Measuring Performance - Essay Example

? COMPANY ANALYSIS: MEASURING PERFORMANCE by module] (a) (i) Gross margin is used to appraise a company’s financial condition through finding out the proportion of revenue remaining after the deduction of the cost of goods sold from total revenues of the company. Here, in case of Maldives Plc, revenue for 2010 is ? 49,800,000 and revenue for 2011 is ? 57,400,000. Now, Gross profit which is equal to revenue minus cost of good sold is ? 25,896,000 in 2010 and ? 26,978,000 in 2011. Thus, gross margin of Maldives Plc in 2010 was (25,896,000 /49,800,000) = 0.52. And, gross margin in 2011 was (26,978,000 / 57,400,000) = 0.47. (a) (ii) If, gross margin of a firm is higher in one year compared to previous year, then it can be said that the company has shown higher efficiency in converting its raw materials into revenues in that year compared to the last year. Thus, companies always want to make higher gross margin. But, it has been found that for Maldives Plc gross margin has declined from 2010 to 2011. It indicates that the company has been less efficient in converting its raw materials into revenues in 2011 compared to 2010. Thus, the performance of Maldives Plc has deteriorated in 2011 from 2010. Hence it can be said that, financial health of Maldives Plc was better in 2010 than in 2011. (Zairi, 1994) (b) (i) Issuing ordinary shares is a method of financing a company’s productive activities. Total number of ordinary shares that the Maldives Plc had in issue in 2010 was (14,300,000/ 2.86) = 5,000,000. Total number of ordinary shares that the Maldives Plc had in issue in 2011 was (16,320,000/ 2.72) = 6,000,000. (b) (ii) A company finances its productive activities either through equity or trough debt. Equity financing implies issuing ordinary shares to public. On the other hand, debt financing implies taking loans from various organizations or individuals. Increasing in the volume of debt is not good for a company’s financial health as debt is huge liability for a company. (Spitzer, 2007) It is found that the number of ordinary shares issued by Maldives Plc has increased in 2011 from 2010. It implies that the company has put more stress on equity financing in 2011 than in 2011. However, in order to get clearer picture about the financing activities of Maldives, it is necessary to have information on long term and short term debt financing of Maldives Plc in 2011 and 2010. Although, it is not still clear from the number of ordinary shares in 2010 and 2011 whether the burden of debt has increased or decreased. The increase in the number of ordinary shares in 2011 will be a good indictor for the financial health of the company if it is coupled with decreased in debt financing. Hence, I would like to have more information on long term and short term debt of Maldives Plc in 2010 and 2011. (Spitzer, 2007) (c) (i) Price earning ratio of a company is generally measured by dividing the market price a stock in a particular year by earnings per share in that year. Here, the market prices of ordinary share issued by Maldives Plc in 2010 and 2011 had been ? 42.90 and ? 38.08 respectively. Now, earnings per ordinary share had been ? 2.86 and ? 2.72. Thus, price-earning ratio for 2010 was (42.90/2.86) = 15. And, price-earning ratio for 2011 was (38.08/2.72) = 14. (c) (ii) The price earning ratio for a stock in reality reflects the association between the market price of the ordinary shares issued by the company and the earnings per share issued by the company in a particular period. This ratio is extensively used determine profitability of a company. The market uses the information on profitability of a company to determine the price of the stock issued by that company. If profitability shows an increasing trend, then market also responds by increasing price per ordinary share. But, a downward trend in profitability acts as a bad signal regarding the performance of the company to the market. The market generally responds to a decline in profitability by moving towards a negative direction in terms of price per ordinary share. (McKinsey & Company Inc., Koller, Goedhart and Wessels, 2010) In case of Maldives Plc it is found that price earning ration of the company has declined in 2011 from 2010. It simply reflects a decline in the profitability of the firm. In this scenario, it is expected that market has taken this declining price earning ratio as a bad signal regarding the performance of the company. As the profitability of Maldives Plc has declined from 2010 to 2011, the market has instantly changed its view regarding the company towards a negative direction that has in turn resulted in decline in the market price per ordinary share from 2010 to 2011. (d) (i) Dividend per share of Maldives Plc in 2010 was ? (7,800,000/5,000,000) = 1.56. Dividend per share of Maldives Plc in 2011 was ? (8,400,000/6,000,000) = 1.4. Now, Dividend Cover for 2010 was (2.86/1.56) = 1.83. And, Dividend Cover for 2011 was (2.72/1.4) = 1.94. (d) (ii) Maldives Plc has maintained dividend cover more or less in a same position in 2010 and 2011. Dividend cover shows how many times dividend can be paid out of profits of a company. If the dividend cover is higher, then it simply implies that the company has better capacity in maintaining its dividends even if its profits fall. But, in case of Maldives Plc , it has been found that dividend cover has been quite low (close to 2 approximately) in 2010 as well as in 2011. Thus, the company shows its lower ability in maintaining its dividend at a same rate even if its profits fall. Thus with decline in its profitability in 2011 from 2010, the company has made a reduction, although very small, in dividend per share. It could be due to low dividend cover of the company. (Zairi, 1994) References: 1. McKinsey & Company Inc., Koller, T., Goedhart, M. and Wessels, D., 2010. Valuation: Measuring and Managing the Value of Companies. New York: John Wiley and Sons. 2. Spitzer, D. R., 2007. Transforming performance measurement: rethinking the way we measure and drive organizational success. USA: AMACOM Div American Mgmt Assn. 3. Zairi, M., 1994. Measuring performance for business results. London: Springer. Read More

 

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