Financial Analysis Project

一篇关于财务项目的分析报告

Financial Analysis Project

Ratio analysis not only allows the company to spot the trends of its industry and history performances, but also enables the company to make comparisons of present and the past; own conditions and industry average. Based on the balance sheet and income statement of the company, this paper selects 14 financial ratios within the last three years, including the industry average as well. Most of the ratios derived from 4 main types of financial ratios: profitability, liquidity, leverage, efficiency ratios. The table showing such financial performances of the company has been prepared as follows: 
 The calculation process is as follows:
(1) Current ratio= Current assets / Current Liabilities = (Short term Investments + Accounts Receivables + Inventories)/ (Payables + Accruals) = 2680112 / 1039800 = 2.58. The current ratio indicates a firm's market liquidity and its ability to meet creditor's demands. Current ratios between 1.5 and 3 are generally acceptable but it varies from industry to industry. The current ratio of 2.58 this year indicates good short-term financial strength.
(2) Quick ratio= (Total current assets – Inventories) / Current Payables = 963632 / 1039800 = 0.93. Quick ratio measures the firm’s ability to use its assets which are the quickest to turn into cash to extinguish or retire its current liabilities immediately. As inventory is excluded, quick ratio represents higher speed of liquidity. The company has a quick ratio of less than 1, which indicates that it cannot currently fully pay back its current liabilities. 
(3) Inventory Turnover= Cost of goods sold / Average inventory = 5800000 / 1501920 = 3.86. Inventory means the number of times inventory is sold or used in a year. A low turnover rate may point to problems in inventory holding, such as overstocking, obsolescence, or deficiencies. But a high turnover rate may indicate the inventory holding policy is too aggressive, which will bring inadequate inventory levels and lead to a loss in business. In this case, the company has an inventory turnover less than industry average, which indicates a higher level of inventory holding, it apparently affects the operation efficiency and occupies lots of the company’s floating capital.
(4) Days Sales Outstanding= Accounts Receivables / (Annual sales / 365 days) = 878000 / (7035600/365) = 45.55. The ratio estimates the company’s average collection period, the figure of 45.55 is much higher than the industry average, which illustrate the company's accounts receivables are being managed worse than its competitors.
(5) Fixed Assets Turnover= Sales / Net Fixed Assets = 7035600 / 836840 = 8.4. The ratio reflects the company’s efficiency in managing fixed assets. The higher the ratio, the higher utilization efficiency, as it indicates less money has been tied up in fixed assets for the sales earned. A declining ratio may indicate the company has invested too much in fixed assets or the fixed assets cannot bring the expected revenue.
(6) Total Assets Turnover= Sales / Total Assets = 7035600 / 3516952 = 2.0. Just like receivables turnover, total assets turnover measures the efficiency of the usage of total assets in generating revenues. The relatively lower figure in this case shows a deficiency of this ability to utilize its total assets. 
(7) Debt Ratio = Total Debts/ Total Assets = 1539800 / 3516952 = 43.78%. Debt ratio is a fundamental ratio which shows a company’s debt financing situation. In this case, debt ratio is less than 50%, so most of the company's assets are financed through equity, but the previous years’ figure is much higher, which may indicate an increase in stocks this year. The higher the ratio, the greater risk will be associated with the firm's operations, but the company should also be aware of the average debt ratio in the industry is 50%, if financial sources mainly from equity, the cost of capital may be higher.
(8) TIE= Earnings before interest and taxes (EBIT) / Interest expenses = 502640 / 80000 = 6.3. The ratio represents times interest earned; it also referred to as interest coverage ratio, which shows how many times a company can use its pre-tax net profit to cover its interest expenses. In 2013 the company has a very low TIE, but in 2014 it managed to reach the industry average level, which remarkably enhances its ability to meet its obligations without being forced into bankruptcy.
(9) Profit Margin= Net income / Sales = 253584 / 7035600 = 3.6%. The company’s profit margin for the past three years is fluctuating, but it is good to see the most recent figure can reach the industry average level. Although only 3.6% of sales is turned into profit, the company apparently improves a lot in turning the previous loss into profit this year.
(10) Basic Earning Power= EBIT / Total Assets = 502640 / 3516952 = 14.3%. The ratio measures a business's basic ability to generate profit from conducting its operations not include the tax and leverage. 
(11) ROA= Net Income / Total Assets = 253584 / 3516952 = 7.2%. The ratio tells how much profit the company can derive from total assets controlled. Though the company turned the negative ROA of last year into a positive figure over 5% this year is quite encouraging, there is still much space exits between the 7.2% and the industry average 9%.
(12) ROE= Net Income / Total Equity = 253584 / 1977152 = 12.8%. ROE measures the firm’s efficiency at generating profits from shareholders’ equity, as with ROA calculated above, the company still needs lots of efforts in enhancing its earning powers.
(13) Price/Earning= Market price per share / Annual Earnings per share = 12.17 / 253584 = 4.8. A higher P/E ratio indicates a high market valuation of a stock, but higher risks come along with higher P/E. Low P/E of a potential stock may be a good opportunity to invest as it may be under-valued in the stock market.
(14) Market/Book= Stock Price / Book value per share = 12.17 / 7.909 = 1.54. The ratio is used to identify undervalued or overvalued securities, and it is usually more than 1. In this case, the company has a lower market/book ratio than the industry, so it is obvious that the market does not see its shares more valuable than other companies in the stock market; however it can be a potential stock to future growth and worth investing if the good condition is expected. 
After the above ratio calculation and financial analysis, strengths and weaknesses of the company have been interpreted. The company is doing quite well in 2014, its financial performance has improved a lot compared with 2013, however gap exists between the company and industry average level. Besides keeping its good momentum of development in 2014, the company need to enhance its ability in the management of current assets especially inventory and receivables; it should also strength its operation of assets, make proper use of debt capital, it is believed that the market will recognize its potential.

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