Before you start analysing the firm\'s financial statements, you will need to ob
ID: 2337793 • Letter: B
Question
Before you start analysing the firm's financial statements, you will need to obtain industry averages for each of the standard financial statement ratios. They are provided below.
1) Analyse the firm's performance over the last 3 years. You should pay attention to all the 16 ratios shown above. Identify any strengths or weakness, in terms of positive or negative trends.
a. Profitability Ratios
b. Efficiency Ratios
c. Liquidity Ratios
d. Leverage Ratios
e. Investment Ratios
2) Analyse the firm's performance in comparison to Industry averages for each of the ratios. Identify any strengths or weaknesses.
a. Profitability Ratios
b. Efficiency Ratios
c. Liquidity Ratios
d. Leverage Ratios
e. Investment Ratios
3) Summarise the firm's performance in terms of profitability, efficiency, liquidity, leverage & potential for investment.
4) Briefly explain to the client any possible problems with your analysis that client should bear in mind. For example, are there any conclusions you have come to that might be unreliable because of the nature of this analysis, and if so, why?
2019 2020 2021 Industry Averages Profitability Ratios Return on equity 21.3% 21.2% 19.6% 22.0% Return on Capital employed 12.9% 13.5% 13.5% 12.8% Operating Profit Margin 14.7% 18.2% 23.0% 14.4% Gross Profit Margin 54.7% 52.0% 49.3% 44.8% Efficiency Ratios Average Inventory Turnover period 79.8 83.3 93.0 78.8 Average settlement period for Accounts Receivable 28.0 27.0 28.4 30.0 Average settlement period for Accounts Payable 39.9 48.8 62.4 37.3 Sales Revenue to Capital Employed 87.3% 74.2% 59.0% 87.0% Liquidity Ratios Current Ratio 2.82 2.88 2.95 4.60 Acid Test Ratio 2.03 2.14 2.25 2.76 Leverage Ratios Gearing Ratio 61.7% 58.5% 55.2% 61.4% Interest Cover Ratio 3.94 4.38 4.65 5.75 Investment Ratios Dividend Payout Ratio 67.8% 59.9% 57.1% 40.8% Dividend Yield 6.61% 6.01% 5.08% 4.70% Earnings Per Share $0.19 $0.21 $0.20 $0.28 P/E Ratio 10.4 9.8 11.5 11.2Explanation / Answer
2019
2020
2021
Negative or Positive trend
Profitability Ratios
Return on equity
21.30%
21.20%
19.60%
it shows a negative trend over the period and not good for the company
Return on Capital employed
12.90%
13.50%
13.50%
it is improving over the year so it shows a positive side for the company
Operating Profit Margin
14.70%
18.20%
23.00%
it is improving over the year so it shows a positive side for the company
Gross Profit Margin
54.70%
52.00%
49.30%
it is decreasing over the year so it shows a negative side for the company
Efficiency Ratios
Average Inventory Turnover period
79.8
83.3
93
it shows a negative trend over the period as more inventory is stored and it requires heavy investment in inventory
Average settlement period for Accounts Receivable
28
27
28.4
it shows a negative trend over the period as it this period is increasing and debtors are paying with delays
Average settlement period for Accounts Payable
39.9
48.8
62.4
it is increasing shows a positive picture for company as company is getting more credit period for payment
Sales Revenue to Capital Employed
87.30%
74.20%
59.00%
it has decreased over the years so shows a negative trend
Liquidity Ratios
Current Ratio
2.82
2.88
2.95
it is increasing means company is investing heavily in current assets which is not a good sign
Acid Test Ratio
2.03
2.14
2.25
it is increasing means company is investing heavily in quick assets which is not a good sign
Leverage Ratios
Gearing Ratio
61.70%
58.50%
55.20%
it is decreasing means company is paying out it debts
Interest Cover Ratio
3.94
4.38
4.65
it is increasing it is a positive sign
Investment Ratios
Dividend Payout Ratio
67.80%
59.90%
57.10%
it is decreasing means company dividend payout ratio is declining over the period
Dividend Yield
6.61%
6.01%
5.08%
it is decreasing means company dividend payout ratio is declining over the period
Earnings Per Share
$0.19
$0.21
$0.20
it shows a mixed trend not much difference over the previous year
P/E Ratio
10.4
9.8
11.5
it is increasing it means people are ready to pay more for the company stock
Profitability Ratio
These ratios show a mixed trend as gross profit ratio and return on equity is decreasing while operating profit margin and return on capital employed show a positive trend so profitability of the company has decreased and it should be matter of concern for the company
Efficiency ratio
companys efficiency ratios show a negative trend like accounts receivable collection period, inventory turnover period, sales to capital employed only the accounts payable payment period has increased which is only the positive side so it is again a matter of concern to the company
Liquidity Ratio
company investment in current assets is increasing as it reveals from increased trend in current ratio and quick ratio.
Leverage ratio
it is improving as capital gearing ratio has decreased and Interest coverage ratio is increasing so it is a positive side for the company
Investment ratio
it overall shows a mixed trend as dividend yield and payout ratio is decreasing, EPS is almost constant and PE ratio shows a positive trend
Ratio
2019
2020
2021
Industry Averages
Trend with Industry average
Profitability Ratios
Return on equity
21.30%
21.20%
19.60%
22.00%
Underperformed from industry
Weakness
Return on Capital employed
12.90%
13.50%
13.50%
12.80%
overperformed from industry
Strength
Operating Profit Margin
14.70%
18.20%
23.00%
14.40%
overperformed from industry
Strength
Gross Profit Margin
54.70%
52.00%
49.30%
44.80%
overperformed from industry
Strength
Efficiency Ratios
Average Inventory Turnover period
79.8
83.3
93
78.8
Poor from industry
Weakness
Average settlement period for Accounts Receivable
28
27
28.4
30
better from insudtry
Strength
Average settlement period for Accounts Payable
39.9
48.8
62.4
37.3
better from insudtry
Strength
Sales Revenue to Capital Employed
87.30%
74.20%
59.00%
87.00%
Poor from industry
Weakness
Liquidity Ratios
Current Ratio
2.82
2.88
2.95
4.6
better from insudtry
Strength
Acid Test Ratio
2.03
2.14
2.25
2.76
better from insudtry
Strength
Leverage Ratios
Gearing Ratio
61.70%
58.50%
55.20%
61.40%
better from company
Strength
Interest Cover Ratio
3.94
4.38
4.65
5.75
Poor from industry
Weakness
Investment Ratios
Dividend Payout Ratio
67.80%
59.90%
57.10%
40.80%
better from insudtry
Strength
Dividend Yield
6.61%
6.01%
5.08%
4.70%
Poor from industry
Strength
Earnings Per Share
$0.19
$0.21
$0.20
$0.28
Poor from industry
Weakness
P/E Ratio
10.4
9.8
11.5
11.2
Poor from industry
Strength
3-
Profitability Ratio
overall Company is performing better in terms of profitanbility from industry average
Efficiency ratio
company is performing better from industry in terms of accounts receivable and accounts payable collection and payment period but company's concern is in terms of inventory turnover period and sales revenue to capital employed ratio
Liquidity Ratio
company is performiing better from industry but still company is operating above the ideal ratio
Leverage ratio
gearing ratio is positive for company but interest coverage ratio is a concern for the company
Investment ratio
investment ratio are better in terms of dividend yield and payout ratio and company is performing poor in EPS but and PE ratio is increasing it means investor s are ready to pay more for the companys stock
4-
ratio analysis can not be the only source of financial analysis and it should be supported by other techniques of financial analysis as ratio shows relationship among two financial variables only with the help of quantitative data
2019
2020
2021
Negative or Positive trend
Profitability Ratios
Return on equity
21.30%
21.20%
19.60%
it shows a negative trend over the period and not good for the company
Return on Capital employed
12.90%
13.50%
13.50%
it is improving over the year so it shows a positive side for the company
Operating Profit Margin
14.70%
18.20%
23.00%
it is improving over the year so it shows a positive side for the company
Gross Profit Margin
54.70%
52.00%
49.30%
it is decreasing over the year so it shows a negative side for the company
Efficiency Ratios
Average Inventory Turnover period
79.8
83.3
93
it shows a negative trend over the period as more inventory is stored and it requires heavy investment in inventory
Average settlement period for Accounts Receivable
28
27
28.4
it shows a negative trend over the period as it this period is increasing and debtors are paying with delays
Average settlement period for Accounts Payable
39.9
48.8
62.4
it is increasing shows a positive picture for company as company is getting more credit period for payment
Sales Revenue to Capital Employed
87.30%
74.20%
59.00%
it has decreased over the years so shows a negative trend
Liquidity Ratios
Current Ratio
2.82
2.88
2.95
it is increasing means company is investing heavily in current assets which is not a good sign
Acid Test Ratio
2.03
2.14
2.25
it is increasing means company is investing heavily in quick assets which is not a good sign
Leverage Ratios
Gearing Ratio
61.70%
58.50%
55.20%
it is decreasing means company is paying out it debts
Interest Cover Ratio
3.94
4.38
4.65
it is increasing it is a positive sign
Investment Ratios
Dividend Payout Ratio
67.80%
59.90%
57.10%
it is decreasing means company dividend payout ratio is declining over the period
Dividend Yield
6.61%
6.01%
5.08%
it is decreasing means company dividend payout ratio is declining over the period
Earnings Per Share
$0.19
$0.21
$0.20
it shows a mixed trend not much difference over the previous year
P/E Ratio
10.4
9.8
11.5
it is increasing it means people are ready to pay more for the company stock
Profitability Ratio
These ratios show a mixed trend as gross profit ratio and return on equity is decreasing while operating profit margin and return on capital employed show a positive trend so profitability of the company has decreased and it should be matter of concern for the company
Efficiency ratio
companys efficiency ratios show a negative trend like accounts receivable collection period, inventory turnover period, sales to capital employed only the accounts payable payment period has increased which is only the positive side so it is again a matter of concern to the company
Liquidity Ratio
company investment in current assets is increasing as it reveals from increased trend in current ratio and quick ratio.
Leverage ratio
it is improving as capital gearing ratio has decreased and Interest coverage ratio is increasing so it is a positive side for the company
Investment ratio
it overall shows a mixed trend as dividend yield and payout ratio is decreasing, EPS is almost constant and PE ratio shows a positive trend
Ratio
2019
2020
2021
Industry Averages
Trend with Industry average
Profitability Ratios
Return on equity
21.30%
21.20%
19.60%
22.00%
Underperformed from industry
Weakness
Return on Capital employed
12.90%
13.50%
13.50%
12.80%
overperformed from industry
Strength
Operating Profit Margin
14.70%
18.20%
23.00%
14.40%
overperformed from industry
Strength
Gross Profit Margin
54.70%
52.00%
49.30%
44.80%
overperformed from industry
Strength
Efficiency Ratios
Average Inventory Turnover period
79.8
83.3
93
78.8
Poor from industry
Weakness
Average settlement period for Accounts Receivable
28
27
28.4
30
better from insudtry
Strength
Average settlement period for Accounts Payable
39.9
48.8
62.4
37.3
better from insudtry
Strength
Sales Revenue to Capital Employed
87.30%
74.20%
59.00%
87.00%
Poor from industry
Weakness
Liquidity Ratios
Current Ratio
2.82
2.88
2.95
4.6
better from insudtry
Strength
Acid Test Ratio
2.03
2.14
2.25
2.76
better from insudtry
Strength
Leverage Ratios
Gearing Ratio
61.70%
58.50%
55.20%
61.40%
better from company
Strength
Interest Cover Ratio
3.94
4.38
4.65
5.75
Poor from industry
Weakness
Investment Ratios
Dividend Payout Ratio
67.80%
59.90%
57.10%
40.80%
better from insudtry
Strength
Dividend Yield
6.61%
6.01%
5.08%
4.70%
Poor from industry
Strength
Earnings Per Share
$0.19
$0.21
$0.20
$0.28
Poor from industry
Weakness
P/E Ratio
10.4
9.8
11.5
11.2
Poor from industry
Strength
3-
Profitability Ratio
overall Company is performing better in terms of profitanbility from industry average
Efficiency ratio
company is performing better from industry in terms of accounts receivable and accounts payable collection and payment period but company's concern is in terms of inventory turnover period and sales revenue to capital employed ratio
Liquidity Ratio
company is performiing better from industry but still company is operating above the ideal ratio
Leverage ratio
gearing ratio is positive for company but interest coverage ratio is a concern for the company
Investment ratio
investment ratio are better in terms of dividend yield and payout ratio and company is performing poor in EPS but and PE ratio is increasing it means investor s are ready to pay more for the companys stock
4-
ratio analysis can not be the only source of financial analysis and it should be supported by other techniques of financial analysis as ratio shows relationship among two financial variables only with the help of quantitative data
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