Financial Statements for Blacksea PLC - Assignment Example

Financial ments for Blacksea PLC (a) Profitability Ratio can be given as under (Profit margins I) Gross Profit Ratio % 2009 2010 = Gross profit/ Sales revenue 608/1230 1080/2280 = 49.43% = 47.36% II) Operating Profit Ratio % = operating profit/sales revenue 238/1230 342/2280 = 19.35% = 15% III) Net Profit Ratio % =Net profit after tax/sales revenue 128/1230 175/2280 = 10.40 % = 7.6 % Liquidity Ratio Denotes companys ability to pay short-term obligations (Current Ratio 2011) Current Ratio, = Current assets/current liabilities 375/257 818/300 1.46:1 2.72:1 Gearing Ratio The ratio informs about the companys degree of leveraging and is presented as total debt/total equity 257/2428 (300+300)/2858 = 10.5% =21% Investment Ratio (Investment Ratios, 2011) I) Earnings per share (EPS) Net Profit/No. of shares 128/1400 75/1600 9 pence/share 10.9 pence/share II) Return on equity Net Profit/Total Equity 128/2428 175/2858 5.2% 6.1% III) Price Earnings Ratio (P/E) Market Price/EPS 136/9 142/10.9 14 13 IV) Dividend Payout Ratio 128/40 175/45 Earnings after tax/ dividend paid 3.2 times 3.88times b) The Financial Report to the Chief Executive of the Company The companies prepare financial statements for various purposes. The management of the company uses it for their internal review, long term planning and corrective actions as necessary. They are also used for setting goals and budgeting. Investors use it for their investment decisions. Creditors too scan the reports before lending. The financial statements also facilitate the comparison between the two companies regarding their performances in the same industry group. Often, it helps evaluate outcomes vis-a-vis set goals and objectives. The balance sheet of the company gives idea regarding assets and liability side of the company. The assets can be bifurcated to have current and fixed assets. Current assets can be quickly converted into the cash within a few months time in the normal course of operations. Fixed assets, also called long term investments of the company in land, plant, building, equipment, fixtures, furniture etc. have longer life period and they last for several years or decades over its useful life. It is nature of the business that decides whether the company will have more capital employed in the current assets or in the fixed assets. There is nothing good or bad per se where assets are deployed; however, when it is compared with the other companies in the same industry group, it can provide an idea whether assets are deployed efficiently or not. So goes with liabilities of the company. They can be bifurcated in the current and long-term liabilities. Current liabilities constitute those payments which are to be paid within a few months. Long-term liabilities mean long-term loans, mortgage payments and other liabilities of similar nature that are to be paid in several years. The financial analysis based on these factors will tell us about the liquidity of the company. This will also tell us about the risk that investors carry by investing in the company. It is important to know whether company’s current assets are sufficient enough to pay for the current liabilities. (Atrill & Mclaney1997) From the above perspective, it will be appropriate to look at the liquidity ratio of the Blacksea Plc. Inferences from the Liquidity Ratio of the Blacksea Plc Current ratio of the company in the year ended June 2009 was noticed at 1.46:1, which further improved to 2.73:1 during the year ended June 2010. This is quite safe for the company. The current ratio for the same industry group is noticed at 2.5:1 so it can be said that Blacksea enjoys somewhat superior current ratio as per the year 2010. Creditors should have no problem in lending to the company based on the existing current ratio. Similarly, gearing ratio (debt/equity) in the year 2009 was pretty comfortable at 10.5%, which went up at 21% in the year 2010. This may cause some anxiety; however, when compared with the same industry group where debt-equity ratio is found to be at 30%, it is certainly within the manageable limits. In a difficult recessionary period, low debt-equity ratio of the company is viewed as a safer investment by investors so the Blacksea plc passes out here with flying colors. Inferences from the Profitability Ratio of the Blacksea Plc The current performance of the company can be judged from the income statement and through various profitability ratios. The gross profit margin, the operating profit margin and the net profit margin of the company for the year ended 2009 were 49.4%, 19.35% and 10.4% respectively. During the year ended June 2010, gross profit margin, operating profit margin and the net profit margin all fell by at least 2-5 percentage points, which clearly shows that the companys operations are under pressure. The company has not been able to either control the costs of production or increase the selling price of its products to cover up the increased costs. Aggregate margins for both the years taken together (2009 & 2010) can be given as per the following. Gross Profit margin = (608+1080)/1230+2280 = 48.09% Operating Profit margin = (238+342)/3510 = 16.52% Net Profit margin = (128+175)/3510 = 8.6% Gross profit, operating profit and net profit margins for the industry group are 52%, 19% and 12% respectively. In this respect, it clearly indicates that Blacksea Plc.’s profit performance is not up to the mark and does not match with the industry performance. The increase in cost of sales of the company for the year 2010 is proportionately much higher than the increase in its revenues. The company needs to scan the factors of cost of sales and find out which particular factor or factors are responsible for this increase in the cost of sales. Similarly, operating expenses in the year 2010 has increased four times when compared with the figure of year 2009 though the revenue of the company has not even doubled. It is obvious that increase in operating expenses is disproportionate and needs a thorough scrutiny so that remedial action can be taken. The investment ratios are important from the view point of stakeholders. The earnings per share (EPS) of the Blacksea in the year ended June 2010 have improved at 10.9 pence from the EPS of 9 pence posted in the year 2009. The reported industry average EPS are at 9 pence per share. In this criterion, the Blacksea has delivered better than the industry average but return on the total equity is dismal at 5.6% when taken as an aggregate figure for the year 2009 and 2010 together. It seems that the company has not used the shareholder’s fund efficiently to increase the revenue and thus the net profit of the company. The available funds could have been used to get steep discounts from the raw material suppliers by paying them against the supply so as to reduce the cost of production or alternatively faster turnaround of the money could have increased the return on equity. On the aspect of shareholder’s confidence on the company, the companys shares command price-earnings ratio (P/E) of 14 and 13 in the stock market for the year 2009 and 2010 respectively, which is higher than the industry P/E average reported as 11. This is an indicative of the better shareholder confidence in the future prospects of the company; however, the company need to deploy funds efficiently to post the improved return as fast as the return on the total equity is concerned. On the dividend payout, the company seems to be a bit conservative in dividend payouts and appears to have philosophy of retaining higher earnings when compared with the industry average. The earnings-dividend payout ratio of 3.5 for the Blacksea is an indicative of higher retained earnings and lesser payout as the industry average ratio for dividend payout is just 2.5 only. Shareholders look at the reasonable growth in the dividend payout year after year and the company needs to keep this in mind in the coming years as that will help push up the share price and stakeholder’s confidence in the working of the company. c) Financial Performance of the Company and the Ratio Analysis The computation of financial ratios is important and essential to judge any publicly traded company. The balance sheet informs about the strength of the company at any given date and the income statement informs us about the performance of the company during a period of time. Currently, results are declared on quarterly basis and that helps us to have a closer look on the companys performance by comparing various financial ratios. In fact, the financial ratios are to be viewed as diagnostic tools in the hands of management for the timely corrective actions so that the basic objectives of revenue and earnings growth along with liquidity aspects of the company do not go out of sight. Investors, creditors and lenders take their crucial investment and lending decisions based on the information available through financial ratios derived from the financial statements. The financial ratios of the company of past several years can tell us about the trend and structural weaknesses and strengths of the company (The importance of financial statements 2012). Since the results of the company are declared every quarter, the financial analysis cannot tell us if something has changed drastically during the period. For example, if the company has lost heavily due to fluctuation in the exchange rate in a foreign exchange transaction then any earlier published financial ratios of the company will not provide any true picture about the state of the company. Though these financial statements are audited by the reputed accountants of the professional firms yet any misappropriations or manipulation may give us misinformation about the company. The case of Enron presented with fudged financial statements is quite well-known, which caused enormous loss to the investors, creditors and lenders. (Argersinger 2011) References 1. Current Ratio (2011), [Online] Available at http://www.investopedia.com/terms/c/currentratio.asp#axzz1j73yBqOt [Accessed 11 January 2012] 2. Profit Margins (2011), [Online] Available at http://www.investopedia.com/articles/fundamental/04/042804.asp#axzz1j73yBqOt [Accessed 11 January 2012] 3. Investment Ratios (2011), [Online] Available at http://www.essortment.com/investment-tips-key-investment-ratios-17713.html [Accessed 11 January 2012] 4. Atrill P., Mclaney E. (1997), Accounting and Finance for Non-Specialists, Prentice Hall. 5. The importance of financial statements (2012), [Online] Available at http://csanad.hubpages.com/hub/The-Importance-of-financial-statements 17713.html [Accessed 11 January 2012] 6. Argersinger, M. (2011), Daily Finance, [Online] Available at http://www.dailyfinance.com/2011/07/19/4-signs-a-company-is-fudging-its-quarterly-earnings-results/ [Accessed 11 January 2012] Read More