Published On:Friday 2 December 2011
Posted by Muhammad Atif Saeed
Financial Report and Financial Analysis by Atif Saeed
Memorandum
TO: Ms. Laila, Finance Director Annapolis Ltd.
FROM: Mr. XYZ, Assistant of Finance Director Annapolis Ltd
DATE: December 02, 2011
SUBJECT: Financial Performance and Position of F & F Ltd.
You are request to me for a report on November 26, 2011 and to be submitted before December 02, 2011.
I have analyzed the Income Statement and Financial Position of F & F Ltd by using of my own knowledge and expertise in Financial Accounting also discussions with other my group fellows. Our analysis opinion is that the Profit of the F & F Ltd is increasing very rapidly because the Operating Expense of the F & F Ltd is at their lowest level. Decrease in the operating expenses is nullifying the effect of the Inflation.
This becomes clearer when we analyze the financial statements of the company “objective and subjective analysis”. We can increase our profitability by acquiring controlling interest in F&F Ltd.
I am very thankful to you for giving me the opportunity to do this work on this assignment. If you have any queries, please don’t hesitate ask me at any time.
Executive Summary:
The report analyzed the Financial Statements of the F& F Ltd. for last two years and conclusive evidence of the financial position of F & F Ltd and also offers recommendations on acquiring of controlling interest in F & F Ltd.
Company Profile:
F&F Ltd.’s core business is to supply shock and struts of International Brand to Local Car Assemblers. Today in the market having a powerful Competition and in the market a large number of suppliers are available. But the company has achieved lots of milestones in very short period since its incorporation and today it is one of the growing company in the industry and one of the main suppliers of the shocks and struts.
Current Analysis of the Business:
The company’s growth rate is increasing very rapidly because the increase in the profits and company decrease their production cost and operating expenses so that’s why the company gain maximum profit in the industry. Company’s profit is more than the profit of the last year.
Comparative Income Statements and Ratio Analysis:
Ratio Analysis and Comparative Income statement has been made in the next pages of the report which identify the key problem areas of the company and clear the situation of the Company.
Graphical Representation:
In the Graphical Representation section, Graphs made for sales, expenses, ratios and financial position of the company comparative with the previous year's data.
Comments and Recommendation
Last section of the report is the Comments and Recommendation for the CEO of the company, for increase in profit and control the operating expense and the CEO have keen to purchase controlling interest in F&F Ltd.
Current Analysis of the Business:
Company's profit is growing very rapidly and the profit of the company is increases significantly from the last year's profit of the company. The Growth rate of the company is more than the industry average. Why the company's profit is growing, the reasons are stated below.
Inflation:
Due to the inflationary trend with in the market, the Cost of the production is increasing.
Competitive Advantage:
The customers of the F & F Ltd are loyal with the company and also a well known supplier with in the market so the decrease in the Advertising Expenses not affects the sales of the Company and the sales are significantly increasing. The other reason for increase in the sales is the management of the company focus to reduce the operating expense of the company this year.
Competition with in the Industry:
The management having only one option to maintain the profit is to decrease the prices because with in the industry, there is very tough competition and the demand of the goods are very elastic. A very small change in the prices affects the demand greatly.
Effect on EPS and Market Price of Share:
Earning per share has increased due to increased in profitability. As a result the Market Value per share has increased a long way in one year only, which can have a vast effect on company’s financial position in future.
Comparative Income Statements and Ratio Analysis:
| Particulars | 2011 Rs in 000 | 2010 Rs. In 000 | Difference Rs. In 000 | Horizontal Analysis |
| Sales | 3348 | 2989 | 359 | 12.2% |
| Cost of | 2377 | 2092 | 285 | 13.62% |
| Gross Profit | 971 | 897 | 74 | 8.25% |
| Profit After Tax | 402 | 329 | 73 | 22.18% |
| Earning Per Share | 3.65 | 3.29 | 0.36 | 10.94% |
| Market value/share | 12 | 7 | 5 | 71.42% |
Explanation:
From the above Comparative Income statement and Ratio analysis it can be seen that Sales of the company has been increase by 12.2% from the previous year which is also more than the industry's average sales, but on the other side the Cost of the sale of the company is increased by 13.62% which is more than the percentage change in the Sales so that why the increase in the sales are not effect the Gross profit of the company so much and the Gross profit is increase only by 8.24%.
Our further analysis shows that there has been huge decrease in the Operating Cost which mainly effect by the decrease in the advertising cost of the company, so thats the reason, the company earn a huge profit. 22.18% increase in the company's profit in the current year from the preceding year, due to increase in the profit of the company Earning per share of the company also increase by 10.94% and the market price of share increased by 71.43%.
Graphical Representation of the Analysis:
Explanation:
The above graphical representation shows clearly how the Sales of the Company change from the previous year and the cost of good. In the graph you also see, Cost of sales are increase but the company earn a huge profit because on the other hand the operative expenses of the company is also decrease, that’s why the company's profit is increase in the current year from the previous year.
Comparative Financial Position and Ratio Analysis:
| Particulars | 2011 Rs. In 000 | 2010 Rs in 000 | Difference Rs in 000 | Horizontal analysis |
| Issued Capital | 1100 | 1000 | 100 | 10.00% |
| Un-App. Profit | 605 | 324 | 281 | 86.72% |
| Long Term Liability | 845 | 330 | 515 | 156.1% |
| Current Liability | 340 | 606 | (256) | (42.25%) |
| Liability Equity | 2890 | 2260 | 630 | 27.9 |
| | | | | |
| Non Current Assets | 2200 | 1550 | 650 | 42% |
| Current Assets | 690 | 710 | (20) | (2.82%) |
| | | | | |
| Earning Per share | 3.65 | 3.29 | 0.36 | 10.94% |
| Market Value/share | 12 | 7 | 5 | 71.43% |
Ratio Analysis:
Current Ratio Analysis:
| Particular | 2011 | 2010 |
| Current Assets | 690 | 710 |
| Current Liabilities | 340 | 606 |
| Current Ratio | 2.03:1 | 1.17:1 |
Graphical Representation:
Explanation:
The Current Ratio reveals your business's ability to meet its current obligations. It should be supplemented with the other ratios like Quick Asset Ratio, Absolute Liquidity Ratio, Receivable turnover ratio, Inventory Turnover Ratio etc.
Current Assets are used to payout the current obligations if the company fails to pay its current liabilities then company would have to sell its non current assets to pay off its liabilities.
F&F Ltd. Is having high current ratio, showing company has strong liquid assets and has no immediate payment issue. F&F Ltd. Current assets detail shows current assets increasing rapidly. Current liabilities of F&F Ltd. Decrease in current year it means F&F Ltd. Have no liquidity problem.
Capital Gearing Ratio:
| Particulars | 2011 | 2010 |
| Debt ( Non-current liabilities) | 845 | 330 |
| Equity Debt | 2550 | 1654 |
| Debt/Debt Equity Ratio | 33.33% | 19.95% |
Graphical Representation:
Explanation:
Capital Gearing or Leverage normally refers to the proportion or relationship between equity share capital including reserves and surpluses to preference share capital and other fixed interest bearing funds or loans. Gearing ratio also measure the risk of capital structure and comparison among the investment by the Company creditors and the Company owners.
Although gearing from 2010 to 2011 shows an increasing trend it is quite less generally (50 % considered ideal). This is because F&F Ltd. Raises finance in the form of equity and since it is a profitable company. It has a large reserve hence therefore it avoid finance cost.
Dividend Yield:
| Particulars | 2011 | 2010 |
| Dividend Per share | 1.1 | 1 |
| Market value per share | 12 | 7 |
| Dividend Yield | 9.16% | 14.28% |
Graphical Representation:
Explanation:
The Dividend Yields is the return to share holders measured in terms of the dividends paid during the period.
We often describe the company's dividend policy in terms of its dividend per share, its dividend payout ratio, or its dividend yield. In absence of any capital gain the dividend yield is the return on investment for a stock. Dividend yield is a way to measure how much cash flow you are getting for each rupee invested in an equity position.
Other Ratios analysis:
| Ratios | 2011 | 2010 |
| Working capital ratio | 0.12 : 1 | 0.046 : 1 |
| Equity ratio | 0.38 : 1 | 0.44 : 1 |
| Debt ratio | 0.41 : 1 | 0.41 : 1 |
| Solvency ratio | 2.44 : 1 | 2.41 : 1 |
| Debt equity ratio | 1.08 : 1 | 1.07 : 1 |
| Gross profit ratio | 71% | 70% |
| Net profit ratio | 12% | 11% |
| Dividend payout ratio | 0.30 : 1 | 0.30 : 1 |
| Return on owners equity | 38.3% | 31.3% |
| Return on assets | 15.6% | 12.8% |
| Dividend per share | Rs. 1.1 per share | Rs.1 per share |
| Price earning ratio | 3.29 :1 | 2.13 : 1 |
| Earning per share | Rs. 3.65 per share | Rs.3.29 per share |
Company's Strength and Weaknesses:
· A huge increase in the non current assets indicates that the company is expanding their operations and this is also a conclusive evidence of the 12% increase in the sales of the company in the current year.
· Decrease of 266 Million in the current liability i.e. 44% is also indicating the company's strong liquidity position.
· 156% increase in the Long term liability of the company indicates the major long term obligation of the company.
Qualitative Factors:
· The Company is involved in the supply of automobile spare parts so if Annapolis Ltd. acquires the F & F Ltd, then the company reduces its operating and administrative expenses and use efficiently its resources.
· By acquisition of the F & F Ltd the market share and share price of the company can be increase.
Comments and Recommendation:
From the above discussion and analysis we can summarize the discussion with the following points:
· 12.01% Increase in the sales of the Company indicates that the F & F Ltd improve their products quality and also decrease their prices to get the competitor advantage.
· Long term liabilities of F&F Ltd 156% increased, it means company have long investment plan.
· In the current market situation every company has face the liquidity problem but 44% decrease in the F & F Ltd's current liability indicates that the company have no liquidity problem.
· Market Price of the F & F Ltd increased by 71%, it means public are interested to invest in the F & F Ltd and also well reputed company in the industry.
In the light of above points I shall recommend, company should acquire controlling interest in F&F Ltd.
Conclusion:
Though the company growth rate has been more than the average of the industry, the profits have increase from the last year because the cost of production and operating costs has reduced sharply. Keeping in view all the qualitative and quantitative aspects, now a day backward strategy is very important for a company if Annapolis Ltd reduce their cost
Technical Notes:
Earning per share: Net Profit after Tax/No of Equity Shares
Current Ratio: Current Assets/Current Liabilities
Capital Gearing Ratio: Equity Share Capital/Fixed Interest fund
Dividend Yield Ratio: Dividend per share/Market Price per share
Working Capital Ratio: Cost of Sale
Equity Ratio: Shareholders Fund/Total Assets
Debt Ratio: Total Debt/Total Assets
Solvency Ratio: Net Profit after tax+ Depreciation /Liabilities
Debt Equity Ratio: Total Long term Debts/Shareholder's Equity
Gross Profit Ratio: Gross Profit/Net Sales*100
Net Profit Ratio: Net Profit/Net Sales*100
Dividend Payout Ratio: Dividend per Share/Earning per Share
Return on owner equity: Net Profit after Tax/Equity Share Capital*100
Return on Assets: Net Profit after Tax/Total Assets
Price Earning Ratio: Market price per Share/Earning per Share
