The inventory levels were increasing while the debt figure was being cut through reduction of days for repayment. The gross profit margins shrank steadily indicating a cut in the profitability ratio. Increase in total revenues and operating expenses shows that there was possible rise in inflation rate; the cost of materials went up as well as the charges on the finished products. The high charges on the finished products or services rendered are to fusion the high costs charged on the raw materials.
In this case, DAS PLC which engages in aircraft servicing may be getting spare parts at exorbitant prices, but decides to cut down their service fees or costs of these parts if the company sell them to prospective clients.
Another possibility of the high revenues could be due to cuts on charges for either goods or services. According to statistics of the company, this could be the reason. The revenues collected was high, but the profit margins continually shrank which is a typical characteristic of firm engaging in price cuts to boost the sales. Business analysts argue that this is not the efficient way of managing a company. In this scenario, there will be increase in sales volume, but losses may be incurred due to inadequate resources to meet the operation costs or cost of materials used.
The net gearing ratios on average of the two financial years show gradual reduction. This could be due to substantial drop in debtors, occasioned by few days taken for collection. The current (working capital) ratio registered an improvement due to increase in inventory and cash, but decrease in both debtors and creditors. This is because current ratio is expressed as a relationship between current assets and current liabilities.
The main problem of this kind of analysis (ratio) is that, it may not give a factual picture of the financial position of a firm, an example is profitability ratios. Using the current ratio, DAS PLC shows an improvement in its profits due to increased values. This contradicts the actual net profit value which indicates decrease between the two trading periods. The same point is also vindicated by the gradual drop in the gross profit margins during the said periods.
Investors (shareholders) are mainly interested in the profits made by the company. This almost guarantees them secure earnings in terms of dividends. Another reason for this is because they want to know the future of the firm. A company with shrinking profit margins has no future because it is using the limited profits for cosmetic improvement. No major development can take place with this kind of results hence denying the investors from reaping the benefits of expansion for example, economies of scale.
In the above events, I realized that although the company had put some minimal efficiency measures (reduction of debt collection and payment periods), there are no prospects of greater improvement. The reason being, most of the financial performance indicators show a downward trend. These include net profit for the year, gross and operating profit margins. Furthermore the earnings per share have not been reflected through out the trading periods while the cash generated from operations per share lack in the last two trading periods. These signs spell doom for the future of this company.
The information that breaks the camels’ back on this matter is the pilferage case. With no compensation for the substantial loss, the company will obviously be operating on tighter budget. The firm will be forced to borrow in order to bridge the short-fall gap. This will definitely increase the value of creditors in the balance sheet, making it hard to pay dividends to shareholders.
Close analysis show that the company already has loans inform of debentures with long-term maturity periods. These dates range from the year 2012 and 2030. Additional debentures subscribed for, mainly increases the value of total liabilities which any business entity strives to minimize or totally discard. Again from the data, I note that price per earnings (P/E) ratio is enumerated as fourteen (14). The aforesaid figure illustrates the actual data taken during the periods that the firm has been operating as given. The financial periods given are more than one accounting year; therefore the figure generated cannot be artificially inflated.
According to financial experts, the above kind of information cannot be left unrecognized. The reason being, the International Standards Accounting Board relates these figures to either future growth or drop of the company’s performance. Any figure close to ten (10) or below twenty (20) is deemed bad for the company. These shows there are little or no prospects of the company’s future growth. The investors usually shy away from investing in such corporate firms due to little or no suitable returns to their investments.
Prospective investors should sell off their shares due to bleak future exhibited by the company’s records. The financial statements provided clearly indicate that in the long run, the firm will not be profitable.
Alternatively, the prospective investors and shareholders can hold their shares with no increment to see if the on-going negotiation for contract renewal is through. If consent is granted by the English Airways company, then there is a possibility for the company to streamline its policies and operations in future for a long term turn-around, which may take considerable lengthy period!