Financial Analysis and Reporting for Union Cement Company - Case Study Example

FINANCIAL ANALYSIS AND REPORTING FOR UCC- PSC IN THE UNITED ARAB EMIRATES NAME: INSTITUTION: TUTOR: DATE: Question four FINANCIAL ANALYSIS OF UNION CEMENT COMPANY Financial reports UNION CEMENT COMPANY IN UAE. As of: Dec 31, 2007 Dec 31,2008 31-Dec-09 31-Dec-10 BALANCE SHEET FOR THE YEARS 2007, 2008, 2009, 2010. AED AED AED AED CURRENCY IN MILLIONS OF UNITED ARAB EMIRATES DURHAMA Assets Cash and equivalents 56.4 29.6 62 25.4 Trading Assets securities 12.6 6.3 4.1 3.1 TOTAL CASH AND SHORT TERM INVESTMENTS 69 35.9 66.1 28.5 accounts receivables 221 232 181.5 167.4 other receivables 0.5 5.2 1.9 4.9 TOTAL RECEIVABLES 221.5 237.2 183.4 172.3 inventory 102.1 180 169.8 196.8 prepaid expenses 0.5 2.5 0 0 other current assests 10.8 0.1 0 0 TOTAL CURRENT ASSETS 403.9 455.7 419.3 397.6 gross property and plant and equipment 1627 1722.3 1764.9 1783.4 accumulated depreciation -716.3 -764.5 -825.1 -893.2 NET PROPERTY PLANT AND EQUIPMENT 910.7 957.8 939.8 890.2 Longterm investments 161.4 121.5 114 112 TOTAL ASSETS 1476 1535 1473.1 1399.8 LIIABILITIES & EQUITY accounts payable 26.7 54.3 6.9 34.6 accrued expenses 16.2 11.6 0 0 short term borrowings 43.4 47.4 13.1 8 other current liabilities, total 3.5 3.6 34.6 31.4 TOTAL CURRENT LIABILITIES 89.8 116.9 54.6 74 minority interest 1.5 1.5 1.5 1.5 pension & other post-retirement benefits 14 15 14 10.9 TOTAL LIABILITIES 103.8 131.9 68.6 84.9 common stock 554.4 637.6 669.4 669.5 retained earnings 798.9 785.4 743.8 643.1 comprehensive income and other 17.4 -21.4 -10.2 0.8 TOTAL COMMON EQUITY 1370.7 1401.6 1403 1313.4 TOTAL EQUITY 1372.2 1403.1 1404.5 1314.9 TOTAL LIABILITIES AND EQUITY 1476 1535 1473.1 1399.8 INCOME STATEMENT FOR THE YEARS 2007, 2008,2009,2010 As of: Dec 31, 2007 Dec 31,2008 31-Dec-09 31-Dec-10 CURRENCY IN MILLIONS OF UNITED ARAB EMIRATES DURHAMA AED AED AED AED Revenues 675.4 1110.8 699.8 554.7 TOTAL REVENUES 675.4 1110.8 699.8 554.7 cost of goods sold 521.9 899.2 567.6 522.7 GROSS PROFIT 153.5 211.6 132.2 32 selling general & admin. Expenses, total 28.2 31.2 44.9 44 other operating expenses 10.4 12.6 0 0 OTHER OPERATING EXPENSES, TOTAL 38.6 43.8 44.9 44 OPERATING INCOME 114.9 167.8 87.3 -12 interest expense -0.4 -4.3 -0.7 -0.8 interest and investment income 59.9 0.2 1.4 1 NET INTEREST EXPENSE 59.5 -4.1 0.7 0.2 other non-operating income (expenses) 3.7 3 0.4 3.4 EBT, EXCLUDING UNUSUAL ITEMS 178.1 166.7 88.4 -8.4 gain(loss) on sale of investments 0 -6.5 -23.3 -14 gain (loss) on sale of assets 0.1 0.5 0 0 EBT, INCLUDING UNUSUAL ITEMS 178.2 160.7 65.1 -22.4 minority interest in earnings -5.7 -5.3 -8.5 -8.7 earnings from continuing operations 178.2 160.7 65.1 -22.4 NET INCOME 172.5 155.4 56.6 -31.1 NET INCOME TO COMMON INCLUDING EXTRA ITEMS 172.5 155.4 56.6 -31.1 NET INCOME TO COMMON EXCLUDING EXTRA ITEMS 172.5 155.4 56.6 -31.1 a) TRENDS Year over year, Union Cement Company (P.S.C.) has experienced revenues fall from $699.8M to $554.7M. There has been however an increase in the cost of goods sold. A loss of 31.1 is seen in the last year 2010 from a gain of $56 that been earned. Union Cement Company (P.S.C.) capital structure is efficient in doing its activities. This is because the debts in the structure are little or even none in the four years. The financial risk of the company is minimal. Cash Collection is a strong indicator since the company is more effective than most in the industry. As of the end of 2010, its uncollected receivables totaled $167.4M. Stock levels, relative to its Cost of Goods Sold, are typical for the industry. A decrease is noticed for the four years as a good indicator of management efficiency in its operations. Dividends have been paid out over the four years as a good indicator to the investors. KEY FINANCIAL RATIOS: Ratio analysis is a key indicator of financial performance of a particular company. RATIO ANALYSIS Quick Ratio (acid Test)= Total Q. A./ Total C.L. 3.36080178 2.358426 4.5695971 2.7135135 Quick Assets = Total Current Assets - Inventory 301.8 275.7 249.5 200.8 Total ASSET Turnover (TAT)= total assets/ inventory 14.4564153 8.527778 8.6755006 7.1128049 Inventory Turnover Ratio (IT) = Net Sales / Inventory 6.61508325 6.171111 4.1213192 2.8185976 Debt to asset Ratio= total liabilities/ total assets 0.0703252 0.085928 0.0465685 0.0606515 Debt to Equity Ratio = Total Liabilities / Owners Equity or Net Worth 0.07572773 0.094107 0.0488952 0.0646414 Gross Profit Margins (GPM) = (Net gross Profit / Net Sales) x 100 22.7272727 19.04933 18.891112 5.7688841 Net Profit Margin (NPM)= (Net profit/net sales)*100 25.5404205 13.98992 8.0880252 -5.606634 Return on Investment (ROI)= (Gain on invst. - cost of invst.)/cost of investment -0.31 0.980944 1.0259179 0.9667774 Return on Assets (ROA) = (Net Profit / Total Assets) x 100 11.6869919 10.12378 3.8422375 -2.221746 Return on Equity= (Net Profit / Net Worth or Owners Equity) x 100 12.5710538 11.07548 4.0299039 -2.365199 Dividend payout Ratio= dividend/ net income -0.5791304 -0.53539 -1.1272085 2.0675241 Current Ratio = Total Current Assets/ Total Current Liabilities 4.49777283 3.898204 7.6794872 5.372973 LIQUIDITY Quick Ratio/ Acid test ratio = Total Quick Assets/ Total Current Liabilities {Q. A. = Total Current Assets - Inventory} This ratio is an indication of the available cash to the company in the short term. Inventory is a long-term source of cash since it has to be disposed of to earn the money. Hence it is deducted from total current assets. Fixed assets are also not included since they are disposable on dissolution according to the company’s management (Morley, 2010, 65) The four years have a ratio above one hence the company has liquid money. The trend however is 3.4, down to 2.4, then up to 4.6 then down 2.7. Performance of the company is likely to be in 2009 since it is more liquid. Debt to Equity Ratio = Total Liabilities / Owners Equity This ratio is below one for the four years. This can be interpreted as 0.08 debt is payable by 1% equity in the first year. This means the company financial position is good since it is more financed by equity rather than debts. The trend is the same for the four years. There is No one year has the company incorporated too many debts into its capital structure. It’s more liquid in the year 2009. OPERATING EFFICIENY Inventory Turnover Ratio = Net Sales / Inventory This ratio indicates how the company operates. The higher the ratio is, the higher the operations in the respective year (Steven, 2007, 87). The trend in UCC has a downward movement in the four years. The ratio should however be greater than one for proper operations. The company is highly efficient in its operations. Total Asset Turnover ratio = Total assets/ Inventory This ratio follows the same trend as the inventory turnover ratio. It starts at 14 down to 7 in 2010. This indicates the inventory is moving at a high speed as the first year 2007. CAPITAL STRUCTURE Debt to equity ratio and debt to assets ratio are focused on here. The structure of the company is highly financed by its equity as compared to debts. The debt to equity ratio for the four years is below one. Though it does not have a consistent trend, the interpretation is that the amount of debt financed by equity is less than total equity. E.g. 0.8% debt financed by 1% equity. SOLVENCY Short term solvency ratios. Current Ratio = Total Current Assets/ Total Current Liabilities The trend is that it starts on a high note i.e. 4.5 for 2007 goes down one year then increases for the following year then drops in 2010. The current ratio should be greater than one for a continuing company. In our case the lowest is 3.9 in 2009. The company stands and a high solvency (Word Bank, 2005). It cannot be easily dissolved. PROFITABILITY Return on Sales or Net Profit Margin = (Net Profit / Net Sales) x 100 This ratio is an indicator of the profits rate for the company (Erich, 2001, 103). In the year 2007, the ratio is as high as 25 then goes down up to -5 in the year 2010. These interpreters to 25% profits for every 1% sale made. The three years are good for investment as they are profitable but the final year has a negative figure indicating losses of 5% for every 1% sales. Gross Profit Margin= (gross profit/net sales) *100 This ratio shows a downward trend for the four years. The last year is not a negative as is the case for net profit margin since the operating expenses have not been deducted that are rather quite the same for the fours. This indicates the company is profitable before deducting any expenses for the four years. This is not a true measure of profitability however (Erich, 2001, 98). Return on Assets = (Net Profit or net income / Total Assets) x 100 The first three years have a positive return from the assets. The last year however is a loss of -2. This implies that the assets put in the company are paying themselves and a profit is earned. The first year 2007 is at the peak. Return on Equity or Net Worth = (Net Profit after interest and tax / Net Worth or Owners Equity) x 100 The net after tax and income profits to the net worth of the company has a decreasing trend. This is peak in the first year and a negative for 2010. It indicates that the owners’ equity invested in the company is generating profits for the three years except for the fourth year that has a loss. {Net Worth or Owners Equity = Total Assets LESS Total Liability} Return on Investment The return on investment indicates the earnings or losses obtained from investment. The company makes losses in 2007 as the figure is a negative and upward it makes gains in its investment. MARKET RATIOS The ratio in the year 2007 and 2008 are negative and positive for 2009 and 2010. This implies that the last two years dividend paid are higher than the net income for the year and vice versa for the other two years. Dividend in 2009 and 2010 is paid out of reserves. The market share is however high in the first two years. Dividend payout ratio = b) STRUCTURAL ANALYSIS The company has one subsidiary. It controls 60% of its shares. This company is called Union Cement Norcem Company Limited LLC; it is responsible for advertising oils in the Arab emirates. The company has also partial control in subsidiaries holding between 20 to 50 percent. The financial reports have been prepared in the light of group accounts. The minority interest share is at 5.7 in 2007 then decreases in 2008 and increases in the following two years, 2009 and 2010. This is an indication of increase in income from the controlled company. c) QUALITY FINANCIAL REPORTING Quality financial reporting should have its financial statements with the following characteristics: (Eugene and Joel, 2009, 567) Financial statements should consolidate the right entities, assets and liabilities- they should encompass its subsidiary and share in associates as well as its total assets and liabilities. Financial statements should properly record and fully disclose any contingent liabilities for guarantees- there should be full disclosure of contingent liabilities in the right amounts. Financial statements should properly reflect securities with characteristics of both liabilities and equity- the balance sheet should clearly indicate total securities. Financial statements should account properly for revenues – sales turnover should be recorded accurately Financial statements recognize costs associated with restructurings in the right period- any takeovers, mergers and acquisition should be reflected in the statements. Financial statements adequately address pension obligations- any actions towards pension obligation should be outlined for the stakeholders’ assessment. Question five FINANCIAL ASSESSMENT FROM THE PERSPECTIVES OF: THE CREDITORS The creditor should assess the liquidation ratio that provides clear indication of the available cash to the company for paying the creditors. The current ratio and acid test ratio are good indicators (Siddiqui, 2006, 241). They should assess the profitability ratios i.e. turnover ratios to see if the company is having an efficient operating cycle. The final aspect would be to assess the financial status i.e. apply debt to equity, debt to assets and determine the position of the company. The UCC Company has a low risk in terms of little or no debts hence creditors can consider delivery products to the company. THE INVESTORS There is need to assess the dividend payout ratio and price per earnings. These are indicators of whether the company shares are fairly well in the market as well as whether they pay dividends. The profitability and financial structure needs to be analyzed as well as the solvency (Booz et al, 2007, 45). The UCC Company stands at a low debt to equity, less risk of solvency and an increasing trend of dividend pay. The company is worthwhile investing into. The last year 2010 is however risk since the company is making losses. THE MANAGEMENT There is need to assess the costs attributing to sales turnover. There is a decrease over the four years indicating efficiency. The operation ratios are above one a good indicator that the company is efficient. The borrowings are less than equity. This implies that the management is efficient since they are running the company more on the equity portions than on debts. There is however need to assess the losses in 2010 and the decreasing revenues on an annual basis. The returns on assets and equity have a downward trend but they are not negative. This is a good indicator but they need to look into ways to improve on the overall performance of the company (Erich. 2001, 120). Bibliography Booz K., Allen D. & Hamilton M., 2007, A financial assessment, AustralAsia Railway Corporation, Australia, 45. Erich A. H., 2001, Financial analysis: tools and techniques : a guide for managers, McGraw-Hill Professional, America, pg. 98., 120 Eugene F. B., Joel F. H. 2009, Fundamentals of Financial Management Fundamentals of Financial Management, 12th Ed., Cengage Learning, United Kingdom, pg. 561-650. Morley M. F., 2010. Ratio analysis Volume 5, Gee & Co., Scotland, pg.56-95. Siddiqui S. A., 2006, Managerial Economics And Financial Analysis, New Age International, United Kingdom, 241. Steven M. B., 2007, Financial analysis: a controller's guide, 2nd Ed.,John Wiley and Sons, United Kingdom, pg. 87. World Bank, 2005. Financial sector assessment: a handbook, World Bank Publications, U.S.A. pg. 63. Read More