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Forge Group Limited - Ratio Analysis Assignment

Quantitative Analysis:

Question: For the years ending June 30, 2014, and June 30, 2011, compute:
• the return on equity (ROE)
• return on assets (ROA)
• profit margin ratio
• asset turnover ratio
• current ratio
• cash flow ratio
• debt-to-equity ratio
• interest coverage ratio
• debt coverage ratio
• NTAB
• EPS
• DPS
• PER
Discuss the results of your ratio analysis and what the analysis tells you about FGL.

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Solution:

Forge group limited was a construction company. Ratio analysis is the important method to analyze the financial statements of the company. While looking at the credentials we found following observations:

Return on equity:
It is performance measurement ratio of the company that how much return or yield earned by equity shareholders. The company has very good ROE in the year 2011 but in the final year 2014 as company was suffering from losses it has negative ROE.

Return on Assets:
It indicates how much company has earned after utilizing all its assets. (Williams 2017) Company was earning 17% of assets value from utilization of all its assets in Year 2011whereas in 2014 company has incurred losses that were of value more than its assets. Because of its poor expansion decision and wrong asset utilization decision, company had to suffer this.

Profit margin ratio:
It shows the net profit margin of the company on sales amount. In year 2011 company was earning 8.75 % on sales as net profit after meeting all its operating and financial expenses. In year 2014, company was earning losses about 62% of its sales amount. Even, Company had to pay taxes which increase its loss. Loss arisen and lower profit margin was a result of half sales amount from previous year and due to more increment in cost of sales.

Asset turnover ratio:
Company has quite good ratio in the year 2011 but in 2014 it just remain half of that was in 2011. There was more reduction in sales revenue than the reduction in net assets utilization. Higher the ratio the better it is, and this is not happening in the case of Forge Group Limited.

Current Ratio:
Shows the short term financial position of the company, in the Year 2011 company had sufficient liquidity for short term purpose that company have almost 2 times current asset than current liabilities but in the year 2014, company just has 40% current assets of its current liabilities. Short term financial health of the company was very poor in Year 2014 as company had to lose its cash and banks along with its inventory and debtors value just to pay off its all current obligations. But still not able to recover and found at the end its current liabilities were double and assets were half compared to previous year.

Cash flow ratio:
It shows the operating cash flows of the company against the value of current liabilities. (Fridson 2011)Company has in the year 2011 about 50% of operating cash flow compared to its current liabilities. In the Year 2014 it is highly poor more than ever before. As the flow fund not able to cover its current liabilities.

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Debt equity ratio:
In starting years, company has low leverage and low risk as in year 2011 company had 70% of equity funds from debt sources. But in the year2014, company had negative equity value because huge losses in the year and debt are still standing for the payment recovery. Company has negative value of 3.26 times in debt equity ratio in year2014.

Interest coverage ratio:
Company was earning huge profits in the initial years. That almost 77 times company can recover its interest obligations because of it lower debt and higher profit in the year 2011. After that in the year 2014 company has already made huge loss without incurring interest obligations. (Palepu 2013)

Debt coverage ratio:
Company was able to recover its fixed installments and finance obligations about 16 times from its operating profits in the year 2011. The higher the ratio the better it considers.

Net tangible assets backing ratio:
In the year 2011, company has $ 2.42 per share value as company has not amortized fully its intangible assets. Also company was having handsome goodwill amount but in the year2014, company having almost $3.50 per share as NTAB because its entire asset are tangible and no goodwill value belongs to the company because of its loss making nature.

EPS:
Earnings per share is the amount that company's shareholder had earned in a year. In 2011, company's EPS was $ 0.45 per share while in the year 2014, it was negative $3.45 per share that means almost 10 times decrease and obligations arise on shareholder to bear the losses. (Penman 2007)

DPS:
Dividend per share was $ 0.09 per share, as company was making earning so it had distributed some funds but in the year 2014, as company already making losses so no chance of distributing funds to shareholder.

PER:
Price earnings ratio reflects the value of the value of share according to EPS. In Year 2011, company having 12 times of its earning as its market price. But in year 2014, company having negative EPS.

Looking at the ratios, there was drastic changes in the company performance in these two years and financial performance has declined in FY 2014.

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FY 2014

Measure Formula
2014
Final Answer
Profitability  
ROE net income / avg shareholder's equity  (negative326463)  /  48579              (6.72)


times
   
ROA                   (1.09)
net income / total assets (negative 326763) / 299556 times
   
Profit Margin Ratio                 (62.83)
net income / net sales (negative 326763) / 520041 %
   
Efficiency  
Asset                   1.36
Turnover sales revenue / net average assets 520041 / 381883 times
     
Liquidity  
Current Ratio                   0.37
current assets / current liability 135796 / 363640 times
   
Cash Flow Ratio      
net opertaing cash flow / current liabilities   times
Gearing  
Debt to Equity Ratio                  (3.58)
debt / equity 415824 / negative 116268 times
   
Interest Coverage  EBIT / interest (negative324162) / 0 #DIV/0! times
   
Debt Coverage      
net operating income / debt service obligations   times
NTAB                   3.48
ne tangible assets ratio= (total assets-intangible assets-preference share) / total shares (negative 299556000-0-0)* / 86169041 $ per share
   
Market  
EPS                  (3.79)
(net income - preference share dividend) / no of equity shares negative 326463000 / 86169041 $ per share
   
DPS     -
dividend paid / no. of equity shares    $ per share
PER     -
share price / earning per share
times
   

FY 2011

Measure Formula
2011
Final Answer
Profitability  
ROE                   0.34
net income / avg shareholder's equity  36887 / 108919 times
   
ROA  net income / total assets 36887 / 213280               0.17


times
   
Profit Margin Ratio                    8.75
net income / net sales 36887 / 421595 %
   
Efficiency  
Asset                   2.25
Turnover sales revenue / net average assets 421595 / 187684 times
     
Liquidity  
Current Ratio                   1.91
current assets / current liability 159023 / 83259 times
   
Cash Flow Ratio net opertaing cash flow / current liabilities 38183 / 83259               0.46 times
   
Gearing  
Debt to Equity Ratio                   0.71
debt / equity 88818 / 124462 times
     
Interest Coverage                 77.21 times
EBIT / interest 54898 / 711
Debt Coverage net operating income / debt service obligations 54898 / 3464            15.85
    times
NTAB ne tangible assets ratio= (total assets-intangible assets-preference share) / total shares (213280-15637)*1000 / 81541569               2.42 $ per share



     
Market  
EPS                   0.45
(net income - preference share dividend) / no of equity shares (36887000-0) / 81541569 $ per share
                  0.09
DPS dividend paid / no. of equity shares  7257000 / 81541569 $ per share
     
PER                12.13
share price / earning per share 5.46 / 0.45 Times
     

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