Capstone Simulation: Finance - Essay Example

Capstone Simulation: Finance 0 Introduction The company performed well when a comparison is done overtime as well as with competitors in the industry. There are a number of ratios that are available that help investors decide on whether an investment is a good buy. Additionally, there are a number of ratios that allow for a general assessment of profitability, liquidity and efficiency. 2.0 Investment Ratios Investment ratios give a good indication of a company’s suitability as an investment whether it be in the long or the short term. A number of ratios are available to help them make this very important decision. The company performed well and this is not only obvious from the perspective of the earnings per share but in respect of the impact it has on the amount of dividends that the business can pay. This has resulted in an improvement in the bond rating of the business and its stock price when compared to competitors. The company’s return on equity was also good at 45%. This is a high return by any measure. Earnings per share Earnings per share (EPS) is a measure that investors use to assess a business’s performance in comparison to other businesses in an industry. In fact, BPP (2009) indicates that it is of particular importance in making a comparison of the results of a business over a period of time as well as in making comparisons of business’s equity in relation to the equity of competitors. It is also useful in comparing returns from loan and other investment types. It is found by dividing the net income attributable to stockholders by the weighted average of the number of shares outstanding during the year. Andrews has the highest EPS of all the companies in the industry. It has an EPS of $39.25 compared to Chester with 6.36, Digby $5.07, Ferris $3.70, Erie $2.69 and Baldwin $0.60. This is an indication that Andrews is way above the competition. Dividends Dividends are the amount that companies distribute to shareholders from the companies earnings. This is also an indication of the company’s performance. However, there are companies that choose to pay dividends even after they have made losses. This depends on the signal they want to send to the shareholders and potential investors. Paying dividends sends a positive signal to investors. The company has distributed over 61% of its net income – an amount of $24 for every share held to shareholders. This is good for shareholders and potential investors who want to ensure a steady stream of income from their investments and who are not willing to invest in companies that expect them to manufacture their own dividends by selling shares. Andrews’ competitors – Digby, Erie, Ferris, Chester and Baldwin paid dividends of $10.66, $6.91, $5.29, $5.20, and $1.77 respectively. Baldwin, Erie and Ferris paid out more in dividends then they earned in 2020. They obviously did not want to send the wrong signal to the market. Ending Stock Price A company’s stock price is an indication of how the market views the company’s performance. The chart below shows stock price information on the six companies in the industry. Figure 1- Relative comparison of the movement in stock prices Figure 1 shows important information on the movement in the share prices of the six companies that compete in the market for sensors. Andrews share price appreciated significantly by 892% from $34.41 to $307. This is a significant achievement for the company especially since none of its competitors came close. All other competitors enjoyed an appreciation in their share price – however small, over the period except for Baldwin who saw a decline to $31.88 from the original $34 where all the companies started. Bond Rating A company’s bond rating gives creditors an indication of its vulnerability of defaulting on its debts (Standard & Poor’s 2012). Andrews’ credit rating improved from B to BB. This is an achievement but considerable improvements are still possible since the company still remains close to the bottom. The company’s ratings are much better than others in the industry and indicate that it will be able to get loans at cheaper rates than the competitors. In fact, the information available on the industry indicates that Andrews and Chester were the only two companies in the industry that were not affected by a fall in credit rating. All the competitor’s ratings have fallen to the next level. However, while Andrews’ ratings improved Chester’s ratings remained the same at B. Andrews has a much better debt to equity ratio than all the companies in the industry and this is obviously one of the reasons for the higher credit rating. The credit rating agencies consider a whole range of factors when assessing a company’s risk of defaulting on loans. They include free cash flow and other liquidity measures. The company’s ability to improve even further its debt to equity ratio, return on assets and other key ratios such as profitability and liquidity will facilitate a further improvement in the future. Profitability Profitability ratios provide information on whether or not the company is profitable. That is, whether the company is making a profit or loss. The level of profitability is defined by the net profit margin. However, the gross profit margin provides important information on the contribution made to fixed cost as well as other operating costs. The company’s contribution margin is higher than the competition but there is room for improvement through the expansion of its production capacity. This should reduce the direct cost of production substantially. Efficiency Efficiency ratios provide information on how well management has carried out its functions. Some of the ratios that are used in this assessment are asset turnover and inventory turnover. Andrews turned over assets 1.87 times. This compares favorably with the best in the industry of 1.92 which was achieved by Ferris. Liquidity The company does not currently have liquidity problems since its current assets far exceed its current liabilities even after inventory is removed. This means that the company is in a good liquidity situation. However, the company needs to generate more income and find ways to reduce the level of receivables on its books. There are a number of innovative ways in which this can be achieved including offering discounts for early payment. Recommendations All the ratios analyzed in the foregoing sections are useful to potential investors and current shareholders in making decisions on whether or not to invest. Creditors who have money to lend are also interested in investing but they also need to know if there is a substantial risk of default. They use this to determine whether they should lend and the rate of interest required in order to sufficiently account for the associated risk involved. It is of extreme importance that Andrews find ways to reduce the gearing level. This should help in facilitating an improvement in the company’s credit rating as well as an associated reduction in the rate of interest charged on iits loans. Investors are also interested in the efficiency with which the company is managed. A company that is managed efficiently has a better chance of achieving its goals. The company also needs to take a look at the income and contribution margin for all the goods it currently sells. Agape and Agape2 are the two products with the lowest margins. Therefore, the company needs to look at other products which are more cost effective to produce and sell. References BPP Learning Media (2009). F7 Financial Reporting Study Text. 3rd ed. London: BPP Learning Media Standard & Poor’s. (2012). Standard & Poor’s Ratings and Definitions. Retrieved from http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245345872839. (Accessed 3rd January 2013 Read More