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Analysis of Financial Statement - Essay Example

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We are pleased to inform you that our findings about the company's financial data from the year 1998 to 2001are completed. We are dispatching you this document for you to see the results and evaluate the company's success on the basis of this result. During these years, net profit margin has fallen drastically…
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Analysis of Financial Statement

Download file to see previous pages... The cost of sales/sales ratio have increased from 0.48 to 0.55, which shows that company's cost of sales have increased which resulted in gross profit to decline and as a result net profit also declined. Similarly, Research and Development/sales ratio also increased for 0.10 to 0.11 which resulted in increase in expenses and declined profits which ultimately caused net profit margin to fall. Below is the computation table for net profit margin:
Based on the above figure, we can see a declining net profit margin trend for the company. Threatened by this we would like to advice the company to diversify their product range so that the effect of decline in net profit is minimized. In other words the declining trend in one industry will be offset by a booming trend in another industry.
We from experience can suggest that return on shareholder's equity can be an effective in assessing the return on your investment. Return on equity actually tells you how much profit your investment is yielding. From the year 2000 to 2001 there has been a downward trend for the company. This is because the profits between these two year decline whereas investment or shareholder equity in the business decreased. The major reason why shareholder equity has seen a trend is because of decline in profits. These profits declined because expenses increase. Both Research and Development and Cost of Sales increase causing the profits to decline and shareholders equity to fall. Here is our computation for Return on Shareholder's equity. (Investopedia, 20 June)
Return on Shareholder Equity= Net Income/ Shareholder Equity
For the year 2000 = 1854/7309 = 0.253 or 25.3%
For the year 2001 = 927/10586 = 0.087 or 8.7 %
The reason behind change in this ratio is changes in prices of the stock and change in price net income per share ratio. This ratio is suggesting that investors are expecting higher profits and growth in earning per share ratio. This has resulted in market demand for stock to rise and prices of stock to inflate and thus resulting in higher P/E ratio.

2) P/E Ratio = Stock Price/Earning per share Diluted
1998= (111/4)/0.24 = 115.625
1999 = (163/4)/0.31 = 131.45
2000 = (281/2)/0.55 = 255.45
2001 = (91/2)/0.27 = 168.51
There was first drastic increase in Price to Book Value Ratio in 2000. This can be due to because the investors value your company highly and despite having low book value they are willing to pay high price for your shares. This is a good sign and show that company has good name in the market and investors value your company highly. However, in 2001, this ratio declined. This shows that company is no more the investor's heaven or investors have shifted away from investing in your company. This can be due to the fact that investors think that your company will be profitable and demand for the share of company decline and your share market value fell, so as this ratio as investors are turning away from investing in your company which is a bad sign. (Frank Wood)
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