Step
1
Ratio
Analysis
As I analyses
the ratios measured for my company “Patties Foods Limited”, I was able to find
out and evaluate my company’s financial performance and different financial
position. Ratio analysis is described as a useful tool for analysing the company’s
business performance. Through ratio analysis, it was easy and clear to
understand information in the financial statements of my company. The ratio
analysis is necessary and important part of the financial anlaysis because it
helps to justify the company’s efficiency and profitability relating to its
management and operations. I can evaluate how well my company has been able to use
its assets and earn profits. Also, it is helpful to analyse the business
performance of a company. Companies can effectively review their work performance
in the past years and can identify their weaknesses and strengths on them. For
understanding of the ratios calculated for my company “Patties Foods Limited”,
I analysed each ratio to decide how well my company achieved their
profitability and efficiency from the year 2011 to the year 2014.
Profitability
Ratios
v
Net
Profit Margin (Net profit after tax / Sales)
| 2014 |
2013 |
2012 |
2011 |
| |
|
|
|
| 6.37% |
2.21% |
8.12% |
8.41% |
:
Net profit ratio is calculated by dividing net income (after tax) by net sales
and it shows the relationship between net profit after tax and net sales. It is
about the number of dollars of profit after tax that a company generates every
dollar of sales. Through the net profit margin calculated of my company, I
discovered that my company has earned 8.41 cents for $1.00 in 2011. After that,
it has slightly reduced to 8.12 cents in the year 2012. Then the earnings have
significantly decreased in 2013, it is 5.91% less than 2012. My company
generated 2.21 cents of profit in the year 2013. And then the earnings have
increased to 6.37 cents and it means that my company quite recovered their
profit. However, the net profit margin is still remained lower than the first
year, 2011. As a result, it illustrates that my company is generating and
recovering the profit throughout the years but we still need to improve the net
profit margin in the future.
v
Return
on Assets (Net Profit after tax/ total assets)
:
Return on assets is calculated by dividing net profit after tax by its total
assets and it measures how a company can effectively manage its assets to
generate their profits during a period. The ratio also helps to understand how
well a company can utilise its investments in assets into their profits. The
ratio of my company “Patties Foods Limited” shows that the rate of 7.95% for
return on total assets was the highest in 2011. After then, the percentage was
slightly reduced to 7.69% in 2012. However, there was the lowest percentage in
2013. It was 5.49% less than 2012.Then the percentage was increased a lot in
2014. My company has recovered a similar rate of return on assets in 2014 but
it still keeps decreasing compared to the first year. As a result, this ratio
illustrates that my company has not been much growth for the past 4 years.
Efficiency
Ratios (Asset Management Ratios)
v
Total
asset turnover ratio (Sales / Total assets)
: Total asset
turnover ratio is calculated by dividing sales revenue by total assets and it
shows the ability of a company to utilise its assets to produce sales
efficiently. Also, it measures how well the company generates sales for every
dollar worth of assets and considers all assets (current and fixed assets). In
relation to Patties Foods Limited this ratio demonstrates that my company has
generated the same $0.95 for every dollar of assets in 2011 and 2012. After
that, it was increased to $1.00 in 2013. It is $0.05 higher than the past two
years. In the year 2014, my company has generated $1.01 worth of sales and it
was the highest value for the past 4 years. As a result, Patties Foods Limited
has been doing business effectively.
Liquidity
Ratios
v
Current
Ratio ( Current assets / Current liabilities)
: Current
ratio is calculated by dividing current asset by current liabilities and it
measures a company’s ability to pay a short-term debt to achieve liquidity within
financial year. If a current ratio below 1, it shows liquidity problems because
it means total current liabilities exceed total current assets. The higher value
of the ratio means the better financial position of the company. Through
current ratio analysis, we can identify our company’s operating efficiency. Over
the four years, in terms of Patties Foods Limited this ratio illustrates that it
has slightly increased from 2.13 in 2011 to 2.34 in 2014. Therefore, my company
is able to cover the cost of their short-term obligations successfully.
Financial
Structure Ratios
v
Debt/Equity
Ratio (Assets= Liabilities +Equity)
: Debt to
equity ratio is calculated by dividing total liabilities by shareholders’ equity
and it is able to measure the riskiness to which assets a company is financed
from the debts and shareholders’ equity. If the value of debt to equity ratio
is high, it is unfavorable because it means that the company relies more on
lenders. It leads to more risky and unstable business. In relation to Patties Foods Limited this
ratio shows that there has been increased from 77.9% in 2011 to 86.5% 2013. Especially,
the ratio was the highest in the year 2013. After then the rate was decreased
to 77.9% in 2014. It is 8.6% less than 2013. Overall, my company has not been
able to produce enough cash to pay for debt obligations effectively.
v
Equity
Ratio (Equity / Total Assets)
Equity ratio
is calculated by dividing shareholders’ equity by total assets and it measures
how much of a company’s assets are financed by their investors. Also, it can identify
about the company’s overall financial strength. A lower value of equity ratio has
higher riskiness to the creditors. Patties Foods Limited has maintained steady
and similar level of equity ratio from 2011 to 2014. The rate of 56.2% was the
highest both in 2011 and 2014. As a result, Patties Foods Limited owned 56
cents for every $1.00 are financed by equity.
Market
Ratios
v
Earnings Per Share (Net profit after tax / Number of
issued ordinary shares )
: Earnings
per share (EPS) measure a company’s profitability and management performance
and it can be used to compare with similar industry. Higher value of earnings
per share means that how much money the company is generating for their
shareholders. The ratio was increased from 2011 to 2012. But then the rate was
declined a lot to 0.04 cents and it was the lowest ratio in 2013. After that,
the earnings per share were increased to 0.11 cents. However, it is still a
lower ratio compared to the first year and my company should generate more
profits to distribute to their shareholders.
v
Dividend Per Share(Dividend / Number of issued ordinary
shares)
Dividend per
share (DPS) shows how much the shareholders in a company can actually get paid
by dividends. Having an increasing dividend per share rate means the company’s
management can be sustainable growth because dividends are sort of profit
distribution to their shareholders. Patties Foods Limited has generated some
amount of dividends paid over the past years. The rate was increased from 2011
to 2013 but then it was decreased to 0.07 cents in 2014. The amount is still
same compare to the first year. Patties foods Limited should make more efforts
to have consistent growth of DPS.
v
Price
Earnings Ratio (Market Price per share / Earnings per Share)
: Price
earnings ratio measures how much investor is willing to pay for a company and
it is based on current market price because if earnings go up, price earnings
will go down. If a company has higher price earnings ratio, it is able to
expect the company’s positive future performance and positive investment. In
relation to Patties Foods Limited the ratio shows that there was slight
decrease from 0.15 in 2011 to 0.12 in 2012. After then the ratio was the highest
in 2013. It is 0.21 higher than 2012. However, the ratio was declined a lot to
0.10 in 2014 and it was the lowest over the past four years. As a result,
Patties foods Limited may not be able to expect positive investment because the
ratio is still low compared to the first year.
Ratios
Based on Reformulated Financial Statements
v
Return On Equity (Comprehensive income / Shareholder's
equity)
| 11.48% |
4.11% |
14.03% |
14.13% |
Return on
equity (ROE) measures how well a company has used the investment dollars to
make profits. Having a high return on equity means the company is more
successful to generate income on new investment. Patties Foods Limited has
maintained a similar level of return on equity from the year 2011 to 2012. After
that the ratio was a lot decreased to 4.11% in 2013. In the year 2014, my
company has recovered the rate to 11.48%.It is 7.37% higher than 2013. However,
the value is still lower compared to the first year.
v
Return on Net Operating Assets (Operating income after tax (OI) / Net operating assets
(NOA))
| 15.24% |
6.27% |
18.27% |
18.20% |
Return on net
operating assets (RNOA) measures how well a company utilises the asset to
generate profits and it shows the company’s ability to generate profit from
every dollar of equity. Through RNOA, we can evaluate the company’s financial
performance effectively. Patties Foods Limited has maintained a steady level of
RNOA from 2011 to 2012. After then the percentage was significantly decreased
to 6.27% in the year 2013. Then the rate was increased to 15.24%. It is 8.97%
greater than 2013 and means that my company did good management performance
compared to the previous year. However, the percentage in 2014 is still lower
than the first year. Therefore, Patties Foods Limited still needs to have more
increase in the future.
v
Net Borrowing Cost (Net financial expenses after tax
/ Net financial obligations)
Net borrowing
cost (NBC) measures the relationship between the net financial expenses after
tax and the net financial obligations. Also it shows that a company has paid
financial borrowings. Patties Food Limited has no NBC ratio because my company
does not have any financial borrowings. It means that Patties Foods Limited has
been doing good financial performance over the past four years.
v
Profit Margin (Operating
income after tax(OI) / Sales)
Profit margin
(PM) ratio measures a company’s ability to generate earnings and it is
expressed as a percentage of sales. Through the PM ratio, investors can
effectively analyse the company’s profitability before they invest in it. Patties
Foods Limited had a net income of $0.10 for every dollar of sales in the year
2011. After that the percentage was significantly declined to 3.1% from 2012 to
2013. There was the lowest value in 2013. It was 6.6% less than the previous
year. In 2014, the PM ratio was slightly recorded to 7.8% but Patties Foods
Limited has not earned a lot of profit compared to the first year.
v
ATO Asset Turnover (Sales / Net operating assets (NOA))
Asset
turnover is calculated by dividing net sales by total operating assets. Having
a higher value of turnover ratio means a company has used the assets
effectively. Patties Foods Limited has used their assets efficiently over the
past four years because the ratio was increased steadily from the year 2011 to
2013. In 2014, the value was slightly decreased to 1.96 but it is still higher
than the value in the first year.
Economic
Profit Analysis
The formula: Economic
Profit = (RNOA – cost of capital) x NOA
Patties Foods Limited
|
2014
|
2013
|
2012
|
2011
|
RNOA:
15.24%
Cost
of capital: 10%
NOA:
|
RNOA:
6.27%
Cost
of capital: 10%
|
RNOA:
18.27%
Cost
of capital: 10%
|
RNOA:
18.20%
Cost
of capital: 10%
|
Economic
profit: 6,612.5
|
Economic
profit:
-4,523.7
|
Economic
profit:
10,370.8
|
Economic
profit:
9,815.5
|
With the above
formula, I have calculated the economic profit for Patties Foods Limited over
the past four years and have attached it in the spreadsheet. I think that RNOA,
Cost of capital and NOA are the key drivers in the economic profit analysis. If
the rate of RNOA is higher than the cost of capital, a company will generate a
positive economic profit during financial period.
In order to
generate a positive economic profit, the total rate of RNOA should exceed the
cost of capital. Economic profit is unique combination of an income statement
measure, a related balance sheet measure and an external capital markets
measure. Also it measures how well the company has generated profit and has
created value about their financial strategy.
Throughout
calculating the economic profit, I figured out those Patties foods Limited has
generated positive economic profits of 9,815.5 in 2011 and 10,370.8 in 2012. After
then my company generated a negative economic profit of 4,523.7 in the year
2013. Then the rate of economic profit for Patties Foods Limited was recovered
to 6,612.5 in 2014. It a lot higher than 2013 but, it is still lower compared
to the first year.
These changes
in economic profits can lead to a result of the tow contributors to the return
on net operating assets ratio of the profit margin and asset turnover. In 2012, the economic profit was the lowest
and it was negative economic profits of 4,523.7. Overall, the key drivers are
increasing profit margin and raising return on operating assets in order to
generate a positive profit for Patties Foods Limited.
