Question

The Scope and Environment of Financial Management Financial Statements and Financial Statement Analysis

Directions: Look for a company that is publicly listed in Bahrain Bourse. Secure a copy of their Financial Report (Latest). Please do not forget to attach the copy of the financial statements (Income Statement, Balance Sheet). Using the Financial Report, provide the following ; Requirements; Compute and provide the general interpretation for the following Financial Ratio; Current Ratio Quick Ratio Average Collection Period Debt Ratio Net Profit Margin Earnings per share Return on Total Asset Return on Equity Price Earnings Ratio Book Value per share

Answer 1

The company selected by us in the Bahrain bourse is Aluminium Bahrain B.S.C. with financial period ending December 31st, 2019.

Attaching the link of the report --> https://www.albasmelter.com/IR/Publications/Documents/Annual%20Reports/AnnualReport2019.pdf

Financial Ratios (Calculations in 000' Bahraini Dinar)

a.) Current Ratio = Current Assets / Current Liabilities = 457,939 / 456,892 = 1.0023

The current ratio compares all of a company’s current assets to its current liabilities. These are usually defined as assets that are cash or will be turned into cash in a year or less, and liabilities that will be paid in a year or less.

The current ratio of 1.0023 is greater or almost equal to 1 which signifies, that the company is capableof paying its obligations because it has a larger proportion of short-term asset value relative to the value of its short-term liabilities.

Also since the ratio is not so large say 3, signifies that the company is using its current assets efficiently, is securing financing very well, or is managing its working capital.

b.) Quick Ratio = Liquid Assets / Current Liabilities = (Current Assets - Inventories - Prepayments) / Current Liab

= [457,939 - 221,155 - (1320+1106)] / 456,892 = 0.513

The quick ratio indicates a company's capacity to pay its current liabilities without needing to sell its inventory or get additional financing.

A result of 1 is considered to be the normal quick ratio. It indicates that the company is fully equipped with exactly enough assets to be instantly liquidated to pay off its current liabilities. A company that has a quick ratio of less than 1 (in this case 0.513 ) may not be able to fully pay off its current liabilities in the short term, while a company having a quick ratio higher than 1 can instantly get rid of its current liabilities.

c.) Average Collection Period = Average Accounts Receivable / Net Sales x 365

= 142,989 / 1,029,378 x 365 = 50.70 Days = 51 Days (Approx)

The average collection period represents the average number of days between the date a credit sale is made and the date the purchaser pays for that sale. A company's average collection period is indicative of the effectiveness of its accounts receivable management practices.

Considering most companies collect within 30 days. Collecting its receivables in a relatively short—and reasonable—period of time gives the company time to pay off its obligations.

If this company's average collection period was longer—say more than 50 days (like in our case), it would need to adopt a more aggressive collection policy to shorten that time frame.

d.) Debt Ratio = Total Debt / Total Assets = 850,537 / 2,420,251 = 0.35

The debt ratio measures the amount of leverage used by a company in terms of total debt to total assets.

A debt ratio greater than 1.0 (100%) tells you that a company has more debt than assets.

Meanwhile, a debt ratio less than 100% (in our case 0.35) indicates that a company has more assets than debt.