Introduction
According to Michell, financial statement analysis is a procedural, keen and a very necessary step taken by interested parties in any business undertaking as a measure to scratch beneath the surface what can be seen by any person concerning the business’. This will set a very important platform for analysing very important parameters like risks the business is facing, returns and many others (Michell, 2010).
A business has many stakeholders whose interests revolve around the operations and sustainability of the business as a going concern. This perspective narrows down to the fact that every interested party aims to see the business posting improved performance year after a year. Financial reporting forms an integral part in providing the necessary data for forecasting, which serves the business with provisions of ways to evade business hurdles (Reilly, 2011).
However there are several reasons making a crucial business decision should not be based on financial statement analysis only. Here are some of the identified limitations this tool of evaluation.
- The fact that financial statement relies heavily on historical information raises many questions about the validity of the same in a different trading period. Circumstances surrounding businesses keep changing and so does the performance.Hence, basing your arguments on analysis that was done under different circumstances may be misleading.
- This process provides only quantitative data brings out major weakness in importance of the process. Qualitative aspects of business performance cannot be captured in financial statements yet they form the bed rock of business success. These are aspects like customer satisfaction from the service delivery, motivation of employees and their willingness to continue serving the business in future.
- Accuracy of financial statements is very crucial, yet a difficult feat to attain. It calls for a very strict attention and professionalism which may not be exercised by the people tasked with this work. This propels the possibility of making in accurate and biased decisions.
- Financial statement analysis focuses mainly on past data, in order to show the future direction of the business. The fact that this model does not put in to consideration some important aspects of gauging business continuity like off balance sheet financing, customer delivery among other aspects keeps the model unreliable since it is not possible to give an absolute solution.(It cannot stand on its own.)
Liquidity ratios.
Liquidity is a company’s ability to meet its short term obligations when they fall due, in a manner that will not injure the long term financial health of the company. Different parameters are used to assess the sustainability of business (Fridson ,2011).
Current ratio.
In simplest terms, current ratio depicts the excess of current assets over current liabilities. The logical business idea is that current liabilities fall due within a year’s time, with the ability of the business to settle all this and remain unhurt by the outflow giving impression of financial strength. The recommendation by most accounting bodies and international organizations is to ensure the current ratio remains higher than 1.20.Any value below this bench mark will show liquidity problems (Fridson ,2011).
Here are the necessary calculations.
As far as this analysis is concerned, I am not satisfied with the current position of the two companies as far as this ratio is concerned. The values obtained are very low, a factor which raises many questions on their financial risk planning. It is evident from the excel calculations that none of the companies exceeds the threshold of 1.30 recommended by governing bodies. On a different note, current ratio has factors which may not constitute to short term financing solution at any time. Considering the two companies used here, the mere inclusion of stock makes it not a prudent ratio to guide the concerned decision makers (Fridson ,2011).
Acid test ratio
As highlighted above, conventionally stock turns out to be in many instances more of along term asset than a short term one. To dispose part of stock in order to offset a short-term bill incurred by the business may be difficult in some instances, hence explaining the exclusion of stock at hand in this calculation. The conventional ratio that gives a guarantee keeping the business safe in torrid trading times is a ratio equivalent to 1 or higher than this bench mark. Any value lower than this will keep the business in a tricky financial position with no guarantee of easy sail through financial storms that are precipitated by harsh economic climate as well as changes in business regulations (Fridson, 2011).
On this front, I hold my reservations to give a positive comment on the strategy. The ratios depict the current liabilities of the two businesses as higher than the current assets, raising the questions of how this will be financed. As well known, financing a short term liability with a long term fund constitutes to a financial mismatch hence keeping the two businesses in a tricky position (Mitchell2010).
The analysis.
Current ratio acid test ratio industry average average
(Current ratio)
2009 0.8 1.06 1
2008 0.89 1.067 1
2007 0.94 1.14 1
2006 0.96 1.15 1
2005 0.94 1.16 1
Workings in the (excel sheet).
Part2.
Time cumulative average market ave, s.d
.per share
(monthly) (t)
Future opportunities for Shangs ltd.
We focus on the following to guide us through the future of the company.
Equity and working capital ratios
This portrays several aspects on how the company puts to use the financial resources at their disposal from different sources: share holders, long term financiers like bond providers as well as internal sources of funding, example being retained earnings Fridson ,2011).
Return on investment
The ratios focused on this paper are rate of return of investment, gearing ratio
Return on investment underlines the return obtained from the various investment avenues that the decision makers have decided to harness in the market. To arrive at this conclusion, here is the drill:
Return on investiment = earnings before interests and tax
Capital employed
Capital employed is a summation of capital elements used to finance the business undertaking. Am satisfied with the returns of the firm. It is favourable and sustainable in the long term (Fridson ,2011).
Financial leverage
On the other hand financial leverage or gearing ratio brings in to focus the percentage of the funding that the business obtains from outside sources, not from share holders.
Most fixed long-term capital sources like bonds and preference shares attract fixed amounts of interest, and excessive a high gearing ratio portrays the company’s income being eroded in meeting the interest obligations (Leonard &Robin 2003).
Gearing ratios analysed from the two companies evaluated brought the following results;
Financial leverage = long term capital sources (debts, preference shares e.t.c)
Capital employed
I’m satisfied with the financial leverage of these company It depicts a favourable financial position (See in the excel) (Fridsin ,2011).
Times interest earned ratio (TIER)
This ratio brings into focus how the company’s earnings can be in a position to cover interest from debt .It portrays the ability of a business to repay it’s pledged instruments by establishing how many times earnings before interest and tax cover interest expense (Carl J&James,2001)
The ratio is calculated as follows:
Times Interest Earned = Earnings before Interest and Tax
Net Interest Expense
For the selected company, this is how the performance was:
The findings from the analysis portrayed the two companies as being in a strong financial position since the TIER ratio was higher than five in each case (the excel document has more on this).On this grounds, the business treads on safe financial grounds and as a result does not risk being caught up in unnecessary debt hurdles on its way to financial stardom (Fridsin ,2011).
Debt equity ratio:
Debt-to-Equity Ratio = Total long term Liabilities
Shareholders' Equity
The ratio brought forth in the excel document has provided satisfactory grounds to judge that the business is operating with the right mixture of debt and shareholders’ funds. A keen look on the excel analysis shows that interest bearing securities do not hold a big chunk of the funds financing the business, making it fair to conclude that the business financing model is sustainable.
Conclusion
Ensuring that low debts are maintained will be the key to survival in all the short term aspects of operations.
Stock performance analysis
In evaluating the stock performance of shangs group we shall look at the Performance of the shangs average share prices for the period of 2005, 2006 and 2007 and 2009 shangs has an issued share capital of $5,956 million shares with a current market capitalization of 172,032million.Over the years of growth in the company, the shares have been split on several occasions. The first share split was done in the year 1987 where the shares were split at the ratio of 3 shares to 1. In 1993, the shares were also split again, this time each share was split into two ordinary shares for each share held. Later and more recently, in 1998, the shares were also split each share held for 2 ordinary shares.
Shangs ltd has consistently been paying very good dividends. For the last three years, dividend payments have grown from $1.61 in 2008 to $1.65 in 2009 and now $1.67 in 2009. This consistent growth shows that the company is able to sustain a good dividend payment for its shareholders and still spare a tidy sum for other investments. The earning per share has also consistently grown over the period and now and was $2.18 in 2009.The only companies in the industry that posted a greater EPS were $3.48 while Vodafone group posted a higher EPS of $2.27 during the same period. Most of the other players posted a lower EPS compared to Shangs ltd (leornard & Robin, 2003).
In 2009, the companies Earnings Per diluted Share increased 1.6% over 2009 to $3.35.
Shangs ltd is a major component of S&P 500 and also the Dow Industrial indexes. For the last almost a decade, the company has recorded an increase in EPS by at least 1.4% but in a different twist of events, S&P announced in 2010 that it will reduce the credit rating of AT&T by small margin. The long-term corporate credit marginally reduced from “A” to “A-”. short term rating was also to “A-2” from “A-1”.This did not significantly adversely affect the business of Shangs ltd with regard to its competitors since most of the players in this industry are in this category of credit rating (London Stock Exchange)
The company still remains one of the most admired companies in the United Kingdom with a rich history and a consistent payout of dividends which is a reflection of the company’s good performance (leornard & Robin, 2003).
References;
Stovall J. (2002).Financial planner’s bible (2nd edition).New Jersey: John Wiley and Sons.
Lefevre E.(1994).Reminiscences if a stock operator. New Jersey: John Wiley&Sons.
Michell, T (2010). Financial statement analysis: and the Struggle for Leadership of the global business leader, New York. John Wiley & Sons.
Fridson, M & Alvarez, F (2011). Financial Statement Analysis: A Practitioner's Guide Volume 597 of Wiley Finance Wiley Finance Editions. Edition4. John Wiley & Sons.
Reilly, F & Brown, K (2011). Investment Analysis and Portfolio Management (with
Leonard C. &Robin J. (2003).Business & economics. New York: Mc Graw Hill.
