Profitability ratios

Financial ratios are calculated using the annual reports of the company. It is used to compare the financial performance and position of the company over the years. There are various types of financial ratios such as profitability ratios, efficiency ratios, liquidity ratios, financial gearing ratios and also few investment ratios. It is important to carry out analysis of such ratios in order to take important decisions.

Profitability ratios help us to acquire information about the profits earned by the company and its financial performance (Alvarez, 2013). A higher profitability ratio is always preferable because it is the primary objective of the company to earn higher profits. Few examples of profitability ratio that has been calculated are:

Return on assets is an indication of how efficiently the management of the company uses its assets so that it can earn maximum returns. If this ratio is increasing over the years, then it means that the efficiency of the management to utilize the assets has increased and vice versa. From the calculations, it is observed that the ratio has decline from year 16.25% to 6.57% from 2014 to 2016. However, it can also be seen that the ratio has started recovering again from 2017. It increased from 6.57% in 2016 to 10.94% in 2018.

This ratio is also a kind of profitability ratio which is considered to be higher the better. We have calculated the ratio from 2014 to 2018 and it is observed that the ratio is falling over the years which are considered to be unfavorable. In 2014, the ratio was 24.80% but there was a continuous decline over the years which brought down the ratio to 16.17% in 2018.

Operating profit margin shows a clear picture of financial performance of the company as it includes only operating profits. In this case, the sales have been decreasing over the years along with the operating profits. This has resulted in decline of operating profit margin from 6.19% in 2014 to 4.47% in 2018.

Gross profit margin is also expressed a s a percentage of sales. It is calculated by dividing the gross profit by sales. Gross profits are the difference between sales and cost of goods sold. So, higher the ratio, better it is (Elaine, 2015). The gross profit was in a decreasing trend from 2014 to 2016 but is recovered in the year 2017. Therefore, we can say that the company has a favorable gross profit margin.

Efficiency ratios

This ratio helps us to know about the number of times the inventory can be turned and sold during a period. The company must have a high turn as it reflects that the company is not spending recklessly on the purchase of inventory and also it is managing the inventories well by not storing excess inventories (Fridson & Alvarez, 2012). It is observed that the inventories turnover period has been quiet stable for this company. There is not much variation over the years which show that the company has neither improved in managing its inventories nor has it worsen.

This ratio helps us to know whether the company is facing any problem in collecting on credit. In the given case, the company has a very low settlement period for debtors. A low settlement period shows that the collection procedure of the company is poor, it does not have a good credit policy or there are no good quality customers (Ittelson, 2009). The debtor’s turnover period has declined from 5.67 days in 2014 to 4.95 days in 2018.

Asset ratio is also a kind of efficiency ratio which helps us to determine that whether the company is able to make optimum utilization of its assets (McLaney & Adril, 2016). Higher turnover ratios mean that the company is using its asset very efficiently whereas lower ratios are just the opposite. The company has a declining asset turnover ratio.

Current ratio is a ratio of current assets to current liabilities. It is a measure of liquidity which helps us to know whether the company is able to pay off its short term obligations using its current assets. This ratio is considered favorable when it is equal to or slightly greater than 1. The current ratio has always been less than 1 over the years and also declining which shows that the company has a poor liquidity position (Parrino, 2013).

Quick ratio is a more stringent measure of liquidity as it excludes inventories. It is interpreted in the same manner like the current ratio. The ratio has always been less than 1. Therefore, it is considered to be unfavorable (Penman, 2012).

Debt to asset ratio tell us about the financial leverage of the company. A company with high financial leverage is comparatively risky. If the debt to equity ratio is less than 1 it shows that the proportion of debt in the total capital structure is less when compared to equity. The debt to equity ratio is very low for this company which shows that the company has low financial risk.

Liquidity ratios

This ratio helps us to know if the company is able to meet its interest expenditure using its operating profit. Higher the ratio, better it is (Siciliano, 2015). The interest coverage ratio has increased from 13.59 times in 2014 to 16.55 times in 2018 which shows that the company is able to meet its interest expense using its operating profit.

An investor who would like to invest in the company would always look for a higher earnings per share. An investor invests in the company for the purpose of wealth maximization and higher returns. So, a higher earnings per share attracts investors. The earnings per share has slightly declined which is considered to be bad for the company as the investors will not be interested in investing in the company.

Price earnings ratio indicates the amount that the investor is willing to pay per dollar of earnings.  If the PE ratio is high then it means that the investors is expecting a higher growth potential. An average PE ratio is times earnings (Simpson, 2012). The PE ratio for this company is increasing which shows that the investors are expecting growth in the company.

The cash flow derived from holding a stock of the company is determined by the dividend yield ratio. The investors find it favorable when there is a high dividend yield ratio.

Part E:

A cash flow statement is prepared in order to provide information about the cash inflows and cash outflows during the year. These cash flows may be derived from various activities such as operating activities, investing activities and financing activities.

Cash flows generated from operating activities reflects the cash outflows and inflows because of the principal business activity.  Cash generated because of operating activity is considered to be most important as it provides a clear picture about the workings of the company. In the year, 2017 the net cash generated from operating activities amounted to $3122million which decreased to $2930million in 2018. This decline in the cash flow was because of the less cash receipts from the customers and also increased payments made to suppliers (Skonieczny, 2012).

The second source of cash generation is from investing activities. This amount is considered to be favorable when it is in negative as it reflects the growing potential of the company. The net cash generation from investing activities in 2017 is $(1431)million whereas in 2018 it is $(1510)million. This shows that the company is engaged in making investments because it has a growth potential.

The third source of cash generation is financing activities. The financing activities of the company includes proceeds from issue of shares, taking loans, repayment of loans and also dividend payment. The net cash generation in 2018 which is $1277 million is comparatively greater when compare to 2017 in which it is $917 million. So, we can say that the amount raised in 2018 is more than 2017.

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Elaine, H. (2015). International financial statement analysis. Hoboken: John Wiley & Sons.

Fridson, M., & Alvarez, F. (2012). Financial Statement Analysis: A Practitioner’s Guide. New York: John Wiley & Sons.

Ittelson, T. (2009). Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. Franklin Lakes, N.J.: Career Press.

McLaney, E., & Adril, D. P. (2016). Accounting and Finance: An Introduction. United Kingdom: Pearson.

Parrino, R. (2013). Fundamentals of Corporate Finance, 2nd Edition. Milton: John Wiley & Sons.

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