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Cross Sectional and Trend Analysis

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Analysis refers to an evaluation of the company’s viability, stability and its future consequences. Financial analysis is the best tool to predict the future. Usually companies hire experts to predict the future of the entity. Mainly the experts emphasize on the past trends, ratio analysis and future consequences. To earn profits and facilitate the shareholders of the organization is one of the main prospective of the firms. From a shareholders’ point of view predicting the future of the organization which directly relates with their dividends, is what financial analysis is all about, but there are lot more benefits for the financial analysis like investors use financial analysis for anticipations regarding the financial health and stability of the company.

By contrast the management of the organization needs financial analysis for future decisions which are so essential to sustain in a competitive market. The purpose of the financial analysis differs between ‘insiders’, or managers, and outsiders or investors and creditors. Investors and creditors will be interested in attempting to predict future earnings and dividends and in assessing a company’s ability to repay its financial obligations. There are a number of ratios which are to be categorized for a definite area just like management ratios and inventory ratios are just for management usage while the ratios like profitability, dividends are equally beneficial for both the management and for the shareholders of the company. Generally the management or the financial analyst performs two type of analysis.

The main prospective of this study is quite straightforward, as we want to analyze the performance of an organization to make effective economic decisions relates to that analysis. We will discuss some escalating points regarding the company and then shift the gears towards the ration analysis of the company, which gives insight knowledge to us regarding the company.

In this section, we have to describe the two main elements contained in the annual reporting and their significance. The financial statements have four dominant things in it which are Income Statement, Balance Sheet, Cash Flow Statement and Changes in Equity. Every element has its own significance as an analyst can calculate a number of rations from all these elements. In this case we have been given the Income Statement and Balance Sheet which is enough to bring us on a decision of investment.

In the financial statement which has been given to us, a number of financial accounting principles have been used including direct cost and direct labor, which can become a part of the analysis, when applied comprehensively.

Ratio Analysis of the Company

Gross Profit Margin (GPM)

Gross margin, Gross profit margin or Gross Profit Rate is the difference between the sales and the production outlay without overhead, payroll, taxation, and relevance payments. Gross margin can be defined as the quantity of contribution to the trade enterprise, after paying for command-flat and command-patchy group overheads, essential to jacket overheads (preset commitments) and impart a barrier for nameless substance. It expresses the relationship between arrant profit and sales revenue. It is an appraise of how well each money of a circle's revenue is used to embrace the overheads of freight sold. We have calculated the GPM of the company which is mentioned in the table below.

 

2005

2006

2007

2008

2009

Gross Profit (000)

1025

1200

1480

1570

875

Sales (000)

3835

5020

6700

7800

8505

GPM %

26.73

23.90

22.09

20.13

10.29

From the above table it can be easily judge that the performance of the company is deteriorating year on year (YOY) because of the escalating cost. The sale of the company is increasing YOY but the GPM ration is continuously manifesting declining figures. The direct material and the direct labor cost are the one which has been found as big culprit of this declining figure.

Net Profit Percentage of Sales (NPPS):

The net profit percentage of sales ratio shows the comparison of sales with the net income, it can be computed by dividing the Net Income by number of sales (Bossaerts, 2006).

NPPS = Net Profit/ Sales

 

2005

2006

2007

2008

2009

Profit after tax(000)

105

120

135

55

-645

Sales (000)

3835

5020

6700

7800

8505

NPSS %

2.74

2.39

2.01

0.71

-7.58

From the above table it can also be recognized that the NPSS of the organization is also decreasing. This particular shows the relationship of profit after tax with the sales. NPSS decreased YOY by 0.35%, 0.38%, and 1.3% and by 6.87% in the years 2006, 2007, 2008 and 2009 respectively. It is certainly a negative sign for any public traded company to report negative NPSS ration in their financial statements. Now, we will analyze the balance sheet ratios.

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