Financial reporting and analysis: advanced report

Calculation of ratios

Profitability ratios

Operating profit (EBIT) %=Operation profit/Sales

2002 Operating profit (EBIT) %=2318/9985%=23.21%

2003 Operating profit (EBIT) %=3196/14300%=22.35%

Efficiency or Management of Assets Ratios

Debtors’ collection period=Trade Debtors/Credit sales *365 days

2002 Debtors’ collection period=1422/9985*365 days=51.98 days

2003 Debtors’ collection period=2032/14300*365 days=51.87 days

Liquidity Ratios

Current Ratios=Current Assets/Current Liabilities (Creditors) %

2002 Current Ratios%=4007/8475%=47.28%

2003 Current Ratios%=5269/11623%=45.33%

Gearing Ratios

Debt ratios=Total liabilities/Total assets

2002 Debt ratios%= 6661+1500/8773%=93.02%

2003 Debt ratios%=8327+1500/12035%=81.65%

Investment Ratios

Earnings per Share=Earning available for ordinary shareholders/Number of ordinary shares in issue

2002 Earnings per Share=1790-70/3800=45 p/per share

2003 Earnings per Share=2493-70/4800=50 p/per share

Dividend Yield=Gross dividend per share/Market price per share%

2002 Dividend Yield= (250/3800/3.40)%=1.93%

2003 Dividend Yield= (400/4800/2.50)%=3.33%

Dividend Cover=Net profit or less attributable to ordinary shareholders/Net dividend on ordinary shares

2002 Dividend Cover=0.45/ (250/3800) =6.82 times

2003 Dividend Cover=0.50/ (400/4800) =6.02 times

Price earnings ratio (P/E) =Market price per share/Earning per share

2002 Price earnings ratio (P/E) =3.40/0.45=7.56 times

2003 Price earnings ratio (P/E) =2.50/0.50=5 times

The analysis of these ratios

Operating profit (EBIT)

It identifies the net profit in pense per pound of sales income. The net profit is from ordinary activities before interest and taxation. It tells us something about a company’s ability to control its other operating expenses or overheads. Let’s look at the data, it is 23.21% in 2002 and 23.35% in 2003, this highlights some areas that may need to be reviewed. The EBIT has shown a 0.86% decrease for the year. The gross profit percentage has shown a 0.17% increase for the year. It is not a good sign, the increased cost leads to this situation, it reflects poor control of expense items, so the relevant department should find out the problems in the increased cost and expenses. Debtors’ collection period

It is a measure of the credit control of the organization and it indicates the length of time that our debtors are taking to pay for the goods they have received from us on credit. Debtors’ collection period of 51.87 days in 2002 and 51.98 days in 2003when compared to the industry average 65days, is well within the norm. It suggests that the credit control is well-monitored. Comparing the year of 2002 from 2003, the ratio is basically unchanged. But let’s look at the detail data, from 2002 to 2003, the credit sales increase very fast, however, the trade debtors also rise fast, the income is almost from debtor which is not a good sign. The company may haven’t had analyzes in customers’ ability to pay or urge their customers t o pay or given discount for prompt payment.

Current Ratios

This ratio looks at the organization’s ability to meet its short-term commitments and its ability to cover its current liabilities. The current ratio is 47.28% in 2002 and 45.33% in 2003, which is a bad situation, it means that the company’s ability to repay may decrease. However, the current liabilities increase much faster than current assets, so the ratio may appear to decrease. On the other hand, the increased bank overdraft is also a bad sign w hich may bring to some more interests to increase the company’s burden.

Debt ratios

It is the ratio of total liabilities to total assets. It helps to identify if the business has

sufficient assets to meet all its liabilities. The debt ratios are 93.02% in 2002 and 81.65% in 2003. However, the decreased data is a good situation, but the high percentage is not good enough. The trade creditors increased from 2002 to 2003, which indicated the company’s ability to repay may decrease. This decrease is positive to the company.

Earnings per share

It identifies how much of a company’s profit can be attributed to each ordinary share. Earnings per share are 45p in 2002 and 50p in 2003. The 5p increase in EPS was caused mainly by increase in the Profit after taxation. However, the increase will make the shareholders feel good. The higher this number, the more money the company is making.

Dividend Yield

It measures the real rate of return by comparing the dividends paid to shareholders to the market place of a share. The ratio is 1.93% in 2002 and 3.33% in 2003. The increased data will be a good message to the shareholders. They will gain more profit from the dividend. However, the increase in gross dividend per share and the decrease in market price per share lead to the increase in dividend yield.

Dividend Cover

It indicates the number of times that the dividend could be paid out from the profits available. A high dividend cover means that the company can easily afford to pay the dividend and a low value means that the business might have difficulty paying a dividend. In the case, the ratio is lower than the average rate, even the ratio decreased from 2002 to 2003. The return for per share is increasing, but the dividend is decreasing, the company must have kept the profit to spend on expendsion, pay for creditors and so on.

Price earnings ratio (P/E)

It is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It relates to the earnings per share to the market price of the shares. However, companies with high P/E ratios are more likely to be considered “risky”investments than those with low P/E ratios, since a high P/E ratio signifies high expectations. The ratio is 7.56 times in 2002 and 5 times in 2003. The decreased

rate indicates shareholders are disappointed about the company’s future operation, they think the company will not go on well in the future.

Sources of long-term finance which may be suitable for the company There are many kinds of ways for the company to have long-term finance. But in my opinion, financing from preference shareholders is just suitable for the company. These are equity shareholders, but they usually have a fixed percentage attached to them. In the case, the rate is 10%. The rate is much higher than bank interest, so it may encourages investors to place their funds in the business rather than elsewhere. As with loan capital, it is advisable for an organization to ensure that the percentage return it guarantees to preference shareholders is greater than the return offered by alternatives such as banks loan. Because of the increased bank overdraft from 2002 to 2003( from 1,192,000 to 2,383,000), the bank seems to be not willing to provide the capital to the company. In times of increasing interest rates, preference shares may be an attractive proposition for a business, since it can limit the interest payments due to an agreed fixed amount. However, on the other hand, in some situation, financing from preference shareholders may turn to be a burden for the company, so every corn has two sides. The company should financing according to their own operating situation.