Thetron Limited


(a)





Thetron limited is a company which is in the packaging industry. It has a consistent growth record over several years. Its financial statement for 20x1, 20x2 and 20x3 are summarised overleaf. The managing director of the company asked to write a report to compare to its performance in 20x1 and 20x2 and the industry average.


In this report, financial ratio analysis will be used to valuate the company’s performance and health. Financial ratios are the one of the most important tools available to business. Because of financial ratios are calculated by using the information provided in historical or forecasted balance sheets and income statements. Ratios are most commonly used for trend analysis. Generally financial ratio fall into several categories:



o Profitability ratios – it focuses on a company’s operational performance and help business owners determine if they are maximizing their bottom line. They also offer insights into the return a company is generating from its assets and invested capital.

o Liquidity ratios -- focus on a company’s ability to pay its bills when they come due. Bankers and suppliers use liquidity ratios to measure a company’s creditworthiness.

o Activity ratios – it measure about how much better working capital management doing.

o Solvency ratios – which give a picture of a company\'s ability to generate cash flow and pay it financial obligations.

o Investor ratios – is about the price of share and the earning per share.
From the history information, the financial ratios at 20x3 are found (at the back of the report). Compared with past tow years and industry average ratio, it shows that:


Profitability ratios


During 20x3, competitive pressure increase, GM (gross margin) goes down to 42% form 42.9% in this previous year. GM in 20x3 was also lower than the industry average figure. During 20x3, OM (operation margin) was also lower than the 20x2, and also the IA (industry average) figure.


Overall, the company’s profit performances in 20x3 have warned and does not compare well with in industry.


Liquidity ratios


During the year, liquidity improves further, however the current ratio was much higher than the industry average. Higher stock and debtor level means more finance is being used than necessary. This brings down ROCE.


Gearing


During 2ox3, the company has become dangerous, G (gearing) goes up to 1.06 from 0.73 in 20x3. And higher than industry average figure as well.


Gearing is measure of financial risk; the company has the risk of closures. The gearing goes up means the products of the company are not welcomed in the market as before.


P/E (price earning ratio)





The P/E ratio is increased from 8.95 in 20x2 to 12.33 in 20x3. And it is much lower than industry average figure in 20x3.


P/E ratio is an indication of how highly the market “rates” or “values” a business. Price earning goes up is good for the company. It means the company make more profit in 20x3. But the P/E ratio of the company is lower than industry average; it means that the profit level of the company made is lower than same industry company. That is not good for the company.


ratio calculation:


Ratio


20x1


20x2


20x3


IA for 20x3


ROCE


13.16%


19.00%


14.50%


18.00%


GM


43.80%


42.90%


42.00%


43%


OM


13.80%


16.10%


14.14%


16%


Current Ratio


0.99


1.78


1.82


1.20


Stock days


79.00


62.00


70.82


60.00


Debtor days


64.00


51.00


61.20


45.00


Creditor days


84.00


64.00


28


50.00


Gearing


1.10


0.73


1.06


0.70


P/E


15.20


8.95


12.33


18.00


Detail calculation


Ratio


Formula


20x1


20x2


20x3


ROCE


Operation profit / Capital employed


97/(351+300+86)=13.16%


135/(409+300)


= 19%


135/(449+450+30)


=14.5%


GM


Cross profit / sales


307/701 =43.80%


359/837=42.9%


405/955=42.00%


OM


Operation profit / Sale


97/701=13.80%


135/837=16.10%


135/955=14.14%


Current Ratio


Current assets / Current liability


174/176=0.99


196/110=1.78


241/132=1.82


Stock days


year end stock / Average daily stock used


4x365/190=79


43x36/253 =62


65x365/335=70.82


Debtor days


year and debtors x 365 / sales


123x365/701=64


116x365/837=51


160x365/955 =61.2


Creditor days


year end creditors x 365 / purchases


43x365/187=84


45x365/255=64


25x365/325=28


Gearing


Debt / equity


( 300+86 )/351 =1.1


300/409=0.73


(450+30)/449=1.06


EPS (earning per share)


Profit after tax / no. of shares


46/200=0.23


78/200=0.39


73/200=0.365


P/E (price earning ratio)


share price / eps


3.49/0.23 =15.20


3.49/0.39 =8.95


4.5/0.365=12.32


Reference


Bayldon, R., Woods, A., and Zafiris, N. (1984), "A note on the pyramid technique of financial ratio analysis of firms performance", Journal of Business Finance and Accounting 11/1, 99-106.


Beaver, W. (1977), "Financial Statement Analysis", Handbook of Modern Accounting, eds Davidson, S. and Weil, R., 2nd ed. McGraw-Hill.


Bernstein, L. (1989), Financial Statement Analysis: Theory, application, and interpretation. Richard D. Irwin, 4th ed.


Brealey, R., and Myers, S. (1988). Principles of Corporate Finance. McGraw-Hill, 3rd ed.


Chen, K.H., and Shimerda, T.A. (1981), "An empirical analysis of useful financial ratios", Financial Management, Spring 1981, 51-60.


Committee for corporate analysis (1990). Corporate analysis of the financial statements (in Finnish). Painokaari.


Courtis, J.K. (1978), "Modelling a financial ratios categorise framework", Journal of Business Finance and Accounting 5/4