ANALYSIS OF M/S RANI LIMITED
INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF PAKISTAN REPORT ON RATIO ANALYSIS OF M/S RANI LIMITED PREPARED FOR: Board of Directors PREPARED BY: Management Accountant TABLE OF CONTENTS Particulars ? Executive Summary ? Introduction Page No. 3-4 5 ? Financial Position and Ratio Analysis 6 – 10 ? Suggestions & Conclusion 11 – 12 ? Appendices ? ? ? ? Horizontal & Vertical Analysis of Income Statement Comparative Ratios & averages Trend of Ratios & Percentages Graphical Representation 13 14 15 16 Page 2 of 16 EXECUTIVE SUMMARY
This report provides an analysis and evaluation of the current and prospective profitability, liquidity and financial stability of Rani Ltd.
Methods of Analysis include trend horizontal and vertical analyses as well as ratios such as Current and Quick Ratios. Other calculations include return on Shareholders Equity and Total Assets and earnings per share to name a few. All calculation can be found in the appendices. Results of data analyzed show that the company’s total revenue has increased but Net profit Margin have declined due to increase in cost of sales. Over all liquidity position of Rani Ltd.
s satisfactory although quick ratio is at alarming level. Corrective measures are required to avoid any liquidity problems in future. The Operating cycle is rising due to huge level of inventories, and receivables collection period. Fall in liquidity ratios, rapid increase in revenues, increase in inventory in relation to revenue, uneven increase in receivables and increase in accounts payable period and decrease in profit margin are the symptoms of “Overtrading”. In line with the decrease in net profit, earning per share has also drastically reduced to Rs. 3.
22 (2010) from Rs. 2. 665 (2012) over preceding years.
Page 3 of 16 This report finds the prospects of the company in its current position are not positive. The major areas of weakness require further investigation and remedial investigation. Recommendations discussed include: ? Improving the average collection period for trade debtors ? Improving the Inventory turnover ? Avoiding unnecessary overtrading This report also indicates the fact that the analyses conducted has limitations.
Some of the limitations include ? Nature and Type of the company is not known ? Current Economic condition is also unknown ? Data limitations as not enough information is provided or enough detail
Page 4 of 16 INTRODUCTION This report provides information obtained through ratio analysis, regarding the profitability, liquidity and financial stability of Rani Ltd for the years 2010-2012. This report will pay particular attention to the earning power, liquidity and credit management, inventory management, and will highlight major strengths and weaknesses while offering some explanation for observed changes. The report will comment on the prospects of the company and make recommendations that would improve Rani Ltd’s current performance. These observations do have limitations which will be noted.
This report will explain how a cash flow statement and a prospectus could enhance analysis.
Page 5 of 16 Financial Position and Ratio Analysis Rani Ltd had a very good performance in the past but now some performance indicators show that the present results are deteriorating and not in line with the previous financial indicators of the company. We understand that the term of reference of the assignment is to analyze the performance and financial position of the company. We have analyzed the financial position of the company on the basis of information and ratios provided to us on the following grounds: • Profitability of the Company Liquidity Position • Efficiency Indicators • Investment Perspective Page 6 of 16 PROFITABILITY OF THE COMPANY All three profitability ratios given in the table below (see appendices) have positive values during the year, as the company gained gross profit and comprehensive income from operational and financial activity for this period but overall profitability of the Rani ltd has considerably declined due to the various reasons out of which very obvious indicators are Cost of goods sold to net sales ratio which show that the in spite of increase in sales over last three years Cost of good sold has increased as % of total sales.
This is mainly due to the amount of inventory that Rani Ltd is maintaining in 2012. As a result of above, very logically net profit to net sales ratio has significantly reduced from 13. 90% in 2010 to only 10.
43% in 2012. This is certainly very alarming position for the management of the company as well as shareholders of the company. If the trend goes on further in next coming year it is very obvious that the company will start incurring losses in the near future. On the same lines Return on net worth has been falling to 7. 54% in 2012 from 10.
0 % in 2010 which indicates that the returns are not up to the mark and may be below the required rate of return of the company and will certainly be not acceptable to the investors of the company. Page 7 of 16 LIQUIDITY POSITION Current ratio of Rani Ltd has increased from 1. 26 times in the year 2010 to 1. 43 times in the year 2012, as we know that the normal level of current ratio is 2 : 1 that shows sound liquidity position. There is increase in current ratio from previous year’s ration, this increase in current ratio is indicating pilling up of inventories as compared to acid test ratio which is increasing as well.
Higher current ratio is also indicating under utilization of working capital as excess current asset can be invested into more efficient utilization. For absolute reason of this increase shows that the company has been involved in over trading due to which account receivable ; inventories turnover have declined and operating cycle days have increased. The Quick/acid test ratio is very useful in measuring the liquidity position of a firm. It measures the firm’s capacity to pay off current obligations immediately and is more rigorous test of liquidity than the current ratio.
Usually a high liquid ratio is an indicates that the firm is liquid and has the ability to meets its current or liquid liabilities in time and on the other hand a low liquidity ratio represents that the firm’s liquidity position is not good.
The Quick Ratio which is 0. 64 time in 2012 is at alarming situation, because, generally, a quick ratio of 1:1 is considered to be satisfactory. It means that Rani Ltd does not have enough assets which can be transferred to monetary funds in a very short time to meet current liabilities.
Working capital is required to maintain to meet the operational needs of the company such as purchase of raw material and payment of salaries and wages to labor but in Rani Ltd working capital has been rising above the needs which is due to the increase in receivables and inventories that causing extra financing cost to the company. But if we compare working capital with inventories, it turns out that inventories are not covered with working capital in full at the end of the period analyzed .
The value of working capital is deemed to be normal when it corresponds to the amount of inventories, which are the least liquid part of current assets.
Page 8 of 16 EFFICIENCY INDICATORS Debtors turnover has gone down abnormally during the current period over preceding years i. e. from 24. 99 times in 2010 to 7. 31 times in 2012 as a result collection period has increased to 49 days from 14 days which certainly need extra financing.
As we know that higher the collection period, the greater is the chance of bad debts.
Inventories need detailed analysis from all aspects. Inventories could be of raw material, work in progress and finished goods, all these when accumulate, block huge amount of funds. This increase could be due to the obsolete or out dated stock or due to excessive orders which were not matched with the production schedules which result increase in storage cost. In terms of days, presently it is taking 100 days to move to the customers which has been increased from 84 days in 2010.
It means that the company needs extra financing for these extra days of pilling up of inventories. The detailed analysis of receivables and inventories concludes that the Operating cycle has severely moved up by 48 days from the level of 90 days in 2010 to 138 days in 2012. Page 9 of 16 INVESTMENT PERSPECTIVE Earning per share has been continuously falling and presently it has reached to 2. 66 in 2012 from 3. 22per share in 2010. EPS has decreased by 17% from 2010 to 2012
Reasons for this declining trend are the same as discussed earlier in profitability ratio, but point of concern is that despite declined in profitability and earning per share, company has maintained dividend per share of Rs 2 which is perhaps to restrain share price from drastic reduction, this strategy might not work in efficient market as investors are more informed and take rational decisions, on the other hand, company will not be able to maintain this level of dividend per share in near future as the company might be in a financial difficulty and may not be able to distribute dividends at this level of profits
Dividend Per share of Rani ltd has increased from previous year which is good indicator for investors as he/she receives dividend despite the fact that the company is not having good profitability performance as compared to previous years.
Book Value per share of Rani Ltd has also increased from 19. 59 in 2010 to 21. 32 in 2012. Gearing Ratio measures the percentage of capital employed that is financed by debt and long term financing. The higher the gearing ratio, the higher is the dependence on borrowing and long term financing.
Gearing Ratio between 25% to 50% is considered normal for a business which is happy to finance its activities using debts. Rani Ltd has maintained its gearing ratio at approximately 27% since last 2010 which means that Rani ltd is neither issuing equity nor raising long term liabilities. Page 10 of 16 SUGGESTIONS ; CONCLUSION The comparative ratio analysis of Rani Ltd has created several mysteries which need to be resolved prior to reach any hasty conclusion. From the interpretation of financial ratios of Rani Ltd, it can be concluded that it is not in a very secure financial position.
Improvement in every area of the company is needed if the company is, in the first instance, to survive and then grow. The key areas of reform are the liquidity of the company and the quantity and quality of working capital, profitability and financial stability.
Management of Raja Ltd must address these areas simultaneously if the company is going to take over Rani ltd. It must be remembered that this analysis is limited- a greater of understanding and evaluation can only occur with utilization of other resources such as comparisons with the companies operating in the same industry as of Rani ltd or comparisons with budget forecasts and the tatement of changes in financial position. Only after this process can a full appreciation of the company’s current situation and possible future occur. At this point the company does not have strong future prospects in the areas of profitability, liquidity or stability if it continues on its current path. Raja Ltd should be concerned with current rates of return of Rani Ltd.
Before making Investment in Rani ltd our company should see other factors as well
We should see if we can get synergies by acquiring the Rani ltd, because from given information and data company is performing not very well so it would be a risky investment if made in hurry. ? Company is having acute Working Capital Management Problems. ? Rani Ltd has neither Aggressive Working capital policy nor conservative one. Page 11 of 16 AVOID OVERTRADING Solution of all the problems lies in the overtrading. Rani ltd must avoid overtrading activities and take reasonable orders which it can meet easily and honor them timely, it will reduce extra finance cost, inventory storage costs and other costs related to it.
If Raja ltd takes over Rani ltd then we should consider following options: ? We must see the future Plans of the company before finalizing any deal.
? Raja limited should change its working capital policies (if acquired). ? We should see the post acquisition benefits and post acquisition operating policies before taking any decision. ? Rani ltd is suffering finance cost as a result of high receivable and inventory level which needs to be lower. ? Rani ltd is not issuing the equity nor raising long term loan, so this option must be considered to increase the capital base. We must take into account Market Price of the Rani ltd.
? Board of Directors should investigate for any Intellectual Capital/Assets of the company which may increase the value of the Rani ltd. ? We must take into account market value of the shares of the company.