Profitability Ratios: This measures the operating efficiency of a company (Pandey, 2003, p.130) relative to revenue or earnings generated and cost incurred. The ROCE for BTA was significantly higher than LTA's, amounting to about 21.5% (27.86% - 6.36%) difference owing to a significantly higher operating profit for BTA. Gross margins were also higher for BTA due to increased sales revenue. But Net margin was on the down turn for LTA as its Gross profits were completely eroded by administrative and selling expenses and selling price was not sufficient in generating impressive sales revenue.
Efficiency Ratios: This ratio used to gain an insight into how effectively and efficiently an organisation is employing its resources invested in fixed assets and working capital. Results show that BTA utilised its fixed assets more productively than LTA as it generated £3.32 in sales for every £1 invested in fixed assets, while LTA generated £2.69 for every £1 invested. On the stock turnover, LTA held stock for an average period of 33.3 days before making sales; which was 4.3 days (37.6 - 33.3) shorter than BTA. Whilst, BTA had a better quality of debtors with average collection period of 35.92 days compared to 43.25 days for LTA. However, the basis for this comparison should be done in tandem with the credit policy of both companies. BTA's terms with its creditors was more favourable as they had longer periods to make payments compared to LTA that lacked bargaining power. LTA will have to invest more in working capital so as to manage the variance in payments and collections.
Liquidity Ratios: This measures the relationship between current assets and current liabilities. Both companies had satisfactory levels of current and acid test ratios, based on the 2:1 and 1:1 standard measures. Results show that LTA and BTA's current and acid test ratios were 4.64/3.42 and 2.46/1.75 respectively. However, BTA's lopsided result is an indication of its higher current liabilities balance compared to LTA.
Capital Structure Ratios: This is a measure of a firm's financial risk and its ability of using debt to shareholders' advantage (Pandy, 2003, p.117) and also shows the proportion of a firm's assets that is financed by debts. It is obvious that LTA's assets were financed more by gearing of about 13.23% as against 7.10% for BTA. However, 86.77% (1 - 0.1323) and 92.9% (1 - 0.0710) were the proportions provided by owners for LTA and BTA respectively. LTA had a poor interest cover due to its poor operating profits compared to BTA. BTA's excellent interest cover indicates that for every £1 to be paid as interest, BTA had £39.22 in cover which is an indication of its superior net profit margin.
Investment Ratios: These are ratios that measure the overall performance of a business in regards its investment attractiveness. The figures for ESP indicate that LTA earned £6.88p in profits for every unit of share, whilst BTA earned £7.64p in profits. The P/E ratio points out that investors rate BTA shares more than LTA in the Alternative Investment Market (AIM) with BTA's superior earning power and the potential of posting favourable investor returns in future, investor confidence in BTA is heightened as they are prepared to pay more. However, for dividend cover; BTA's result was impressive as available profits could cover for dividend payments up to 3.19 times. Whereas, LTA had a cover of 1.72 times which means that they might face difficulty in paying dividend due to lower disposable earnings. LTA had a higher dividend yield compared to BTA. However, BTA's result of 1.92% could be attributed to higher number of ordinary shares issued, thus with a greater dividend obligation.
Financial Analyst's report to ABC
BTA's financial position and performance was impressive for the period under review compared to LTA as most financial indicators showed a positive outlook. Notwithstanding, LTA's revenue was eroded by high levels of operating costs, thus LTA's management will need to give attention to operational efficiency to improve performance and also negotiate better terms with suppliers. In spite of this, BTA's capital structure exposed a higher mix of equity indicating that they are not taking advantage of leveraging operations with debt, as debt could be a cheaper source of financing. Thus, BTA are quite conservative in borrowing.
However, it is also pertinent to state that reliance on financial ratios is not sufficient enough to pass judgement as there is a need to look at the companies' qualitative fundamentals such as:
quality and style of management
product and service brands
market share
technology
marketing strategy
employee relations policy etc.
Most importantly, a look at past performances could also be useful in evaluating trends over time; as the records at hand only gives a onetime snap shot of performance. Thus, a whole range of other indicators need to be taken into consideration before deciding.
1. Profitability Ratios
LTA
BTA
ROCE (%)
6.36
27.86
Gross margin (%)
50.7
53.21
Net margin (%)
3.2
11.14
Mark-up (%)
102.84
113.72
2. Efficiency Ratios
LTA
BTA
Fixed asset turnover (times)
2.7
3.3
Stock turnover (days)
33.3
37.6
Debtors' collection (days)
43.25
35.92
Creditors' payment (days)
14.67
20.48
3. Liquidity Ratios
LTA
BTA
Current ratio
4.65:1
2.46:1
Acid test
3.42:1
1.75:1
4. Capital Structure Ratios
LTA
BTA
Gearing (%)
13.23
7.10
Interest Cover (times)
9.6
39.22
5. Investment Ratios
LTA
BTA
EPS (price)
6.88
7.64
P/E(times)
12.35
16.36
Dividend Cover (times)
1.72
3.19
Dividend Yield (%)
4.71
1.92APPENDIX 1
Financial Ratios Results
APPENDIX 2:
Financial Ratios Calculations
Profitability Ratio:
ROCE = Profit before interest & tax * 100%
Share capital + Reserves + Long-term loans
(Bozos: 2010)
ROCE (LTA) = 768 * 100%
5,000 + 1,400 + 4,098 + 1,600
ROCE (LTA) = 768 * 100%
12,098
ROCE (LTA) = 0.0635 * 100%
ROCE (LTA) = 6.36%
ROCE (BTA) = 3,922 * 100%
10,000 + 3,076 + 1,000
ROCE (BTA) = 3,922 * 100%
14,076
ROCE (BTA) = 0.2786 * 100%
ROCE (BTA) = 27.86%
Gross profit margin = Gross profit * 100%
Sales (Pike and Neale, 2003, p.68)
Gross profit margin (LTA) = 12,168 * 100%
24,000
Gross profit margin (LTA) = 0.507 * 100%
Gross profit margin (LTA) = 50.7%
Gross profit margin (BTA) = 18,730 * 100%
35,200
Gross profit margin (BTA) = 0.5321 * 100%
Gross profit margin (BTA) = 53.21%
Net profit margin = Net profit before interest & tax * 100%
Sales
(Pike and Neale, 2003, p.68)
Net profit margin (LTA) = 768 * 100%
24,000
Net profit margin (LTA) = 0.032 * 100%
Net profit margin (LTA) = 3.2%
Net profit margin (BTA) = 3,922 * 100%
35,200
Net profit margin (BTA) = 0.1114 * 100%
Net profit margin (BTA) = 11.14%
Mark-up margin = Gross profit * 100%
Cost of goods sold
(Bozos: 2010)
Mark-up margin (LTA) = 12,168
11,832
Mark-up margin (LTA) = 1.0284 * 100
Mark-up margin (LTA) = 102.84%
Mark-up margin (BTA) = 18,730
16,470
Mark-up margin (BTA) = 1.1372 * 100%
Mark-up margin (BTA) = 113.72%
Efficiency Ratios:
Fixed asset turnover = Sales
Fixed Assets
(Bozos: 2010)
Fixed asset turnover (LTA) = 24,000
8,900
Fixed asset turnover (LTA) = 2.69 Times
Fixed asset turnover (BTA) = 35,200
10,600
Fixed asset turnover (BTA) = 3.32 Times
Stock turnover = Stock * 365
Cost of goods sold
(Pike and Neale, 2003, p.69)
Stock turnover (LTA) = 1,078 * 365
11,832
Stock turnover (LTA) = 0.0911 * 365
Stock turnover (LTA) = 33.2547 ≈ 33.3 Days
Stock turnover (BTA) = 1,698 * 365
16,470
Stock turnover (BTA) = 0.1030 * 365
Stock turnover (BTA) = 37.595 ≈ 37.6 Days
Debtor collection period = Trade debtors * 365
Credit Sales
(Pike and Neale, 2003, p.68)
Note: Since the value for credit sales is not known we would employ the use of the sales revenue figure.
Debtor collection period (LTA) = 2,844 * 365
24,000
Debtor collection period (LTA) = 0.1185 * 365
Debtor collection period (LTA) = 43.2525 ≈ 43.25 Days
Debtor collection period (BTA) = 3,462 * 365
35,200
Debtor collection period (BTA) = 0.0984 * 365
Debtor collection period (BTA) = 35.916 ≈ 35.92 Days
Creditor Payment period = Trade creditors *365
Cost of goods sold (Pike and Neale, 2003, p.69)
Creditor payment period (LTA) = 476 * 365
11,832
Creditor payment period (LTA) = 0.0402 * 365
Creditor payment period (LTA) = 14.673 ≈ 14.67 Days
Creditor payment period (BTA) = 924 * 365
16,470
Creditor payment period (BTA) = 0.0561 * 365
Creditor payment period (BTA) = 20.4765 ≈ 20.48 Days
Liquidity Ratios:
Current Ratio = Current asset
Current Liabilities
(Pandy, 2003, p.114; Pike and Neale, 2003, p.69)
Current ratio (LTA) = 4074
876
Current ratio (LTA) = 4.65 Times
Current ratio (BTA) = 5,860
2,384
Current ratio (BTA) = 2.4580 ≈ 2.46 Times
Acid Test Ratio = Current Asset - stock
Current Liabilities
(Pandy, 2003, p.115; Pike and Neale, 2003, p.69)
Acid Test Ratio (LTA) = 4,074 - 1,078
876
Acid Test Ratio (LTA) = 2,996
876
Acid Test Ratio (LTA) = 3.4200 ≈ 3.42 Times
Acid Test Ratio (BTA) = 5,860 - 1,698
2,384
Acid Test Ratio (BTA) = 4,162
2,384
Acid Test Ratio (BTA) = 1.7458 ≈ 1.75 Times
Capital Structure Ratios:
Capital gearing ratio = Long-term debt * 100%
Capital Employed
(Bozos: 2010)
Capital Employed = Share capital + Reserves + Long-term debt
Therefore:
Capital Gearing Ratio (LTA) = 1,600 * 100%
5,000 + 1,400 + 4,098 + 1,600
Capital Gearing Ratio (LTA) = 1,600 * 100%
12,098
Capital Gearing Ratio (LTA) = 0.1323 * 100%
Capital Gearing Ratio (LTA) = 13.23%
Capital Gearing Ratio (BTA) = 1,000 * 100%
10,000 + 3,076 + 1,000
Capital Gearing Ratio (BTA) = 1,000 * 100%
14,076
Capital Gearing Ratio (BTA) = 0.0710 * 100%
Capital Gearing Ratio (BTA) = 7.10%
Interest Cover Ratio = Profit before interest
Interest charges
(Pandy, 2003, p.122; Pike and Neale, 2003, p.70)
Interest cover ratio (LTA) = 768
80
Interest cover ratio (LTA) = 9.6 Times
Interest cover ratio (BTA) = 3,922
60 + 40
Interest cover ratio (BTA) = 3,922
100
Interest cover ratio (BTA) = 39.22 Times
Investment Ratios:
Earnings per share = Earnings attributed to ordinary shareholders
Ordinary shares issued
(Pandy, 2003, p.137; Pike and Neale, 2003, p.71)
Earnings attributed to ordinary shareholders = Profit after tax but because there is no Tax deductions we will make use of the value for "Profit before tax".
Therefore:
Earnings per share (LTA) = 688
10,000
Earnings per share (LTA) = 0.0688
Earnings per share (LTA) = 6.88
Earnings per share (BTA) = 3,822
50,000
Earnings per share (BTA) = 0.07644
Earnings per share (BTA) = 7.64
Price Earnings Ratio = Ordinary Share price
Earnings per share
(Pike and Neale, 2003, p.71)
Price Earnings Ratio (LTA) = 0.85
6.88
Price Earnings Ratio (LTA) = 0.1235
Price Earnings Ratio (LTA) = 12.35 Times
Price Earnings Ratio (BTA) = 1.25
7.64
Price Earnings Ratio (BTA) = 0.1636
Price Earnings Ratio (BTA) = 16.36 Times
Dividend Cover Ratio = Earnings attributed to ordinary shareholders
Dividend Paid
(Bozos: 2010)
Dividend Cover Ration (LTA) = 688
400
Dividend Cover Ratio (LTA) = 1.72 Times
Dividend Cover Ration (BTA) = 3,822
1,200
Dividend Cover Ration (BTA) = 3.185 ≈ 3.19
Dividend Yield Ratio = Dividend per ordinary share * 100%
Ordinary share price
(Pandy, 2003, p.139; Pike and Neale, 2003, p.71)
To get the:
Dividend per ordinary share = Dividend Paid
Number of ordinary shares
(Pandy, 2003, p.138)
Therefore:
Dividend per ordinary share (LTA) = 400
10,000
Dividend per ordinary share (LTA) = 0.04
Thus:
Dividend Yield (LTA) = 0.04 * 100%
0.85
Dividend Yield (LTA) = 0.0471 * 100%
Dividend Yield (LTA) = 4.71%
Dividend per ordinary share (BTA) = 1,200
50,000
Dividend per ordinary share (BTA) = 0.024
Thus:
Dividend Yield (BTA) = 0.024 * 100
1.25
Dividend Yield (BTA) = 0.0192 * 100%
Dividend Yield (BTA) = 1.92%
