry has 1.2%. this shows that the company makes significant returns hence being in a stable position to manage its finances. Good profit margins help in forecasting good financial performance in an organization. Weaknesses

5 The weakness of XYZ is presented by the days’ sales outstanding ratio. As compared with the industry, the days for collecting debts for XYZ are extremely many. For instance, from the computation it is evident that the company has to collect the debts after 68 days. This may delay the company from meeting its daily obligation. The company should collet its debts on time and this will help in stabilizing its financial performance. Effect of Double Sales/Inventory on the Validity of Ratios If XYZ company doubles its sales and inventory, the net assets will have a significant increase. The income inventory ratio will also increase presenting good financial performance. The XYZ ratios will also be above the industry average and this indicates that positive and healthy financial status. Additionally, while the sales-to-inventory ratio is constant, both the net income/sales ratio and the net income/total asset ratio will rise. Part Two: Investment Analysis An investor has to consider certain qualitative factors before venturing into an investment. There is a need to conduct an intensive analysis on the stakeholders, SWOT (strength, weaknesses, opportunities and threats), and the PEST (political, economic, social, and technological) factors which affects investment. Qualitative factors have impact on the decision- making process of the company hence creating a need of being considered when venturing into a new investment. For instance, the SWOT can be used to determine the possible capabilities for new ventures while the PEST present external factors that can affect the investment (Hou et al., 2022). Furthermore, different stakeholders such as managers, employees, shareholders, customers, suppliers, government and local; community also affects the decisions made by the coming with regard to investment.

6 Financial ratios are mainly used by an organization or an investor to determine whether the company is financially stable. Ratios which are examined when venturing into an investment comprise of the profitability, liquidity, stock turnover, risk and return, and sales turnover. Profitability ratios are examined to determine both markup and margins which are essential indicators of the financial performance of the business. The cash flows and liquidity ratios are used to assess the amount of working capital needed for investment and the generated returns. The management of the organization can also use cash flows and liquidity ratios to evaluate the solvency of an organization. Risk and return ratios are also considered when evaluating investments made by the company. The sales and stock turnover ratios are effective in analyzing the viability of an investment by identifying overstocking and deficiencies, overstocking and some of the strategies which can be effectively used in when evaluating the market. Nonfinancial factors are also useful when examining the investment viability of a given project in an organization. Some of the non-financial factors which have a significant impact on an organization include satisfaction of the customers and the employee turnover. The staff turnover is crucial in the work environment as it can result to quality output (Dangouloff et al., 2021). For instance, a low staff turnover ratio may make the staff to enjoy working in an organization can also rely on the staff turnover to formulate recruitment strategies that can help in attaining better results. It I also important to create a god relationship with the customers as this helps in the prosperity of an organization since customers a Part Three: Forecast Forecasting is used when budgeting to plan for the future operations of an organization. Through forecasting, the management of the company can make strategies which can be used in improving the operations pf a given project (Lei & Cailan, 2021). When forecasting revenues in

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

7 a hypothetical manufacturing company, one can use both the aggressive and conservative case. Entrepreneurs can forecast for the revenue by making fluctuations between the budgeted targets and the actual sales made by an organization. The aggressive/ budgeted of an organization are formulated by making effective assumptions on how the organization can attain the requirements of the budgeted plan. When making revenue projections it is possible for the organization to formulate conservative assumptions and relax some of those for its aggressive case. Furthermore, profitability forecasting is significant for the hypothetical manufacturing company. The process involves combination of the revenues and expense of the organization hence being I a position to forecast of the future profits which can be generated by the business. An effective financial plan made by an organization will help the management of the organization to identify possible areas that can generate income. Through profit forecasts, the management can identify some of the expenses which can avoided in order to maximize profit. Asset management forecasting comprise the aspects of receivables, payables, and inventory control. An organization can effectively track its performance through asset management hence increasing its wealth. Financial factors such as profitability, liquidity, and valuation and ratios are effective in forecasting the performance of the company. The profitability ratios are significant as the help in identifying the income generated by a given organization (Muammar Khadafi et al., 2021). Key and relevant information affecting the performance of the company can be presented using the profitability ratios. The organization can also use the liquidity ratios when measuring its performance. Trough liquidity ratios, the management can easily convert the company’s assets to cash. The converted cash can be used by an organization to repay creditors, and buy the supplementary assets when there is an emergency. The financial performance of the

8 manufacturing company can also be determined through valuation ratios. Valuation ratios are effective in analyzing how the organization can make its investments attractive to potential investors. The corporation can find out if its present stock prices are overpriced based on several metrics by applying valuation ratios. Additionally, a company should be less expensive in general the more appealing an investment is. Some of the techniques which can be used for the hypothetical manufacturing company when formulating effective strategies for forecasting its growth in terms of sales. Three basic types of forecasting techniques comprise of qualitative techniques, time series analysis and projection, and casual models. Some of the qualitative techniques comprise of Delphi methods, market research, and panel consensus. The management can also use time series analysis to evaluate historical performance for several years. Finally, it is significant to consider non- financial factors when making forecasts for an organization. The company can improve its reputation and relationship with customers and suppliers when is has effective non-financial factors in its operation. Some of the non-financial factors for investments for the company involves improving the staff morale, matching the industry standards and good practice, and meeting the requirements of the current and future legislation. Additionally, the non-financial variables that are important in the forecasting study include identifying and addressing dangers in the future and preserving intellectual property.

9 References Dangouloff, T., Botty, C., Beaudart, C., Servais, L., & Hiligsmann, M. (2021). Systematic literature review of the economic burden of spinal muscular atrophy and economic evaluations of treatments. Orphanet Journal of Rare Diseases , 16 (1). https://doi.org/10.1186/s13023-021-01695-7 Hou, T., Luo, X. (Robert), Ke, D., & Cheng, X. (2022). Exploring different appraisals in deviant sharing behaviors: A mixed-methods study. Journal of Business Research , 139 , 496–509. https://doi.org/10.1016/j.jbusres.2021.09.066 Lei, H., & Cailan, H. (2021, January 1). Comparison of Multiple Machine Learning Models Based on Enterprise Revenue Forecasting . IEEE Xplore. https://doi.org/10.1109/ACCTCS52002.2021.00077 Muammar Khadafi, Marzuki Marzuki, Chairil Akhyar, Chalirafi Chalirafi, Fuadi Fuadi, Irada Sinta, & Rico Nur Ilham. (2021). Analysis of financial ratio determinants for increasing operating profit in MSMEs service sector: An empirical case Study from barber shop business in Indonesia. Management Research and Behavior Journal , 1 (2), 68–73. https://doi.org/10.29103/mrbj.v1i2.5090

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

527252_Investment Ratios and Forecasting Assignment 1

Related Documents