sample answer in chapter 6

8/3/2019 Sample Answer in Chapter 6

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Sample answer for Financial Ratio analysis

Profitability Ratio Year 2002 Year 2003

1) ROE 37.1% 28.9%2) ROA 25.6% 23.7%

3) Net profit margin 10.9% 9.2%

4) Gross profit margin 22.1% 22.7%

Comments on profitability ratio:

In terms of comparison between the 2 period year 2002 and year 2003, it can be seen that

There is a decrease of 8.2% in return on owners funds ratio. This means thebusiness has used the resources provided by the owner to generate profit in year

2002 is less efficiency than in year 2003, with 1 dollar invest, the owner just get28.9% return on money instead of 37.1% as in 2002. This movement may be theresult of the contribution of the following reason as follow:

Larger proprietorship figure, the owner increasing investment but notachieving a corresponding increase in sales and profit. In this situationalthough the net profit available to equity share holders has risen slightlyover the period 164.2 in compared with 159.2, but the share capital andreserves of the company have increased considerably (262.5 in comparedwith 171.8). The non- corresponding increase in profit and investmentleads to the reducing in the return to owners equity.

The ROA has decreased slightly in 2003. This is due to that the net profit has notincreased in line with the increase in total assets.

The gross profit margin shows a slight increase in 2003 over the period (22.7% inyear 2003 in compared with 22.1% in year 2002). This may be due to a number ofreasons such as an increase in selling prices and decrease in the cost of sales.However the net profit margin has shown decrease over the period. This meansthat operating expenses are absorbing a greater proportion of sales income in 2003than in the previous year, year 2002. ( $276 in year 2002 which is 12.3% of salesin compared with 369 in year 2003 which is 13.8% of sales)

In terms of looking at the overview of the economy, although there is a slight decrease inowners equity over the year, either 37.1% or 28.9% is a very good return. By thatamount of money if we invest in the bank as the term deposit, we just get 2% interest onthe amount invest according to Vietnamese interest rate for currency as US, or even ifyou invest in Australia, the maximum rate you can get is just 7% per year. Thereforedespite the slight decrease in the return on owners funds ratio, the form of investment in


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business is still more benefit than any alternative forms of investment with similar levelof risk.

Efficiency Ratio Year 2002 Year 2003

Inventory turnover period 57 days 59 days

Average settlement period for debtors 43 days 31 days

creditors 47 days 38 days

Average Assets turnover ratio 2.4 times 2.6 times

Comments on efficiency ratios

In term of comparison between the two period year 2002 and year 2003 it can be seen

that:

The inventory turnover period has shown a slight increase over period, this means in year2002, inventory is being held 2 days longer than in year 2003. 59 days for inventory to beturnover seems not good as funds would be tied up in inventories which can not be usedfor other profitable profit, it may lower the liquidity ability or status/ position of thebusiness.

The average settlement period for both debtors and creditors has reduced. The reductionmay have been the result of deliberate policy decisions for example tighter credit controlfor debtors, paying creditors promptly in order to maintain goodwill or to take advantage

of discount.

There has been an increase in the asset turnover ratio, which means that the sales haveincreased by a greater proportion than the assets of the company.

Liquidity Ratio Year 2002 Year 2003

Current ratio 1.8 1.7

Acid test 0.9 0.7

Cash flow from operation ratio 0.5 0.5

Comments on Liquidity Ratio

The liquidity ratio summary reveals a decrease in both the current ratio and the acid testratio. These changes suggest a worsening liquidity position for the business. If we look atthe ratio of Acid test 0.9 in year 2002, and 0.7 in year 2003 it indicates that the liquidityposition of the business is unsatisfactory enough to cover their liability when it come due,for sure business will experience difficulty in meeting its immediate commitments and incase of abnormal issues arise the business can not be quite manageable.


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Again the situation is the same if we look at cash flow from operation ratio, during theyear this figure does not change but 0.5 means net cash we have got in hand fromoperation activities just equal haft of the liabilities, it is not enough to cover the maturingobligations. This ratio should give some cause of concern

Gearing Ratio Year 2002 Year 2003

Gearing ratio 28.6% 8.6%

Interest cover ratio 10.1 times 39.7 times

Comments on gearing ratios

Look at the figures belong to gearing ratio, it can be seen that both the gearing ratio andinterest cover ratio have improved significantly in year 2003. Gearing ratio which revealsus the financial structure of the business substantially decrease in year 2003 (8.6% in

compare with 28.6% in previous year). The reason which contributes to the greatdecrease of 20% comes from the repayment of $140 M in year 2003.

Again, the interest cover ratio in year 2003 is 39.7 times, it means that profit generatedfrom the business is 39.7 times interest payment for the year. This is mainly due to thefact that a substantial part of the long-term loan (debenture) was repaid during year 2003.This repayment has had effect of reducing the relative contribution of long-term lendertofinancing the company and reducing the amount of interest expense.

To sum up business did perform very well in year 2003 in term of gearing ratio. Itreduces the level of risk for its own business.

Investment Ratio Year 2002 Year 2003s

Dividend per share 6.7 cents 9.0 cents

Dividend payout ratio 25.3% 36.5%

Dividend yield ratio 4.2 % 4.0 %

Earning per share 26.5cents 24.6cents

Operating cash flow per share 26.8 cents 27.7 cents

Price earning ratio 9.4 times 14.2 times

Comments on Investment Ratio

There has been a significant increase in the dividends per share in year 2003 whencompared to the previous year. 9 cents in year 2003 means for every share holding theshareholder receive 9 cents actual cash in hand. In this situation, share price is issued at$0.5 or 50 cents. 9 cents over 50 cents equal 18%, it is considered as good return incompare with the other source of investment.


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Dividend payout ratio measures the proportion earnings that a company pays out toshareholders in the form of dividends. In this situation, it can be seen that the companyhas already increased the proportion of earning distributed to equity shareholder to 36.5%in year 2003, 11.2% higher than previous year. It looks good from shareholder point ofview as they receive more cash return. However the payout ratio for the year ended 31

Dec 2003 is still fairly low. Only about a third of earning available for dividends is beingdistributed.

The dividend yield has changed very little over the period and remains fairly low atapproximate 4%.

Earning per share shows a slight fall in year 2003 when compared with the previous year.

A slight increase occurs in the operating cash flows per share. However, the P/E ratioshows a significant improvement, it reveals that the market is clearly much moreconfident about the future prospects of the business at the end of the year to 31 st Dec

2003.

sample answer in chapter 6

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