Analysis-of-Financial-statements

Analysis-of-Financial-statementsANALYSISOFFINANCIALSTATEMENTSNameJiachengCaoPastandlikelyfutureoffinancialperformanceandfinancialpositionToanalyzethepast,presentandfutureofPulsinsfinancialperformanceandpositionwehavetousetheirfinancialstatementsandthefinancialratios.Thefirstratiosinconsiderationaretheprofitabilityratios.Thecompany’sgrossprofitmargin(GPM)standsat54%,andthenetprofitmarginNPMstandsat25%asat2013.TheGPMhasbeenkeptbetweentherangesof50%to60%oftheyear2008.Itisduetothehighlevelsofcostofsalesarisingfromtheuseofhighandnewtechnologywhichresultsinhigh-qualityproductsandthushighersaleslevels(Subramanyametal.,2009:34).TheNPM,however,hasbeenrisingfrom5%to25%in2008duetothecompany’sabilitytocontrolitsexpenditure.Theprofitabilityratiosareexpectedtoremaininthesametrendbecausethecompanyhadafivetimesadministrationandsellingexpensesin2013asthatof2012.ExpansionofbusinessandexportationofproductstoGermanyexplainstheincreasedcosts(Robinson,2012:86).Theacceptedliquidityratiosforbusinessesarealways1:1or2:1.Thefollowingtableshowstheliquidityratiosofthecompanyovertheperiodbetween2006and2013.DATE2006200720082009201020112012VALUE0.700.601.780.951.250.950.92Theratioshavebeenontherisefrom2006to2008.In2009,theyfellandroseagainin2010.In2011,itfellto2012.Theforecastindicatesthattheorganizationwillmaintainafavorableliquidityratioaboveonebyensuringthatitreducesthevalueofitstradecreditorsthusraisingtheabilityofthecompanytomeetitsshort-termobligations.ThecurrentratioofthecompanyDate20052006200720082009201020112012Values0.350.951.032.241.281.641.411.41Thecurrentratiosarepartoftheliquidityratios.Ithasbeenontherisesince2005toapeakin2008.Howeverafterthatithasbeenfluctuatingbutmaintainedatarateabove1andabovetheindustryaverage.Thetrendisexpectedtobemaintainedacrosstheperiod.Themanagementefficiencyratios,theinventoryturnoverperiodanddebtordayshaveconstantlybeenincreasingbyonemonthsince2008.Theresultisalongoperatingcashcycle(OCC).ThelongertheOCC,thegreaterthefinancialrisksacompanyencounters.Theforecastforthe2014financialyearswillhavetoberaisedto71daysbecauseofthetrendofincreaseintheturnoverperiods.Thegearingratiosofthecompanywerehighatthestartasshowninthetablebelow.Theylaterreducedduetotheabilityofthecompanytofinanceitselfandreducethedebtfinancingfromloanstakenfrombanks(Petersonetal.,2012:98).Apartfromthehighestinterestcoversin2011of92timesduetonoloancoverthatyear.Thecompany’sabilitytopayitsinterestshasremainedatabove20timesovertheperiod,andtheforecastholdsthatthetrendtocontinuetothenextfinancialperiod.DATE20052006200720082009201020112012VALUES-153.11-314.27-534.1477.82313.80146.89228.57218.95Thecompany’searningspershareratios(EPS)havealsobeenincreasingfrom£6in2008to£2500in2014.Thetrendisexpectedtobecontinuingtothenextperiodbecausethevaluepersharewillberisingastheresultofincreasedconfidenceinthemanagementoftheownersofthecompany.Workingcapitalanalysis200720082009201020112012Tradedebtors70,945161,719271,539510,306608,5881,035,955Stock50,58964,680101,231168,065326,070633,329Tradecreditors117,833140,092303,537427,991715,7771,307,765WorkingCapital3,701173,35186,068273,924291,040531,994Theworkingcapitalhasindicatedariseinthevalueofthetradecreditorsanddebtors.The2010to2012valuesareindicatingastrongabilityofthecompanytoretainmoreoftheircustomers.Thetradecreditorsaremorethanthetradedebtorsbecauseofincreaseddemandandsalesfortheproduct.ThetrendisforecastedtoremainthesameduetoexpansionandthecompanyexportingitsproductstoGermany.BenchmarksThebestbenchmarkforthecompanyisInnocentSmoothiesInc.becausetheyhaveasimilarnatureofproductsandhistory.InnocentisgrowingthroughcoordinationwhilePulsinthroughdirection.IthasgivenPulsinachancetolookaheadandlearnfromthemistakesandachievementsofInnocentbecauseInnocentisstandingmoreestablishedgrowthprocess(Wahlenetal.,2010:56).PulsinhasdonewellinmaintainingabetterprofitabilitythanInnocentinthebeginning.TheNPMofInnocentrangedbetweennegativesandzerowhilethatofPulsinwasbetween20%and25%.ItwasbecauseInnocentdidnotexercisecontrolovertheirexpenseswhilepulsingdid.Itwasalsobecauseinnocent’sshareswereboughtbyCoca-ColawhilePulsinkeptitsharesbetweenitsthreedirectors.AfterCoca-Colatookoverthebusinessin2009,therewasslowdecision-making,unlikePulsinwherethedirectorshavecontrolofthebusinessandmakefastdecisions.Thegearingratioswasabove100%untilwhen2009becausethebusinesshadencounteredproblemsinabilitytopaytheirdebts.Pulsinexperiencedthesameproblemsbutusedtheoptionstore-investratherthanborrowingsfrombanks.Theyalsomadeuseofcrowdborrowingswhoseinterestrateswerelowerthanthoseofthebankbyabout3%to5%.Pulsin,however,hasbeenexperiencinglowerperformanceintermsoftheOCC.InnocenthasahigherOCCandlowerinventorydaysaswellasdebtordays.PulsinshouldavoidusingmorecashfrequentlybyensuringitimprovesitsOCClevelbyensuringthedebtorandinventorydaysarebelow30days(Kopczynski,1996:37).OtherfactorslikeimageprotectionandcorporateresponsibilityhavehelpedInnocentgainmoresalesthanInnocent.Itisbecauseitallocatessomepartoftheprofitstoenhancethecompany’sreputationthusincreasingthecustomerconfidence.Pulsinshouldlearnfrominnocent’sstrategyofusingabout10%to20%oftheirprofitfordonationstocharitiesandadvertsthusmaintainingahealthyandethicalimage.Lecturer’spresentationThesalesofPulsinLtdhaveperformedwell.Infigure1thesalesvaluehasbeenincreasingovertheperiodfrom2011to2013.Alsoitisnotabletheeffectofinnovationandintroductionofnewproductsastheproteinpowderswhichwerenewproductsin2011theirsalesvolumehasbeenincreasingalmosttothatofthesizeoftheirtopsellingproduct.Figure1Source:Pulsinguestlectureslide,2014AsthecompanyistravellingtowardsgrowththroughdirectioninthesecondphaseoftheGreinercurveitisimportanttoconsiderthesalesdirection(Fridsonetal.,2011:28).ThecompanyshouldfocusondevelopingsalesintheU.Kinternetandwholesalecustomersastheyaccountfor70%ofthetotalsales.Infigure2,thesalesofproductstotheinternetarehighestat£1.59perunitfollowedbywholesalersat£0.75perunitandfinallydistributorsat£0.7perunit.Thecompanyshould,therefore,focusmoreonthecustomerswhowillgivethemmoresalesandbetterprofitmargins.Moreover,infigure3,itshowstheproblemofcashflowcyclecouldbesolvedbecausethereareusuallyshorterpaymentperiodswithsellinggoodstowholesalersandontheUKinternet.Therefore,thedebtordaysandOCCwouldbecorrespondinglydeclined(Feldmanetal.,2007:79).Moreover,infigure3,itshowstheproblemofcashflowcyclecouldbesolvedbecausethereareusuallyshorterpaymentperiodswithsellinggoodstowholesalersandontheUKinternet(Bernstein,etal.,2000:56).Therefore,thedebtordaysandOCCwouldbecorrespondinglydeclined.Figure2:Source:Pulsinguestlectureslide,2014Figurethreeprovidesasolutiontotheproblemofcashflowcycle.ThedebtordaysintheOCCcanbereducedbyincreasingthesalestowholesalersandtheU.Kinternetbecausethereareshorterpaymentperiods.Figure3Source:Pulsinguestlectureslide,2014RecommendationsandconclusionsPulsinhasencounteredmanyadvantagesduetoitsinvolvementinResearchandDevelopment(R&D).ItisduetothepolicyoftheU.KgovernmentthatanyinvestmentinR&Dattractsacorporationtaxreliefofabout225%oftheR&D.Thecompanyshould,therefore,havestructuredresearchmethodssuchasusingDataMonitoringsystemandemployingresearchcompaniestocontrolthequalityoftheresearch.Itwillassistbecausethecompanywillhavereducedtaxesthusmoreprofits.Thecompanykeepsafavorableamountofcashintheirfinancialstatementsbecausemajorityoftransactionsarecarriedoutthroughcash.Theholdingofmorecashcanleadtosustainablegrowthinthefuture.Keepingalowgearingratiowhichdeclineseveryyearenablesthecompanytoexpandasitincreasesitsreducesitsrelianceondebts(Atrill,2013:30).ReferencesAtrill,P.(2013).FinancialAccountingforDecisionMakers.Harlow,PearsonEducation.HYPERLINK"http://www.myilibrary.com?id=459576"http://www.myilibrary.com?id=459576.Bernstein,L.A.,&Wild,J.J.(2000).Analysisoffinancialstatements.NewYork[u.a.],McGraw-Hill.Feldman,M.,&Libman,A.(2007).Crashcourseinaccountingandfinancialstatementanalysis.Hoboken,N.J.,Wiley.http://www.books24x7.com/marc.asp?bookid=16885.Fridson,M.S.,&Alvarez,F.(2011).Financialstatementanalysisworkbookstep-by-stepexercisesandteststohelpyoumasterfinancialstatementanalysis.HobokenN.J.,Wiley.HYPERLINK"http://www.books24x7.com/marc.asp?bookid=43202"http://www.books24x7.com/marc.asp?bookid=43202.Jablonsky,S.F.,&Barsky,N.P.(2001).Themanager'sguidetofinancialstatementanalysis.NewYork,Wiley.Kopczynski,F.J.(1996).Prospectivefinancialstatementanalysis.NewYork:Wiley.PetersonDrake,P.,&Fabozzi,F.J.(2012).Analysisoffinancialstatements.Robinson,T.R.(2012).Internationalfinancialstatementanalysis.Hoboken,N.J.,JohnWiley&Sons.HYPERLINK"http://www.books24x7.com/marc.asp?bookid=46147"http://www.books24x7.com/marc.asp?bookid=46147.Subramanyam,K.R.,&Wild,J.J.(2009).Financialstatementanalysis.Boston,McGraw-HillIrwin.Wahlen,J.M.,Bradshaw,M.,Baginski,S.P.,&Stickney,C.P.(2010).Financialreporting,financialstatementanalysis,andvaluation.Mason,Ohio,South-Western.