Financial Analysis of a Company
Essay Preview: Financial Analysis of a Company
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Concept of analysisFinancial analysis is calculation and comparison of ratios which are derived from information in an enterprise financial statements. The trends of this ratios are then used to make inferences about the financial condition of a company, its operations and attractiveness as an investment. Ratio analyses involve comparing figures against previous years, other enterprises in the industry or the economy in general. Ratios looks at the relationships between individual values and relate them on how an enterprise has performed in the past, and perform in the future. In this paper, financial analysis of Madaraka investments limited is going to be illustrated in details.Basis of comparisonsA ratio gains utility by comparisons with other data and standards. For instance a gross profit margin for enterprise 25% is meaningless by itself. If we know that the competitor has the profit margin ratio of 10% the we know that the industry is more profitable than its industry. If we know the trend is upward, then we know that the management is implementing effective business policies and strategies. The following for instances are basis for such comparisons: inter-enterprise comparison and intra-enterprise comparisons. Inter-enterprise involves comparison with the best enterprise in the company and the average enterprise in the industry.Basis of presentationRatios may be presented in three different forms. Ones is pure ratio and the second is percentage and lastly is number of times. Pure ratio is in form of x:y; say ratio of current asset to current liabilities is 3:2. Percentage is mostly commonly used form of ratio. A variable is used as a percentage of the other. The number of times is which a variable is expressed as the nuber of times of anotherUses of ratio analysisRatios analysis has many uses which include evaluating the performance of an enterprise and compare with the performance of the previous and that of the competitor and the industry, setting benchmarks or standards for performance through budgeted ratio, to highlight areas that need to be improved or areas that offer promising future potentials and lastly is to enable external parties like investors or lenders to access creditworthiness and profitability of the enterprise.Classification of ratiosFinancial ratios can be classified into profitability ratio, liquity ratio, activity ratio, gearing ratio and investment ratio.Gross profit marginThis measures efficiency of managing price both buying and selling pricesGross profit margin = Gross profit/sales * 100Gross profit mark-upRatio of gross profit to cost of goods soldGross profit mark- up = Gross profit/cost of goods sold *100Net profit margin (after tax) Measure of propotion of net profit to sales after covering all expensesNet profit margin = net profit after tax /sales * 100Net profit margin before taxNet profit = net profit (before tax/sales *100Return on shareholders capital employed = Net profit before interest and tax/ total capital employed * 100Return on shareholders’ equity = net profit after tax and preference dividend/ shareholders equity *100Return on assets = net profit before interest and tax/ total assets employedLiquidity ratios are the groups of ratios used to analyses the ability of the enterprise to meet short term obligations
Current ratios = current assets /current liabilitiesQuick ratios = current assets – stock and prepayments /current liabilitiesActivity ratio measures the efficiency of utilizing the resources at the enterprise disposalStock turn over = cost of goods sold/ average stock whereby the avargae stock is found by adding opening and closing stocks then the total divided by twoStock turnover period = Average stock/cost of goods sold * 365 daysDebtors turnover = credit sales/ average debtorsDebt collection period = Average debtors /credit sales * 365 days Credit turnover =credit purchases/ Average creditorsCredit payment period = average credit / credit purchases * 365 dys Asset turnover = sales/assetsFixed asset turnover = sales/ fixed assetsLeveragesThese are ratios that are measuring long term solvency of the enterprise. This is abitlity of the company to meet long term obligations of the company. Gearing ratio = debt capital/ total capital employed * 100Debt equity ratio = Debt capital / owners capitalDebt ratio = total liabilities/ total assetsInterest cover = profit before interest and taxes/ interest chargesDividend ratio measures both profitability and the returns to the shareholders investment as well as the business dividend payout policyEarnings per share = Net profit after tax and preference dividends / total ordinary shares Dividend per share = total ordinary dividends / total ordinary sharesDividends payout ratio = dividends per share / Earning per share Retention ratio = earnings per share – dividend per share/ earning per shareRatio analysis and interpretation of Madaraka Investments LimitedThe following information has been extracted from the accounts of Madaraka Investment Limited, for the year ended 31 December 2015. Comparable figures for the previous years are also shown. Profit statement for the year ended 31 December 2015 2014 Sh.000 sh000Sales 115,200 72,000Cost of goods (70,000) (42,000)Gross profit 44,400 30,000Less trading expenses (19, 800) (16,200) 24,600 13,800Less debenture interest (900) (900)Net profit before taxation 23,700 12, 900Less corporation tax (11,520) (5,760)