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Financial Statement Analysis: Profitability Ratios

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Describe about the Financial Statement Analysis?


Total Assets

The total assets of the company have been stable over the years. It has been in the range of 135000 million USD, over the 5 years range with +/- 10%. This indicates a strong network and control over the assets. Year 2013 has shown the highest figure in 4 years period.

Asset Structure

Looking at the asset structure of the company it can be said that it has maintained a strong asset structure, with majority of the investment (More than 80%) in Non Current Assets. Of this Goodwill forms 50% of the Total Non-Current Assets, and has been rising due to the growing popularity of the company. However investment in cash has been too low and for the years 2011 and 2010, the same was exceptionally low. The same needs to be ensured to be kept at optimum levels so as to ensure a proper liquidity position.


Liability and Equity Growth

The Liability growth has been in a abnormal trend. Initially the same was falling indicating a good signal. However, in the year 2013 it has increased a lot as compared to other years. Hence the same must be controlled. Similar trend was seen in Equity Growth as well. In the term of 5 years it was the lowest in 2010. As regards the retained earnings are concerned the same is increasing in a very steady manner over the years, and in the 5 year period the same has grown substantially. The same has grown from $ 57,309 m to $ 80,197 m in this period. This is the result of the exception profitable performance of the company.

Income Statement

Net Sales – The sales of the company are growing in a reasonable fashion. In all the years of the period under review the same is growing and has been in a steady fashion.

Cost of Goods – The cost of goods sold of the company are reasonably low. This is the reason for the strong financial position and the good profitability of the concern. It has been at around 50% of the sales.

Gross Profits – Since the Cost of Goods Sold has been low, the Gross Profit has also been very high and has been at around 50% of the sales. For some years the GP was more than 50% as well.

General Expenses – The other general expenses of the company has also been quite stable over the period under review. It has been at 50% of the Gross profit and most importantly it is under control and has been maintained at that level.

EBT – Income before taxes have been quite good. It is more than 15% for all the years. It was however, seen that in 2012 the same has fallen. However, for the year 2013 the company reviewed and it has been made at a good levels.

Net Income – considering the net income levels the company has not been much good in this year. Over the years this figure has shown to be falling as compared to the sales. This is a serious matter to be considered by the management and before making any investment decision.

Share Outstanding – The share outstanding has also remained in somewhat stable manner, indicating that not many issues have been made in shares arena.

Depreciation and Amortisation – The depreciation and amortization expenses of the company are not in a single trend. For some of the years the same has fallen while in some it has been in huge levels. In 2013 it was however at a much low levels.

Taxes – Looking at the figures it can be seen that the tax expenses of the company are falling over the period. It is a very good indication of profitability, as in a way the unproductive expenses are reducing and the company is retaining the maximum for its own growth and development.


Cash Flow Statement

Net Cash from Operating Activities – The cash flows from operating activities has been in a line. It has been at around $ 14000 m. The year 2010 had shown exception results and in that year the cash flow was the highest.

Net Cash from Investing Activities – No trend can be fitted to this item of the company financial statement. However, there is one similarity that in all the years under the review the same has been in the investment arena, and has been negative. The year 2010 had lowest investment figures while in 2013 there was exceptional and was highest.

Net Cash from Financial Activities – The cash flow form Financial Activities have been negative. This has remained so for all the years. This indicates that the capital has been liquidating and the company is able to repay its debts. In the year 2010 this repayment was maximum and in 2013 the lowest.

Net Change in Cash – Net changes in cash have been fluctuating. In 2010 there was a negative cash flow while in all the other years the same was some-what of a profitable nature.

Free Cash Flow – The overall free cash flows have been positive with the year 2010 being the highest generating year.


Liquidity Ratio

Current ratio – For the years under the review the company has maintained the current ratio at around 0.8 level. However, this low level of Current Ratio is a signal of poor profitability. A current ratio of 2 is ideal. This low ratio can create liquidity crisis.

Quick ratio – The quick ratio has also been at around 0.4-0.5. This low figures, i.e. lower than 1 can be a matter of concern in the years to come.


Asset Management Ratio

Days Sales Outstanding (DSO) – The average sale outstanding days has been around 28 days. Considering the industry average the same is ok , and is an indication of better management of receivables.

Fixed Asset Turnover – This ratio has been maintained at 4 steadily showing that the company has been utilizing the assets in an optimum manner in all the years.

Total Asset Turnover – This ratio has also been quite stable and at 0.60. However considering the industry trend it seems to be a bit low, and must be at around 0.8

Inventory Turnover – This ratio has been at around 6 times, indicating that the company is revolving its inventory in an optimum manner and is not piling up much stock. This indicates good inventory management at the company.              

Debt Management Ratios

Debt Ratio – The Debt ratio of the concern is considerably low and it has also been discussed earlier that the company has a primary focus on equity component more than the debt.

Times Interest Earned – The number of times interest earned has been fluctuating. It has been from 16-25. This is a poor signal of the company’s debt management fund.


Profitability Ratios

Profit Margins – The company has been in good profitability and has given profit figures for more than 10% in each year. The same was 16%, and the highest in 2009. From then the ratio is declining.

Return on Assets – The return on assets has been maintained at around 8%-10%. This shows that the company has optimally utilized the total assets of the concern.

Return on Equity – The return in equity has been at a quite good ratio, and has been more than 15% for all the years. This indicates that the company is well using the funds of the investor.


Other Data

Tax rate – The effective tax rate of the company has been around 25%. For the year 2011 and 2013 it was near 20%. This is a proper signal and an indication of good fiscal structure of the organization.


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