QCAA Accounting Performance analysis of a public company

Gross profit (＄50.86 m to ＄36.59 m) and net profit (＄78.13 m to ＄25.11 m) decreased from 2021. The gross margin dropped from 56.79 in 2021 above the industry benchmark of 48.43 to 40.07 in 2022, below the industry benchmark of 47.28. Net profit ratios for both years are consistently above the industry benchmarks of 22.85 and 21.65.
Cost of sales as a percentage of sales has increased by 19.45 percentage points, therefore gross profit has decreased by $14.27 m or 16.72 percentage points. Changing suppliers should be considered to reduce these costs or reduce the amount of stock kept on hand.
Sales have increased by 1% in 2022 yet the cost of these sales has increased by 46% since 2021. Considering increasing sales prices could recoup some costs. Other revenue has increased since 2021 and it may be profitable to increase these items.
Effective management of most expenses resulted in consistent or decreasing costs. The revaluation of investment properties with gains of ＄63.49 m in 2021 and ＄13.46 m in 2022 overinflated the net profit figures, particularly in 2021. This explains the positive comparison with industry benchmarks. Without the revaluation, the net profit ratios would be 16.34% (2021) and 12.76% (2022), both below the industry benchmarks.
Employee expenses decreased by ＄3.77 m, indicating a reduction in staff or movement from casual to permanent positions.
Marketing and administrative expenses have halved, indicating a reduction in spending or change of suppliers.
The profitability of the Motel Company could improve by changing purchasing policies (suppliers and quantities) and increasing selling prices.

A purchase of bank bonds for ＄99 970 is reflected in non-current assets and the cash flow. This money could have been used to reduce operating costs, attract more passengers and improve profitability.

Deferred tax assets have appeared in 2020. These will offset future tax debts and reduce cash outflows in a future period.

The business has purchased (＄145 570) and sold (＄62 670) property, plant and equipment during the year, reflecting the expansion of its fleet and offices.

The business is highly geared at 75% against the industry benchmark of 60%, so it would need to issue shares and pay down debt. Finance costs have been growing, supporting the interpretation of the business being highly geared.

Income from operations has dropped by ＄98 830 from 2019 (see cash receipts from customers, which have reduced by ＄147 530). Borrowings have increased by ＄1 156 000. One share issue raised ＄310 460, so another share issue may be needed to increase cash flow. The share issue has been put towards paying off existing borrowings. More borrowings were needed to help meet the cost of payments for other deposits and for purchases of property, plant and equipment. The current ratio and acid test for the business are below the industry average, indicating liquidity issues.

The company must focus on consolidation in Queensland as a priority before expansion. It should show improvements in liquidity and gearing. Expansion requires extensive capital expenditure with high risk, particularly when considering the drop in operating cash inflows.

XYZ Catering Company’s net profit has decreased to ＄59 173 in 2023. Total revenue increased by 1.35%, while expenses increased by 1.98%. This has resulted in a decrease of 13 cents in EPS and ROE decreasing from 18.2% to 16.2%.

The 84.3% decrease in Other income from ＄3 254 to ＄511 has negatively impacted profitability. Reasons could include a reduction in interest revenue due to decreases in cash and equivalents, and/or financial asset investments.

If the expansion proceeds, inventories costs may increase significantly to stock the additional equipment. Liquidity should not be negatively impacted, as inventories could be funded from cash and cash equivalents.

Trade and other receivables have increased ＄23 102. Further credit sales could increase the risk of bad debts. If liquidity and cash flow are not monitored closely, payment of trade and other payables, which have increased ＄22 466, could be further impacted.

If equipment is sold, as well as leased, the possible decrease in lease revenue could be offset somewhat if the business moves into repairs and maintenance of equipment that has been sold.

The board should proceed with the expansion, especially given the success of the trial. Once established, additional sales should increase net profit. The introduction of a tight credit policy is recommended to ensure prompt payment is received from trade and other receivables. This should result in an improved cash position, a reduction in bad debts and the ability to pay trade and other payables in a timely manner to maintain an excellent business reputation.

Notes

Valid: sound, well-founded; legitimate and able to be supported.
Relevant financial data and information may include:

Profitability

• net profit ratio
• NP/net sales x 100
• 2023: $\frac{62\,707}{677\,378} \times 100 = 9.26\%$
• 2024: $\frac{59\,173}{686\,496} \times 100 = 8.62\%$
• ROE: is provided in stimulus

Liquidity

• Current ratio
• 2023: $\frac{580\,316}{401\,724} = 1.44:1$
• 2024: $\frac{599\,436}{419\,204} = 1.43:1$
• Turnover of a/c receivable
• 2024: $\frac{678\,811}{(172\,353 + \frac{195\,455}{2})} = 3.69$ times or 99 days approximately

Stability

• Equity: 45%
• Liabilities: 55%

Other relevant relationships/trends/ratios may include:

• current tax receivables increased by 169.26% or ＄2 544
• investment in joint ventures increased by 331.94% or ＄12 741
• PPE increased by 18.48% or ＄10 245
• intangibles increased by 5.34% or ＄6 131
• trade and other payables increased by 6.1% or ＄22 466
• borrowings increased by 65.81% or ＄8 447
• or other suitable response consistent with a reasonable understanding.