Gazal Corporation Limited Financial Analysis - Case Study Example

Financial Analysis Name: Lecturer: Course name: Course code: Date: Executive summary Financial analysis is the process of examining the company's operations to determine if they are suitable or viable to invest in. Financial analysis is used to determine the stability of an entity, its solvency situation, the liquidity situation or how profitable the company is for an investor to invest in that company. When carrying out financial analysis of a company, the main areas of attention are the cash flow statement, income statement and the balance sheet. Financial analysis uses historic data as a basis for future prediction. Financial statement analysis is broken down into profitability analysis, liquidity analysis, asset efficiency, market performance and capital structure analysis (Cecilia, 2007). To perform this analysis different financial ratios will be used. Profitability analysis ratios include return on equity, return on assets, gross profit margin and profit margin. When analyzing asset efficiency, asset turnover ratio, times inventory turnover and times debtors turn over ratios are used (Narayanaswamy, 2010). Current ratio, quick asset ratio, and cash flow ratio indicates the liquidity position of the company. Capital structure ratios include debt to equity ratio, debt ratio, equity ratio, interest coverage ratio and debt coverage ratio. Ratios used to analyze the market performance of a company include net tangible assets per share, earnings per share, and price earnings ratio. Introduction Gazal Corporation Limited is an Australian company publicly owned and it is one of the biggest listed branded apparel companies. The company is based in Sydney Australia and it is listed on the Australian Securities Exchange, the company's area of specialization is building and developing international and national standard brands in fashion and apparel industry. Gazal is a leading Australian apparel supplier of school wear, intimate apparel, business shirts for men, and casual wear sold under such brand names as Bracks, Van Heusen, Body Nancy Ganz, Midford, Bisley and Calvin Klein. Profitability ratios a) Return on equity Shareholders have vested interests in the company profits. Return on equity is used to analyze the performance of the business in relation to shareholders equity. This ratio compares the magnitude of net profit to the amount equity of shareholders invested in the company. ROE = net profit / average shareholder's equity x 100. 2011 2012 Net profit 4,908 13,859 Average shareholder's equity 62,705 61,536 ROE 8.00% 23.00% From the table above, ROE of Gazal has an upward trend from 8 in 2011 to 23 in 2012. This shows that for every $1 invested by shareholders, the company made 23 cents of net profit in 2012. b) Return on assets Return on assets is used to determine business’s profits to available assets used to generate profits. This ratio compares the generated profits to the total assets of the company. ROA = earnings before interest and tax / average total assets x 100 2011 2012 EBIT 13,850 18,001 Average total assets 172,680 147,530 ROA 8.02% 12.20% It is revealed from the above information that ROE improved in 2012 as compared to 2011. This shows that for each dollar of assets, the company made 8.02 cents of profits before interest and tax in 2011, there was an upward trend in 2012 with every dollar of assets generating 12.2 cents of profits before interest and tax. c) Gross profit margin Gross profit margin is used to compare a business's gross profit to sales revenue, revealing the portion of revenue from sales that become gross profit. Companies that make profits through selling inventory have their major expenses being cost of goods sold (Deegan, 2009.). Valuable information concerning the profitability of a company can be extracted by calculating gross profit as a percentage of total sales. Gross profit margin = gross profit / sales revenue x 100 2011 2012 Gross profit 116,076 126,719 Sales revenue 254,932 272,037 Gross profit margin 45.53% 46.58% Information above reveals an increasing trend in gross profit margin. The information above reveals that the company's average mark up increased in 2012 to 46.58% up from 45.53% in 2011. in other words, for every dollar of revenue from sales, the company made 46.58 cents of gross profit in 2012. d) Profit margin Profit margin is used to compare a company's sales revenue to earnings before interest and tax (EBIT). It is used to indicate the average amount each dollar of sales contributes to the company's profits before interest and tax. Profit margin = earnings before interest and tax / sales revenue x 100 2011 2012 EBIT 13,850 18,001 Sales revenue 254,932 272,037 Profit margin 5.43% 6.62% The profit margin of Gazal increased from 5.43% in 2011 to 6.62% in 2012. this means that for each dollar of revenue from sales, Gazal were able to make 6.62 cents of profit before interest and tax (Cecilia, 2007). From the above profitability ratios, it is revealed that Gazal's profitability as compared to year 2011 is improving considerably. Asset Efficiency Ratios a) Asset turnover ratio This ratio is used to reveal the overall efficiency of the company in generating income per $ of the total investment in assets. The going concern of the company is determined by its ability to generate revenue from sales. Asset turnover ratio = sales revenue / average total assets 2011 2012 Sales revenue 254,932 272,037 Average total assets 172,680 147,530 Asset turnover ratio 1.48 1.84 It is revealed from the above table that the asset turnover ratio of Gazal increased in 2012 to 1.84 up from 1.48 in 2011. This means that for each dollar investment in assets, Gazal was able to generate $ 1.48 of revenue from sales in 2011 which rose to $ 1.84 in the year 2012. b) Times inventory turnover and days inventory If the inventory of a company is sold in faster rate, it will enable the company to meet its short term obligations using the cash generated from sales of inventory (Michael Berrington, 2012). There is a high risk of damage or obsolescence if the company holds huge amount of slow moving goods hence increasing resource inefficiencies. Inventory turnover ratio is a very important ratio that measures the length of time a company takes to turn over its inventory during a financial year. Days inventory turnover ratio = average inventory / cost of goods sold x 365 2011 2012 Average inventory 45,575 43,334 Cost of goods sold 138,856 145,318 Days inventory 120 days 109 days Gazal improved on efficiency in inventory turnover in 2012 as compared to 2011. From the table above, it took the company 120 days to sell of its inventory in 2011, and it improved to 109 days in 2012. Gazal held sufficient inventory to, on average, last for 109 days in 2012 which improved from 120 days in 2011. c) Times debtors turn over and days debtors Immediate collections and improved cash flows results from efficient management of debtors. It is costly to the company if most of its debtors are slow in paying their debts (Mills., 2006). Days debtors reveal the average period of time it takes for a company to collect the money for the trade debtors. Days debtors = average trade debtors / sales revenue x 365 2011 2012 Average trade debtors 16,483 14,781 Sales revenue 254,932 272,037 Days debtors 24 days 20 days The efficiency in day’s debtors improved in 2012 to 20 days from 24 days in 2011. It is revealed from the table above that, on average, customers made payments to Gazal 24 days after the sale was made in 2011, and it improved in 2012 to 20 days. Liquidity ratios a) Current ratio Current ratio is used to determine the relationship existing between current assets and current liabilities. Normally, current assets are used to meet the short term obligations of the company. This ratio determines the dollars of current assets the company has per dollar of current liabilities. Current ratio = current assets / current liabilities 2011 2012 Current assets 89,484 72,140 Current liabilities 66,109 38,408 Current ratio 1.35 1.88 The current ratio of Gazal rose to 1.88 in 2012 up from 1.35 in 2011. This means that Gazal had $ 1.35 of current assets for every $ 1 of current liabilities in 2011 which considerably improved to $ 1.88 of current assets for each $ 1 of current liabilities in 2012. b) Quick asset ratio Quick asset ratio measures more stringent test on liquidity situation of a company. This ratio considers that some current assets takes longer time to be converted to cash than others, and does not include those that take longer time (Narayanaswamy, 2010). The quick asset ratio determines the dollars of current assets available (excluding inventory) to service a dollar of current liabilities. Quick asset ratio = current assets less inventory / current liabilities 2011 2012 Current assets less inventory 43909 28806 Current liabilities 66,109 38,408 Quick asset ratio 0.66 0.75 Quick asset ratio of Gazal had an increasing trend from 0.66 in 2011 to 0.75 in 2012. This reveals that Gazal had $ 0.66 of quick assets for every $ 1 of current liabilities in 2011, and it improved to $ 0.75 of quick assets for each $ 1 of current liabilities in 2012. c) Cash flow ratio Cash flow ratio indicates the ability of a company to meet its current obligations using operating activity cash flows. Operating activities can provide cash that can be utilized in covering short term obligations of a company in addition to cash on hand. This raio is used to analyze the scope of this capacity. Cash flow ratio = net cash flows from operating activities / current liabilities 2011 2012 Net cash flow from operating activities 19,454 15,281 Current liabilities 66,109 38,408 Cash flow ratio 0.29 0.4 Cash flow ratio increased in 2012 to 0.4 from 0.29 in 2011. This ratio reveals that for each $ 1 of current liabilities, the company was able to generate $ 0.29 of cash from operating activities during 2011, and it improved in 2012 such that for each $ 1 of current liabilities, Gazal was able to make $ 0.4 of cash from operating activities (Earl K., 2009). Capital structure ratios The capital structure of a company is the percentage of debt financing in relation to equity financing. Capital structure ratios reflect the financing decision of a company (Markenzie, 2011). Capital structure ratio of a company is also referred to as gearing ratio and it reveals the proportion of debt to equity financing, and are very important when analyzing the long term viability of a company. a) Debt to equity ratio Debt to equity ratio determines the amount of dollars of debt that exist per each dollar of equity funding. If this ratio is more than 100 per cent, then the company relied so much on debt financing than on equity financing. Debt to equity ratio = total liabilities / total equity x 100 2011 2012 Total liabilities 105,644 77,975 Total equity 67,036 69,555 Debt to equity ratio 157.60% 112.10% From the table above, Gazal relied on debt financing more than equity financing in2011 as compared to 2012. The ratio reduced in 2012 to 112.1% from 157.6% in 2011. This means that for every $ 1 of equity fund, Gazal used $ 157.6 of debt finance in 2011, this reduced in 2012 such that for every $ 1 of equity fund, the company used $ 157.6 of debt finance (Deegan, n.d.). b) Debt ratio Debt ratio shows the amount of dollars of liabilities that exist per dollar of assets in a company. If the ratio is more than 50 per cent, then the company funded its investments in assets by depending on more debt than equity. Debt ratio = total liabilities / total assets x 100 2011 2012 Total liabilities 105,644 77,975 Total assets 172,680 147,530 Debt ratio 61.18% 52.85% From the table above Gazal relied more on debt to fund its investments in assets in 2011 with a percentage of 61.18% as compared to 2012 which was 52.85%. It reveals that for each $ 1 of assets, Gazal used $61.18 of debt to finance in 2011; it reduced in 2012 such that for each $ 1 of assets, Gazal used $52.85 of debt to finance. c) Equity ratio The equity ratio determines the dollars of equity per each dollar of assets. According to the accounting equation, the equity equals the assets plus the liabilities (Clarke, 2012). If equity ratio was not more than 50 per cent, then the company was more reliant on debt financing than equity financing. However, revealing that the company had more liabilities than assets. Equity ratio = total equity / total assets x 100 2011 2012 Total equity 67,036 69,555 Total assets 172,680 147,530 Equity ratio 38.82% 47.15% The table above reveals an upward trend in equity ratio. In 2011 the ratio was 38.82% and it increased in 2012 to 47.15%. This means that for each dollar of assets, Gazal was using $ 38.82 of equity finance, the ratio rose in 2012 such that Gazal was using $ 47.15 of equity finance. d) Debt coverage ratio Debt coverage ratio relates the cash flows from operating activities with long term debt, and it calculated by dividing non-current liabilities by cash from operating activities (Cecilia, 2007). It is also used to determine the ability of a company to continue in operation in the longer term and remain solvent as it reveals how long it will take to repay the existing long-term debt commitments as the current operating level. Debt coverage ratio = non-current liabilities / net cash flow from operating activities. 2011 2012 Non-current liabilities 39,535 39,567 Net cash flow from operating activities 19,454 15,281 Debt coverage ratio 2.03 2.59 From the table above, the debt coverage ratio increased in 2012 to 2.59 from 2.03 in 2011. This means that for every $ 2.03 of long term debt, Gazal generated $ 1 of operating cash flow in 2011 which increased in 2012 such that for every $ 2.59 of long term debt, Gazal was able to generate $ 1 of operating cash flow. Market performance analysis Shareholders are more interested on market performance analysis because it provides the per share situation of the company. a) Net tangible assets per share Net tangible assets per share reveal the net tangible assets backing up each share (that is, those Assets that could usually be converted to cash if circumstances forces). Assets such as goodwill are not included in this ratio. Net tangible assets per share = Ordinary shareholders’ equity – intangible assets / Number of ordinary shares on issue at year-end 2011 2012 Ordinary shareholders’ equity – intangible assets 43830 46486 Number of ordinary shares on issue at year-end 57395 56617 Net tangible assets per share 0.76 0.82 The ratio increased in 2012 to 0.82 from 0.76 in 2011. This reveals that Gazal had $ 0.76 of net tangible assets at book value backing up each ordinary share in 2011, and it rose in 2012 such that Gazal had $ 0.82 of net tangible assets at book value backing up each ordinary share. b) Earnings per share Earnings per share ratio compares the earnings made to the number of shares issued. Earnings per share = Net profit available to ordinary shareholders / Weighted number of ordinary shares on issue 2011 2012 Net profit available to ordinary shareholders 4,908 13,859 Weighted number of ordinary shares on issue 57395 56617 Earnings per share 0.09 0.24 EPS rose to 0.24 in 2012 from 0.09 in 2011. This reveals that Gazal made $ 0.09 of profit for each ordinary share in 2011, which considerably rose to $ 0.24 of profit for each ordinary share in 2012. c) Price earnings ratio The price earnings ratio compares the relationship existing between the earnings per share and the market price of shares of a company (Ayeir, 2011). It reveals how much the market is currently willing to pay for each $1 of earning generated by company. Price earnings ratio = current market price / earnings per share 2012 Current market price 2.98 Earnings per share 0.24 Price earning ratio 12.42 From the above table it is revealed that at this date the market is willing and prepared to pay 12.42 current earnings per share to purchase 1 share. Conclusion From the analysis, it can be drawn a conclusion that Gazal Corporation Limited is in a healthy financial position. Comparing 2011 financial year to 2012 financial year, the company is improving in profitability, efficiency, liquidity and in its market performance. Investing in the company is considered viable. Reference List Ayeir, N., 2011. Accounting: General Accepted Financial Accounting Standards. Cengage Learning. Cecilia, D., 2007. Corporate Accounting in Austalia. UNSW Press. p.639. Clarke, E.A., 2012. Accounting: An Introduction to Principles and Practice. Cengage Learning. p.12. Deegan, C.a.R.M., n.d. Do Australian Companies Objectively Report Environmental News? 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