Financial Analysis Essay For Alpine Construction And Maple Builders.

1.How do the two companies compare in terms of their financial health/position? What are your findings?

Which company provides the best long term profit potential (PROFITABILITY)?

Which company has the better liquidity (WORKING CAPITAL MANAGEMENT)?

Which company is run most efficiently (ASSET UTILISATION)?

Which company is in the best market position (FINANCIAL MARKETS)?

Which company has the better financial stability (SOLVENCY)?

Which company compares most favourably to the industry benchmarks (INDUSTRY)?

2.What conclusions can be drawn from your financial analysis? Which of the two companies appears to be in a better financial health/position and why?

3.What are your recommendations for TT Ltd?

Make a recommendation on which of the two companies TT should invest in.

You must explain your reasons for making this recommendation.

Suggest three ways of potentially improving the company you have recommended investing in. These suggestions should be practical, specific and explained in reasonable detail. Each suggestion must be distinctly different from the other two; they must not relate to the same issue or aspect of the company.

Diploma in Business & Enterprise Management (L-7) 9 Assignment/Report, Fin Analysis

4.Dividend payments

The directors of Alpine Construction Ltd declared a dividend of $50,000 and have made this known to TT. Since balance day Alpine has a further rent payment due of $40,000. Include a section to:

Explain the Solvency Test to the directors in accordance with the Companies Act 1993 and its subsequent amendments.

Select and apply amounts in accordance with the solvency test and draw a

conclusion, of whether the decision for the payment of dividend was appropriate.

5.Limitations & variations

Explain possible limitations of your financial analysis including: form and content, accounting measurement, classification, materiality, consistency, comparability, and neutrality. What can be done to address these limitations in future reports?

Suggest and explain any variations that might exist in your report’s content if it was presented to different end users; either a creditor or an employee.

Taggart Transpacific Ltd. is a New Zealand based company which is engaged in supply and manufacturing of building materials to the construction companies. Due to the increase competition and to enhance its competitive advantage, the company is looking forward to purchase a controlling interest in the construction company for securing and ensuring its future demand. The companies chosen are Alpine Constructions and Maple Builders, which are core construction companies operating in different locations of New Zealand. In order to invest and purchase the interest, TT wants to know the performance and position of both the companies by conducting a deep financial analysis with help of useful ratios. Financial data is been provided by TT and the analysis is done for the year 2017 and 2018. The ratios calculated are profitability, asset utilization, financial market, working capital management and long term financial stability ratio. Furthermore, a solvency test is also done by using the dividend payment and the limitation of the analysis is been explained at the end of the report.

Gross profit ratio

It is a financial ratio which identifies the company’s financial health and the amount of profit made by the company out of total revenue after doing the calculations of cost of goods sold. GPR is also known as gross profit margin and is presented in form of percentage of total sales (Barman & Sengupta, 2017).

Company	2017	2018	% change	Industry standard %
Alpine	75%	60%	- 10%	60%
Maple	45.01%	55.02%	10.01%

Table 1: Gross Profit Ratio

From the above table it can be observed that the GPR of Alpine in 2017 was 75% and of Maple was 45.01% followed by 60% and 55.02% in year 2018 respectively. Alpine’s GPR is reduced by 10% whereas Maple’s GPR increases by 10.01%.

It is also known as net margin and is a financial analytical ratio which is also expressed as a percentage of total revenue. It shows the amount of total sales earned as a profit after paying all the operating and non-operating expenses. Higher the ratio, higher will be the profitability.

Company	2017	2018	% change	Industry standard %
Alpine	22.5%	13.11%	- 9.39%	20%
Maple	6.76%	10.44%	3.68%

Table 2: Net Profit Margin

It is observed that the NPR of Alpine has reduced by 9.39% over the past two years. In 2017, the ratio was 22.5% and the same was reported at 13.11% in 2018. On the other hand, Maple’s NPR was 6.76% in 2017 which increased to 10.44% in 2018 showing a rise of 3.68% over the years. If compared, Alpine has more net profit.

ROTA is also a profitability ratio which measure company’s earnings before interest and tax against its total assets. It basically gives insights to management about how much money is made from each dollar invested in the company. This enables the managers to understand the relationship between the company’s resources and its income (Godwin & Alderman, 2012). 

Company	2017	2018	% change	Industry standard %
Alpine	125.45%	64.74%	- 60.71%	36%
Maple	36.73%	57.72%	20.99%

Liquidity Ratios

Table 3: Return on Total Assets

The analysis shows that alpine faced a huge fall in its Return on total assets ratio as in 2017 the ratio was 125.45% which reduces to a great extent and reached to 64.74% in 2018. On the other side, Maple’s ROTA has increased over the time period. It was 36.73% in 2017 and 57.72% in 2018 showing an overall increase of 20.99% during the period.

Current ratio

It is the most popular liquidity ratio which shows the relationship between the current assets and current liabilities of the company. It basically identifies company’s ability to meet all its short term financial obligations with its current assets. The ideal current ratio is 2:1 which is required to be maintained by the companies (Leach, 2010).

Company	2017	2018	change	Industry standard
Alpine	2.4:1	2.19:1	- 0.21:1	2:1
Maple	1.87:1	1.88:1	0.01:1

Table 4: Current ratios

The above table shows the current ratio of both the companies. For Alpine, in year 2017 the ratio was 2.4:1 which reduces to 2.19:1 in 2018 whereas for Maple, the ratio was 1.87:1 in 2017 and the same in 2018 is reported at 1.88:1. Though Maple’s ratio has increased but it is less than the ratio of Alpine and is also less than the industry average.

It is also a liquidity ratio which indicates the financial health of a company by measuring its most liquid assets against its current liabilities. In other words, it show the potential of an organization to meet all its short term obligations with its quick assets such as cash, debtors and accounts receivables. The ideal ratio is 1:1 (Lee, Lee & Lee, 2009)

Company	2017	2018	change	Industry standard
Alpine	0.5:1	0.3:1	- 0.2:1	1:1
Maple	1:1	1.11:1	0.01:1

Table 5: Quick ratio

From the above table, it can be seen that Alpine’s QR is lower than Maples and from the industry average. Moreover, it ratio has also decreased in year 2018. For Alpine, in 2017 the ratio was 0.5:1 and in 2018 the ratio was 0.3:1. On the other hand, Maple had a ratio of 1:1 in 2017 and the same in 2018 is 1.11:1, showing an increase of 0.01:1 in the ratio.

Accounts receivables turnover ratio

It is an activity ratio which measure the efficiency of the firm in utilizing its assets. It shows how effectively and efficiently a company collects its debtors. A high ARTR means company is quite efficient in managing its credit given to the customers and is generally operates on cash basis (Tracy, 2012). 

Company	2017	2018	change	Industry standard
Alpine	68.64 times	46.13 times	-22.51 times	50 times
Maple	24.65 times	31.47 times	6.82 times

Table 6: Accounts Receivables turnover ratio

For the year 2017, Alpine’s A/R ratio was 68.64 times which reduces to 46.13 times in 2018. It shows a change of -22.51 times during the year. While, in case of Maple the ratio was 24.65 times in 2017 which increases to 31.47 times in 2018. However, Maple’s ratio shows an increase of 6.82 times over the years.

Asset Utilization Ratios

This ratio determines the number of times a company has sold and convert its inventory into cash over the period. A high ITR is favourable for the companies and it is calculated by dividing the sales with average inventory (Weygandt, Kimmel & Kieso, 2009). 

Company	2017	2018	change	Industry standard
Alpine	3.20 times	3.47 times	0.27 times	6.2 times
Maple	7.10 times	7.75 times	0.65 times

Table 7: Inventory Turnover ratio

It can be seen from the above table that Maple has high ITR than Alpine. In 20117 its ratio was 7.10 times which increases to 7.75 times in 2018. Whereas, Alpine’s ITR was reported at 3.20 times in 2017 and 3.47 times in 2018. The inventory turnover of Maple is better because its ratio is higher than the industry average and is also more than that of Alpine.

Earnings per share

This ratio indicates company’s profitability and is considered as a part of profit of company’s profit divided among the each outstanding share of the common stock (Jenter & Lewellen, 2015).

Company	2017	2018	change	Industry standard
Alpine	$29.70	$14.40	-$15.3	$2.28 per share
Maple	$1.50	$2.56	$1.06

Table 8: Earnings per share

EPS for Alpine was $29.70 in 2017 and $14.40 in 2018 and for Maple, the ratio was $1.50 in 2017 which increases to $2.56 in 2018 showing a rise in EPS of $1.06 per share.

This ratio shows the amount of dividend issued by the company for every outstanding share. The amount of dividend paid also includes interim dividend and the ratio is calculated by dividing total dividend with the number of ordinary shares issued (Jindal & Jain, 2017).

Company	2017	2018	change	Industry standard
Alpine	$23.76	$11.52	-$12.24	$1.40 per share
Maple	$0.75	$1.28	$0.53

Table 9: Dividend per share

For the year 2017 and 2018, Alpine has a ratio of $23.76 and $11.52 respectively. On the other hand, Maple has a ratio of $0.75 in 2017 and $1.28 in 2018 showing an increase of $0.53 per share. Unlike Alpine, Maple shows a rise in its DPS against the industry standard of $1.40 per share.

Debt to assets ratios

This ratio indicates the total amount of debt in relation to assets. It basically shows the amount of leverage taken by the companies (Sharan, 2015).

Company	2017	2018	% change	Industry standard %
Alpine	75.03%	66.37%	-8.66%	80%
Maple	63.64%	49.24%	-14.4%

Table 10: Debt to total asset ratio

From the above table, it can be observed that Alpine had 75.03% debt to asset ratio in 2017 and in 2018 the ratio is reported at 66.37%. For Maple, the ratio was 63.64% in 2017 and 49.24% in 2018. Both the companies shows a decrease in their Debt to total asset ratio as compared to their industry average of 80%.

It is also one of a solvency ratio which is used to measure the financial leverage of any company. It shows the proportion of companies’ short term and long term debt against its equities (Levi & Segal, 2015).

Company	2017	2018	% change	Industry standard %
Alpine	300.56%	197.33%	-103.23%	150%
Maple	175%	97.02%	-77.98%

Financial Stability Ratios

Table 11: Debt to equity ratio

The above table shows the debt equity ratio for both the construction companies. It can be observed that D/E ratio of Alpine was 300.56% in 2017 which reduces to 197.33% in 2018. While on the other side, Maple had a D/E ratio of 175% in 2017 which also reduces to 97.02% in 2018. Currently both the companies has ratio less than the industry average of 150%.

	Alpine Construction Ltd.	Maple Builders Ltd.	Industry standard
Name of Ratio	2018	2018
Profitability Ratios
1)    Gross profit	60%	55.02%	60.00 %
2)    Net profit	13.11 %	10.44%	20.00 %
3)    Return on Total Assets	64.74 %	57.72 %	36.00 %
Asset Utilization Ratios
1)    Inventory Turnover	3.47 times	7.75 times	6.2 times
2)    Accounts receivable turnover	46.13 times	31.47 times	50 times
Financial Markets Ratios
1)    Earnings per share	$14.40	$2.56	$2.28/Share
2)    Dividends per share	$11.52	$1.28	$1.40/Share
Solvency Ratios
1)    Debt to Total Assets	62.37 %	49.24 %	80.00 %
2)    Debt to Equity	197.33 %	97.02 %	150.00 %
Working Capital Management Ratios
1)    Current Ratio	2.19:1	1.88:1	2:1
2)    Quick Ratio	0.3:1	1.11:1	1:1

Table 12: Industry Benchmarking

The above table shows the different financial ratios used for Alpine constructions and Maple Builders to measure and evaluate their performance and position against several industry benchmarks for the year 2018. Starting with the gross profit margin, Alpine has the high GPR of 60% than Maple and which is equal to the industry benchmark. The same goes with the Net profit and return on total assets. Alpine has high ratios as compared to Maple and also it ROTA is 64.74% in 2018 which is way more than the industry average of 36%.

When it comes to inventory turnover, Maple outperforms having 7.75 times of ITR more than that of Alpine and industry benchmark. But talking about accounts receivable, Alpine has a high ratio of 46.13 times almost close to the industry standard. Earnings per share and dividend per share of Alpine constructions is $14.40 and $11.52, more than Maple’s ratio and higher than the benchmark. However working capital management ratios are in favour of Maple and not in Alpine.

From the above financial analysis, conclusion about the five calculated ratios can be made which compares both the construction companies. The performance is compared for the years 2017 and 2018.  The comparison for 2018 is done in the above table with the industry benchmark. Now, here the performance is compared over the two years of both the companies. It is observed that GPR of Alpine has reduced by 10% where the GPR of Maple has increased by the same percentage. Talking about NPR and return on total assets, Alpine has faced a decrease of 9.39% and 60.71% respectively whereas the trend is reversed in case of Maple Builders and the ratios are increased by 3.68% and 20.99% respectively.

Talking about liquidity ratios, both are reduced in case of Alpine Constructions and are increased in case of Maple Builders. The growth in Maple’s ITR is 0.65 times which is more than that of Alpine’s ITR growth by 0.27 times. Also in Accounts receivable turnover ratio, Alpine faced a decrease 22.51 times in the ratio whereas Maple has shown an increase of 6.82 times in its A/R ratio. Earnings per share is higher for Alpine though shown a reduction of $15.3 per share during the period. The same trend followed in Dividend per share of Alpine which reduces by $12.24 per share. Where as in case of Maple, both the ratios has shown an increase of $1.06 and $0.53 respectively. As far as debt to total assets and debt to equity ratios are considered, both the companies has shown a significant reduction in the ratios. However, the decrease in Alpine’s ratios are more than that of Maple’s ratio.

Solvency Test

So overall, it can be concluded that though Maple Builders’ ratios are less in figure but the company is performing better than Alpine and is shown an increasing and positive trend in its performance.

It can be said that both the companies are doing good and bad in their sectors. Both have good turnover and should focused on improving their performance. As the improvement is been concerned, Maple Builders is entirely focused on enhancing its performance and has increased it over the years. Unlike Alpine Constructions, the company has shown a continuous growth in all the aspects and has reflected a positive trend in its performance. However, its ratios are less than that of Alpine but have increased over the years. So, as per the analysis, it is concerned TT should invest in Maple Builders.

Following steps must be taken by Maple Builders Ltd to remain in a good financial position.

• Maple Builders need to focus on their sales and improve their turnover which will eventually enhance the profitability of the company and its financial position.
• Another area which requires the focus is reduction in accounts receivables turnover as a high ratio is not favourable for the company. Maple should focus on increasing its efficiency for making timely collection of its debtors.
• Maple should focus on reducing its portion of debt and must enhance equity financing in the business. This will also improve its earnings per share.

The capability of an organization to pay its financial obligations is measured by taking a solvency test. Solvency is very much important for the business and its insufficiency may lead to bankruptcy.

A) Maple Builders Ltd. Liquidity Test

Current asset Ratio: current asset/current liabilities + rent

Current assets = $280,000

Dividend = $50,000

Current assets – dividend = $280000 - $50,000 = $230,000

Current liabilities = $149,000

Rent = $40,000

Current liabilities + rent = $149,000 + $40,000 = $189,000

                        = $230,000/$189,000

                        = 1.22:1 > 1

The result is more than one which shows that Maple Builders Ltd. has passed the liquidity test.

B) Balance Sheet Test

Total asset ratio = (Total asset – dividend)/Total Liabilities + rent

Total assets = 596,000 - 50000

                    = $546,000

Total Liabilities = $293,500 + $40,000

                        = $333,500

Debt to Total asset ratio = ($333,500/$546,000) x 100

                                    = 61.08% (Pass)

Conclusion

The above solvency test concluded that Maple Builders Ltd. has successfully passed both the liquidity and balance sheet test. It has a greater solvency position and is able to meet its liabilities.

Following are the limitations of this analysis:

• Difficult to measure accurate results as the data is available for two years only.
• The inflation rate is high for both the companies for both years.
• Details given is not well explained.
• Qualitative methods cannot be applied.

Owners of the company need this report for taking important decisions related to their investments. Moreover they can measure the performance of the companies and build up their strategy accordingly so that they can make a sustainable business. Managers are the key persons of the organization and also have the power to take important and crucial decisions related to the functioning of organization. For this purpose, they need accurate analysis of balance sheet and profit and loss statement.

References

Barman, A.N. & Sengupta, P.P., (2017). DETERMINANTS OF PROFITABILITY IN INDIAN TELECOM INDUSTRY USING FINANCIAL RATIO ANALYSIS. International Journal of Research in Management & Social Science, p.25.

Godwin, N. & Alderman, C., (2012). Financial ACCT2. USA: Cengage Learning.

Jenter, D. & Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of Finance, 70(6), pp.2813-2852.

Jindal, D. & Jain, S. (2017). Effect of Receivables Management on Profitability: A Study of Commercial Vehicle Industry in India. Management, 2(2), pp.246-255.

Leach, R., (2010). Ratios made simple: a beginner's guide to the key financial ratios. Britain: Harriman House Limited.

Lee, A.C., Lee, J.C. & Lee, C.F., (2009). Financial Analysis, Planning and Forecasting: Theory and Application. (2nd ed). Singapore: World Scientific Publishing Company.

Levi, S. & Segal, B. (2015). The Impact of Debt-Equity Reporting Classifications on the Firm's Decision to Issue Hybrid Securities. European Accounting Review, 24(4), pp.801-822.

Sharan, V., (2015). Fundamentals of Financial Management. (3rd ed). New Delhi: Pearson Education India.

Tracy, A., (2012). Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet. RatioAnalysis. Net

Weygandt, J.J., Kimmel, P.D. & Kieso, D.E., (2009). Managerial accounting: tools for business decision making. (5th ed). New Jersey: John Wiley & Sons.