The Core Functions of the Bangko Sentral ng Pilipinas
Report
1. INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF PAKISTAN
REPORT ON RATIO ANALYSIS
OF
M/S RANI LIMITED
PREPARED FOR:
Board of Directors
PREPARED BY:
Management Accountant
2. TABLE OF CONTENTS
Particulars Page No.
Executive Summary 3-4
Introduction 5
Financial Position and Ratio Analysis 6 - 10
Suggestions & Conclusion 11 - 12
Appendices
Horizontal & Vertical Analysis of Income Statement 13
Comparative Ratios & averages 14
Trend of Ratios & Percentages 15
Graphical Representation 16
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3. EXECUTIVE SUMMARY
This report provides an analysis and evaluation of the current and prospective
profitability, liquidity and financial stability of Rani Ltd. Methods of Analysis
include trend horizontal and vertical analyses as well as ratios such as Current and
Quick Ratios. Other calculations include return on Shareholders Equity and Total
Assets and earnings per share to name a few. All calculation can be found in the
appendices. Results of data analyzed show that the company’s total revenue has
increased but Net profit Margin have declined due to increase in cost of sales.
Over all liquidity position of Rani Ltd. is satisfactory although quick ratio is at
alarming level. Corrective measures are required to avoid any liquidity problems
in future.
The Operating cycle is rising due to huge level of inventories, and receivables
collection period. Fall in liquidity ratios, rapid increase in revenues, increase in
inventory in relation to revenue, uneven increase in receivables and increase in
accounts payable period and decrease in profit margin are the symptoms of
“Overtrading”.
In line with the decrease in net profit, earning per share has also drastically
reduced to Rs.3.22 (2010) from Rs.2.665 (2012) over preceding years.
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4. This report finds the prospects of the company in its current position are not
positive. The major areas of weakness require further investigation and remedial
investigation. Recommendations discussed include:
Improving the average collection period for trade debtors
Improving the Inventory turnover
Avoiding unnecessary overtrading
This report also indicates the fact that the analyses conducted has limitations.
Some of the limitations include
Nature and Type of the company is not known
Current Economic condition is also unknown
Data limitations as not enough information is provided or enough detail
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5. INTRODUCTION
This report provides information obtained through ratio analysis, regarding the
profitability, liquidity and financial stability of Rani Ltd for the years 2010-2012.
This report will pay particular attention to the earning power, liquidity and credit
management, inventory management, and will highlight major strengths and
weaknesses while offering some explanation for observed changes.
The report will comment on the prospects of the company and make
recommendations that would improve Rani Ltd’s current performance. These
observations do have limitations which will be noted. This report will explain how
a cash flow statement and a prospectus could enhance analysis.
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6. Financial Position and Ratio Analysis
Rani Ltd had a very good performance in the past but now some performance
indicators show that the present results are deteriorating and not in line with the
previous financial indicators of the company.
We understand that the term of reference of the assignment is to analyze the
performance and financial position of the company.
We have analyzed the financial position of the company on the basis of
information and ratios provided to us on the following grounds:
• Profitability of the Company
• Liquidity Position
• Efficiency Indicators
• Investment Perspective
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7. PROFITABILITY OF THE COMPANY
All three profitability ratios given in the table below (see appendices) have
positive values during the year, as the company gained gross profit and
comprehensive income from operational and financial activity for this period but
overall profitability of the Rani ltd has considerably declined due to the various
reasons out of which very obvious indicators are Cost of goods sold to net sales
ratio which show that the in spite of increase in sales over last three years Cost of
good sold has increased as % of total sales. This is mainly due to the amount of
inventory that Rani Ltd is maintaining in 2012.
As a result of above, very logically net profit to net sales ratio has significantly
reduced from 13.90% in 2010 to only 10.43% in 2012. This is certainly very
alarming position for the management of the company as well as shareholders of
the company. If the trend goes on further in next coming year it is very obvious
that the company will start incurring losses in the near future.
On the same lines Return on net worth has been falling to 7.54% in 2012 from
10.60 % in 2010 which indicates that the returns are not up to the mark and may
be below the required rate of return of the company and will certainly be not
acceptable to the investors of the company.
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8. LIQUIDITY POSITION
Current ratio of Rani Ltd has increased from 1.26 times in the year 2010 to 1.43
times in the year 2012, as we know that the normal level of current ratio is 2 : 1
that shows sound liquidity position. There is increase in current ratio from
previous year’s ration, this increase in current ratio is indicating pilling up of
inventories as compared to acid test ratio which is increasing as well.
Higher current ratio is also indicating under utilization of working capital as excess
current asset can be invested into more efficient utilization. For absolute reason
of this increase shows that the company has been involved in over trading due to
which account receivable & inventories turnover have declined and operating
cycle days have increased.
The Quick/acid test ratio is very useful in measuring the liquidity position of a
firm. It measures the firm’s capacity to pay off current obligations immediately
and is more rigorous test of liquidity than the current ratio. Usually a high liquid
ratio is an indicates that the firm is liquid and has the ability to meets its current
or liquid liabilities in time and on the other hand a low liquidity ratio represents
that the firm’s liquidity position is not good. The Quick Ratio which is 0.64 time in
2012 is at alarming situation, because, generally, a quick ratio of 1:1 is considered
to be satisfactory. It means that Rani Ltd does not have enough assets which can
be transferred to monetary funds in a very short time to meet current liabilities.
Working capital is required to maintain to meet the operational needs of the
company such as purchase of raw material and payment of salaries and wages to
labor but in Rani Ltd working capital has been rising above the needs which is due
to the increase in receivables and inventories that causing extra financing cost to
the company. But if we compare working capital with inventories, it turns out that
inventories are not covered with working capital in full at the end of the period
analyzed . The value of working capital is deemed to be normal when it
corresponds to the amount of inventories, which are the least liquid part of
current assets.
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9. EFFICIENCY INDICATORS
Debtors turnover has gone down abnormally during the current period over
preceding years i.e. from 24.99 times in 2010 to 7.31 times in 2012 as a result
collection period has increased to 49 days from 14 days which certainly need
extra financing. As we know that higher the collection period, the greater is the
chance of bad debts.
Inventories need detailed analysis from all aspects. Inventories could be of raw
material, work in progress and finished goods, all these when accumulate, block
huge amount of funds. This increase could be due to the obsolete or out dated
stock or due to excessive orders which were not matched with the production
schedules which result increase in storage cost.
In terms of days, presently it is taking 100 days to move to the customers which
has been increased from 84 days in 2010. It means that the company needs extra
financing for these extra days of pilling up of inventories.
The detailed analysis of receivables and inventories concludes that the Operating
cycle has severely moved up by 48 days from the level of 90 days in 2010 to 138
days in 2012.
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10. INVESTMENT PERSPECTIVE
Earning per share has been continuously falling and presently it has reached to
2.66 in 2012 from 3.22per share in 2010. EPS has decreased by 17% from 2010
to 2012
Reasons for this declining trend are the same as discussed earlier in profitability
ratio, but point of concern is that despite declined in profitability and earning per
share, company has maintained dividend per share of Rs 2 which is perhaps to
restrain share price from drastic reduction, this strategy might not work in
efficient market as investors are more informed and take rational decisions, on
the other hand, company will not be able to maintain this level of dividend per
share in near future as the company might be in a financial difficulty and may not
be able to distribute dividends at this level of profits
Dividend Per share of Rani ltd has increased from previous year which is good
indicator for investors as he/she receives dividend despite the fact that the
company is not having good profitability performance as compared to previous
years.
Book Value per share of Rani Ltd has also increased from 19.59 in 2010 to 21.32 in
2012.
Gearing Ratio measures the percentage of capital employed that is financed by
debt and long term financing. The higher the gearing ratio, the higher is the
dependence on borrowing and long term financing. Gearing Ratio between 25%
to 50% is considered normal for a business which is happy to finance its activities
using debts. Rani Ltd has maintained its gearing ratio at approximately 27% since
last 2010 which means that Rani ltd is neither issuing equity nor raising long term
liabilities.
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11. SUGGESTIONS & CONCLUSION
The comparative ratio analysis of Rani Ltd has created several mysteries which
need to be resolved prior to reach any hasty conclusion. From the interpretation
of financial ratios of Rani Ltd, it can be concluded that it is not in a very secure
financial position. Improvement in every area of the company is needed if the
company is, in the first instance, to survive and then grow.
The key areas of reform are the liquidity of the company and the quantity and
quality of working capital, profitability and financial stability. Management of Raja
Ltd must address these areas simultaneously if the company is going to take over
Rani ltd.
It must be remembered that this analysis is limited- a greater of understanding
and evaluation can only occur with utilization of other resources such as
comparisons with the companies operating in the same industry as of Rani ltd or
comparisons with budget forecasts and the statement of changes in financial
position. Only after this process can a full appreciation of the company’s current
situation and possible future occur.
At this point the company does not have strong future prospects in the areas of
profitability, liquidity or stability if it continues on its current path. Raja Ltd should
be concerned with current rates of return of Rani Ltd. Before making Investment
in Rani ltd our company should see other factors as well
We should see if we can get synergies by acquiring the Rani ltd, because from
given information and data company is performing not very well so it would be a
risky investment if made in hurry.
Company is having acute Working Capital Management Problems.
Rani Ltd has neither Aggressive Working capital policy nor conservative
one.
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12. AVOID OVERTRADING
Solution of all the problems lies in the overtrading. Rani ltd must avoid
overtrading activities and take reasonable orders which it can meet easily and
honor them timely, it will reduce extra finance cost, inventory storage costs and
other costs related to it. If Raja ltd takes over Rani ltd then we should consider
following options:
We must see the future Plans of the company before finalizing any deal.
Raja limited should change its working capital policies (if acquired).
We should see the post acquisition benefits and post acquisition operating
policies before taking any decision.
Rani ltd is suffering finance cost as a result of high receivable and inventory
level which needs to be lower.
Rani ltd is not issuing the equity nor raising long term loan, so this option
must be considered to increase the capital base.
We must take into account Market Price of the Rani ltd.
Board of Directors should investigate for any Intellectual Capital/Assets of
the company which may increase the value of the Rani ltd.
We must take into account market value of the shares of the company.
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13. APPENDICES
HORIZONTAL & VERTICAL ANALYSIS OF INCOME STATEMENT
Vertical Analysis
2012 2011 2010
% of total Rs % of total Rs % total Rs
Sales 100.0% 100% 100%
20,440.0 19,467.0 18,540.0
CGS 59.9% 55% 58%
12,247.0 10,650.0 10,753.0
Operating Expenses 15.1% 17% 17%
3,086.0 3,268.0 3,063.0
Financial Charges 5.3% 4% 4%
1,082.0 839.0 725.0
Net Profit 10.4% 14% 14%
2,132.0 2,650.0 2,578.0
Horizontal Analysis
Particular % 2012 % 2011 % 2010
Increase/(Dec Increase/(Dec Increase/(Dec
from previous from previous from previous
year year year
Sales 5.0% 5.0%
20,440.0 19,467.0 18,540.0
CGD 15.0% -1.0%
12,247.0 10,650.0 10,753.0
Operating Expenses -5.6% 6.7% Don’t know
3,086.0 3,268.0 3,063.0
Financial Charges 29.0% 15.7%
1,082.0 839.0 725.0
Net Profit -19.5% 2.8%
2,132.0 2,650.0 2,578.0
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14. COMPARATIVE RATIOS, PERCANTAGES & AVERAGES
S. No. Description 2012 2011 2010
1 Current Ratio 1.43 1.21 1.26
2 Quick Ratio 0.64 0.56 0.57
3 Working Capital 2239 894 698
4 Net Profit Margin 10.43% 13.61% 13.90%
5 Gross Profit Ratio 40.08% 45.30% 42.00%
6 Return On Assets 7.54% 9.85% 10.60%
7 Interest Cover (Times) 4.72 6.61 6.52
8 Receivable Turnover (Times) 7.31 10.21 24.99
9 Receivable Turnover (Days) 49 35 14
10 Payable Turnover (Times) 31.70 28.84 47.50
11 Payable Turnover (Days) 11 12 8
12 Inventory Turnover (Times) 3.57 4.66 4.42
13 Inventory Turnover (Days) 100 77 84
14 Operating Cycle (Days) 138 100 90
15 Earning Per share 2.66 3.31 3.22
16 Dividend Per Share 2.18 2.06 -
17 Dividend Payout Ratio 0.82 0.62 -
18 Book Value Per Share 21.32 20.84 19.59
19 Return On Capital Employed 22.15 24.48 21.80
20 Return On Shareholder Equity 12.5 15.90 16.44
21 Gearing Ratio 26.02% 26.47% 27.70%
Note: Assumed 360 days in a year
All ratios & percentages are rounded off to the nearest two decimal places
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15. TRENDS OF RATIOS & PERCENTAGES
Current Ratio
Quick Ratio
Working Capital
Receivable Turnover (Days)
Inventory Turnover (Days)
Operating Cycles
Sales
Cost of Sales
Dividend per Share
____________________________________________________
Net Profit Margin
Gross Profit
Return on Assets
Return on Capital Employed
Return on Shareholder Equity
Earning Per Share
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