Financial Statements Analysis - Research Paper Example

Students Name: Instructor’s Name: Course Code and Name: Date of Submission: Financial statements analysis project Executive Summary Proposal covered There has been an increased problem in analyzing financial statements using convention ways. As a result, most people have been using only fewer methods in making financial decisions. Looking at that, I was prompted to carry out this project to see viability of making more financial analysis methods to get better information. The project covers different types of financial analysis, their limitations and the results found in carrying out the project. Background information For informed decisions in terms of investments, the investors need to understand various ways of financial analysis that would guide them to make the right decision regarding investment in order for them to gain much return from their invested capital. In start up business investors and creditors play a vital role by providing external financial support for their growth therefore in corporate world they play a pertinent role such that their decisions are much valued. For effective decision making business personnel and the general public have to understand not in general but in particular best ways of analyzing financial information. When demand for external financial assistance began in The United States of America in 18th century, there was a need for companies to organize themselves and give right information before their company getting financial assistance. The financial analysis helped many people in getting the correct information about companies they were interested in. Concise analysis Chapter one covers profile of the company looking into study of the industry in which Verizon operates its history and financial profile. Chapter two entails introduction of the proposal defining the purpose, scope objectives, methodology, data collection and limitations of the study. The objectives are most relevant in carrying out the study. Chapter three entails overview of the project where the financial statement introduction has been done, Furthermore there is the concept of the analysis, types, procedures, methods and overview of ratios. The data have been analyzed and interpreted in chapter four and lastly in chapter five, findings and suggestions have been made. Main conclusions The company’s efficiency profitability are slightly achieved while financial soundness is less achieved as the company still relies heavily on geared finance to operate. The earnings have increased but there is the problem of debts in the company. The company should shift from geared finance so as to look for future prospects in terms of company ownership of the assts. The debts should also be controlled to reduce the company’s chance of encountering bankruptcy. The company should take care of well-being of the stock holders and the shareholders as they are the main source of capital structure. Furthermore, in order to control profits, the expenditure should be cut as it is shown that the company has a high tendency of getting more profits with less investment. TABLE OF CONTENTS Table of Contents Financial statements analysis project 2 Executive Summary 2 Proposal covered 2 Background information 2 Concise analysis 2 Main conclusions 3 TABLE OF CONTENTS 4 Chapter: 1 Profile of the company 6 Industry study 6 Company History 7 Financial profile of the company 8 Chapter 2: Introduction 9 Introduction of the study 9 Purpose of the study 9 Scope of the study 9 Objectives o f the study 10 Methodology 10 Data collection 11 Limitations 11 Chapter: 3 Project Overview 12 Introduction of Financial Statements 12 The balance sheet 12 The Income Statement 13 Statement of cash flows 13 Meaning and concept of financial analysis 13 Types of financial analysis 13 Overview of ratio analysis 14 Chapter: 4 Analysis and interpretation 15 Comparative Balance sheet 15 Comparative Income Statement for the periods ending Dec 31, 2014, 2013, 2012 17 Income from continuing operations 17 Common size analysis of balance sheet and income statement 19 Balance sheet 19 Income statement 21 Ratio analysis 22 Chapter 5: Findings and Suggestions 24 REFERENCES 25 Chapter: 1 Profile of the company Industry study Verizon Communications is divided into three main units; small business, residential enterprise and wireless services. It is associated with four components of business; domestic telecommunication, domestic wireless, International wireless and information services. It offers all data and mobile services. This includes wireless services (Tracy, 2014). The company also provides phone, telephone and internet services to small firms and residences too. Its section, Verizon Enterprise Solutions, offers services to corporate clients as well as government ones. The industry of integrated wireless communication is extremely competitive and concentrated. It includes providers of both fixed-line and wireless services. The offers given are voice and high-density data transmission services (Tracy, 2014).The industry is regulated heavily by the Federal Communications Commission to maintain competition in the industry through reducing spectrum licensing in geographical areas and prohibiting companies from making large mergers to prevent monopolization. The market can be analyzed in term of the market and competition. There is more need for services provided by wireless providers than earlier times because of fast growth of wireless technology. Market penetration of the wireless post pay subscribers hit 104% by October 2013 (Verizon Communications Inc., 2014). With development of tablets and E-readers and game consoles the number of connected devices per person is expected to increase in other years.4 There also has been an increase in pre-paid subscribers as customers look for cheaper ways to stay connected. Companies in the industry look to expand their services in wire line with provision of high speed internet. The cardinal players in the market (T-Mobile, AT&T, Sprint-Nextel and Verizon) gain 94.7% of the entire industry revenue.4 this is due to mergers and acquisitions of smaller companies which provide newer customers. These mergers provide new customers and expanding markets. Apart from these players, Verizon faces competition from cable companies like Comcast (Verizon Communications Inc., 2014). The table below shows competitors in wireless technology with T-Mobile starting, Sprint and lastly Verizon. The company also has stiff competition from wireless service providers. Wireless technology providers T-Mobile Sprint Verizon Market Cap 188.96B 32.24B 199.47B Customers 110.37M 47.02M 102.79M Revenue 128.13B 35.49B 120.55B EBITDA 48.87B 4.48B 48.57B EPS 3.39 -0.77 4.00 P/E 9.68 N/A 11.49 ARPU 47.49 50.89 55.57 Churn Rate 1.37% 1.94% .97% Company History Verizon Communications Company was incorporated in Delaware in June 30th 2000 and is based in New York. It is as a result of the merging of Bell Atlantic Corp. and GTE Corp. The name is derived from the Latin word ‘veritas’ and horizon. This merging led to a massive $ 58 million capital creation getting the wireless division first before the moniker and logo (Verizon Communications Inc., 2014). The company faced problems like 18-day strike leaving the company with more than 250,000 repair requests to handle. There was delay to sell DSL Internet connection and reluctance to allow it offer long distance in twelve of its thirteen states. Also the company faced problem of postponement of initial public offering on several occasions because of lack of interest by investors. Furthermore, it experienced a below-expectations profit with the initial forecast for the year 2001 being reduced by a third (Verizon Communications Inc., 2014). Verizon also faced problem of pulling out of a merger with North Point, a DSL company. Despite these problems, it remained optimistic and set out to offer complete service packages. In March 2001, it made a joined force with Lucent Technologies making a $5 billion deal in offering a future generation of high-speed wireless and internet service technology. It faced a competition from Sprint. The deal doubled the company’s existing voice capacity. In less than a year, it was operating in more than 40 countries (Verizon Communications Inc., 2014). In 2005, it purchased MCI giving the company access to corporate and international subscribers. The revenue was increased by a fifth. In 2011, it acquired Terremark, an IT services starting sales of iPhone4 in that year (Verizon Communications Inc., 2013). To increase more growth, it bought Hughes Telematics, a wireless features producing company. Verizon also bought the forty five percent shares of Vodafone in Verizon Wireless. In 2013, it launched Verizon Partner Program, a partner program that provides easier access to communications and other network solutions (Tracy, 2014). Financial profile of the company Stock Value $54.31 Beta Value 0.64 Average Daily Volume (10 day) 3 19.063 m Shares Market Capitalization $199.00 b Shares Outstanding 1.14 b Book Value per share $13.57 EPS 2014 $0.87 P/E Ratio 12.49 Dividend Yield 4.5% Dividend Payout Ratio 52% Company Performance ROA 8.00% ROE 26.03% Sales $120.55 b Financial Ratios Current Ratio 2.62 Debt to Equity 109.42% Financial Position Total assets $ 232,708 Debt maturing within one year 2,735 Long-term debt 110,536 Employee benefit obligations 33,280 Non controlling interests 1,378 Equity attributable to Verizon 12,298 Chapter 2: Introduction Introduction of the study This paper presents a financial statement analysis project to be used in analysis of companies’ financial statements. The main aim of the project is to develop technical and analytical skills and also critical thinking by requiring analysis of key aspects of a company’s financial disclosures, evaluating company’s financial decisions and discussing non-financial items that affect a company’s ability to be successful. Purpose of the study The purpose of the study is to assess the company’s performance, efficiency and position in regard to financial ability. It is also undertaken to explain causes of certain financial situations of the company. Its aim is to analyze the phenomena, study the relationship and find the most appropriate causes of the relationships. The study is both analytic and predictive in nature. It explains analysis of the phenomena and also predicts situations like forecasts of the coming years using the hypothesized relationships Scope of the study The study covers the problems affected by companies due to poor analysis of financial position. It takes a look at the most appropriate ways of analyzing financial statements. It has become more demanding for correct financial analysis by company owners and also creditors. The study will be used by both project managers and other administrative managers, students and the general public in order to understand financial position analysis of companies. The information given is a guideline in making financial decisions. Objectives o f the study The major objectives of the study are as follows;- a) Past performance assessment. As an indicator of future performance, past performance is important for investors and creditors as they are interested in the business trend. The study aims to look at the past sales trend, cost of the goods that were sold, expenses of the operations, net income, cash flows and investment returns. b) Current position assessment The analysis takes a look at the firm’s types of assets owned and the due liabilities against the enterprise. This gives picture of the company’s current position. c) Profitability and growth prospects prediction. The study aims at predicting future earnings prospects and earnings growth rate useful to investors when comparing investment alternatives and judgment of business earning potential. d) Bankruptcy and failure prediction The study is an important tool in assessment of the company’s failure and bankruptcy. e) Operational efficiency assessment. The analysis helps in assessing of management’s operational efficiency. The performance of the business shown in the statements reveal deviations in performance standards set earlier. Management’s actual performance indicates its efficiency. Methodology Methodology for the project was guided by the following guidelines;- Reasonability, comprehensiveness, flexibility and accessibility Enforcement of critical judgment and insight Achieving of effective project outcome Facilitating standardized reporting Every task tackled using common methods Expected deliverables produced and handed over Solutions quickly implemented In order to achieve better results and goals, the project used the following methods; a) Short term analysis. This method is concerned with working capital analysis. Both current assets and liabilities were analyzed to get the cash position of the business. This gave the liquidity position of the business b) Horizontal analysis Comparative financial statements were used to analyze financial statements for a number of years. c) Vertical analysis Calculation of a year’s financial ratios was performed d) Ratio analysis Performance ratio reviews in various categories of company benchmark were used Data collection Secondary data was used. Data used in the project is collected mostly by reading historical information of the company via internet journals and databases. The company’s financial information was very important in the collection. Tools Content analysis was used as the main tool for collecting the information. In manipulation of data, calculations were used. Limitations The analysis gives a good opportunity in past data review but the following limitations of the study may deter its effectiveness;- The data used was in the past form and this nature may not be good in representing future unforeseen circumstances Under and overstating of market value of liabilities and assets may significantly leave the users without the knowledge of real value of the balance sheet Chapter: 3 Project Overview Introduction of Financial Statements Financial statements are a company’s medium of information disclosure concerning financial performance (Harper, 2014). Investment decisions are done gleaning information from fundamental analysis. There are three important financial statements comprising of income statements, balance sheets and cash flow statements (Gerald & Ashwinpaul, 2014). They are better understood in context of all other financial statement components. For example, an income statement can only be meaningful if it is related to the balance sheet. This also applies to the statement of cash flows. Financial statements are designed to explain how corporate performance measures in terms of finance fair on. They are important as they show how activities are reflected and give a clear distinction between cash flow and profits The balance sheet This represents a record of assets, equity and liabilities of a company at a particular point of time (Gerald & Ashwinpaul, 2014). It is named based on the general fact that the business’s structure balances in the following way;- Assets = Shareholders’ equity + Liabilities Assets are the resources that the business has ownership on or controls at a particular time. They include; - inventory, machinery, cash and buildings Liabilities are the debts that finance the company while equity is the total value of money owned by the shareholders. The Income Statement It is a record that examines company’s performance over a particular frame of time (Harper, 2014). It gives information on revenues, profits and expenses as a result of operations in that particular time. Statement of cash flows This is a record of inflows and outflows over a period of time (Gerald & Ashwinpaul, 2014). It mainly focuses on operating cash flow, cash flow from investment and cash flow from financing. It is very important as it has less risk of manipulation as it is hard to fake cash. Meaning and concept of financial analysis Financial analysis is the evaluation process of projects, businesses budgets and other entities related to finance (Dodd & Benjamin, 1998). It is used to check on the viability of an entity in terms of stability, solvency, liquidity and profitability. To understand problems and opportunities in financial and investment decisions, techniques such as funds flow analysis and financial ratios are employed. Types of financial analysis The types of financial analysis used are liquidity, solvency, profitability, trend and comparative analyses. Liquidity Analysis. The company’s tendency to meet short-term liabilities is calculated using current and quick ratios. Solvency analysis. Long-term capacity of the company’s ability to meet its financial commitments is done using proprietary, times interest earned and current assets to equity ratios Profitability analysis. The company’s profitability level is calculated using return on assets, profit margin and return on common stockholders’ equity ratios. Trend analysis. Common-size balance sheet and income statements are used to show the fall and rise of the position based on a base year. Comparative analysis. The company’s financial position is calculated using the comparative balance sheet and income statement. Procedure of financial statement analysis There are six stages in financial statements analysis which enable effectiveness. They include;- a) Establishing of objectives. This is done by defining the purpose of the study and giving the analysis a context. b) Data collection. Necessary data is collected from various sources to achieve the analysis goals. c) Data processing. The data collected is sorted and adjusted to represent trend and ratios. d) Conduct analysis. The data are interpreted and analyzed to get the results e) Recommendation development. Inferences are drawn and the results shared with useful people. Different perspectives of people would give different way of recommendation. f) Review or follow up. This usually checks to see if there is need for revision of the recommendations and conclusions (Ehrhardt & Brighane, 2008). Methods and devices of financial analysis The following methods are involved in the analysis of financial statements;- Past performance. Here, analysis is done based on historical time periods, for example, the past four years. Future performance. This method uses combination of mathematical and statistical techniques in analyzing historical figures. This extrapolation enables prediction of future values but can be the main source of errors while predicting. Comparative performance. This is mostly done on similar firms or comparing different periods of the same firm’s functionality (Ehrdhardt & Brighane, 2010) Overview of ratio analysis Ratio analysis is a tool of comparing the relationship between different business information. Most ratios are useful only when compared to other things. The ratios are generally divided into four classification areas; - debt, turnover, profitability and liquidity (Tracy, 2014). Debt ratio indicates debt financing extend Turnover indicates effectiveness of resource management by the company at disposal to generate sales Profitability shows extent of resource management Liquidity gives information on the company’s ability to meeting its short term obligations The way ratios are analyzed give meaning. Ways such as industry average can be used in order to interpret the information. Company trends and industry comparison stand a good chance in benchmarking the ratios (Bragg, 2014). Industrial figures can be found in various sources;- Commercial sources Government sources Trade associations Chapter: 4 Analysis and interpretation Comparative Balance sheet (Dollars in millions, except per share amounts) At December 31, 2014, 2013, 2012 Year 2014 2013 2012 Assets Current assets Cash and cash equivalents $ 10,598 $ 53,528 3,093 Short-term investments 555 601 470 Accounts receivable, 13,993 12,439 12,576 Inventories 1,153 1,020 1,075 Prepaid expenses and other 3,324 3,406 4,021 Total current assets 29,623 70,994 21,235 Plant, property and equipment 230,508 220,865 209,575 Less accumulated depreciation 140,561 131,909 120,933 89,947 88,956 88,642 Invest. In unconsolidated business 802 3,432 3,401 Wireless licenses 75,341 75,747 77,744 Goodwill 24,639 24,634 24,139 Other intangible assets, net 5,728 5,800 5,933 Other assets 6,628 4,535 4,128 Total assets $ 232,708 $ 274,098 $225,222 Liabilities and Equity Current liabilities Debt maturing within one year $ 2,735 $ 3,933 4,369 A/cs payable n accrued liab. 16,680 16,453 16,182 Other 8,649 6,664 6,405 Total current liabilities 28,064 27,050 26,956 Long-term debt 110,536 89,658 47,618 Employee benefit obligations 33,280 27,682 34,346 Deferred income taxes 41,578 28,639 24,677 Other liabilities 5,574 5,653 6,092 Equity Common stock ($.10 par value) 424 297 297 Contributed capital 11,155 37,939 37,990 Reinvested earnings 2,447 1,782 (3,734) Accumulated comp. Income 1,111 2,358 2,235 Common stock in treasury (3,263) (3,961) (4,071) Deferred compensation 424 421 440 Non controlling interests 1,378 56,580 52,376 Total equity 13,676 95,416 85,533 Total liabilities and equity $ 232,708 $ 274,098 $225,222 The comparative balance sheet shows that Verizon Communications increased assets from 2012 to 2013 then slightly reduced in 2014 but has not tried to increase investment in fixed assets. Its current liabilities have increased from 2012 to 2014. Its equity increased from 2012 to 2013 then slightly decreased in 2014. Comparative Income Statement for the periods ending Dec 31, 2014, 2013, 2012 Year 2014 2013 2012 Amounts in’000 $ $ $ Total revenue 127,079 120,550 115,846 Cost of revenue 49,931 44,887 46,275 Gross profit 77,148 75,663 69,571 Operating expenses Research development - - - Selling general and administrative 41,016 27,089 39,951 Non-recurring - - - Others 16,533 16,606 16,460 Total operating expenses - - - Operating income or loss 19,599 31,968 13,160 Income from continuing operations Total other income/ expenses net (1,194) (166) (1,016) Earnings before other interest and taxes 20,185 31,944 12,468 Interest expense 4,915 2,667 2,571 Income before tax 15,270 29,277 9,897 Income tax expense 3,314 5,730 (660) Minority interest (2,331) (12,050) (9,682) Net inc. from continuing Ops 11,405 11,639 1,199 Non recurring events Discontinued operations - - - Extraordinary terms - - - Effect of accounting changes - - - Other items - - - Net income 9,625 11,497 875 Preferred stock n other adjustments - - - Net income applicable to common shares 9,625 11,497 875 Absolute value of net income increases from2012 to 2013 then slightly reduces while sales increases from 2012 to 2014. The change in value of income from 2012 to 2013 is higher than the change from 2013 to 2014. Gross profit increases from 2012 to 2014 meaning that the profitability of the company increases across the years. Common size analysis of balance sheet and income statement Balance sheet Years Ending Dec. 31 Assets Dec '12 Dec '13 Dec '14 Dec '15E Dec '16E Dec '17E Cash Only 44.40% 44.40% 0.37% 0.58% 0.96% 1.27% Total Short Term Investments 0.50% 0.50% 0.49% 0.49% 0.49% 0.49% Accounts Receivables, Net 10.32% 10.32% 10.36% 10.36% 10.36% 10.36% Accounts Receivables, Gross 10.32% 10.85% 10.90% 10.90% 10.90% 10.90% Bad Debt/Doubtful Accounts 0.00% -0.54% -0.55% -0.55% -0.55% -0.55% Inventories 0.85% 0.85% 1.00% 1.00% 1.00% 1.00% Other Current Assets 2.83% 2.83% 3.38% 3.38% 3.38% 3.38% Total Current Assets 58.89% 58.89% 15.59% 15.81% 16.18% 16.50% Net Property, Plant & Equipment 73.79% 73.79% 71.60% 70.22% 69.17% 68.51% Total Investments and Advances 2.85% 2.85% 2.73% 2.64% 2.56% 2.50% Long-Term Note Receivable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Net Goodwill 20.43% 20.43% 74.70% 72.58% 70.94% 69.45% Net Other Intangibles 67.65% 67.65% 66.51% 66.26% 65.32% 64.65% Other Assets 3.76% 3.76% 1.83% 1.83% 1.83% 1.83% Total Assets 227.37% 227.37% 232.96% 229.34% 226.00% 223.44% ST Debt & Curr. Portion LT Debt 3.26% 3.26% 2.52% 2.56% 2.44% 2.44% Accounts Payable 13.65% 13.65% 13.50% 13.50% 13.50% 13.50% Miscellaneous Current Liabilities 5.53% 5.53% 5.43% 5.43% 5.43% 5.43% Total Current Liabilities 22.44% 22.44% 21.45% 21.49% 21.37% 21.37% Long-Term Debt 74.37% 74.37% 76.84% 70.92% 65.85% 61.24% Employee Benefit Obligations 22.96% 22.96% 22.32% 21.90% 21.62% 21.38% Deferred Tax Liabilities 23.76% 23.76% 23.36% 23.79% 22.99% 22.03% Other Liabilities 4.69% 4.69% 5.53% 5.53% 5.53% 5.53% Total Liabilities 148.22% 148.22% 149.49% 143.63% 137.36% 131.55% Common Stock Par/Carry Value 0.25% 31.72% 78.44% 76.21% 74.49% 72.92% Retained Earnings 1.48% 1.48% 6.17% 10.82% 15.66% 20.66% Treasury Stock -3.29% -3.29% -3.35% -3.45% -3.58% -3.71% Total Shareholders' Equity 32.22% 32.22% 83.46% 85.71% 88.64% 91.88% Accumulated Minority Interest 46.93% 46.93% 0.00% 0.00% 0.00% 0.00% Total Equity 79.15% 79.15% 83.46% 85.71% 88.64% 91.88% Liabilities & Shareholders' Equity 227.37% 227.37% 232.96% 229.34% 226.00% 223.44% Trend analysis of the company reveals that generally the company’s assets increase in the period 2012-2014 but the future forecasts show that the assets will reduce as from 2014 to 2017. The percentage of total liabilities is positive from 2012 to 2014 hence meaning that there has been an increase in debt of the company across the period. Share capital of the company is increasing trend meaning that the company is increasing its issuing of shares. Retained earnings remain constant and then increase due to constant profit and then increase in profits. The percentage of shareholders’ equity is higher than outsiders’ meaning it relies more on the company’s funds in buying assets. Income statement Years Ending Dec. 31 Dec '12 Dec '13 Dec '14 Dec '15E Dec '16E Dec '17E Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% COGS excluding D&A 39.91% 37.24% 38.00% 38.00% 38.00% 38.00% Depreciation 12.88% 12.46% 12.78% 12.52% 12.35% 12.19% Amortization of Intangibles 1.33% 1.32% 1.30% 1.29% 1.30% 1.28% SG&A Expense 27.75% 22.47% 26.00% 26.00% 26.00% 26.00% EBIT (Operating Income) 18.13% 26.52% 21.92% 22.19% 22.35% 22.53% Non-operating Income (Expense) - Net 0.35% -0.02% 0.00% 0.00% 0.00% 0.00% Interest Capitalized 2.22% 2.21% 3.74% 3.90% 3.63% 3.37% Pretax Income 8.54% 24.29% 18.09% 18.19% 18.64% 19.07% Income Tax Provision -0.57% 4.75% 6.23% 6.26% 6.41% 6.56% Equity in Earnings of Affiliates 0.28% 0.12% 0.09% 0.09% 0.09% 0.09% Consolidated Net Income 9.11% 19.53% 11.86% 11.93% 12.22% 12.51% Minority Interest Expense 8.36% 10.00% 0.00% 0.00% 0.00% 0.00% Net Income 0.76% 9.54% 11.86% 11.93% 12.22% 12.51% Absolute net income value has increased from 2012 to 2014 meaning that the company’s earnings have increased. Operating profits increase from 2012 to 2013 then reduces a little in 2014 while non-operating profits have a negative trend. The company faces more tax with the increase in years therefore affecting the income. Cost of goods sold slightly reduces from 2012 to 2013 then increases slightly and remains constant. This means the operating expenses slightly reduced in 2013 and then increased. Ratio analysis Financial ratios were computed for the years ending 2014, 2013 and 2012 Measurement for the common stockholder Profitability analysis ratios are useful as they measure the company’s ability to make profits (Morley, 1984). Return on assets = Net Income/average total assets Average total assets = (Beginning total assets + ending total assets)/2 a.t.a for 2014 = (274,098 +232,708)/2 = 253,403 A.t.a for 2013 = (225,222 +274,098)/2 = 249,660 A.t.a for 2012 = (230,461 + 225,222)/2 = 227,841.5 Yr 2014 ROA = 9,675/ 253,841.5 = 3.81% Yr 2013 ROA = 11,497/ 249,660 = 4.6% Yr 2012 ROA = 875/ 227,841.5 = 0.38% ROA increases from 2012 to 2013 then slightly reduces from2013 level in 2014. This means the company earns more money with less investment from 2012 to 2013 and slightly reduces in 2014. Return on common stockholders’ equity (ROCE) = net income/ average common stockholder’s equity Av. Common stockholders’ equity = beginning common stakeholders’ equity + ending common stockholders’ equity)/2 a.c.s 2014 = (424 + 297)/2 = 360.5 A.c.s 2013 = 297 + 297) /2 =297 A.c.s 2012 = 297 + 297) /2 =297 Yr 2014 ROCE = 9,675/ 360.5 = 26.83 Yr 2013 ROCE =11,497/297 = 38.71 Yr 2012 ROCE = 875/ 297 = 2.95 ROCE increases from 2012 to 2013 then slightly reduces from2013 level in 2014 this means the company earns more money with less investment from 2012 to 2013 and slightly reduces in 2014. Profit margin = net income/ sales Yr 2014 = 9,675/ 127,079 = 7.58% Yr 2013 = 11,497/ 120,550 = 9.5% Yr 2012 = 875/115, 84 = 0.75% Profit margin increases from 2012 to 2013 then slightly reduces from 2013 level to 2014. This means the company earns more money with less investment from 2012 to 2013 and slightly reduces in 2014. Measurement for the short term creditor Liquidity ratios are more appropriate to the short-term creditor as they help to evaluate the ability of the company to pay its short-term debts (Morley, 1984). Current ratio or working capital ratio = current assets/ current liabilities Year 2014 = 29,623/28,064 =1.06 Year 2013 = 70,994/ 27,050 = 2.62 Year 2012 = 21,235/ 26,956 = 0.79 This means the company’s liquidity position increases from 2012 to 2013 then slightly reduces at 2014. Quick assets = current assets – inventories Yr 2014 - Q.A = 29,623-1,153 =28,470, Q.R = 28,470/ 28,064 =1.01 Yr 2013 - Q.A =70,994 -1,020 = 69,974, Q.R = 69,974/ 27,050 = 2.59 Yr 2012 – Q.A = 21,235 – 1,075 = 20,160, Q.R = 20,160/ 26,956 = 0.75 Quick ratio increases from 2012 to 2013 then slightly reduces from2013 level in 2014. This means the company’s liquidity position increases from 2012 to 2013 then slightly reduces at 2014. Measurement for the long term creditor Solvency ratios are more appropriate as they tend to measure the ability of the company in surviving for a long time (Morley, 1984). Current assets to equity ratio = current assets/ stockholders’ equity 2014 =29,623/ 13,676 = 2.17 2013 = 70,994/95,416 = 0.74 2012 = 21,235/ 85,533 = 0.25 Current assets to equity ratio increases from 2012 to 2014. This means that the company has taken more debt with years and hence more burden in 2014. Proprietary ratio = (stockholders’ equity/ total assets) *100` 2014 =13,676/232,708 *100 = 5.87% 2013 =95,416/274,098 *100 = 34.81% 2012 = 85,533/ 225222 *100 37.97% Proprietary ratio reduces from 2012 to 2014. This means it highly depends on debts as of 2014 than 2012 therefore heavily burdened. Times interest earned = earnings before interest and tax (EBIT) / tax interest expense 2014 = 15,270/5,645 = 2.7 2013 = 29,277/17,780 = 1.64 2012 = 9,897/10,342 = 0.95 Times earned ratio increases from 2012 to 2014. This means there is an increase in chance to meet debt obligations in the company. Chapter 5: Findings and Suggestions Using the above ways, various findings have been encountered. The company’s efficiency profitability are slightly achieved while financial soundness is less achieved as the company still relies heavily on geared finance to operate. The earnings can be said to have increased but there is the problem of debts in the company. The trend analysis shows the rise and fall in the company’s position in reference to the base year. The company, as it can be seen, tends to issue a lot of shares and this reduces the management’s control of the company’s decision making. This is problematic to the company as sometimes the shareholders may not have the knowledge required in some decision making. Well-being of the common stock-holder is guaranteed as the profitability ratios show an increase with a slight decrease in the 2014 year. This shows in case of any problem, the common stockholder is guaranteed. Well-being of the short-term creditor is also guaranteed as the company’s liquidity is substantial. The long-term creditor’s well-being is not guaranteed as the company is overburdened by more debts. In case of any problem, he may not be able to be paid. The debts should also be controlled to reduce the company’s chance of encountering bankruptcy. The company should take care of well-being of the stock holders and the shareholders as they are the main source of capital structure. Furthermore, in order to control profits, the expenditure should be cut as it is shown that the company has a high tendency of getting more profits with few investments. REFERENCES Bragg, S. (2014) Business ratios guide. Second Edition. Amazon Books. London, United Kingdom. Dodd, D. & Benjamin, G (1998). Security analysis. John Wiley & Sons Inc., Hoboken, USA. Ehrhardt, M. & Brighane, E. (2008). Corporate finance: A focused approach. 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