ACC1AIS Financial Analysis of Ahmed Company Assessment Answer
Running Head: Financial Analysis of Ahmed Company
By comparing with performance of Ahmed with the industry benchmark can provide an insight about how well Ahmed has been performing during the month of May 2020. Ahmed cost of sales to turnover ratio is 36.9% which is lower than the industry benchmark of 57% (ato.gov.au.2020). Hence, Ahmed is able to purchase goods at a lower cost than the industry average. The total expenses to turnover ratio amounted to 71.3% which is lower than the industry benchmark of 77% - 88%. It can be deducted that Ahmed has been able to manage is expenses more effectively than the industry average. The average total expenses is 82.5% which is nearly the same as the industry average. The rent turnover ratio and motor vehicle expenses ratio are respectively at 2.6% and 1.6% are lower than the benchmark which is an indication of the low expenses conducted by Ahmed.
Ahmed Company compared with Funtastic Limited
The results show that the profitability ratios of Ahmed are relatively higher than its competitor, Funtastic Ltd. Ahmed is generating a gross margin of 63.1% compared to a negative margin of 21.10% from Funtastic. This implies that the management of Ahmed is in a position to yield higher returns in the form of gross profit. On the other hand, both companies are generating a negative net profit margin. The net profit margin of Ahmed is higher than Funtastatic, which means that Ahmed is in a better position to manage its costs.
The liquidity position of Ahmed is better than Funtastic Ltd. Ahmed has generated a current ratio of 3.2 compared to 1.4 from Funtastic. Hence for every dollar of its short-term debt, Ahmed has $3.2 in terms of assets which can be quickly converted into cash to repay its obligations. Similarly, Ahmed has a lower debt accumulation as its debt ratio is lower than Funtastic Ltd. Hence, it can be deduced that Ahmed has a better liquidity and financial position than Funtastic.
The financial analysis carried out provides evidence that Ahmed has to improve its profitability position as currently it is generating a negative net profit margin. Hence Ahmed need to become more efficient in the management of its operating expenses. The company should be reviewed its operating costs. Secondly, the current ratio which stands at 3.2 is very high. This means that Ahmed has an excess working capital liquidity. Hence, this excess liquidity could be used to repay the loan taken from the bank. Additionally, Ahmed can invest the excess liquidity to generate higher returns or invest in the non-current assets of the business. The company also have a high inventory level and by making use of an effective inventory management, it could create a better financial position for Ahmed.