1.

Report for friend

a. PROFITABLIBITY
i. Net profit margin – Measures the net profit generated from sales revenue.
ii. Return on equity – Measures a firm’s profitability in terms of return being
generated for owners/shareholders.

King’s Boats Ltd

 Net profit margin (NPM)

o Started with 34.60% % ratio and continued to increase over the next two
years (37.40% - 2017, 38.50% - 2018). However, is still below the
industry average of 40.50% (2% below) this will have effects on their
profitability. This could signal that they may have some cash flow issues
by not generating enough returns. However, the chances of this
outcome occurring is low as they are only just below the industry
average.
 Return on equity (ROE)
o Started with 14.65% and has increased over the two year to be 0.10%
above the industry average of 15.50%. (15.45% - 2017, 15.60% -2018)
this signals a positive trend – as it has increased over the period of 2
years. This could indicate that the increase in profit and stable equity
base has resulted in an increase return on the owner’s investment.
However, from this outcome it does not mean that the profitability of
the business has increased.

Mahal’s Speed Boats Ltd

 Net profit margin

o The margin percentage as of 2016 was 39.56% and had increased by in
2017 to 41.60%. However, the following year (2018) there had been a
significant drop causing the profit margin (34.45%) causing it to be the
be way below the industry average of 40.50%. This decrease is of
concern as they could be experiencing an increase to their expenses.
This will overall effect their profitability. This indicates the business is
not generating enough returns to grow their business and is heading for
problems with their cash flow.
 Return on equity
o The return on equity in 2016 was at 29.64% and over the course of 2
years the percentage had continuously decreased (25.55% - 2017,
16.50%). This percentage is still above the industry average (15.50%) by
1%. However, their ROE is above the industry average by 1%. This could
indicate that the increase in profit and stable equity base has resulted
in an increase return on the owner’s investment. However, from this
outcome it does not mean that the profitability of the business has
increased.
b. ASSET MANAGEMENT
i. Inventory turnover – Measures the number of times that an organisation
has been able to buy and sell its inventory over a period of a year.

King’s Boats Ltd

 The turnover has increased and decreased over the period of time. Starting off
with 5.15 (2016), then in 2017 decreasing to 5.05 and is current is currently
above the industry average (5.30) sitting at 5.60 (2018). The increase of this
ratio of inventory has positively affected the profitability ratios of King’s Boats
Ltd. This will also have an effect on their liquidity ratios in particular their quick
ratio.

Mahal’s Speed Boats Ltd

 The turnover has decreased significantly over the past 2 years. Starting off with
5.10 in 2016 and in 2018 their ratio is currently 9.15 below (4.45) the current
industry average. This ratio suggests that the business needs to thoroughly
investigate their inventory turnover. This has impacted the businesses overall
profitability ratios previously calculated. This will have an ongoing effect on the
liquidity and the quick ratio.

c. FINANCIAL STRUCTURE
i. Financial leverage multiplier – Measures how much of the funding of an
organisation is provided by the owner(s) or shareholder, which is expressed
by a number not a percentage.
ii. Time interest earned ratio – Measures the proportion of earnings before
interest and tax (EBIT) there is to cover interest expense.

King’s Boat Ltd

 Financial leverage multiplier (FLM)

o Over the years the FLM has been on a decreasing trend going from 2.33
in 2016 to 2.25 in 2018. However, this is higher than the industry
average of 1.95. The ratio for the business is 2.25:1, this ratio means the
business has $1 in equity to fund $2.25 of assets. This means that they
would have to find an additional $1.25 of debt financing required to
fund the asset. This can increase the debts for the business and could
become an issue in the future.
 Time interest earned ratio (TIE)
o The ratio has increased from 3.95 to 4.25 over the period of time. This
just below the industry average of 4.90. The current ratio shows that
the business is able to cover their obligations of interest has they are
above the ratio of 3. This is a favourable TIE but the business should try
to improve its long-term financial stability to be above 5.
 The shareholder’s equity has increased from $725,000 to $765,000

Mahal’s Speed Boats Ltd

 FLM
 o Has been on a decreasing trend going from 2.42 in 2016 to 1.58 in 2018.
This below the industry average of 1.95. The ratio for the business is
1.95:1, this means that the business has $1 in equity to fund $1.95 of
assets. This means that they would have to find an additional $0.95 of
debt financing required to fund the asset. This can increase the debts
for the business and could become an issue in the future.
 TIE
oThe TIE has significantly increased from 4.05 to 15.56 which is well
above the industry average. The current ratio shows that the business is
shows that business is more than comfortable to cover their obligations
of interest. This is a very favourable ratio for the business as they are
well above the favourable ratios of 3 and 5.
 Shareholder’s equity increased from $485,000 to $685,000

d. LIQUIDITY
i. Current ratio – Measures the liquidity of the organisation in terms of
whether the organisation is able to meet its short-term obligations.
ii. Quick ratio – Measures the ability of the company to meet its short-term
debts

King’s Boat Ltd

 Current ratio (CR)

o Has decreased from 2.16:1 to 1.96:1. This is below the industry average
of 2.15:1. This that for every $1 in Current liabilities (CL) there is $1.96
in current assets (CA) to meet short term debt. The ideal ration is 2:1
 Quick ratio (QR)
o Has decreased from 1.42:1 to 1.39:1. This is till above the industry
average of 1.35:1. This ratio is acceptable as it meets the 1:1 ratio
however, the ideal ration for the business would be a 2:1 ratio.
However, to make a comment on any cash flow issues we need a cash
flow statement.

Mahal’s Speed Boats Ltd

 CR
o Increased from 2.22:1 to 2.24:1 this is above the industry average (IA).
This that for every $1 in Current liabilities (CL) there is $2.24 in current
assets (CA) to meet short term debt. This ratio meets the ideal ratio of
2:1
 QR
o Has decreased from 1.30:1 to 1.15:1, this below the IA. This meets the
acceptable ratio of 1:1. However, because of the decreasing inventory
turnover ratio, the acceptable ratio for quick ratios can become a major
concern if cash flow issues become more obvious. To make a comment
on any cash flow issues we need a cash flow statement.
 e. MARKET PERCEPTION
i. Earnings per share ratio (EPS) – Measures the amount of earnings of a
company for each issued ordinary share.

King’s Boats Ltd

 The increase in EPS ($3.18 to $3.20) proves that the business profitability is also
increasing. However, the EPS for the business is below the IA by $0.10. This
ratio can be interpreted by indicating that more earnings are available per
share.

Mahal’s Speed Boats Ltd

 There is a decrease in EPS ratio, it has gone from $1.59 to $1.25. The decrease
in the EPS ratio proves that the business profitability has also decreased. This
ratio is well below the IA. This ratio can be interpreted by indicating that there
are less earnings are available per share.

Overall, I suggest that my friend should invest in King’s Boats Ltd, as they are more profitable and
liquid, have better asset management and have a better market perceptions than Mahal’s Speed
Boats Ltd.

2. After analysing both businesses cash flow statement, I will have still suggested that my
friend should invest in King’s Boats Ltd over Mahal’s Speed Boats Ltd. This is because in:
a. 2016 King’s Boats Ltd had a Net cash flow of $555,000 and Mahal’s had $386,000
b. 2017 King’s had a Net cash flow of $473,000 and Mahals had $246,000
c. 2018 King’s had a net cash flow of $395,000 and Mahal’s has ($101,000)
3.
a. Net assets backing per share = Net assets/Number of shares issued
i. Kings = 3.44
ii. Mahal = 2.86
b. My friend will be paying for the goodwill of either business via their client/customer
base, there brand image and there employee loyalty. These factors contribute to the
businesses value as a going concern.
c. The book value for kings is $1.53 compared to its market value of $1.90. The book
value for mahal’s is $1.52 compared to the market value of $2.10. My friend would
be paying more than what the book value is per share, however, she should be
paying the market price of kings as it a better investment is cheaper and she is gain
more benefits than what mahal’s would offer.