Financl analysis of dareen company Research Paper

Financl analysis of dareen company - Research Paper Example Comparison using ratios over two financial years of Dareen Merchandizing and with industry would provide considerable insight regarding Dareen Merchandizing business performance. 1- PROFIT MARGIN FORMULA = NET INCOME Â   Â   SALES Â   (McLaney, 2009) A- RATIO: Ratio DM 2011 Industry 2011 DM 2010 Industry 2010 PROFIT MARGIN =219,030/815000 26.87% 26.00% =136,990/645,000 21.24% 22.00% B- COMMENT ON COMPANY PERFORMANCE AND INDUSTRY TREND 2011- PM-Favorable over industry 2010- PM- Favorable over industry Profit margin in the year 2011 has increased as compared to year 2010. Main reason driving this increase appears to increase in prices as well as sales of the product. Income statement shows sales increased from AED 645,000 in year 2010 to AED 815,000 in year 2011. Increase in price is also clued from comparatively minimal increase in cost goods sold than increase in sales. Increase in sales can be attributed to heavy advertising expenditure incurred from AED 2200 in year 2010 to AED 25000 in 2011. ... C- RECOMMENDATION Increase in sales without similar increase in cost refers that firm has strong control over cost components. However, this increase in sales has a push from high advertising expenditure and hence, firm has room for improvement in this respect. Control over advertising expenses has additional capacity to improve this profitability ratio. Moreover, control over utilities expenses that have increased almost near to double, can also improve net income which will ultimately improve DM’s profitability and will take it ahead of industry profitability margin. Control over these would give some room to decrease price (for instance, seasonal discounts etc) which will further increase sales and would promote profitability positively. 2- INVENTORY TURNOVER FORMULA = SALES Â   Â   INVENTORY Â   (McLaney, 2009) A- RATIO: Ratio DM 2011 Industry 2011 DM 2010 Industry 2010 INVENTORY TURNOVER 815,000/170,700 10.00X 645,000/32,470 9.00X 4.77X 19.86X B- COMMENT ON COMPANY PER FORMANCE AND INDUSTRY TREND 2011- IO- Unfavorable over industry 2010- IO- Favorable over industry Inventory turnover ratio of DM doesn’t reflect some healthy picture. In the year 2010 DM had a very minimal inventory in reference to the amount of sales. In the following year of 2011, the amount of retained inventory increased to large extent. It reflects that in both years company had inefficient inventory management. In the former year it must be constantly involved in the buying inventory every few day i.e. every 18 day (360/19.86) which resulted extra exercise, cost and time which could have been invested in other productive exercise. In the year 2011, firm purchased sizeable inventory each time in