Ratio analysis for assignment

Part 1: Financial analysis

(a) Evaluating Profitability

Profitability analysis consists of tests used to evaluate profit
performance during the year. The results are combined with other data to
forecast potential profitability (Hoggett & Edwards 1996). In other
words, the objective of profitability relates to a company’s ability
to earn a satisfactory income so that investors and stockholders will
continue to provide capital. It is also closely linked to its liquidity
because earnings ultimately produce cash flow.(Needles, Anderson,
Cardwell & Mills 1996)

Profitability is determined by several ratio calculations as follows:

*Return on owner’s equity

*return on total assets

*Net profit margin

*Gross profit margin

Return on owners equity (ROE) : Measure of the profitability of
stockholder’s investments.

Net profit after ( taxation and preference dividends) X 100

Average (ordinary share capital + reserves)

Return on total assets (ROA) : Measure of overall earning power or
profitability

Net profit before interest and taxation X 100

Average total assets



Net profit margin : Measure of net income produced by each dollar of
sales

Net profit before interest and taxation X 100

Sales

Gross profit margin: Measures the difference between sales revenue and
cost of sales

Gross profit X 100

Sales



(b) Performance and efficiency

Efficiency is calculated by using the following ratios:

*Average inventory turnover period

*Average debtors settlement

*Average creditors settlement

*Sales (asset) turnover

Average inventory turnover : Measure of relative size of inventory.
Inventories often represent a significant investment for businesses and
this can have an adverse effect on cash flow or liquidity

Average inventory held X 365

Cost of sales

Average debtor settlement : Measure of average time taken to collect
receivables (receive Payments)

Average debtors X 365

Credit sales

Average creditor settlement : Measure of average time taken to cover
outgoings (pay bills)

Average creditors X 365

Credit purchases

Sales ( asset turnover) : Measure of how efficiently assets are used to
produce sales.

Sales

Average total assets

(c) Resource use

(d) Liquidity

Liquidity is the company’s ability to pay bills when they are due and
cover any unexpected needs for cash. The ratios used to determine
liquidity all have to do with working capital or some part of it
because all bills are paid out of a company’s working capital
(Needles, Anderson, Caldwell & Mills 1996)

The following ratios are used to determine a company’s liquidity :

*Current ratio

*Quick ratio or Acid test

*Cash flows from operations

Current Ratio : Measure of short term debt paying ability.

Current ratio= Current assets

Current liabilities

* Industry Benchmark is normally two to one

Quick ratio or Acid test : Measure of short term debt paying ability. It
is often argued that many companies cannot turn assets or inventory into
cash rapidly. This test therefore is a more stringent test of a
company’s liquidity.

Acid test= Current assets (excluding inventory and pre payments)

Current liabilities

*Industry Benchmark is one to one

Cash flows from operation : Measure of operating cash flow with current
liabilities.

Operating cash flows

Current liabilities

(e) Financial Stability / Solvency



(f) General comment and conclusions

BU5002 ASSIGNMENT SEMESTER 1, 2003

There are 2 parts, part 1 is a practical financial analysis, part 2 is a
report on benchmarking

You need to attempt BOTH parts.

Assignments are due the Monday after the final exam – gives you a
further uninterrupted weekend - DUE DATE: MONDAY APRIL 14, 2003

Assignments MUST be in the MBA box top floor of Commerce Building by
6.00PM Monday April 14th, 2003.

Part 1: Financial Analysis

You have been asked by management to prepare an analysis of Key
Corporation Pty Ltd. You are required to provide a written report to
management based on your analysis of the financial data for Key
Corporation Pty Ltd below.



Your report should include:

Profitability

Performance and efficiency,

Resource use,

Liquidity

Financial stability/solvency.

General comment and conclusions bring all the above together.

In dealing with (a) to (f) above you are required to:

Identify appropriate ratios/measures for (a) to (e) above;

Explain what each of these ratios/measures represents e.g. Current Ratio
represents liquidity/availability of cash in the short term by looking
at the relationship between current assets and current liabilities (–
you will need to expand a lot more on this)

Show your comprehension of what these ratios/measures indicate,
individually and jointly, about the company’s performance and future
prospects. This should identify any weaknesses and/or strengths of the
company.

Support your conclusions with reference to relevant figures and industry
comparisons. Additional calculations may also be undertaken.

Key Corporation Pty Ltd

Balance Sheet (Statement of Financial Position) Accounts

1996 1997 1998 1999

$ $ $ $

Cash at bank 11100 11600 16700 10300

Cash on hand 400 400 600 600

Marketable securities 12800 4300 10900 0

Accounts Receivable 20400 37800 35000 37400

Inventory 11280 11300 11240 11100

Prepayments 4720 4370 4560 4850

Plant (net) 15000 18000 19000 21000

Land 40000 40000 40000 30000

Building (net) 70000 64000 54400 60400

Patents 12000 11600 13200 13300

Goodwill 2000 1600 1200 800

199700 204970 206800 189750

Accounts Payable 46400 52890 49270 35210

Bills Payable 18000 18000 8000 11000

Wages Payable 7800 4800 9900 8400

Provision for Income Tax 5500 3400 3600 2700

Debentures 38000 32200 39000 29000

Paid-up capital ($1 shares) 56000 56000 56000 56000

Share Premium reserve 6000 6000 6000 6000

Retained Profits 22000 31680 35030 41440

199700 204970 206800 189750

Key Corporation Pty Ltd

Comparative Profit and Loss Account (Statement of Financial Performance)

For the years ended 30th June 1997 – 1999

1997 1998 1999

$ $ $

Operating Revenue $71200 $73500 $68800

Cost of goods sold:

Opening Inventory 11280 11300 11240

Purchases 43000 45200 38000

54280 56500 49240

Closing Inventory 11300 11240 11100

Cost of goods sold 42980 45260 38140

Gross Profit 28220 28240 30660

Expenses:

Selling 6800 8200 9900

Administrative 3400 3400 6000

Depreciation 6500 5000 5000

Interest 3000 2500 3000

19700 19100 23900

Operating profit before income tax 8520 9140 6760

Income tax expense 3400 3600 2700

Operating profit after income tax 5120 5540 4060

Extraordinary items (after tax) 6800 (1000) 4800

Operating profit after tax & ext. items 11900 4540 8860

Retained profits at 1 July 22000 31680 35030

33920 36220 43890

Dividends Paid 2240 1190 2450

Retained profits at 30th June $31680 $35030 $41440



Key Corporation Ltd Cashflow Statement For the Year Ended June 30





1997 1998 1999

Net Cashflow from Operating Activities





Receipts from Customers 63,600 84,300 67,600



Payment to Suppliers (36,510) (48,820) (52,060)



Payment for Services (22,250) (24,290) (15,490)



Payment for Income Tax (5,500) (3,400) (3,600)



Payment for Interest (3,000) (2,500) (3,000)

Net Cash provided by Operating Activities (3,660) 5,290 (6,550)

Net Cash Flow from Investing Activities





Net inflows from sale and purchase of fixed assets 3,700 1,000 1,700

Net cash used by Investing Activities 3,700 1,000 1,700

Net Cash Flow from Financing Activities





Payment of Dividends (2,240) (1,190) (2,450)



Change in Debentures (5,800) 6,800 (10,000)

Net Cash used by Financing Activities (8,040) 5,610 (12,450)









Net Cash Movement for the Period would be (8,000) 11,900 (17,300)









Add Cash at Bank Opening 24,300 16,300 28,200

Closing Cash at Bank @ 31/12 16,300 28,200 10,900











Reconciliation of Cash/Cash Equivalents







1,996 1,997 1,998 1,999

Cash at Bank 11,100 11,600 16,700 10,300

Cash on hand 400 400 600 600

Marketable securities 12,800 4,300 10,900 -



24,300 16,300 28,200 10,900





Key Corporation Ltd - Summary Ratios:





1997 1998 1999

Return on Equity (ROE) 13.4% 4.8% 8.8%

Return on capital employed (ROCE) 9.3% 8.9% 7.3%

Return on Assets (ROA) 5.7% 5.7% 4.9%

Net Profit Margin (Net profit after tax (NPAT) including Extraordinary)
16.3% 15.8% 14.2%

Gross Profit Margin 39.6% 38.4% 44.6%

Profit Margin (using Operating profit after tax (OPAT) before
Extraordinary) 7.2% 7.5% 5.9%

Avg Inventory Turnover days 96 91 107

Avg Receivable Turnover days 149 181 192

Avg Creditors Turnover days (Accts payable only) 421 412 406

Asset Turnover 35.2% 35.7% 34.7%

Current Ratio 0.88 1.12 1.12

Quick Ratio 0.68 0.89 0.84

Operating C/flows to Current Liabilities -0.05 0.07 -0.11

Gearing 25.6% 28.7% 21.9%

Debt Ratio 54.3% 53.1% 45.5%

Equity Ratio 45.7% 46.9% 54.5%

Times Interest Earned 3.84 4.66 3.25

Earnings Per Share (cents) 0.21 0.08 0.16

Dividend Per Share (cents) 0.04 0.02 0.04

Dividend Payout Ratio 18.8% 26.2% 27.7%

Operating Cashflow per share -0.07 0.09 -0.12



The following industry averages were available through industry
publications:

1997 1998 1999

Current ratio 2.1:1 2.1:1 2.2:1

Quick ratio 0.9:1 1.0:1 0.9:1

Average Collection period (days) 125 124.5 125.3

Inventory turnover (times per year) 6 5.6 6.2

Profit margin*based on operating profit after income tax 6.5% 8.5% 8.5%

Debt ratio 30% 32% 30%

Earnings per share (cents) 60c 60c 62c

Rate of return on shareholders’ equity 11% 12% 11%

ASSIGNMENT - MARKING CRITERIA

ASSIGNMENT Part 1 Financial Analysis

Please refer to your course material for details regarding presentation
noting particularly:

All assignments are to be professionally typed on standard A4 paper
using 1.5 line spacing.

binding of assignments is not required – staple top left hand corner

page limit – 5 pages maximum (about 1500 words) – remember quantity
need not reflect quality. Substance over form.

any appendices are not included in the page limit

reports should follow (generally) a format for a professional report.

assignments MUST be in the MBA box top floor of Commerce Building by
6.00PM Monday April 14th, 2003.

all calculations are to be provided in the appendix to your report

students should make good use of tables and appendices where applicable

students are expected to research the topic in other relevant
accounting/finance texts. This research should be well referenced. Do
not rely solely on the assigned text for interpretations.

Referencing should be as per the GOVERNMENT PRINTER see text references
further on