In this century the uses of financial analytical tools such ratio analysis, trend analysis and common sized analysis is inevitable in any organization or company operations. So in order for the company to succeed it must effectively use financial analysis tool. This is because financial analytical tools help to know the health of the business, how to plan for future, if the business have inventories to support production target, or if the firm have ability to pay creditors and also to provide indicators of how well the firm and its business units are performing. The financial analysis is also undertaken by shareholders, investors, suppliers of funds and suppliers of inventories and so on (Arora 2012).
This report is about the interpretation of financial statements at Tanga Cement Company by using financial analysis tools. This report is divided into four parts. Part one is about background of the case study (Tanga Cement), part two is concerned with financial analysis and tools used in analyzing the financial performance of Tanga Cement, part three is about limitation on analytical tools used and part four comprises of conclusion.
The study revealed that Tanga Cement Company Ltd has been doing well in production and it is making reasonable profit year after year. This revelation has been resulted from the Company financial Statements and Financial Analytical tools (Ratio Analysis, Common sized analysis and Trend Analysis).
LIST OF TABLES
Table 1 Tanga cement balance sheet……….………………………………………….3
Table 2 Tanga cement income statement…….………………………………………...4
Table3: Summary of return on sales ratios …...............................................................6
Table 4: Summary of return on Assets ratios………………………………………….6
Table 5: Summary of current ratios………………………............................................7
Table 6: Summary of quick ratios………… ………….……………………………….8
Table 7: Summary of inventory turnover ratios…..........................................................8
LIST OF ABBREVIATIONS
IT: Information Technology
FIFO: First in First out
LIFO: Last in First out
ROS: Return on Sales
TABLE OF CONTENTS
EXECUTIVE SUMMARY ii
LIST OF TABLES i
LIST OF ABBREVIATIONS ii
1.0: BACK GROUND OF TANGA CEMENT COMPANY iv
2.0:FINANCIAL STATEMENTS, ANALYTICAL TOOLS AND ITS INTERPRETATIONS. v
2.1 Financial statements v
2.2 Financial Analysis v
Table 1. TANGA CEMENT BALANCE SHEET vii
Table 2. TANGA CEMENT INCOME STATEMENT viii
2.2.1 Trend analysis viii
2.2.2 Ratio analysis viii
3: LIMITATIONS ON FINANCIAL ANALYTICAL TOOLS USED xiii
4: CONCLUSION xiv
REFERENCES xvi
1.0: BACK GROUND OF TANGA CEMENT COMPANY
According to Tanga Cement Website (2011), Tanga Cement is a cement company based in Tanzania. The company was founded in 1980 in alliance with the government of Denmark in 1989, as a state company of the Tanzanian government, entered into a management contract with Holcim Cement of Switzerland. In 1996 the government began to privatize the company and as of 2007 it is owned by public and by Holcim Mauritius.
Currently company ownership is as follows:
62.5% Afrisam Mauritius
36.25% Tanzania General Public & Institutions
0.75% Employees Share Trust
Moreover company production capacity is more than 1,250,000 tones/year where it targets the market demand of Tanzania. With 15000 Tanzanians being the shareholders, Tanga cement shares trade under its brand name Simba, at Dar es Salaam Stock Exchange.
The Company produces its financial report in annual bases where those financial reports are uploaded to the website so that every shareholder can check the company financial position online. In our analysis we have taken the yearly financial reports from 2006 up to 2008 as a company financial reports study analysis.
2.0:FINANCIAL STATEMENTS, ANALYTICAL TOOLS AND ITS INTERPRETATIONS.
2.1 Financial statements
Financial statements are the summary report that shows how a firm has used the funds entrusted to it by its shareholders and lenders, and what is current financial position (businessdictionary.com 2012).
There are three (3) financial statements such as balance sheet, income statement and cash flow.
Balance sheet is the financial statement which contains information about resources and the obligations of the entity and about its owners' interests in the business at a particular point of time i.e. assets, liabilities and owners' equity.
Income statement (profit and loss account) is the financial statement which shows the summary of revenues, expenses and net income/loss of a firm during the accounting period. It serves as a measure of the firm's profitability.
Cash flow statement is the financial statement which shows inflows and outflows of cash during the specific period.
2.2 Financial Analysis
Financial Analysis is an assessment of the effectiveness with which funds (investment and dept) are employed in a firm, efficiency and profitability of its operations, and value and safety of debtors' claims against the firm's assets (businessdictionary.com 2012).There are three (3) techniques and tools that were used in the analysis of financial statements of Tanga cement, such tools includes Trend analysis, Common sized and ratio analysis.
SIMBA CEMENT INCOME STATEMENT
YEARS
2008
2007
2006
Tzs'000
Tzs'000
Tzs'000
Revenue - sale of goods
121,349,244
93,784,426
77,626,645
Cost of sales
68,871,990
51,057,886
-45,952,752
Gross profit
52,477,254
42,726,540
31,673,893
Other operating income
999,277
1,267,303
396,414
Other operating expense
-146,016
-
-
Selling expenses
0
-
-
Administrative expenses
-7,327,710
-7,590,738
-7,148,240
Depreciation and amortization
-2,207,366
-2,024,505
-1,895,277
Profit from operations
42,799,272
34,378,600
23,026,790
Share of profit of associates
987,282
431,432
90,000
Finance cost
-312,057
-122,720
-137,377
Finance revenue
31,382
1,553
Foreign exchange gains /(losses)
-286,853
-265,467
84,457
Impairemnt of an associate
-
-
-
Profit before tax
43,219,026
34,421,845
23,065,423
Income tax expense
-12,965,708
-10,831,187
-7,067,479
Profit for the year
30,253,318
23,590,658
15,997,944
Gaining in fair value
Total comprehensive for year
30,253,318
23,590,658
15,997,944
Basic earnings per share (Tzs)
475
371
251
Diluted earnings per share (Tzs
475
185
251
Table 1. TANGA CEMENT BALANCE SHEET
COMPREHENSIVE BALANCE SHEET FOR TANGA CEMENT AS AT 31 DECEMBER
YEARS
2008
2007
2006
Tzs'000
Tzs'000
Tzs' 000
ASSETS
Non-current assets
Property, plant and equipment
58,776,827
40,811,579
25,226,657
Intangible asset
39,836
79,674
119,512
Due from Employees' share trust
-
-
133,009
Investment in associates
468,959
435,677
418,246
59,285,622
41,326,930
25,897,424
Current assets
Inventories
21,138,953
17,688,472
9,113,426
Accounts receivable third party and other
4,600,852
3,219,070
3,906,770
Cash and bank
3,804,282
6,552,597
10,112,629
29,544,087
27,460,139
23,132,825
TOTAL ASSETS
88,829,709
68,787,069
49,030,249
EQUITY AND LIABILITIES
Capital and Reserves
Issued share capital
1,273,421
1,273,421
1,273,421
Re-valuation surplus
2,795,906
2,933,351
3,081,673
Retained earnings
57,337,761
46,307,762
31,100,806
61,407,088
50,514,534
35,455,900
Non-current Liabilities
Provision for site restoration
53,444
49,443
45,442
Deferred tax provision
6,340,887
3,795,940
4,467,136
6,394,331
3,845,383
4,512,578
Current liabilities
Interest bearing borrowing
6,078,136
1,027,386
419,554
Trade and other payables
14,422,864
11,547,684
8,627,451
Income tax payable
527,290
1,852,082
14,766
21,028,290
14,427,152
9,061,771
TOTAL EQUITY AND LIABILITIES
88,829,709
68,787,069
49,030,249
Table 2. TANGA CEMENT INCOME STATEMENT
2.2.1 Trend analysis
This is the financial analytical tool which compares two or more year's financial data to study the trends. According to a lecture delivered as part of module ARUM58EKM, It involves the calculation of percentage relationship that each statement item bears to the same item in the "BASE YEAR" (Arora 2012).
2.2.1.1The trend Analysis for Tanga cement
The analysis and interpretation of the financial statements of Tanga cement made with calculation of trend percentages comes out with the following:
Sales and cost of goods sold have shown a positive increase throughout the three years. This situation is viewed as favorable because it enhances the increase the in gross profit. So Tanga cement should try to maintain the strategy is using in increasing its sales.
Net profit was tremendously increasing from year to year accompanied with the increase of fixed assets and capital and reserves. The analysis shows that the situation is favorable and the company has a good policy of manufacturing and trading.
2.2.2 Ratio analysis
Ratio analysis is the financial analytical tool which is used to explain the important association between figures shown on a balance sheet, in income statement, cash flow statement or in any other part of accounting organisation. Ratios show how one number is related to another. It may be expressed in the form of co-efficient, percentage, proportion, or rate (accountingformanagement.com 2011)
2.2.2.1 Ratio analysis and valuation for Tanga Cement Company
a. Profitability Ratio
According to Atrill P and McLaney E (2008) is the ratio that provides an insight to the degree of success of the business in making the good profit to their owner.
Return on Sales
This ratio is used to evaluate company's operational efficiency. It is also known as operating profit margin. It shows how much profit is produced per Shs of Sales. Increase in ROS it shows the company is growing more efficient while a decreasing in ROS could signal looming financial troubles.
Return on Sales = Net Income (before tax and interest changes)
Sales
Year
2010
2009
2008
Tanga Cement
0.305
0.376
0.353
Standard
1.91
1.91
1.91
Table3: Summary of return on sales ratios
In our analysis we found the average ROS for Tanga Cement is 0.23 while the industry average ratio is 1.91 so this implies that the company is not operating efficiently because its ROS value is low from the industry average. The management of Tanga cement should try to come up with a good strategy that will help them to boost profit and sales.
Return on Assets
This ratio is used for measuring the return of total investment in the firm.
Return on Assets = Net Income after Tax x100
Total Asset
Year
2008
2007
2006
Tanga Cement
34.05%
34.29%
32.6%
Standard
1.81%
1.81%
1.81%
Table4: Summary of return on Assets ratios
For Tanga Cement we found that, the average return on asset is 33.64 while industrial average ratio is 1.81%.This shows that Tanga Cement is significantly above the industry average ratio. For this case the company is in a good position on the return of total investment, hence the company has high ability of growing.
b. Liquidity Ratio
According to Atrill P and McLaney E (2008) It is the vital to the survival of the business that there is sufficient liquid resource available to meet maturing obligation (that is amount owing that must be paid in the near future). Mostly it is measured by Current Ratio and the Quick Ratio.
Current Ratio
This ratio falls under category of liquidity ratio it measures company's ability to meet its maturing short term obligation
Current Ratio = Current Asset x100
Current Liabilities
Year
2008
2007
2006
Tanga Cement
1.4
1.9
2.55
Standard
1.83
1.83
1.83
Table5: Summary of current ratios
Current ratio for Tanga Cement is 1.94 times while industrial ratio is 1.83 times. Hence this indicates that Tanga Cement is in a good position to meet its both long term and short liabilities which is good because, in situation like this the company can grow.
Quick Ratio
The ratio measures the company's ability to meet its short term obligation with its most liquid assets.
Quick Ratio = Current Asset -Inventories
Current Liabilities
Year
2008
2007
2006
Tanga Cement
0.4
0.68
1.55
Standard
1.09
1.09
1.09
Table6: Summary of quick ratios
Quick ratio for Tanga Cement is 0.87 times while industrial average ratio is 1.09 times, this indicates that Tanga Cement is below industrial average by 0.14 times. Hence this is not favorable financial position. The difference is not big but, the difference indicates the company cannot meet its entire obligation; it has to make sure it has enough cash to meet its obligation.
c. Activity Ratios
Inventory Turnover
Ideally the ratio show how many times the company's inventory is sold and replaced over the period of time.
Inventory Turnover = Cost of Sales
Average Inventory
Year
2008
2007
2006
Tanga Cement
3.26
2.89
5
Standard
10.46
10.46
10.46
Table7: Summary of inventory turnover ratios
Inventory turnover in Tanga Cement is 3.71 times while the industry average is 10.46 times. This shows Tanga Cement is not in favorable financial position since its turnover is 3.67 times compared to 10.46 times of industrial average ratio, hence the degree at which the inventory will be sold and replaced in Tanga cement is 3.67 times, this is the low turnover. The company is doing worse on this part because its turnover is almost two times less from industry average.it shows that the company's resources have not been properly utilized.
Analysis and interpretation of balance sheet and income statement for Tanga cement.
1. Capital and reserves at first increased by 1.12% from 2006 to 2007, in the year 2008 it declined by 4.31%. This means that the company in 2008 was generating much loss that caused its reserve to decrease as well as capital which resulted to decrease in company wealth.
2. Investment in non current assets increased from 52.18% to 66.74 from 2006 to 2008. The investment done in the preceding years was beneficial to the company that's why the investment in 2008 declined because there was no need of investing much.
3. Current assets generally have been decreasing from 47.18% to 33.29% from 2006 to 2008. Cash and bank was decreasing from year to year this is a good sign since short term obligations such as current liabilities have been resolved by cash and bank. The company has no need of holding cash and bank while it needs to make profit using that money
3: LIMITATIONS ON FINANCIAL ANALYTICAL TOOLS USED
When calculating the financial ratios, may find getting two types of answers. Some ratios might be good and some might be bad ratios compared to industry standard, which will make it difficult to judge if the company is I a good position or not.
Financial ratios are giving the actual financial picture of the company whether the company is going at the right or wrong direction. These ratios do not give a solution of what to do if things go wrong.
In analytical tools, the data which is used is only accounting data instead of economic data.
In doing financial ratios analysis, data that is used are obtained from bank statement, balance sheet and cash flows of previous years. This shows that they are using historical data which is bad because they do not reflect the actual economic situation.
In financial analysis ,data obtained cannot be used alone, the data obtained must be compared with other data so as to get actual interpretation
Different accounting practices can distort comparison even within the same company. A good example is one can use LIFO and one use FIFO; the answers will definitely be different.
The set standard industry financial ratios are not authentic because the levels of business differ from place to place. A good example is on IT industry. The level of technology in third world countries is very low, so logically third world countries won't be able to meet the set standard due to our level of technology.
4: CONCLUSION
Tanga Cement Company Limited has been doing well in production and making sound profit year after year. Tanga Cement is also the second largest cement producer in Tanzania with a production of 1.25 million tpa capacity. Tanzania Portland Cement in Dar es Salaam is the major (largest) producer with a production capacity totaling 1.4 million tpa.
This revelation has been resulted from the Company financial Statements and Financial Analytical tools (Ratio Analysis, Common sized analysis and Trend Analysis). Generally the performance of Tanga Cement Co. LTD is good.
