You are on page 1of 6

Project 1 Analysis of Financial Ratios

Introduction
I used the Balance Sheet and Income Statement of the NAPOLACT S.A.
Romanian Company. NAPOLACT S.A. is based in Cluj-Napoca and it
specializes in dairy production.
I downloaded the Balance Sheet and Income Statement from these 2 sites:
- http://www.date-financiare.ro/199125-napolact-sa
- http://doingbusiness.ro/financiar/raport/843243/napolact-sa/
The Company didnt publish a very detailed financial report but I managed to
find almost all the information that I needed (I made some comments in the
excel file where I couldnt find necessary data).
I will attach below the Balance Sheet, Income Statement and terms used in
calculations (snippets from my excel document).

Ratio Analysis
Using ratio analysis we can compare one companys performance to that of
its competitors, to industry averages, and to its own performance in the past.
There are four big types of ratios: Liquidity Ratios, Solvency Ratios,
Operating Ratios and Profitability Ratios.

Liquidity Ratios
Liquidity ratios tell us about a companys ability to meet short-term financial
obligations such as debt payments, payroll, and accounts payable.
Current ratio measures a companys current assets against its current
liabilities. The formula is Current ratio = Total current assets/ Total current
liabilities.
In my case:
Total current assets = 70,435,137.00
Total current liabilities = 54,393,450.00
Current ratio = 1.29492 times
This ratio is higher than industry averages which is good and may indicate
that the company holds a lot of cash that its not putting to work or returning
to shareholders in the form of dividends. The company has 1.29 RON in
current assets for every 1 RON in current liabilities.
Quick ratio (acid test) measures a companys ability to meet its
obligations quickly.
Formula: Quick ratio/Acid test = (Total current assets Inventory)/ Total
current liabilities. Significance: It thus ignores inventory, which can be hard
to liquidate (If a company has to liquidate inventory quickly, it typically gets
less for inventory than this company would otherwise).
In my case:
Total current assets = 70,435,137.00
Total current liabilities = 54,393,450.00
Inventory = 6,766,729.00
Quick ratio = 1.17052 times
This is good as the ratio is bigger than 1.
Cash Ratio a very short-term creditor might be interested in the cash rate.
Formula: Cash ratio = Cash / Total Current liabilities.
In my case:
Cash = 5,422,184.00
Total current liabilities = 54,393,450.00
Cash ratio = 0.09968 times
This is problematic (<1) because the company needs more that its cash
reserve to pay off current debt.

Solvency Ratios
Long-term solvency ratios represent the firms long-term ability to meet its
obligations using debt to pay its operations and how easily it can cover the
cost of that debt.
Debt equity ratio this measure shows the extent to which a company is
using borrowed money to enhance the return on owners equity.

Formula: Total debt / Total equity. Significance: Investors and leaders


scrutinize the ratio to determine whether a company is too highly leveraged
or it is too conservative and isnt using enough debt to generate profits.
Interpretation: This rate takes into account all debts of all maturities to all
creditors. Whether this is high or low depends on the capital structure.
In my case:
Total equity = 46,044,097.00

Operating Ratios
Operating ratios help management to assess a companys level of efficiency,
namely how well the company put its assets to work and managing its cash.
Asset turnover shows how efficiently a company uses all of its assets
gas, machinery, and so on to generate revenue (How many RONs of
revenue do we bring in for gach RON of assets?) In general, the higher the
number - the better. We can increase this ratio either by generating more
revenue with the same assets or by decreasing the asset of the business,
perhaps by lowering average receivables.
Formula: Total asset turnover = Sales / Total assets
In my case:
Sales = 222,864,517.00
Total assets = 103,185,776.00
Asset turnover = 2.15984 times
For every RON in assets, we generated 2.15 RON in sales, which is decent.
Receivable days (average collection period) tells us how quickly a
company collects funds owed by customers. A company that takes an
average of 45 days to collect its receivables will need significantly more
working capital than one that takes 25 days.
Formula: Receivable days = 365 days (Accounts receivable)/ Sales.
In my case:
Sales = 222,864,517.00
Accounts receivable = 58,246,224.00
Receivable days = 95.39370 days
In average the company collects on its credit sales in 95 days. The company
needs high working capital.
Days in inventory shows how quickly a company sells its inventory during
a given period of time the longer it takes, the longer the companys cash is
tied up and the greater the likelihood that the inventory will not sell at full
value.
Formula: Days in inventory = 365 days (Average inventory)/ Cost of goods
sold.
In my case:

Cost of goods sold = 26,667,891.00 (I used the Cost of goods sold from your
excel example as I didnt find this information for NAPOLACT S.A. anywhere)

Inventory = 6,766,729.00
Days in inventory = 92.61535 days
On average, the inventory sits 92 days before it is sold. It takes pretty long
so the companys cash is tied up for a long time and there is a big likelihood
that the inventory will not sell at full value.

Profitability Ratios
Profitability ratios measure how efficiently the firm uses its assets and how
efficiently the firm manages its operations (the focus is the bottom line net
income).
Profit Margin measures how much out of every RON of sales a company
actually keeps in earnings. A higher profit margin indicates a more profitable
company that has better control over its costs compared to its competitors.
Formula: Profit margin = Net income / Sales.
In my case:
Net income = 1,973,692.00
Sales = 222,864,517.00
Profit margin = 0.0086 = 0.86%
This tell us that the company generates a little less than 1 ban in profit for
every RON in sales. This is a small profit.
Gross profit margin (this wasnt in the excel document) shows how
efficiently a company produces its goods or delivers its services, taking only
direct costs into account.
Formula: Gross profit margin = Gross profit / Sales.
In my case:
Gross profit = 2,563,869.00
Sales = 222,864,517.00
Gross profit margin = 0.0115 = 1.15%
1.15% gross profit margin means that for every RON generated in sales, the
company has 1.15 bani left over to cover basic operating cost and profit. It
serves as the source for paying additional expenses and future savings.
Return on assets (ROA) indicates how well a company is using its assets
to generate profit. Its a good measure for comparing companies of different
sizes.
Formula: Return on assets = Net income / Total assets.
In my case:
Net income = 1,973,692.00
Total assets = 103,185,776.00
Return on assets = 0.01913 = 1.913%

1.913% ROA means that for every RON invested in assets during the year
produced 1.913 RON of net income. This is a low ROA and indicates
inefficient use of companys assets.
Return on equity (ROE) shows profit as a percentage of shareholders
equity. In effect, its the owners return on their investment. ROE is the true
bottom-line measure of performance.
Formula: Return on equity = Net income / Total equity.
In my case:
Net income = 1,973,692.00
Total equity = 46,044,097.00
Return on equity = 0.04287 = 4.287%
This means that the company generated 0.042 RON of profit for every RON
of shareholders equity. ROE measures how much the shareholders earned
for their investment in the company. It is a low percentage so that means
that management isnt efficient in utilizing its equity base.