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.

	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	11.2

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?

Answer 1

		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