Profitability Ratios
2005 Performance
2004 Performance
Change
Return on assets
12.8%
11.4%
1.4%
Return on equity
22.2%
21.7%
0.5%
Net profit margin
6.1%
5.3%
0.8%
Gross profit margin
21.2%
21.0%
0.2%
EPS
215.5%
178.9%
36.6%
Current ratio
118.5%
111.7%
6.8%
Quick ratio
35%
33.2%
1.8%
Receivable turnover
59.3%
73%
-13.3%
Asset turnover
210%
217%
-6%
Computation Formulae:
1. Return on Assets = Net Income/ Total Assets
2. Return on Equity = Net Income/ Shareholder’s Equity
3. Net Profit Margin = Net Income/ Revenues
4. Gross Profit Margin = (Revenues – Cost of Goods Sold)/ Revenues
5. Earnings per Share = (Net Income – Dividends on Preferred Stock)/ Average Outstanding Shares
6. Current Ratio = Current Assets/ Current Liabilities
7. Quick Ratio = (Current Assets – Stocks)/ Current Liabilities
8. Receivable Turnover = Net Credit Sales/ Average Accounts Receivable
9. Asset Turnover = Revenue/ Total Assets
Profitability Ratio
Return on assets or ROA increased by 1.4%. This indicated stronger performance on funded projects. It reflects that managers are more efficient in dedicating the company’s assets to generate income. Return on equity also increased by 0.5%. This showed that the company’s profit result in 2005 exceeded the rise in shareholder investments for the same year. In effect, the usual negative result of increasing the number of shareholders did not apply to the firm as the rise in shareholders that will share the profit is outweighed by additional earnings.
Net profit margin increased by 0.8%. It indicated that for every sales of the company it keeps .008. The small profit margin implies that the company and the industry where it belongs had difficulties in lowering costs or adding value in their activities. High competition and inefficient assets can serve as impediments in obtaining higher profit margin. The performance of gross profit margin sent message of aggravation to the minimal gains of net profit margin having only increased by 0.2%. As shown in the Group Profit and Loss account, cost of sales received almost 80% of company’s sales. As a result, there is only minimal potential for the company to pay its expenses on a pre-paid basis and derive cash savings.
In computing the earnings per share or EPS of the company, there are no available data on dividend for preferred stocks. The share of company’s profit allocated to each common stock increased by 36.6%. This is possible because there are no preferred shares that are issued that make allocation of earnings cheaper. Further, the company did not implement any significant buyback programs and merely used its earnings potential to capture a higher EPS. These illustrate how the firm accessed numerous shareholders and inventors without reducing the wealth of current shareholders. There is no need to provide higher dividend to common shareholders because their capital gains are maintained. The savings can be used to attract more investors and keep as retained earnings that can be utilized in future projects.
Liquidity
Current ratio increased by 6.8%. This shows stronger firm’s ability to meet its current financial liabilities. This gain is triggered by in accounts receivables and stocks and also decline in account payables. The gains arising from stocks can also indicate that the firm had faced stiffer competition and such increased rivalry led to more difficult inventory turnover. This position is supported by a huge decline in cash at bank and in hand despite rise in accounts receivables and decline in account payables. Additional costs can be sourced in carrying expenses and inability to minimize cost in the warehouse. In contrast, as current ratio is higher than 1, the firm has the ability to pay short-term obligations when they come due. However, accessing to alternative financing should be planned to assure that bankruptcy issues are avoided.
Minimal increase in quick ratio showed that the exclusion of stocks in the current assets substantially decreased the ability of the firm to pay its short-term obligations. Stocks have significant contribution to reflect the current assets of the firm which can become risky as stocks are usually more illiquid than other components of current assets. Stocks are hard to present to creditors when they are pursuing payment from the company especially on the part of banks. The company can easily loose credit standing that can adversely affect its operations and source of immediate funds.
Efficiency
Receivable turnover ratio declined by 13.3%. This reflected the inability of the firm to have an efficient credit scheme especially in transactions involving trades. It should be noted that these kind of loan is interest-free that aggravated the position of the firm. This is because the funds that are used to produce and deliver the goods are paid with limited resources or borrowed in banks that are exposed to interest expense. There is inefficiency in extending credit and/ or collection which implicate problems in to whom credit should be extended or to whom collection tasks be assigned. However, if the reduction in collection efficiency is motivated to minimize high inventory levels, the inefficiency merely serve as a solution to the initial problem of inventory slack. The firm may prefer to dispatch inventory on a leaner credit terms than being perish or accumulate additional warehouse-related costs.
Asset turnover is decreased by 6%. This showed that the firm may have excessively acquired additional assets to produce the same outputs which only resulted to inefficiency. To illustrate, the firm bought goodwill in the period 2005. Also, additional land, buildings and equipment are leased in 2005 period triggering increase in asset value. To complete asset changes, the company had invested in the form of portfolio investments to other companies and affiliates. The negative aspect of increased in investments is that it produced hard-to-sell inventories which the firm currently is facing difficulties particularly in solvency issues. The caution is not executed in which cost-savings should be applied if the firm is loosing in differentiation strategy. Otherwise, it will continue to suffer financial insolvency in its future undertakings.
Credit:ivythesis.typepad.com
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