Financial Strength of Gulf International Chemicals - Example

and Section # of PART A Task INTRODUCTION The role of financial strength is crucial in the growth of any organization. Its long-term objectives and strategies as well as it short term decisions including day to day operation are subject to the financial resources of the company. In our paper, our objective is to assess the financial strength of the two companies which are Gulf International Chemicals and Oman Chlorine, and based on their financial performance, we will put forward our conclusion. Gulf International Chemicals – Horizontal Analysis Gulf International Chemicals – Vertical Analysis Oman Chlorine – Horizontal Analysis Oman Chlorine – Vertical Analysis Task 2 Gulf International SAOG Gulf International SAOG – horizontal analysis show that the company did not hold a strong financial position as at December 31 2011. The company portrayed a dismal picture despite the fact that the equity increased by 1.1%. The company saw its total assets decline by 11% due to a fall in the fixed assets. At the same time, the current liabilities of the company reduced by 41% due to reducing lease payments and payables. Gulf International SAOG did not perform well in the financial year 2011. The company saw it sales decline by 26% reflecting upon the poor performance of the company. Similarly, the company saw its gross profit decline from 30% which signified upon a fall upon the efficiency of lack of control over its inputs. Overall, the net profits decreased by 55% in the financial year 2011. The drastic decline in profits has destroyed the investment climate at the company. The vertical analysis show us that Gulf International Chemicals gross profit margin decline from 33.1% t0 31.6% reflecting the inefficiency to control the input costs and variable overheads. Similarly, the profit from operations declined from 18.1% to 10.6%. This reflects that the company lost its control over the expenses which increased by 4% despite the decreasing sales. Overall, the net profit of company fell from 15.9% to 9.6% due to the dwindling sales, increasing expenses and manufacturing costs. The company’s short term position does not sound well. The company is in bad financial shape with low on profitability, liquidity and sales quantity. Likewise, looking at Bloomberg and Financial Times, the long term position of the company does not sound well. Oman Chlorine SAOG Oman Chlorine SAOG – horizontal analysis show that the company held a strong financial position as at December 31 2011 as compare to December 31 2010. The company portrayed a better picture which saw an increase of 9% in the total assets. On the other hand, the companys equity increased by 15%-majority of which was used to pay to loans which helped decrease non-current liabilities by 45%. Oman Chlorine SAOG did perform well in the financial year 2011. The company saw it sales increase by 15% reflecting upon the excellent performance by the company and sales management. Similarly, the company saw its gross profit increase by 14 % which signified a higher contribution towards the overall profits. However, the net profits increased merely by 3.7% in the financial year 2011 due to 474% increase in the income tax. The vertical analysis shows us that Oman Chlorine gross profit margin decline from 64.3% to 64.0% reflecting the company’s ability to control its manufacturing costs in the recessionary period. However, the profit from operations increased from 44.1% to 44.2%. This reflects that the company has an efficient control over the expenses despite the increasing sales. Overall, the net profit of company fell from 43.5% to 39.2% only due to the higher income taxes. The literature review suggests that Oman Chlorine’s sales increased due to increasing amount of oil explorations in the Gulf region. This has sustained during the economic crisis due to their committed and dedicated relationships with major multinational clients around the world. The company’s annual reports and chairman’s review supports the strong financial position and credit worthiness of the company. The review emphasizes on the increase in sales and profits in the financial year 2011. Bloomberg and Financial Times suggest Oman Chlorine has a strong competitive position in the local market as well as the Gulf region. However, the Chairman review maintains that the future outlook remains highly uncertain. The company will only be able to sustain the current levels of growth. Nonetheless, a new Calcium Chloride project is set to put the company in a forward position and increase its share in the local as well as regional market. (Bloomberg, 2013) (Financial Times, 2013) (Chairman’s Review 2011) The company’s short term position is sustainable. The company is in good financial shape with increasing profitability, liquidity and sales quantity. Likewise, looking at Bloomberg and Financial Times as well as Chairman’s review, the long term position of the company does sound great. The company will rise to acquire a strong position in the local market as well as regional market. Task 3 Based on the findings in task 1, the results are the same as supported by the newspaper clippings and reviews. Gulf International Chemicals is in a bad financial position whereas Oman Chlorine is a healthy state and on an upward trend. CONCLUSION The horizontal and vertical analysis suggests the stronger financial position of Oman Chlorine than that of Gulf International Chemicals. Not only the Gulf’s profits showed a decline as compared to the incline of Oman but the fact that Oman’s base in terms of the profits that it earned last year were also much larger. Thus one is more inclined towards Oman Chlorine than Gulf International Chemicals when it comes to investment. PART B Question 1 a. i and ii. b. On the basis of payback period, I would recommend project A as the initial investment will be paid back in 2.25 years as compared to 2.32 years for project B. While, on the basis of discounted payback period, I would again recommend project A as the initial investment will be paid back in 2.77 years as compared to 2.89 years for project B. Other than financial measures, there are several factors that need to be looked upon when deciding between projects. Technology is the most important criterion. When analyzing between projects, the planner must assess the type of technology required and its impact on the company. Similarly, the company needs to assess the public or end user’s opinion on the particular project. Since the end users are the most important part of the project, therefore, their opinion needs to be properly appraised. Likewise, the company needs to assess the skill set required for the project and its availability in the market. (Lopes, 2013) (UK Answers, 2005) (Microsoft, 2010) Question 2 a. b. i. Product A requires 2 units of material for each final unit whereas product B requires 8 units of material for each final unit. In a situation where there is a short supply of material, Product A will be more profitable as it will require less material to breakeven and will contribute towards the margin with each unit. ii. Product A: CM per labor hour: RO 18 Product B: CM per labor hour: RO 20 In a limited production capacity, product B will be more profitable as it has a bigger contribution margin per labor hour. iii. In a limited sales quantity, Product B will be more profitable as it has higher contribution margin per each unit. iv. Product A: CM per sales value: 45% Product B: CM per sales value: RO 40% Product A will be more profitable as it provide a greater CM per sales value. v. Since product A contributes more to the profit, we will use the limited liters to produce the maximum quantity of A i.e. 300 units. On other hand, the leftover material will allow us to produce 50 units of Product B. Overall; it will provide the maximum CM of RO 37,000. BIBLIOGRAPHY Books Bernstein, L. A. (1978). Financial statement analysis: theory, application, and interpretation. Homewood, Ill, R.D. Irwin. Brigham, E. F.,Houston, J. F. (1998). Fundamentals of Financial Management. Fort Worth, Dryden Press. Elliott, B., & Elliott, J. (2008). Financial accounting and reporting. Harlow, Financial Times Prentice Hall. Emery, D. R., & Finnerty, J. D. (1997). Corporate financial management. Upper Saddle River, NJ, Prentice Hall. Harrison, W. T., & Horngren, C. T. (2001). Financial accounting. Upper Saddle River, NJ, Prentice Hall. Meigs, W. B., Mosich, A. N., & Meigs, R. F. (1975). Financial accounting. New York, McGraw-Hill. Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2007). Financial statement analysis. Boston, Mass, McGraw-Hill/Irwin. Websites Bloomberg (2013) GICI:Muscat Stock Quote - Gulf International Chemicals. [online] Available at: http://www.bloomberg.com/quote/GICI:OM [Accessed: 15 Apr 2013]. Bloomberg (2013) OCHL:Muscat Stock Quote - Oman Chlorine SAOG. [online] Available at: http://www.bloomberg.com/quote/OCHL:OM [Accessed: 15 Apr 2013]. Gicoman.com (2013) Welcome to Gulf International Chemicals (SAOG). [online] Available at: http://www.gicoman.com/ [Accessed: 15 Apr 2013]. Markets.ft.com (2013) Gulf International Chemicals SAOG, GICI:MUS company performance - FT.com. [online] Available at: http://markets.ft.com/research/Markets/Tearsheets/Financials?s=GICI:MUS&subview=Overview [Accessed: 15 Apr 2013]. Moutinho, N. and Lopes, M. (2013) Non-Financial Analysis in Project Appraisal – An Empirical Study. [online] Available at: https://bibliotecadigital.ipb.pt/bitstream/10198/5685/1/Non-Financial%20Analysis%20in%20Project%20Appraisal%20%E2%80%93%20An%20Empirical%20Study%20-%20Complete%20paper.pdf [Accessed: 15 Apr 2013]. Office.microsoft.com (2010) Overview: Analyze and approve project proposals - Project Server - Office.com. [online] Available at: http://office.microsoft.com/en-us/project-server-help/overview-analyze-and-approve-project-proposals-HA100995977.aspx [Accessed: 15 Apr 2013]. Omanchlorine.com (2012) Oman Chlorine. [online] Available at: http://www.omanchlorine.com/ [Accessed: 15 Apr 2013]. UK Answers (2005) Impact Of Non Financial Factors On New Projects Finance Essay. [online] Available at: http://www.ukessays.com/essays/finance/impact-of-non-financial-factors-on-new-projects-finance-essay.php [Accessed: 15 Apr 2013]. Read More