Essay: The comparison of mg fabrications data

In context to the above statement

EXECUTIVE SUMMARY

This report is about the comparison of MG fabrications data on the ground of provided financial details for the year 2008, 2009 and 2010 with the aim to recommend a company which is more suitable for investments and has potential to progress at an incremental rate in future. I will be using different methods to calculate ratios that are important to any form of business at any given stage. I would be calculating the Liquidity ratio; since it will show the companies capability whether liquid assets are available to meet short term commitments.

Liquidity Ratios

Liquidity ratios attempt to measure a company’s ability to pay off its short-term debt/liabilities. This is done by comparing a company’s mostliquid assets (or, those that can be easily converted to cash), over its short-term liabilities. Following are the commonly used Liquidity ratios.

		2008	2009	2010
Current Assets		70234	104943	154551
Current Liabilities		10053	20106	29800
Current ratio		6.98	5.21	5.18

The results of MG fabrications current ratios are 6.986372, 5.219487 and 5.186275 which shows that the company’s liquidity is within average and company have enough current assets to pay its immediate liabilities. Company has a good working position, no chances of bankruptcy in near future.

Note:

The current ratio reveals your business’s ability to meet its current obligations.However, it should be supplemented with the other ratios listed below. The current ratio is a suitable and quiet consistent tool evaluating a company’s level of liquidity. An average current ratio could be between two to one.

		2008	2009	2010
Current Assets		70234	104943	154551
Current Liabilities		10053	20106	29800
Quick Ratio		6.093504	4.281956	3.74047

Also known as the "acid test ratio", this ratio specifies that an entity cannot cash all of its short term assets quickly specially the inventory, it needs to be furnished for sale. Therefore In the Quick Ratio we reduce all of those current assets calculate over all current liabilities. It shouldn’t be less than one because of the same reasons as current ratio.

Quick ratio’s are as follows

2008 2009 2010

6.093504 4.281956 3.74047

The answers of the quick ratios shows that the first year the company was not facing liquidity problems, the proportion of the next year 2009 was quiet low and the year after that which is 2010, they reached up to the danger mark.

Analysing the result of the liquidity ratios of MG fabrication we can find that the difference of the current ratio of the company was quit higher than the quick, it demonstrate that the company has stock proportion quite high in the current assets. It is suggested that quick ratio should be 1, which is convincingly there in this case but we can see that the quick ratio is decreasing at a faster rate. It was the highest in 2008 and decreased by appox 2 % and the following year there was a decrease of more than 1.5%. Since it is more than 1, the ratio will be considered as good and it can be taken for granted that the company is in good condition but there is an scope of improvement which cannot be neglected.

PBIT = Gross profit – expenses

		2008	2009	2010
Gross Profit		108514	142425	176335
Expenses		54257.02	67821.27	81385.53
Capital Employed		76159	101531	124930
ROCE		71.24	73.47	76.00

This is really good, it shows that company has a high return and is in profit. People will get high return if invest in it; this will attract more and more investors. From the investors point of view profitability ratios are considered very significant as they give investor an idea whether he/she should invest his money in a particular company or not.

In finance, ratio analysis is carried out to judge the liquidity of the organization. It helps the analysts to find if a company is capable enough to pay its liabilities.
Some of the important ratios are:

• Current Ratio
• Asset Test Ratio
• Return on Asset
• Return onInvestment
• Inventory turnover ratio
• Operating Cycle

Ratio analysis is an important and age-old technique offinancialanalysis. The following are some of the advantages of ratio analysis:

1. simplifiesfinancialstatements.
2. Facilitates inter-firm comparison.
3. Helps in planning.
4. makes inter-firm comparison possible.
5. Help in investment decisions.

Analysing business performance is vital for organisations and investors as it helps them to take short and long term decisions. For an entity it provides grounds to set financial and non-financial objective goals and developing strategies and policies in order to achieve them and comparing its recent performance with past gives an idea which company is suitable in terms of sustainable profitability and security of their investment.

Performance could be measured within the organisation among different sections and among various organisations performing in same sector, using different financial and non financial tools like profitability, productivity, innovation and quality, efficiency, customer satisfaction etc. Following we will briefly discuss the effectiveness, implications and limitations of these methods.

Below mentioned are the different ways by which analysis of a company can be done. They are mainly divided into two parts.

FINANCIAL METHODSFinancial Statements:

Financial statements provide brief overview of an entity’s financial activities and performance, having looked at them one can understand the company’s financial position that what are the sources of its finances, how they have been used, what are the outcomes and which sector needs attention and improvement.

Following are the three main financial statements. These statements are the foundation for the Ratio Analysis widely used in financial methods of performance measurement.

Profit and Loss Accounts:

This shows profit and loss in a particular period.

Balance Sheet:

Itsummarizes company’s assets, liabilities andshareholders’ equity.

Cash Flow Statements:

It reveals the incomes received and expenses paid in cash in a particular period.

In performance measurement process, ratio analysis have significant part, the main ratios apart from Liquidity Ratios are as follows.

A. Profitability Ratios

Website www.tutor2u.net explains “Profitability ratios are measures of corporate profitability and financial performance. The main profitability ratios are:·The GPR helps to control the production costs. Changes in sales revenue and volumes do not affect the gross profit percentage.

• The Net profitratio orProfit marginrepresents the ultimate profitability and guides management to set their profit targets and reduce expenses for future.
• Mark-up ratios measure the amount of profit added to the cost of goods sold. Higher mark-up ratio is a sign of good performance in terms of profitability.
• Earnings per Share measures the overall profit generated for each issued share over a particular period.

B. Investment / Finance Ratios

• The interest coverratio gives us an idea about the safety margin that the business has in terms of being able to pay its interest.

C. Efficiency Ratios

The efficiency ratios provide insight into how well an organisation is employing its financial resources invested in long term assets and working capital. Following we will discuss the use of these ratios.

• Stock turnover ratio supports an entity to manage its inventory in terms of purchasing or ordering of raw materials and productions of furnished goods.
• The fixed assets turnover ratio measures how non-current assets are utilized to generate sales, by comparing sales to non-current assets.
• Thedebtor’s ratiodefines an entity’s time frame and efficiency of collection of it receivable from customers.
• A similar calculation to that for debtors, giving an insight into whether a business is taking full advantage of trade credit available to it.

Limitations

There are certain limitations which must be considered before adopting any of these financial measures. Davis, T and Boczko, T, (2005) define these limitations as:

• “There may be a lack of uniformity in accounting definitions and techniques.
• “Balance sheets are for a particular moment in time and only represent the business position for that time.”
• “There may actually be no standards for comparison.”
• “Changes in circumstances, environment, like economic conditions, changes in money values, may have significant impacts.”
• “The past should not consider as a good predictor of future.”

NON-FINANCIAL METHODS

As we have discussed about the financial methods of analysing performance and their usefulness, website

www.exinfm.com

defines that “there are some factors which actually drive the financial activities of an entity to perform well, if these factors are not performing well ultimately, the financial and overall outcomes will be negative”. Following we will highlight the real drivers behind the financial performance and which are quite useful to measure an entity’s overall performance.

A. Customer Satisfaction and Retention

It plays an undeniable role in the growth and development of an entity as business solvency relies on its customers. Recognizing the customer satisfactions levels helps evaluating the performance.

B. Human resource Management

It is quite significant because the qualified, trained and committed staff are the precious assets of an entity that’s why they are called human capital, analysing how an organisation is managing its staff, the processes, how it hires and fires, use of staff skills and expertise for overall organisational, staff, and social developments and benefits, an investor can recognize the performance level.

C. Quality and Innovation

A company which provide a distinctive products or service form its market competitors is definitely shines among them. Assessment of the product or service of a company with other similar products or services in the market in terms of value, quality and other features describe that how company is performing.

D. Brand image and reputation

A company which provide a distinctive products or service form its market competitors is definitely performing well. An organisation’s brand image and reputation also indicates its overall performance.

E. Process efficiency

Efficiency in process and policies enable an entity to perform well. Performance also relies on the convenience, promptness of the process which an entity adopts as employees, supplier, customer and other establishment become involve and encounter such process.

CONCLUSION

Mg Fabrication

As we have discussed the various financial and non-financial methods to analyse an entity’s overall performance. These measures assist an organisation to identify the areas within business where they need improvement, define future targets and setting standards, processes etc… they also help external stakeholders like investors, governments and other establishments to analyse and to compare the business performances. However the limitations of these methods must be kept in mind before taking any measure.