Financial Statement Analysis - Example PDF

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FINANCIAL STATEMENT ANALYSIS - EXAMPLE Charlie and CRF are two companies that specialise in buying and wholesaling electrical components. Annual result extracts of the financial statements for the year ended 31 December (excluding taxation) are set out below: ! Income Statement Extracts £000s Charlie

CRF

Sales Turnover

40,000

30,000

Less: Cost of Sales

24,000

14,000

Trading Profit

16,000

16,000

Depreciation

2,400

1,000

Other

4,500

5,080

Operating Profit

9,100

9,920

300

100

Distributive Profit

8,800

9,820

Dividends

1,200

800

Retained Profits

7,600

9,020

Operating Expenses:

Less: Interest Payable

Statement of Financial Position Extracts £000s Charlie

CRF

20,500

33,000

6,500

25,000

14,000

8,000

Stock

4,000

6,000

Trade Debtors

2,000

2,500

Cash

2,000

500

8,000

9,000

Trade Creditors

3,000

3,000

Long Term Loans

3,000

1,000

16,000

13,000

4,000

6,000

12,000

7,000

16,000

13,000

3

1.25

Fixed Assets: Equipment and Vehicle at Cost Accumulated Depreciation

Current Assets:

Current Liabilties:

Net Assets: Financed By: Share Capital, £1 Ordinary Shares Accumulated Profit less Losses

Share price (£ per share)

Charlie

CRF

9.1/19 = 48%

9.92 / 14 = 71%

14 / 20.5 = 68%

8 / 33 = 24%

40 / 14 = 2.86x

30 / 8 = 2.75x

8 / 3 = 2.67x

9 / 3 = 3.0x

4 / 3 = 1.3

3/3=1

Profitability: ROCE: Fixed Asset Age: Fixed Asset Turnover: Liquidity: Current Ratio: Quick Ratio:

a) Compare the position and performance of the two companies by calculating efficiency, financing and investment rations and interpret them accordingly. Note, above is provided for context.! 3/4 Ratios per heading. ! Efficiency: !

Charlie

CRF

Stock turnover ratio:

(4 / 24) x 365 = 61 days

(6 / 14) x 365 = 157 days

Debtors collection period:

(2 / 40) x 365 = 19 days

(2.5 / 30) x 365 = 31 days

Creditor Settlement period:

(3 / 24) x 365 = 46 days

(3 / 14) x 365 = 79 days

Charlie

CRF

3 / 19 = 16%

1 / 14 = 7%

9.1k / 300k = 30x

9,920k / 100k = 99x

Charlie

CRF

8.8 / 4 = 2.2

9.82 / 6 = 1.64

PE Ratio:

3.0 / 2.2 = 1.36

1.25 / 1.64 = 0.76

Dividend Cover:

8.8 / 1.2 = 7.3x

9.820 / 0.8 = 12.3x

Dividend Yield:

0.3 / 3 = 10%

0.133 / 1.25 = 10.7%

Financing: ! Gearing (L/T debt / equity) Interest cover:

Investment:!

EPS:

b) CRF is investigating its cash position and the ageing schedule - this has revealed that customers are taking 40 days to pay. The company is therefore considering the introduction of a cash discount system at “2 / 20 net 30”. CRF’s cost of capital is currently 16%. Advise the company if the discount is worthwhile, outlining the limitations of this advice in the light of credit management policies in general. !

Calculation: [(1+2 / 98) 360/20] - 1 = 43.8%!

This suggested discount is not worthwhile as its cost is greater than the cost of finance to the company. ! The current cost of capital is currently 16% therefore the cost of getting the cash sooner is 43.8%. ! The underlying principle of credit management is that firms will sell goods/services by granting credit to their customers. The hope is that offering credit to customers will boost sales and therefore profits. However, this benefit is tempered by the cost of financing this and the risk of a bad debt.!

Some limitations of the analysis are as follows:! •

The take up of discounts are estimated probabilities, thus the calculations will only be as good as the estimates themselves.!

•

The cost of the discount takes no account of effect on sales / bad debts.!

•

There should be consideration of credit terms offered by competitor firms or firms in the same industry.!

c) Identify the relative strengths and weaknesses of ratio analysis in general, in the context of Charlie and CRF, how financial accounts may or may no assist with prediction. !...