Financial Analysis of a Company
Essay by pauleta • February 11, 2016 • Case Study • 2,998 Words (12 Pages) • 1,247 Views
Concept of analysis
Financial analysis is calculation and comparison of ratios which are derived from information in an enterprise financial statements. The trends of this ratios are then used to make inferences about the financial condition of a company, its operations and attractiveness as an investment. Ratio analyses involve comparing figures against previous years, other enterprises in the industry or the economy in general. Ratios looks at the relationships between individual values and relate them on how an enterprise has performed in the past, and perform in the future. In this paper, financial analysis of Madaraka investments limited is going to be illustrated in details.
Basis of comparisons
A ratio gains utility by comparisons with other data and standards. For instance a gross profit margin for enterprise 25% is meaningless by itself. If we know that the competitor has the profit margin ratio of 10% the we know that the industry is more profitable than its industry. If we know the trend is upward, then we know that the management is implementing effective business policies and strategies. The following for instances are basis for such comparisons: inter-enterprise comparison and intra-enterprise comparisons. Inter-enterprise involves comparison with the best enterprise in the company and the average enterprise in the industry.
Basis of presentation
Ratios may be presented in three different forms. Ones is pure ratio and the second is percentage and lastly is number of times. Pure ratio is in form of x:y; say ratio of current asset to current liabilities is 3:2. Percentage is mostly commonly used form of ratio. A variable is used as a percentage of the other. The number of times is which a variable is expressed as the nuber of times of another
Uses of ratio analysis
Ratios analysis has many uses which include evaluating the performance of an enterprise and compare with the performance of the previous and that of the competitor and the industry, setting benchmarks or standards for performance through budgeted ratio, to highlight areas that need to be improved or areas that offer promising future potentials and lastly is to enable external parties like investors or lenders to access creditworthiness and profitability of the enterprise.
Classification of ratios
Financial ratios can be classified into profitability ratio, liquity ratio, activity ratio, gearing ratio and investment ratio.
Gross profit margin
This measures efficiency of managing price both buying and selling prices
Gross profit margin = Gross profit/sales * 100
Gross profit mark-up
Ratio of gross profit to cost of goods sold
Gross profit mark- up = Gross profit/cost of goods sold *100
Net profit margin (after tax)
Measure of propotion of net profit to sales after covering all expenses
Net profit margin = net profit after tax /sales * 100
Net profit margin before tax
Net profit = net profit (before tax/sales *100
Return on shareholders capital employed = Net profit before interest and tax/ total capital employed * 100
Return on shareholders’ equity = net profit after tax and preference dividend/ shareholders equity *100
Return on assets = net profit before interest and tax/ total assets employed
Liquidity ratios are the groups of ratios used to analyses the ability of the enterprise to meet short term obligations
Current ratios = current assets /current liabilities
Quick ratios = current assets – stock and prepayments /current liabilities
Activity ratio measures the efficiency of utilizing the resources at the enterprise disposal
Stock turn over = cost of goods sold/ average stock whereby the avargae stock is found by adding opening and closing stocks then the total divided by two
Stock turnover period = Average stock/cost of goods sold * 365 days
Debtors turnover = credit sales/ average debtors
Debt collection period = Average debtors /credit sales * 365 days
Credit turnover =credit purchases/ Average creditors
Credit payment period = average credit / credit purchases * 365 dys
Asset turnover = sales/assets
Fixed asset turnover = sales/ fixed assets
Leverages
These are ratios that are measuring long term solvency of the enterprise. This is abitlity of the company to meet long term obligations of the company.
Gearing ratio = debt capital/ total capital employed * 100
Debt equity ratio = Debt capital / owners capital
Debt ratio = total liabilities/ total assets
Interest cover = profit before interest and taxes/ interest charges
Dividend ratio measures both profitability and the returns to the shareholders investment as well as the business dividend payout policy
Earnings per share = Net profit after tax and preference dividends / total ordinary shares
Dividend per share = total ordinary dividends / total ordinary shares
Dividends payout ratio = dividends per share / Earning per share
Retention ratio = earnings per share – dividend per share/ earning per share
Ratio analysis and interpretation of Madaraka Investments Limited
The following information has been extracted from the accounts of Madaraka Investment Limited, for the year ended 31 December 2015. Comparable figures for the previous years are also shown.
Profit statement for the year ended 31 December
2015 2014
Sh.000 sh000
Sales 115,200 72,000
Cost of goods (70,000) (42,000)
Gross profit 44,400 30,000
Less trading expenses (19, 800) (16,200)
24,600 13,800
Less debenture interest (900) (900)
Net profit before taxation 23,700 12, 900
Less corporation tax (11,520) (5,760)
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