Financial Analysis of China Gold Industry - Example

FINANCIAL ANALYSIS OF CHINA GOLD INDUSTRY Introduction The china gold industry has a stiff competition due to the number of upcoming companies that are doing the mining and the smelting. China is the second gold exporters after South Africa, an idea that has initiated a lot of high profile performance competition and quality metal production. Consequently, this paper uses a major firm in the Chinese gold industry, which is one of the industry’s associations called the Lingbao Company Limited. It is significance to note that a company in the gold industry engages in activities different from those of companies in other industries. Consequently, the financial ratios used by this company depend on the characteristics and demands of the industry. The analysis of the financial statements may focus on two key areas, even though these are non-inclusive. In effect, the areas are the trend lines and the proportions. The trend line analysis involves drawing trends of several performance indicators, such as revenues, profits, receivables, accounts payables, gross margins, and cash accounts(Stickney, 2004). In contrast, proportion analysis involves the calculations of the sizes of different accounts in relation to some identified variable accounts. The sizes of the ratios gives different meanings of the accounts calculated for the interpretations of the performance of the firm. Primarily, it is required that businesses understand their financial ratios because financial ratios show the strengths and weaknesses of a company. With a continuous examination of the financial ratios, the company’s managers may detect any fluctuations in the overall financial ratios, and notes the company’s performance over time (Stickney, 2004). Further, financial ratios play a significant role in forecasting and financial analysis. Essentially, financial ratios allow companies and managers to set precise goals hence easily track progress in the attainment of these goals. Even so, experts advise that companies should choose financial ratios that apply to the business (Taylor, 2010). It is significant to note that there are several financial ratios that apply to all industries. Nevertheless, there are industry-specific financial ratios, for instance, those applicable to the gold industry. The most common financial ratio is the operating margin. It is calculated by dividing the operating income by the net sales (Bull, 2008). Evidently, the operating margin ratio is an indication of how much of a company’s revenues remain after paying off all operating expenses. The most common expenses considered are new materials costs and employees’ salaries. As such, a low operating margin indicates that the company does not have enough funds to carter for other non-operating costs and pay off debts (Bull, 2008). The financial analyst, therefore, use the proportion approach, and the following are the ratios that we will use to determine the firm performance for the decision making. Profitability - Lingbao gold co ltd-h Return on equity=Income/Equity 2013 -673.4/1,693.5 = -0.39 2014 33.7/1,693.5=0.019 Return on assets= Income/Asset 2013 -673.4/6723.5=-0.1 2014 33.7/7139.6=0.004 Return on Capital=Income/Total capital The return on equity is one of the investor directly related ratio which the investor should consider before risking their funds to invest in a firm. The ratio indicates what the investor should expect by the end of the year to be the income on the funds he has invested in the firm. From the two ratios above, the rate of return on equity in 2013 was -39% which is a loss in amount in the capital gains market. The following year, the value has gone up to 1.9%. This is a very goodincrease and the return is quite better compared to the previous year where there was a loss. This makes it reasonable to invest in this stock(Taylor, 2010). Before the firm is acquired, the acquirer must be aware about the market rate of return on the equity and compare it with what the firm offers. It might be sometimes be dangerous for a firm to acquirer a firm which is going to bring losses only to the firm eating in to the already accumulated funds. The firm which when acquired would take the longest time possible to repay the initial amount of capital employed should be avoided. Return on asset on the other hand is a very important ratio in determining whether the firm is appropriately making use of the assets it owns to generate revenue for the firm. The assets are the components that are employed to be used in generating funds for the organization. The return on asset should be more 0.2% as an average return on asset. The return on assets is a direct indicator of whether the firm is putting in to good use of the assets it has or it can determine whether the assets have been underutilized. From the above analysis of the Lingbao, the firm has got extremely low value of the return on asset, which means the assets the firm owns do not vividly correspond to the earning of the firm(Taylor, 2010). This shows the earning are very low as compared to the size of the available assets. The ratio even though has increased from -10% in the year 2013 to 0.4% in 2014. The increase can be attributed to many factors in in the sector like the demand increase and the decrease in cost. Generally in the year 2013, the firm performance was lower as compared to 2014. Acc receivable turn over=Total supply purchase/Acc receivable 2013 8072.8/608.8= 13.26 2014 5921.9/642=9.22 The above ratio is known as accounts receivable turnover ratio, which measure the ability of the firm to collect the accounts receivable. The accounts receivable collection is affected by factors like the collection period and the stringent penalties put by the firm. From the above analysis, the ability to collect the debt has decreased from 13.26 to 9.22 in the year 2013 to 2014 respectively. Besides the increase, the ratio is also very high and the firm needs to do some adjustment in its policies to collect more revenue to make the ratio be below 1.0 which is preferred. The company has reduced the stringent credit conditions. Margin Analysis Gross profit margin= Cost of goods sold/Revenue 2013 8072.9/7942.1=1.01 2014 6496.4/5129.1= 1.26 The gross profit margin simply brings out the picture of relationship between the gross profit and the revenue that is collected. The gross profit margin is very important in discovering the relationship between the gross profit before the external issues like the expenses and the tax and the revenue that has already been collected. The gross profit margin ratio should be close to 0.9 or 1 for a better performing firm (Stickney, 1993). From the look on the financial statement and the ratio analysis above, this performance is exemplary. The firm has got a ratio between the gross profit and the revenue collected as the performance indicator. The ratio of the gross profit is a justifying ratio since it shows the clear status of the firm. The ratio of the firm is increasing from the year 2013 where the value is 1.01 to 1.26 and this means the firm is working very hard to maximize on the wealth of the shareholders. Even though the revenue collected has reduced but the performance is relatively good. Primarily, the marginal analysis is a significant decision-making tool in the world of business. In essence, it is the financial ratio that allows the company to measure additional benefits of a given production activity against costs incurred (Bull, 2008). As a result, managers in the gold manufacturing process can understand whether an activity is profitable, and make decisions based on the marginal analysis (Yadav, 2007). Debt/Equity 2013 2068.1/1663.2= 1.24 2014 2080.3/1696.3=1.22 The total debt to equity ratio is a very common leverage ratio whose main function is to show to the extent to which the management is willing borrow funds to finance its activities rather than using the equity fund for the funding. This ratio is not having an average point of ratio or standard required for the firm to maintain. The firm managers need to find the optimum debt level and equity level which bring optimum Weighted Average Cost of Capital The total debt to equity ratio has slightly decreased from 1.24 in 2013 to 1.22 in 2014. This means that the management decided to reduce the amount of debt being used to finance the operations and activities of the firm this means therefore that the firm has decided either to use the equity funding for its activities or to reduce its operations hence borrowing less debt. Debt to asset ratio 2013 2068.1/6723.5=0.31 2014 2080.3/7139.6= 0.29 The total debt to the total asset just like the debt equity ratio is also commonly used for the performance evaluation purposes. The ratio shows how the assets of the firm can finance the current debt that the firm has with other firms. From the above analysis, the firm can sufficiently and without any problem finance its debts using the assets should they be liquidated. Even though the firm can manage this, the ratio has reduced(Taylor, 2010). This can be either attributed to the reduced use of debts finance the firm’s activities or the assets have increased in value which is not likely to be the case unless the greater percentage should be land that appreciates in value. From the above ratio there has been a slight decrease in the debt to assets ratio. contribution margin= Operating Income/Net sales 2013 -708.3/7942.1= -0.089 2014 242.6/6496.6=0.03 The contribution margin shows the relationship between the operating income and the net sales. The net sales are the total revenue collected during the financial year when the variable costs are subtracted. The operating income to net sales ratio shows the net profit remaining when the variable costs have been subtracted(Stickney, 1993). The ratio ought to be reasonably large in size for a firm that performs well. From the above financial analysis, the contribution margin has increased from -8.9% to 3% which is a very large difference. The ratios however are not badly off when the performance aspect is reviewed and this therefore means that, the bank did very well in the net profit that remains after the variable cost have been reduced. Current assets/current liabilities 2013 3032/2915.1= 1.04 2014 3384.7/3268.5=1.03 The above ratio is known as current ratio and its main purpose is to measure the amount of liquidity available to carter for the current liabilities. From above calculation, the current ratio has reduced from 1.04 in 2013 to 1.03 in 2014. This means that the firms liquidity have reduced and can only afford to finance the current obligations up to half the amount. Current stock-cash or stock/Current liabilities 0.500 0.56 The above ratio is known as quick ratio and its main use is similar to that of the current ratio except that it does not include the available inventory in the calculation. It is mean to determine the liquidity of the firm(Stickney, 2004). The liquidity just like the above current ratio have shown, have reduced from 0.56 to 0.5, meaning the liquid cash available can only finance up to half the current obligations. Put simply, the quick ratio is a financial ratio that validates the company’s liquidity. Besides, it is also called the acid-test ratio (Bull, 2008). In effect, the quick ratio sums the company’s cash, marketable securities, and accounts receivables, and divides them by the current liabilities. The higher the outcome the better the company’s liquidity. As noted, the ratio differs from the current ratio because it excludes inventories. The reason for excluding inventory is that it is difficult to quickly turn inventory into cash (Yadav, 2007). That the present quick ratio is 0.5 means the company cannot finance more than half its assets. References Bull, R., 2008. Financial ratios: How to use financial ratios to maximise value and success for your business. Amsterdam: Elsevier/CIMA Pub. Foster, G., 1978. Financial Statement Analysis, 2/e. Pearson Education India. Gitman, L. J., and Madura, J., 2001. Introduction to finance. Boston, Mass. [u.a.: Addison Wesley. Melicher, R. W., and Norton, E., 2013. Introduction to finance: Markets, investments, and financial management. Ou, J. A., and Penman, S. H., 1989. Financial statement analysis and the prediction of stock returns. Journal of accounting and economics, 11(4), pp. 295-329. Penman, S. H. and Penman, S. H., 2007. Financial statement analysis and security valuation (p. 476). New York: McGraw-Hill.a Stickney, C. P., Brown, P. R. and Wahlen, J. M., 2004. Financial reporting and statement analysis: A strategic perspective. South-Western Pub. Stickney, C., Brown, P., and Press, D., 1993. Financial Statement Analysis. Subramanyam, K. R., Wild, J. J. and Halsey, R. F., 2009. Financial statement analysis. Cambridge: Cambridge University Press. Taylor, M. (2010). Financial statement analysis. Tyran, M. R., 1996. Handbook of business and financial ratios. Englewood Cliffs, N.J: Prentice-Hall. Yadav, A. R. 2007. Financial Ratios and the Prediction of Corporate Failure. New York, NY: Palgrave Macmillan. Financial Statements Currency in Millions of Chinese Renminbi (Yuan)s As of: Dec 31 2011 Reclassified CNY Dec 31 2012 CNY Dec 31 2013 CNY Dec 31 2014 CNY Revenues 5,720.8 6,393.3 7,942.1 6,496.4 TOTAL REVENUES 5,720.8 6,393.3 7,942.1 6,496.4 Cost of Goods Sold 4,841.8 5,589.8 8,072.8 5,921.9 GROSS PROFIT 879.0 803.5 -130.7 574.5 Selling General & Admin Expenses, Total 278.8 361.3 441.5 360.0 Depreciation & Amortization, Total 4.9 4.3 0.3 6.0 Other Operating Expenses -4.2 -24.9 -33.8 -36.0 OTHER OPERATING EXPENSES, TOTAL 279.5 340.7 408.0 330.0 OPERATING INCOME 599.5 462.8 -538.7 244.5 Interest Expense -156.3 -241.3 -239.0 -241.7 Interest and Investment Income 10.3 4.5 3.9 6.6 NET INTEREST EXPENSE -146.0 -236.8 -235.1 -235.1 Currency Exchange Gains (Loss) -13.4 -1.2 -11.4 -2.3 EBT, EXCLUDING UNUSUAL ITEMS 440.1 224.7 -785.2 7.1 Impairment of Goodwill -- -- -34.1 -- Gain (Loss) on Sale of Assets 2.7 0.0 -4.9 49.6 Other Unusual Items, Total -5.9 -- -22.6 -- EBT, INCLUDING UNUSUAL ITEMS 436.9 224.7 -846.8 56.7 Income Tax Expense 128.1 59.8 -138.5 39.4 Minority Interest in Earnings 1.8 0.4 34.9 16.4 Earnings from Continuing Operations 308.8 164.9 -708.3 17.3 NET INCOME 310.6 165.3 -673.4 33.7 NET INCOME TO COMMON INCLUDING EXTRA ITEMS 310.6 165.3 -673.4 33.7 NET INCOME TO COMMON EXCLUDING EXTRA ITEMS 310.6 165.3 -673.4 33.7 Currency in Millions of Chinese Renminbi (Yuan)s As of: Dec 31 2011 Reclassified CNY Dec 31 2012 CNY Dec 31 2013 CNY Dec 31 2014 CNY 4 Year Trend Assets         Cash and Equivalents 349.6 267.9 367.2 372.3 TOTAL CASH AND SHORT TERM INVESTMENTS 349.6 267.9 367.2 372.3 Accounts Receivable 418.1 527.3 608.8 642.0 Other Receivables 320.6 236.4 282.4 277.3 TOTAL RECEIVABLES 738.8 763.6 891.2 919.2 Inventory 2,042.1 3,267.6 1,450.0 1,641.2 Other Current Assets 93.4 127.0 324.1 452.0 TOTAL CURRENT ASSETS 3,223.9 4,426.1 3,032.5 3,384.7 Gross Property Plant and Equipment 3,066.1 3,420.4 3,697.9 3,965.5 Accumulated Depreciation -780.1 -1,026.2 -1,251.9 -1,453.2 NET PROPERTY PLANT AND EQUIPMENT 2,286.0 2,394.2 2,446.0 2,512.3 Goodwill 41.4 41.4 7.3 7.3 Long-Term Investments 10.5 10.5 10.5 19.7 Deferred Tax Assets, Long Term 115.7 143.8 303.6 290.0 Other Intangibles 676.7 695.5 729.3 730.6 Other Long-Term Assets 207.0 207.5 194.3 194.9 TOTAL ASSETS 6,561.2 7,919.0 6,723.5 7,139.6         LIABILITIES & EQUITY         Accounts Payable 417.6 599.9 554.8 527.2 Short-Term Borrowings 23.8 23.8 23.8 23.8 Current Portion of Long-Term Debt/Capital Lease 1,504.7 2,781.7 1,724.0 2,110.6 Current Income Taxes Payable 17.7 21.9 1.3 5.6 Other Current Liabilities, Total 431.0 486.0 530.2 513.6 Unearned Revenue, Current 60.1 100.8 80.9 87.6 TOTAL CURRENT LIABILITIES 2,454.9 4,014.1 2,915.1 3,268.5 Long-Term Debt 1,729.6 1,434.6 2,068.1 2,080.3 Minority Interest 47.0 46.7 12.7 -2.8 Unearned Revenue, Non-Current 15.2 21.2 50.0 81.3 Deferred Tax Liability Non-Current 7.3 0.1 0.2 2.1 Other Non-Current Liabilities 7.7 14.4 13.9 14.0 TOTAL LIABILITIES 4,214.8 5,484.4 5,047.3 5,446.1 Common Stock 154.1 154.1 154.1 154.1 Additional Paid in Capital 827.9 827.9 827.9 827.9 Retained Earnings 1,313.0 1,401.3 674.0 707.7 Comprehensive Income and Other 4.4 4.7 7.5 6.6 TOTAL COMMON EQUITY 2,299.3 2,388.0 1,663.5 1,696.3 TOTAL EQUITY 2,346.4 2,434.7 1,676.2 1,693.5 TOTAL LIABILITIES AND EQUITY 6,561.2 7,919.0 6,723.5 7,139.6 Read More