Financial Performance - Ratio Analysis of Amino Technologies - Example

RATION ANALYSIS: AMINO TECHNOLOGIES Prepared by (Student’s Name) Professor’s Name Institutional Affiliation Date Table of Contents Executive Summary…………………………………………………………………………………………………………………………………3 A. Introduction & Company Background…………………………………………………………………………………………4 B. Financial Performance: Ratio Analysis………………………………………………………………………………………..5 i. Profitability Ratio…………………………………………………………………………………………………………..5 ii. Efficiency ratios………………………………………………………………………………………………………………8 iii. Liquidity ratios……………………………………………………………………………………………………………….9 iv. Market ratios……………………………………………………………………………………………………………….11 C. Limitations of Ratios Analysis……………………………………………………………………………………………………12 D. Solvency of Amino Technologies………………………………………………………………………………………………16 Recommendation & Conclusion…………………………………………………………………………………………………………….18 References List………………………………………………………………………………………………………………………………………19 Executive Summary The report has successfully portrayed the different ratio analysis for the company for the three-year period between 2012 and 2014. The results of the analysis indicates that the profitability of the company over the period is impressive with the management adopting effective marketing strategies necessary for translating sales revenues into enough profits. In fact, the company has made sure to lower prices for its lower functionality solutions. The liquidity position over the period indicates that there s enough assets needed foe offsetting possible short term obligations. In essence, the liquidity of the company is strong enough in comparison to overall liabilities held within the period. The efficiency ratio indicates that management has taken stringent efforts to formulate effective ways of promoting asset utilisation and thus, ensure the underlying resources are used in an optimal manner. Despite the fact that ratio analysis allows for direct comparison, the report has argued that there exists limitations like possibility of window dressing results, difficulty in interpretation of figures as well as changes in accounting policies. In regards to solvency of the firm, it has been noted that the company does not hold any form of borrowings hence a likely positive future of continual operations. This, in fact, forms the basis for recommending the company to potential investors like Hector. A. Introduction &Company Background The focus of this paper is on identifying an e-business company that is listed on London Stock Exchange and thereafter conduct an extensive ratio analysis for a three-year period between 2012 and 2014. It also provides a solvency analysis and a discussion on possible limitations of ratio analysis. For this report case, the company under analysis is Amino Technologies, which is listed in London Stock Exchange in early June 2004 and operates under the electronics, technologies hardware and equipment. Amino Technologies is deemed to be an IPTV innovator given that it is engaged in the development of newer solutions that seeks to allow operators to apply a higher quality value added services that will, in turn propel such important business aspects as customer retention and overall growth (Amino Technologies, 2015). The firm provides a distinctive and broad array of devices, content and home monitoring solutions for all of its connected homes- an activity that greatly relies on its extensive IP experiences and knowledge. Currently, the firm enjoys a customer base that stretches to more than 850 customers that are fairly spread in more than 85 countries and mostly amongst operators and service providers (Amino Technologies, 2015). Notably, Amino Technologies is a wholly-owned subsidiary of Amino Technologies Plc listed in LSE with the market symbol; AMO. The firm operates from its headquarters in Cambridge, United Kingdom with other international offices in both the US and China as well (Amino Technologies, 2015). The company’s strategy and business model is engaged in the formulation of distinctive products and solutions that are designed to assist with broadband network operators avail entertainment to all associative connected homes (Amino Technologies, 2015). Particularly, the firm bases its immediate solutions to developing IPTV-Internet Protocol Television that is focused on delivering entertainment services to TVs over a broadband network that are supervised by operators for quality of service that is likened to the overall customer experiences provided through such other medium as satellites, terrestrial as well as cable networks (Amino Technologies, 2015). Consequently, the Group also focuses on strengthening this business model with provision of efficient software however most of the company’s sales revenues is enjoyed through sale of IPTV set-boxes (Amino Technologies, 2015). B. Financial Performance: Ratio Analysis i) Profitability Ratio Year /Ratios 2012 2013 2014 Gross Profit Ratio = (Revenues-COGS/Revenues) 41,700-24,160/ 41,700 *100% = 42.06% 35,852-9,616/ 35,852 * 100% = 73.18% 36,190-19,417/36,190 *100% = 46.34% Profit Margin = Net income/sales 2,842/41,700*100% = 6.82% 4,165/35,852*100% = 11.62% 4,074/ 36,190*100% =11.25% ROA =Net Income/total assets 2,842/32,004*100% =8.88% 4,165/32,325*100% = 12.88% 4,074/34,801 *100% = 11.71% ROE= net income/total equity 2,842/22,445*100% =12.66% 4,165/24,922*100% =16.71% 4,074/25,797 *100% = 15.79% Analysis Gross profit margin ratio increases significantly in the period between 2012 and 2013 from 42.06% to 73.18% and later drops to 46.34% in 2014. The significant in the gross margin in the period between 2012 and 2013 emanates from the firm’s continual focus on ensuring to secure higher margin businesses as well as delivering distinctive and continual operational improvements (Amino Technologies, 2014). Notwithstanding, the increase in the ratio is also as a result of stronger cost control mechanism within the period with much emphasis being directed towards newer product development and capitalisation of costs as well (Amino Technologies, 2014). Subsequently, the increase in the revenues in the preceding year resulted to continued growth in the margin in comparison to 2012 with North America maintaining a stronger market for the firm with a 14% total sales increase (Amino Technologies 2014 Annual Reports, p.5).. Of particular interest, there was increased demand for lower cost, lower functionality products especially within the emerging markets like Eastern Europe as well as Latin America (Amino Technologies 2014 Annual Reports, p.5). The firm’s net profit margin increases within the three-year period from 6.82% to 11.25% in 2012 and 2014 respectively. The increase in the ratio is largely due to the increase in the level of net income within the period as well as a reduction in pre-exceptional operating expenses before amortisation and depreciation (Amino Technologies 2014 Annual Reports, p.5).The reduction in the level of these costs is certainly associated with a stronger cost control especially in regards to selling, general and administrative expenses that was in smaller extent countered by a significant reduction in the level of capitalisation of Research and Development costs (Amino Technologies 2014 Annual Reports, p.5). Markedly, it is important to note that Amino Technologies also focuses its business model on pricing strategies that have a positive influence on sales revenues. In fact, the company understand so well that in order to boost its current sales revenues then it has to generate products that best suit such markets as Eastern Europe and other notable emerging markets that are fairly characterised by lowly-priced business solutions with lower functionality capacities (Amino Technologies 2014 Annual Reports, p.5). The company’s return on assets (ROA) ratio increases substantially in the three-year period from 8.88% to 11.71% in 2012 and 2014 respectively. The significant increase in the ratio value ascertains that Amino Technologies has been positioned fairly to utilise its existing asset base to post sufficient sales revenue over the period (Amino Technologies 2014 Annual Reports). This might be attributed to increased research and development on better ways to use the existing asset platform and also, it is more likely that the firm is now operating under efficient and workable management policies that seek to put all resources under optimal use within a certain period. Notably, Amino Technologies’ return on equity (ROE) increases within the three-year period from 12.66% to 15.79% in 2012 and 2014 respectively. The increase in this ratio value is positive indication that the firm has now devised efficient ways of utilising existing shareholders’ equity to effect sufficient revenues (Amino Technologies 2012 Annual Reports). It is also attributed to the stronger working capital management policies put in place by the company’s immediate managers. Chart 1 below shows the trend analysis for the ratios over the three-year period (Chart 1) ii. Efficiency Ratios Year /Ratios 2012 2013 2014 Asset turnover = sales/total assets 41,700/32,004 =1.3 35,852/32,325 = 1.2 36,190/34,801 = 1.0 Debtors turnover= sales /average no of debtors 41,700/9,559 = 4.4 35,852/7,403 =4.8 36,190/9,000 = 4.0 Receivable turnover ratio =sales/accounts receivable 41,700/(162+7,936) =5.2 35,852/(162+5,248) =6.6 36,190/(162+6,903) = 5.1 Analysis The company’s asset turnover ratio decreases slightly within the period from 1.3 to 1.0 in 2012 and 2014 respectively. The decrease in the ratio value is an unfavourable and indicates that Amino Technologies’ capacity to generate sales from its asset-base has been weakened and it might be a result of poor wear and tear policies so that assets are not replaced on time. The debtors’ turnover ratio decreases slightly from 4.4 to 4.0 within a similar operational period. The slight decrease in the ratio is an indication that the firm still operates under a favourable environment since it means that it has slightly improved on its payment policies to favour their suppliers. Certainly, it means that the company has resorted to ensuring to pay-off its debts on time in order to create a smooth and favourable working rapport with its immediate list of suppliers. In fact, Amino Technologies seems to be paying cash for all purchases made within a certain quarterly period and this might be attributed to the fact that it also conducts cash sales in most of the business occasions. The same pattern is replicated with the company’s receivables turnover ratio that decreases slightly within the three-year period from 5.2 to 5.1 in 2012 and 2014 respectively. The rather high ratio values within the period is an indication that Amino Technologies operates under a cash basis or even that it is credit collection policies are fair and sufficient to collect debts on a timely fashion. The fact that the ratio value is fairly positioned above the 5 times rate means that Amino Technologies enjoys sufficient amounts of cash flows that is necessary to aid with its day-to-day operations. The efficiency ratio trend analysis is shown in the Chart-2 below; (Chart-2) iii. Liquidity Ratios Year /Ratios 2012 2013 2014 Current ratio= current assets/current liabilities 27,141/9,559 =2.8 27,306/7,403 = 3.7 29,923/9,004 = 3.3 Acid test ratio =(cash+ accounts receivable+ short-term investment)/current liabilities 7,936+5+17,103/9,559 = 2.6 5,248+19,521/7,403 = 3.3 6,903+20,758/9,004 = 3.1 Analysis Amino Technologies’ current ratio increases significantly within the three-year period from 2.8 to 3.3 in the period between 2012 and 2014. The increase in the ratio value is a positive indication and means that the firm is operating under favourable environment. In fact, it means that the company is able to meet its short term commitments as and whenever the fall due. Given that the standard current stands at 2, it thus goes without saying that the firm has made sure to put up with intensive levels of assets to cover for all of its existing current liabilities. Subsequently, the company acid test ratio also increases within the period from 2.6 to 3.1 in 2012 and 2014 respectively. The increase in the ratio value is a clear indication that the firm has ensured to maintain capacity needed for meeting its short term obligations as and whenever the fall due without depending on the level of inventories at any given moment. The liquidity ratio trend analysis is shown in the Chart-3 below; iv. Market Ratios Year /Ratios 2012 2013 2014 Dividends payout= dividends declared during the year/ earnings for year available for distribution*100 1,043/2,842*100% = 36.7% 2,111/4,165*100% = 50.7% 1,914/4,074 *100% =46.9% Earnings per Share(EPS)= Earnings available to ordinary shareholders/ no. of ordinary shares 2,797/52,131 =0.05 cents 4,221/52,761 = 0.08 cents 4,060/53,032 = 0.08 cents Price/earnings ratio= market price per share/earnings per share 59.43/0.05 = 1,188.6 times 79.37/0.08 = 992.1 times 125.39/0.08 = 1,567.4 times (Historical Stock prices accessed from Yahoo Finance: https://uk.finance.yahoo.com/q/hp?s=AMO.L&b=31&a=11&c=2012&e=31&d=11&f=2014&g=m) Analysis Amino Technologies’ dividends payout ratio increases significantly within the three-year period from 36.7% to 46.9% in 2012 and 2014 respectively. The increase indicates a healthy-operational company that is on its way to maturity. It means that Amino Technologies has perceived the benefit of increasing dividends paid to shareholders in relation to the amount of profits that is not distributed but rather reinvested back into the business operations as retained earnings for purposes of expansion of business activities and other innovative related exercises within a given period of time. This is especially true because Amino Technologies has attained business maturity given that it already operates in China and the USA hence a need to attract more investors into its shareholding. The company’s earnings per share increase slightly from 0.05 to 0.08 within the three-year period starting 2012 to 2014 respectively. The increase in the ratio value is a positive indication given that the firm operates within the average ratio figures of the industry. It is in fact attributed to the relative improvements in the level of profits and profits that are distributed to the existing shareholders. Amino Technologies price/earnings ratio also increases substantially from 1,188.6 times to 1,567.4 times in the period between 2012 and 2014 respectively. The improved ratio is favourable to the operations of the company since it postulates that the company will enjoy a future positive performance and thus, there is a higher probability that the investors will be willing to pay more for the shares of the company. Using this ration, Amino Technologies potential investors will be willing to purchase the company’s shares since there is a high chance that its market value per share will also increase significantly. C. Limitations of Ratio Analysis It is argued that the use and reliance of ratios to analyse data is indeed a risky affair given that they are just but a convenient way to summarise enormous piles of financial data for purposes of comparing a company’s immediate performance (Gadoiu, 2003). While it is true that ratio analysis is able to avail important information relating to a company’s immediate operations as well as its financial position, it still has a substantial number of limitations that calls for utmost care and judgement application. These possible limitations are discussed as follows; Companies operate under a multi-product model that allows for different divisions within different industries hence for these types of companies, it becomes a challenge to formulate a certain set of industry averages necessary for comparison purposes (Gadoiu, 2003). In this regards, it is thus certainly clear that ratio analysis is more useful for small and narrowly-based companies as opposed to large and multi-divisional ones. The application of ratio analysis can be limited by different accounting policies as they are applied by different companies (Gadoiu, 2003). In fact, different inter-company comparisons might disrupt inter-company comparisons as some policies increase different accounting items by levels that are not fit for making company comparisons. Subsequently, with the application of ratio analysis as in part a above might prompt the application of creative accounting, which is only focused on showing the perfect financial performance or position; an aspect, which might be misleading to the different users of the information especially potential investors (Gadoiu, 2003). A perfect example is when a company like Amino Technologies opts to improve on its profitability levels by way of selecting a revaluation strategy that only seeks to revalue assets that will likely result to revaluation surplus while abandoning to show those indicating a revaluation deficit presented at depreciated historical costs. Certainly, ratio analysis provides an opportunity for window dressing by management team tasked with the preparation of financial statements. Window dressing is an approach adopted by management in a bid to indicate a stronger financial position (Gadoiu, 2003). Companies like Amino Technologies might engage in this exercise in order to present stronger-looking financial statements hence deceiving the different stakeholders and especially the investors of the management engaging in sound business practice while in fact; it is engaged in illicit activities. Notably clear, while using ratio analysis it is important to note that they are not definitive measures hence need to be interpreted in a more careful way. While it is in fact possible that they can avail a firm’s performance or even financial condition within a certain period, on their own, ratios cannot effectively portray whether the overall performance is healthy or unhealthy hence require some other quantitative sets of information in order for analysts to make well-informed decision analysis (Gadoiu, 2003). There is a possibility of ratio analysis being highly affected by a possibility of outdated information that is presented within the financial statements (Gadoiu, 2003). There is a higher likelihood that the figures and data presented within a given set of accounts are likely to be months out of date and this; might prevent that ability to provide a proper postulation of a firm’s current financial position (Gadoiu, 2003). In essence, it is important to note that most of the financial statement presentations contain enormous amounts of summarised information hence indicating that the ratios are only but a summary of the accounting periods at hand (Parab, 2010). Through the summarisation process, there is likelihood that some of the important information might be eliminated, which would otherwise be of significant effect to the decisions made by the different users of these accounts. In truth, ratios are entirely focused on a year-to-year summary, which might be a true and fair indication of the company’s overall year’s end outcomes. Ratios are subjected to the aspect of inflation. The existing financial accounting conceptual framework calls for all companies to utilise a historical cost of accounting methodology (Parab, 2010). In cases where the historical cost framework is applied, activities of asset revaluations within the statement of financial position could be misleading as such. In consequence, ratios computed under this information cannot be considered useful for purposes of sound decision making. Of particular concern, activities related to inflation might have negatively disrupted a company’s statement of financial position. Moreover, inflation will likely affect aspects related to depreciation charges, profits as well as inventory costs (Parab, 2010). Thus, the interpretation of a company’s financial performance over a given period of time or even in the case of comparative analysis of companies positioned within different ages should be subjected to intensive interpretation that is based on sound and clear judgmental policies (Parab, 2010). The changes in prices for different products and services offered by a company will likely render the immediate comparison of outcomes over a given period of time irrelevant and misleading given that the underlying financial figures cannot be positioned within a similar level with the overall purchasing power (Parab, 2010). There is a high possibility that alterations in the level of results over a given period might indicate that a company has made significant improvements in its overall performance and condition when in fact; immediately after altering for inflationary changes will portray a totally different picture (Parab, 2010). Ratio analysis is also limited by technological changes that happen over time. It is therefore important that the analysts of financial performance align possible improvements with changes that happen within its technological base (Parab, 2010). Thus, for ratios analysis to be considered meaningful then a company should make sure to compare its overall results with another firm that exhibits a similar technological advancement given that it will be a perfect basis of measurement of efficiency. Possible alterations in the accounting policies by different accounting bodies will likely affect the comparison of company’s results between two different accounting periods (Parab, 2010). The challenge with this form of change arises when the directors are allowed a chance to manipulate the end results through adoption of new accounting policies (Parab, 2010). The quick adoption of an accounting policy is likely as a result of the directors trying to avoid the immediate effects of an outdated accounting policy so that they can gain the effects prompted by the new policy (Parab, 2010). This is likely to be executed in the sensitive periods especially when a company’s level of profit is deemed to be lowly placed. Additionally, it is a huge challenge to make overall assessment of ratio analysis figures. In fact, it is quite possible that a company might possess ratios that look perfect while others are deemed to be bad thus making it a challenge to ascertain whether a company is balanced, strong or even weak in terms of its overall performance (Parab, 2010). Lastly, there seems to be a direct impact of government influence on ratio analysis especially when selective criterion is adopted in different accounting periods thereby prompting a clear and concise distortion of annual comparisons (Parab, 2010). A company might be allowed a tax holiday within a given time frame while the preceding periods might be marred with intensive taxations hence comparisons of these periods might be misleading for that matter. D. Solvency of Amino Technologies i) Debt-to-assets ratio (total liabilities/total assets) 2014: 9,004/34,801 *100%= 25.9% The ratio value indicates a favourable position since it postulates that Amino Technologies has ensured to limit debt funds that are used to purchase its overall asset-base. In fact, it means that the firm has used a low financial leverage that has sought to reduce its overall financial risks in the form of possible fixed interest payments in the future. ii). Debt-to-capital ratio (liabilities+ Equity/ total borrowings) 2014: 34,801/- The company does not seem to have used any borrowings in the financial year that ended 2014. This is an indication that it operates under low financial leverage and risk. It also means that the company enjoys total control of its operations hence a perfect environment for future growth opportunities as well as a higher capacity to pay and raise the level of dividends in the near future. iii). Debt-to-Equity ratio (total debt/ total equity) 2014: -/25,797 The company does not operate on any form of borrowings thus it is positioned fairly in the case of liquidation since it only uses equity funds alone to conduct its business operations. The fact that the company only operates on equity funds is an indication that it is able to sustain its operations into the foreseeable future. There is no likely cause of alarm for its operations halting since most of the control is held by the shareholders as opposed to creditors. iv). Interest coverage ratio (EBIT/Finance costs or Interest expense) 2014: 3,958/- At the current moment, the company does not pay any form of interest expenses since it does not hold any form of borrowings. Given that it is not operating any form of debt funds, it thus means its solvency into the future is foreseeable positive hence no need for alarm. In a nutshell, even though the company does not seem to prioritise debt funds over equity, it is important that it includes a manageable level since there are advantages associated with debt funds like minimal interest rates and the capacity to utilise these funds for long term projects that might likely be profitable in the near future. Recommendation & Conclusion To sum up the discussion above it can be seen that the Amino Technologies is an e-business that operates within the London Stock Exchange and has a significant prospect to invest in. In fact, using the ratio analysis of this company then it can be deduced that Hector’s initial assumptions of the sector being profitable now and in the near future as being positive. Following this line of reasoning, the Hector’s cash resource should be invested in this company because it operates a very profitable venture. This can be seen by the impressive ratios like ROE, ROA and profit margin that have continued to improve over the years meaning that the company’s marketing strategies like pricing have been formulated in a far much proper manner that seems to be working to generate enough sales revenue that has been translated successfully into profits. The company’s liquidity ratio also indicates that it is able to meet its short term obligations as and whenever the fall due. Subsequently, the company’s efficiency ratio postulates that it is able to utilise its existing asset and equity platform to post enough revenues that are needed for making profits. The market ratios over time postulate that Amino Technologies is fairly placed to pay dividends to all existing shareholders. The ratio also formulates that it is able to attract large shareholder equity since it offers a very impressive earnings per share value that has continued to increase over the years. Above all, the firm’s solvency ratio ascertains that it will be operating into the future without any need for worry since it is not operating under any form of borrowings. References List Amino Technologies 2015. About Us: Company overview. Retrieved from Company website http://amino.hsprod.investis.com/company_Overview Amino Technologies.2014. 2012-2014 annual reports. Retrieved on January 12, 2016 from http://amino.hsprod.investis.com/company_Reports Gadoiu, M. 2003. Advantages and Limitations of the Financial Rations used in the Financial Diagnosis of the Enterprise. Scientific Bulleting-Economics Sciences, vol.13, no.2.p.87-95 Parab, B.2010. Uses and Limitations of Ratio Analysis. Retrieved on January 12, 2016 from http://xa.yimg.com/kq/groups/28711324/1063695210/name/Parab+ (2010) +Uses+and+Limitations+of+Ratio+Analysis.pdf Yahoo Finance! 2015. Amino Technologies: Historical prices. 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