Prepared by Hoai An
Sample answer for Financial Ratio analysis
Profitability Ratio 1) ROE 2) ROA 3) Net profit margin 4) Gross profit margin Comments on profitability ratio:
Year 2002 37.1% 25.6% 10.9% 22.1%
Year 2003 28.9% 23.7% 9.2% 22.7%
In terms of comparison between the 2 period year 2002 and year 2003, it can be seen that There is a decrease of 8.2% in return on owners funds ratio. This means the business has used the resources provided by the owner to generate profit in year 2002 is less efficiency than in year 2003, with 1 dollar invest, the owner just get 28.9% return on money instead of 37.1% as in 2002. This movement may be the result of the contribution of the following reason as follow: Larger proprietorship figure, the owner increasing investment but not achieving a corresponding increase in sales and profit. In this situation although the net profit available to equity share holders has risen slightly over the period 164.2 in compared with 159.2, but the share capital and reserves of the company have increased considerably (262.5 in compared with 171.8). The non- corresponding increase in profit and investment leads to the reducing in the return to owners equity. The ROA has decreased slightly in 2003. This is due to that the net profit has not increased in line with the increase in total assets. The gross profit margin shows a slight increase in 2003 over the period (22.7% in year 2003 in compared with 22.1% in year 2002). This may be due to a number of reasons such as an increase in selling prices and decrease in the cost of sales. However the net profit margin has shown decrease over the period. This means that operating expenses are absorbing a greater proportion of sales income in 2003 than in the previous year, year 2002. ( $276 in year 2002 which is 12.3% of sales in compared with 369 in year 2003 which is 13.8% of sales)
In terms of looking at the overview of the economy, although there is a slight decrease in owners equity over the year, either 37.1% or 28.9% is a very good return. By that amount of money if we invest in the bank as the term deposit, we just get 2% interest on the amount invest according to Vietnamese interest rate for currency as US, or even if you invest in Australia, the maximum rate you can get is just 7% per year. Therefore despite the slight decrease in the return on owners funds ratio, the form of investment in
Prepared by Hoai An business is still more benefit than any alternative forms of investment with similar level of risk.
Efficiency Ratio Inventory turnover period Average settlement period for debtors creditors Average Assets turnover ratio Comments on efficiency ratios
Year 2002 57 days 43 days 47 days 2.4 times
Year 2003 59 days 31 days 38 days 2.6 times
In term of comparison between the two period year 2002 and year 2003 it can be seen that: The inventory turnover period has shown a slight increase over period, this means in year 2002, inventory is being held 2 days longer than in year 2003. 59 days for inventory to be turnover seems not good as funds would be tied up in inventories which can not be used for other profitable profit, it may lower the liquidity ability or status/ position of the business. The average settlement period for both debtors and creditors has reduced. The reduction may have been the result of deliberate policy decisions for example tighter credit control for debtors, paying creditors promptly in order to maintain goodwill or to take advantage of discount. There has been an increase in the asset turnover ratio, which means that the sales have increased by a greater proportion than the assets of the company. Liquidity Ratio Current ratio Acid test Cash flow from operation ratio Comments on Liquidity Ratio The liquidity ratio summary reveals a decrease in both the current ratio and the acid test ratio. These changes suggest a worsening liquidity position for the business. If we look at the ratio of Acid test 0.9 in year 2002, and 0.7 in year 2003 it indicates that the liquidity position of the business is unsatisfactory enough to cover their liability when it come due, for sure business will experience difficulty in meeting its immediate commitments and in case of abnormal issues arise the business can not be quite manageable. Year 2002 1.8 0.9 0.5 Year 2003 1.7 0.7 0.5
Prepared by Hoai An
Again the situation is the same if we look at cash flow from operation ratio, during the year this figure does not change but 0.5 means net cash we have got in hand from operation activities just equal haft of the liabilities, it is not enough to cover the maturing obligations. This ratio should give some cause of concern Gearing Ratio Gearing ratio Interest cover ratio Comments on gearing ratios Look at the figures belong to gearing ratio, it can be seen that both the gearing ratio and interest cover ratio have improved significantly in year 2003. Gearing ratio which reveals us the financial structure of the business substantially decrease in year 2003 (8.6% in compare with 28.6% in previous year). The reason which contributes to the great decrease of 20% comes from the repayment of $140 M in year 2003. Again, the interest cover ratio in year 2003 is 39.7 times, it means that profit generated from the business is 39.7 times interest payment for the year. This is mainly due to the fact that a substantial part of the long-term loan (debenture) was repaid during year 2003. This repayment has had effect of reducing the relative contribution of long-term lender to financing the company and reducing the amount of interest expense. To sum up business did perform very well in year 2003 in term of gearing ratio. It reduces the level of risk for its own business. Investment Ratio Dividend per share Dividend payout ratio Dividend yield ratio Earning per share Operating cash flow per share Price earning ratio Comments on Investment Ratio There has been a significant increase in the dividends per share in year 2003 when compared to the previous year. 9 cents in year 2003 means for every share holding the shareholder receive 9 cents actual cash in hand. In this situation, share price is issued at $0.5 or 50 cents. 9 cents over 50 cents equal 18%, it is considered as good return in compare with the other source of investment. Year 2002 6.7 cents 25.3% 4.2 % 26.5cents 26.8 cents 9.4 times Year 2003s 9.0 cents 36.5% 4.0 % 24.6cents 27.7 cents 14.2 times Year 2002 28.6% 10.1 times Year 2003 8.6% 39.7 times
Prepared by Hoai An Dividend payout ratio measures the proportion earnings that a company pays out to shareholders in the form of dividends. In this situation, it can be seen that the company has already increased the proportion of earning distributed to equity shareholder to 36.5% in year 2003, 11.2% higher than previous year. It looks good from shareholder point of view as they receive more cash return. However the payout ratio for the year ended 31 Dec 2003 is still fairly low. Only about a third of earning available for dividends is being distributed. The dividend yield has changed very little over the period and remains fairly low at approximate 4%. Earning per share shows a slight fall in year 2003 when compared with the previous year. A slight increase occurs in the operating cash flows per share. However, the P/E ratio shows a significant improvement, it reveals that the market is clearly much more confident about the future prospects of the business at the end of the year to 31st Dec 2003.