Assignment 3 Draft

Hey guys, here is my ASS#3 Draft. I know I'm quite late but due to problems with my computer and lack of time I only started writing my comments on each ratio a few days ago. This is a part of stage one. I still have a lot to write and hopefully I will have that uploaded by tomorrow. I am waiting for your feedback ;).

Stage 1 

Ratio Analysis 

The ratios have been calculated for each year from 2011-2014 and have been added in the ratio tab in the excel spreadsheet.  The information from different tabs of the excel spreadsheet has been linked to show the independence between them and to make calculation easier. 

Profitability Ratios 

Net Profit Margin (Net profit after tax /sales)  

                                                                                          

This ratio was calculated with information found in the income statement in the financial statements tab and itshows us  the percentage that the company has gained for every dollar that it has made for each year. For example on 2011 for 1$ it has earned 18.4 cents . By the net profit margin calculation throughout the years we can understand that it has decreased on 2012, it is 8.3% less than 2011. Then on 2013 their earnings have slightly increased but they still remain lower than the first year. And on 2014 their earnings have decreased a lot. This shows that although it made a great profit in the first fiscal year, ithasn't been efficient at increasing their profit. 

Return on Assets (Net Profit after tax/ total assets) 

 

Return on Assets was calculated with data found in the income statement and balance sheet from financial statements tab. This shows a certain percentage benefit generated for every dollar's worth of assets. It helps us understand how efficiently CMI is  using total assets to generate profit.In 2011 this percentage is very high. As in the first profitability ratio, their profit is higher in 2013 compared to 2012, however the percentage keeps declining on to 2014 showing that the company hasn't had much success in generating profit from its total assets. 

 Efficiency Ratios (Asset Management Ratios) 

Total asset turnover ratio(sales/total assets) 

 

This ratio shows the number of sales generated for every dollar's worth of assets. It shows how well the company can use assets to generate sales. This ratio is calculated by dividing sales with total assets. CMI  appears  to have had many ups and downs throughout the years. It had less sales in 2011 by generating $1.24 for each $1 worth of asset (since the profitability ratios were higher in 2011 it shows that the products sold were few but with a high price) and the highest in 2012 generating $1.65 sales for every $1 asset. The fact that the amount of sales has declined from 2012-2014 shows that the company is not doing a good job in using its assets efficiently.  

Liquidity Ratios 

Current Ratio(current assets/current liabilities) 

 

This ratio measures a firm's ability to pay its short-term debts when they fall due and achieve liquidity. It depends on the current assets and current liabilities found in the balance sheet. Current assets are resources expected to turn into cash within the financial year while liabilities are accounts that need to be paid within the financial year.  2 is considered as the average current ratio in most firm but they depend on the industry.  Compared to the average,CMI's  current ratios appear to have high liquidity and it has increased in the recent years. in 2014 they received $4.55 for each $1 debt.This shows that this company is very successful in paying its liabilities 

Financial Structure Ratios 

Debt/Equity Ratio 

 

Assets=Liabilities + Equity so equity and liabilities are the ones financing the business and this ratio helps us find out what percentage of the financing debts and equity take. If this ratio is close to 100% this means that both debt and equity are financing the company equally, but in CMI's case this ratio has had an increase in 2012 so during this year the company has had difficulties in generating enough cash to pay its debts. The ratio has been lower in the rest of the years, but the lowest is in 2014 by 20.3%. This shows that in this year CMI hasn't used any opportunities to gain profit from financial borrowings, even though it would  have been beneficial to it. 

Equity Ratio(Equity/Total Assets) 

 

The Equity Ratio shows what percentage of the Assets is financed by the Equity shareholders. For CMI during all of the financial years most of the funds are equity's contribution and a smaller percentage is funded by the creditors.In 2012 for every $1 that CMI owns 65 cents are funded by equity and the creditor's contribution has increased during this year, but the percentage is a lot higher(approximately 80%)in the rest of the years. 

Market Ratios 

EPS Earnings Per Share(Net profit after tax/number of issued ordinary shares ) 

 

It is a good indicator on the profitability of the company since it shows the amount of profit that is generated by the number of ordinary shares in the firm.  In 2011 EPS is higher than the rest of the years showing the profit was higher during that year. Then in 2012 it is decreased by 0.23. An increase is noticed in 2013 but the earnings per share have declined much lower in 2014 telling us that the earnings distributed to the number of issued ordinary shared is very low and  the company has a lot of work to do if it wants to be successful. 

DPS Dividend Per Share(Dividend/Number of Issued Ordinary shares) 

 

This ratio shows the number of dividends paid for the number of issued ordinary shares. CMI's DPS appears to be very interesting since the ratio is 0 from 2011-2013 because there have been no dividends paid at all during these years. However in 2014 the number of dividends paid is$0.09. So another increase in DPS is expected for the next years. 

Price Earnings Ratio(Market Price per share/ Earnings per Share) 

 

The Price Earnings Ratio shows the how much investors are willing to pay for every $1 earning.  Tha Market Price Per Share of CMI has changed throughout the years as shown below.  

CMI's price earnings ratio has also changed during the 4 years with the highest ratio in 2012 and the lowest in 2011. It has declined in 2013, but it increased once more in 2014 where it results in a price earning ratio of$8.47 . 

Ratios Based on Reformulated Financial Statements 

ROEReturn On Equity(Comprehensive Income/Shareholder's Equity) 

 

The Return On Equity Ratio is a very important ratio since it shows the profitability of a company throughout a year based on the equity that has been invested in the business for that year. For CMI Electrical the income generated from the shareholders equity , as every other ratio that shows profit is higher in 2011. It is decreased by nearly 8% in 2012 since the Comprehensive Income has also decreased. An increase is seen in 2013 and another decrease in 2014. We can tell that the company has failed to increase it's ROE recently and it's performance is very low in the last year compared to the previous ones. 

RNOA Return on Net Operating Assets(Operating Income After Tax (OI)/Net Operating Assets (NOA)) 

 

This Ratio shows the net operating income that comes from each dollar worth of net operating assets. The net operating assets are one of the most important factors from which the company can generate profit. Again,while looking at CMI's RNOA we can tell that it was higher 5 years ago and in 2014 it has declined again.Judging from the ups and downs the company has gone through, we can expect a small increase in the future, however it is very unlikely that the income will be higher than any of the previous years except for 2014. 

NBCNet Borrowing Cost (Net Financial Expenses After Tax / Net Financial Obligations) 

 

The Net Borrowing Cost Ratio shows the debt obligations of a company based on interest rates. For CMI the lowest NBC ratio is in 2011 and it has had a slight change in 2012. The highest is in 2013 showing that the company has had more costs on borrowing during this year because of an increase in interest rates. It has decreased in 2014, however it still remains high. This shows that the company's performance hasn't been good in the last two years since it's costs on debts have been higher. 

PM Profit Margin(Operating Income after tax(OI) /  sales) 

 

This ratio shows the profit earned for each dollar of sales made. It is quite similar to the Net Profit Margin ratio, but unlike that, the PM analyses the relationship between operating income after tax and sales. For CMI the profit is the lowest in the last year, 2014 showing that the company hasn't earned a lot of profit and is going through a hard time generating profit from the sales. 

ATO Asset Turnover(Sales/Net operating Assets (NOA)) 

 

The ratio shows how many sales each dollar NOA generates. This ratio changes over time as the business also changes. ATO ratio for CMI indicates that this company has been most efficient in generating sales from the net operating assets in 2012. This ratio is the lowest in 2014 and this is so because even though the NOA is similar in all four years,the sales have been lower, compared to the previous years, in 2014.