Financial management, Exercises of Financial Management

Download Financial management and more Exercises Financial Management in PDF only on Docsity! 0 Financial Management Major Group Assignment MBA-Nonbusiness Student Submitted to: Dr. Murtaza Masoud Niazi Submitted by: 1. Edrees Omed 912-1709033 2. Nasrullah Sajed 912-1709031 3. Mohammad Abid 912-1709025 4. Shamsurahman Sediqi 912-1709027 1 Table of Contents Executive Summary ................................................................................................................... 2 Introduction to the Assignment:................................................................................................. 3 Corporation’s Background ......................................................................................................... 4 Methodology .............................................................................................................................. 5 Analysis...................................................................................................................................... 6 Liquidity Ratios ...................................................................................................................... 6 1. Current Ratio ............................................................................................................... 6 2. Acid Test Ration (Quick Ration) ................................................................................ 6 Profitability Rations ............................................................................................................... 7 1. Return on Asset Ration ............................................................................................... 7 2. Asset Turnover Ratio .................................................................................................. 7 3. Return on Sales............................................................................................................ 7 4. Asset to Equity ............................................................................................................ 8 5. Return on Equity ......................................................................................................... 8 Efficiency Ratios .................................................................................................................... 9 1. Accounts Receivable Turnover Ratio ......................................................................... 9 2. Inventory Turnover Ratio ............................................................................................ 9 Leverage Ratios .................................................................................................................... 10 1. Debt Ratio ................................................................................................................. 10 2. Debt to Equity Ratio .................................................................................................. 10 Comparative Interpretations..................................................................................................... 11 1. Liquidity Ratio .............................................................................................................. 11 2. Profitability Ratios ........................................................................................................ 12 3. Efficiency Ratios ........................................................................................................... 14 4. Leverage Ratios ............................................................................................................ 15 Conclusion ............................................................................................................................... 16 Recommendations .................................................................................................................... 17 References: ............................................................................................................................... 18 Annexes (Financial Statement/Excel Spreadsheet) ................................................................. 19 4 Corporation’s Background Textile industry is the largest industry in Pakistan that make 8.5% of the GDP which make Pakistan the 8th largest exporter of textile in Asia. It makes 57% of export revenue, but in recent years the export in this industry has significantly declined. Al-Qadir Textile Mills Limited Company, with registered office located in Chakwal, Pakistan, is primarily engaged in the spinning and processing of textile fibers. It is also involved in the weaving, twisting and knitting and transforming basic cotton fibers (natural or synthetic) into yarns or fabrics. These yarns or fabrics are further manufactured into usable items, such as apparel, sheets towels, and textile bags for individual or industrial consumption. It provides 100% cotton yarn that is used for weaving and knitting of textile materials. Its cotton carded yarn is available in various pellets and box sizes. The company distributes its products in the domestic and overseas markets. Its products include bedclothes, mulberry wood-wool slab, pure silk washcloth, raw silk, satin, silk cotton quilt and silk garment. This company like many other companies in this industry had a considerable decline in sales and revenue generation. Al-Qadir Textile Mills Limited Company was incorporated in the year 1986 and is listed on Karachi and Lahore Stock exchanges in the year 1991. 5 Methodology Financial analysis is about defining weakness and strengths of business. Financial methodology in this paper is both exploratory and quantitative. It is exploratory because there is no norm or standard to compare quality. Furthermore, it is quantitative because analysis and conclusions are driven from financial data compiled, summarized and processed from income statement and balance sheet. Processed data brought up comparative financial ratios, which will be used in the analysis and comparative interpretation sections. Financial analysis can be performed by applying several methods or techniques, but financial ratio analysis is the most popular and widely used method for analysis. This method divides accounting numbers to create a meaningful relation among individual items or group numbers of financial statement and balance sheet, it points out main indicators, like, liquidity, profitability, efficiency, and leverage of business. Financial ratios make income statement and balance sheet easier to understand and makes the numbers comparable to other companies operating in the same sector. 6 Analysis There are four main categories of financial ratios used in this assignment, which will be described and analyzed one by one. Liquidity Ratios Liquidity Ratio gauges company’s ability to pay for its expenses. Current ratio and Quick Ratio are the main liquidity ratios. 1. Current Ratio Current ratio reflects current financial strengths of a company to cover its current liabilities with its current assets. Current Assets = 251,257.00 = 1.55 Current Liabilities 161,893.00 Current liquidity ratio of Al-Qadir Textile Company is $ 1.55 in 2012 which means that Al- Qadir has $ 1.55 current assets compared to $ 1 of current payable account. So Al-Qadir has 1.57 times more current assets than its current liabilities. 2. Acid Test Ration (Quick Ration) The quick ratio is also called the “acid test” ratio. That’s because the quick ratio looks only at most liquid assets, which include cash, stocks and bonds, accounts receivable, and compares them to current liabilities. Cash - Inventory = 251257-146972 = 0.64 Current Liabilities 161893 Quick liquidity ratio of Al-Qadir Textile Company is $ 0.64 in 2012. This means that Al-Qadir has $ 0.64 current quick asset compared to $ 1 of current liabilities. Low Quick Ratio or a Quick Ratio bellow 1 is a bad sign for company and investors, it shows that company is not making enough profit to compensate its expenses and larger portion of inventory is stocked and cannot be exchanged into cash quickly. In Al-Qadir Textile Company, there is large difference between 1.55 of current ratio and 0.64 quick ratio. This indicates that there is an inventory problem and Al-Qadir Textile Company is not able to pay its current liabilities unless it sells its long-term assets. Long-term assets are those assets that generate revenue and are vital to company’s survival. On the other hand higher liquidity ratios are good signs for supplier of raw material and investors in general. They can be sure that the company is able to pay for its expenses. Therefore, Al-Qadir is currently at a bad position and cannot pay its short-term loans that it get, in the form of raw material and services, unless it sells long-term assets. 9 Efficiency Ratios Efficiency ratios are also called as ACTIVITY RATIOS they measure how quickly a company can collect cash, change inventory into cash. 1. Accounts Receivable Turnover Ratio It measures how quickly a firm can turn its account receivable into cash within a specific period. It shows the efficiency of the company to collect its credit sales. The faster it collects its receivables, the more it is liquid. Sales = 1453021 = 46.40 Account receivables 31314 Al-Qadir Textile Company collects its credit sales 46.40 time a year. The average collection period is 365/46.40 = 7.9 days. It means that company is able to collect its receivables every 8 days. It indicates high quality of credit sales and receivables. Higher turnover ratio of Al-Qadir Textile Company proves high quality credit sales or low amount of credit sales which helps the company to pay its quick loans. 2. Inventory Turnover Ratio This ratio shows how efficient a company is managing its inventory and is determined by comparing Cost of Goods Sold to Inventory. It measure how many times inventory is turned to sales within a given period. Inventory turnover Ratio is a good measure to asses Company’s ability to control its merchandise. Higher ratio shows that company is not overspending it resources by storing inventory. This ratio also show liquidity measure of the product. Creditors particularly study this ratio before lending loans or supplying raw materials on credit. Al-Qadir Textile Company in 2012. Cost of Goods sold = 1360656 = 9.26 Average inventory 146972 The average inventory turnover ratio of 9.26 means that Al-Qadir has been able to turn its inventory to sales 9.26 times a year. The average number of days that inventory remains in the stock is 365/9.26= 39.4 40 days. It means that firm was able to turn all of its inventory into sales within 40 days. We cannot conclude whether it is performing well or bad unless we compare Al-Qadir with other firms operating in this industry or overall industry. Efficiency ratio are mostly used by managing board to improve company, investors, creditors who are interested at the profitability of the business. Efficiency ratio go hand in hand with profitability ratio. Higher turnover ratios mean that firm is able to increase profitability by increasing sales even if they charge small profit margin. 10 Leverage Ratios Leverage ratios measure the value of equity by analyzing debt to asset or stakeholders’ equity. In other words it measures the firm overall debt load and by comparing it to total assets or owner’s equity. 1. Debt Ratio This ratio measures total liabilities compared to its total assets. I measures company’s ability to pay off its liabilities with its assets. It’s sometime called as Capital structure. In other words it shows what portion of financing is provided through debt and what portion is provided through owners’ equity. Higher levels of liabilities compared with assets are considered highly leveraged and more risky for lenders. Al-Qadir Textile Company’s Debt Ratio in 2012. Total liabilities = 161893+86452 = 0.35 Total assets 463678+251257 A 0.5 debt ratio or less is considered to be less risky. In Al-Qadir Textile Company’s 0.35 means that 35% is debt financing and 65% is equity financing. It is also called capital structure and can be written 35:65 too. 2. Debt to Equity Ratio This ratio compares a company’s total debt to its total equity. In other words how much is debt for each dollar of equity. Total liabilities = 161893+86452 = 0.53 Stakeholders’ equity 466590 Al-Qadir Textile Company’s Debt to Equity ratio is 0.53 in 2012. This means that for one dollar that they generate through equity financing they generate 0.53 dollars through debt as well. Leverage ratios measure the financing balance of investment in a business. When majority of assets belong to shareholders, the company is said to be less leveraged. The proportion of debt financing of Al-Qadir Textile Company is 35% and majority of assets belong to shareholders. Therefore, we can say that this firm is less leveraged and capital structure of the firm is not risky. This degree also depends on the nature of business and it should be compared with overall industry average and other firms to draw a conclusion. 11 Comparative Interpretations In this section we comparatively interpret Al-Qadir Textile Company’s financial ratio data internally in the years 2009 to 2012 and externally with overall textile industry average in these years. 1. Liquidity Ratio Tab.1 Current Ratio Year Company Industry 2009 1.00 0.86 2010 1.57 0.93 2011 1.45 1.04 2012 1.55 1.04 As presented in Tab.1, current asset ratio of the company has almost remained consistent but it had an overall good advantage over textile industry average. This shows that Al-Qadir Textile Company is in a better condition to cover its liabilities than industry average. Tab.2 As presented in Table.2, Al-Qadir Textile Company’s quick ratio are steadily declining while that of industry average are steadily increasing. This issue has been discussed in analysis section. The wide gap between current ratio and quick ratio of Al-Qadir Textile Company indicate an inventory problem, which is not liquid and each year larger portion of inventory is stored in stocks. Therefore, Al-Qadir Textile Company will not able to pay its short-term loans, unless they sell their long-term assets. For raw material supplier and creditors this is a bad sign. Summing up all points in terms of liquidity, even Al-Qadir Textile Company had a better position in current ratio than industry, but quick ratio shows that there is an increasing inventory problem in Al-Qadir Textile Company. Quick Ratio Year Company Industry 2009 0.17 0.42 2010 1.09 0.47 2011 0.91 0.54 2012 0.64 0.64 14 3. Efficiency Ratios Tab.8 Accounts Receivable Turnover Ratio Year Company Industry 2009 228.52 7.60 2010 41.68 6.31 2011 94.47 8.83 2012 46.4 7.62 Table.8, comparatively presents data on A/R turnover rate for Al-Qadir Textile Company and textile industry average. This data show that Al-Qadir Textile Company is far more efficient in collecting their credit sales than industry average. This means that Al-Qadir Textile Company’s customer have better quality in terms of paying their debts. Tab.9 Inventory Turnover Ratio Year Company Industry 2009 4.32 3.43 2010 22.55 3.82 2011 21.40 4.43 2012 9.26 4.58 This table also shows that Al-Qadir Textile Company is far more efficient in management of their sales and inventory. Inventory turnover rate has remained almost steady in textile industry, whereas, Al-Qadir Textile Company had a significant increase in 2011 and 2012. Inventory turnover rate is two times higher in Al-Qadir Textile Company than average textile industry. To sum up, we can say that management of Al-Qadir Textile Company were more efficient at handling their resources. This is a good sign for investors and creditors of textile industry. These ratios also show that Al-Qadir Textile Company’s inventory are more liquid than other companies operating in textile sector. 15 4. Leverage Ratios Tab.10 Debt Ratio Year Company Industry 2009 0.47 0.69 2010 0.32 0.44 2011 0.32 0.62 2012 0.35 0.61 Tab.10, presents information to compare portion of financing provided through debt and equity for Al-Qadir Textile Company and average industry. Overall capital structure of Al-Qadir Textile Company did not change over years but this index decreased for industry average. In 2012 35% of financing for Al-Qadir Textile Company was provided through debt and 65% of financing was provided through equity. High percentages of this ratio indicate that the business is highly leveraged and risky for the lenders. In 2012 capital structure for Al-Qadir Textile Company and industry average was both 35:65. Tab.11 Debt to Equity Ratio Year Company Industry 2009 0.88 2.25 2010 0.47 1.17 2011 0.47 1.61 2012 0.53 1.55 As tab.11, presents debt to equity ratio is considerably better in Al-Qadir Textile Company than industry average. This latterly mean that for each dollar of invest that Al-Qadir Textile Company receives through equity financing, it generate 0.47 dollars of debt financing. But in industry average it generates 1.61 dollars of debt financing. Investing in Al-Qadir Textile Company is less risky and it pays less amount of their income in the form interest for bondholders. Leverage ratios measure the financing balance of investment in a business. When majority of assets belong to shareholders, the company is said to be less leveraged. The proportion of debt financing of Al-Qadir Textile Company is 35% and majority of assets belong to shareholders. Therefore, we can say that this firm is less leveraged and capital structure of the firm is not risky. 16 Conclusion Before driving a concrete conclusion it must be noted that Financial Analysis is a continuous process and are applied to evaluate past performance, current financial position, and predict future performances. From 2009 to 2012 textile industry including Al-Qadir Textile Company had a major decrease in liquidity position, and profitability rates. Profit margin of Al-Qadir Textile Company decreased from 5% in 2010 to 1% in 2010 and it decreased from 6% to 1% in textile average industry. These data show that a large economic change has caused this industry to make less profit than previous years. Liquidity ratios show that both industry and Al-Qadir Textile Company have inventory problem. But comparatively Al-Qadir Textile Company is performing better than industry average. Moreover, Al-Qadir Textile Company outperformed industry average in terms of effective utilization of its resources. Inventory turnover ratio and account receivable turnover ratio of Al-Qadir Textile Company is two to five times more than industry average. After conducting a comprehensive financial ratio analysis, we can conclude that textile industry overall suffered very much, average margin profit reached to 1%. But Al-Qadir Textile Company had comparatively better financial position than textile industry average. 19 Annexes (Financial Statement/Excel Spreadsheet) Current Assets 197,867.00 145,642.00 189,644.00 251,257.00 Current Liabilities 198,358.00 93,015.00 130,645.00 161,893.00 Current Assets - Inventory 197867-163248 145642-44284 189644-70241 251257-146972 Current Liabilities 198,258.00 93,015.00 130,645.00 161,893.00 Net income 10,733.00 53,325.00 22956 14655 Total assets 380742+197867 497617+145642 491152+189644 463678+251257 Sales 761,897.00 1,106,614.00 1608282 1453021 Total assets 380742+197867 497617+145642 491152+189644 463678+251257 Net income 10,733.00 53,325.00 22,956.00 14,655.00 Sales 761,897.00 1,106,614.00 1,608,282.00 1,453,021.00 Total assets 380742+197867 497617+145642 491152+189644 463678+251257 Stakeholder's equity 307342 436203 461887 466590 Net income 10,733.00 53,325.00 22,956.00 14,655.00 Stakeholder's equity 307342 436,203.00 461,887.00 466,590.00 Sales 761,897.00 1,106,614.00 1,608,282.00 1,453,021.00 Accounts receivable 3,334.00 26,552.00 17,024.00 31,314.00 Cost of Goods Sold 705,901.00 998,647.00 1,501,531.00 1,360,656.00 Average Inventory 163,248.00 44,284.00 70,241.00 146,972.00 Total liabilities 72909+198358 93015+114041 130645+88264 161893+86452 Total assets 380742+197867 497617+145642 491152+189644 463678+251257 Total liabilities 72909+198358 93015+114041 130645+88264 161893+86452 Stakeholder's equity 307342 436,203.00 461,887.00 466,590.00 Return on sales EFFICIENCY RATIOS: 4.32 Acoounts Receivable Turn over rate 41.70 94.50 46.4 Inventory turnover Assets-to-equity 1.47 1.47 1.53 Return to equity 1.32 0.01 1.88 0.03 228.52 0.53 22.55 21.40 9.26 Debt Ratio 0.32 0.32 0.350.47 0.88 Debt to Equity ratio 0.47 0.47 LEVERAGE RATIOS: 0.12 0.05 0.03 1.72 2.36 2.03 0.05 0.01 0.01 Return on Assets 0.08 0.03 0.02 Asset turnover 0.02 PROFITABILITY RATIOS: Current ratio 1.57 1.45 1.55 Quick ratio 1.09 0.91 0.64 1.00 0.17 Al-Qadir Fibers Ltd Textile Company Ratio Analysis Spreadsheet 2010 2011 2012Years LIQUIDITY RATIOS: 2009 20 Current Assets 220,764,916.00 225,191,650.00 293,041,006.00 284,386,811.00 Current Liabilities 257,359,194.00 243,223,714.00 280,463,429.00 273,438,733.00 Current Assets - Inventory 107,804,055.00 113,616,411.00 152,384,669.00 154,781,671.00 Current Liabilities 257,359,194.00 243,223,714.00 280,463,429.00 273,438,733.00 Net income -4,345,104.00 29,435,383.00 34,823,895.00 6,080,888.00 Total assets 567,798,949.00 586,725,680.00 638,696,712.00 661,541,860.00 Sales 443,804,227.00 506,447,318.00 713,308,283.00 658,029,617.00 Total assets 567,798,949.00 586,725,680.00 638,696,712.00 661,541,860.00 Net income -4,345,104.00 29,435,383.00 34,823,895.00 6,080,888.00 Sales 443,804,227.00 506,447,318.00 713,308,283.00 658,029,617.00 Total assets 567,798,949.00 586,725,680.00 638,696,712.00 661,541,860.00 Stakeholder's equity 174,897,422.00 218,713,312.00 244,924,968.00 259,227,209.00 Net income -4,345,104.00 29,435,383.00 34,823,895.00 6,080,888.00 Stakeholder's equity 174,897,422.00 218,713,312.00 244,924,968.00 259,227,209.00 Sales 443,804,227.00 506,447,318.00 713,308,283.00 658,029,617.00 Accounts receivable 58,409,833.00 60,276,973.00 80,823,662.00 86,404,762.00 Cost of Goods Sold 387,564,218.00 425,930,509.00 623,050,164.00 593,094,653.00 Average Inventory 112,960,861.00 111,575,239.00 140,656,331.00 129,605,140.00 Total liabilities 392,901,530.00 255,712,367.00 393,771,742.00 402,314,650.00 Total assets 567,798,949.00 586,725,680.00 638,696,712.00 661,541,860.00 Total liabilities 392,901,530.00 255,712,367.00 393,771,742.00 402,314,650.00 Stakeholder's equity 174,897,422.00 218,713,312.00 244,924,968.00 259,227,209.00 2.25 1.17 1.61 1.55 Debt Ratio 0.69 0.44 0.62 0.61 Debt to Equity ratio 3.43 3.82 4.43 4.58 LEVERAGE RATIOS: Inventory turnover -0.02 0.13 0.14 0.02 EFFICIENCY RATIOS: Acoounts Receivable Turn over rate 7.60 8.40 8.83 7.62 Return to equity 0.78 0.86 1.12 0.99 Return on sales -0.01 0.06 0.05 0.01 Assets-to-equity 3.25 2.68 2.61 2.55 Asset turnover Quick ratio 0.42 0.47 0.54 0.64 PROFITABILITY RATIOS: Return on Assets -7.51 0.05 0.05 0.01 LIQUIDITY RATIOS: Current ratio 0.86 0.93 1.04 1.04 Textile Industry Ratios Analysis Spreadsheet Years 2009 2010 2011 2012 Company Ratios Chart Overview i Claes art i i acter) Toa Dae Cert tay Certo pera Center erect 50.0 Poem bem else bio) Industry Ratios Chart Overview Nos Pete tees a ee Return to equity coceeetTng Taree aClals Return on As: Quick rat Cora cli (10.00) (8.00) (6.00) (4.00) (2.00) 2.00 4.00 2012 2011 =2010 2009 21 100.00