Current Ratio- 2014 has a higher current ratio (1.94170148) as opposed to 2015’s current ratio (1.109492613), which means the liquidity ratio of 2014 is higher. A higher liquidity ratio is good for the company meaning they have a better chance of paying off their debts.
Debt- Asset ratio – The asset to debt ratio shows a company’s financial leverage. This means it shows to what extent the company’s assets can finance the company’s debt. Lafarge Malaysia had a debt-asset ratio of 21.69% in the year 2014 and 29.02% in 2015. A higher percentage means more leverage and more risk. The company experienced a significant increase in its debt-asset ratio from 2014 to 2015 meaning more of its assets were financed by debt in 2015 than in 2014.
Net Profit Margin- As we can see in the appendix the net profit margin for 2014 (9.33%) is higher than the net profit margin of 2015 (9.13%). The higher the margin (in this case 9.33%, 2014) it means the company is more efficient in turning their revenue into profit.
Return on assets- The return on assets (ROA) gives investors an idea of how profitable a company is in relation to its assets. The ROA provides an idea of the management’s efficiency in generating earnings by using the company’s assets. Lafarge Malaysia had a ROA of 6.42% in the year 2014 and 5.76% in the year 2015. Lafarge Malaysia experienced a fall in the return on assets. The higher the ROA the better the efficiency of the management in generating earnings from invested capital. The fall in ROA means the management was less efficient in using the company’s assets in generating income.
Return on equity- The return on equity (ROE) measures profitability in terms of how much profit a company makes with each unit of money of shareholder’s equity. For example it shows how much profit was made per ‘dollar’ of shareholder’s equity. The ROE of Lafarge Malaysia for the year 2014 was 8.19% and 8.12% for the year 2015. The company experienced a slight drop in ROE meaning it made less profit per ringgit of shareholders equity in 2015 than it did in 2014.
5. Comments on Performance of the Company
Current Ratio
Financial reports are important for any company; it shows the company’s current position and helps the deciders of the company by providing information in making correct financial choices. Current ratio is one of the essential financial ratios. As it weighs the company’s liquidity it helps not only the internal corporate but also outside lenders to make decisions about the company. It measures the company’s capacity to pay off their debtors. If the current ratio is below 1 it means the company has too many liabilities. At the same time having a current ratio of above 3 means the company is not utilizing their resources efficiently and fully. Lafarge had a current ratio of 1.94 at the end of 2014 but it decreased in 2015 resulting in 1.11. This means the company has the ability to pay off their creditors with the assets available but it does decrease in 2015. The decrease may be because the company had an increase in short term loans, leaner working capital or spent more cash optimally.
Debt-Asset ratio
Lafarge Malaysia had a debt-asset ratio of 21.69% in the year 2014 and experienced an increase of 7.33% to get to a debt-asset ratio of 29.02% in 2015. This means more of the company’s assets were financed by debt. A low ratio shows that the majority of the company’s assets are funded by equity where as a high ratio of over 1.00 or over 100% indicates that the company is putting itself at risk of not being able to pay back its debts. According to Adam Kantrovich (Business Management at Michigan State University) a debt-asset ratio above 30% shows risk and a company with 51% or more is highly leveraged. Regarding these points, despite the increase of 7.33% in the ratio, 29.02% is still considered relatively low and means that the majority of Lafarge Malaysia’s asset funding is coming from equity and not debts. However this increase in the ratio shows the company is not making an effort to reduce their debt which could become an issue in the longer term if this pattern persists.
Net Profit Margin
Also known as Net Margin, the net profit margin shows how much total profit a company has made from their total sales. Very simple, it tells a company how much profit they are making for every dollar they earn from sales. The higher the profit margin the higher the profit the company is making. In 2014, Lafarge Malaysia had a net profit margin of 9.33% which means that the company was making a profit of 9.33 cents for every dollar they made. In 2015, the percentage dropped from 9.33% to 9.13%, which means now Lafarge was making a profit of 9.13 cents for every 1 dollar. That is a decrease of 0.2%.
Return on Assets
The return on assets indicates how profitable a company is in relation to its assets. This is important to investors as it tells them the earnings generated from the company’s assets/ invested capital. It gives investors an idea on how effective the company is in terms of converting their capital to net income. A higher return on assets is better as it indicates a company is earning more with less investment and is more efficient in using its investment.
Lafarge Malaysia had a return on assets rate of 6.42% in 2014 and suffered a reduction of 0.66% to go to 5.76% in 2015. This shows a reduction in efficiency of the company’s earnings generated with respect to its assets. The formula to calculate return on assets is;
ROA= net income/total assets
The reduction in efficiency is due to their total assets increasing from RM 3,990,632 (2014) to RM 4,358,928 (2015) while the net income decreased from RM 256,007 (2014) to RM 251,233 (2015). (See Appendix 1.00 for financial statements extracts mentioned). This means that in the year 2015 Lafarge generated less earnings whilst having more earnings than the previous year indicating lower efficiency and a lower return on assets.
A decreasing return on assets is a sign of trouble in the future, specifically for growth companies. Companies like Lafarge Malaysia require large investments in assets including inventory, facilities and manufacturing equipment. A declining return on assets rate is not a good sign for the future of the company.
Return on equity
Return on Equity is the net income as a percentage of the total shareholder’s equity. It measures how much profit is made with the shareholder’s investment. Return on equity is a very important figure for investors and is a main factor in evaluating stocks. The return on equity for this company decreased very little in 2015 when compared to that of 2014. The return on equity for 2014 was 8.19%and for 2015 was 8.12%. A return on equity below 10% is considered low however it is suggested that investors look at an average return on equity of the company for a period of 5-10 years to get a better idea of the growth of this company as analysis of just 2 years may not be enough.