Part of your role at Numbers Up Accountants is to make recommendations to client
ID: 2450463 • Letter: P
Question
Part of your role at Numbers Up Accountants is to make recommendations to clients about potential investments. You have been asked to provide a recommendation on the best investment regarding two jewellery businesses detailed below. The only information that you have to work with is the following ratio values.
Ratio
Bling Bling (BB)
Alchemy Matters (AM)
Return on Equity
24%
35%
Return on Assets
18%
20%
Average Collection Period
52 days
39 days
Inventory Turnover
10 times
7 times
Gross Profit Margin
59%
70%
Profit Margin
16%
12%
Times Interest Earned
10 times
17 times
REQUIRED:
Write a short report to the owner in your own words in relation to the profitability, liquidity and financial stability of the businesses (BB and AM) based on the ratio results in the table above. In your report, consider what commercial or market factors might have impacted on the results (i.e. competition, suppliers, etc.) and which business would make the better investment based on the information provided (maximum 400 words)
Ratio
Bling Bling (BB)
Alchemy Matters (AM)
Return on Equity
24%
35%
Return on Assets
18%
20%
Average Collection Period
52 days
39 days
Inventory Turnover
10 times
7 times
Gross Profit Margin
59%
70%
Profit Margin
16%
12%
Times Interest Earned
10 times
17 times
Explanation / Answer
1. As per given data in the case, profitability of Alchemy Matters is better than Bling Bling because operating expense of Alchemy is less than Bling Bling.
2. Liquidity of BB is better than AM because inventory turnover ratio is higher than AM.
3. Financial Stability of AM Company is better than BB as average collection period of AM is better than BB and return on assets is as well.
4. As return on equity is good for AM, then I would like to invest in AM.
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