Accounting

Executive Summary
A financial analysis of Madison Stores Limited is conducted in this report by focusing mainly on the profitability and efficiency, liquidity and financial stability of the organization.  Such analysis is conducted with particular attention to the information needs of shareholders (return and investment risk) and creditors (liquidity and going concern).  From such an analysis a good profitability and efficiency were noted.  However a weak liquidity and financial stability are outlined, which increase considerably the risks of the company and decrease the viability of investing and providing credit terms to the firm.

Introduction  Myer Holdings Limited
Myer Holdings is Australias largest department store group that has operated for over 100 years in such industry.  The group offers over 600,000 product lines encompassing 2,400 brands from over 800 international suppliers across the globe.  In this business support, the financial health of Madison Stores, a subsidiary of Myer Holdings will be conducted to provide financial information to aid a potential shareholder and creditor in their economic decisions.
A shareholder is interested in two basic elements, which encompass the return derived from the investment and the risks pertinent to such investment.  Returns from an equity investor take the direct form of dividends and the indirect form of capital appreciation leading to capital gains if the equity is sold in the stock market.  Therefore, the shareholder is interested in the profitability and growth of the organization.  As regards the risk element question, the financial position and stability of the firm should be examined.  Such elements outline the working capital management, cash management and capital structure of the firm, all of which portray the going concern potential of the organization.
A creditor is mainly interested in timely payments from the customer.  In this respect, in order to answer such a question attention is more devoted towards the liquidity and cash flow of the company.  Risk is also evaluated by a creditor and thus the going concern of the organization will be assessed in a similar manner like the shareholder noted above.
Financial Analysis of Madison Stores Limited
Two techniques will be adopted to assess the financial health of Madison Stores and answer the questions requested by the shareholder and creditor noted above.  These techniques entail a horizontal and vertical analysis.  A horizontal analysis comprises the percentage changes in key variables over a specific time frame to identify any trends.  The computations pertinent to such an analysis are portrayed in Appendix A of this paper.  A vertical analysis, also known as ratio analysis is also conducted in Appendix B.  By entwining such techniques one can further enhance and support the arguments pertinent to the firms financial health.
A financial health of an organization is normally classified into three main sections, being profitability, liquidity and financial stability.  In this respect, the proceeding financial analysis will be conducted in line with the aforesaid common practice.
Profitability and Efficiency

The horizontal analysis portrayed in graphical form above indicates an upward trend for the profitability items of the firm.  Indeed, both the revenue and profit elements increased from 2008 to 2009.  This immediately hints improvement in the profitability of the organization, which means better returns for the potential shareholder.  The accounting ratios outlined in Appendix B can be useful to pinpoint the key elements leading to such a trend.
The gross profit margin and net profit margin of Madison Stores outline the gross profit and net profit generated from every 100 of sales.  The gross profit margin declined, which means that lower gross profit is being made from the sales revenue.  Such a decline is due to a decrease in cost efficiency in terms of the direct costs of the organization.  Indeed, the cost of sales increased by 38.76 during the period examined, which is much higher than the rise in sales of 26.10 outlined in Appendix A. With respect to the net profit margin an increase was noted.  By referring again to the horizontal analysis conducted below, one can note that this stems from a decrease in operating costs of 7.04 and a decrease in taxation of 4.85.  Thus, management should be applauded for their cost efficiency in operating costs.
When one examines the profitability of the organization, consideration should also be given to the utilization of resources.  The asset turnover is applied, which highlights the effectiveness of total assets to generate revenue.  This ratio remained fairly stable during the years.  This portrays that the companys effectiveness in utilizing its resources to generate profits remained fairly unchanged.  The return on assets is also computed, which outlines the ability of assets to generate income.  Its increase means that management was more effective in profit generation from resources.
The effect of the improving profitability noted above is also reflected in the return on equity ratio, which outlines the return that equity investors attain.  This is a favorable element for the company in the stock market, which may portray a rise in the price of stocks.
Liquidity
A general overview of the working capital management of the company is attained from the current ratio.  The current ratio outlines the ability of current assets to cover current liabilities.  A declining trend is portrayed which immediately outline poor working capital management.  It is viable to investigate further the current assets and current liabilities of the organization in order to shed further light on its liquidity, because as already noted the aforesaid ratio provide a generic view.  A very important element of the firms current assets is cash.  The cash of the company declined by 19.37.  This is also a negative element on the firms liquidity.  Despite such a drop the cash flow ratio of the firm increased, which is in line with the increase in net cash from operating activities.  An examination of the cash flow statement further clarifies such conflicting figures by outline that the decline in cash is due to further investments and repayment of debts. 
As regards the management of inventory outlined by the inventory turnover, an increase in such ratio is noted.  This means that the stock management of the company improved.  Better stock management is good for both the companys liquidity and profitability by enabling more cash available and reducing the risk of obsolete inventory.
The accounts receivable turnover decreased, which means that the credit control department is taking more time to collect money from debtors.  Indeed, the debtors collection period computed in Appendix B, shows an increase of 48 days.  Such ineffectiveness should be solved, because it is limiting the cash potential of the company.
On the contrary, the accounts payable turnover increased, which implies that less time is taken to pay creditors.  This is sustained by the decline in creditors payment period of 47 days computed in Appendix B.  A serious concern is raised when one compares the creditors payment period of 324 days with the debtors collection period of 343 days.  This is due to the fact that payments to creditors are being made before money is collected from trade debtors.  Such element further strains the cash flow of the company and is a serious matter that the potential creditor should consider.
Financial Stability
The debt of the company is diminishing in relation to total assets and equity as outlined by the debt asset and debt equity ratios.  This means that the risks of financial failure of the firm are declining due to lower interest commitments.  Indeed, non-current liabilities diminished by 8.86.  However, the interest charges increased by 176.03 during the years.  This is due that a significant portion of long-term debts will be paid next year, which are classified as current liabilities this year.  In fact the short-term interest bearing liabilities increased by 81.09.   Thus the benefit of lower interest due to lower debts will be gained next year.
The ability of operating profit to cover interest charges declined as shown by the fall in times interest earned.  Even the ability of cash to cover interest commitments diminished as noted by the fall in the cash interest coverage.  Hence, one can contend that the financial stability of the company is declining, hindering its going concern potential, which is an important element for shareholders and creditors as noted at the beginning of this paper.
Limitations of Financial Analysis
The financial analysis conducted in this paper, relies only on financial figures and neglects qualitative elements.  It is important that both the shareholder and creditor meticulously consider qualitative elements that also affect the organisation.  Such elements can take different forms, like customer perspective, innovation element in firm and future plans, which considerably affect the organization and may alter the decision.
Recommendation
A good profitability was noted, which outlines sustained going concern and good returns for shareholders.  This is a positive element for both interested users.  Declining working capital management and ineffective credit control were noted that put a strain on the firms cash flow.  These factors shake the going concern of the firm and the ability for the company to meet debt obligations on a timely basis.  This is an important element for the creditor.  A weak financial stability was noted that further raises concerns about the going concern of the organization.  Therefore, one can contend that this is a risky investment for the shareholder and it is thus advisable that heshe opts for other investments.  Likewise, considerable risks are noted for the creditor especially the cash concern, which diminishes the likelihood of accepting such business preposition.  However, as outlined in the previous section it is important that qualitative features are considered before taking a decision in order to see a complete picture of the company.