Beruflich Dokumente
Kultur Dokumente
28, 2014
Table of Contents
1. Introduction and background
2. Analysis of the Company
3. Ratio Analysis
3.1 Liquidity Ratios
3.2 Stability Ratios
3.3 Efficiency Ratios
3.4 Growth Ratios
3.5 Debt Ratios
3.6 Net Profit Margin
3.7 Asset Turnover
3.8 Cash Debt Coverage
3.9 Current Cash Debt Coverage
3.10 Expense Ratio
3.11 Free Cash Flow
3.12 Gross Profit Margin
3.13 Return on Equity
3.14 Return on Total Assets
4.0 Vertical & Horizontal Analysis
5.0 Recommendations
6.0 Conclusion
Executive Summary
2
This paper is based on the request from Peter Charles of a report on the performance of Pejenca
Industrial Supply LTD based on the companys financial statements for the period 1998 to 2002. This
report is prepared for his upcoming appointment with the bank. The bank as a preliminary to the
granting of a loan will review these financial statements. Appropriate vertical, horizontal and ratio
analysis of these financial statements will be produced. Through this analysis, the nature and causes of
trends will be identified thus relevant recommendations will be made in regards to Pejencas resources
efficiencies in the areas of profitability, liquidity and solvency during this period.
At the completion of high school, a London industrial supply company employed Charles where he
worked at the shipping and receiving order desk. Eventually he moved into a sales role and within a
few years was promoted to sales manager and then general manager. After seventeen years of working
with this firm, the owners son joined the family business in which Charles found lack of promotional
opportunities could no longer be achieved. Charles decided to join former co-workers David Stanley
(who was also in the same situation) in starting up their own business and thus, Pejenca Industrial
Supply was founded in September 1989. Stanley operated the Hamilton division independently of
Charles London division. The London operation consisted of Charles and his wife Jennifer as
employees for the first four months. Charles responsibilities consisted of shipping; receiving and
Jennifer (former teacher) role consisted of handing out the catalogue of a U.S supply company.
Originally, Pejenca concentrated on supplying industrial businesses with specified cutting tools. These
included drills, taps (tools to thread the inside of pipes), and carbides (specialized saws which remove
metal from solid rods, thus enabling a rods thickness to be adjusted as necessary). Eventually, the
company achieved a reputation for experts in specialized cutting tools. The first year consisted of sale
levels above what was expected and thus another employee was hired in December. Further products
were added to the catalogue throughout the years. In 1999, the company not only specialized industrial
cutting tools but precision tools, abrasives, and machine accessories as well. The three major goals for
Pejenca were being in solid financial shape, recognizing that the people, the business and that
satisfying the customers expectations for quality and service was paramount. Thus, Charles and
Stanley developed a company mission statement (see Exhibit 1), quality statement (see Exhibit 2), and
value statement (see Exhibit 3) to guide the company and its employees to meet the desires of the
owners. Lastly, Pejenca was dedicated to producing equitable revenues for the long-term advantage
4
Involvement with the Independent Distributions INC (IDI) where the company needs to pay a
certain percentage of a fee but excludes other competitors from joining IDI. But if another
competitor joins IDI then Pejenca loses veto rights and cannot exclude them and may lose the
exclusive distribution rights.
There is an expectation of growth in the company with 15% to 20% sales growth with an
improved gross margin.
There is no minimum billing requirement as other competitors practice which could affect the
operations and cause the company to have a surplus or deficit of their resources and inventory.
The net cash flow from financial and investing activities sees a negative value from the year
2000-2001. This means that more cash is being spent then is being received. This could effect
Pejenca in a negative way.
The effect of low season sales on December, July and August is a concern.
5
Charles had started working just after high school even though he has good amount of
experience in the supply industry of cutting tools
To avoid any service related delays, Pejenca requires a new extension and is seeking a loan from a
bank. We as analysts would try to recommend whether it would be feasible to take the loan or not.
Ratio
2002
3%
2001
3%
2000
3%
1999
4%
1998
4%
2.016
1.922
2.323
2.015
1.409
104
89
96
99
51
33
36
23
31
44
41
45
40
42
42
39
32
34
36
30
0.3156
0.2225
0.4477
0.0444
N/A
0.036
0.016
0.036
0.004
N/A
0.108
0.062
0.143
0.013
N/A
Current Ratio
Debt Ratio
Expense Ratio
2.92
0.4815
25%
2.71
0.3145
24%
3.45
0.2762
23%
2.97
0.3411
23%
2.00
0.4128
22%
($130.50)
$73.00
$139.50
$9.50
N/A
28%
88.9x
15%
9%
27%
40.36x
15%
10%
27%
27.05x
15%
11%
28%
20.89x
23%
15%
27%
N/A
N/A
N/A
2
3
7
8
9
10
11
12
13
14
15
16
17
We will be using different ratio analysis techniques to evaluate various aspects of Pejencas operating
and financial performance such as efficiency, liquidity, profitability and solvency. We would check the
trend of these ratios to see whether Pejenca Industrial Supply Ltd. is improving or deteriorating. The
ratios would be compared against the industry average ratios to see the performance of Penjenca
Industrial Supply Ltd.
3.1 Liquidity
3.1.1 Current Ratio
It is balance-sheet financial performance measure of company liquidity. Current ratio indicates a
company's ability to meet short-term debt obligations. The current ratio measures whether or not a
firm has enough resources to pay its debts over the next 12 months (Current Ratio 2014).
2002
2001
2000
1999
1998
2.92:1
2.71:1
3.45:1
2.97:1
2.00:1
on time quite efficiently. This means Pejenca has a good solvency ratio. But on the other hand as it is
very high compared to the market average ratio, Pejenca is not utilizing its assets completely to
generate profits.
3.1.2 Acid Test Ratio / Quick Ratio:
The term Acid-test ratio is also known as quick ratio. The most basic definition of acid-test ratio is
that, it measures current (short term) liquidity and position of the company. To do the analysis
accountants weight current assets of the company against the current liabilities which result in the ratio
that highlights the liquidity of the company (Acid-Test Ratio 2014).
200
2
200
1
200
0
199
9
199
8
2.016
1.922
2.323
2.015
1.409
advantage over the competition with a lower net worth to total assets. This also shows to lenders that
with a higher net worth, Pejenca has the ability to raise more capital and would give them more
confidence in financing Pejenca.
2002
2001
2000
88.9x
40.36x
27.05x
199
8
20.89x N/A
1999
Interest coverage has increased drastically over the years. This indicates that there is a very minimal
risk for Pejenca to repay the new interest if a new loan is taken. It also is a big indicator for investors
and lenders that Pejenca is a less risky company to invest in and thus tells us that Pejenca has the
potential to take loans.
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3.3 Efficiency
3.3.1 Age of receivables / Average Accounts Receivable Settlement Period
The average time it takes for a business to receive the amount owed from the customers in a specific
accounting period. The shorter the period the better is their position.
200
2
41
200
1
45
200
0
40
199
9
42
199
8
42
11
The average time it takes for a business to pay off its creditors in a specific accounting period. This
equation can assess the companys cash situation. This demonstrates how a business handles its
outgoing payments. (Ready Ratios 2014)
200
2
33
200
1
36
200
0
23
199
9
31
199
8
44
products or all combined), and it can be used for retail as well as manufacturing. (Inventory Turnover
2014)
200
2
200
1
200
0
199
9
199
8
39
32
34
36
30
Fig: 07
Average
Inventory Turnover Period.
The industry average of inventory turnover period is 54 days. But Pejencas ratio is negative and is not
positive in par with the industry average. This means that they are taking too much inventory for their
sales or it is becoming redundant. As more inventories require more inventory space, the extra cash
can complement Pejenca to use the space efficiently giving them lower storage costs against the
competition.
3.4 Growth
3.4.1 Sales
There is a positive trend in sales growth as per exhibit 8 from 1998 to 2001. But there is -1.7%
decreases which shows a sales deficit which shows that there are less sales in 2002 than in 2001. This
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is a major problem but Pejenca can overcome this since they have a high sales growth and maybe in
2002 the sales for a particular season on 2002 was not good.
2002
2001
2000
1999
1998
0.4815
0.3145
0.2762
0.3411
0.4128
14
200
2
200
1
200
0
199
9
199
8
3%
3%
3%
4%
4%
15
Asset turnover (total asset turnover) is a financial ratio that measures the efficiency of a company's use
of its assets to product sales. It is a measure of how efficiently management is using the assets at its
disposal to promote sales. The ratio helps to measure the productivity of a company's assets (Asset
Turnover 2014).
200
2
200
1
200
0
199
9
199
8
104
89
96
99
51
16
means the business is able to pay all of its current liabilities from the cash flow of its own operations.
(Cash-Debt Coverage Ratio 2014)
199
8
2002
2001
2000
1999
0.3156
0.2225
0.4477
0.0444
N/A
200
2
200
1
200
0
199
9
0.108
0.062
0.143
0.013
199
8
N/A
It gives the measure that what is the actual cash available to pay for interest expense. Pejenca shows an
increase in the coverage ratio. This shows that Pejenca has the ability to generate cash from operations
from year to year gradually. Thus they are stable.
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200
2
200
1
200
0
199
9
25%
24%
23%
23%
199
8
22%
18
2002
2001
2000
199
9
($130.50)
$73.00
$139.50
$9.50
199
8
N/A
200
2
200
1
200
0
199
9
28%
27%
27%
28%
199
8
27%
20
200
2
200
1
200
0
199
9
15%
15%
15%
23%
199
8
N/A
One of the most important profitability measures is return on equity [ROE]. Return on equity reveals
how much profit a company earned in comparison to the total amount of shareholder equity found on
the balance sheet. The amount of net income returned as a percentage of shareholders equity. Return
on equity measures a corporation's profitability by revealing how much profit a company
generates with the money shareholders have invested.
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200
2
9%
200
1
10%
200
0
11%
199
9
15%
199
8
N/A
The return on assets is declining from 15% in 1999 to 9 % in 2002 showing that Pejenca is becoming
inefficient to manage their total assets to generate higher net income.
From the vertical analysis of Income statement we can see that Pejenca is showing declining earnings
before taxes starting from 1998 to 2002 where earnings was 5.4% which came down to 3.4% in 2002.
Return on Equity:
We can see from the Income statement that Pejenca is showing declining trend of return on equity.
They had 29.1% of return on equity having 27.2% gross profit. This means that Pejenca is making
$0.15 from every $1 of shareholders equity. But even gross profit increased to 28% in 2002 having the
return on Equity 15.2% showing a decrease whereas industry average is 23%. This could be the reason
of higher wages & employee benefit increment (it increased from 15% to 18.4% in 1998 and 2002).
From the vertical analysis of Statement of Financial position, we can see that Pajencas Current asset
percentage to Total Asset is increasing steadily which is 73% the year 1998 to 83% in the year 2002.
This is due to higher incremental Cash sales increment and decline in credit sales. This denotes better
company control over credit sales.
Liabilities:
Pajencas liabilities management is showing good control over its debt especially in the account
payable areas. In 2002, Pajenca has been able to reduce its accounts payable drastically in this year
cutting down by half which is from 86% to 46%.
5.0Recommendations
1. Utilizing of Assets efficiently and effectively: There is a gradual increase of the ratio from the
year 1998 to 2000 and again a drop from the year 2001 to 2002 but overall it is quite strong
against the market average ratio of 1.7:1. This means Pejenca has a good solvency ratio. But on
the other hand as it is very high compared to the market average ratio, Pejenca is not utilizing
its assets completely to generate profits. So they need to utilize the assets. They can make full
utilization of assets by
o Investing idle assets like cash.
o Rent out or lease the non-current assets to different business entities and seek further
revenues from it.
2. Improvement in technology to meet the market trends and competition
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3. By building a new inventory storage Pejenca is hoping to increase their inventory capacity and
their sales growth would be expected to start to increase once again rather than continue to
decrease.
4. Pejenca should concentrate more on Just-in-Time Inventory Management system. It would
enable them manage their huge inventory and improve their productivity and efficiency
enabling them to expand their sales and profitability.
5. In 2002 Pejenca Industrial Supply Ltd. took a loan of $300,000 but again is seeking a loan of
$150,000 which shows that it is taking too much external finances and increasing its debt. It
should try to utilize its current assets and inventory and reduce its debts before undergoing
taking another loan.
6. For the past three years Pejenca has been providing 15% return on equity. If Pejenca takes
$150,000 loan then Pejenca has to ensure that the ROE needs to be stable or needs to be
improved to keep the shareholders confident in the company and its operations.
7. Consider reviewing employees benefit and wages. They may consider outsourcing non-vital
operations to third party vendors so that overall costs could be minimized.
8. Pejenca has a good acid test ratio and they can repay their creditors on time. They need to
maintain their acid test ratio.
9. Pejenca can improve their Average Accounts Receivable Settlement Period by reducing the
number of days to collect their receivables.
Please refer to Appendix for projected Income Statement, Cash Flows and Balance Sheet.
The projected figures mentioned below are based on year 2002 since we do not have sufficient
information present on the report.
As per the requirement from the bank Loan taken after deduction of
On 2003, dividend given to shareholder is assumed to be $210,000 as there is an expansion of
Pejencas capital if a loan of %
Account receivable would increase due to efficiency in inventory management.
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We thus recommend Pejenca to expand their space without taking the loan. They can start production
of a new inventory space during the off-season when the production and storage is less and thus it will
not affect their productivity.
If Pajenca does not take the loan then they will have 177
A bank loan would require extra interest payments of 6% on the loan. Without the loan Pejenca can
save around ________________ in interest. It is not absolutely necessary to take the loan and pay
interest payments. The main concern with not getting a loan is that the company must be entirely sure
that they can afford to finance the extension without a loan and still operate efficiently.
A few other things for Pejenca to consider in the long-run would be to re-evaluate their credit policy so
that they can reduce bad debts and collect their receivables more quickly. Charles should also decide
whether he needs more employees with the additional space and a growing company.
6.0Conclusion
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