Analysis of financal ratios

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A presentation about analysis of financial ratios done by my group in Ngee Ann Polytechnic.

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  • It generate enough cash??
  • . Calculate and analyse the liquidity ratios over time (for the same company) and compare the ratios either to the industry average or to that of a close competitor (if possible), giving reasons for differences (if possible). Cover the following:
     
    Net working capital
    Current ratio
    Quick ratio
    AR turnover
    Inventory turnover
     
    Answer the question:
    Is the company managing its liquidity position well, will it be able to sustain its operations in the short and medium term? (11 marks)
  • . Calculate and analyse the liquidity ratios over time (for the same company) and compare the ratios either to the industry average or to that of a close competitor (if possible), giving reasons for differences (if possible). Cover the following:
     
    Net working capital
    Current ratio
    Quick ratio
    AR turnover
    Inventory turnover
     
    Answer the question:
    Is the company managing its liquidity position well, will it be able to sustain its operations in the short and medium term? (11 marks)
  • . Calculate and analyse the liquidity ratios over time (for the same company) and compare the ratios either to the industry average or to that of a close competitor (if possible), giving reasons for differences (if possible). Cover the following:
     
    Net working capital
    Current ratio
    Quick ratio
    AR turnover
    Inventory turnover
     
    Answer the question:
    Is the company managing its liquidity position well, will it be able to sustain its operations in the short and medium term? (11 marks)
  • Is the company managing its liquidity position well, will it be able to sustain its operations in the short and medium term?
  • CDL is operating in a very capital-intensive industry as it has low fixed assets turnover.
    CDL’s debt to equity ratio is less than 1, which shows that they are using less bank loans and thus incurring lesser interest expenses.
    Furthermore, CDL’s profit for 2007 & 2008 is able to cover the interest expenses by 7 & 8 times respectively.
  • Analysis of financal ratios

    1. 1. Developing… CHIA YEN • CHIEN WEN • CINDY • SI HUI
    2. 2. V s
    3. 3. CALCULATION OF RATIOS 1 million + 30 billions
    4. 4. ($2,945,229,000-3,106,106,000) = Decreased by 5.18% 3,106,106,000 Extract from: CDL’s Consolidated Income Statement Year ended 31 December 2008
    5. 5. Reasons: •Economic downturn. •Purchasing properties involve a large amount of money •and thus people push back their decisions to purchase any properties until the economy improve.
    6. 6. The decrease in sales is small / insignificant as compared to CapitaLand Limited. Possible reasons: •CDL has outstanding recognition for their management and services. •Investors and clients prefer working with CDL. City Development Limited CapitaLand Limited Decreased by 5.18% Decreased by 27.43%
    7. 7. Extract from: CDL’s Consolidated Income Statement Year ended 31 December 2008
    8. 8. Year 2007 Year 2008 Differences City Development Limited 52.41% 56.83% Increased by 4.42% point •CDL’s gross profit margin has increased by 4.42% point to 56.83% in 2008. •CDL had better control over the cost of sales as it decreased by 14% in 2008 •Allows the gross profit margin to increase in 2008. •Resulted from launches mid and mass market segments which were well received.
    9. 9. • CDL is doing better in terms of gross profit margin •Because the gross profit margin of CapitaLand limited only increased by 3.97% point while CDL’s gross profit margin increased by 4.42% point. •It could be that CapitaLand were still concentrating on high end properties, which are not so well received. Year 2007 Year 2008 Differences City Development Limited 52.41% 56.83% Increased by 4.42% point CapitaLand Limited 34.99% 38.96% Increased by 3.97% point
    10. 10. Year 2007 Year 2008 Differences City Development Limited 28.63% 23.15% Decreased by 5.48% point •CDL’s net profit margin fall by 5.48% point in 2008. •Although other operating income increase by 372.85% and administrative expenses decreased by 3.48%, it is not enough to cover the 33.14% increase in other operating expenses, 20.27% increase in net finance cost and 134.17% increase in income tax expenses. • There was not enough amount of money to cover the increases in expenses.
    11. 11. Year 2007 Year 2008 Differences City Development Limited 28.63% 23.15% Decreased by 5.48% point CapitaLand Limited 83.12% 53.10% Decreased by 30.02% •CDL is doing better as compared to CapitaLand Limited •CapitaLand Limited had a huge decrease in net profit margin of 30.02% point in 2008. •Expenses for CapitaLand increased by a lot during 2008 as compared to CDL •It's operating expenses increased by 1194% and finance cost increased by 27.95%
    12. 12. •Sales of CDL decreased but the gross profit margin has increased in 2008. •There will be more money available to pay any additional expenses or save the money for future use. •Net profit margin decreased because the expenses for the company increased for the year.
    13. 13. •Net profit margin of CapitaLand Limited (Industry), had decreased a lot more as compared to CDL. •Both CDL and CapitaLand Limited have the same trends in their sales and profit margin. The trends are very likely to continue for at least 1-2 years if the economy does not improve.
    14. 14. •However, with CDL’s strong cash position, it will probably not face any serious cash flows problems in the future. • Profits made by the company are adequate as shown by the increase in gross profit margin and sustainable because the net profit margin only decreased very little as compared to its competitor.
    15. 15. Year 2007 Year 2008 Differences City Development Limited 0.73 0.71 Decrease by 0.02 •CDL’s fixed assets turnover decreased by 0.02 to 0.71 in 2008. •Decrease in fixed assets turnover cannot be due to the company going into an expansion phase as the fixed assets of the company decreased during the year. •It might be because CDL is not making efficient use of their fixed assets to generate revenue as the sales dropped by 5.18% in 2008.
    16. 16. Year 2007 Year 2008 Differences City Development Limited 0.73 0.71 Decrease by 0.02 CapitaLand Limited 2.39 1.69 Decrease by 0.70 •CapitaLand Limited had a fixed asset turnover of 1.69 while CDL only had a fixed asset turnover of 0.71. •This difference came about because CapitaLand Limited is increasing its investments in fixed assets while CDL is decreasing its investments in fixed assets. • This could also indicate that CDL is a less asset-efficient company as compared to CapitaLand Limited.
    17. 17. •CDL choose to reduce its investments in fixed assets during the economic downturn. •This is a wise move because there will be lesser people who will buy properties during the economic downturn and thus resulting in lesser profit for the company. •By reducing the investments in fixed assets, the company will be able to cut down on its cost and sustain its profits.
    18. 18. Yes. Although the company had decreased its investment in fixed assets in 2008, it is not a very big decrease. The investment in fixed assets only decreased by 2.26%. This is not likely to affect future profitability and thus the company will be able to safeguard its future profitability with its current investments in fixed asset.
    19. 19. •CDL’s debt-equity ratio increased by 0.01 in 2008. •Since the change was insignificant we can presume that the company is using similar financing strategy for both years. Year 2007 Year 2008 Differences City Development Limited 0.77 0.78 Increased by 0.01
    20. 20. Year 2007 Year 2008 Differences City Development Limited 0.77 0.78 Increased by 0.01 CapitaLand Limited 1.18 1.09 Decreased by 0.09 •CDL’s debt-equity ratio is small as compared to CapitaLand Limited because CapitaLand Limited has a ratio of 1.09 while CDL only has a ratio of 0.78 in 2008. •They adopt different financing strategy. CDL rely more on equity financing while CapitaLand Limited rely more on debt financing.
    21. 21. Year 2007 Year 2008 Differences City Development Limited 7.22 7.59 Increased by 0.37 •CDL’s interest coverage ratio increased by 0.37 in 2008. •This is resulted from the decrease in interest expense for the year by 17.56%. •Although the earnings before interest and tax also decreased by 13.34%, the decrease was smaller as compared to the decrease in interest. • Therefore the interest coverage ratio was able to increase in 2008.
    22. 22. Year 2007 Year 2008 Differences City Development Limited 7.22 7.59 Increased by 0.37 CapitaLand Limited 8.68 4.67 Decreased by 4.01 • CapitaLand Limited only has an interest coverage ratio of 4.67 while CDL has 7.59. • CDL has a lower debt burden as compared to CapitaLand Limited because CDL can pay more times of interest with its earnings before interest and tax. •This difference between the two companies is because CapitaLand Limited interest expense for the year is higher than CDL by 265% and thus CapitaLand Limited has a higher debt burden.
    23. 23. • CDL choose to rely more on equity financing • It is a more prudent way of financing • They will face lower risks of insolvency • The company do not have to worry about paying interest expenses.
    24. 24. •However, CDL is able to move more towards debt financing because it is cheaper. • With its high interest coverage ratio, CDL has the ability to pay the interest expenses • It will not encounter any problem in paying interest expenses if it chooses to rely on debt financing.
    25. 25. Invest in CDL: Liquidity Does it generate enough cash?
    26. 26. Total CA – Total CL CDL CapitaLand S$ ‘000 S$ ‘000 2007 4,446,809, – 1,524,762 = 2,922,047 10,262,842 – 5,142,326 = 5,120,516 2008 4,825,533 – 1,689,936 = 3,135,597 9,544,580 – 4,692,772 = 4,851,808 - Both companies have positive NWC - Showing that both are able to pay off its short-term liabilities.
    27. 27. CA / CL Current Ratio 2007 2008 CDL 4,446,809 1,524,762 = 2.92 4,825,533 1,689,936 = 2.86 CapitaLand 10,262,842 5,142,326 = 2.00 9,544,580 4,692,772 = 2.03 • Both companies’ current ratio: more than 2  Healthy. • In 2007 and 2008, CDL’s current ratio of 2.92 and 2.86  considered high. • CDL should use the excess CA for investment.
    28. 28. 2007 2008 S$ ‘000 S$ ‘000 CDL (4,446,809 - 2,578,015 – 85,345) / 1,524,762 = 1.17 (4,825,533 – 2,920,056 – 87,836) / 1,689,936 = 1.08 CapitaLand (4,446,809 - 2,578,015 – 85,345) / 1,524,762 = 1.17 (9,544,580 – 3,347,168 – 351,304) / 4,692,772 = 1.25 (CA – Inv – Prepayment) / CL • In 07 and 08, both companies’ quick ratio are > 1. • Both are able to meet their current liabilities if they become due immediately.
    29. 29. 2007 2008 S$ ‘000 S$ ‘000 CDL 3,106,106 / [(169,082 + 145,388)/2] = 19.8 ACP = 365 / 19.8 = 19 days 2,945,229 / [(145,388 + 151,392)/2] = 19.8 ACP = 365 / 19.8 = 19 days CapitaLand 3,792,703 / [(222,409 + 618,370)/2] = 9.0 ACP = 365 / 9.0 = 41 days 2,752,321 / [(618,370 + 251,516)/2] = 6.3 ACP = 365 / 6.3 = 58 days • CDL: A/R Turnover is higher. Credit policies are effective.
    30. 30. 2007 2008 S$ ‘000 S$ ‘000 CDL 1,478,150 / [(2,578,015 + 2,281,858)/2] = 0.61 1,271,410 / [(2,920,056 + 2,578,015)/2] = 0.46 CapitaLand 2,465,657 / [(3,540,778 + 3,622,665)/2] = 0.69 1,680,164 / [(3,347,168 + 3,540,778)/2] = 0.49 • Both companies’ inventory turnover are low. • Nature of business.
    31. 31. • Based on the ratios above, CDL appears to be cash rich. • Able to sustain operations in the short and medium term. Is the company managing its liquidity position well, will it be able to sustain its operations in the short and medium term?
    32. 32. Invest in CDL: Market Price At t ract ive?
    33. 33. Stock Market Ratio Ratios that determine the attractiveness of the current pricing of stocks
    34. 34. Earningsper share The significant decrease in Earnings Per Share as compared to 2007 is due to economic downturn which resulted in low demand for Residential Property and Commercial Estates in 2008. The decrease in EPS for both companies shows an decrease in earnings and profits as compared to the previous year 2007. CapitaLand, being financially stronger and bigger than CDL, however has been seriously affected. Therefore granted them weaker returns than CDL.
    35. 35. Profit EarningsRatio
    36. 36. Profit EarningsRatio • The huge decrease in market price of shares in 2008 as compared to 2007 caused the P/E ratio to drop in 2008 to 10.05 times from 17.62 times for CDL. • The drop in P/E ratio could signify that investors are getting more cautious of the market situations as the economic crisis starts to unravels itself.
    37. 37. Dividend Yield
    38. 38. Dividend Yield • The dividend yield in 2008 as compared to 2007 has increased in general for the two companies. • However, with dividend returns of 0.54% for 2007 and 1.19% for 2008 for CDL, relying totally on dividends as the main source of investment return will not be sufficient. • The dividend yield may not be a good indication of dividends paid as, it is very much determined by the share-price of the shares which is very much fluctuating. As seen, CDL has been paying a 7.5cent dividend for 2007 and 2008 but, the dividend yield has increased in 2008 due to the significant drop in share prices.
    39. 39. Net assetsbacking per share Net assets backing per share = Ordinary Shareholders’ Equity No. of ordinary shares
    40. 40. • There is no movement in share capital during 2008. Changes of net assets was due to increase in reserves. • Net assets backing per share, which is the accounting value per ordinary share of CDL of $7.72. However, upon winding up, the investors may not receive $7.72 per share invested as value of most assets is recorded in the book on historical cost basis rather than fair value. • The current market price of an ordinary CDL share of $6.28 is quite attractive as market price is lower than accounting value by $1.44. Net assetsbacking per share
    41. 41. Price-book ratio Price Book Ratio = Market Value of Shares Book Value of Shares
    42. 42. • CDL is worth less than its cost as price- book ratio is less than 1. • Investors are unlikely to pay much due to the economic downturn. • Compared to CDL, price-book ratio of CapitaLand is more attractive as an investor pay less for each dollar of accounting value of CapitaLand. Price-book ratio
    43. 43. Invest in CDL: Conclusion I nvest or not invest ??
    44. 44. Evaluateand Conclusion Criteria Support Qualitative Qualified & experienced management Net profit margin 23.15% Capital-intensive 0.71 Financial leverage CDL is adopting intensive equity financing. Although this is more expensive in the long-run, the risk of technical insolvency is lower. As compared to debt financing in current market conditions, debt financing will be riskier.
    45. 45. References& Sources City Developments Ltd. (2008). Annual Report 2007. Singapore: Investor profile. Retrieved December 31, 2008, from Wikipedia, The Free Encyclopedia Web site: http://en.wikipedia.org/investor_profile Teo, Joyce (2008, December 07). Government offers fewer land sales sites. Retrieved December 31, 2008, from AsiaOne Web site: http://business.asiaone.com/Business/My %2BMoney/Property/Story/A1Story20081205-105842.html Goh, David (2009, January 3). Property prices down but not property taxes. Retrieved January 3, 2008, from AsiaOne Web site: http://business.asiaone.com/Business/My %2BMoney/Property/Story/A1Story20090102-111928.html Reuters (2009, January 2). S'pore Q4 private home prices fall 5.7%. Retrieved January 3, 2008, from AsiaOne Web site: http://business.asiaone.com/Business/My %2BMoney/Property/Story/A1Story20090102-111906.html Marina Bay Sands. Retrieved December 31, 2008, from Wikipedia, The Free Encyclopedia Web site: http://en.wikipedia.org/wiki/Marina_Bay_Sands Far East OrganiSation. Retrieved December 31, 2008, from Wikicompany Web site: http://wikicompany.org/wiki/Far_East_Organization
    46. 46. End of Presentation

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