Analysis of Financial Statements Research Paper

Analysis of Financial Statements - Research Paper Example Although this high level of debt provides higher level of ROE for the company, the debt levels are quite high thus entails very huge risks. A major recommendation for these companies is to conserve their funds instead of paying dividends, and use these in order to fund their growth instead of relying too much on debt. While the two companies remain profitable, the apparent weakness in their operation is their liquidity position, where in most instances they have less than a dollar in current assets, much less in quick assets to cover a dollar of current liability. Although the companies manage their assets well in terms of efficiency, a major recommendation is to retire current portions of debt by long-term debt in order to improve liquidity position. This decline in liquidity position, as well as the companies' aggressive capital structure policies create a perception of higher risks although both are profitable in their operations. Over the years, cash flow from the company's operations has been decreasing. For the period of four years, the cash flow in 2007 is at the lowest at 942.5. This cash flow results from the company's operations. The company's cost of sales has been relatively stable over the years, at 75% of sales in 2004 and 2005, to 76% in 2006 and 2007. Consequently, the company's gross profit figure is stable at 25% in 2004 and 2005, and 24% in 2006 and 2007. The company's expenses in relation to sales has also been at a relatively stable level over the course of four years. The company's marketing expenses are 19% of sales in 2004 and 2005, and 18% in 2006 and 2007. Coles Myer Limited spends 4% of its sales over the period of four years. After the expenses are deducted, the company's net profit figure plays around 2-3% from 2004 to 2007; 3% in 2004, 2% in 2005, 2% in 2006, and 3% in 2007 in proportion to sales. For every dollar of sales, the company receives an after-tax net profit of 0.02 cents over the course of four years. These figures result in a return on assets of 14% in 2004, 7% in 2005, 6% in 2006, and 8% in 2007. As regards the company's efficiency, the company has increased its inventory turnover over the course of the years: from 8.82 in 2005, down to 8.71 in 2006, then up to 9.08 in 2007. The company's frequency of collection has increased too, from 41.21 times in 2005, to 48.98 times in 2006, and up to 64.22 times in 2007. However, the performance of its assets in relation to sales has been decreasing over the years, from 3.94 in 2005, 3.7 in 2006, and 3.68 in 2007. ii. Investing From 2004 to 2007, Coles Myer Limited has increased its investments in property, plant and equipment-the company's biggest expenditure as regards its investing activities from 704.1 in 2004, to 925.0 in 2005, 1040.1 in 2006 and 1040.8 in 2007. This signifies some physical expansion on the