Professor Essay Example

LAP Holding and Metropolis Limited Financial Analysis

Question 1

LAP HOLDING LIMITED

Financial ratios

  1. Current ratio

Current ratio is a financial liquidity ratio that measures whether or not the company has sufficient resources to pay short-term liabilities (debts and payables) over the next 12 months. It compares a firm’s current assets to its current liabilities. Expressed as follows;

Current assets/current liabilities

4520000/1036000= 4.3629

5080000/979000=5.1889

  1. Quick ratio

Current Assets -inventories-prepayments/ Current liabilities

520000-2892000-15000/1036000=1.556

5084000-3211000-7000/979000=1.9060

  1. Receivables Turnover

Net credit sales/ Average account receivable

6940200/1507500=4.60 times

8581200/1505500=5.69 times

  1. Inventory Turnover

Calculated as follows;

Cost of Goods Sold/ Average inventory

5668/2917.5=1.94 times

8215/3051.5

=2.69 times

results, it is necessary to determine days in inventory outstanding as follows;In order to get precise

Days inventory is outstanding= 365/ Inventory turnover ratio

365/1.94=188 days (2012)

365/2.69=136 days (2013)

  1. Debt to total assets

Computed as;

Short-term debt + Long-term debt/ Total assets

1036000+963000/12768000=0.156

979000+854000/16266=0.112

  1. Debt to Equity ratio

Total liabilities/ Shareholders equity

1999000/10769000=0.18

1833000/14433000=0.12

  1. Net tangible asset backing

Total assets-intangible assets-total liabilities/number of ordinary shares

12768000-5000-1999000/2000000=53.82

16226000-4000-1833000/220000=65.58

  1. Gross profit margin

5899000/11567000=50.99%

6087000/14302000=42.56%

  1. Rate of return on ordinary shareholders fund

Net profit-taxes-preference dividends/owners capital and reserves

588000-147000-10000/10767000=0.04

191000-40000-10000/14433000=0.009

  1. Net profit margin

Net profit/sales revenue

441000/11567000=3.81%

151000/14302000=1.06%

  1. Interest coverage ratio

Earnings before interest and taxes/interest expense

648000/58000=11.17

258000/67000=3.85

  1. Earnings per share

Net profit after tax and preference dividend/no of ordinary shares issued

441000-50000/200000=1.955

151000-500000/220000=0.459

  1. Price earnings ratio

Market price per share/earnings per share

6/1.955=3.069

5.5/0.459=11.98

Question 2

MEMORANDUM

TO MS LOIS LAIN, CHIEF EXECUTIVE OFFICER

MR CLARK KENTISH, CHIEF FINANCIAL OFFICER

FINANCIAL ACCOUNTANT

SUBJECT FINANCIAL STATEMENT ANALYSIS OF METROPOLIS LTD

DATE 10TH FEBRUARY 20X6

The purpose of this memo is to analyse the financial performance of Metropolis Limited which is done using financial ratios. Financial ratio analysis is important because it will highlight the strengths and weaknesses of the business (Palepu & Healy 2008). Analysis will be presented by constructing profitability, efficiency and liquidity ratios.

Financial Ratios 20X1 20X2 20X3 20X4 20X5

Current ratio 1.5 1.8 1.5 1.7 1.5

Quick ratio 0.8 1 0.8 0.7 0.7

Gross profit margin (%) 30 29 24 25 21

Net profit margin (%) 6.3 6.8 3.3 5.9 0.46

Return on equity (%) 23.7 21.8 15.2 24 2.4

Debt to Equity 1.72 1.29 0.21 1.64 2.63

Inventory turnover (Days) 78 72 75 98 99

Account Receivable turnover 2.19 2.49 2.22 2.48 2.01

Times Interest Earned 3.35 5.53 1.91 3.1 1.67

Profitability Analysis

The company gross profit margin ratio declined from 30% in 20X1 to 21% in 20X5. Although the company is having a relatively high gross profit margin ratio, its decline over the years show poor management policies relating to the control of costs. The company should consider putting mechanisms in place to cut down the cost of production in order for maximum generation of gross profit. Net profit margin ratio increased for the first two years, that is, 6.3% in 20X1 to 6.8% in 20X2. It declines in the subsequent year, increases in the next year, 20X4, and decline again in 20X5. The increase in net profit margin ratio in the first two years is an indication of good management practices relating to sales activities. The subsequent decrease in net profit margin is an indication of increased costs of production. Overall, the company can increase its gross profit and net profit by cutting costs of production.

Efficiency Analysis

The average turnover period from 20X1 to 20X5 is 85 days. The collection period of debts is fairly constant. The average period of 85 days is high and the company must institute measures to bring the inventory turnover (days) to less than 60 days which is beneficial for efficient operations.

Liquidity Analysis

The current ratio has remained steady throughout 20X1 to 20X5. Quick ratio is also fairly constant. Although both current and quick ratios remain fairly constant in all the years, it is relatively low. The company may not be able to cover its obligations successfully when they fall due in the future. Metropolis should increase the assets and institute good credit management policies to recover the debts in time.

Metropolis limited is in a relatively healthy position but gross profit margin and net profit margin ratios decline indicates inefficiencies concerning management of costs. In addition, inventory turnover period is high and mechanisms should be put in place to reduce it to around 60 days or less.

References

Palepu, K. G., & Healy, P. M. (2008). Business analysis & valuation: using financial statements. Mason, OH, Thomson/South-Western.