I2IT – IGNOU CENTER OF EXCELLENCE FOR ADVANCED EDUCATION & RESEARCH

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Ratio Analysis and Forecasting

30 Nov. 10

Submitted to:-Prof Priya Angle

Submitted by:-Ruveena Vaidya

Indrani Kulkarni
Atul Sharma
 contents

Corporate Fact Sheet

Consolidated Income Statement

Balance Sheets

Ratio Analysis

About Horizontal and vertical analysis

Forecasting

References
 Corporate Fact Sheet

 Company Name: Creative Technology Ltd

 Founded: 1981

 Chairman and CEO: Sim Wong Hoo

 Worldwide Headquarters: Singapore

 Worldwide Network: Creative Labs Americas

Creative Labs Europe
Creative Labs Asia

 Major Products:
Personal Digital Entertainment
MP3 Players
Cameras
Webcams, Pocket Video Cameras
Audio
X-Fi Audio Solutions, Sound Cards
Multimedia Speakers
Speaker Systems, Docking Systems,
Portable Systems
Headphones
Headphones, Backphones, Earphones,
Headsets
Others
Music Keyboards, Mice, Keyboards

 Net Sales (2010): US$275.3 million

 CONSOLIDATED INCOME STATEMENT
For the financial year ended 30 June 2009

2009 2008
US$’000 US$’000

Sales, net 466,074 736,848

Cost of goods sold 385,728 572,946

Gross profit 80,346 163,902

Expenses:
Selling, general and administrative (96,519) (141,148)
Research and development (61,743) (63,872)
Restructuring charges (11,168) (9,666)
Chairman’s gift of shares to employees – (3,774)

Total expenses (169,430) (218,460)

Other income 4,277 12,370

Other (losses) gains, net (50,951) 180,202
Share of loss of associated companies (2,498) (2,458)
Interest expense (135) (5,644)

(Loss) profit before income tax (138,391) 129,912

Income tax credit (expense) 515 (1,735)

Net (loss) profit (137,876) 128,177

 BALANCE SHEETS
As at 30 June 2009
2009 2008
US$’000 US$’000

ASSETS

Current assets:
Cash and cash equivalents 250,551 408,644
Trade receivables 42,365 82,554
Inventories 37,600 99,788
Other current assets 21,448 50,153
351,964 641,139

Non-current assets:
Financial assets, available-for-sale 27,753 37,247
Other non-current receivables 977 10,892
Investments in associated companies 1,372 1,242
Property and equipment 33,944 34,243
Intangible assets 6,719 –
Other non-current assets 31,693 46,484
102,458 130,108

Total assets 454,422 771,247

LIABILITIES AND EQUITY

Current liabilities:
Trade payables 30,296 66,507
Accrued liabilities and provisions 70,014 91,704
Current income tax liabilities 2,203 5,287
Current portion of long term obligations 10 100,019
102,523 263,517

Non-current liabilities:
Deferred income tax liabilities 29,510 29,746
Long term obligations – 10
29,510 29,756

Total liabilities 132,033 293,273

Equity:
Share capital 266,753 300,100
Treasury shares (21,475) (32,113)
Fair value reserve 7,151 3,377
Other reserves 60,512 59,286
Retained earnings 9,072 146,945
322,013 477,595

Minority interests 376 379

Total equity 322,389 477,974

Total liabilities and equity 454,422 771,247
 Ratio Analysis

A firm’s balance sheet contains many items taken by them, have no clear

meaning. Financial ratio analysis is a way of appraising their relative importance.
The ratio of current assets to current liabilities, for example, gives the analyst an
idea of the extent to which the firm can meet its current obligations. This is
known as a liquidity ratio. Financial leverage ratios (such as the debt–asset ratio
and debt as a percentage of total capitalization) are used to make judgments
about the advantages to be gained from raising funds by the issuance
of bonds (debt) rather than stock. Activity ratios, relating to the turnover of such
asset categories as inventories, accounts receivable, and fixed assets, show how
intensively a firm is employing its assets. A firm’s primary operating objective is to
earn a good return on its invested capital, and various profit ratios (profits as a
percentage of sales, of assets, or of net worth) show how successfully it is
meeting this objective.
Ratio analysis is used to compare a firm’s performance with that of other firms in
the same industry or with the performance of industry in general. It is also used
to study trends in the firm’s performance over time and thus to anticipate
problems before they develop.

Liquidity Ratios

These values come from your balance sheet and are a measure of your liquidity.
Your current ratio indicates your ability to pay your current debt out of your
current asset. Although a satisfactory value for a current ratio varies from industry
to industry, a general rule of thumb is that a current ratio of 2 to 1 or greater is
fairly healthy. Thinking in terms of rupees, a 2 to 1 ratio means that you have Rs2
of current assets from which to pay every Re1 of current bills.

Current Ratio= Total Current Assets / Total Current Liabilities

CR (2009) =351964/102523
= 3.4
CR (2008)=641139/263517
=2.4
The current ratio has increased from 2008 to 2009. However, the ratio is very
high compared to the standard ratio which can be 2:1.

Quick Ratio= (Cash + AR) / Total Current Liabilities

Also called Acid-Test Ratio, this is very similar to your current ratio but it includes
only those current assets that can be most readily used to pay bills today: cash
and accounts receivable. In general, you should try to maintain a quick ratio of 1
to 1, which means you have $1 worth of cash and accounts receivable for every
$1 dollar of total current liabilities.

QR (2009) = (250551+42365)/102523
=2.8
QR (2008) = (408644+82554)/263517
=1.8

The difference between current ratio and quick ratio shows the stock pile-up.
Creative has a large stock pile up and it also has an extremely large quick ratio
compared to the standard.

Financial Ratios

Inventory Turnover= COGS / Inventory

Number of times inventory turns in period. High turn can indicate better liquidity
or good merchandising or shortage of needed inventory for sales. Low turn can
mean overstocking, obsolescence; builds to inaccurate sales forecast can also a
planned inventory build-up in anticipation of possible material shortages.

IT (2009) = 385728/37600
=10.2
IT (2009) = 572946/99788
=5.7
The inventory turnover ratio increased by almost 100% from 2008 to 2009.
Assets Turnover= Net Sales / Net Assets

This ratio measures your productive use of your fixed assets the amount of sales
generated for every dollar’s worth of assets. It is calculated by dividing sales in
dollars by assets in dollars. Asset turnover measures your company’s efficiency at
using its assets in generating sales or revenue; the higher the number the better.
It also indicates pricing strategy: companies with low profit margins tend to have
high asset turnover; those with high profit margins have low asset turnover

AT (2009) = 466074/454422
=1
AT (2008) = 736848/771247
=0.9
The asset turnover ratio is low compared to the standard, but there has been a
slight increase from 2008 to 2009.

Days’ Receivables= Debtors / sales turnover x 365

(Debtors days)
Average time in days that your receivables are outstanding. Measures your
control of your credit and collections. Greater the days, greater probability for
delinquencies.

DD (2009) = 42365*365/466074
=33 days
DD (2008) = 81554*365/736848
=41 days
The debtor turnover has decreased from 2008 to 2009 which indicates that the
organisation collects in receivables in a month’s time on an average.

Profitability ratios

This value measures the percent of money your company generated over the cost
of producing your goods or services. In other words, gross profit margin (or
percent) is the ratio of your net sales (gross sales minus your cost of goods sold)
divided by your gross sales, expressed as a percentage.
Gross Profit Margin= (Gross Profit / Net Sales) x 100

GPM (2009) = 80346/466074

=17%
GPM (2008) =163902/736848
=22%
The gross profit margin decreased from 2008 to 2009. This may be because even
though there was a decrease in the COGS in the same period, the decrease in
sales was much higher proportionately.

Return on capital employed - ROCE

=Profit before interest and tax (1-T) / capital employed

It shows how effective the firm is in using its capital to generate profit. A ROCE of
25% means that it uses every Rs. 1 of capital to generate 25p in profit. The higher
the better

Capital employed = working capital +fixed assets

Working capital = current assets – current liabilities

2009
Working capital=351964-102523
=249441

Capital employed=249441+102458
=351899

ROCE= 138391(1-0.17)/351899
=32.4%

2008

Working capital=641139-263517
=377622
Capital employed=377622+130108
=507730

ROCE= (129912)(1-0.18)/ 507730

=20.5%
It shows how effective the firm is in using its capital to generate profit. The
ROCE has increased from 2008 to 2009.

Net Profit Margin= Net Income (After Tax) / Net Sales

This is the profit you made on this business. The net income divided by your gross
sales, expressed as a percentage. Your company’s after-tax profit margin tells you
(and investors) the percentage of money your company actually earns per dollar
of sales. Interpretation is similar to your profit margin, the after tax profit margin
is more stringent as it takes into account taxes. Looking at the earnings of a
company often doesn't tell the entire story. Profit can increase, but it does not
mean that its profit margin is improving.

NPM (2009) = 137876/466074

=29%
NPM (2008) = 128177/736848
=17%
The net profit margin is increasing from 2008 to 2009.

Gearing Ratios

Interest Coverage= EBIT / Interest Expense

Indicates what portion of debt interest is covered by your company’s cash flow
situation. A ratio below 1 means that your company is having problems
generating enough cash-flow to pay its interest expenses. Ideally you want the
ratio to be over 1.5.

IC (2009) = (138391)/135
= (1025.11)
IC (2008) = 129912/5644
 =23
The interest coverage ratio here is very high as creative paid off the last of its
debt with interest in 2009.

Debt to Owners’ Equity = Total Debt / Total Equity

Also called Debt to Worth, this ratio compares the total liabilities of your business
to your total owners’ equity or net worth (the value of your total assets minus
your total liabilities from your balance sheet). It indicates what proportion of
equity and debt your company is using to finance assets. Also, it expresses a
degree of protection provided by owners for creditors. Low indicates greater
long-term financial safety and/or flexibility to borrow.

DTE (2009) = 0 (as debt is 0 in 2009)

DTE (2008) = 10/477974

=2.09x10-5

Total Debt to Total Assets = Total Debt / Total Assets

DTA (2009) = 0

DTA (2008) = 10/771247

=1.29x10-5

Measures the leverage of your assets – what you owe on your assets. This is your
total liabilities divided by your total assets (from your balance sheet). Unlike your
current ratio, this compares all of your assets and all of your liabilities; in other
words, it shows the ratio of what you owe to what you own.

Shareholder`s Ratios

Earnings per share = Profit after tax / No of shares

EPS (2009) = (137876)/73350

= (1.88)
EPS (2008) = 128178/82516
=1.55
The EPS is in negative in the year 2009 which means there was a loss incurred
per share.

Price earnings ratio = market price / earnings per share

The higher the better generally. Comparison with other firms helps to identify
value placed on the market of the business.

PE (2009) = 2.64/ (1.88)

= (1.4)
PE (2008) = 4.7/1.55
= 3.03
The PE ratio in 2009 was negative due the EPS being negative.
 Forecasting
The financial manager must also make overall forecasts of future capital requirements
to ensure that funds will be available to finance new investment programs. The first step
in making such a forecast is to obtain an estimate of sales during each year of the
planning period. This estimate is worked out jointly by the marketing, production, and
finance departments: the marketing manager estimates demand; the production
manager estimates capacity; and the financial manager estimates availability of funds to
finance new accounts receivable, inventories, and fixed assets.

For the predicted level of sales, the financial manager estimates the funds that will be
available from the company’s operations and compares this amount with what will be
needed to pay for the new fixed assets (machinery, equipment, etc.). If the growth rate
exceeds 10 percent a year, asset requirements are likely to exceed internal sources of
funds, so plans must be made to finance them by issuing securities. If, on the other
hand, growth is slow, more funds will be generated than are required to support the
estimated growth in sales. In this case, the financial manager will consider a number of
alternatives, including increasing dividends to stockholders, retiring debt, using excess
funds to acquire other firms, or, perhaps, increasing expenditures on research and
development.
There are two types of forecasting technique:-
1. Horizontal Analysis.
2. Vertical Analysis.
We will forecast for the year 2010 from vertical analysis, as the forecasted sales
for 2010 is given as US$ 275300

PROFIT AND LOSS STATEMENT FOR THE YEAR 2010

 Average of 2009 and 2008 % Change 2010(US$’000)

Sales, net 601461 275300 (Given)

Cost of goods sold 479337 79 219401.55

Gross profit 54098.45

Expenses:
Selling, general and administrative 237667 39.5 (108784.65)
Research and development 62807.5 11.64 (28748.17)
Restructuring charges 10417 1.7 (4768.05)

Total expenses (Loss) (142300.87)

Other income 8323.5 1.4 3809.82

Other (losses) gains, net 64625.5 10 29580.3
Share of loss of associated companies (20) (0.03) (9.09)
Interest expense (2889.5) 0.4 (1134.23)

(Loss) profit before income tax (55978.39)

Income tax credit (expense) (610) (0.1) (277.38)

Net (loss) profit (55701.01)

BALANCE SHEETS (2010)

 Average of 2009 and 2008 % Change 2010(US$’000)

ASSETS

Current assets:
Cash and cash equivalents 329597.5 54.75 150862.96
Trade receivables 62459.5 10.38 28588.89
Inventories 68694 11.42 31442.53
Other current assets 35800.5 5.96 16386.56
227280.95

Non-current assets:
Financial assets, available-for-sale 32500 5.40 14875.86
Other non-current receivables 5934.5 0.9 2716.33
Investments in associated companies 1307 0.2 598.23
Property and equipment 34093.5 5.66 15605.23
Other non-current assets 39088.5 6.49 17891.54
51678.19

Total assets 278968.14

LIABILITIES AND EQUITY

Current liabilities:
Trade payables 48401.5 8.04 22154.27
Accrued liabilities and provisions 80859 13.44 37010.68
Current income tax liabilities 3745 0.6 1714.15

Non-current liabilities:
Deferred income tax liabilities 29628 4.92 13561.29

Total liabilities 74440.39

Equity:
Share capital 47.12 129721.36
Treasury shares (4.4) (12264.12)
Fair value reserve 0.8 2409.4
Other reserves 9 27416.89
Retained earnings (46629.01)
100654.52

Total liabilities and equity 175094.91

As our current assets are not equal to our current liability the
company needs the extra funding of 103873.23

References
1. www.creative.net
2. www.britannica.com
3. Financial Accounting