IB Gates

Introduction

Financial analysis is a process that focuses on evaluating ways to invest and employ money in companies, as well as studying the efficiency and profits generated by their operations, and it is based on the use of a variety of tools, such as financial ratio analysis. Financial analysis is defined as a study of the financial information of a specific facility or project to realize the opportunities and problems associated with an investment (TUOVILA, 2022)

Our case study analyzes the data of two companies, the first is Fashion Forward, and their financial position could have been a better case. Dream Designs, which is in its best financial condition, with total assets twice as much as Fashion Forward.

Evaluating the results

Fashion Forward has a more prominent position for the ratios: Profit Margin Ratio, Return on Assets Ratio, and Debt to Equity Ratio. Dream Designs has a more vital role in current share, quick ratio, AR turnover ratio, average collection period, inventory turnover ratio, and average sales period. With these comparisons and considering additional financial figures from the past two years' income statements for both companies, Dream Designs is the organization to follow. Dream Designs' returns, net income, and its more vital position in inventory turnover, assets, and liabilities make it the best option. Some areas of improvement if a merger occurs are reducing SGA and improving the debt-to-equity ratio. (BLOOMENTHAL, 2021)

Ratio	Formula	Fashion Forward 2018	Dream Designs 2018
Profit Margin Ratio	(Net income / net sales)	0.0546	0.0394
Return on Assets	(Net income/ Average total assets)	0.0492	0.0481
Current Ratio	(Current assets/Current liabilities)	1.11	1.40
Quick Ratio	(Current Assets-Inventory)/Current liability	1.01	1.28
AR Turnover Ratio	(Net credit sales/ Average AR)	11.43	16.46
Average Collection Period	(365/ AR Turnover Ratio)	31.94	22.18
Inventory Turnover Ratio	(COGS/ Average inventory)	12.90	15.66
Average Sales Period	(365/Inventory Turnover Ratio)	28	23
Debt to Equity Ratio	(Total liabilities/Total equity)	0.96	0.77

Case analysis

· The profit margin generated is higher with Fashion Forward indicating a more profitable mode.

· The net income generated from each dollar is slightly greater for Fashion Forward.

· Dream Designs has a greater current ratio to cover liabilities and strengthen its financial position.

· Dream Designs has a greater ratio of quick assets to cover liabilities if necessary.

· Dream Designs has a better ratio for collecting receivables.

· The debt-to-equity ratio favors Fashion Forward as their ratio is closer to one and indicates a more solid position (Gallo, 2015)

Conclusion

The importance of financial analysis lies in analyzing the financial position of companies and analyzing the extent of their liquidity and purchasing power. Through a financial analysis of the two companies for the years 2017 and 2018, it can be said that Dream Designs has a large purchasing power to acquire Dream Designs.

Recommendations

· Dream Designs can acquire Fashion Forward

· If the acquisition takes place, Dream Design must improve the reputation of Fashion Forward, increase its sales and increase the size of its assets.

· If the acquisition does not take place, there are recommendations for Fashion Forward to increase the amount of assets, increase sales, and reduce the amount of credit sales.

References

BLOOMENTHAL, A. (2021). Ratio Analysis. Retrieved from https://www.investopedia.com/terms/r/ratioanalysis.asp

Gallo, A. (2015). A Refresher on Current Ratio. Retrieved from https://hbr.org/2015/09/a-refresher-on-current-ratio

TUOVILA, A. (2022). Financial Analysis. Retrieved from https://www.investopedia.com/terms/f/financial-analysis.asp

Financial Analysis & Accounting: The Highlights