Mining Corporations liquidity, solvency, profitability, and investment specific ratios are provided in exhibit The exhibits also provide the corresponding ratios for jphones. A comparison of Mining Corporation and jphones ratios accompanies each exhibit followed by an overall summary at the end. Mining Corporation's amount in million and jphones amount in thousands.
Comparison of mining's and jphones: Jphone's operations seem to be more efficient than mining's corporation. Other than quick ratio jphone's liquidity ratios are superior to those of mining corporations. Actually the purpose of picking that kind of ratios to compare with is to highlight the company's short term financial position. In the particular scenario jphones shows high potential to deals with short-term debt paying ability comparing with mining's corporation. But we never ignore the previous year financial record which leads to tell about both company's consistency. In compare to that mining corporation was exceptionally good except current ratio to jphone's corporation. It is also possible that mining's corporation face problems in working capital management, specifically inventory management which seems in the recent year also.
Liabilities includes current liabilities and debenture issuance where as assets includes fixed assets along with current assets (stocks, debtors, cash)
Comparison of mining's and jphones: consistent with jphones strong liquidity position, jphones has very debt .Thus, its long term paying ability as shown in debt ratio is far more superior than mining's corporations. Individually evaluate the position of both companies in time series analyses than both of them shows upward trend t in the low debt position with its assets in account. In compare to previous year position mining's corporation shows superiority than jphones. But jump to improvement by jphones is much more respectable than mining's corporation.
Long term liabilities include debentures only. ROI stands for return on equity, ROCS stands for return on common stocks, and ROA stands for return on assets.
Comparison of mining's and jphones: The first two categories (liquidity, solvency) indicates that jphones is stronger than mining's corporation and also shows high potential of stability relatively. However in the profitability category, mining's corporation is far superior to that of jphone's in every area except return on common stock (may be the point of difference in decian criteria). It might be possible that company make a mistake in chosen the right target ratio for their finance while evaluating the different investment opportunities. But in profitability ratios, pick of the ratio (ROI) refer; good position of mining's corporation. Most of the time critical analyses decian criteria focuses on profitability ratios, to disclose there opinions about the company overall performance. In accordance to that mining's corporations shows upward trend comparatively. Both companies show down ward trend in time series an analysis which is questionable.
Note: Dividends declaration is same for the mining's corporation in time series, but jphones increase 30% than the previous year dividend.
Comparison of mining's and jphones: For investor's point of view EPS is the pick of ratio to evaluate because its shows the company potential of their earnings, according to stocks outstanding. Here clearly jphones shows a great position relatively. Dividend policy of jphones is also superior to that of mining's corporation (time series analyses).but again both companies losing their consistence capability timely which is again questionable.
Comparison of mining's and jphones - overall summary: A financial statement analysis is carried out by and for creditors as well as equity investors. In comparing mining's corporation and jphones we come across an interesting dichotomy. Because of its strong liquidity and solvency position, jphone declaring to the strong candidate for a credit granting decision. Which seems less risky then mining's corporation. On the other hand lower risk implies a potentially lower return as seen in jphone's lower profitability relative to that reported by mining's corporation. Thus for the equity investors mining's corporation may be proffered investment. But in consideration of dividend policy of jphones and its investors specific ratios small investors like Ahmet Hussian also open their choice to invest in jphones by continuously taking higher dividends comparatively and hope to get higher market price of shares in future.
The comparative analysis of mining's and jphone is limited insofar as it ignores the following factors:
Mining's corporation large and older mining business limits its comparability to a pure technology based start up business.
Ratios are based on financial data that reflect different accounting methods and assumptions
Economic, political and cultural environment in which the two firms operate effect the firm, risk and return profile.
For these reasons ratio analyses is just the beginning and further detailed technical and fundamental analyses is required to determine the operating differences rather than accounting methods or any other factors.
PART (2):
PRINCIPAL METHODS TO ANALYSE COMAPY'S PERFORMANCE:
When some company, come to proceeds normally in the micro or macro environment different stake holder are then associated with it. These stakeholders are actually called the internal and external users of the particular organization. It includes employees, shareholders. Government, regulatory authorities, and the general public. Now the question arises that how these users make their decisions accordingly to their roles? The answer is very clear that they may access to the different sources of information released from the organization i-e, financial statements in annual reports. Only financial data gathered from company is not sufficient to make a certain decision, but a complete process of analyses is required to take future steps. So financial data analyses is a judgmental process, where one of the primary objectives is to identify the majors' changes in trends, amounts, and relationship. These turning points often, signal early warning of a significant shift in the future success and failure.
The analysis of financial data employs various methods to emphasize the comparative and relative importance of data presented and evaluate the position of the firm. These methods include ratio analysis, common size analysis, ratio comparison with industries, time series analyses in ratio analysis, and comparison of results with other types of data Gibson (1998).
Ratio analysis:
Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. The level and historical trends of these ratios can be used to make inferences about a company's financial condition, its operations and attractiveness as an investment FRA (2009). Financial ratios are usually expressed as percent or as times per period where a ratio can be computed from any pair of number. Basically ratio analyses provide linkage between the components of balance sheet and income statement to come up with easy and reliable data. Absolute figures or ratios appear meaningless; unless compared to other figures or ratios. In ratio analyses there is an important concepts used as the name of trend analyses, which study the financial history of a firm for comparison. By looking at the tend of particular ratio, one sees rather that ratio falling, rising, or remaining relatively constant. This helps detect problems or observe good management. Through ratio analyses meaning full results arises; when ratios are compared with industries and with result of their competitors. In ratio analyses there different types ratios which critically help the analyst to come up with company's performance. These include liquidity ratios, activity ratios, profitability ratios, investor's specific ratios.
Liquidity ratios:
Actually liquidity ratios show that company has how much capability to sustain their position in short term. On the other hand it also defines the company's short term debt paying ability. To evaluate the performance of any company; analysts, analyze the financial data through liquidity ratios specific for creditors, because this portion is very relevant source of information needed by creditors specifically and investor's generally. Liquidity ratios include current ratio which shows the relationship between company's current assets and their current liabilities which help the analyst to link up the company's short- term financial management. Other ratios are quick ratio, cash ratio, net working capital, sales to working capital etc. all these ratios evaluate the organization's cash made capability from their resource in the account as quickly as possible.
Decision Criteria: Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts, Liquidity Ratios (2009).
Solvency ratios:
Company's long term paying ability can be evaluated through solvency ratios which make linkage between liabilities and other items in the balance sheet and income statement. For example debt ratio which provide the linkage of total liabilities with total asset. Again these ratios provide vital information for creditors. Because, through solvency ratios creditors are easily come to know the certainty of company's long term debt paying ability.
Profitability ratios:
Every organization runs their business under the goal of wealth maximization. That's why each and every company wants upward trend of revenues, by making utmost efforts to sustain it also. If some company's achieved their certain goal, then they enjoy a good performance because all the stake holders compensate from it automatically. Most of the analysts draw their conclusion about the organization performance on behalf of profitability ratios. Profitability ratios measure how well a company is performing by analyzing how profit was earned relative to sales, total assets and net worth, Profitability ratios (2009). Actually in profitability ratios the pick of the ratio is ROI (return on investment) where income comprises with long-term debt and total stock holder equity.
Investment specific ratios:
Above categories ratios are very attract full to creditors and management point view, but these kinds of ratios provide a comprehensive helping tool for investors. Because investment ratios; deals with company's dividend policy, market growth of company's share, and most importantly EPS (earning per share) technique. Most of the investors' analysts make their decision about company's performance either good or bad on the basis of inventor's specific ratios.
Note: see all the financial ratios and their function, in Gibson (1998).
Annual reports:
Another important source of information for intern and external user are annual reports of particular company. Annual reports includes auditor's opinion about company's performance and its long-term sustainability in the market, management review; where top management describes the current performance, their future plans and also compare their position with past. Thirdly in annual reports detailed financial statement provide a clear picture about the income and their resources. Lastly different disclosing points mentioned by company which is ambiguous in financial statements. Annual reports provide such data which leads to know company's performance.
Common size analyses:
Common size analyses expresses in percentages. For example, if cash is $40000 and total assets is $1000000, then cash presents 4% of total assets. The use of percentage is preferable to the use of absolute amounts. The use of Common size analyses makes comparison of form of different sizes much more meaningful. Care must be exercised in the use of Common size analyses with small absolute amounts because a small change in amount can result in a substantial percentage change. There are two main methods used in Common size analyses, Vertical and horizontal analyses.
Vertical analyses compare each amount with a base amount selected from the same year. For example advertisement expenses were $1000 in 2000 and sales were $100000, the advertisement would have been 1% of sales. Whereas, horizontal analyses compares each amount with a base amount for a selected base year. For example if sales were 400000 in 2001, and 600000 in 2002 , then sales increased to 150% of the 2001 level in 2002, an increase of 50%.
