Introduction
Abu Dhabi national paper mill is the oldest tissue manufacturer within the region. The initial production for the company was in 2002 with close to 22000 jumbo tissue paper rolls. The company currently produces averagely 27000 jumbo tissue rolls rendering it to be the biggest paper mill within the region. The company manufactures and markets its products to the regional, local and overseas converters. The company has been expanding its level of production on a yearly basis. The company has plans of introducing a de-inking and new tissue machines. This will assist Abu Dhabi national paper mill meet the high market demand for quality tissue products. The company strives to preserve the environment by meeting all international standards of air pollution. This paper focuses on calculation of basic financial management ratios and a report for the company.
Income statement and balance sheet for the company
Consolidated income statement for Abu Dhabi National paper mill (1.1-31.12)
Consolidated balance sheet for Abu Dhabi paper national mill as at 31st December
Calculation of ratios
Short-term solvency ratios
Current ratio
Current ratio = total current assets ÷ total current liabilities
- Current ratio for 2009 = 27120 ÷ 23176 = 1.17
- Current ratio for 2010 = 24234 ÷ 19930 = 1.22
- Current ratio for 2011 = 18198 ÷ 14876 = 1.22
Quick ratio
Quick ratio = (Total current assets – inventory) ÷ Total current liabilities
- Quick ratio for 2009 = (27120 – 825) ÷ 23176 = 1.13
- Quick ratio for 2010 = (24234 – 1085) ÷ 19930 = 1.16
- Quick ratio for 2011 = (18198-1765) ÷ 14876 = 1.10
Asset management ratios
Receivables turn over
Receivables turnover = sales ÷ accounts receivables
- Receivables turnover for 2009 = 32924 ÷ 15580 = 2.11
- Receivables turnover for 2010 = 33365 ÷ 14870 = 2.24
- Receivables turnover for 2011 = 36474 ÷ 12117 = 3.01
Day’s receivables
Day’s receivables = 365 ÷ receivables turnover
- Day’s receivables for 2009 = 365 ÷ 2.11 = 172.99
- Day’s receivables for 2010 = 365 ÷ 2.24 = 162.95
- Day’s receivables for 2011 = 365 ÷ 3.01 = 121.26
Inventory turnover
Inventory turnover = cost of goods sold ÷ inventory
- Inventory turnover for 2009 = 26479 ÷ 825 = 32.10
- Inventory turnover for 2010 = 30057 ÷ 1085 = 27.70
- Inventory turnover for 2011 = 33029 ÷ 1765 = 18.71
Day’s inventory
Day’s inventory = 365 ÷ inventory turnover
- Day’s inventory for 2009 = 365 ÷ 32.1 = 11.37
- Days inventory for 2010 = 365 ÷ 27.7 = 13.52
- Day’s inventory for 2011 = 365 ÷ 18.71 = 19.51
Fixed assets turnover
Fixed assets turnover = sales ÷ net fixed assets
- Fixed assets turnover for 2009 = 32924 ÷ 15858 = 2.08
- Fixed assets turnover for 2010 = 33365 ÷ 15885 = 2.1
- Fixed assets turnover for 2011 =36474 ÷ 15914 = 2.29
Total assets turnover
Total assets turnover = sales ÷ total assets
- Total assets turnover for 2009 = 32924 ÷ 42978 = 0.77
- Total assets turnover for 2010 = 33365 ÷ 40021 = 0.83
- Total assets turnover for 2011 =36474 ÷ 34112 = 1.07
Debt management ratios
Times interest earned ratio
Times interest earned ratio = EBIT ÷ interest expense
- Times interest earned ratio for 2009 = 1982 ÷ 712 = 2.78
- Times interest earned ration for 2010 = 1908 ÷ 634 = 3.01
- Times interest earned ratio for 2011= 2073 ÷ 482 = 4.3
Debt ratio
Debt ratio = total debt ÷ total assets = (Total assets-total owner’s equity) ÷ Total assets
- Debt ratio for 2009 = (42978 – 9508) ÷ 42978 = 0.78
- Debt ratio for 2010 = (40021 – 10345) ÷ 40021 = 0.97
- Debt ratio for 2011 = (34112 – 11317) ÷ 34112 = 0.67
Debt to equity ratio
Debt to equity ratio = total debt ÷ total owners equity
- Debt to equity ratio for 2009 = (42978 – 9508) ÷ 9508 = 3.52
- Debt to equity ratio for 2010 = (40021 – 10345) ÷ 10345 = 2.87
- Debt to equity ratio for 2011 = (34112 – 11317) ÷ 11317 = 2.04
Equity multiplier
Equity multiplier = total assets ÷ total owners equity
- Equity multiplier for 2009 = 42978 ÷ 9508 = 4.52
- Equity multiplier for 2010 = 40021 ÷ 10345 = 3.87
- Equity multiplier for 2011 = 34112 ÷ 11317 = 3.01
Profitability ratios
Profit margin
Profit margin = net income ÷ sales
- Profit margin for 2009 = 1758 ÷ 32924 = 0.05
- Profit margin for 2010 = 2010 ÷ 33365 = 0.06
- Profit margin for 2011 = 5254 ÷ 36474 = 0.14
Return on assets
Return on assets = net income ÷ total assets
- Return on assets for 2009 = 1758 ÷ 42978 = 0.04
- Return on assets for 2010 = 2010 ÷ 40021 = 0.05
- Return on assets for 2011 = 5254 ÷ 34112 = 0.15
Return on equity
Return on equity = net income ÷ total owners’ equity
- Return on equity for 2009 = 1758 ÷ 9508 = 0.18
- Return on equity for 2010 = 2021 ÷ 10345 = 0.19
- Return on equity for 2011 = 5254 ÷ 11317 = 0.46
Market value ratios
Price to earnings ratio
Price to earnings ratio = price per share ÷ earning per share
- Price to earning ratio for 2009 = 52.7 ÷ 6.10 = 8.64
- Price to earning ratio for 2010 = 62.95 ÷ 7.25 = 8.68
- Price to earning ratio for 2011 = 99.25 ÷ 19.32 = 5.14
Market to book ratio
Market to book ratio = price per share ÷ book value per share
- Market to book ratio for 2009 = 52.7 ÷ 58 = 0.9
- Market to book ratio for 2010 = 62.95 ÷ 67 = 0.94
- Market to book ratio for 2011 = 99.25 ÷ 101 = 0.98
Report about the performance of the company
Interpretation of short-term solvency ratios
Solvency ratios show the ability of an entity to meet its debt obligations. The current ratio shows the ability of an entity to pay for the short term liabilities using its current assets. A company has outstanding performance with a current ratio that is over one. Abu Dhabi national paper mill performs well on this parameter because the ratio is high across the three years. On the other hand, the quick ratio is an indicator of the short term liquidity of an organization. A company is more stable than the other when this ratio is high. Abu Dhabi national paper mill has a high solvency quick ratio because it is over one and increasing over the three years. This means that the company has the ability of meeting its debt obligations in the future. These solvency ratios grant the company favor in the eyes of investors (Robinson et al. 2008).
Asset management ratios
This set of ratios identifies the efficiency and effectiveness of an organization in managing its assets to generate revenue. High asset management ratios show that the organization is using its assets well to generate income. The company has an increasing receivable turn over ratio which is an outstanding performance. The other asset management ratios also reveal satisfactory organizational performance. This means that the Abu Dhabi national mill has an exceptional ability to use its assets to generate income (Brigham & Houston 2012).
The inventory turn over ratio shows the number of times the company sells and stocks its inventory every year. This value should neither be too high nor too low at any given time. This company has a stable inventory turnover ratio, and this shows a stable management in place. The company has an increasing trend in the receivables turnover ratio, inventory turnover ratio, fixed asset turn over ratio and total asset turn over ratio. This results into a declining trend in the day’s receivables and day’s inventory ratios.
Debt management ratios
The debt management ratio is a measure of how much the operations of an entity comes from debt financing instead of other sources like personal savings and stock. An organization has a promising future if it has low and decreasing values of these ratios. It is better for a profit making organization to use most of its assets in financing operations than heavily relying on debt. This is because it is extremely expensive for an organization to manage debt. This category has the times interest earned ratio, debt ratio, debt to equity ratio and the equity multiplier. The debt management ratios do not reveal a given trend, but they are primarily low.
Profitability ratios
These ratios form the most prestigious financial analysis ratios especially to the investors of the company. There is no investor who can confidently put his or her resources in a company that in making loses. Most investors look for companies whose profitability keeps on increasing on a yearly basis. The company has an excellent performance in its profit margin. Abu Dhabi natural paper mill has an increasing trend in the profit margin over the period of analysis. This trend reveals that the organization is stable in the long run (Thukaram, 2007, p. 99). Other profitability ratios are the return on assets and return on equity respectively. The company has positive values on these ratios, and this reveals that it is highly profitable. These rations have an increasing trend which shows the long term sustainability of the organization. These results earn the company a competitive advantage and investor confidence within the market.
Market value ratios and other equations
Some of the ratios that fall under this category include the price to earning ratio and market to book ratio. The price to earning ratio for the company has a negative trend because of the increase in share prices with time. This shows that the company does not increase the earnings for shares as the price increases. This can be demoralizing to share holders, and the company should consider high interests for its investors. There is a remarkably small variation between the market and book share values. This does not have any significant effect on the company and its stakeholders.
Conclusion and recommendations
The Abu Dhabi natural paper mill company performs well in most the financial parameters. Analysis of the solvency ratios reveals that the company meets its debt obligation using its current assets. The asset management ratios reveal that Abu Dhabi national paper mill has a high ability of using its assets to generate income. This is a result of its strong leadership team that is efficient in resource allocation. Analysis of the debt management ratios reveals that the company funds most of its operations from within. This works for the well being of the enterprise because it is extremely expensive to rely on debt financing.
The most valuable thing the company should undertake is to reward investors by paying them high share interests. The company has an increasing share price value over the three years. The challenge is that the increase in share interest is not proportional to the rise in share price. The best way the company can attract and retain several investors is rewarding them according to the performance of the enterprise. In general, the company’s financial analyses show that Abu Dhabi national paper mill has a stable financial position. The company should just enhance its operations to ensure better performance in the future.
References
Brigham, F.E. and Houston, F. J., 2012. Fundamentals of financial management. Mason: Cengage learning.
Robinson, T., Henry, E. and Greuning, H., 2008. International financial statement analysis. New Jersey: John Wiley & Sons.
Thukaram, R., 2007. Management Accounting. New Delhi: New age international publishers.