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Analysis of Financial Ratios for the Napolact S.A. company

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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.

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.

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