Facts:
· First Investments Inc. owned stock of Basic Industries (BI), a diversified multinational corporation with major shares in various electrical related markets
· The BI annual report of 1994 shows a decline in the return on owners’ equity (ROE)
· Fred Aldrich, a trainee in First Investment, was asked to conduct a financial analysis on BI
· Three years financial statements (1994, 1993 and 1985) and reported 10 year financial highlights (1985 to 1994) were available for the analysis assignment
· The focus was on the 1993-1994 period and comparison of the quality of the returns on equity of 1985 and 1994, along with the other key financial ratios
· The analysis should not focus on the financial information
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This indicates a high proportion of company’s funds are through equity.
The biggest difference is in long-term debt to equity ratio, which almost doubled from 0.17(in 1985) to 0.27(in 1993) and increased to 0.32(in 1994).
Times Interest earned 5.56 (in 1994) is almost ⅕th of its counterpart 25.19 (in 1985), a dramatic decrease. The interest expense in 1985 was only $27.4M compared to $180.1M in 1994.
When the financial leverage is increased, the company uses more debt financing instead of equity financing which initially leads to a higher return on equity. However, an increase in debt will only increase return on equity if the return on assets is higher than the interest rate.
Liquidity Ratios
Current Ratio is 1.34 in 1994, 1.28 in 1993 and 1.81 in 1985. The major decrease in assets shows that marketable securities turned into long-term investments.
The Quick Ratio and Working Capital Ratio have decreased from 1985. This clearly tells us that the net current liabilities of the company have increased.
Profitability Ratios - Operating Performance
Net Profit Margin has reduced from 5.05% in 1993 to 4.53% in 1994 (a net decrease of 0.52% ). The main culprit in the decrease of profit margin seems to be the rising interest expense shown by the interest expense to revenue ratio rising from 0.44% to 1.34%.
The proportionate increase in Sales (15.87%) is more than Net Income increase (3.78%).
Relatively less increase
First of which, is the current ratio. It has been rapidly declining since 2000. To me this indicates that there is a liquidity issue. Each year their trade debt increase exceeds the increase of net income for the company. As a result, the working capital has taken a nosedive from $58,650 in 2002 to only $5,466 in 2003.
Increase in current liabilities Substantial increase in current liabilities weakened the company’s liquidity position. Its current liabilities were US$2,063.94 million at the end of FY2010, a 48.09% increase compared to the previous year. However, its current assets recorded a marginal increase of 25.07% - from US$1,770.02 million at the end of FY2009 to US$2,213.72 million at the end of FY2010. Following this, the company’s current ratio declined from 1.27 at the end of the FY2009 to 1.07 at the end of FY2010. A lower current ratio indicates that the company is in a weak financial position, and it may find it difficult to meet its day-to-day obligations.
Overall regards to liquidity ratios, the higher the number the better; however, a too high also indicates that the firms were not using their resources to their full potential. Current ratio of 1.0 or greater shows that a company can pay its current liabilities with its current assets. JWN’s ratio increased from 2.06 in 2007 to 2.57 in 2010, and slightly decreased to 2.16 in 2011. JWN’s cash ratio increased significantly from 22% in 2007 to 80% in 2010. JWN has a cash ratio of 73% in 2011, which is useful to creditors when deciding how much debt they would be willing to extend to JWN. In addition, JWN also has moderate CFO ratio of 46%, indicating the companies’ ability to pay off their short term liabilities with their operating cash
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The Net profit margin increased in 2001 and 2002 but declined sharply in 2003 and even further in 2004.
Profitability ratios decreasing from 2005 to 2006 although the sales has increased substantially and the net income as well but not in the same percentage of increase due to the high reliance on debt as the interest expense increased as mentioned before.
Change in revenue criteria increased both sales and cost of sales by $ 28 Million. The profit margin was decreased from 1.55% to
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Clearly, Net profit margin is decreased in 1994. In 1992 it was the highest then it is showing downward trend. It is the only cause which is lowering Return over Equity (ROE).
Landry’s Debt to Asset ratio also increased from year 2002 to 2003. In 2002 Landry had a debt to asset ratio of 0.39. In 2003 Landry’s debt to asset ratio increased to 0.45. While both numbers are acceptable and considerably low, the increase from 2002 to 2003 could influence potential investors to not invest in Landry’s stock. This increase also suggests that Landry’s debt also increased from 2002 to 2003. Overall, while there was a slight increase from 2002 to 2003 Landry’s still had a good debt to asset ratio. We think that a contributing factor to the debt
Abstract : Analysis of financial statement of a company is an important because it is useful to obtain Information
The financial performance of the company over the years six t thirteen is shown in table no 7. The data includes Revenue generated over the years, Earning per share, Return on Investment and Stock Prices. Chart 5 shows that there has been a decline in the revenues generated. Charts 6 to 8 all show a decline in Earnings per Share, Return on Equity and Stock Prices suggesting a poor financial performance by the company.