PMV Financial Analysis: Gross Margin, Net Profit, and Solvency Overview

PMV Financial Analysis: Gross Margin, Net Profit, and Solvency Overview

Augmentation of PMV's Gross Margin and Net Profit Ratio

It indicates an improvement in PMV's gross margin from 60.98% in 2020 to 64.30% in 2021, attributed to consistent growth in sales revenue. It signifies PMV's efficacy in delivering services using direct labor and supplies. The net profit ratio has risen to 18.84% from 11.33%, indicating PMV's enhanced capacity to convert sales into profit. The substantial rise in return on assets from 6.94% to 12.13% indicates the company's excellent use of its assets to create profit (Miransyah and Dempo 2021). PMV has a robust profitability stance.

The PMV current ratio rose to 1.4822 in 2021, up from 1.2543 in 2020. This is a favorable indication, showing that the corporation have sufficient current assets to fulfill its immediate financial commitments. The fast ratio markedly increased from 0.9504 in 2020 to 1.0745 in 2021. A fast ratio over 1 signifies that the firm have sufficient rapid assets to satisfy its creditors at maturity (Kurniani 2021). The corporation has a robust liquidity position.

There is a marginal decrease in PMV's Inventory Turnover Ratio from 2.8960 in 2020 to 2.8207 in 2021, suggesting an unwarranted accumulation of stock or outdated inventory. The debtor turnover ratio rose to 72.5031 from 45.6138. This indicates the implementation of an effective credit collection procedure inside the organization, resulting in prompt recovery of receivables. The rise in PMV's asset turnover ratio from 0.6126 to 0.6437 signifies improved efficiency in the company's sales generation via asset use (Kurniani 2021). All factors indicate that the corporation maintains a generally successful operational stance.

The reduction in PMV's debt-to-equity ratio from 0.6346 in 2020 to 0.4882 in 2021 indicates a less reliance on borrowed capital, making PMV more attractive for investment. The rise in the equity ratio from 0.6118 in 2020 to 0.6720 in 2021 indicates that PMV has used a greater proportion of owners' contributions to fund its assets compared to borrowed capital (Brindescu–Olariu 2016). The corporation has a robust solvency position.

The ratio analysis presented in Part A may aid the auditor in pinpointing the sections of PMV’s financial statements that are susceptible to serious misrepresentation. Consequently, the time, type, and breadth of audit processes must be adjusted to evaluate such high-risk sectors. It may need the execution of more comprehensive audit processes.

This debate delineates and substantiates three possible accounts that may be inaccurately represented:

Sales revenue rose to $1,443,174,000 in 2021, up from $1,215,316,000 in 2020. This account may be exaggerated, since a rise in the gross profit ratio suggests inflated sales via fabricated transactions without a matching entry for the cost of products sold (Nguyen, Ngo, and Le 2020). 

Liabilities Accruing Interest – Non-current interest-bearing obligations declined to $77,834,000 from $146,659,000, while current interest-bearing liabilities rose from zero to $69,000,000. This statement may be underestimated by intentionally categorizing non-current interest-bearing borrowings as current interest-bearing borrowings to enhance the solvency position (Dritsas and Petrakos 2018).  

Total equity rose to $1,532,905,000 in 2021 from $1,347,448 in 2020. This statement may be exaggerated, since a rise in total equity would enhance PMV’s debt-to-equity and equity ratios, so improving its solvency situation.

According to ASA 570 Going Concern, three categories of variables will be assessed to determine PMV's ability to continue as a going concern. They include financial, operational, and other considerations (ASA 570, 2022).

Financial Factors – These factors encompass net liabilities from a high gearing position, negative operating cash flows, unfavorable key financial ratios, substantial operating losses, significant declines in the value of assets utilized for cash flow generation, cessation or arrears of dividends, failure to timely settle creditor obligations, non-compliance with loan covenants, among others (ASA 570, 2022).

Operating Factors - These factors include management's desire to terminate operations or liquidate the enterprise, the departure of key management personnel without succession, the loss of significant market share, shortages of essential suppliers, and the emergence of formidable rivals (ASA 570, 2022).

Additional Factors – These factors encompass noncompliance with statutory or capital requirements, legal actions against PMV that may result in judgments PMV cannot satisfy or that limit trading opportunities, adverse alterations in government policy or legislation, and disasters that are underinsured or uninsured (ASA 570, 2022).

References

Auasb.gov.au. 2022. ASA 570. [online] Available at: <https://auasb.gov.au/media/jbwpiyr5/asa_570_12_21.pdf> [Accessed 23 April 2022].

Brindescu–Olariu, D., 2016. Solvency ratio as a tool for bankruptcy prediction. Ecoforum Journal, 5(2).

Dritsas, S. and Petrakos, G., 2018. Risk of Material Misstatement in Fluctuated Economic Environments: The Case of Greece. International Business Research, 11(6), pp.243-248.

Kurniani, N.T., 2021. The effect of liquidity ratio, activity ratio, and profitability ratio on accounting profit with firm size as a mediation. Journal of Economics and Business Letters, 1(3), pp.18-26.

Miransyah, G.G. and Dempo, S.R.S., 2021. Profitability Ratio Analysis at PT. Medikaloka Hermina, TBK. BINA BANGSA INTERNATIONAL JOURNAL OF BUSINESS AND MANAGEMENT, 1(1), pp.60-67.

NGUYEN, H., NGO, T.K.T. and LE, T.T., 2020. Risk of material misstatement in the stage of audit planning: Empirical evidence from Vietnamese listed enterprises. The Journal of Asian Finance, Economics and Business, 7(3), pp.137-148.