Company Introduction
Discuss about the Financial management Evaluation of Clustering Algorithms.
In Australia Boral are the largest building and construction material suppliers. It is the largest suppliers of material in all the territories and states. In this, report an analysis is made about the operating activity of the company.
The financial statement of a company is prepared to reflect the performance and activity of the company. The financial statement is an indispensible part for calculating the financial ratios (Vogel 2014). The profit and loss and balance sheet of the company is given below:
|
Income Statement of BORAL LTD |
||
|
Amount in Million |
||
|
Particulars |
2015 |
2016 |
|
Revenue |
$4,298 |
$4,311 |
|
Cost of revenue |
$3,039 |
$2,927 |
|
Gross profit |
$1,258 |
$1,384 |
|
Operating expenses |
||
|
Sales, General and administrative |
$1,984 |
$1,122 |
|
Other operating expenses |
($912) |
($40) |
|
Total operating expenses |
$1,072 |
$1,082 |
|
Operating income |
$186 |
$302 |
|
Interest Expense |
$76 |
$71 |
|
Other income (expense) |
$179 |
$53 |
|
Income before taxes |
$288 |
$284 |
|
Provision for income taxes |
$45 |
$32 |
|
Net income from continuing operations |
$243 |
$252 |
|
Net income from discontinuing ops |
$14 |
$4 |
|
Other |
||
|
Net income |
$257 |
$256 |
|
Net income available to common shareholders |
$257 |
$256 |
|
Earnings per share |
||
|
Basic |
$1 |
$1 |
|
Diluted |
$1 |
$1 |
|
Weighted average shares outstanding |
||
|
Basic |
$209 |
$201 |
|
Diluted |
$212 |
$203 |
|
EBITDA |
$614 |
$602 |
Table 1: Income Statement
(Source: created by Author)
|
BORAL LTD Balance Sheet |
||
|
Amount in Million |
||
|
2015-06 |
2016-06 |
|
|
Assets |
||
|
Current assets |
||
|
Cash |
||
|
Cash and cash equivalents |
$ 506 |
$ 452 |
|
Short-term investments |
$ 10 |
$ 19 |
|
Total cash |
$ 515 |
$ 471 |
|
Receivables |
$ 660 |
$ 624 |
|
Inventories |
$ 538 |
$ 557 |
|
Other current assets |
$ 28 |
$ 32 |
|
Total current assets |
$ 1,741 |
$ 1,684 |
|
Non-current assets |
||
|
Property, plant and equipment |
||
|
Gross property, plant and equipment |
$ 5,400 |
$ 5,576 |
|
Accumulated Depreciation |
$ (2,952) |
$ (3,059) |
|
Net property, plant and equipment |
$ 2,448 |
$ 2,517 |
|
Equity and other investments |
$ 1,078 |
$ 1,078 |
|
Goodwill |
$ 209 |
$ 213 |
|
Intangible assets |
$ 18 |
$ 22 |
|
Deferred income taxes |
$ 244 |
$ 237 |
|
Other long-term assets |
$ 127 |
$ 49 |
|
Total non-current assets |
$ 4,124 |
$ 4,116 |
|
Total assets |
$ 5,865 |
$ 5,800 |
|
Liabilities and stockholders’ equity |
||
|
Liabilities |
||
|
Current liabilities |
||
|
Short-term debt |
$ – |
$ 359 |
|
Capital leases |
$ 1 |
$ 1 |
|
Accounts payable |
$ 642 |
$ 608 |
|
Deferred income taxes |
$ 95 |
$ 37 |
|
Other current liabilities |
$ 185 |
$ 177 |
|
Total current liabilities |
$ 923 |
$ 1,182 |
|
Non-current liabilities |
||
|
Long-term debt |
$ 1,317 |
$ 1,009 |
|
Capital leases |
$ 4 |
$ 3 |
|
Deferred taxes liabilities |
||
|
Other long-term liabilities |
$ 97 |
$ 101 |
|
Total non-current liabilities |
$ 1,418 |
$ 1,112 |
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Total liabilities |
$ 2,341 |
$ 2,294 |
|
Stockholders’ equity |
||
|
Common stock |
$ 2,362 |
$ 2,246 |
|
Retained earnings |
$ 996 |
$ 1,098 |
|
Accumulated other comprehensive income |
$ 166 |
$ 162 |
|
Total stockholders’ equity |
$ 3,524 |
$ 3,506 |
|
Total liabilities and stockholders’ equity |
$ 5,865 |
$ 5,800 |
Table 2: Balance sheet
(Source: created by author)
The financial ratios are the comparison of the financial statement. The financial statement ratios are computed because it is useful to various stake holders. The stake holder that uses the computation of the financial ratios are the investors, creditors and management. It is regarded as the most commonly used tools for decoding the performance of the business (Kou et al. 2014). The most important features of the ratios are that they are easy to compute and simple to understand. The ratios are calculated based on the financial statement of the company provided below:
The key financial ratios of the company Boral is given below:
|
Key Financial Ratios |
||
|
Particulars |
2015 |
2016 |
|
Debt Equity Ratio |
0.37 |
0.29 |
|
Current Ratio |
1.89 |
1.42 |
|
Quick Ratio |
1.30 |
0.95 |
|
Return on Equity |
7.29% |
7.30% |
|
Net Profit Margin |
5.98% |
5.94% |
|
Inventory Sales Ratio |
0.125 |
0.129 |
Table 3: Key financial ratios
(Source: Created by Author)
The debt to equity ratio is a liquidity ratio. The calculation is done by dividing the total debt to total equity. If the debt equity ratio of the company is high this indicates that the company is using more debt financing than the equity financing (Damodaran 2016). The formula that is used for calculating the debt equity ratio is given below:
Debt equity ratio= Debt /Equity
The calculation in the Table 3 shows that the debt equity ratio of the company in 2015 is 0.37 and in 2016 is 0.29. It is generally implied that low debt equity ratio means that there is stability in the company. The companies have higher solvency risk have high debt equity ratio. In the current scenario the debt equity ratio of the company has reduced marginally (Brigham and Ehrhardt 2013). That indicates that the solvency situation of the company has improved from 2015 to 2016. The long term debt of the company has reduced as a result the debt equity ratio of the company has also reduced. On analyzing the debt equity ratio it can be said that in 2015 the 37% of the assets have been financed by the long term debt. In 2016, the debt equity ratio indicates that the 29% of the total assets are financed by long term debt. Therefore based on the debt equity ratio it can be said that the solvency situation of the company has improved.
Analysis of the Financial Statement
Current ratio
The current ratio is a liquidity ratio. This ratio measures the ability of the business to pay the short-term debt of the company with its current liabilities. The current liabilities are the debts that are due within the current year (Leary et al. 2014). It means that the business has limited time for raising funds for payment of liabilities. This means the businesses that have higher current assets can pay of their current liability without selling their long-term assets. The method for calculating the current ratio:
Current ratio= Current Assets/ Current Liability
The current ratio of the company in 2015 is 1.89 times and in 2016, it is 1.42. This means that in 2015 the company for every $1 current liability has $1.89 of current assets. In 2016, the company has $1.42 of current assets for every $1 of current liability. It means that the business has more assets to pay off the liability therefore higher current ratio is suitable for the company. However, very high current ratio specify that the business is not using the current assets is effectively. In general, the business should have current assets 2 times of the current liability. In this, case the current ratio of the company is less than 2 in both the years 2015 and 2016. In addition to this, the current ratio of the company has further reduced in 2016 from 2015. The reason for the reduction in current ratio is the reduction of the current assets and increase in current liability (Al Mamun 2013). Therefore, it can be said that based on the current ratio the company is not in the current situation.
Quick ratio
The quick ratio is also known as acid test ratio. This ratio indicates the repayment capability of the business to pay off its current liability with the current assets. The current asset in this case does not include the inventories. The formula for calculating the quick ratio is given below:
Quick ratio= Current assets – Inventories/ Current liability
In this case, the quick ratio of the company in 2015 is 1.30 and in 2016 is 0.95. This means that in 2015 the company had enough quick assets to pay off the current liability of the company. However, in 2016 the company does not have enough quick assets to pay off the current liabilities (Weygandt et al. 2015). This indicates that in 2016 there can be a solvency issue that the company has might face. Therefore based on the ratio it can be said that the solvency situation of the company has declined.
Analysis of Key Financial Ratios
Return on Equity
The return on equity is a profitability ratio that measures the ability of the business to earn profit from the shareholders fund. The Return on equity measures the ability of the management to earn profit from the shareholders fund (Spronk et al. 2016). The formula for calculating the return on equity is
Return on Equity= Net Income/ Share holders equity
In this case, the ROE of the company in 2015 is 7.29% and in 2016, it is 7.30%. The ROE of the company has remained stable. The reason is that the net income of the company has remained stable. Therefore, it can be said that the position of the business has remained stable. It is not a negative sign but this is not a positive of the company.
Net Profit margin
The net profit margin indicates the profit making ability of the business. The calculation of net profit margin ratio is given below:
Net Profit margin ratio= Net Income/ Net Revenue
The Net profit margin of the company in 2015 is 5.98% and in 2016 is 5.94%. The net profit margin of the company is stable in both the year. The reason is that the net income of both the year has remained stable (Spronk et al. 2016). The analysis of the net profit margin of the company indicates that the business has remained similarly profitable in both the years. This indicates that the business has not improved the performance of the company in the two consecutive years.
Inventory Sales ratio
The inventory sales ratio is useful because it indicates the manner in which the inventory is managed in the business. The formula for calculating the inventory sales ratio is:
Inventory sales ratio= Inventory/ Revenue
The increase in inventory to sales ratio indicates that the investment is growing more rapidly than the sales. In this case, inventory sales ratio is 0.125 in 2015 and it is 0.129 in 2016. The reason behind the increase in the Inventory sales ratio is increase and increase in inventory (Steidel et al. 2014).
Conclusion
The report indicates the performance of the business by calculating the key financial ratios. Based on the above report it can be concluded that the liquidity position and solvency position of the company is satisfactory. However, the profitability of the company has remained stable. Therefore, it can be said that the performance of the company needs to be improved.
Reference
Al Mamun, A., 2013. Performance Evaluation of Prime Bank Limited in Terms of Capital Adequacy. Global Journal of Management and Business Research, 13(9).
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.
Kou, G., Peng, Y. and Wang, G., 2014. Evaluation of clustering algorithms for financial risk analysis using MCDM methods. Information Sciences, 275, pp.1-12.
Leary, M.T. and Roberts, M.R., 2014. Do peer firms affect corporate financial policy?. The Journal of Finance, 69(1), pp.139-178.
Spronk, J., Steuer, R.E. and Zopounidis, C., 2016. Multicriteria decision aid/analysis in finance. In Multiple Criteria Decision Analysis (pp. 1011-1065). Springer New York.
Steidel, C.C., Rudie, G.C., Strom, A.L., Pettini, M., Reddy, N.A., Shapley, A.E., Trainor, R.F., Erb, D.K., Turner, M.L., Konidaris, N.P. and Kulas, K.R., 2014. STRONG NEBULAR LINE RATIOS IN THE SPECTRA of z? 2-3 STAR FORMING GALAXIES: FIRST RESULTS FROM KBSS-MOSFIREBased on data obtained at the WM Keck Observatory, which is operated as a scientific partnership among the California Institute of Technology, the University of California, and NASA, and was made possible by the generous financial support of the WM Keck Foundation. The Astrophysical Journal, 795(2), p.165.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.
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