Financial Resource Management
Introduction:
MG Fabrications (Bolton) Ltd. is a leading company in the field of Structural Fabrication. This company was formed in the year 2000 and currently it has a work force of 25 employees. It has a large workshop which is equipped with a range of sophisticated machines, which include the Peddinghaus Cutting and Drilling Line and Ficep Tipo A Fittings Machine. The company has a capacity of manufacturing single item measuring 20 meters in length and weighing 15 tonnes.
MG Fabrication boasts about the ability to provide detail and design, erection and steel fabrication for most conventional buildings structure along having the capability to deal with smaller structures such as stair-cases, handrails and mezzanine floors etc. Additionally the company acknowledges its ability to meet strict deadline along with excellent customer services has built up its goodwill in the Greater Manchester area and contributed to a lot of repeat business.
Statement of Comprehensive Income
2008 |
2009 |
2010 |
|
£ |
£ |
£ |
|
|
Total sales |
421764.1097 |
664278.4728 |
917336.94 |
|
Less: cost of sales |
337411.2877 |
553565.394 |
780263.6 |
|
———– |
———– |
———– |
|
|
Gross profit |
84,353 |
110,713 |
137,073 |
|
Less: expenses |
42176.41097 |
52720.51371 |
63264.616 |
|
Less: loan interest |
0 |
0 |
233.3395 |
|
———– |
———– |
———– |
|
|
Net profit |
42,176 |
57,993 |
73,575 |
|
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======== |
|
Statement of Assets and Liabilities’ at 31 March: |
|||
2008 |
2009 |
2010 |
|
£ |
£ |
£ |
|
|
Fixed assets |
2077 |
2170 |
2357 |
|
Current assets: |
|||
|
Inventory |
583 |
1167 |
2333 |
|
Accounts Receivable |
1167 |
2450 |
5600 |
|
Cash at bank |
42503 |
58319 |
73622 |
|
Current Liabilities: due in less than 1 year |
|||
|
Trade accounts payable |
1307 |
2613 |
3873 |
|
Bank overdraft |
0 |
0 |
0 |
|
Dividends |
513 |
747 |
840 |
|
Non-Current Liabilities: due in more than 1 year |
|||
|
Loan |
0 |
0 |
2333 |
|
———– |
———– |
———– |
|
|
44509 |
60746 |
76866 |
|
|
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======== |
|
|
Equity Capital |
|||
|
Capital brought forward |
2333 |
2753 |
3290 |
|
Add: profit for year |
42176 |
57993 |
73575 |
|
———– |
———– |
———– |
|
|
Capital carried forward |
44509 |
60746 |
76866 |
|
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======== |
|
Ratios:
In order to properly analyse the financial health of MG Fabrications (Bolton) Ltd. we should look into its key financial ratios over a span of three years to determine if its performance has improved or deteriorated over time.
The formulae for these key ratios are as follows:
1) Profitability Ratios
a) Gross Profit Ratio = Gross Profit X 100
Sales
b) Net Profit Ratio = Net Profit X 100
Sales
c) Return on Capital Employed = Net Operating Profit X 100
Sales
2) Liquidity Ratios
a) Current Ratio = Current Assets
Current Liabilities
b) Liquid Ratio = Current Assets – Stock
Current Liabilities
3) Efficiency Ratios:
a) Fixed Asset Turnover Ratio = Sales Revenue
Net Book Value of Fixed Assets
b) Stock Turnover Ratio = Cost of Goods Sold
Average Stock
c) Stock Turnover in Days = Stock X 365
Cost of Goods Sold
d) Debtor Days = Debtors X 365
Credit Sales
e) Creditor Days = Creditors X 365
Credit Purchase
f) Total Assets turnover Ratio = sales
Total Assets
g) Debt Ratio = Total Liabilities
Total Assets
h) Inventory to Cost of Sales Ratio = Averageinventory during aperiod x 100.
cost of sales during that period
4) Investors Ratios:
a) Dividend payout ratio = dividends
Net Income for the same period
1) Profitability Ratios
a) Gross Profit Ratio
|
MG Fabrications(2008) |
MG Fabrications(2009) |
MG Fabrications(2010) |
|
=84353 × 100 421764 =20.0% |
= 110713 × 100 664278 =16.66% |
=137073 × 100 917336 =14.94% |
b) Net Profit Ratio
|
MG Fabrications(2008) |
MG Fabrications(2009) |
MG Fabrications(2010) |
|
=379588 × 100 421764 =90.0% |
= 611558 × 100 664278 =92.1 % |
=854072 × 100 917336 =93.1 % |
c) ROCE
|
MG Fabrications(2008) |
MG Fabrications(2009) |
MG Fabrications(2010) |
|
=42176 × 100 44509 =94.75% |
= 57993 × 100 60746 =95.46% |
=73808 × 100 76866 =96.02% |
2) Liquidity Ratios
a) Current Ratio
|
MG Fabrications(2008) |
MG Fabrications(2009) |
MG Fabrications(2010) |
|
= 44253 1820 = 24.31 |
= 61936 3360 = 18.43 |
= 81555 4713 = 17.30 |
b) Liquidity Ratio
|
MG Fabrications(2008) |
MG Fabrications(2009) |
MG Fabrications(2010) |
|
= 43670 1820 = 23.9 |
= 60769 3360 = 18.08 |
= 79222 4713 =16.80 |
3) Efficiency Ratios
a) Fixed Asset Turnover Ratio
|
MG Fabrications(2008) |
MG Fabrications(2009) |
MG Fabrications(2010) |
|
= 421764 44510 = 9.47 |
= 664278 60746 = 10.93 |
= 917336 76866 = 11.93 |
b) Stock Turnover Ratio
|
MG Fabrications(2008) |
MG Fabrications(2009) |
MG Fabrications(2010) |
|
= 337411 583 = 578.7 |
= 553565 1167 = 474.3 |
= 780263 2333 = 334.4 |
c) Stock Turnover in Days
|
MG Fabrications(2008) |
MG Fabrications(2009) |
MG Fabrications(2010) |
|
=583 × 365 337411 =0.63 Days |
= 1167 × 365 553565 =0.76 Days |
=2333 × 365 780263 =1.09 Days |
d) Debtor Turnover in Days
MG Fabrications(2008) |
MG Fabrications(2009) |
MG Fabrications(2010) |
|
=1167 × 365 421764=1.009 Days |
= 2450 × 365 664278 =1.34 Days |
=5600 × 365 917336=2.22 Days |
e) Creditor Turnover in Days
MG Fabrications(2008) |
MG Fabrications(2009) |
MG Fabrications(2010) |
|
=1307 × 365 337411= 1.41 Days |
= 2613 × 365 553565 = 1.72 Days |
=3873 × 365 780263= 1.81 Days |
f) Total Assets turnover Ratio
|
MG Fabrications(2008) |
MG Fabrications(2009) |
MG Fabrications(2010) |
|
= 421764 46330 = 9.10 |
= 664278 64106 = 10.36 |
= 917336 83790 = 10.94 |
g) Debt Ratio
|
MG Fabrications(2008) |
MG Fabrications(2009) |
MG Fabrications(2010) |
|
= 1820 46330 = 0.039 |
= 3360 64106 = 0.052 |
= 7046 83790 = 0.084 |
h) Inventory to Cost of Sales Ratio
MG Fabrications(2008) |
MG Fabrications(2009) |
MG Fabrications(2010) |
|
=583 × 100 337411=0.17% |
= 1167 × 100 553565 =0.21% |
=2333 × 100 780263=0.30% |
a) Dividend payout Ratio
MG Fabrications(2008) |
MG Fabrications(2009) |
MG Fabrications(2010) |
|
= 513 42176=0.012 |
= 747 57993= 0.012 |
= 840 73575= 0.011 |
Analysis of Financial Statements:
Profitability Ratios:
ROCE: It is an indicator of how efficiently a company uses its capital to generate revenue.
On careful examination of MG Fabrications ROCE we see that there is stable increase over the span of three years to 94.75%, 95.46% and 96.02%. This shows that the company’s efficiency in the utilisation of its fixed assets has constantly improved.
Gross profit ratio: The gross profit ratio is the ratio of gross profit of a company to its total sales. MG Fabrications gross profit ratio has fallen over the year from 20% to 14.94%.
The reason for this fall is, although sales have increased over the span of three years, the increase in the cost of sales has even been higher.
Net Profit Margin: Netprofitmargin indicates how effectiveacompanyis incontrollingthecostsand expensesassociated with their normalbusiness operations. The figures for MG Fabrications shows that its net profit ratio has increased steadly between 2008 to 2010. The reason is that increase in other expenses is less than the increase in sales.
Liquidity Ratios:
Current Ratio: Thecurrent ratiomeasures firm’s capacity to meet its current obligations. The ideal industrial standard is 2:1, on looking at MG Fabrications ratios we see that, although the current ratio is falling it is still excessively high. This shows that the company has idle resources.
Liquid Ratio :The acid test ratio is also known as the liquid or the quick ratio. The idea behind this ratio is that stocks are sometimes a problem because they can be difficult to sell or use. In this case as well, even though the liquid ratio is falling over the years it is still excessively higher than the standard 1:1. This is again depicts the existence of idle resources.
Efficiency Ratios:
Inventory Turnover Ratio:This ratio tells us the "number of days that on average money is tied up in stocks". (Khan, Khan & Jain, 2007 ). The longer this is the worse it is for the business as the money is not available to be used elsewhere.From figure stock turn over of MG fabrications is falling from 2008, 0.63 to 2009,0.76 and 2010, 1.09.
Debtor Days: Thedebtor’s day’sratio measures how quickly cash is being collected from debtors. The longer it takes for a company to collect, the greater the number of days debtors. By reducing its debtors days a company can significantly to imrove its cash flow and reduce the chances of bad debts. On looking at MG Fabrications debtors ratio we see that it has gone up between 2008 to 2010. An effort must be made to speed up its debt collection by offering incentives ( such as offering discounts).
Creditors Days: Creditor days, a similar measure todebtor days. It is the average time that a company takes to pay its creditors (http://moneyterms.co.uk/creditor_days/). Lengthening creditor days may mean that a company is heading for financial problems as it is failing to pay creditors, on the other hand it may mean that a company is simply getting better at getting good credit terms out of its suppliers (improving itsworking capital management), or that its pattern of purchasing has changed. According to above table in 2010 company is taking more time to pay its creditors. It is very good for company as this will improve its cash flow.
Stock Turnover: Inaccounting, thestock turnoveris anequationthat measures the number of times stock is sold or used over in a period such as a year. The equation equals the cost of goods sold divided by the averageinventory. The stock turnover is falling over the years, this is an unhealthy sign. Rectifactory effort should be made to correct the sign.
Asset Turnover: Asset turnovermeasuresa firm’sefficiencyin using its assets for generating sales or revenue. A higher ratio indicates better efficiency. The figures of MG Fabrications show that the company’s fixed assets improving over the years.
Inventory to Cost of Sales Ratio: Percentageofcost of salesattributable toaverage inventory. A decreasing number indicates higherefficiencyin use ofresources; an increasing number suggests potentialcash flow problemsdueto greatersumstied up ininventory.From the figures calculated in the table we see the ratios increased over the years, this indicates that company may face cash flow problems in the future.
Investor Ratios:
Dividend payout Ratio: Dividend payout ratiois the fraction of net income a firm pays to its stockholders in dividend. In case a company has a high ROI it should declare fewer dividends and retained its profit for future investment. On looking at MG Fabrications financial data we see that its ROI was increasing over the years, this increase can justify the sebtle fall in the dividend it declare in 2010.
Limitations of Ratios Analysis:
Economic regulate trade in only portion of the knowledge essential to evaluate whole functionality and effectiveness of the company’s other geometric process such as threat must be occupied into explanation to get hold of a full image of a company’s pecuniary rank.
Additionally, assessments of proportions may be deceptive on a number of calculations. A company can have assumed new secretarial principles; that is, it can have transferred from a “First In First Out” to a “Last In First Out” assessment of records. It can have transformed from a direct-line process to a hasten reduction. All through combination, they can be recognized with a new trade. In addition, the rate of the company’s asserts can be understated as of shrill increase some business statistics may also be deformed, particularly if the averages take in many small businesses with particular monetary flaws.
You must be cautious to resolve the kind of sum unpaid acquired by the company you’re examine. If supply were inflate by concerning translatable debentures that is owing to identified or cannot be transformed quickly, the explanation of the D/E proportion will be dissimilar than while the money owing correspond to directly union subjects. In addition a few concerns economics their savings with diminutive -term charter. As a consequence, some monetary relation will be inconspicuous as a outcome of these fiscal whereabouts. This is particularly factual in the container of ROI. Also be cautious when by means of reported facts, as business statistics occasionally symbolize only the finest and most economically Resonance Corporation. In addition the classification of the firm’s ratios with industry ratios
Conclusion:
Thus ratio analysis is a very powerful tool in the hands of the managers to monitor the financial health of a company. By looking at the changes in the financial ratios of a concern over a period of time, an experience manager can determine whether its financial health has improved or detoriated. In case the position has improved the factors which have let to such an improvement may be given emphasis to in the future. If however, the financial position has detoriated immediate rectifactory steps must be taken to control the factors responsible for the fall in performance.