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Financial Analysis
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Chapter 6 FINANCIAL ANALYSIS
This chapter is based on the financial analysis of the company. First the
accounting polices of the company is given, and then the financial analysis of
the company is explained by using different financial ratios.
6.1 Significant Accounting Policies
The company follows the following accounting policies.
6.1.1 Accounting Convention
These accounts have been prepared under the historical cost convention in
accordance with the schedule v of the companies ordinance, 1984.
6.1.2 Fixed Operating Assets
These are stated at cost less accumulated depreciation, except land leasehold
which is stated at cost. Depreciation has been charged by applying reducing
balance method at the normal rates. Full depreciation will be provided on
additions, irrespective of the date of additions.
6.1.3 Stock and Stores
These are valued as under:
a. Raw material: At annual average cost.
b. Finished goods: At lower of cost or net realizablevalue.
c. Stores and spares: At moving average cost.
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6.1.4 Turn Over Tax
In the light of the decision of supreme court dated 04-06-1997, the units
enjoying the tax holiday period under clause 118-C are exempted from the
payment of turn over lax u/s 80-D, hence the provision for turn over tax has
not bee made in these accounts.
6.1.5 Figures
Have been rounded off to the nearest rupee.
Of the previous year have been re-arranged and regrouped.
6.2 Ratios Analysis
The financial analysis Silverstone (Pvt) limited is based upon the companys
annual audited report. There are different financial analysis procedures thatcan be adopted to measure the financial strength of a company. A couple of
these procedures are financial ratios calculated from the annual balance sheet
and statement or cost of goods sold statement, to measure and locate the exact
causes of variation in income in two successive years.
The financial ratios upon which the for-going analysis is going to be based can
be categorized in three broad categories.
a. Profitability Ratios
b. Asset Utilization Ratios
c. Liquidity Ratios
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BALANCE SHEET (Rs.)
Share Capital 2001 20001. Authorized 4000000 ordinary
Shares of RS: 100 / each 40,000,000 40,000,000
2. Issued subscribed and paid up 3,116,000 31,160,000
3. Unappropriated profit 16,196,038 12,337,078
4. Log term loans 457,667 690,667
5. Log term deposits 1,290,000 4,031,911
6. Lease many payable 60,000 900,000
CURRENT LIABILITY
1. Current portion of long term
loans 2,323,000 6,332,668
2. Current portion of lease money
payable 30,000 30,000
3. Short term borrowings 18,606,962 429,556
4. Accruals and other liabilities 7,675,895 5,591,812
PROPERTY AND ASSETS
1. Fixed operating Assets 48,499,991 42,749,333
2. Intangible Assets 4,500 4,500
3. Long term deposits 1,153,425 666,645
CURRENT ASSETS
1. Store and spares 19,509 98,148
2. Stock in trade 1,129,296 13,419,871
3. Trade debtors 13,624,107 6,672,698
4. Advances deposits, prepayments
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and other accruals 63,337,773 5,887,1333
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INCOME STATEMENT (Rs.)
2001 2000
Sale 103,967,467 8,748,227
COGS (87,666,934) (72,895,970)
Gross profit 16,900 14,584,317
OPERATING EXPENSES
Administrative (8,704,462) (8,035,515)
Selling & distribution (1,473,124) (1,442,475)
Financial (2,998,884) (2,526,870)
OPERATING PROFIT 37224064 2579,457
Other income 1975,38 280,954
Profit before taxation 3,921,642 2608411
Taxation 62,882 379,628
Profit After Taxation 3,858,960 2,928,039
Unappropriated brought
toward profit 12,337,078 9,409,039
Unappropriated carried
forward 16,196,038 12,337,078
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0
3.34%
3.71%
0
0.005
0.01
0.015
0.02
0.025
0.03
0.035
0.04
1 22000 2001
PROFIT MARGIN
Series2
Series1
Financial Analysis
Silverstone
6.2.1 Profitability Ratios
1. Profit Margin =SalesIncomeNet
2000 = %34.3227,480,87
039,928,2=
2001 = %71.3467,967,103
960,858,3=
Source: Silverstone Annual Report, 2001.
As obvious the profit margin has increased from 3.34% to 3.71. This is
due to the increased income in 2001.
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2. Return on Asset =AssetsTotal
IncomeNet
2000 = %67.10219,428,27
039,328,2=
2001 = %939.11651,341,32
960,858,3=
Source: Silverstone Annual Report, 2001.
RETURN ON ASSETS
10.67%
11.94%
10.00%
10.50%
11.00%
11.50%
12.00%
12.50%
2000 2001
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3. Return on equity =Equaity
IncomeNet
2000 = %0673.0078,497,43
8039,292=
2001 = %081.0038,356,42
960,3858=
RETURN ON EQUITY
0
0.081%
0.0673%
0
0.01
0.02
0.030.04
0.05
0.06
0.07
0.08
0.09
2000 2001
Source: Silverstone Annual Report, 2001.
Return on Equity has increased from 0.067% to 0.08%. this is due to the
more income in 2001 as compared to 2000.
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6.2.2 Asset Utilization Ratios
1. Receivable Turnover =ceivablesCreditSale
Re)(
2000 = Times1.13692,6672
227,480,87=
2001 = Times63.7102,624,13
462,967,103=
0
13.10
7.63
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
1 2 3
2000 2001
RECEIVABLES TURNOVER
Source: Silverstone Annual Report, 2001.
The Receivable Turnover ratio has been decreased during the financial
year 2001 as compared to that of financial year 2000. The net change
observed is 5 times, which shows that the conversion of receivables into
cash has been decreased for the year.
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Average Collection Period =SaleCreditdailyAverage
RA /
2000 = Days27239672
2692,667=
2001 = Days47284892
107,624,13=
27
47
0
10
20
30
40
50
1 2
2000 2001
AVERAGE COLLECTION PERIOD
Source: Silverstone Annual Report, 2001.
The average collection period has been prolonged by 20 days in the
financial year 2001 as compared to that in 2000. This is due to the
decreased in receivables turnover.
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3. Inventory turnover =Inventory
Sale
2000 = Times51.6871,419,13
227,480,87=
2001 = Times63.7107,624,13
467,967,103=
INVENTORY TURNOVER
6.51
7.63
5.8
6
6.2
6.4
6.6
6.8
7
7.2
7.47.6
7.8
2000 2001
Source: Silverstone Annual Report, 2001.
The inventory turnover ratio has been increased during the year 2001.
Net change is 1 times, which shows the greater efficiency of the
organization.
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4. Fixed Asset Turnover =AssetFixed
Sale
2000 = Times046.2333,749,42
227,87480=
2001 = Times14.2991,499,48
103967467=
FIXED ASSET TURNOVER
0
2.142.05
0
0.005
0.01
0.015
0.02
0.025
2000 2001
Series2
Series1
Source: Silverstone Annual Report, 2001.
The fixed assets turnover has been increased slightly during the year
2001 as compared to that in 2000, which is a good sign for the
organization.
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5. Total Asset Turnover =AssetTotal
Sale
2000 = Times23.1692,848,20
227,480,87=
2001 = Times26.1567,999,81
467,967,103=
TOTAL ASSETS TURNOVER
1.23 1.26
0
0.002
0.004
0.006
0.008
0.01
0.012
0.014
2000 2001
Source: Silverstone Annual Report, 2001.
The total assets turnover of the organization has also been slightly
increased during the financial year 2001 as compared to that in financial
year 2000. The total assets turnover ratio for the period is 1.26 times,
which was 1.23 times in 2000, which shows the better performance for
the year.
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6.2.3 Liquidity Ratios
1. Current ratios =sLiabilitieCurrent
AssetsCurrent
2000 = Times68.1041,249,16
219,428,27=
2001 = Times12.1862,635,28
651,341,321=
2. Quick Ratio =LialitiesCurrent
InventoryAssetCurrent
2000 = Times86.00041,249,16
871,13419,219,29428=
2001 =
Times65.0862,28635
102,624,13,651,32341=
QUICK RATIO
0
0.65
0.86
0
0.002
0.004
0.006
0.008
0.01
2000 2001
Series1
Series2
Source: Silverstone Annual Report, 2001.
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The quick ratio of the organization has been decreased for the year
2001. The net change is 0.21 times, which shows that the most liquid
assets of the organization has been decreased for the year.
6.3 Explanations to the Ratios Determined
In the coming paras explanation has been given to the all above determined
ratios.
6.3.1 Asset Utilization Ratio
Analyzing the Income Statement and Balance Sheet of the company for the
year 2000 and 2001. We see a drop on the receivable turnover ratio from 13.1
to 7.63. The sale and receivables to increased but not in that proportion as in
2000. This is due to the increases rate on credit , which has caused the
receivables to increase.
The same thing is pronounced by the average collection periods, which is 27
days in 2000 but has increased to 47 days in 2001, which means that the
company should improve its receivables channels.
The inventory turnover, has increased from 0.51 763 the figures shows that the
sale has been increased but at the same time the inventory has increased and is
not maintained in that efficient manner as were in the year 2000.
Fixed asset turnover has increased from 2.01 to 214, which shows in forced
asset evolution. This is because of the fact total asset turnover has also
increased from 1.23 to 1.26 again the fact in the increase in the sale in 2001.
6.3.2 Profitability Ratio
Profit margin shows increase from 3.34% to 3.71. The figure shows a high
increase in the sale, but at the same tine the company has increases its profit
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margin this is because that sale has increases and increased sale means high
production and high promotion means, low manufacturing cost, and low
manufacturing cost means high net income and high net income means high
profit margin. The same thing is pronounced by the ratios of return on asset,
and return on equity. In both the cases at has increased in 2001 as compared to
2000, which is as stated above is because of the improvement net income.
6.3.3 Liquidity Ratios
As the Calculations shows that current and quick ratio has been decreased.
The current ratio is decreased from 1.68 to 1.12 and which ratio has been
decreased from 0.86 to 0.65. This is because that current liabilities has
increased and the reason for increase in current liabilities is due to the use of
increased raw materials on credit, which was required for the high production
as needed for increased sale in the year 2001.