ASS#3 RATIO ANAYIS

    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)

6.45%

2.20%

7.69%

7.95%

: 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)

1.01

1.00

0.95

0.95

: 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)

2.34

2.30

2.55

2.13

: 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)

77.9%

86.5%

82.5%

77.9%

: 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)

56.2%

53.6%

54.8%

56.2%

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 )

0.11

0.04

0.14

0.12

: 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)

 

(0.07)

(0.08)

(0.08)

(0.07)

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)

0.10

0.33

0.12

0.15

: 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)

 

0%

0%

0%

0%

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)

7.8%

3.1%

9.7%

10.1%

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))

 

1.96

2.01

1.88

1.81

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.