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FNA1002

FINANCIAL ACCOUNTING
GROUP PROJECT

TUTOR:
TAN WEE SZU

B29 GROUP 1:
LIU DAN (U059739R)
LIU RIJING (U033695)
PHAM TUAN MINH (U056702N)
TAN WEI PING REGINA (U024962?)

DEPARTMENT OF FINANCE & ACCOUNTING


SCHOOL OF BUSINESS
NATIONAL UNIVERSITY OF SINGAPORE

SEMESTER 2
SESSION 2005/2006
FNA1002 Group 1 Project__________________________________________________

Question 1

What is the nature of business of the company?

Stamford Tyres Corporation Ltd. (will also be subsequently referred to as ‘Stamford’ in


this project) does manufacturing and also provides services. The manufacturing segment
of Stamford consists of the manufacturing of Stamford Sport Wheels (which is one of the
company’s proprietary brands) light alloy wheels and tyres outsource contract
manufacturing using Stamford’s brands. The service segment consists of retain chain
operations, international distribution network, and fleet and mining tyre management
services.1

What are the company’s main types of revenues and expenses?

The company’s main revenue is from their tyres and wheels business. It is divided into
wholesale and distribution, retail and fleet and servicing of motor vehicles. The revenue
from the wholesale and distribution of tyres and wheels amount to S$157,191,000. While
S$34,022,000 is from retail and fleet, S$ 80,000 is from servicing of motor vehicles 2.
Revenue coming from the Singapore segment contributes 58.2% of total revenue, 28.8%
from South Asia and 13.0% from North Asia3.

Stamford’s main types of expense are the cost of raw materials and goods sold
(S$138,811,000) and salaries and employees benefits (S$15,473,000)4.

Question 2

What is meant by the term “revenue recognition”?


1
Pg 3, Letter to Shareholders
2
Pg 53, Note 3
3
Pg 78, Note 35
4
Pg 41, Consolidated Profit and Loss Account

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Revenue recognition is defined as recognizing revenue after realization. In cash basis


accounting, revenues are recognized when cash is received. However, in accrual basis
accounting, revenues are recognized when they are (1) realized or (2) realizable and
earned no matter when cash is received.

When does the company recognize revenue?

Based on the revenue recognition policies by Stamford Tyres Corporation Limited5:

The revenue from services provided is documented when the services have been
rendered. As for the revenue from the rental of tyres, it is recorded based on the usage of
tyres by customers.

For the purchases made from the financial year, volume rebates from the suppliers is
subtracted if the goods are unsold on the date in the balance sheet. Otherwise, it is
credited against cost of goods sold in the profit and loss account in the case where the
goods were sold on the balance sheet date.

Advertising and promotion rebates given by suppliers are recognized under 2 different
categories. In the first, those that are determined according to the amount of purchases
made during the financial year will be credited against marketing and promotion
expenses in the profit and loss account. In the second category, those that are reimbursed
at the suppliers’ discretion will be credited when these are received against marketing and
promotion expenses in the profit and loss account.

During the financial year in which the Company and/or the Group’s prerogative to accept
payment have been established, dividend income is recognized gross in the profit and loss
statement

5
Pg 46, Note 2(c)

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Time proportion basis is used to record interest income on the basis of the principle
outstanding and at the applicable rates.

Explain concisely if the methods adopted are appropriate?

Stamford records revenue on the accrual basis which means revenue is recorded right
after the services have been performed or the goods have been delivered. Stamford also
takes into account the amount of any volume rebates, advertising and promotion rebates
from the suppliers. Therefore, the amount recorded is the cash value of the service
transferred to the customer.

The revenue recognition is appropriate because revenue is recognized to the extent that it
is probable that the economic benefits will flow to the Group and the revenue can be
reliably measured. The method used is appropriate since it obey the revenue principle;
revenues are recognized when they are realized or realizable and earned.

Question 3

What percentage of total assets does the company hold as accounts receivable at the
end of the financial year? How does this compare to the previous year?

The table of percentage of total assets held as account receivable:


Title/Year 2005 2004
Total assets (S$ ‘000)6 199,470 182,117
Total Account Receivable (S$ ‘000)7 68,748 60,067
Percentage of total asset hold as
34.5% 33.0%
account receivable (%)

The percentage has raised 1.5% compare to the previous year (2004)

How would you evaluate the appropriateness of the company’s bad debt policy?
6
Pg 42, Balance Sheets
7
Pg 61, Note 16 & 17

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Stamford accounts for its bad debt using the Allowance for uncollectible account
method8. This method accounts for the losses of bad debt on the basis of estimates.
Stamford records the estimated amount in the Allowance for Doubtful Trade Receivables
and Allowance for Doubtful Receivables. These are the contra accounts for Trade
Receivable and Other Receivables.

This method is appropriate because it neither overestimates the total assets nor
underestimates the expense. Thus, it provides a clearer view of Stamford’s financial
position. It is also consistent with accrual accounting and matching principle.

In 2005, Stamford records S$ 5,329,000 for total Allowance for doubtful receivable,
which is about 8% of total receivable9.

Question 4

What are the types of inventories carried by the company?

Stamford holds four types of inventories (1) inventories for sale, (2) inventories held for
rental, (3) raw materials and (4) work-in-progress – aluminum alloy wheels10.

In general, why must companies use cost flow assumptions to cost their inventories?
What cost flow assumption does the company use to cost its inventories?

In general, the price of a good is not constant. For instance, it can be affected by
inflations, influences from the market, etc. Therefore, it is difficult to record for
inventories without any cost flow assumption of product sold.

The company uses weighted-average-cost method to record its inventories.

8
Pg 49, Note 2(m)
9
Pg 61, Note 16 & 17
10
Pg 61, Note 15

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Is the assumption appropriate?

This assumption is appropriate. Stamford does not deal with unique or expensive
inventories such as antique of jewelry that requires the specific unit cost to be recorded.
In addition, the cost includes all direct expenditure and production overheads based on
normal level of activities. In addition, as compared to first-in, first-out (FIFO) cost
method, the weighted-average cost method incurs lower income taxes as it reports lower
profits when inventory unit costs are increasing.

Compute the total historical cost of the company’s inventories as the latest balance
date?

Historical Cost = Inventories for sale + allowance for obsolescence11


= S$62,338,000 + S$6,278,000
= S$68,616,000

Question 5

How does the company depreciate its property, plant and equipment (fixed assets)?
Does this policy look reasonable? In answering the latter question, explain concisely
the tradeoffs management makes in choosing a depreciation policy, and how an
investor can assess the reasonableness of the depreciation policies of a company.

Stamford uses the straight-line method to calculate the depreciation of property, plant and
equipment (P, P & E).12

Depreciation rate (per annum):


Leasehold land and building 1.7% to 3.5%
Leasehold improvement 10%
11
Pg 61, Note 15
12
Pg 44, Note 2 (d)

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Motor Vehicle 20%


Plant and equipment 5% to 10%
Computer Software and Hardware 331/3 %
There is no depreciation for free hold land and construction-in-progress.

During the financial year, the whole year’s depreciation is charged in the year of
acquisition and no depreciation is charged for the year of disposal. Fully depreciated
assets which are still in use are retained in the financial statements.

Stamford reviews the useful life of property, plant and equipment annually to ensure that
the method used and period of depreciation are consistent with the fluctuations of
economic benefits. Based on the above information, Stamford has changed the period for
office furniture and equipment from 10 years to 8 years and leasehold building from 64
years to 50 years. Those changes have incurred an additional S$294,000 depreciation
charge for the financial year.

The policy of estimating the depreciation is appropriate. Usually, managers consider the
tradeoffs in choosing a depreciation method out of 3 main types: Straight line, units-of-
production, and double-declining-balance method. Straight line method divides the
depreciation costs by its useful life in years; this makes the calculation easier and more
convenient. The units-of-production method compute the depreciation based each unit of
output produced by the assets. By using this method, the manager can have a better
estimation of depreciation and the asset’s remaining useful life. The double-declining-
balance method is used mainly to reduce the income tax as it accelerates depreciation and
lower the net profit.

An investor can look at the annual report of the company to get the information about the
method used to compute the depreciation of property, plant and equipment. Furthermore,
the investor can also find annual depreciation rates of property, plant and equipment and
compare with the usual rate of depreciation of these assets. Thereby, he or she can make
an evaluation of the reasonableness of the depreciation policies of Stamford.

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Did the company dispose of any property, plant and equipment during the latest
financial year? Was there any gain or loss on such disposals? What would be the
journal entry to record such disposals? (Where applicable, use one of the disposals
made by the company to illustrate how the gain/loss should be recorded.)

Stamford did record a gain of S$193,000 on disposal of property, plant and equipment for
the year ended 30 April 2005.13

Journal entry for this disposal14:


30 April 2005 Accumulated Depreciation ……………………. $662,000
Cash…………………………………………….. $416,000
Gain on Disposal of plant and equipment ……………$193,000
Plant and equipment…………………………………..$885,000
To record gain on disposal of plant and equipment

Question 6

Does the company have any intangible assets? What are these? What are the
accounting policies regarding amortization or impairment of these intangible assets?

Yes, Stamford Tyres Corporation Limited has intangible assets15, which are (1) computer
software (2) goodwill (3) preliminary, pre-operating expenses and (4) research and
development costs

For computer software, they are stated at cost less accumulated amortization and any
impairment loss. Commencing from the date the software is available for used, the cost is
amortized on a straight line basis over a period of 3 years.

13
Pg 54, Note 5
14
Pg 57, Note 9
15
Pg 48, Note 2(j)

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Goodwill is regarded as the excess of the fair value of the consideration given over the
fair value of the identifiable net assets of the subsidiary, joint venture and associated
companies when acquired.

Positive goodwill is amortized through the consolidated profit and loss account on a
straight line basis over its useful economic life up to a maximum of 20 years, determined
on individual basis. Goodwill which is assessed as having no continuing economic value
is written off to the consolidated profit and loss account.

Preliminary, pre-operating expenses and research and development costs are


expensed as incurred, except for development costs which are expected to generate future
economic benefits. Such development expenses are capitalized and amortized through
profit and loss account on a straight line basis over a period of 5 years upon
commencement of operations.

Question 7

Besides the stated liabilities on the balance sheet, state and (if possible) quantify other
possible future obligations that the company has as at the latest balance date. What is
the importance of such information to investors? (Note: If the company reports more
than three other possible future obligations, pick any three to explain.)

The possible future obligation is Guarantees issued for bank facilities granted to
subsidiary companies16

This information is important because it provides a better look on the company’s


prospects when the obligation occurs. The future obligation will involve cash outflows in
the future which can result in lower cash equivalents. Investors may do a wrong
investment on the company if the obligation were not stated on the annual report.

16
Pg 74, Note 32

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Question 8

What are the transactions that are reported in the company’s statement of changes in
equity? In your own words, explain as completely as possible the nature of each of
these transaction(s). (Note: If there are more than three transactions reported, pick
any three to explain.)

The transactions reported in the Company’s statement of equity changes are (i) the
issuance of ordinary shares, (ii) cash dividend payout and (iii) the transfer from capital
reserves.

The issuance of shares is to finance or expand the operations and the investments of the
Company by issuing to investors shares that represent the market value of the business,
which in turn receive cash or equivalent asset from investors and transfer to its paid-up
Capital. Cash dividend payments are made from the revenue reserves account, which is
the retained profits of the business, and this transaction can be carried out even when the
company incurred a loss in the financial period only if retained profits balance is positive.
The transfer from capital reserves due to exercise of Warrant 2007 is a transaction where
by warrants owners are allowed to purchase ordinary shares at exercise price of $0.10 and
the net proceeds will be transferred from capital reserve to share premium reserve.

Question 9

Refer to the balance sheet. Are there any investments in other companies or entities
made by the company? How are they accounted for?

Yes, Stamford Tyres Corporation has investments in other companies and entities in the
form of (1) subsidiary companies, (2) joint venture companies and (3) associated
companies

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Investments in subsidiary companies are recorded at cost less provision for diminution
in value in the financial statements. The purchase method of accounting is applied in the
acquisitions of subsidiary companies.

Joint ventures are considered as entities having interest on a long-term basis by the
Company and are also partly managed by the Group having one or several parties under a
contractual agreement.

The Group’s interest in the joint venture company is documented in the consolidated
balance sheet and profit and loss account using the proportionate consolidation method.
The Group’s share of the joint venture company’s assets, liabilities, income and expenses
are joined on a line by line basis with items that are the same in the consolidated financial
statements. Investments in Joint Venture Company are stated at cost less provision for
diminution in value on the Company’s financial statements

An associated company is regarded as a company, not being a subsidiary company, in


which the Group has a long-term interest of not less than 20% of the equity and in whose
financial and operating policy decisions the Group exercises significant influence.

The Group’s share of the post-acquisition reserves of associated companies is included in


the investments in the consolidated balance sheet. When the Group’s share of post-
acquisition losses surpasses the amount of the respective investment, the investment is
reported at nil value and recognition of losses is ceased except to the extent of the
Group’s commitment.

In the event where the audited financial statements of these associated companies does
not match those of the Group’s, the share of profits is obtained from the last audited
financial statements available and unaudited management financial statements to the end
of the accounting period. Investments in associated companies are stated at cost less
provision for any diminution in value.

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Question 10

Is there a “minority interests” item on the balance sheet and, if so, what does this refer
to? Is there a “goodwill” item on the balance and, if so, how did this arise?

Yes, there is a “minority interests” item on the balance sheet. Minority interests refers to
the event whereby the parent company i.e. Stamford Tyres Corporation Limited,
purchases less than 100% of the shares of her subsidiary companies. In this case here,
minority interests on the consolidated balance sheet indicate the percentage of the
subsidiaries’ equities which are not held by Stamford Tyres Corporation Limited. The
minority interests can be thought of as an adjustment .This is because during the
preparation of the consolidated balance sheet, Stamford Tyres Corporation is assumed to
have whole ownership of her subsidiaries.

There is not a “goodwill” item on the balance sheet. Goodwill arose when Stamford
Tyres Corporation Limited paid more than the market value of her subsidiaries’ net assets
in order to acquire the subsidiary companies. At the beginning of the financial year, there
is an amount of $61,000 of goodwill in the Intangible Assets account. However, it is fully
amortized during the year and at the end of the year and it account becomes zero at the
end of the year17.

Question 11

Did the cash and cash equivalents are the company increase or decrease? What are the
causes of this decrease?

The cash and cash equivalents of the year 2004 is $18,699,000 and of the year 2005 is
$8,776,000. The cash and cash equivalents of the company decreased by $9,923,000
during the latest financial year.

17
Pg 60, Note 13

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This decrease is mainly caused by financing activities. Compared with 2004, the cash
flows from financing activities have decreased sharply by $17,511,000. The proceeds
from trust receipts in 2004 are $20,050,000, while in 2005, it becomes minus $7,179,000,
plus that the proceeds from issue of shares have decreased by $4,452,000. Also due to the
$2,059,000 used in operating activities, cash and cash equivalents decrease during the
latest financial year18.

Is this positive or negative for the company? Explain.

It is a negative sign for the company. Cash and cash equivalents decrease sharply during
the last financial year, and it has a trend to decrease in the following years, because
instead of generating cash from operation activities, the company actually used up
$2,059,000 in 2004. It implies four things:

Firstly, the cash flow from operating activities and investing activities is negative and
decreased during the latest financial year, which means managers did not manage cash
well. Secondly, the decrease in cash and cash equivalents means the company does not
have strong ability to pay dividends to share holders and interest and principal to
creditors. Thirdly, from the cash flow statement we can predict future cash flows. The
decrease of cash and cash equivalents implies that the cash flow of next year may not be
good either. Finally, we can see that the quantity of earnings is not good, because most of
its cash comes from borrowing.

Question 12

Who are the company’s external auditors? What sort of audit opinion did the company
receive in its latest financial year? In your own words, what does the opinion mean to
external users?

18
Pg 42, Consolidated Statement of Cash Flow

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Stamford’s external auditor is Ernst & Young, Certificated Public Accountants19.

The auditors’ opinion was that Stamford had prepared the consolidated financial
statements of the Group and the balance sheet of the Company appropriately in
conformity to the provisions of the Singapore Companies Act, Cap. 50 and Singapore
Financial Reporting Standards. This reflects a reasonable view of the financial position of
both group and company as at 30 April 2005.

To external users, the opinion shows that Stamford’s financial statements are acceptable
and dependable. Therefore, it makes investors can be sure that the statements were not
modified to hide bad trends or show unreal statistics. External users can rely on these
statements to assess the current and future prospect of Stamford, and thus, making the
right decision in investing.

Question 13

The Council on Corporate Disclosure and Governance (CCDG) has issued a Guide on
the Operating and Financial Review (OFR). In your own words, explain why an OFR
can be useful to an investor. Does the company provide information recommended by
the OFR guide?

An OFR can be useful to an investor in the sense that it provides a good understanding of
historical and prospective analysis of the company from the viewpoints the directors and
management. There are 6 main principles to what an OFR should include.

First, the OFR should provide information relevant to the investors which help them
make use of the financial reports to aid their decisions. Though, Stamford Tyres did not
have a section specially allocated to “OFR”, they incorporated the relevant information in
various sections.

19
Pg 40, Auditors’ Report

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Secondly, significant features of performance for the period covered by the financial
report should be considered regard the overall company as well as businesses or
geographic segments to assess the performance as a whole. For example, the known
trends and factors with impacts on the company’s future were mentioned in the director’s
letter. There is also a breakdown of revenue and profit information, certain assets and
liabilities information regarding geographical segments under note 35.

Thirdly, key financial and non-financial performance used by management to access the
company and performance should also be included in the OFR

Secondly, the nature of the company, their objectives and strategies and the major areas
of operations in the company’s business should be sufficiently discussed and analyzed.
Discussion should cover the group business of the listed company, including its principal
subsidiaries. For instance, discussion and analysis of performance were stated in the
director’s letter to the shareholders and under the section “five year financial highlight”.

Fifthly, there should be risk factors of the business, which was summarized under “Risk
management policies” pg 30 in the corporate governance report, including the general
business risk, product liability claims, credit and inventory risk and subsequently foreign
currency risk, interest rate risk and liquidity risk.
Lastly, The OFR should comment how to maintain and enhance the position and
profitability of the company. This was mentioned throughout the report.

Overall, there is no specific section directly following the OFR guidance in the financial
report of Stamford Tyres. However, the required information is included sufficiently
through out the report, though shatteringly.

Question 14

Refer to the Corporate Governance Statement (or equivalent) in the company’s annual
report. In your own words, explain why this statement can be useful to an investor.

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The purpose of the Corporate Governance Report is to institute and ensure an ethical and
lawful environment within the company. In the Report, the matters concerning how the
company is managed are stated adequately. Such issues with regards to how the Board
conducts its affairs, the hierarchy in the company, the people in the Board, the distinction
of the roles of the President and the Chairman, the selection and performance of the
Board, accessibility of information, remuneration matters, audit cum accountability and
communication with shareholders are included. By disclosing such information, it allows
the investors to have an insight view of how the organization is managed. This
knowledge will assist the investors in assessing if the company is organized in such a
manner that it is safe to make an investment. In addition, the details allow the investors to
know who are the people running the company and who they want to elect for in the next
election at the Annual General Meeting.

Besides these, the Corporate Governance Report also states the risks that arise from the
business operations i.e. the common business risk, inventory and credit risk and product
liability claims. This disclosure informs and updates the investors on the risks the
company runs into and the measures taken to minimize or prevent them. Such
information will assure the investors that their investments are secure and also to consider
if the company is worth investing in.

The Report also assures the investors that there will be timely disclosure of the
company’s information to update them on the businesses and operations as well as
general meetings to address the queries or displeasures of the investors. Such interactions
will boost the investors’ confidence in the company because this gives the investors’ a
deeper feeling of ownership of the company. The rights of the shareholders to participate
in voting and the internal code on dealings with securities further enhance trust in the
Company.

With this information provided by the Corporate Governance Report, investors will also
be able to evaluate the credibility of the company’s financial statements and the
transparency in which it reveals information about its operations, and whether there are

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enough checks and balances to prevent any abuse of power by any directors or by the
management.

By considering all these matters, investors can then decide whether a company has good
governance in terms of its performance and also accountability.

Question 15
Compare the performance of the company for the latest two years. If you are a
shareholder, will you be happy? Support your answer with appropriate ratio and
percentage analysis. Show computations of the ratios and percentages.

Stamford financial analysis:


Ability to pay debt and current liability:
Year/Ratio 2005 2004
Total current assets ($ ’000) 144,918 133,557
Total current liabilities ($ ’000) 86,522 85,326
Current ratio 1.67 1.57
Total liabilities ($ ’000) 131,018 118,588
Total assets ($ ’000) 199,470 182,117
Debt ratio 0.66 0.65

Current ratio shows the company’s ability to pay current liability with current assets, i.e.
the ability to pay the current debt of the company. The ratio has increase from 1.57 to
1.67, which is an acceptable ratio for most company.

Debt ratio shows the proportion of Stamford’s liabilities that have to be financed by
assets. It increased from 0.65 to 0.66 (a relatively low-risk position), meaning that
Stamford has keep the obligations stable (with an insignificant change in the ratio).

Current ratio and debt ratio imply that Stamford has a relatively strong financial position
and is unlikely to go bankrupt in the next few years.

Ability to sell inventory and collect receivable:


Year/Ratio 2005 2004

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Cost of goods sold ($ ’000) 138,811 138,805


(62,338 + 52,657) / 2 (52,657 + 40,43221) / 2
Average inventory20
= 57,498 = 46,544
Inventory turnover 2.41 2.98
One day’s sales ($’000)22 524.8 520.6
(68,748 + 60,067) / 2 (60,067 + 51,29323) / 2
Average Account Receivable ($ ‘000)
= 64,408 = 55,680
Days’ sales in receivable 122.7 106.9

Inventory turnover indicates the salebility of inventory; it shows how many times the
company sells its average inventory in a year. Stamford’s slightly decrease by 0.57, from
2.98 to 2.41. It is a reasonable value for inventory turnover.

Days’ sale in receivable shows how many days it takes for Stamford to collect the
average level of receivable. Days’ sale in receivable has increased from 106.9 to 122.7.
The increase shows a bad sign in collecting cash and could lead to cash shortage.

Profitability:
Year/Ratio 2005 2004
Net profit ($ ‘000) 8,607 11,544
Interest expense ($ ‘000) 0 0
24
(199,470 + 182,117) / (182,117 + 145,386 ) /
Average total assets ($ ‘000)
2 = 190,794 2 = 163,752
Return on assets (%) 4.51 7.05
Net profit ($ ’000) 8,608 11,544
Net sales ($ ’000) 191,581 190,005
Rate of return on net sales 4.49 6.08
Net profit ($ ’000) 8,607 11,544
Preference dividend ($ ’000) 0 0
Average ordinary shareholders’ equity (68,452 + 63,529) / 2 (63,529 + 49,444) / 2 =
($ ’000) = 65,991 56,487
Return on equity (%) 13.0 20.4

20
Pg42, Balance Sheets
21
Stamford Tyres Annual Report 2004, Pg 28, Balance Sheets
22
See Question 3
23
Stamford Tyres Annual Report 2004, Pg 28, Balance Sheets
24
Stamford Tyres Annual Report 2004, Pg 28, Balance Sheets

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Return of assets (ROA) measures a company’s success in using its assets to earn profit
for the two groups who finance the business: creditors and shareholders. 4.51% is a not
very good rate of return on total assets since the industry average ROA is about 7.80%.
Furthermore, Stamford has shown a bad sign in operating its assets as ROA reduced
slightly from 7.05% to 4.51%.

Return of equity (ROE) a measure of the amount of profit earned for every dollar
invested by the ordinary shareholders; it can indicate how successful the company is.
20.4% in 2004 and 13.0% in 2005 is a good ROE. Stamford’s return on equity is higher
than its return on assets which shows that its operating income exceeds the interest from
borrowing. However, a decrease from 20.4% to 13.0% is a considerable dropping off. As
a result, the amount of profit for every dollar invested has decreased. This is unfavorable
for shareholders.

The earnings per ordinary share (EPS) give the amount of net profit per share of
Stamford’s issued ordinary shares. This EPS dropped from 6.2 to 4.2 cents due to a
decreased net profit and an increased in the number of issued ordinary shares which
means each share is now linked with a lower proportion of net profit, suggesting concerns
about the value of shares.

Share analyzing:
Year/Ratio 2005 2004
Earnings per ordinary share (cents/share)25 4.2 6.2
Dividend per ordinary share (cents/share) 2.026 2.0
Market price per ordinary share (cents/share)27 15.0 15.1
Dividend yield (%) 13.3 13.2
Market price per ordinary share (cents/share) 15.0 15.1
Earnings per share (cents/share) 4.2 6.2
Price/earnings ratio 3.6 2.4

25
Pg 41, Consolidated Profit and Loss Account
26
Pg 72, Note 29
27
Market price = (Share Capital + Share premium) / Total number of Share

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Dividend yield measures the part of a share’s market value that is returned as dividend in
a particular year. Stamford’s dividend yield in 2005 seems to be equal to 2004’s. It means
that the amount of return as dividends is unchanged for the year.

Price/earnings ratio (P/E) is an important ratio in deciding the status of the shares, i.e. to
buy, hold or sell shares; it indicates the market price for every dollar earned. Stamford’s
P/E has increased from 2.4 to 3.6, meaning that shares are sold at 3.6 times the earnings.
This increasing ratio indicates a high probability of market share price to fall.

Although Stamford is considered to have a good financial position and/or seems not to
face with probable financial problems, the dropping off of return of assets, return of
equity, earning per share indicates declined returns to shares. The increased in P/E also
suggest that the market price of Stamford’s share will fall soon. This may even lead to an
unexpected release of ordinary shares and thus, making the price to fall dramatically. As
shareholders, we will obviously be not happy with such a pessimistic condition.

Question 16

If you are a potential investor, would you use your own money to buy shares of the
company? Why?

From the above ratios and data used for analysis, we can see that Stamford’s financial
position can be considered ‘healthy’ and ‘strong’ although there are some bad signs
appear on Cash Flow and days’ sale on receivable. Stamford seems not easy to go
bankrupt in next few years as it has high current ratio and very low debt ratio.

However, as potential investors, we will consider the trends of these ratios and the returns
of share/equity. As we have computed and discussed in Question 15, Stamford shows
some bad symptoms on the returns to shareholders (such as decrease in return on equity,
return on total assets and EPS) and an increase in P/E from 2004 to 2005. As those
problems appear, we will not invest in Stamford’s share at the moment, based on the

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FNA1002 Group 1 Project__________________________________________________

2005’s statistics. However, we will keep lookout for and further analyze its business in
the next year as Stamford has such a good financial position which can help it change
those not good signals.

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