Ratio analysis is a method used to analyze the financial reports of a company and interpret trends in the company’s performance. As a nonaccounting manager, you use numerous ratios to analyze your company’s performance year-by-year and benchmark the performance to industry averages, to an individual competitor’s performance, or against a predetermined target.
For this assignment, read “Case study question 7.2: General Machinery Ltd” on page 168 in chapter 7 of our textbook, Accounting for Managers: Interpreting Accounting Information for Decision Making, 5th. Using the data from the case study, repond to the tasks below.
Tasks:
Consider the following scenario for this assignment: You are an external investor who is considering General Machinery as one of the potential companies for investment. Respond to the following in your initial discussion post:
- Discuss the major issues facing the company.
- Recommend what actions the company should take to improve its overall performance, addressing each of profitability, liquidity, gearing, activity, and shareholder return measures.
- In what way does the Statement of Cash Flows help you to interpret the ratios and financial performance of the company?
- What information does ratio analysis provide for meeting the requirements of the case questions?
- Which ratios are the most important, and which ones are of limited value? Justify your choices for the scenario.
- Why do you need to compare:
- The current year ratios with the prior year ratios?
- The ratios of competitors in the same industry or some other benchmark?
- Other than the computations used in ratio analysis, what else is necessary to properly analyze a company for investment?
Submission Details:
By the due date assigned, post your response to the Discussion Area. Through the end of the module, read and respond to at least two other classmates’ posts on at least two different days of the week.
Write your initial response in 300–500 words. Your response should be thorough and address all components of the discussion question in detail. Include citations of all sources, where needed, according to the APA style, and demonstrate accurate spelling, grammar, and punctuation.
Case study question 7.2: General Machinery Ltd
General Machinery manufactures computer numerical control (CNC) equipment for its customers who use the equipment in the manufacture of electronic circuit boards. Ratios have been calculated from annual reports for the last five years and are shown in Table 7.19. The Statement of Cash Flows is shown in Table 7.20.
TABLE 7.19 Ratios.
|
|
2014 |
2013 |
2012 |
2011 |
2010 |
|
ROI |
5.0% |
3.2% |
3.6% |
6.2% |
5.8% |
|
ROCE |
9.2% |
7.1% |
6.2% |
7.6% |
6.4% |
|
Operating margin |
16.8% |
13.9% |
12.6% |
15.7% |
14.1% |
|
Gross margin |
70.0% |
71.0% |
72.0% |
74.0% |
75.0% |
|
Overhead to sales |
53.2% |
57.1% |
59.4% |
58.3% |
60.9% |
|
Sales growth |
11.4% |
9.4% |
6.7% |
9.1% |
|
|
Working capital |
198% |
360% |
340% |
368% |
326% |
|
Acid test |
135% |
287% |
270% |
275% |
243% |
|
Gearing |
42.0% |
40.5% |
38.6% |
36.5% |
37.4% |
|
Interest cover |
182% |
162% |
202% |
376% |
517% |
|
Asset turnover |
48% |
46% |
44% |
44% |
41% |
|
Days’ sales outstanding |
60 |
63 |
68 |
70 |
73 |
|
Inventory turn |
3.3 |
3.1 |
2.8 |
2.2 |
2.3 |
|
Days’ purchases outstanding |
78 |
88 |
102 |
105 |
111 |
|
Dividend per share |
$0.036 |
$0.027 |
$0.025 |
$0.036 |
$0.036 |
|
Dividend payout ratio |
48.4% |
57.9% |
49.0% |
41.4% |
45.7% |
|
Dividend yield |
3.0% |
2.5% |
2.5% |
4.5% |
5.6% |
|
EPS |
$0.075 |
$0.047 |
$0.052 |
$0.088 |
$0.080 |
|
P/E ratio |
16.0 |
23.4 |
19.3 |
9.1 |
8.2 |
General Machinery’s Statement of Cash Flows is also shown for the last few years (Table 7.20).
TABLE 7.20 Statement of Cash Flows.
|
|
2014 |
2013 |
2012 |
2011 |
|
Cash flow from operating activities |
|
|
|
|
|
Cash receipts |
772,000 |
700,000 |
635,000 |
595,000 |
|
Cash payments |
−628,000 |
−601,000 |
−537,200 |
−503,000 |
|
Interest paid |
−72,000 |
−60,000 |
−40,000 |
−25,000 |
|
Income tax paid |
−17,700 |
−11,100 |
−12,240 |
−20,700 |
|
Net cash from operating activities |
54,300 |
27,900 |
45,560 |
46,300 |
|
Cash flow from investing activities |
|
|
|
|
|
Payments for property, plant & equipment |
−200,000 |
−50,000 |
−50,000 |
− |
|
Net cash used in investing activities |
−200,000 |
−50,000 |
−50,000 |
− |
|
Cash flow from financing activities |
|
|
|
|
|
Proceeds from borrowings |
50,000 |
50,000 |
50,000 |
− |
|
Dividends paid |
−20,000 |
−15,000 |
−14,000 |
−20,000 |
|
Net cash from/used in financing activities |
30,000 |
35,000 |
36,000 |
−20,000 |
|
Net increase/(decrease) in cash |
−115,700 |
12,900 |
31,560 |
26,300 |
|
Cash at beginning of year |
135,700 |
122,800 |
91,240 |
64,940 |
|
Cash at end of year |
20,000 |
135,700 |
122,800 |
91,240 |
1. Discuss the major issues facing the company.
2. Recommend what actions the company should take to improve its overall performance, addressing each of profitability, liquidity, gearing, activity, and shareholder return measures.
3. In what way does the Statement of Cash Flows help you to interpret the ratios and financial performance of the company?