Evaluate Financial Statements Using Financial Ratios (Essay Sample)

Evaluate Financial Statements Using Financial Ratios
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Abstract
This report analyzes the financial statements of RAS AL KHAIMAH CEMENT COMPANY P.S.C for the period ended 31st September 2015. They analyzes has concentrated on the use of financial ratios to bring out a clear understanding the financial figures as indicated in the financial statements. Through this analysis, the various users of these statements will have relevant information to make informed decisions concerning the company.
After the analysis, deep interpretation has been done to the results of the analysis. Reading through the interpretation section, one will acquire qualitative aspect of the quantitative figures as indicated on the analysis section.
Acknowledgement
I take this opportunity to thank the people who took part in the computation of the financial statements of RAS AL KHAIMAH CEMENT COMPANY P.S.C. particularly, I thank the deloitte touché for declaring the financial statements of the company as true and showing a fair view of the company’s financial statements.
Also I wish to thank my supervisor for his time in guiding me in coming up with these financial analysis of this company.
Introduction
RAS AL KHAIMAH CEMENT COMPANY P.S was established in the year 1995 to foster the economic and social development in the country. The company acquires its raw material from the Ras Al Khaim Emirate and use its high-quality technology to produce the cement. A stable supply of cement is maintained and the customers can get the cement for their construction needs whenever the need arise.
For the sustainability and the accomplishment of the company’s mission, effective planning and financial management is required. Ratio Analysis is a management tool that improves the understanding of the financial statements produced periodically or at the end of the financial year. They provide the trends over time regarding the financial performance of the company and how effective the management are in ensuring that the company is achieving its objectives. They are the indicators of performance and managers usually use them to bring out the strengths and weaknesses along with which strategies can be made and initiatives formed.
Ratios are relevant for decision making if they are calculated with reliable and accurate financial figures. The calculation of the figures should be consistent from period to period. Ratios are relevant in comparing the performance of companies in a similar industry whose businesses are almost the same. If used this way they indicate the competitive nature of the company and the possible market share. Better results than other companies in the same industry is an indicator that the company is likely to get more investors willing to invest in the company. The shareholders of the company also get good returns from their invested capital in the company.
Ratio analysis facilitates in making decisions that are informed. Managers use the results to plan their financial resources in advance in case the company is likely to face financial constraints shortly. If the company is found to have excess cash, the management could otherwise commit the extra cash in other short-term investments that can bring in extra money apart from the core business of the company. Good management of the company’s resources is essential as it enables the continuity of the company. Any manager aspiring to do great things for a company is required to first make good management of the available resources.
The computed financial ratios of the company relevant in decision making and financial management of the company. Figures are derived from the company’s financial statements for the year ended 31st September 2015.
Liquidity ratios
* Current ratio=current assets/current liabilities
Year 2015
166,562,112/41,695,386= 3.995
Year 2014
167,524,842/30,355,685= 5.519
* Acid test ratio= (current asset-stock)/current liabilities
Year 2015
(166,562,112-60,546,204)/41,695,386= 2.543
Year ended 2014
(167,524,842-57,824,774)/30,355,685= 3.614
Asset management ratios
* Debtors turnover=credit sales/average debtors
Year ended 2015
Average debtors= (debtors at the begging +debtors at the end)/2
(45,080,326+59,082,767)/2= 52,081,546.5
Thus debt turnover is 165,585,717/52,081,546.5=3.1
Year ended 2014
Debt turnover= 169,700,395/45,080,326= 3.8
* Stock/ inventory turnover
=cost of sale/average stock
Year ended 2015
Average stock= (opening stock + closing stock)/2
(57,824,774+60,546,204)/2= 59,185,489
Thus the debtors turnover= 147,314,504/59,185,489= 2.49
2014
153,680,853/57,824,774= 2.658
Profitability ratios
* Gross profit margin= (gross profit/sales)*100%
Year ended 2015
(18,271,213/165,585,717)*100= 11%
Year ended 2014
(16,019,542/169,700,395)*100= 9.4%
* Gross profit mark up= (gross profit/cost of sales)*100
Year ended 2015
(18,271,213/147,314,504)*100= 12%
Year ended 2014
(16,019,542/153,680,853)*100= 10%
Debt management ratios
Year ended 2015
* Average collection period= (average debtors/total credit sales)*365
(59,185,489/165,585,717)*365= 130 days
Year ended 2014
(45,080,326/169,700,395)*365= 97 days
* Average payment period= (average creditors/credit purchases)
Average creditors= (opening creditors + closing creditors)/2
Year ended 2015
(31,141,779+26,885,683)/2= 29,013,731
Thus average payment for the period will be = (29,013,731/147,314,504)*365= 72 days
Year ended 2014
(26,885,683/153,680,853)*365= 64 days
Leverage ratios.
These ratios measure the extent to which a company uses its assets which have been financed by non-owner supported funds. They measure the financial risk of the company. The higher the ratio, the higher the financial risk.
* Debt ratio or capital gearing ratio
It measure the proportion of debt finance capital employed by a company. If the ratio is 50% and above, the company is said to be highly geared.
Debt ratio= (total long term debt/capital employed)*100%
Year ended 2015
(3,340,092/685,928,001)*100= 0.49%
Year ended 2014
(3,083,651/710,684,059)*100= 0.43%
* Debt equity ratio
This measures the proportion of the non-owner supplied funds to owner’s contribution to the company.
Debt equity ratio = (long term debt/equity or net worth)*100
Year ended 2015
(3,340,092/640,892,523)*100= 0.52%
Year ended 2014
(3,083,651/677,244,723)*100= 0.45%
Chapter 2. The interpretation of the results of the analysis
1 Liquidity ratios
The company has the ability to meet its short term maturing obligations as and if they fall due. This has been revealed by the current ratio being more than one. This year’s ratio is at approximately declining from the previous years which was at 5.5. Although the decline was recorded, the company is still at a good position if meeting its maturing obligations. The company can increase its current liabilities without affecting its working capital.
According to the results of the acid test ratio, the company is still able to cater for its current liabilities with its most liquid assets. The current ratio is at 2.5:1. This has declined from the previous year’s 3.6:1. The company can be able to clear its short term liabilities using its current assets that easily convertible into cash. This shows that the company is doing well.
1 Asset management ratios
They measure the company’s management of its inventory. Higher turnover ratio is indicative of better performance since this indicates that the firm’s stocks of inventories are being sold more quickly. On the other hand, if the turnover is extremely high, the company could be losing its sales to its competitors as a result of inventory shortages in the market. In our case here, this year’s turnover stands at 3.1 showing a decline from the previous year’s a record of 3.8. it means that the stock of inventories was replenished three times this financial year. This is good movement of the inventories in and out of the company.
These attempts to measure a company’s success in managing its assets to generate sales.
1 Profitable ra...