Question

Q.#1 Using Excel Format

The data below show a summary of three major international companies’ financial statements.

	Company
	A	B	C
Financial statements	GBPm	GBPm	GBPm
Income statements
Revenue	5268.00	4646.25	13411.88
Profit before interest and taxation (EBIT)	1012.80	880.00	1863.22
Net interest payable	(96.00)	(122.50)	(221.84)
Taxation	(223.20)	(260.00)	(683.22)
Minorities	(112.80)	(131.25)	(197.06)
Profit for the year	580.80	366.25	761.10
Balance sheets
Fixed assets	4352.40	5614.44	13779.60
Current asset investments, cash at bank and in hand	391.84	342.20	818.40
Other current assets	691.92	758.74	1960.80
Total assets	5436.16	6715.38	16558.80
Interest bearing debt (long term)	(746.48)	(1811.30)	(4448.40)
Other creditors and provisions (current)	(1516.52)	(1300.36)	(3729.60)
Total liabilities	(2263.00)	(3111.66)	(8178.00)
Net assets	3173.16	3603.72	8380.80
Shareholders' funds	2679.64	2724.62	7398.00
Equity minority interests	493.52	879.10	982.80
Capital employed	3173.16	3603.72	8380.80
Cash flow
Working capital movements	(65.72)	83.78	128.40
Net cash inflow from operating activities	1036.80	1218.75	2704.56

Required:

1. Complete the following table:

	Company
	A	B	C
Debt Management Analysis (solvency)
Debt ratio
Debt to Equity Ratio
Times-Interest-Earned Ratio
Liquidity Analysis
Current Ratio
Asset Management Analysis
Total Asset Turnover
Profitability Analysis
Return on Equity
Net Margin

2. Perform a comparison analysis between the three companies based on following ratios:
   1. Debt ratio
   2. Total Asset Turnover
   3. Net Margin

“Explain your full conclusion for part b”

Answer 1

			Company A	Company B	Company C
S.No.	Debt management analysis	Formula	Calculation	Ratio	Calculation	Ratio	Calculation	Ratio
1	Debt ratio	(Short-term debt + Long-term debt)/ Total assets	2263/5436.16	0.42	3111.66/6715.38	0.46	8178/16558.80	0.49
2	Debt to Equity ratio	(Short-term debt + Long-term debt+Other fixed payments) / Shareholder's equity	2263/3173.16	0.71	3111.66/3603.72	0.86	8178/8380.80	0.98
3	Times-Interest earned ratio	Earnings before interest & tax / Interest expense	1012.80/96	10.55	880/122.50	7.18	1863.22/221.84	8.40
	Liquidity analysis
4	Current ratio	Total current assets / Total current liabilities	(391.84+691.92)/1516.52	0.71	(342.20+758.74)/1300.36	0.85	(818.40+1960.80)/3729.60	0.75
	Asset management analysis
5	Total asset turnover	Net Sales/Average total assets	5268/5436.16	0.97	4646.25/6715.38	0.69	13411.88/16558.80	0.81
	Profitability analysis
6	Return on equity	(Net income/Shareholder's equity)*100	(580.80/3173.16)*100	18.30%	(366.25/3603.72)*100	10.16%	(761.10/8380.80)*100	9.08%
7	Net Margin	(Net Profit / Revenues)*100	(580.80/5268)*100	11.03%	(366.25/4646.25)*100	7.88%	(761.10/13411.88)*100	5.67%

Comparing the debt ratio, total assets turnover ratio and net margin for the three companies, it can be seen that Company A is most effective amongst the three.

The debt ratio, which provides information on the portion of debt in financing total assets of the Company, is lowest for Company A. This is a good indicator of financial health as lower debt means lower debt obligations and interest obligations. However, too low debt ratio is also not considered good from the point of view of effectively utilizing resources.

Secondly, the total assets turnover, which shows how quickly and effectively the assets of a Company can generate sales. Higher the ratio, the better it is. This is also best for Company A.

Net margin, which is net income after all obligations such as interest and taxes – to –sales ratio, is also highest for Company A at 11%. As we can see in the income statement, that though Company C has the highest revenues figure, but its profitability is least owing partially to huge debt servicing costs and majorly to high operating costs. While, Company A having the lowest sales revenue still is most profitable, owing to lower leverage and better management of operating costs. Lower debt ratio ensures it has less debt servicing expenses and more profits at hand.

So, the above ratios do work in an inter-linked manner and one does affect the other.