Ratio analysis is an important tool for understanding and comparing business performance. Ratios and certain financial calculations are not frequently used and looked isolated. It is important to carry out calculations of ratios and other significant financial figures with previous years (many companies publish five or ten year summaries as part of their annual reports) in order to identify positive or adverse trends). Comparison with other, relevant competitors and industry "norms" is also important.
The purpose of this assignment is to analyze the financial report of Ansell Limited and help managers and shareholders to making decision. Ansell Limited is the new name of the company formerly known as Pacific Dunlop Limited. The company's name was changed in April 2002 as a result of a strategic repositioning of the company to concentrate on its core business, protective products and services in a broad healthcare context. The company leverages the solid foundation provided by the Ansell Healthcare business that has been a major part of the parent company's portfolio of businesses since it was acquired in 1969.
Ansell Limited, as the company is now known, has a long and distinguished career dating back to when its first business, pneumatic bicycle tyre manufacture, commenced in Australia in 1889. Since its commencement the company has changed its name on many occasions to reflect the nature of the businesses in which it was involved at the time. Ansell Limited is an Australian publicly listed company with its Corporate Head Office located in Richmond, Australia. The company is listed on the Australian Stock Exchange as its home exchange.
1.0 Profitability Ratios
1.PROFITABILITY
2007
2006
Return on Equity (ROE)
16.71%
18.15%
Return on Assets (ROA)
9.59%
10.40%
Gross Profit Margin
36.84%
37.42%
Profit Margin
9.89%
11.64%
Cash Flow to Sales Revenue
11.95%
11.57%
Return on equity
One of the most important profitability metrics is return on equity. Return on equity means the amount of profit a company obtained in comparison to the total amount of shareholder equity found on the balance sheet. There is a decrease ROE between two years from 18.15% to 16.71%. Any business that has high return on equity will be easily able to generate cash internally. In many parts, the higher a company's return on equity compared to its industry, the better. This should be obvious to even the less-than-astute investor. We can conclude that the higher you can get the return; on your equity, in this case 18.15% in 2006, the better.
Return on Assets (ROA)
We know that return on assets is a profitability ratio that compares an entity's profits to the assets available to generate the profits. Effectively, the ratio reflects the results the results of the entity's ability to convert sales revenue into profit, and its ability to generate income from its asset investment.
ROA indicates of how profitable a company is relative to its total assets. The higher the ROA number, the better, because the company is earning more money on less investment. Ansell Limited has an ROA of 9.59% in 2007, but there is a higher ROA in 2006. So we can say the year 2006 is better at converting its investment into profit. The management's most important job is to make wise choices in allocating its resources.
Gross Profit Margin
The gross profit margin reflects the gross profit generated per dollar of sales revenue. Entities with high turnover tend to have smaller gross margins. 36.84% of gross profit margin means for every RM1sales generated the business earn RM 0.3684 gross margin. The above ratio of 36.84% compares with 37.42% at 2006 of Ansell, there are a slight decrease in gross profit margin, therefore, 2006 is better. The ratio above shows slight decreasing trend in the gross profit since the ratio has reduced from 37.42% in 2006 to 36.84% in 2007. This indicates that the rate in increase in cost of goods sold is more than rate of increase in sales, hence the increased inefficiency.
Profit Margin
An individual must meet all other expenses from its gross profit. Profit margin can be refereed as the comparison of sales revenue and EBIT. This ratio reveals that percentage of sales revenue dollars results earning before interest and tax. This is a way used to measure performance and can be compared across companies in simliar industry. The profit margin ratio shows that the margin is an improvement from 9.89% to 11.64% about Ansell Limited between two years. The profit margin show how much profit a company makes for every $1 it generates in revenue, the higher a company's profit margin, the better.
Cash Flow to Sales Revenue
The ratio is the percentage measure of a firm's ability to convert sales into cash , and an important indicator of its creditworthiness and productivity . In year 2007 of Ansell Limited, the ratio is 11.95% that is higher than year 2006. The high number of 2007 means the firm will be able to grow because it has sufficient cash flow to finance additional production (Bebbington, 2001).
2.0 Asset Efficiency Ratio
2.Asset Efficiency
2007
2006
Asset Turnover Ratio
0.98 times
0.90 times
Inventory Turnover (days)
86 days
88 days
Debtors turnover (days)
67 days
68 days
An entity's asset efficiency depends heavily on the efficiency with which it manages its current and non-current investment. A major part of an entity's investments in assets is investments in inventory and debtors. It is therefore useful to assess management's efficiency in managing these assets. This can be done by calculating the entity's inventory and debtor turnover.
Ansell's ability to convert a dollar investment in assets into sales revenue dollars has improved over the two years. In 2007, an investment of $1 assets generated 98 cents of sales revenue, compared to 90 cents in 2006. The increase in the asset turnover has contributed to the entity's improvement in ROA.
The day inventory indicates the average period of time it takes for an entity to sell its inventory. In 2007, Ansell Limited on average 86 days to sell its inventory items, that less than the average days taken in 2006. The trend shows a decrease in days which indicates a quick of stock turnover. When we conclude, we can say that the higher the inventory turnover period means the less effective is in its operations, the higher the amount of investment that must be tied up in inventories and the longer the operating cycle necessary to replenish cash. In other words, year 2007 with the lower inventories turnover period than year 2006 is more efficient in its purchasing, receiving, and sales activities.
The days debtor indicates the average period of time it takes for an entity to collect the money from its trade debtors. Earning at a zero rate of return it is advantageous for an entity to turn over its inventory and debtors as quickly as possible. We know that lower day inventory and days debtors generally reflect better management efficiency. Ansell Limited's management of debtors also appears to have improved, with the debtors being converted to cash on average in 67 days in 2007 compared to 68 days in 2006 (Bebbington, 2001).
3.0 Liquidity Ratios
3. Liquidity
2007
2006
Current Ratio
2.75 times
2.32 times
Quick Asset Ratio
1.96 times
1.74 times
Cash Flow Ratio
0.64 times
0.41 times
The current ratio shows the dollars of current assets the entity has per dollar of current liabilities. A lower ratio suggest that the entity will have difficulty in meeting its short-term obligations. However, a high current ratio is not necessarily good, as it could be due to excess investments in unprofitable assets (cash, receivables or inventory). Ansell Limited had $2.32 of current assets for every $1 of current liabilities in 2006. This increased to $2.75 of current assets for $1 of current liabilities in 2007. Recall that a lower ratio can indicate greater efficiency so, if this ration continues to move upwards, it might indicate that the entity has excess investment in current assets.
The quick asset ratio estimates the dollars of current assets available to service a dollar of current liabilities. It is a tougher test of liquidity because it doesn't include current inventory from the numerator. Inventory is excluded because it is the current asset that takes the longest period of time to convert to cash. This means that Ansell Limited has RM 1.74 worth of liquid current assets for every RM1 worth of short-term obligations in 2006. This ratio also increases at 2007 that is RM 1.96 worth of liquid current assets for every RM1 worth of short-term obligations. So Ansell Limited has better ability to pay short-term obligations in 2007. That because the lower the current and acid -test ratios, the lower the liquidity of the business. And liquidity ratios may be too low, thereby an inability to pay short-term obligations.
Cash flow ratio helps to assess liquidity is the cash flow ratio. The cash flow ratio indicates an entity's ability to cover its current obligations from operating activity cash flows. We know that the higher the ratio, the better the position of the entity to meet its obligation. In 2007, Ansell Limited had $0.64 of operating cash flows for every $1 of current liabilities. This increased from $0.41 of operating cash flows for every $1 of current liabilities in 2006, suggesting that the company has a greater capacity to meet its current obligations from its operating activities cash flows (Bebbington, 2001).
4.0 Capital Structure Ratio
4.Capital Structure
2007
2006
Debt to Equity Ratio
103.7%
100.1%
Debt Ratio
50.92%
50.02%
Equity Ratio
49.08%
49.98%
Interest Coverage Ratio
6.63 times
6.63 times
Debt Coverage Ratio
2.72 times
2.55 times
The debt to equity ratio indicates how many dollars of debt exist per dollar of equity financing. If this ratio exceeds 100 per cent, then the entity is more reliant on debt funding than equity funding. 103.7% of debt to equity ratio in 2007 indicates $1.037 of debt exist per dollar of equity financing. Because this ratio is exceeds 100 per cent, so the entity is more reliant on debt funding than equity funding.
The debt ratio indicates how many dollars of liabilities exist per dollar of assets. If the debt ratio exceeds 50 per cent, then the entity finances its investment in assets by relying more on debt relative to equity. The debt ratio of 2007 indicates that the entity is financing every $1 of assets with 50.92 cents of debt. The remaining 49.08 cents is financed with equity. The ratio exceeds 50 per cent, so the entity finances its investments in assets by relying more on debt relative equity. This ratio is above the arbitrary rule of 50 per cent debt and 50 percent equity. Both of the two years, the debt ratios are exceeds 50 per cent, but not exceed too much. Compare the two years, the 2006 is better because it more near the "50-50" rule (debt ratio is 50.02% and equity ration is 49.98%).
The interest cover ratio used to determine how easily a company can pay interest on outstanding debt. Debt expenses can be said as burdening Ansell limited if the ratio is lower. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses. The interest coverage ratios in two years are same and at 6.63 times, that are satisfactory.
The debt coverage ratio links the cash flows from operating activities with long-term debt, and is found by dividing non-current liabilities by cash from operating activities. It also measures an entity's ability to survive in the longer term and remain solvent, as it indicates how long it will take to repay the existing long-term debt commitments at the current operating level. The debt coverage ratio for 2006 indicate that, if Ansell Limited maintains its operating cash flow, it would take the company on average 2.55 years of operating cash flows to repay its non-current liabilities. This cash debt coverage ratio is lower than in 2007 (Atrill, 2001).
5.0 Market Performance Ratios
5.Market Performance
2007
2006
Net Tangible asset ratio
0.50
0.55
Earning Per Share
0.67
0.73
Dividend Per Share
0.23
0.20
Dividend Payout Ratio
34%
27%
Operating Cash flow Per Share
9.99
8.44
Net Tangible Asset Ratio
The net tangible asset backing per share provides an indication as to the book value of the company's tangible assets per ordinary share on issue. Compare Ansell Limited's NTAB per share with its share price. The share price exceeds the NTAB per share. The magnitude of the excess reflects the market's assessment of the entity's future growth prospects.
Dividend Per Share
The dividend per share is the former measure of return, and indicates the distribution of the company's profits in the reporting period via dividends expressed relative to the number of ordinary shares on issue. Dividend per share is 2.27 in 2007 and 2.01 in 2006. There is an increase in DPS. In order to avoid dividend cuts unless their financial condition demands it or there has been some other change in the business or its capital structure. As a result of this, increases in the dividend are taken to be a sign that the management is confident that the new level can be maintained or improved on. The increasing of DPS is not good because dividends are a form of profit distribution to the shareholder. Having a growing dividend per share can be a sign that the company's management believes that the growth can be sustained.
Earning Per Share
Earning per share is the part of a company's profit allocated to each outstanding share of common stock. Earning per share is thought to be the one most important variable in confirming a share's price. It is also a major component of the price-to-earnings valuation ratio.
Earning per share is a definition utilized in evaluating the profitability and success of a company on a per-share basis. It's not usually very helpful to compare the EPS of one company with others. Differences in capital structure can render any such comparison meaningless. However, it can be very useful to monitor the changes that occur in this ratio for a company over time. In 2007, the EPS of Ansell Limited is 67.6 cents, which means 67.6 cents' company profit allocated to each outstanding share of common stock. There is a decrease of EPS from 2006 to 2007.
5.1 Dividend Payout Ratio
The dividend payout ratio provides an idea of how well earnings support the dividend payments. The dividend payout ratio has increase from 27% in 2006 to 34% in 2006. Generally, the high growth companies have lower dividends payouts and low growth companies have higher dividend payouts. More mature companies tend to have a higher payout ratio. For as much above exoterica, Ansell Limited is in growth stage and have more high growth rate (Atrill, 2001).
Conclusion
In conclusion, the five ratio analyses are used in this assignment: profitability ratios, asset efficiency ratios, liquidity ratios, capital structure ratios and market performance ratios. Ansell Limited is in a very secure financial position. The company has strong future prospects in the areas of profitability, liquidity, asset efficiency, capital structure and market performance on its current path.
Profitability is the ability of a business to earn profit over a period of time. After analysis, Ansell Limited has the lower ROA, Gross profit margin and profit margin in 2007, and the profitability to ordinary shareholders is not good and showing an downward trend. The ROE measurements show us that 2006 is higher, so he makes better use of its capital. 2007 compares to 2006, it has lower profit margin, so the performance of 2006 is better. 2006 has a higher gross profit margin that is good.
A comparison of the efficiency ratios between two years provides a mixed picture. As a general rule, 2007 with the lower inventories turnover period than 2006 in Ansell Limited is more efficient in its purchasing, receiving, and sales activities. 2007 has the higher asset turnover ratio. That reveals 2007 is more efficiency at using its assets in generating sales or revenue.
The current ratio and quick asset ratio of 2007 are higher. We can get know that 2007 has higher liquidity of the business and better ability to pay short-term obligations.
For as much dividend payout ratio, we can get know Ansell Limited is in growth stage and have more high growth rate because it has higher dividends payout ratio in 2007. And Ansell Limited has the higher dividend yield ratio that is considered to be evidence that a stock is underpriced in 2007. Although it's not usually very helpful to compare the EPS of one company with others, but we know Ansell Limited is increase bigger percentage between two years.
