Analyzing a company an dmaking comparisons - Research Paper Example

An analysis of activity ratios and profitability ratios of both companies i.e. ENERSYS and EXIDE is conducted for time period from 2010-2011. The first ratio calculated is profit margin, which is Net Profit/Total Revenue. Net profit margin/Total Revenue is an important measure of profitability and tells how much a company has earned after it has paid off all its expenses. So ENERSYS profitability is calculated to estimate where ENERSYS currently stands in comparison to its competitors. ENERSYS net profit margin is 6% in 2011 and 4% in 2010.

Exide’s net profit margin is 1% in 2011 and -4% in 2010. Clearly, ENERSYS is way ahead of Exide in terms of profitability as ENERSYS earns a profit of 6% in 2011over its revenue earned. This means that ENERSYS gets to keep a profit share of 6% after all its expenses has been paid. On the other hand, Exide earns a net profit of only 1% in 2011, which means that Exide gets to keep a profit of only 1% after all its expenses have been paid. So, ENERSYS performs well as it earns more net income then Exide.

However, Exide has improved more than ENERSYS since 2010 as Exide’s profit margin improved from -4% to 1%, while ENERSYS’s profit margin increased from 4% to 6% (ENERSYS, 2011). ENERSYS Return on Assets was 6% in 2011, so it earned 6% on its assets which is much better than Exide’s ROA of 1%. . SO, clearly in terms of profitability ENERSYS outperforms Exide. Receivables turnover ratio for ENERSYS was 4.05 in 2011 and 3.98 in 2010, while receivables turnover ratio for Exide was 5.35 in 2011 and 5.

23 in 2010. ENERSYS Days Sales outstanding was 89 days in 2011 and 92 days in 2010, while Exide’s days sales outstanding was approximately 68 days in both 2011 and 2010 (Seeking Alpha, 2011).. Looking at the activity ratios for both Exide and ENERSYS, it is surprising to note that Exide performs well then ENERSYS in its asset utilization. Exide is better able to collect its revenue money after sales have been made in few days and so would convert its revenue to cash sooner than ENERSYS. ENERSYS’s competitive financial position is strong in terms of its profitability as it has a higher net income in previous years as compared to its competitors and higher total assets, and has made a lot of capital investments.

However, ENERSYS is weaker in utilization of assets and has to put in stringent policies in order to tackle the issue (Yahoo, 2011a). A careful analysis of Free Cash Flow available to the firm will determine which firm is outperforming the other. Calculating the Free Cash Flow to Firm by adding Cash Flow from Operations to Interest expense and fixed investments, it is seen that Exide has greater Free Cash Flow to Firm than ENERSYS. ENERSYS free cash flow to firm is $31945000, while Exide’s Free Cash Flow is $35088000.

Also, looking at the cash flow statement of both companies, ENERSYS has a negative cash flow due to higher investment in capital and higher debt financing. However, despite negative cash flow during 2011(Yahoo, 2011b), ENERSYS still has more cash reserves than Exide. This shows that ENERSYS is making profits and is not holding back as it is buying more capital in order to increase and develop further for the future. ENERSYS fixed capital expenditures entails that it will have a much positive outlook in