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Program: MBA (INNOVATIVE MANAGEMNET)

SESSION: Jan 2011

SUBJECT: FINANCIAL RESOURSE MANAGEMENT

SUBMITTED BY: RAHAT ALI

STUDENT ID: 41564

SUBMITTED TO: MR. RICHARD ASIBEY-BONSU

DATE: 16 MARCH 2011

British InstituteOf Technology & E-commerce



Table of contents

1. Abstract

2. Introduction

3. ABC ining Corporation balance sheet

4. ABC ining Corporation income statement

5. J phones balance sheet

6. J phones income statement

7. Profitability Ratio

a Return on capital employed

b et profit argin

c Asset turn over

8. Liquidity Ratios a Current ratio

b Acid test ratio

c Debtor¶s turnover

9. anagement efficiency Ratio

a Stock turnover ratio

10. Corporate ratios

a Earnings per shares

b Dividend per shares

c Dividend cover

11. Financial ratios a Share holder profitability ratio

12. Conclusion and suggestion

13. References



Abstract:

As Ahmet Hussain 75 years old pensioner, approached our firm for financial and

investment advice, who recently won £20,000 in lottery. y position in the company

is Assistant financial management advisor and my task will be producing a report

based on the information given about the two companies which has been proposed

by Ahmet Hussain. hese companies need to be analysed on the ground of

investment potential.

Int ducti n:

There are two companies given in the question, company 1 is ABC ining

Corporation which is long established, multinational, and over 2000 subsidiaries . The

operation extended to 70 different countries as it is a mining company so its main

interests is for minerals in Africa and refining, processing, and production of a wide

range of products. This corporation also interest in marketing and production of gas,

coal, and chemicals and various other products.

While the other company which is J phones Ltd only operating for just two years but

has a young dynamic management staff. They produce single principal product line,

A Smartphone incorporating recent technological advancements. Although the

company is new, but they have adapted effective way of advertisement via television

and press to introduce their product lines.

ow we have to analyse the financial data of both the companies which is

deliberately muddled by one of the partner of the firm. It is necessary to put this

information in the table so it can be easily understandable.

Tables are shown on the next page of balance she et and income statements for

both the companies for the year 2001 and 2002.



AB

MINNING CORPORATION

BALANCE S ¡ EET2002 (£ Millions)

2001 (£ Millions)

Fixed Asse¢ s ( Non- c

£ ¤ ¤

ent assets)

Current Assets (stock)

Inventory

Debtors (receivables)

Cas ¥

Total current asset

Total Assets (Net asset)

Equity

Reserve Capital

Ordinary s ¦ ares Capital

Preference S ¦ ares Capital

Retained Earnings

Liabilities

Fixed Liabilities -----------------------------------------------------

Current Liabilities--------------------------------------------------

Other Current Liabilities

Taxation---------------------------------------------------------------

Dividends-------------------------------------------------------------

Total current liabilities--------------------------------------------

Total Equity & Liabilities

49,300

6000

9500

7000

22,500

71, 800

======

7, 000

40, 000

2, 500

5, 059

--------- 54, 559

2, 500

26, 000

2, 530

3, 450

31980

89, 039

======

38, 000

6000

6000

3000

15,000

53, 000

======

5, 500

32, 500

3, 000

2, 314

---------- 43, 314

......

14, 000

2, 311

2, 900

19211

62, 525

======



ABC MINNING CORPORATION

INCOME STATEMENT2002 (£ Millions)

2001 (£ Millions)

Revenue (Sales)

Less Operating Cost

Operating Prof it (PBIT)

Less Interest

Prof it bef ore tax (PBT)

Less tax

Prof it af ter tax and interest (PAT)

Less dividend

Ordinary dividend £3, 200

Preference dividend £ 250

£ 35, 000

(£ 25, 900)

£ 9, 100

(£ 375)

£ 8, 725

(£ 2, 530)

£ 6, 195

£ 3,450

£ 2, 745

£ 29, 634

(£ 21, 292)

£ 7, 705

(£ 180)

£ 7, 525

(£ 2, 311)

£5, 214

£ 2, 900

£ 2, 314

Retained prof it f or the year

Retained Prof it (Earnings) £2, 314

-----------

Net Prof it £5, 509

======



J PHONE LTD

BALANCE SHEET2002 (£ Millions)

2001 (£ Millions)

Fixed Assets ( Non- current assets)

Current Assets (stock)

Inventory

Cash

Total current asset

Total Assets (Net asset)

Equity

Reserve CapitalOrdinary shares Capital

Preference Shares Capital

Retained Earnings

Current Liabilities

Dividends 2002 2001

Preference 30, 000 13,000

Ordinary 28, 500 18, 000

Total current liabilities--------------------------------------------

--------- ----------

Non Current Liabilities

Debenture 8 % 160, 000 150, 000

Debenture 12% 300, 000 ----

---------- -----------

Total Equity & Liabilities

165,000

730, 000

150,000

15, 000

895,000

1, 060, 000

======

20, 000 95, 000

300, 000

116, 794

---------

531, 794

350, 000

408,500

58,500

460, 000

1, 431, 293

=======

180, 000

384, 000

90,000

16, 000

490,000

670, 000

======

100, 000 90, 000

130, 000

79, 719

----------

399, 718

200, 000

231,000

31, 000

150,000

780, 718

=======



J PHONE LTD 2002 (£ Millions)

2001 (£ Millions)

INCOME STATEMENT

Revenue (Sales) 412, 500 350, 625

Less Operating Cost (268, 125) (227, 906)

Operating Prof it (PBIT) 144, 375 122, 719

Less Interest (48, 800) (12, 000)

Prof it bef ore tax (PBT) 95, 575 110, 719

Less tax ----- ------

Prof it af ter tax and interest (PAIT) 95, 575 110, 719

Less Dividend Preference dividend 30, 000

Ordinary dividend 28, 500

--------- (58, 500) (31, 000)

----------- -----------

Retained prof it f or the year 37, 075 79, 719

Retained Prof it (Earnings) B/F 79, 719

-----------

Net Prof it 116, 794

P fit bility ti :

It measures the profitability of the company which is the ability of the business to

make profit for the share holders. Different tools can be used in order to analyse the

profitability ratio. I will be using few tools in order to analyse the profitability of ABC

ining Corporation and J phones Ltd .



(a)Retu n n capital empl yed (ROCE):

It measures the efficiency with which capital employed by the business is utilized and

expressed in percentage.

R CE = PBIT/capital employed * 100

Where ³PBIT´ is profit before interest and tax and Capital employed is fixed asset +

current asset.

ABC mining corporation2002


ROCE = 9100/49,300+22,500 *100

= 9100/71800 * 100

=12.6%

ROCE = 7705/38000+15000 * 100

= 7705/53000 * 100

= 14%

J phone Ltd

2002

J phone Ltd

2001

ROCE= 144,375/165,000+895,000 *100

= 144,375/ 1,060,000 *100

= 13%

ROCE= 122,719/180, 000+ 490,000 *100

= 122,719/670,000 * 100

= 18%

(b) Net profit Margin:

It measures relationship between profit and sales.

et profit margin = PBIT/Net sale * 100



ABC mining corporation

2002


2001

= 9100/35000 *100

= 26%= 7705/29,634 * 100

=26%

J phone Ltd

2002

J phone Ltd

2001

= 144,375/412500 * 100

= 35%

=122,719/350,625 * 100= 35%

(c)Asset Tur n Over :

This is also called asset utilization ratio which measures the relationship between

sales and net asset.

= Sales/Net Asset

Net asset = FA+CA-CL-FL .

Where the FA stands for fixed asset, CA for current asset, CL for current liabilities

and FL stands for fixed or long term liabilities.

Asset turnover ratio is calculated on the table given below:




2002


2001

Asset turn over = 35000/37,320

= 0.93 times

Asset turn over = 29634/33789

= 0.87 times

J phone Ltd

2002

J phone Ltd

2001

Asset turn over =412500/191500

= 2.15 times

Asset turn over = 350625/289,000

= 1.21 times

Liquidity Ratios:

It measures the availability of liquid funds in order to meet the cash requirement of

the organization. Liquidity ratio generally use current ratio and acid test ratio, whichare as follows:

(a) Curr ent Ratio:

The current ratio also called as working capital ratio relates the current assets

and current liabilities. It measures the potential reservoir of cash of the

organization. Current asset is divided by the current liabilities and the differenc e

is denoted by X : 1 .

Current Ratio = current asset / current liabilities

= X : 1

Where the current asset is stock, debtor, bank, card and the current liability is

trade creditor, short term loan payable in year overdraft, and outstanding

payments.



We will use this ratio in order to understand these companies¶ reservoirs of liquid

fund. Current ratio for both the companies is mention in the table on the next

page.



Current ratio = 22500 / 31980

= 0.70 : 1 Current ratio = 15000 / 19211

= 0.78 : 1

J phone Ltd

2002

J phone Ltd

2001

Current ratio = 895000/408500

= 2.2 : 1

Current ratio = 490000/ 231000= 2.2 : 1

(b) Acid test ratio:

It is also known as quick ratio, it is similar to current ratio but it exclude the current asset

from the stock which is hard to convert in to cash. The formula will be like

Acid test ratio = current asset ± stock / current liabilities

= X : 1

enerally 1 : 1 or 1.5 : 1 is consider good to analyse the liquidity of the company.Here we will check for the companies given in the question. The table for both

companies is mentioned as follows:




2002


2001

Acid test ratio = 22500 6000 / 31,980 = 0.51 : 1

Acid test ratio = 15000 6000 / 19211 = 0.46 : 1

J phone Ltd

2002

J phone Ltd

2001

Acid test ratio = 895000 730,000 / 408500

= 0.4 : 1

Acid test ratio = 490000 ± 384000/ 231000= 0.45 : 1

(c)Debtor s Tur nover :

It measures the debtor¶s Turnover in days. It is formulated by as follows

Trade¶s debtor¶s / credit sales * 365 days

And the answer will be in days. The table is as follows:




2002


2001

Debtors turnover = 9500/35000 * 365

= 99.07 days

Debtors turnover = 6000/29,634 * 365

= 73.9

J phone Ltd

2002

J phone Ltd

2001

Debtors turnover = 150,000/412500 * 365

= 132.7 days

Debtors turnover = 90,000/ 350,625 * 365

= 93.68 days

Management Efficiency Ratios:

(a)Stock Tur nover Ratio

Stock Turnover (in days) = stock/cost of sale * 365




2002


2001

Stock turnover = 6000/29500 * 365

= 84.55 days

stock turnover = 6000/21929 * 365

= 99.86

J phone Ltd

2002

J phone Ltd

2001

stock turnover = 730,000/268125 * 365

= 993.75 days

stock turnover = 384,000/ 227,906 * 365

= 614.99 days

Corporate Ratios:

(a) § arnings Per Share (EPS)

Earnings per Share = Net prof it af ter interest, tax and preference dividend

Number of shares in issue


2002


2001

EPS = 5945/40000

= 0.14 P

EPS = 4914/32500

= 0.15 P

J phone Ltd

2002

J phone Ltd

2001

EPS = 65575/190,000

= 0.345 P

EPS = 97719/ 180,000

= 0.542 P



(b) ̈ ividend Per Share

Dividend per Share = Paid and proposed ordinary dividend

Number of Shares in issue


2002


2001

DPS = 3200/40000

= 0.08 P

DPS = 2600/32500

= 0.08 P

J phone Ltd

2002

J phone Ltd

2001

DPS = 28500/190,000

= 0.15 P

DPS = 18000/ 180,000

= 0.10 P

(c) © ividend Cover

Dividend Cover = Prof it attributed to ordinary shareholders Paid and proposed ordinary dividend


2002


2001

Dividend cover = 5945/3200

= 1.85


= 1.89

J phone Ltd

2002

J phone Ltd

2001


= 2.30

Dividend cover = 97719/ 18000

= 5.42



E) Financial Ratios

(1) Shareholder Profitability Ratio

Shareholder Prof itability = Prof it attributed to ordinary shareholders x 100%

Total Assets


2002


2001

Share holder prof itability = 5945/71800*100%

= 8.27 %

Share holder prof itability = 4914/53000 * 100%

= 9.27%

J phone Ltd

2002

J phone Ltd

2001

Share holder prof itability = 65575/1060000 * 100%

= 6.18%

Share holder prof itability = 97719/ 670,000* 100%

= 14.5n8%

Conclusion & suggestion:

According to my analysis above I came on to the conclusion that J phones Ltd is

doing very well in terms of return on capital employed, Net profit margin, asset turn

over, current ratio and corporate ratios. As far as ABC ining Corporation is

concern, in comparison to j phones Ltd, profitability ratios are slow but steady along

with the corporate ratios. ABC ining Corporation is better in liquidity ratios and

share holder profitability ratio which is a great concern for the customer we are

dealing with.

some of the trends suggest that both the companies are having problem just like in

acid test ratio where ABC mining corporation have only 0.51 : 1 in 2002 while J



phones have 0.40 : 1 in 2002. Which suggest both companies are struggling wi th its

liquidity funds to meet their requirements.

y suggestion to the customer who is 75 years old and he may not want a risky

company where he invests so in my opinion ABC ining Corporation would be a

better choice because of its long term commitments and better share holder

profitability ratio. This company is less risky in my opinion because of its better

liquidity ratios. And its steady figures in the above tables suggest it may not have

sudden downwards trends.

Refer ences:

anaging finance by David Crowther published in 2004

Financial ratio analysis available [online] at

http://www.bized.co.uk/compf act/ratios/sdc5.htm

[accessed on 28 march 2011]

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