(BUSM1010) Finance assignment analysing the financial performance of Tassal Group Limited(TGR) and Motorcycle Holdings Limited(MTO)

Question

Task: You are required to analyse the financial position and performance of two companies for the two stated financial years (2020 and 2021) in your finance assignment. You need to provide a recommendation as to which may be the best company for the Fund to invest into, if any.

Answer

Two companies Tassal Group Limited(TGR) and Motorcycle Holdings Limited(MTO) are been considered for investment in this finance assignmentand a detailed analysis based on different ratios have been presented in this assignment.

Analysing the Liquidity position in the finance assignment
A liquidity ratio helps in understanding the ability of the company to pay off its short-term obligation. The current assets and current liabilities are taken into consideration in this finance assignmentfor calculating the liquidity ratios. It helps in understanding the margin of safety for the creditors and other short term loan holders based on the amount of assets the company has in handy. In the given question we have calculated 2 types of ratios for the given companies: Current Ratio – It takes into consideration the total current assets and liabilities that a company has and helps in determining whether the company is capable to pay of its liabilities with the assets that it has. It is calculated as Current Assets/ Current Liabilities(Barnes, December 2006). Quick Ratio – It helps in understanding the ability of the company to pay off its liabilities without selling off its inventory and also does not take into account the prepaid expenses.

It can be seen in thisfinance assignmentthat in case of TGR the current ratio has increased from 2020 t0 2021, which means that the company is growing in its capacity to pay off its short term obligation and because of the pandemic the Current ratio was low in 2020, with respect for quick ratio its considerably same for both the years. In case of MTO the current ratio has reduced from 2020 to 2021 and this can be due to an increase in short term debts and that is then affecting the liquidity position of the company in the long run(Ilham, April 2020). With respect to quick ratio also it can be stated in the finance assignment that it has reduced which means that in case the company does not sale its inventory its liquidity position would be very unstable.

Sources of finance
The capital structure ratio of the finance assignmentthrows light on the capital structure of any company that can be inclusive of equity and debt and helps the investors in understanding what would happen to their investments in the worst-case scenarios. Two types of capital structure ratios are calculated below: Debt- Equity Ratio – It is a ratio of the long-term debt to the equity holdings in the company. It helps in understanding the owners or shareholders own contribution in the capital in alignment with the long-term debt that is financing the company.
Capital Gearing Ratio – It helps in calculating the total equity to the total fixed interest bearing securities ratio. It helps in understanding the equity position of a company in comparison to its interest bearing securities like preference share, debentures etc.

In the given finance assignmentwe see for TGR the debt-to-equity ratio has increased from 2020 to 2021 which means there is a reduction in the proportion of equity to the total debt of the company which indicates that the company has taken more debt in 2021 to support its operation and the capital gearing ratio has reduced which indicates that the equity portion has reduced in comparison to the debt portion for the company(Nasution, 2019). In case of MTO as per the finance assignmentwe see that the debt-to-equity ratio has reduced which indicates that there is an increase in the total equity investments and thus portion of debt has reduced in the capital structure which means that there is less risk for the investors as equity has less risk but less rewards too and the capital gearing ratio has also increased highlighting the same increase in equity in comparison to total debt.

Managing expenses
Profit margin ratios in the finance assignment
Profit margin ratios helps in determining the what percentage of the companys sale consists of profit. It helps in understanding how well the company is managing its expenses in order to generate the maximum amount of revenue from its sale. We have calculated three different profit margin ratios in thisfinance assignment-

Gross profit margin – It shows the total profit after taking into consideration the cost of goods sold.

Net profit margin – It shows the net profit margin after taking into consideration all the total costs that the company is incurring to generate the sales(Rochim, 2017). Operating profit margin – It shows the net operating profit after taking into consideration the net operating expenses to generate the sales.

It can be seen in the finance assignment that in case of TGR the profit margin ratios have reduced in all the three ratios which means that the overall expenses of the company have increased considerably in comparison to the revenue generated by the company. In case of MTO it can be seen that the profit margin ratios have improved which means that the company is managing its expenses in a better way and thus the profit component has increased in total sales of the company.

DuPont Analysis
Du Pont Analysis is an expected return on equity formula. It helps in decomposing the different drivers of equity return. It is calculated by the given formula in this finance assignment: DuPont Analysis=Net Profit Margin * Asset Turnover * Equity Multiplier.

In the given finance assignmentwe can see that in case of TGR the ROE has decreased which is because the net profit margin has decreased even though the average assets and the equity multiplier has increased. This shows that the company is unable to manage the expenses properly and thus net income has decreased. Other side we see that in case of MTO the ROE has increased and that is because the net profit margin has improved which means the company is making more profit in comparison to prior year and hence the net ROE has also improved(Rutkowska-Ziarko, June 2015). It can also be attributed to the fact in this finance assignmentthat the company has made more investment in equity and that has helped the company to better its resources.

Recommendations
Based on the overall analysis given in the finance assignment it can be said that the company should invest in MTO as the company is having a better capital structure and the overall return that they are providing to the shareholders is also more. There is less risk involved and the overall return is also more. Except the liquidity position in all other aspects MTO has performed better than TGR and hence the investors should consider investing in that. In case of the other company the return is also low, even though the liquidity position is very stable. But in all other cases apart from the one mentioned in this finance assignmentthe net profit is also low and the capital gearing has also reduced thus TGR is not a very good option to invest for the CIO of Eminence Investment Fund and thus MTO should be their option and MTO should try to maintain more current assets so that they have enough funds to pay off their liabilities on time.

Bibliography
Barnes, P. a., December 2006. The Analysis and Use of Financial Ratios in finance assignment: A Review Article. Journal of Business Finance & Accounting 14(4), pp. 449 - 461.

Ilham, I., April 2020. The Influence of Current Ratio and Debt to Asset Ratio on Return on Assets at PT Selaras Aditama. Jurnal Ad ministrare 6(2), p. 229.

Nasution, A. E., 2019. The Effect of Debt to Equity Ratio and Total Asset Turnover on Return on Equity in Automotive Companies and Components in Indonesia. DOI:10.2991/icame-18.2019.20.
Rochim, N. G., 2017. ANALYSIS ON THE EFFECT OF CURRENT RATIO, CASHFLOW FROM OPERATION TO DEBT, FIRM SIZE AND RETURN ON EQUITY ON STOCK RETURN. International Jurnal of Islamic Business Ethics (IJIBE), pp. 41-50.
Rutkowska-Ziarko, A., June 2015. The Influence of Profitability Ratios and Company Size on Profitability and Investment Risk in the finance assignment. Folia Oeconomica Stetinensia 15(1).