Financial Statement Analysis

FINANCIAL MENT ANALYSIS al Affiliation Financial ment analysis The rate of sales growth is given by the following formula
Rate of sales growth=Net sales of current year-Net sales of previous year
Previous net sales x 100%
Chem- Dem’s rate of sales growth for 2012 is given by:
3,814-3,051 = 25%
3,051 x 100%
Chem-Med’s forecasted rate of sales growth for years 2011, 2012 and 2013 are given below:
Year 2011: 5,340-3,814 = 40%
3,814 x 100%
Year 2012: 7,475-5,340 =39.98%
5,340 x 100%
Year 2013: 10,446-7, 475 = 39.75%
7,475 x 100%
The rate of sales growth above shows that the financial capacity of the company is forecasted to increase from the actual 25% in 2010 to approximately 40%.
2. Net income growth is given by the following formula:
Net Income growth=Net Income of current year-Net Income of previous year
Net Income of previous year x 100%
Chem-Dem’s net income growth for 2010 is given by:
1,150-766 = 50.13%
766 x 100%
Chem-Med’s forecasted net income growth for years 2011, 2012 and 2013 are given below:
Year 2011: 1,609-1,150 = 39.91%
1,150 x 100%
Year 2012: 1,943-1,609 =20.76%
1,609 x 100%
Year 2013: 2,903-1,943 = 49.41%
1,943 x 100%
The above figures shows unstable growth rate of the company, from 50% growth in 2010 to a forecasted growth of 39.91% in 2011.Net income growth gives a good picture on how a company’s profits increases.
3. Comparison of Chem-Med’s 2010 current ratio to that of Pharmacia.
Current ratio is calculated as:
Current Ratio= Current Assets/Current Liabilities
Chem-Med’s Current ratio for 2012 is given by.
$1,720,000/ $ 593,000 = 2.9times.
Chem-Med’s current ratio for 2010 is 2.9 times while that of Pharmacia is 2.8 times. This shows that Chem-Med will be able to pay its current liabilities using its current assets and as such would not resort to additional external financing. Additionally, Chem-Med’s current ratio is far above the industry’s 2.4 times in 2010.This show that the liquidity of the company is far much better than most of its competitors in the industry.
Chem-Med’s 2013 forecasted current ratio is given by.
$3,261,000 /$ 1,647, 000 = 2 times
This shows a reduction of the company’s liquidity status.
4. Debt-to –Asset ratio of Chem-Med Company for 2010, 2011, 2012 and 2013.
Debt to Asset ratio = Total Liabilities/Total Assets
Year 2010: $ 614,000/$4,491,000= 0.14 to 1
Year 2011: $ 857,000/ $ 6,343,000= 0.14 to 1
Year 2012: $1,212,000/$8,641,000= 0.14 to 1
Year 2013 $1,664,000/11,995,000= 0.14 to 1
From the above calculations, it can be seen that Chem-Med’s debt to Asset ratio is constant. This shows that only 0.14 of the company’s assets are financed by debt as opposed to equity.
From the calculation of Chem-Med’s Debt to Asset ratio of 2010, it shows that only 0.14 of its assets are financed by debt as opposed to the company’s 0.52.This means that Chem-Med has less debt compared to the industry.
5. Chem-Med’s account receivable collection period.
Average collection period = 365 days x average accounts receivable
Sales revenue (Credit sales)
Year 2010: 365 days x $ 564,000/$3,814,000= 54 days
Year 2011: 365days x $ 907,000/ $5,340,000= 62 days
Year 2012: 365 days x $1,495,000/$7,475,000= 73 days
Year 2013 365 days x $2,351,000/$10,466,000= 82 days
From the above computations, it is evident that collection period is getting longer. This means that the liquidity of the company is reducing because the credit sales are not converted to cash as quickly as the previous years.
6. Return on Equity ratio
Return on Equity ratio= Net Income/ Shareholders’ equity x 100%
Chem-Med’s ROE for 2010= $1,150,000/ $ 2,062,000 x 100%= 55.78%.This shows that Chem-Med’s ROE is above that of Pharmacia and industry, which are 29.56% and 12.29% respectively.
Using Du pont method, Chem-Med’s financial position is far much better than Pharmacia. Du Pont method analyses ROE in three parts that include profitability (profit margin), operational efficiency (asset turnover) and financial leverage.
ROE= profit margin x asset turnover/ (1-debt to assets).
For Chem-Med.
ROE =1150/3814 x {net sales/average total assets}/ (1-Debt to assets).
=1150/3814 x {3814/4491}/1-0.14)
=0.32 x 0.85/0.86
=0.10=10%
References
Robinson, T. (2009). International financial statement analysis. Hoboken, N.J.: John Wiley &amp. Sons.