FINANCIAL RATIO ANALYSIS
OF FU-WANG FOODS LIMITED Introduction Financial analysis refers to an assessment of the viability, stability and profitability of a business. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested in. It is prepared using ratios that make use of information taken from financial statements financial reports like income statement, balance sheet, and cash flow statement. This analysis is presented to top management as one of their bases in making business decisions. Ratios can be divided into four major categories:
Liquidity Profitability Sustainability Operational Efficiency Leverage (Funding – Debt, Equity, Grants)
Liquidity Ratio Analysis Liquidity ratio can be used to determine a company’s ability to pay off its short term debt obligations. So, naturally higher liquidity ratio would indicate firm’s strength to meet up its short term obligations.I will evaluate here the Current Ratio and Quick Ratio.
Current Ratio An indication of a company’s ability to meet short-term debt obligations, the higher the ratio, the more liquid the company is. It is expressed as follows:
Current assets Current Ratio: Current liabilities
The ratio of current ratio 0f this firm is given below:
Particulars
2016
2015
Current Assets
873,650
780,953
Current Liabilities
386,602
873,650
Current Ratio
2.3
2.4
Interpretation: By the analysis of 2 years CR of FU-WANG Foods LTD. We can find that the company has very high current ratio that’s mean there is excess
cash that should possibly be invested elsewhere in the business or that there is too much inventory.
Quick ratio: The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.The quick ratio or acid test ratio is calculated by deducting
inventories from current assets and dividing the result by current liabilities
Current Assets-Inventory Quick ratio = Current liabilities
The ratio of Quick ratio of this firm is given below:
Particulars
2016
2015
Current Assets
873,650
780,953
Current Liabilities
386,602
325,451
Inventory
189,444
176,038
Quick Ratio
1.77
1.86
Interpretation:
Here FU-WANG FOODS LTD has a quick ratio of 1.77 in 2016, which is lower than 2015. This means company solvency is decreasing to pay off its current debts.
Company must decrease the ratio by decreasing total liabilities or increasing total asset in better position.
Activity Ratio : Inventory turnover: This ratio indicates the efficiency of the firm’s in selling product. The inventory turnover ratio is defined as follows: Cost of goods sold Inventory turnover = Inventory The ratio of inventory turnover of this firm is given below:
Particulars
2016
2015
Cost of Good Sold
563,649
579,692
Inventory
189,444
176,038
Inventory Turnover
2.10
3.3
Interpretation: This ratio helps us to determine how well the company is using its inventory to generate its revenue. FU-WANG FOODS LTD inventory turnover ratio is 3.3 in 2016 and 2.10 in 2015 , which is good from the last year.According to the calculation FU-WANG FOODS LTD has a turnoverratioin2016 is 3.3 times, which means it is earning TK3.3 worth of revenue for every TK1 worth of inventory.
Average collection period (DSO)
Average collection period also called Days sales outstanding (DSO), is used evaluate the firm’s ability to collect its credit sales in a timely manner. calculated as follows:
Receivables Average collection period = Average daily credit sales
The ratio of Average collection period of this firm is given below:
Particulars
2016
2015
A/C Receivables
289,124
239,314
Average daily sales
2,101.668
2,246.167
Average collection period
137.57
106.54
Interpretation: In 2016 it took a much higher time to recollect the money from their customers for FUWANG FOODS LTD which is a bad sign for the company. As accounts receivable increased and average per day sales decreased Average collection period has also decreased on these years.
Total Asset Turnover
The total Asset turnover ratio measures how effectively the firm uses its total assets to help generate sales. It is the ratio of sales to total assets.
Sales Total asset turnover:
Total assets
If the present total assets turnover ratio is higher than previous it would be better for the company’s present performance.
The ratio of Total asset turnoverof this firm is given below:
Particulars
2016
2015
Sales
767,109
819,851
Total Assets
1,482,203
1,343,232
Total Assets Turnover
0.52
0.61
Interpretation
In the year 2016 total asset turnover ratio has decreased which means in these years FUWANG FOODS LTD was able to generate less sales according to their total assts. By the
analysis we can say that, company must increase their sales.
Debt Ratio
The debt ratio measures the proportion of total assets financed by the firm’s creditors. It’s formula:
Total Liabilities Debt Ratio Total Assets
The ratio of Debt Ratio of this firm is given below:
Particulars
2016
2015
Total Liabilities
443,293
391,456
Total Assets
1,482,203
1,343,232
Debt Ratio
29.91%
29.14%
Interpretation: Debt Ratio is a financial ratio that indicates the percentage of a company’s assets that are provided via debt. The higher the ratio, the greater risk will be associated with the firm’s operation. In addition, high debt to assets ratio may indicate low borrowing capacity of a firm, which in turn will lower the firm’s financial flexibility. FU-WANG FOODs LTD has a ratio of 29.91% in 2016 & 29.14% in 2015 which indicates that it has a lower borrowing capacity. Company must decrease the ratio by decreasing total liabilities
or increasing total asset in better position.
Profitability Ratio: Profitability allows us to measure the firm’s ability to earn an adequate return on sales, total asset and equity. Gross Profit Margin Gross profit margin measures the percentage of gross earnings of the company on its net sales.
Gross Profit Gross Profit Margin Ratio = Sale
The ratio of Gross Profit Margin of this firm is given below:
Particulars
2016
2015
Gross Profit
203,460
240,159
Sales
767,109
819,851
Gross Profit Margin
26.52%
29.29%
Interpretation: Gross profit margin refers, how much profit is earned on products without considering indirect costs. In last two years, the gross profit margin of FU-WANG FOOD LTD in 2016 is decreasing from 2015. Company must increase the ratio
by decreasing indirect costs in better position.
Operating Profit Margin: The operating profit margin represents the “Pure Profits” earned on each sales.
Operating Profit Operating Profit Margin Ratio = Sales
The ratio of Operating Profit Margin of this firm is given below:
Particulars
2016
2015
Operating Profit
134,364
169,903
Sales
767,109
819,851
Operating Profit Margin
17.5%
20.7%
Net Profit Margin Net profit margin measures the percentage of net earnings after tax of the company on its net sales/net premium.
Net Profit after tax Net Profit Margin Ratio = Sales
The ratio of Net Profit Margin of this firm is given below: Particulars
2016
2015
Net Profit after Tax
86,159
110,054
Sales
767,109
819,851
Net Profit Margin
11.23%
13.42%
Interpretation The net profit margin for FU-WANG FOODs LTD in last was not good as it is decreasing significantly. That means percentage change in sales of FU-WANG FOODs LTD was lower than percentage change in net profit. Company should increase their EBIT to
keep increasing net profit.
Earning Per share (EPS)
EPS represents the amount canned on behalf of each outstanding share of common stock not the amount of earnings actually distributed to share holders. EPS is calculated as follows.
Net Profit after tax Earnings Per Share = Number of shares
The ratio of EPS of this firm is given below: Particulars
2016
2015
Net Profit after Tax
86,159
110,054
Number of shares
83,275
83,275
Earnings Per Share
1.03
1.32
Interpretation: In 2016 the earning per share of FU-WANG FOODs LTD was 1.03 which is lower than 2015, where the ratio was 1.32. EPS is closely watched by then investing public and is considered an important indicator of corporate EPS success. By the above analysis we can see the bad position of the firm.
Return on Asset
Return on asset, often called the return on investment. It measures the overall effectiveness of management in generating profits with its available assets. We can get this ratio by this formula,
Net Income ROA = Total Assets
Higher rate of this ratio indicates the higher/ better position of a firm. The ratio of ROA of this firm is given below: Particulars
2016
2015
Net Income
86,159
110,054
Total Assets
1,482,203
1,343,232
Return on Asset
5.8%
8.1%
Interpretation Return on assets or ROA gives us an idea about how the firm has utilized its assets to generate its net income. In 2016 the ratio was 5.8% which was lower than 2015. The position of the firm is very bad according to this ratio so it should need to increase its Net income as soon as possible to improve or increase the company situation.
Return on Stockholders Equity
The ratio of net income to common equity measures the return on common equity or the rate of return on stockholders’ investment,
Net Income Return on equity = Total stockholders’ equity
If the present return on equity is more than past ratios that indicates the better position to the present then past. The ratio of ROE of this firm is given below:
Particulars
2016
2015
Net Income
86,159
110,054
Total stockholders’ equity
1,038,910
951,776
Return on Equity
8.29%
11.56%
Interpretation This ratio helps us to understand how much revenue the company has generated utilizing the money invested by its shareholders. In 2016 the return on common equity was
8.29% which is lower than 2015 where the ratio was 11.56%. Company should increase its Net Income against of Stockholders equity to improve the situation of this company.
