TOPIC: PERFORMANCE ANALYSIS

Accounting Internal Assessment

Name: Renea Dixon

Teacher: Ms. Turlounge
Registration Number: 100051
School: Immaculate Conception
High School
Name of Subject: Accounting
Territory: Jamaica
Centre Number: 1000511046
 Table of Content

Acknowledgement i

Introduction ii

Report

1. Aims and objectives 1

2. Literature Review 2

3. Data Collection 4

4. Data Presentation and Analysis 5

5. Evaluation 12

6. Recommendations 15

7. Conclusion 16

Appendices

Ratios iii

Statement of Comprehensive Income 2011 xi

Statement of Financial Position 2011 xi

Statement of Comprehensive Income 2013 xii

Statement of Financial Position 2013 xiii

Earnings per share xiv

Bibliography xv
 Acknowledgement
I would like to acknowledge Palace Amusement Company (1921) Limited for its financial

reports for 2011 to 2013. I would like to commend this company for its comprehensible financial

statements. I would also like to acknowledge my Accounting teacher for guiding me throughout

this Internal Assessment.

 Introduction
Palace Amusement (1921) Company Limited was formed by Audrey Morais. Prior to

1921, the company was operated as a private limited company. Palace Amusement then went on

to operate Movies, Rose Gardens and Palace Cinema. The company changed owners three times

since it went into operations. These owners were J. Arthur Rank (1947 -1949), Russell Graham

(1949 -1962) and Douglas Graham (1962 to present)

Palace Amusement (1921) Limited is listed on the Jamaica Stock Exchange (JSE) and

has a total of one hundred and fifty (150) shareholders. The company issued 1,437,028 stock

units. Although it has one hundred and fifty (150) shareholders, the majority shareholder,

Russgram Investments presently owns 62.05% of the company.

Palace Amusement (1921) Company Limited currently has four (4) of the seven (7) cinemas

fully operational. These cinemas are The Carib in Cross Roads, Kingston, Cineplex in Liguanea,

Kingston, Portmore Palace in Portmore, St. Catherine and Multiplex in Montego Bay, St. James.

Currently Palace Amusement (1921) Company Limited is managed by Douglas Graham

(Executive Chairman), Scott Graham (Assistant General Manager), Carol Lee (Financial

Controller), Melanie Graham (Marketing Manager), David Chong (Chief Engineer), Steven

Cooke (Concessions Manager) and Eileen Thomas (Company Secretary).

 Report
1. Aims and Objectives
The aims and objectives of this internal assessment are:

 To assess the overall performance of Palace Amusement Company (1921) Limited to

determine if it is a viable investment.

 To measure the overall profitability the company possesses over a three (3) year period.

 To analyze the activities of the company from 2011 to 2013.

2. Literature View

Drake, 2012 defines accounting statement analysis or ratio analysis as, “the selection,

evaluation, and interpretation of financial data, along with other pertinent information, to assist

in investment and financial decision making.” It can also be defined as the comparison of the

performance of different business over different years. This is done as mere figures can be

meaningless but when place in formulas important information can be deciphered and is

accomplished through analyzing ratios. The writers of the article believe that no one year can

provide enough information for a business to have adequate information to analyze the

performance of a business. Eversull, 2009, states “No single financial indicator will provide

enough information to determine a firm’s financial health,’ is stated by one of the writers to

emphasize his belief on this.

The information provided from ratio analysis may mean different things to different

components of a business. To investors, it means being able to estimate how much returns they

can gain from investing in a particular company, as stated by Tugas, 2012 who asserts that the

investor usually attempts to arrive at an estimation of a company’s future stream in order to

attach a value to securities being considered for purchase or liquidation. One could say that it

influences an investor to make informed decisions, as to whether or not to invest in a company.

The importance of such ratios in Rotan’s opinion, 1996, is, “it measures the performance and

operational impact of the firm on the industry.” This means that serves as a gage as to how the

business is operating against its rivals in the industry. This quote also gives evidences as to how
it enables investors to make informed decisions. This is so as the investor has to analyze the

performance of the business in order to decide whether or not to invest money in a firm.

To a creditor, it serves as a yardstick as to the average period of time it takes for them to

be paid. Tugas, 2012 states,”…a creditor is usually concerned with the ability of an existing or

prospective to make interest and principal payments on borrowed funds.” Management uses

financial ratio analysis to view the overall performance of the business. They also use it to

perceive how well the firm is operating in an industry as well as to evaluate what measures can

be taken to improve the business. Brigham and Houston, 2009, states, “financial analysis

involves comparing the firm with other firms in the business and evaluating trends in the

financial position over time.”

Both articles agree that financial ratio analysis assists investors in making

informed decisions when they choose to invest in a company.

However both article disagree when it comes to the how financial ratio analysis should be

in order to be important to firms. Eversull and Rotan believe that the information should be

gathered over a period of years whereas Tagas believes that it can be gathered from the last

financial period.

In conclusion, financial ratios analysis is important to not only the firms but the investors

that they hope to attract.

3. Data Collection

The research conducted in this internal assessment was formulated using only secondary sources

of data.

Secondary sources of data are materials that digest, analyze, evaluate and interpret

information contained within primary sources or other secondary sources. The secondary sources

used in this assessment are financial statements provided by the company and research papers.

Financial Statements are records that outline the financial activities of a business, firm and/or an

individual. The financial statements were used in this internal assessment to evaluate the overall

performance of the business and to interpret the trend of the business and see if any changes can

be made to improve the firm.

Research papers are substantial pieces of academic writing. The research papers were

used to gain an understanding as to what is financial ratio analysis and how it enables not only

management but investors to give unbiased opinions on the firm.

4. Data Presentation and Analysis
Figure 1: Current Ratio

Chart showing a Comparison between Current

Ratio for the years 2011 to 2013

1.5
1.6 1.39
1.4 1.19
1.2
AMOUNT

1
0.8
0.6
0.4
0.2
0
2011 2012 2013
Current Ratio 1.39 1.5 1.19

YEARS

Current Ratio

In the year of 2011, Palace Amusement Company (1921) Limited had a current ratio of 1.39

which means it was able to use $1.39 to cover $1 of each liability it incurred. In year 2012, slight

improvements were made as $1.50 was able to cover $1 of each liability acquired. However this

improvement in the amount of liabilities that its current assets could cover decreased in 2013; the

company was only able to use $1.19 of its current assets to cover $1 of liability incurred.
Figure 2: Acid Test

Chart showing the Acid Test Ratio for the years 2011 to 2013
1.4

1.2 1.2
1.15
1 0.97
Axis Title

0.8

0.6

0.4

0.2

0
2011 2012 2013
Acid Test 1.15 1.2 0.97
Axis Title

Acid Test

Despite the results seen in the Current Ratio (Figure 1), the Acid Test showed fluctuating results

throughout the years. In the year 2011, the company was able to cover each $1 of liability that it

had incurred using $1.15 of its most liquid assets. This later increased in 2012 as $1.20 could

cover a $1 of the company’s liabilities without the firm having to sell its inventory.

Unfortunately this good trend did not continue in 2013, only $0.97 each the company’s most

liquid assets could pay for each liability incurred. This means that in 2013, Palace Amusement

Company (1921) were unable to cover each liability incurred without having to sell its inventory.
Figure 3: Gross Profit Margin Percentage

Chart showing the Gross Profit Margin Percentage recorded

for the periods 2011 to 2013

2013 19.61%
Years

2012 20.98%

2011 20.87%

18.50% 19.00% 19.50% 20.00% 20.50% 21.00% 21.50%

2011 2012 2013

Gross Profit Margin Percentage 20.87% 20.98% 19.61%

Gross Profit Margin Percentage

Palace Amusement Company (1921) Limited recorded a Gross Profit Percentage Margin of

20.87% for the year of 2011. The company gross profit percentage margin increased in 2012

when it earned a 20.98%. However in the year of 2013, a decrease was seen in the gross profit

percentage margin as only 19.61% was gained.

Figure 4: Net Profit Percentage Margin

Net Profit Percentage Margin

Net Profit Percentage Margin

0.96%
0.94%
0.94%
0.92%
0.90%
0.88% 0.87%
0.86%
0.84% 0.83%
0.82%
0.80%
0.78%
0.76%
2011 2012 2013
Net Profit Percentage Margin 0.83% 0.94% 0.87%

Despite the gross profit percentage margins recorded in Figure 3, the company recorded dismal

Net Profit Percentage Margins during the period of 2011 to 2013. Only a measly 0.83% was

calculated to be the net profit percentage margin in 2011. 2012 was no better as only 0.94%

remained from the gross profit margin after expenses were deducted. In 2013, although the net

profit margin was lower than 2012, it was a better year than 2011. It showed that Palace

Amusement Company (1921) Limited was able to slightly cut expenses that
 Chart showing the Returns generated from capital
employed
4.70% 4.65%
4.64%
4.65%
4.60%
4.55%
Percentage

4.50%
4.45%
4.40% 4.37%

4.35%
4.30%
4.25%
4.20%
2011 2012 2013
Return on Capital Empolyed 4.64% 4.65% 4.37%
Year

Return on Capital Empolyed

Figure 5: Returns on Capital Employed

Returns on Capital Employed was calculated at 4.64% for the year of 2011. This means that

capital (whether machinery, monies or labour) was being efficiently used in the company at only

4.64% for 2011. There was a slight improvement in 2012 as the firm moved up by 0.01% to

4.65%. However in 2013, the firm experienced that the capital employed in the company could

not adequately run it efficiently enough for decent returns to be gained. Only 4.37%, the lowest

amount in the three (3) year period was generated.

Figure 6: Price Earnings per Share

Chart showing the Price earned on each share

sold
2013 9.83

2012 10.2

2011 7.01

0 2 4 6 8 10 12

2011 2012 2013

Price Earnings per share 7.01 10.2 9.83

Price Earnings per share

The company was able to allocate $7.01 to each company shares sold. This increased in 2012 as

the company was able to allocate $10.20 to each share sold, but in 2013 there was a slight

decrease in this as the company was able to only pay out $9.83 to each share sold.
Figure 7: Days in Inventory

Chart showing the comparison between Days in Inventory and

Average Collection Period
25
24.08
24

23

22

21 20.74
20.47

20

19

18
2011 2012 2013
Days in Inventory 20.47 20.74 24.08

Days in Inventory

In 2011, Palace Amusement Company (1921) Limited kept inventory in its storerooms on an

average of 20.47 days. This increased in 2012 as inventory remained in the storerooms on an

average of 20.74 days at a time. This greatly increased in 2013 as inventory remained in the

storerooms on an average of 24.08 days.

Figure 8: Average Collection Period

Chart showing the Average Collection Period for the years

2011 to 2013
35
31.82
30 29.32
25 24.75

20

15

10

0
2011 2012 2013
Average Collection Period 29.32 31.82 24.75

Average Collection Period

Although Figure 7 showed that inventory remained in the storerooms for fairly short periods of

time, collecting outstanding amounts from debtors took a greater amount of time to be done by

the company. In 2011, the average collection period was 29.32 days. This later increased in 2012

as it took the company 31.82, almost more than a month, to collect outstanding amounts from

debtors. This decreased in 2013, also was the lowest in the three year period, to 24.75 days on

average collection period.

Figure 9: Total Debts to Total Assets

Chart showing the Total Debts to Total Assets over a three year
period
Debt to Assets
0.6
0.5
0
0.5
0.41
0
0.38
0
0.4

0.3

0.2

0.1

0
2011 2012 2013

Debt to Assets 0.38 0.41 0.5

The Equity Ratio was used in the three year period to determine whether the business is financed

by debt instruments or equity. In 2011, the company was financed with more equity rather than

debt at $0.62. The company recorded that it increased in financing the company with more

equity versus that of debt at a result of $0.70. However in 2013, the business became financed

greater with debt instruments and not equity as it recorded the result of the ratio to be $1.01.
Figure 10: Equity Ratio

CHART SHOWING THE EQUITY RATIO OVER A

THREE YEAR PERIOD

2013 1.01

2012 0.7

2011 0.62

0 0.2 0.4 0.6 0.8 1 1.2

2011 2012 2013

Equity Ratio 0.62 0.7 1.01

Equity Ratio

Despite the constant financing of the business through equity then the sudden change to debt, the

business only recorded a small amount of debt being used to finance the business through the

purchase of assets in the three year period using the Debt to Asset Ratio. In 2011, only $0.38 of

each asset was financed by debt. 2012 and 2013 showed increases in this as $0.41 and $0.50

respectively of each asset was financed by debt. This means that Palace Amusement Company

(1921) Limited needs to issue more shares and sell them above the previous par value in order

for the business to be mainly financed by equity instead of debt instruments.

Figure 11: Times Interest Earned

TIMES INTEREST EARNED

Times Interest Earned

4.5
4 3.82 3.79

3.5
3
2.41
2.5
2
1.5
1
0.5
0
2011 2012 2013
Times Interest Earned 2.41 3.82 3.79

The company was able to meet 2.41 of each debt obligation in 2011. This increased in 2012 as

the company was able to meet more of its debt obligations; 3.82 of each debt obligation.

However there was a slight decrease in 2013 as only 3.79 of each debt obligation could be met.
Evaluation
 The overall performance of Palace Amusement Company (1921) Limited is good

however in order for it to be a viable enough company for investments the company

needs to make changes to both its level of liquidity and solvency. It needs reduce the

amount of current assets it has idle. This shown throughout the three (3) year period as

2011 had a current ratio of 1.39, 2012 recorded a current ratio of 1.5 but in 2013

measures could be seen being made to correct this as the current ratio was only 1.19.

Although it is clear that Palace Amusement Company (1921) Limited needed to reinvest

more of its current assets in the business, the acid test ratio highlighted this. For the

periods of 2011 and 2012, it is easily seen that the business needed to utilize its most

liquid assets such as cash in hand or cash at bank as the acid test ratio recorded for those

years were 1.15 and 1.2. Its most liquid assets should therefore be used for the purchase

of more equipment or the payment of expenses, which is greatly needed to increase the

profitability of the company. In 2013, the company did not show that it had idle resources

in the company as its acid test ratio is 0.97. This means that the firm was not able to

cover its liabilities using only its most liquid assets when they become due. In order for

Palace Amusement Company (1921) Limited to correct this, more current assets need to

be injected into the business.

As for the company’s solvency level, it needs to be improved. For the years 2011

and 2012, the business was being financed mainly using equity. However the company

took a turn for the worse in 2013 when it became financed by mainly debt instruments

and not equity. This is very poor for the company as it cannot sustain itself using the

shares sold to its shareholders on the Jamaica Stock Exchange (JSE). The company needs
 to issue more shares to finance the business in the future, make use of the retained

earnings the company possesses or to issue more shares and sell them above the previous

par value, if this is possible. The company also showed a good Total Assets to Total

Debts level in both 2011 and 2012 as it was 0.38 and 0.41 respectively. This means that

the company possessed more assets than debt as well as if the company needed to

liquidate tomorrow then it could pay $0.38 and $0.41 of each dollar on each liability for

2011 and 2012 respectively. However in 2013 the company made an improvement as it

recorded that it had equal amount of assets as it does liabilities. It recorded that for each

asset that it possessed that $0.50 of each dollar of asset can cover a liability possessed by

the company. The company is also able to meet its debt obligations in a rather timely and

efficient manner. The Times Interest Earned ratio proves this as in 2011 the company

could only meet 2.41 of each debt obligation. In 2012 this improved to 3.82 but later

decreased in 2013 to 3.79. The company needs to be consistently able to meet its debt

obligations and aim to either get back to the place it was at in 2012 or greater.

 The profitability of the company in the three (3) period was good but it needed to

improve some aspects in order to attract investors. In the three year period, the company

recorded 20.87% in 2011, 20.98% in 2012 and 19.61% of Gross Profit Margin

Percentage but only 0.83% in 2011, 0.94% in 2012 and 0.83% in 2013 as it Net Income

Margin Percentage. The company needs to reduce its expenditure as it shows that

20.04%, 20.04% and 18.78% of the Gross Profit Margin Percentage accounted for the

business’ expenditure in 2011, 2012, 2013 respectively. As it can be seen, the company

made strides to decrease its large expenditure percentage in 2013 after constantly
 spending 20.04% of its Gross Profit Margin Percentage on expenses. The company needs

to continue on this track and endeavor to further reduce its large expenditure bill. In

regards to its Returns on Capital Employed, the company made a slight improvement of

4.64% to 4.65% in 2011 to 2012. This means that it was able to improve the returns it

gained from 2011 in 2012, even if it was only by 0.01%. In 2013, the returns the

company gained from its capital employed fell to 4.37%. This means that the company

was able to see its least amount of returns in this year. Palace Amusement Company

(1921) Limited needs get back to the rate of returns on its capital employed in 2012 and

improve on this rate in the years to come.

In 2011, the company was able to pay $7.01 from each share sold. This later

increased in 2012 as it was able to pay $10.20. However this decreased in 2013 to $9.83.

This means that the company is generating enough money to pay out fairly decent sums

to its shareholders. This is a good sign that the company is profitable from 2011 to 2012

but shows a dip in the profitability of the company in 2013.

 The activity in the company is fairly good but it needs to tighten up on the amount of

days it keeps its inventory as well its average collection period. Days in inventory for the

company showing that the days in which stock is being kept for increases over time. This

is shown as it was 20.47 days in 2011, 20.74 days in 2012 and 24.08 days in 2013.

Although the amount of days in which inventory is being kept for is increasing, the

company still has good activity as the stock days have not gone over a month. The

company should try to decrease this back to the place it was in 2011 or even better. The

average collection period needs to greatly increase as the days it takes for the company to
collect from its debtor fluctuates as the years go by. This is shown as 2011 recorded

29.32 days, 2012 recorded 31.82 and 24.75 days in 2013.

Recommendations

It is recommended that:

 The company should decrease the amount of expenditure it has.

 It should utilize more of its current assets in the business.

 Put in measures to ensure that it can collect outstanding amounts from debtor in a more

timely fashion.

 Decrease the amount of days it keeps its inventory.

 Invest in the purchase of more fixed assets so that its current and acid test ratios will

decrease and that the business will have more assets than liability. Also so that more

equity rather than debt is financing the business.

 Reinvest the idle cash at hand and cash in bank in the business so that the company can

be better able to meet its debt obligations in a more timely fashion.

Conclusion
In conclusion, Palace Amusement Company (1921) Limited is a profitable, has good

performance and is active but can be better and grab the eyes of investors if changes are made.
Appendix 1
Ratios
Liquidity Ratios

Current Ratio

A Current Ratio is a financial ratio that measures whether or not a firm is able or has the

resources to repay its short term debts.

Formula:

Current Assets
Current Liabilities

2011 2012 2013

$140,625,000 $154,189,000 $189,482,000

$101,437,000 $102,942,000 $158,872,000

= 1.39 = 1.50 = 1.19

Acid Test

The Acid Test or Quick Ratio measures a company’s ability to meet short term obligations using

only its most liquid assets

Formula:

Current Assets – Inventory

Current Liabilities

2011 2012 2013

$140,625,000 - $24,026,000 $154,189,000 - $30,723,000 $189,482,000 - $35,945,000

$101,437,000 $102,942,000 $158,872,000

= $116,599,000 = $123,466,000 = $153,537,000

$101,437,000 $102,942,000 $158,872,000

= 1.15 = 1.20 = 0.97

Profitability Ratios
Gross Profit Margin Percentage
This is a financial metric used by firms to assess the financial health by revealing the portion of

money left over from revenues after accounting for the cost of sales or cost of goods sold.

Formula:
Gross Profit * 100
Revenue/Sales

2011 2012 2013

$109,892,000 * 100 $127,939,000 * 100 $123,303,000 * 100

$526,668,000 $609,678,000 $628,753,000

= 20.87% = 20.98% = 19.61%

Net Income Margin Percentage

This financial ratio is used by firms to assess the financial health of a company after all expenses

have been subtracted from the Gross Profit.

Formula:
Net Income * 100
Revenue/Sales

2011 2012 2013

$4,357,000 * 100 $5,711,000 * 100 $5,473,000 * 100

$526,668,000 $609,678,000 $628,753,000

= 0.83% = 0.94% = 0.87%

Return on Capital Employed (ROCE)
Return on Capital Employed is used to measure efficiency at which capital is being employed or

used in the firm.

Formula:
Earnings before taxation and interest * 100
Capital Employed
Formula to calculate Capital Employed:
Total Assets – Current Liabilities
2011 2012 2013

Capital Employed: Capital Employed: Capital Employed:

$338,982,000 - $101,437,000 $360,728,000 - $102,942,000 $433,683,000 - $158,872,000
= $237,545,000 = $257,786,000 = $274,811,000

$11,032,000 * 100 $11,987,000* 100 $12,009,000* 100

$237,545,000 $257,786,000 $274,811,000

= 4.64% = 4.65% = 4.37%

Price Earnings per Share Ratio

Earnings per Share is the portion of a company’s profit that is allocated to each outstanding share

of common or ordinary share, serving as an indicator of the company’s profitability.

Formula:
Net Profit attributable to stockholders
Number of Ordinary Stock Units

2011 2012 2013

10,078,000 14,663,000 14,124,000

1,437,000 1,437,000 1,437,000

= 7.01 = 10.20 = 9.83

Activity Ratios
Day in Inventory
This is the number of days it takes inventory to be sold in a particular period.

Formula:

365
Inventory Turnover
Inventory Turnover:
Cost of Sales
Average Inventory
Formula for Average Inventory:

Opening Inventory + Closing Inventory

2

2011 2012 2013

Inventory Turnover Inventory Turnover Inventory Turnover

Average Inventory: Average Inventory: Average Inventory:
$22,718,000 + $24,026,000 $24,026,000 + $30,723,000 $30,723,000 + $35,945,000
2 2 2
= $46,744,000 = $54,749,000 = $66,668,000
2 2 2
= $23,372,000 = $27,374,500 = $33,334,000

$416,776,000 $481,739,000 $505,450,000

$23,372,000 $27,374,500 $33,334,000

= 17.83 = 17.60 = 15.16

Days in Inventory Days in Inventory Days in Inventory

365 365 365

17.83 17.60 15.16

= 20.47 Days = 20.74 Days = 24.08 Days

Average Collection Period

This is the number of days it takes a firm to receive the money owed to them by its debtors.

Formula:

365
Accounts Receivable Turnover

Accounts Receivable Turnover Formula:

Revenue/Sales
Accounts Receivables

2011 2012 2013

Accounts Receivable Accounts Receivable Accounts Receivable

Turnover: Turnover: Turnover:

$526,668,000 $609,678,000 $628,753,000

$42,312,000 $53,148,000 $42,639,000

= 12.45 = 11.47 =14.75

365 365 365

12.45 11.47 14.75

= 29.32 = 31.82 = 24.75

Solvency Ratios
Total Debt to Total Assets
This is a measurement representing portion of a firm that is financed by loans and financial

obligations lasting more than a year.

Formula:
Total Debt
Total Assets

2011 2012 2013

$129,617,000 $148,278,000 $218,190,000

$338,982,000 $360,728,000 $433,683,000

= 0.38 = 0.41 = 0.50

Debt to Equity
This is used to measure the relative proportion of shareholder’s equity and debt is used to finance

the firm’s assets.

Formula:
Debt
Equity

2011 2012 2013

$129,617,000 $148,278,000 $218,190,000

$209,365,000 $212,450,000 $215,493,000

= 0.62 = 0.70 = 1.01

Times Interest Earned (TIE)
This ratio is used by a firm to measure how well it can meet its debt obligations.

Formula:
Earnings before taxation and interest
Interest Expense

2011 2012 2013

$11,032,000 $11,987,000 $12,009,000

$4,571,000 $3,139,000 $3,166,000

= 2.41 = 3.82 = 3.79

Appendix 4

Earnings per Share (Notes)

Earnings per Share 2011

Earnings per Share 2012

Earnings per Share 2013
Bibliography
 Palace Amusement Company (1921) Limited Financial Statements for the years 2011,

2012 and 2013

 Tugas, FC. (2012, November 21). A Comparative Analysis of the Financial Ratios of

Listed Firms Belonging to the Education Subsector in the Philippines for the Years 2009-

2011. Ramon V. del Rosario College of Business De La Salle University. Manila,

Philippines.

 Eldon Eversull, E and Rotan, BL (1997, March 17). Analysis of Financial Statements.

United States Department of Agriculture, United States.

 Secondary Sources of Data.

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Date last visited: March 3, 2016.