Professional Documents
Culture Documents
Walker Ltd is a diversified enterprise with its main interests in the manufacture and retail of plastic products. The financial statements of Walker Ltd need to be analysed. An investor is considering purchasing shares in the company. Relevant ratios need to be selected and calculated and a report needs to be written for the investor. The report should evaluate the companys performance and position
2005 $000 Current Assets Bank Accounts receivable Inventory Non-current assets Fixtures & fittings (net) Land & buildings (net) Total assets Current Liabilities Accounts payable Income tax Non-current liabilities Loan Shareholders Funds Paid-up ordinary capital Retained profit Total liabilities & equity 33.5 240.8 300.0 574.3 64.6 381.2 445.8 1,020.1 $000 $000
2006 $000
Horizontal Analysis
41.0 210.2 370.8 622.0 63.2 376.2 439.4 1,061.4 99 104 108
2005 $000 Sales Less Cost of goods sold Gross profit Wages & salaries Rates Heat & light Insurance Interest expense Postage & telephone Depreciation Buildings Fixtures & fittings Net profit before tax Less Income tax Net profit after tax $000 2,240.8 1,745.4 495.4 $000
2005 $000 Cash flow from operations Receipts from customers Payments to suppliers & employees Interest paid Tax paid Net cash flow from operating activities Investing activities Purchase of non-current assets Net cash used in investing activities Financing activities Dividends paid Issue of ordinary shares Repayment of loan capital Net cash outflow from financing activities Increase in cash & cash equivalents 2,281 (2,050) (24) (46.4) 160.6 (121.2) (121.2) (32.0) 20.0 -__ (12) 27.4 $000 $000
2006 $000
2,711.8 (2,460.4) (6.2) (60.2) 185 (31.4) (31.4) (40.2) 34.1 (140.0) (146.1) 7.5
Credit purchases for the year 2006 were $2,142,800. General prospects for the major industries in which Walker is involved look good with a forecast glut of oil set to reduce the cost of production and world demand for plastic remaining strong. Benchmarks: There are no exact benchmarks for Walker Ltd because it is a diversified company. The following are average indicators that relate to the plastic retailing and manufacturing industries for the year 2006. Gross profit margin 25% Net profit margin 7% Inventory turnover 6 times Debt/equity ratio 0.6 : 1 Return on Assets 12% Return on Equity 20%
Important note: The calculations of the ratios in this illustration did not use averages for total assets, equity and inventory. The 2005 and 2006 year end figures were used and this is a slight variation to the formulas provided.
Profitability ratios:
Gross Profit Margin Net Profit Margin Return on Assets Return on Equity
Benchmarks
Industry 25% Industry 7% 12% Industry 20%
2005
22% 7.1% 15.6% 32%
2006
22.7% 6.1% 15.5% 26%
Benchmarks
2005
2006
Benchmarks Ideal standard 2:1 Acceptable standard 1:1 Ideal standard 2:1 Acceptable standard 1:1 Standard 30 days Benchmarks Industry 0.6:1 Standard benchmark 1:1
2005 1.78:1
2006 1.70:1
Quick Ratio
0.85:1
0.69:1
TIE
10.14 times
39.74 times
For the investor considering the purchase of shares in the company, the return they will earn is the key financial factor but an overall evaluation of the companys performance and position is also important to get a better picture of how well the company is actually doing. ROE in 2006 is 26%. Whether or not this is attractive depends on the perceived riskiness of this investment and other alternatives available but this return is certainly more attractive than current bank interest rates. ROE has decreased by 4% but the companys ROE at 26% is still better than the industry average of 20% Riskiness of business is being reduced by the significant repayment of loan in 2006.
Profitability The NP% and ROA ratios show a small downward trend in % over the 2 year period. ROE% ratio show a more significant decrease but is still better than the industry average. Gross Profit Margin is slightly unfavourable at about 2.3% below the industry benchmark of 25%. The horizontal analysis information show that Sales have increased by 20%. However operating costs have increased by 34%. Asset Management IT has gone down slightly from 5.8 to 5.58 times. IT is still close to the industry benchmark of 6 times. AT has increased showing more sales being generated from asset usage
Liquidity
Current ratios of 1.78:1 (2005) and 1.70: 1 are at above acceptable levels but below ideal level. Quick ratios appear more of a concern being below acceptable levels in both years and even more so in 2006 (0.69:1). Raises some concerns over the liquidity of the business and inventory management (although IT ratio only shows a slight decline in 2006). Days Payable is a concern as there may be poor debt payment management.
Financial Structure Although slightly higher than D/E industry benchmark (0.67:1), business has become less risky due to the significant repayment of loan in 2006. TIE is extremely good for the business at 39.74 times (well above 5 the standard benchmark). Cash flow situation Strong cash flow from operating activities (increased from 160,600 to 185,000). Spending under investing activities suggest more growth. Repayment of debt under financing activities imply restructuring of business to have more equity funding rather than debt funding.
Given: 1) the strong forecast for the industry (ie general prospects looking good and world demand for plastic products remaining strong), 2) the sales growth in this business, 3) acceptable ratios as they are quite close to the industry averages, 4) good cash flows from operating activities and 5) favorable ROE, although it has decreased, it is still better than the industry average ROE.
=> it is recommended that the investor purchase shares in the Walker Ltd company.