Using Financial Statement Analysis to assess a companies performance - Free Essay Example

Mission Create a chain of restaurants providing authentic, home style Indian food on a consistent basis across the Indian Restaurants Group. The subsidiaries of the Company include Chandan Ltd, Rice Spice Ltd, and Mela Redhill Ltd. 3 Monkeys restaurant based at Herne Hill had been underperforming, which had to be closed. The add-on to the group is Mela which is situated in Redhill. The recession is affecting all the segments including the restaurant business. Strategy to counteract on downturn Incorporating local taste in the menu Takeaway service Approaching corporate sector# Better utilization of Human resource Increase in promotional activity Increase brand awareness Financial Analysis using annual report 2009 Ratio Analysis Return on capital employed: ROCE reflects a companys ability to earn a return on all of the capital that the company employs. Year 2009 Profit before interest Tax 28 Capital Employed 1949 ROCE 1.43% (0.0143) Lower ROCE value shows that companys financial position and growth is not healthy and it is not in a position to invest any further into the business (this could also be the result of the acquisition of Mela (Restaurant) Current Ratio: The ratio is mainly used to give an idea of the companys ability to pay back  its short-term liabilities (debt  and  payables)  with its short-term assets Year 2009 Current Assets 2718 Current Liabilities 984 Current Ratio 2.78 Quick (Acid Test) Ratio: A stringent test that indicates  whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. Year 2009 Current Assets Inventory 868 Current Liabilities 769 Quick Ratio 1.10 When comparing the current ration with quick ration we can see that QC is much lower which indicates current assets are highly depended on the inventory. Debt to Equity Ratio: A measurement of a companys financial leverage, calculated as the companys  debt divided by its total  capital Year 2009 Total Liabilities 984 Networth 1734 Debt to Equity Ratio 0.56 Above ratio is very low which indicates company has low funds to operate or finance its operations. Gross Profit Margin: It is used to assess  a firms financial health by revealing the  proportion of money left over from revenues after accounting for the cost of goods sold Year 2009 Gross profit 1813 sales 2470 Gross profit margin 73% (0.73) Gross profit margin for this company is very high which when compared with quick ratio does not give the same information on the company operating funds. Debtor Turnover ratio: A ratio used to work out how many days on average it takes a company to get paid for what it sells. Year 2009 Dept 218 Sales 657 Debtor turnover ratio 0.33 x 356= 121 Days Debtor Turnover ratio is high; company takes 4 months to credit itself. These results are worrying: especially when we know that small businesses in the UK are suffering because large businesses take too long to pay their accounts. Stock Turnover ratio: The stock turnover ratio show how many times over the business has sold the value of its stocks during the year. Year 2009 Cost of Goods Sold 657 Avg. Inventory 23 Stock Turnover ratio 28.57 28.57 is not a good sign for Stock turnover ratio, this shows it take company 28 days to get the money by sell the stocks. Gearing: Gearing is a measure of financial leverage, demonstrating the degree to which a firms activities are funded by owners funds versus creditors funds. Year 2009 Long term loans 215 Capital Employed 1949 Gearing Ratio 11% (0.11) Chairmans report Mr. Haresh Kanabar (Chairman) has spoken about the huge revenue for this year twice as much as last year (2008). However, as per the analysis it is evident that companys financial position is not very good and they incurred a loss. There share price has also fallen 5.0 pence compared to 3.6 pence last year. Mr. Kanabar is optimistic about the business after acquiring the new restaurant Mela and the new strategy to boost the sales. This might not turn into his favour, since Melas performance is at a slow start and does not seems that it will pick up very quickly. TT Electronic Company background TT electronics is a technology-based group providing components, sensors, integrated manufacturing services and secure power solutions to a broad base of customers worldwide. The business is underpinned by a blue chip global customer base, leading products and technologies, and world class engineering skills. The Groups businesses are organised into the following divisions: * Components * Sensors * Integrated Manufacturing Services * Secure Power * General Industrial The Components division is focused on the delivery of niche, highly engineered, bespoke electronic components for a number of end markets including military, aerospace, medical, industrial, telecommunications and mass transit. These are custom designed for specific applications by our global network of applications sales engineers who support our customers own design centres. Mission Development of new technologies is based upon understanding our customers needs and providing solutions. Financial Analysis using annual report 2009 Gross Profit Margin Year 2009 Gross profit 79.2 Sales 499.6 Gross profit margin 15% (0.158) Net Profit Ratio: The objective of margin analysis is to detect consistency or positive/negative trends in a companys earnings. Year 2009 Profit after Tax 19.6 Revenue 499.6 Net profit ratio 3.9% (0.039) Net profit compared to last year it has gone down compared to last years net profit and it also shows low earning generated from revenue. ROCE: A ratio that indicates the efficiency and profitability of a companys capital investments. Year 2009 EBIT 17.2 Capital employed 282.7 6.0% (0.0608) Since the company is into manufacturing the electrical goods might be the reason for low ROCE. ESR: The significance of EPS is viability of any business depends on the income it can generate. This ratio also helps in the measurement of an investors performance; the other is a method of stock technical analysis which can help you to determine if a companys stock price accurately reflects its worth. Year 2009 Net income -17.2 Preferred dividend 0 Avg. Outstanding Shares 155 ESR 0.11 Current Ratio Year 2009 Current Assets 194 Current liabilities 111 Current Ratio 1.77 Quick Ratio Year 2009 Current Assets Inventory 110.1 Current Liabilities 111 Quick Ratio 0.99 This is a worrying number, below 1 which indicates that company might not be in good position to pay off its immediate obligations. Inventory turnover ratio Year 2009 Cost of goods sold 420.4 Avg. Inventory 101.95 Inventory turnover ratio 4.124 Gearing Ratio Year 2009 Dept 126.9 Capital employed 282.7 Gearing ratio 44% (0.448) Gearing Ratio is about 44% which shows amount borrowed money, however to get a better idea it should be compared with companies from the same sector. Lets look at debt-equity ratio for a better idea. Debt- Equity Ratio Year 2009 Total liabilities 237.9 Net worth 155.8 Debt- Equity Ratio 152% (1.52) Debt- Equity ratio is 152% very high; company is mostly dependent of borrowed funds which intern might increase the company debt. Chairmans report Chairman admits that recessions effect on the group of companies and the low revenue compare to last year; Group revenue was  £499.6 million (2008:  £584.3 million). Even with reduced revenue company was able to reduce their long term debt a decrease of 49.7%. at 31 December 2009 was  £56.9 million compared with  £113.2 in 2008. Strategy and measure taken to improve the companys performance seems to be working in a positive way. Company comparison From an investor point of view Indian Restaurant group has been underperforming since the time they had started. Also their reserves has fallen 613.00k and net income by 115.04% from a loss of 492.00k despite a 122.92% increase in revenues from 1.11m to 2.47m. Also their share prices kept falling from the time of company was listed in LSE. From an investor point of view I will suggest wait and watch for this company. For TT electronic although they lost 1.30 per share in 2009 but going forward it shows a stability and increase in the price value which is evident from the reduced debt and increase in the cash flow. Out of above 2 companies TT Electronic will be a good choice to invest in. Social Responsible TT electronic have under taken few changes such as Environment: to reduce the waste and increase the efficiency they are committed to ISO14001. Health and Safety: Providing a workplace where our employees feel safe is not only a legal obligation, but a fundamental factor in building their engagement with the Group. Low-carbon technology: Technological innovation ensures low carbon economy. For example, in 2009 established a team to look at opportunities in electric and hybrid vehicles and already working with customers to increase the efficiency of the systems.