Wednesday, May 6, 2020

Financial Analysis

Question : Discuss about the Fanancial Analysis ? Answer : Introduction Al Anwar Ceramic Tiles Company is a manufacturer of Ceramic Tiles in the Sultanate of Oman. Founded in 1998 and having its headquarters in Muscat, it has seen a fast growth and has been able to establish itself well. In the year 2015, the industry faced a challenging task and hence the gross revenue was on the lower side that is 27.4 million and a revenue decline of 4.6% as compared to the year 2015 was observed. Various other incomes declined and the net profit stands at 6.54 million (Bloomberg, 2015). The company is highly engaged in regular enhancement programs, global sourcing in an effective manner, employment of strategies that are appropriate to nature, etc. all the factors has helped the company to lessen the down time and enhance the yield. Dhofar Cattle Feed Company was founded in 1984 with the mission of producing the best quality animal feed. Over years, it has today grown to have an installed production capacity of 400,000 MT/Annum. Experienced professionals in quality standards and excellent sales and marketing abilities make it one of the best in this field. The performance of the segment of the poultry is badly impacted due to import that is low in terms of cost and the local manufacturers are not able to match the imported cost (Bloomberg, 2015). Despite the challenges, the company put a satisfactory performance and this can be cited due to the management of the company and internal control. Vertical Horizontal Analysis A vertical analysis of the balance sheets of both the companies for the years 2015 and 2014 is conducted and the results are tabulated below: Al Anwar Ceramic Tiles DhofarCattle Feed company Current Assets 2015 2014 2015 2014 Cash Cash Equivalents 0.45 2% 1.92 10% 0.52 3% 0.44 3% Short Term Investments 8.59 39% 5.00 25% - 0% - 0% Receivables 8.81 40% 8.34 41% 7.77 41% 8.10 47% Inventories 3.95 18% 4.80 24% 10.81 57% 8.66 50% Prepaid Expenses - 0% 0.11 1% - - TOTAL 21.80 100% 20.17 100% 19.10 100% 17.20 100% Non Current Assets Plant Equipment 20.5 82% 21.77 77% 23.9 48% 24.79 48% Long Term Investments 4.65 18% 6.44 23% 25.74 51% 26.92 52% Intangibles 0 0% 0 0% 0.34 1% 0 0% Other Long Term Assets 0 0% 0 0% 0.28 1% 0.22 0% TOTAL 25.15 100% 28.21 100% 50.26 100% 51.93 100% Less: Current Liabilities Trade Payables 3.53 81% 2.18 43% 5.49 24% 7.88 34% Short Term Debt 0 0% 0 0% 15.75 69% 14.21 62% Capital Leases 0 0% 0 0% 1.66 7% 1.16 5% Accrued Expenses 0 0% 1.61 32% 0 0% 0 0% Other Current Liabilities 0.85 19% 1.31 26% 0.05 0% 0.05 0% TOTAL 4.38 100% 5.1 100% 22.95 100% 23.3 100% Non-Current Liabilities Deferred Income Tax 0.41 36% 0.38 26% 0 0% 0 0% Other Long Term Liabilities 0.72 64% 1.08 74% 5.77 100% 5.13 100% TOTAL 1.13 100% 1.46 100% 5.77 100% 5.13 100% It can be seen that Receivables constitute a majority portion in Al Anwar whereas inventory constitutes a major portion of current assets in Dhofar Cattle Feed Company. The Plant Equipment is the major portion in Al Anwar whereas Long Term Investments are major in the Current Assets division for Dhofar. Trade Payables occupies a major portion in Current Liabilities section in Al Anwar whereas Short Term Debt occupies a major position in Dhofar. A horizontal analysis of the Income Statement and Balance Sheet figures reveals the below results: DhofarCattle Feed Company Particulars 2013 2014 2015 Revenue 29.52 100% 31.87 8% 43.87 49% Cost of Revenue 25.55 100% 27.2 6% 34.56 35% Gross Profit 3.97 100% 4.67 18% 9.31 135% Total Operating Expenses 32.73 100% 34.87 7% 43.02 31% Operating Income -3.21 100% -3 -7% 0.85 126% Income before Taxes -2.88 100% -2.88 0% 1.24 143% Net Income -3 100% -2.67 -11% 1.33 144% Current Assets 13.24 100% 17.20 30% 19.10 44% Non Current Assets 49.76 100% 51.93 4% 50.26 1% Total Assets 63.00 100% 69.13 10% 69.36 10% Current Liabilities 16.83 100% 23.3 38% 22.95 36% Non Current Liabilities 2.48 100% 5.13 107% 5.77 133% Total Liabilities 19.31 100% 28.43 47% 28.72 49% Stockholders Equity 43.69 100% 40.7 -7% 40.63 -7% It can thus be seen that the initial loss-making company has turned profitable in the year 2015. As the total assets have increased by 10%, the total liabilities have increased by 49% and there is also a drop in the stockholder's equity by 7%. Al Anwar Ceramic Tiles Particulars 2013 2014 2015 Revenue 26.41 100% 28.78 9% 27.44 4% Cost of Revenue 13.19 100% 13.90 5% 14.43 9% Gross Profit 13.22 100% 14.88 13% 13.01 -2% Total Operating Expenses 18.29 100% 19.83 8% 20.45 12% Operating Income 8.12 100% 8.95 10% 6.99 -14% Income before Taxes 8.95 100% 11.05 23% 7.42 -17% Net Income 7.89 100% 9.77 24% 6.54 -17% Current Assets 15.92 100% 20.17 27% 21.80 37% Non-Current Assets 28.26 100% 28.21 0% 25.15 -11% Total Assets 44.18 100% 48.38 10% 46.95 6% Current Liabilities 5.98 100% 5.10 -15% 4.38 -27% Non-Current Liabilities 1.14 100% 1.46 28% 1.13 -1% Total Liabilities 7.12 100% 6.56 -8% 5.51 -23% Stockholders Equity 37.05 100% 41.46 12% 41.44 12% According to the figures, there is a 24% increase in the net income for the year 2014 but 17% drops in the same for the year 2015. Current Assets have seen a good increase while current liabilities have dropped and the shareholders equity has also increased by 12% which is a good sign. Cost-volume-profit analysis A cost-volume-profit analysis of both the companies reveals the following: In the case of Al-Anwar, as the sales have increased, the cost of revenue has fallen for the year 2014 leading to a good gross profit margin. But for the year 2015, the sales has fallen still the costs of revenue which comprise of direct costs has risen sharply implying the increased prices of direct materials, labor and overheads. The result is a negative gross profit (Deegan, 2011). In the case of Dhofar, the increase in costs of revenue is lower than the increase in revenue for the year 2014 and it continues to remain the same for the next year also. This indicates that the trend of price rise is directly proportional to the increase in revenue (Melville, 2013). On comparison, it can be said that Al Anwar seems to be hit badly by the increasing costs whereas Dhofar has been able to manage and retain its cost-volume-profit ratios. Investment Appraisal Techniques Analysis In the case of Al-Anwar, it can be said that 1OMR invested in 2013 has depreciated by more than 50% as on date. Thus the NPV and Pay Back period is currently negative and long term investors have definitely lost money on this stock (Parrino et. al, 2012). In the case of Dhofar, let us assume 1OMR invested in 2013 has remained at almost the same rate, which helps us infer that the stock has seen some ups and downs but has not led to any huge profits or losses. The NPV and payback periods can vary from a year to more (Williams, 2012). Analysis of Profitability and financial performance Al Anwar is a loss making the company and even the current years quarterly financial figures are not very impressive. Dhofar has also not been able to produce great results for the three-quarters of the current year 2016, but on a consolidation of the full years profits, there could be some recovery and improvement noticed in comparison to the prior year (Graham Smart, 2012). The Ratios based on 2015 figures are tabulated below: Ratio Al Anwar Dhofar Cattle Feed P/E Ratio 13.59 91.91 Gross Margin 41.20% 19.59% Operating Margin 16.88% -0.70% Net Profit Margin 16.44% 0.32% Revenue/Share 0.08 0.56 Book Value/Share 0.13 0.49 Return on Equity 9.56% 0.30% Return on Assets 8.40% 0.20% Return on Investment 9.29% 0.31% Quick Ratio 3.93 0.53 Current Ratio 5.15 0.96 Debt Equity Ratio 0.00% 15.38% Asset Turnover 0.51 0.62 Inventory Turnover 3.19 3.21 Dividend Yield 11.70% 2.20% Dividend Growth 24.56% -33.51% The financial performance of Al Anwar for the year 2015 has been better than that of Dhofar according to the ratios. Also, it would be pertinent to note that Al Anwar is a completely debt free company, whereas Dhofar is having short and long term liabilities and debts. Apart from this, the return on equity, assets, and investment is better in the case of Al Anwar. The Dividend yield ratios and dividend growth have also proved to be good. Hence, these are the factors that an investor consider while investing in a company. The current and quick is very high that indicates the company will be able to discharge the obligation and at the same time it needs to be noted that the company has surplus cash and can be utilized or invested elsewhere to generate better returns (Davies Crawford, 2012). Business Performance using financial non-financial measures The financial measures are the ratios and figures calculated. The non-financial measures include the SWOT Analysis and Balanced Scorecard approach. The increasing technological problems, price changes and increasing rates of interests seem to be affecting Dhofar. Its peer players in this industry are seemingly performing better than Dhofar (Freedman, 2013). Al Anwar is having a reasonable performance when it comes to peer comparison, though it has been hit by the global recession and general increase in price levels, it is still able to maintain its dividends and profits (Freedman, 2013). SWOT Analysis of Al-Anwar Strength Profitability Sales network and distribution Weakness Productivity in future More investments in RD Opportunities Venture capital Threats Higher increment in the rate of interest Comparison of both companies At the current stage, both the companies are presumably in deep waters. It is difficult to recommend the purchase of any share. The ratios are better for Al Anwar though at a decreasing trend in comparison to the prior two years. Whereas the share price appreciation has not taken place for Al-Anwar and from this angle Dhofar is a relatively safer bet as it will not lead to capital deterioration. Hence this could be the time to wait for Al Anwars share price to show some steady and improved performance. Investment in Dhofar is not being recommended as the company is running in losses. Therefore, as per the given scenario, the performance of Al Anwar needs to be analyzed for a certain time frame and then a decision needs to be taken into consideration 9 Horngren, 2013). Which is better? From different angles, different companies are looking better. Hence to trademark any one company, Al Anwar can be said to be a better company than Dhofar though this in not the right time to invest in the shares of Al Anwar. As per the scenario and the analysis, it can be said that the company Al Anwar is a better bet and the performances indicates that. The computed ratio project that the ROE, ROA, and the liquidity are better as compared to Dhofar. However, there are some deficiencies and the industry is going through a tough time (Needles Powers, 2013). Hence, it is difficult to ascertain whether it is the bottom. Therefore, Al Anwar should be on the radar list and must be kept under consideration. Conclusion The financial analysis for Al Anwar has cited the dip in revenues and profitability of the company from the last three years. Apart from this, analysts are of the stand to hold the position on this share. The financial analyst's review has predicted the median estimates for the next one year to see a 47% increase in the share price from its current rate. The reality of the same can be predicted through the quarterly results. In the case of Dhofar, the revenues have grown with time (Spiceland et. al, 2011). Thus it is a safer bet in comparison to Al Anwar. It can be concluded that in the changing times as technology has advanced, investors are better informed and make real-time decisions about capital appreciation and dividend yields. Hence to survive in the competitive markets, efficiency in all areas of internal controls and cost controls can help the company achieve the desired profits and also keep investors happy. NET PRESENT VALUE METHOD PROJECT A Present Value of Inflow = Cash Inflow* Annuity Factor of 10%,5 years = 40,000 * 3.791 = Rs.1,51,640 Less: Present Value of Outflow = Rs.1,00,000 Net Present Value = Rs. 51,640 PROJECT B Present Value of Inflow = Cash Inflow* Annuity Factor of 10%, 5 years Cash in Flow D.Factor (10%,5 years) 60,000 0.909 30,000 0.826 20,000 0.751 50,000 0.683 50,000 0.621 Present Value of Inflow Present Value of Outflow Net Present Value INTERNAL RATE OF RETURN METHOD PROJECT A IRR =Cash Inflow* P.V of Annuity Factor = Outflow = 40,000*P.V of A.F = 1,00,000 = P.V of A.F = 2.5 TRIAL AND ERROR METHOD 27% =2.5827 29%=2.483 X=2.5 29-27 = 2.483-2.5827 X-27 2.5-2.5827 = X=28.66% IRR Cash in Flow D.Factor (30%,5 years) 60,000 0.769 30,000 0.592 20,000 0.455 50,000 0.35 50,000 0.269 Cash in Flow D.Factor (33%,5 years) 60,000 0.752 30,000 0.565 20,000 0.425 50,000 0.32 50,000 0.24 30% =1,03,950 33%=98,570 X=1,00,000 33-30 = 98,570-1,03,950 X-30 1,00,000-1,03,950 = X=32.20.% PROFITABILITY INDEX METHOD PROJECT A PI = PV of Inflow/PV of Outflow = 1,51,640/1,00,000 =1.5164 PROJECT B PI = PV of Inflow/PV of Outflow = 1,59,540/1,00,000 =1.5954 Project B is recommended because of the above-shown calculations. In the Net present value method, the cash inflow is Rs.51640 in Project A whereas the cash inflow is Rs. 59540 in project B.We can see that the cash inflow is more in project B so Project B is recommended. In the Interest rate of return method, the rate in case of project B exceeds project A which shows that Project B will help us to have more cash inflow. The rate in case of project A is 28.66% whereas in the case of project B it is 32.20%. Hence, project B is recommended. In Profitability method, the profitability index is more in the case of Project B. In the above calculations it has been shown that the cash inflow from project A is 1.5164 whereas in the case of project B it is 1.5954. Therefore, project B is recommended. (c) The terms which are measured numerically are called financial factors whereas the one measured subjectively is called non-financial factor. Following are the non-financial factors- (i) Corporate culture- The way a company performs its functions and carry out its operations shows its impact on capital investment. The change of way of communication or setting up of a new business building is some of the examples (Davies Crawford, 2012). (ii) The quality of products- There is a great impact of capital investment on the quality of the products. It is expected by the company to maintain a balance between the cost and the quality of the capital resources. This quality of the capital resources may have a negative or positive impact on the quality of the product that has been produced. Calculations showing contribution per unit. Particulars Product A(per unit) Product B(per unit) Sale Price 20 15 Material 10 9 Direct wages 3 2 Variable expenses 3 2 Contribution p.u 4 2 `Calculation showing total contribution and total profit. Particulars Situation 1 Situation 2 Situation 3 A B A B A B No. of units 100 200 150 150 200 100 Sales price 2000 3000 3000 2250 4000 1500 Material 1000 1800 1500 1350 2000 900 Wages 300 400 450 300 600 200 Variable expenses 300 400 450 300 600 200 Contribution 400 400 600 300 800 200 Total Contribution 800 900 1000 Fixed expenses 800 800 800 Total profit 0 100 200 The most profitable situation is when 200 units of A and 100 units of B is produced. The profit earned is more in situation 3 when compared to situation 1 and situation 2. The variable expenses are those expenses which increase with the increase in the output. Material cost and labor are variable expenses. The fixed expenses remain the same irrespective of the number of units produced. The total contribution is the highest in situation 3 and so is the profit. All the variable expenses are deducted from the sales value to get the total contribution. Then, fixed expenses are deducted from the contribution then we will get the profit (Libby et. al, 2011). References Bloomberg 2015, Company Overview ofDhofar Cattle Feed Co. S.A.O.G, viewed 19 December 2016, Bloomberg 2015, Company Overview ofAl Anwar Ceramic Tiles Company SAOG, viewed 19 December 2016, Davies, T. Crawford, I 2012, Financial accounting, Harlow, England: Pearson. Deegan, C. M 2011, In Financial accounting theory, North Ryde, N.S.W: McGraw-Hill. Freedman, L 2013, Strategy, Oxford University Press Graham, J. Smart, S 2012, Introduction to corporate finance, Australia: South-Western Cengage Learning. Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group. Libby, R., Libby, P. Short, D 2011,Financial accounting, New York: McGraw-Hill/Irwin. Melville, A 2013, International Financial Reporting A Practical Guide, 4th edition, Pearson, Education Limited, UK Needles, B.E. Powers, M 2013, Principles of Financial Accounting, Financial Accounting Parrino, R., Kidwell, D. Bates, T 2012, Fundamentals of corporate finance, Hoboken, Series: Cengage Learning. NJ: Wiley Spiceland, J., Thomas, W. Herrmann, D 2011, Financial accounting, New York: McGraw-Hill/Irwin,University Press Williams, J 2012, Financial accounting, New York: McGraw-Hill/Irwin.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.