Financial Ratios from February and 2013 and 2014 Statements - Essay Example

Lecturer Paper Introduction The financial ments are very important in daily running of a company. Management usuallyuses these statements to make decisions on the future growth of the firm. The statements are also used to measure the future prospects of the company and the need for expansion. Some of the key financial statements used by the companies include income statements, balance sheet and the cash flow. The calculation of ratios is also important in analyzing the performance of the business. The analysis of the financial statements consists of the application of various analytical techniques and tools to the financial statements and other data to obtain useful information. Income Statement Income statement is a financial statement that is used to measure the financial performance of a company for a specific accounting period. The performance is presented by indicating how revenue and expenses are incurred by the company via operating and non-operating activities. It begins with the money that the firm made and subtracts the expanses connected with the production within the year. Expenses include office rental, payroll, and cost of supplies. It also records any item that was returned in the company and depreciation. (Fridson, and Fernando, 2002) The purpose of balance sheet It provides a snapshot of the profitability of a company after a particular period. The income statement is used by the banks and in determining whether the earning is enough to repay the loan being requested. Investors and the creditors uses the statement in the determination of the firms past performance, analyze current performance and predict the future of the enterprise. It will also be in a position to analyze the possibility of streams in the firm that can generate revenue through reporting of various expenses. It is also used in the comparison of company expenses from one year to another and measures the ability of the company to control costs. It analyzes the periodic decline of the value of intangible and fixed assets when reporting amortization and depreciation. The statement is important as it is used by accountants in the preparation of tax returns for both the staff members and the business. Balance sheet The balance sheet measures the financial position of the company. It is also referred to as the statement of the financial condition, statement condition and the statement of the financial position. It presents the assets, liabilities and the net worth of the company. It provides the users an idea on the financial position of the company at a particular time. Their balance sheet is based on the accounting equation that Assets = Liabilities + owners equity. It is called a balance sheet because at every given time, the summation of capital and liabilities must be always equal to the assets. Suppliers, lenders and taxation often require an audited balance sheet besides being required by the law. It is only regarded as a valid when it gives the fair and true view of the state of affairs in the organization and should always follow the provisions found in the GAAP. (Fridson, and Fernando, 2002) The purpose of balance sheet Investors and creditors uses the balance sheet in determining the financial standing of the company since it lists what is owned by the company and what it owes. It summarizes the company’s assets, liabilities and shareholders’ equity and distribution. It forms a basis on whether to invest in the company and whether there will be reasonable returns after sometimes. It measures how the economic resources contributed by the shareholders are being used in the growth of the company. Importance of applying key principles to enhance the usefulness of the financial statements When the statement is generated by company’s it is expected that the statement presented must be always; 1. Objective, verifiable and reliable 2. Expectation of consistency in the statement released 3. There is an expectation of comparability of the accounting information. Balance sheet The assets which are listed in the balance sheet always have a cost that can be calculated and measured with the original amount being shown on the original cost of every asset. For instance, if a track of land was purchased at $10,000 in 2000. The company still owns the land and it’s now appraised up to $25,000. The cost principle requires that the land should be represented in the asset account with the original amount of $10000 and not the new amount. Therefore the principle helps in measuring the true value of company’s assets. If a company bought another land today, the monetary unit assumption principle dictates that, it should only be added to the original Sale of the land that was bought in 2000. The supply account measures the all the supplies that the organization obtained but have not used. Given that they are consumed, the account will be moved to the income statement. This is a requirement with the matching principle which requires all the expenses to be properly matched with streams of revenues in the statement. This will ensure that a right financial position of the company is recorded. The prepaid accounts show the cost of expenses like insurances that have not expired. When the expense e.g. insurance expired, it is moved to the insurance expense on the statement account, as required by the matching principle. It is possible to defer the cost of a prepaid expense in the balance sheet because of the principle of going concern assumption. The assumption of the monetary unit and cost principle helps in the prevention of some valuable assets from appearing in the balance assets. Income statement The first principle that shows how the income statement was profitable during the time period is the accrual basis of accounting. Revenues- The preparation of the fees that were earned during the considered period follows the matching principle and the revenue recognition principle. Matching principle refers to what steer’s accountants towards the adoption of accrual basis of accounting as opposed the application of the cash basis. This principle help accountants to ensure that all revenue streams are located. Notes to the financial statements The principle that is applied in the notes of the above financial statements is the full disclosure principle. The principle requires that accountants must include explanatory notes when preparing financial statements. The notes should contain information that is important for the readers to take reasonable credit and investment decisions. The principle is important since the investor will ensure that they have the facts and data that will help in taking of various decisions. The disclosure is a confirmation that there is nothing being hidden from the investors. Financial Ratios from February and 2013 and 2014 Statements Liquidity Ratios Liquidity Ratios helps in explaining whether the business is in position to meets its short term obligations. Liquidity is important to any business since in tough times; a firm without enough liquidity to cater for its short term debts might be forced in making tough decisions so as to raise money. (Roselli, L., 2014) Current ratio It’s calculated from the balance sheet. It measures the ability of a company to meet its short term liabilities with the short term assets. Current assets of a business include marketable securities, receivables, cash and inventories. Current liabilities include accrued income taxes, current maturities of long term debt, accounts payable and the accrued expenses. Current Assets Current Liabilities 2013 results 1342/-2334 -0.575 2014 results 1,430/-2,873 -0.4977 Since the ratio for both years is less than one, it means that the firm has less short term assets than its short term debts. It means that the company is vulnerable to bumps in the economy or the business climate. Acid Test or Quick Ratio It measures the liquidity position of the business. The quick ratio helps in the comparison of the cash equivalents plus cash and accounts receivables to the current liabilities. Cash + Marketable Securities + Accounts Receivable Current Liabilities Or = (Current Assets - Inventory) / Current Liabilities         2013 1342-781/-2334 -0.2404 2014 (1,430-852)/ /-2,873 578/-2873 -0.2012 The negative figure for both 2013 and 2014 is a confirmation that a firm will not be able to meet its short term financial obligations. Cash Ratio This ratio is the conservative view of liquidity. Cash Equivalents + Marketable Securities Current Liabilities Or = (Current Assets - Inventory-cash) / Current Liabilities         2013 1342-265-781/-2334 -0.1268 2014 (1430—261-852)/2873 -0.11 It is a further confirmation that the company is not able to meet its short term financial obligations. Profitability Ratios These ratios explain how good a company is when converting operations into profits. Net Profit Margin (Return on Sales) It measures the net income dollars that is generated by a dollar of sales Net Income * Net Sales 2013 647/18116 0.0357 2014 -238/17680 -0.0135 In 2013, for every dollar of sales there will be a profit at a rate of 0.0357. For 2014, despite high sales the ratio is indicating a negative figure meaning that for every dollar of sales, there will be a loss at a rate of 0.0135. Return on Assets Calculated from Income statement and balance sheet ROA shows how good the company is using its assets to make money. Return on Assets =  Net Income / Average Total Assets 2013 647/1342+9185 0.06146 2014 -238/1430+9299 -238/10729 -0.02218 In 2013, for every a dollar owned by the family, it makes a profit 0.06146 times while in 2014, It means that for every dollar of assets a company owns, it makes loss of 0.02218 on an annual basis. (Wild, and Leopold, 2001) Return on Investment Calculated from Balance sheet This ratio measures the income that is earned on the invested capital Net Income * Long-term Liabilities + Equity 2013 647/-2963+5230 647/2267 0.2854 2014 -238/3164+4692 -0.1558 2013 results show that for every dollat that is invested by the company as capital, it will gain at a rate of 0.2854 while in 2014 it shows that for every dollar that a firm invested as a capital, there will be a loss of -0.1558. Return on Equity This ratio measures the income that is earned on the investment of the shareholders. (Investopedia Stock Analysis 2015) Net Income * Equity 2013 647/5230 0.1237 2014 -238/4692 -0.0507 It shows that the company will gain at least gain 0.1237 invested in the company in 2013 while in 2014 the ratio shows that the owners of the company will lose at least 0.0507 times in every dollar that is invested in the company. Gross Profit Margin Calculated from the income statement It explains the relationship between the revenue on sales and the cost of goods sold. (Tamari, 1978) Gross Profit Net Sales 2013 1206/18116 0.06657 2014 1074/17680 0.0607 The low ratio shows that the company is making very low gross profits for both years. The sales are high but the costs of production are also very high resulting to poor performance. (MacLatchie, 1995) Financial Leverage Ratio/ Debt Ratios Total Debts to Assets It gives information on the ability of the firm to absorb the reduction in assets that arises from losses without any possible jeopardy on the creditors interests. (Palepu, and Paul, 2000) Total Liabilities Total Assets 2013 2963+2334/9185+1342 0.5031 2014 (3164+2873)/9299+1430 6037/10729 0.56268 The ratio for both years shows that the firm is able to absorb the asset reduction Debt to Equity Ratio  It ensures the relationship between the amount of capital that is borrowed and that amount that is contributed by the shareholders. (Fridson, and Fernando, 2002) Debt-to-Equity Ratio = Total Liabilities Total Shareholder Equity 2013 2963+2334/5230 1.0128 2014 (2873+3164)/ 4692 = 1.287 For both years, the low ratio means that the company is able to meet its debt obligation and therefore cannot be forced into bankruptcy. Interest Coverage Ratio (Times Interest Earned) This ratio indicates the capacity of the company to meet interest payments. It adopts EBIT (Earnings before Interest and Taxes). EBIT Interest Expense 2013 947/75 12.627 2014 -95/-87 1.0916 In 2013, the company will be ready to meet the payment by 12.627 times while in 2014 it shows that the company will be able to meet its interest payments by 1.0916 times. Capitalization Ratio The ratio indicates the long term usage of the debt Long-Term Debt Long-Term Debt + Owners Equity 2013 2963/2963+5230 2963/2267 1.307 2014 3164/3164+4692 3164/1528 2.08 The figures shows a positive adoption of the debt despite the low figures reported. Long-term Debt to Net Working Capital The ratio gives an insight into the ability of the company to pay its long term debts from the existing current assets after paying its current liabilities Long-term Debt Current Assets - Current Liabilities 2013 2130/1342-2334 2130/-992 -2.147 2014 2272/1430-2873 2272/1443 -1.5756 The negative figures for the company means that the company might not be able to meet its long term goals. Efficiency Ratios These are ratios that give the investors the insight on how efficient the business is when it comes to investing its working capital and the fixed assets. Asset Turnover Ratio Calculated from the balance sheet and the income statement Asset Turnover Ratio = Sales / Average Total Assets 2013 18116/9185+1342/2 18116/5263.5 3.4418 2014 17680/9299+1430/2 17680/5364.5 3.2957 The ratio means that for every a dollar of assets a company has, it will be able to generate 3.4418 for 2013 and 3.2957 for 2014 dollars in sales on annual basis. Inventory Turnover Ratio  The inventory turnover ratio helps in the measuring the efficiency in the cycling of the inventory. Inventory Turnover Ratio = Costs of Goods Sold / Average Inventory 2013 16910/781 21.65 2014 16606/852 19.49 The ratio shows that the company should always be prepared to replenish its inventory by 21.65 in 2013 and 19.49 times in 2014.   Cash Turnover It measures the effectiveness of the company in utilizing its cash Net Sales Cash 2013 18116/265 68.36 2014 17680/261 67.74 The high ratio shows how effective the company is when it comes to the utilization of its funds in the daily operations. Days Sales in Receivables It helps in the determination as to whether a change in the receivables will change sales. Gross Receivables Annual Net Sales / 365 2013 781/18116/365 781/49.63 15.74 2014 852/17680/365 852/48.438 17.59 The positive figure explains the high turnover of the stock which is healthy for the operations of the company. Inventory Turnover The ratio measures the liquidity of the inventory Cost of Goods Sold Average Inventory 2013 16910/781 21.65 2014 16606/852 19.49 Investment Valuation Ratios These ratios are used to get the idea on whether the stock prices are reasonable. They are generally easy to interpret and they are relative metrics. Price-to Earnings Ratio P/E It’s calculated from Income Statement, Most Recent Stock Price  P/E Ratio = Price per Share / Earnings per Share 2013 6.5/26.65 0.2439 2014 6.5/10.23 0.635 PEG Ratio It adopts the format of the P/E ratio for the numerator and them divides the figure by the potential growth of the EPS   PEG Ratio = (P/E Ratio) / Projected Annual Growth in Earnings per Share  2013 0.2439//-1.3839 -0.1762 2014 0.6354/-1.3839 -0.4591 A general thumb rule is that any PEG below 1 is healthy and desirable and therefore the above PEG is desirable and it points out to the positive future performance of the company. (Foster, 1986) Dividend Yield Obtained from the most recent stock price from the income statement; Used in the comparison of the dividend paying stock. Dividend Yield = Dividend per Share / Price per Share Cash Flow Statement analysis The cash flow statements are important as they disclose how money is being raised in the company and how expenditure is done. It is also one of the financial analytical tools that measure the ability of the enterprise to cover its expenses in the short term. Generally, if the company is bringing in more cash than what it spends then it will be regarded as healthy and operations should continue. It is divided into three main sections including operations, investing and the financing of the operations. Cash from operations- This section explains the cash that was generated by the firm from the past year from some of its core operations. The statement starts with the earnings generated from the operations. It then subtracts the taxation that is paid and the net interests paid from the loans borrowed. The total cash flow of $722 million in 2014 and 1107 in 2013 is an indication of good performance. The next section is the cash from investing. Some businesses often invest their cash obtained from previous operations. It accounts for cash used in making new investments and also the proceeds that is obtained from previous investments. In the above statement the figure is -1011 in 2013 and -1052 2014, meaning that the company is investing back significant cash that it projects will lead to good growth in the future. (Cash Flow Analysis. 1992) The last section is the cash from financing. It refers to cash movement from financing activities. There are two main steps which includes loans and issuance of stock to new investors. The company records a positive figure of 325 million in 2014 and -45 in 2013. The cash movement in 2014 was higher compared to the movement in 2013. References Cash Flow Analysis. 1992, Washington, D.C.?: U.S. Small Business Administration, Investopedia Stock Analysis: Why is overhead cost allocation sometimes manipulated on an income statement?2015, , Newstex, Chatham. Foster, G., 1986. Financial Statement Analysis. 2nd ed. Englewood Cliffs, N.J.: Prentice-Hall, Fridson, M., S., and Fernando A., 2002,. Financial Statement Analysis a Practitioners Guide. 3rd ed. New York: John Wiley & Sons, Myer, J., N., 1999. Financial Statement Analysis. 4th ed. Englewood Cliffs, N.J.: Prentice-Hall, Palepu, K. G., and Paul M. H., 2000. Business Analysis & Valuation: Using Financial Statements : Text & Cases. 2nd ed. Cincinnati, Ohio: South-Western College Pub., 2000. Robinson, T.,R. 2009, International Financial Statement Analysis. Hoboken, N.J.: John Wiley & Sons, Roselli, L., 2014. Financial Reporting and Regulatory Update Highlights for Public Companies, Quarter Ended 3.31.14. Florham Park, N.J.: Financial Executives Research Foundation, Tamari, M., 1978. Financial Ratios: Analysis and Prediction. London: P. Elek, Wild, John J., and Leopold A. 2001 Bernstein. Financial Statement Analysis. 7th ed. Boston, Mass.: McGraw-Hill, Read More