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05/11/2014

Course title Financial Statement Analysis

Submitted to:
Mr. AHSAN MASOOD

Submitted by: Mohsin Khan
BBA-S04-031/LHR

Naveed Asghar
BBA-S04-033/LHR

Semester: 7

th

Semester: 7th
Date of submission:
28th JUN, 2007

I

Ratios Gross Profit Net Profit Margin Return on Assets Debt-Equity Ratio Current Ratio Quick Ratio Interest Coverage Ratio Dividend Payment Ratio Price Earning Ratio Total Assets Turnover Ratio Fixed Assets Turnover Ratio Return on Capital Employed Inventory Turnover Ratio Average Age of Inventory (Days) Debt Turnover Ratio Number of Days (Debt) Earning per Share Market / Book Ratio Operating Profit Margin Average Collection Period Total Debt to Total Assets Ratio

2006 13.06 5.07 7.80 .03 1.32 0.35 148.29 39.6 5.81 1.54 7.38 18.32 2.66 137 15.47 24 26.12 0.75 8.76% 4.49 0.58 Gross Receivables II

2005 10.39 3.82 7.7 0.05 1.42 0.31 67.64 30.60 8.58 2.01 7.66 15.90 3.19 114 22.25 16 19.59 0.60 6.83% .371 0.53

Days Sales In Receivables = ----------------------------------------------Net Sales / 365

Trade Debts+ Other Receivables=Gross Receivables
2006 583015 17513.10 33.29 2005 329658 17445.49 18.89

Day's Sales In Receivables Analysis:
The number of day’s sales in receivables relates the amount of the account receivables to the average daily sales on account. This shows that how firm is efficient in collection of receivables. While looking the ratio the firm shows about 76% increase from 2005 (18.89 day’s) to 2006 (33.29 Day’s) which means the firm is trying to cover its receivables and trying for the recollection of bad debts. • Net Sales Accounts Receivables Turnover = ---------------------------------------Accounts Receivables
2006 583015 17513.10 33.29 2005 329658 17445.49 18.89

0

Account Receivables Turnover:
Computation of this ratio provides the liquidity of receivables. This ratio is calculated for internal Analysis. There is a decreasing trend in the calculation from 2005 (17.029) to 2006 (13.89). the firm should maintain a decreasing the bad debt ratio to liquidate III

the firm receivables more quickly. The firm should use such strategies that the firm overstates its receivables turnover, thus overstating its liquidity. Average Gross Receivables • Accounts Receivables Turnover in Days = -----------------------------------------Net Sales / 365
2006 404127 5616885 365 277409+253436/2 2005 304570.5 5186605 365 253436+102269/2

28.44 404127

19.79 304570.5

Account Receivables Turnover in Days Analysis:
This ratio indicates the receivable liquidity in terms of days per year. The computation of this ratio shows an increase as compare to the previous data like in 2005 it is 19.79 days and 28.44 days in 2006 per year, the firm is facing an increasing trend which is not fit for the organization health because the firm should maintain to have a good collection system for it’s receivables so that the operating activity may generate more sales and thus gives firm more profits in short term. Here the firm should provide discounts on n/ 10, n/15 some specific discount so that the receivables collection period is reduced. • Ending Inventory Day’s Sales In Inventory = ---------------------------------------Cost of Goods Sold / 365
2006 1678938 3126363 365 2005 1217900 2922862 365 152 Days 2004 917621 2536186 365

196 Days

132 days

Day's Sales in Inventory:
The day’s sales in inventory estimate the number of days that it will take to sell the current inventory. While analyzing the ratio it shows an increasing from 132 days in 2004 to 152 Days but in 2006 it is increased up to 196 days show that the firm has a very lose in the management of its inventory to the sales therefore the firm should provide more attention to its inventory management. There is also an indication that with in the medical the inventory is very important because if there insufficient amount in the account that would lead to the unavailability of any medical drug in the market which will lead to the high demand and the prices would slightly increased by the shortage. The firm might be having more product category there for the firm is maintaining additional inventory for those products. IV

Cost of Goods Sold • Inventory Turnover = -----------------------------------------Average Inventory  Average inventory= Beginning 2006(Would be considered as ending) +balance 2005(would be considered as beginning) and would be divided by 2.  Average inventory= Beginning 2005(Would be considered as ending) +balance 2004(would be considered as beginning) and would be divided by 2.
2006 3126363 775814 166864+1217900/2= 4.0297842 775814 2005 2922862 1676710.5 1217900+917621/2 = 1.7432121 1676710.5

Inventory Turnover Analysis:
It indicates the liquidity of the inventory. The calculation shows a slight increase in 2006 4.029 from 1.74 in 2005. The firm is facing ineffectiveness in the utilization of its inventory management practices. The firm should plan for the nice perfection of the inventory management practices. Average Inventory • Inventory Turnover in Days =----------------------------------------Cost of Goods Sold / 365
2006 775814 3126363 365 166864+1217900/2= 2005 1676710.5 2922862 365 1217900+917621/2 =

90.58 775814

209.38 1676710.5

Inventory Turnover in Days Analysis:
It shows the number of days instead of times per year. The computation of this ratio shows a decreasing in inventory turnover in days which is almost opposite to the previous computations the values show a decreasing effect in days which would also reduce the operation time of receivables and inventory to complete operating cycle. The effect is only because of increase in the COGS that why the ratio is indicating a good result in the computations.

V

Operating Cycle = Accounts Receivables Turnover + In Days
2006

Inventory Turnover In Days
2005

Accounts Receivables Turnover in days
4.0297842

Inventory Turnover in days
90.58

Operating Cycle 94.6097842

Accounts Receivables Turnover in days
1.7432121

Inventory Turnover in days
209.38

Operating Cycle 211.1232121

Analysis: Operating Cycle helps the firm to compare its performance with different periods and with similar companies that how much the firm is effective in its operations. Its computations indicate that how long it will take to realize cash from the inventory. Here the firm shows an increasing effect which means the firm is taking less time to complete its period from previous period. • Current Assets Current Ratio =------------------------------------Current Liabilities
2006 3262322 2374865 1.37 2005 2320619 1639452 1.41

Analysis:
Shows a firm’s ability to cover its current liabilities with its current assets. Here the firm is showing decreasing trend from 2005 to 2006 which means the firm’s ability to recover its current liabilities from its current assets has slightly decreased. • Quick Ratio = Current Assets—Inventory or Stock in trade ---------------------------------------------------------------------Current Liabilities
2006 881036 2374865 0.37 2005 529911 1639452 0.32

Analysis:
The ratio shows a firm’s ability to meet current liabilities with its most liquid assets. The firm is showing an increased quick ratio in 2006.

VI

Quick ratio of less than 1 is clearly indicating that company is not much liquid to pay its short term debts. • Cash Equivalents + Marketable Securities Cash Ratio =-------------------------------------------------------------Current Liabilities
2006 118297 2374865 0.05 2005 57993 1639452 0.035

Analysis:
This ratio shows an immediate liquidity of firm. It is the extremely conservative point of view that an analyst computes the liquidity from Cash ratio.

VII

Ratio Formulas, Calculations and Analysis

VIII

Operating Income Times Interest Earned =-----------------------------------------------------Interest Expense + Capitalized Interest
2006 1504766 3512 428.48 2005 1346545 2734 429.52 2004 1120862 3498 320.43

Analysis: The time interest earned ratio indicates a firm’s long term debt paying ability from the income statement view. If this ratio is high so it shows that the firm is in a good position to pay the long term debt. In our case this ratio is very high because the firm is totally equity financed and they have very low debt from the outside. So it shows that the abbot laboratories in a position to pay their long term debt very easily. They can get the fund from any where with a very reasonable interest rate because it has a good coverage of the interest obligation. Operating Income Fixed Charge Coverage =-----------------------------------------------------Interest Expense + Capitalized interest + Interest Portion of Rentals

Notes: Capitalized interest and interest portion of rentals does not exist in the annual report. • Total Liabilities Debt Ratio =----------------------------------------Total Assets
2006 780249 4810514 0.1622 2005 717211 4129055 0.1736 2004 579021 3368603 0.1718

Analysis: The debt ratio indicates the percentage of assets financed by the creditors and it helps to determine how well creditors are protected in case of insolvency. From the perspective of long term debt paying ability the lower this ratio the better the company’s IX

position. In our case we can easily see that our firm debt ratio is very low which indicates that firm is in a good position. The main reason is that our firm is fully financed by equity. Total Liabilities Debt / Equity Ratio =-----------------------------------------Shareholder’s Equity
2006 780249 4030265 0.1935 2005 717211 3411844 0.2102 2004 579021 2789602 0.2075

Analysis: This ratio also indicates the firm long term debt paying ability. These computations compare the total debt with the total shareholder equity. This ratio also determines that how well the creditors are protected in case of insolvency. But in case of our firm there is very low risk because it’s totally equity financed. The lower this ratio the better the firm position. As in our case this ratio is very low which shows that the firm is in a very good position. Total Liabilities • Debt To Tangible Net Worth =---------------------------------------------------------Shareholder’s Equity – Intangible Assets Notes: Intangible assets does not exist in financial statements that’s why we cant calculate the debt to tangible net worth ratio.

X

Ratio Formulas, Calculations and Analysis

XI

Net Income before Minority Share Of Earnings and Nonrecurring items Net Profit Margin =----------------------------------------------------------------Net sales
2006 1028313 5616885 18.23% 2005 927249 5245322 17.68% 2004 752238 4616780 16.30%

Analysis: A commonly used profit measure is return on sale, often termed net profit margin. This ratio gives a measure of net income dollars generated by each dollar of sales. The high the better the firm position. Is in our case the firm is in good position to generate profit against the each dollar sale. There are some factors which affect this ratio like competitive forces, economic condition, use of debt etc. • Net sales Total Asset Turnover = ----------------------------------------Average Total Assets
2006 5638454 4469785 1.26 2005 5186605 3748829 1.4

Analysis: Total assets turnover measures the activity of the assets and the ability of the firm to generate sales through the use of the assets. As in our case the ratio decreased from 1.4 to 1.26 which shows that the firm can not use their assets efficiently and effectively as compare to the previous year. Net Income before Minority share of earnings and non recurring items Return on Assets = ---------------------------------------------------------Average Total Assets
2006 1028313 4469785 23.00% 2005 927249 3748829 24.73%

XII

Analysis:
Return on assets measures the firm’s ability to utilize its assets to create profits by comparing profits with the assets that generate the profits. As in our case the firm utilizes its assets properly. A little decreased observed as compared to the previous year but did not affect the firm negatively. • Operating Income Operating Income Margin =------------------------------------------Net Sales
2006 1504766 5616885 26.68% 2005 1346545 5186605 25.86% 2004 1120862 4560156 24.47%

Analysis:
The operation income margin includes only operating income in the numerator. As is in our case an increasing trend has been observed in the ratio which shows a good indication for the firm. Net Sales • Operating Asset Turnover = -------------------------------------------Average Operating Assets
2006 5638454 822798 6.85 2005 5245322 821475 6.39

Analysis: The operating assets turnover ratio measures the ability of the operating assets to generate the sales dollar. As in our case the firm mange the operating assets properly because an increasing trend has been observed in the ratios which shows that the firm is in a good position. The firm uses the operating assets effectively and will create a good operating profit. Operating Income • Return on Operating Assets = ------------------------------------Average Operating Assets
2006 1504766 822798 1.83 2005 1344565 821475 1.6367

XIII

Analysis: This ratio indicates the non-operating items contribution to generate profit. The firm ratio show an increasing trend in the computation means that the operating and non-operating both assets are used properly. • Du Pont Return On = Operating Income * Operating Asset Operating Assets Margin Turnover
2006 0.2668 x 6.85 Ans 1.83 2005 0.2586 x 6.39 Ans 1.6524

Net Sales Sales to Fixed Assets =--------------------------------------------------Average Net Fixed Assets (Exclude Construction in Progress)

2006 5616885 3244716 1.7311

2005 5186605 2841844 1.8557

Analysis: This ratio measures the firm ability to make productive use of its property, plant, and equipment by generating sales dollar. As in case of our firm a decreasing tren has been observed. The lower this ratio the better the firm position. Net Income before Minority Share Of earnings and non recurring items + [(Interest Expense) * (1—Tax Rate)] Return on Investment =-------------------------------------------------------------Average (Long-Term Liabilities + Equity)
2006 1030719 3443255 0.2753 2005 929138 3123336 0.2974

Analysis: The return on investment applies to ratios measuring the income earned on the invested capital. This is type of ratio is used for the evolution of the firm. A little decreasing trend has been observed as compare to the previous year. This ratio is basically

XIV

attracting the fund providers. The high this ratio will lead to a fruitful result. This ratio basically shows the earning performance of the abbot laboratories. Net Income before Non recurring items -Dividends on Redeemable Preferred Stock Return on Total Equity =----------------------------------------------------------Average Total Equity
2006 1028313 3721055 0.2763 2005 927249 3100723 0.299

Analysis: This ratio basically shows the total return against the total equity. It shows the return to both the common shareholder as well as to preferred stock holder. The abbot laboratories will provide a lesser amount in the recent year as compare to the previous year Net Income before Non recurring items -Preferred Dividends Return on Common Equity = ----------------------------------------------------Average Common Equity
2006 1028313 1000000 1.0283 2005 927249 1000000 0.9272

Analysis: This ratio basically shows the return only to the common shareholders. The Abbot provides more return to the shareholder in the recent year as compare to the last year. The reason may be in this year the firm will get more profits. • Gross Profit Gross Profit Margin = --------------------------------Net Sales
2006 2512091 5616885 44.62% 2005 2322458 5186605 44.67% 2004 2080594 4560156 45.53%

Analysis:

XV

This ratio basically compare the gross profit with the net sales that how much sales will generate how much gross profit. According to our firm a decreasing trend has been observed from last three years.

Ratio Formulas, Calculations and Analysis

XVI

Earnings before Interest and Tax Degree of Financial leverage =---------------------------------------------------Earnings before Tax
2006 1504766 1501254 1.002339 2005 1346545 1343811 1.002035 2004 1120862 1117364 1.003131

Analysis:
This ratio indicates financial leverage is in the multiplication factor by which the net income changes as compare to the changes in EBIT. The financial leverage is slightly declining which mean that a conservative investor would look favorable in Abbot’s low financial leverage. This ratio reflects that as earning before interest charge, net income will change by 1.0023 in 2006 which is two low effect and providing an attractive image for the investor to the firm. Earnings before interest, tax, Minority Share of Earnings, Equity Income, And Nonrecurring items All-Inclusive Degree of =------------------------------------------------------------Financial Leverage Earnings before Tax, Minority Share of Share of Earnings, Equity Income, and Nonrecurring items

Can’t be calculated because of non provided data in annual Reports

Net Income – Preferred Dividends Basic Earnings =----------------------------------------------------------Per Common Share Weighted Average Number of Common Share Outstanding

Can’t be calculated because the firm has no such preferred Stock in owners equity account. • Market Price per Share Price / Earnings Ration =------------------------------------------XVII

Diluted Earnings per Share Can’t be calculated because market value per share of the firm is not provided data in annual Reports. • Net Income – All Dividends Percentage of Earnings Retained =---------------------------------------------------Net Income
2006 1028313 100000 10.28313 2005 927249 100000 9.27249 2004 752238 100000 7.52238

Analysis: This ratio indicates that how much cash company retained for the future investment after paying dividends in other words the current earnings retained for internal growth. In year 2006 company retained more then previous years because the firm is in stable position but investments are made more in 2006 in both operating Assets and Capital expenditure therefore the firm is having less amount in it’s general reserves and want to maintain a proper reserve as previous but the percentage is not that much high in all periods. This also indicates that the firm is having less positive NPV projects therefore they don’t require any retained earnings. Dividend per Common Share Dividend Payout =-------------------------------------------------Diluted Earnings per Share
2006 1.69448 10.5 16.14% 2005 3.38172 9.47 35.71% 2004 2.81606 11.06 25.46%

Analysis: The firm in 2006 shows a lower dividend percentage as discussed above the firm is having more investments in year 2006 therefore they are paying lesser percentage of dividend in year 2006. But in previous year the firm had paid a very handsome amount of dividends which means the firm is having a regular dividend paying policies for their share holders. Dividend per Common Share • Dividend Yield =----------------------------------------------------Market Price per Common Share

XVIII

Can’t be calculated because market value per share of the firm is not provided data in annual Reports.

Total Stockholder’s Equity – Preferred Stock Equity Book Value per Share = ----------------------------------------------------------------Number of Common Shares Outstanding
2006 4030265 100000 40.30265 2005 3411844 100000 34.11844 2004 2789602 100000 27.89602

Note: There is no preferred stock Analysis: The firm has more investment policies in both year 2006-05 for this reason the sales has increased and which is reflecting more operating activity and generating more resources for the firm so the book value per share in increasing in both years from its base year. Stock Options Outstanding Materiality of Options =--------------------------------------------------Number of Shares of Common Stock Outstanding There is no such type of stock options for the employees or officers for the firm there for this ratio can’t be calculated. •

XIX

Ratio Formulas, Calculations and Analysis

XX

Operating cash flow / current Operating cash flow Maturities of long term debt and =----------------------------------------Current notes payable . current maturities of long term Debt and current notes payable Note: The ration can not be solved because there is no portion of long term debts in our current notes payables. Operating cash flow Operating cash flow/ total debt = ---------------------------------------Total debt 2006 478909 = ----------------------------780249 498624 = ---------------------------- = 717211 613385 = --------------------------579001 = 0.6137

2005

0.6952

2004

= 1.0593

Operating cash flow / total debt Analysis: This ratio indicates that how much the firm ability to pay debt in a year. The 2006is low as compare to 2005and 2004from 73% to 93% which is a very good paying ability of debt in these two years. • operating cash flow – preferred dividends Operating cash flow per share = --------------------------------------------------------Common shares outstanding 2006 478909 = ----------------------------100000000 498624 XXI = 0.0047

2005

=- -----------------------100000000 613385 = -----------------------100000000

= 0.0049

2004

= 0.0061

Operating cash flow per shares Analysis: This ratio tells us about the share that in one share how much cash receive against the share. The computation of this ratio indicates low ratio in year 2006but high in 2005and 2004,which show positive cash against the share. operating cash flow • Operating cash flow / cash dividends = -----------------------------------Cash dividends 2006 478909 = -----------------------169448 498624 = ---------------------338172 613385 = ----------------------281606 = 2.8262

2005

= 1.4744

2004

= 2.1781

Operating cash flow / cash dividend Analysis: This ratio tell us that how much cash dividend pay on cash flow, in 2006it has very good paying ability of dividend with a very good amount as compare to year 2005 And same situation of paying dividend in year 2004 as also good paying ability of dividend.

XXII

XXIII

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