Abstract: This report is an attempt to find out the financial position of Sonargao Plumbing on the basis of the Financial Statements. We have attempted to find out whether the firm is in a good position or not. After studying the report one will be able find the Answer of the Following questions:
- problems of Sonargao Plumbing
- Strength & Weakness of Sonargao Plumbing
- Growth prospect of Sonargao Plumbing
Introduction: Sonargaon plumbing is a small manufacturer of plumbing supplies located in Sonargoan Narayanganj
In order to answer the Following:
- What is the number of shares outstanding? How much Sonargaon Pay in cash Dividends in 2010?
- Do any of the ratios Of Soanrgaon Plumbing indicate possible problem areas?
- Do the Changes form 2009 from 2010 offer that the firm is growing stronger or weak?
We will calculate the following ratios:
a) Liquidity Ratios: It indicates the extent to which Current Liabilities (CL) covered by assets to be converted to into cash in the near future.
CA
Current Ratio:
CL
CA- Inv.
Quick Ratio:
CL
b) Asset management Ratios: It indicates how well the company is managing its assets.
A/C Receivable
1. 
Days Sales Outstanding:
Days Sales Outstanding: Sales /360
Cost of Goods Sold
2. Inventory turnover:
Inventory turnover: Inv.
Sales
3. 
Total Asset Turnover:
Total Asset Turnover:TA
c) Profitability Ratios: It shows the combined effects of Liquidity, Asset Management and Debt Management on operating results.
Gross Profit
1. 
Gross Profit Margin :
Gross Profit Margin : Sales
EAT
2. Net profit Margin:
Net profit Margin: Sales
EAT
3. 
Return On Asset:
Return On Asset:TA
EAT
4. 
Return On Equity:
Return On Equity:TE
d) Debt management Ratios:
EBIT
Times Interest Earned(TIE):
I
e) Market value Ratios:
Market Price per Share
1) 
Price Earning Ratios(PE):
Price Earning Ratios(PE): EPS
The Income Statement and Balance sheet for Sonargao Plumbing are given below:
| SonargaoPlumbing | |||||||
| Comparative Income Statement | |||||||
| | 2010 | 2009 | | | | | |
| Sales | 75,000 | 70,500 | | | | | |
| Cost Of Goods Sold | (44,000) | (42,500) | | | | | |
| Gross Profit From Sales | 31,000 | 28,000 | | | | | |
| General And Administrative Expenses | (15,500) | (11,000) | | | | | |
| operating Income(EBIT) | 15,500 | 17,000 | | | | | |
| Interest Expenses(I) | (840) | (10,50) | | | | | |
| Pre Tax Income(EBT) | 14,660 | 15,950 | | | | | |
| Taxes | (4,100) | (44,60) | | | | | |
| Net Income(EAT) | 10,560 | 11,490 | | | | | |
| Dividends Declared And Paid | 5,737 | 4,500 | | | | | |
| Sonargao Plumbing | |||||
| Comparative Balance Sheet | |||||
| | 2010 | 2009 | |||
| Cash | 2,280 | | 2,157 | | |
| Marketable Securities | 1,400 | | 1500 | | |
| A/C Receivables | 4,500 | | 2500 | | |
| Inventories | 11,000 | | 6,000 | | |
| Total Current Assets | | 19,180 | | 12157 | |
| Plant and Equipment | 22,000 | | 18,000 | | |
| (Less: accumulated Depreciation) | | | | | |
| Land | 9,000 | | 9,000 | | |
| Total Fixed Assets | | 31,000 | | 27,000 | |
| Total Assets | | 50,180 | | 39,157 | |
| A/c payable | 4,500 | | 1,100 | | |
| Notes Payable | 7,200 | | 3,000 | | |
| Accrued Liabilities | 1,300 | | 1,000 | | |
| Total Current Liabilities | | 13000 | | 5,100 | |
| Bank loan | 4,200 | | 4,200 | | |
| Mortgaged Loan | 4,200 | | 5,900 | | |
| Total Long Term Liabilities | | 8,400 | | 10,100 | |
| Total Liabilities | | 21,400 | | 15,200 | |
| Common Stock (Tk.1Per) | 10,000 | | 10,000 | | |
| Paid In Excess Par | 3,000 | | 3,000 | | |
| Retained Earnings | 15,780 | | 10,957 | | |
| Total Equity | | 28,780 | | 23,957 | |
| Total Liabilities And Equity | | 50,180 | | 39,157 | |
Answer of Question1:
The No. of Share Outstanding = Book Value per Share × Common stock
= 1 × 10,000
= Tk. 10,000
| Sonargao Plumbing Statement Of Retaining | |||||||
| 2010 | |||||||
| Beginning R/E | | 10,957 | | | | | |
| EAT | 10,560 | | | | | | |
| Less: Dividend to P/S | | | | | | | |
| Less: Dividend to C/S | | | | | | | |
| Addition to R/E | |  | | | | | |
| Ending R/E | | 15,780 | | | | | |
Hence,
Dividend Paid In 2010 to the C/S = Beginning retaining + EAT (2010) – Retaining Earning (2010)
=10,957 + 10,560-15,780
= Tk. 5,737
In order to answer the Questions 2 & 3 we have calculated the following ratios of Sonargao Plumbing.
| Sonargao Plumbing Ratio Calculation | |||||||||
| Ratios | Formula | Calculation(2010) | Calculation(2009) | 2010 | 2009 | Industry Average | |||
| Liquidity Ratio: | |||||||||
| Current Ratio | CA  CL | 19180  13000 | 12157
5100 | 1.4 Times | 2.38 Times | 1.4 Times | |||
| Acid test (Quick) Ratio | CA- Inv. CL | 19180-11000  13000 |  12157-6000 5100 | 0.629 Times | 1.207 Times | 0.9 Times | |||
| Asset Management ratio: | |||||||||
| Days Sales Outstanding | A/C receivable  Sales/360 | 4500 75000/360 | 2500  70500/360 | 21.6 Days | 12.765 Days | 45 Days | |||
| Inventory turnover | Cost of goods Sold  Inv. | 44000  11000 | 42500 6000 | 4 Times | 7.083Times | 5 Times | |||
| Total Asset Turnover | Sales TA | 75000 50180  | 70500 39157 | 1.494 Times | 1.800 Times | 1.3 Times | |||
| Profitability Ratio: | |||||||||
| Gross Profit Margin |  Gross Profit Sales | 31000  75000 |  2800070500 | 41.33% | 39.71% | 30% | |||
| Net profit Margin(NPM) | EAT Sales | 10560  75000 |  11490 70500 | 14.08% | 16.297% | 16% | |||
| Return On Asset(ROA) | EAT  TA | 10560 50180 | 11490  39157 | 21.044% | 29.34% | 25% | |||
| | | | | | | | |||
| Return on Equity(ROE) | EAT TE | 10560 28780  | 11490 23957  | 36.69% | 47.96% | 10% | |||
| Debt Management Ratio | |||||||||
| Times Interest Earned(TIE) | EBIT  I | 15500 840  |  17000 1050 | 18.45 Times | 16.19Times | 12 Times | |||
| Market Value Ratio | |||||||||
| Earnings per Share | EAT – Div.to Preferred Stock  No. of Share Outstanding | 10560-0  10000 | 11490-0 10000 | 1.056 | 1.149 | | |||
| Price Earning Ratio(PE) | Market Price per Share EPS | 22 1.056 | 18 1.149 | 20.83 | 15.665 | 14 | |||
Problems in Sonargao Plumbing Ratios:
Liquidity Position:
1. Weakness in liquidity: The Current ratio for Sonargao Plumbing in 2010 is 1.4 times and in 2009 are 2.38 times. Here the industry average is 1.4 times. Although the liquidity position of Sonargoa Plumbing in 2010 is the same as was in Industry average but with compared to its liquidity position in 2009 is somewhat weak. The weakness in the liquidity can be explained by quick ratio. The quick ratio in 2010 is below the Industry Average and that of in 2009.
2. Holding More Inventories: The reduction of the quick ratio of Sonargao Plumbing in 2010 below Industry average and that of 2009 indicates that it is holding more inventories. If the company can collect the Receivables, it can pay off the Short term liabilities even without liquidating the Inventories.
Therefore our evaluation of the liquidity position of Sonargao Plumbing is fairly poor.
To get why it is in the situation we shall consider the values of Asset Management ratios.
Asset Management:
3. Weakness In Collecting Receivables: The average collection periods of the Receivables for Sonargao plumbing in 2010 is below the Industry Average and more than that of in 2009. With compared to 2009 it is not well enough to collect its Receivables.
4. Low Inventory Turnover: The Inventory turnover in 2010 is below Both Industry Average and that of 2009 which again indicates that Sonargao Plumbing is holding excessive inventories.
5. Low Asset Turnover: The Total Asset Turnover is slightly above the Industry average but it is below the value of 2009 which indicates that its sales have decreased significantly in 2010 with compared the sells performances of 2009.
Therefore after considering the Asset management ratios we have obviously found that Sonargoan Plumbing has a Liquidity Problem and its sales are low.
Profitability of Soanargao Plumbing:
6. Gross Profit: The gross profit margin of Sonargao Plumbing for 2010 is above the Industry Average and that of 2009.
7. Low Net Profit Margin: Although Sonargao Plumbing has good gross profit but its net profit margin (NPM) is below the Industry average and that of 2009 which indicates that its sales are too low and its costs are very high.
8. Low ROA: The ROA for Sonargao Plumbing for 2010 is below Industry Average and that of 2009 which indicates that this low ROA is due to the company’s above average use of debt.
9. High ROE: But the ROE indicates that Sonargao Plumbing has ROE above Industry average and that of 2009. Therefore it has used debt normally not excessively.
Its Debt management is well enough. It will be confirmed after examining the debt Management Ratio.
Debt Management of Sonargao Plumbing:
10. The Times Interest Earned (TIE) of Sonargao Plumbing is above the Industry average and that of its 2009 values. Hence the company is not going to be bankrupt rather it is managing its debt well enough. Its low ROA is due to its low sales and high cost.
Stock Market Performances of Sonargao Plumbing:
11. Price Earning Ratio of Sonargao Plumbing for 2010 is above the Industry Average and that of the values of 2009. Hence It has high Growth prospect.
Strength of Sonargao Plumbing:
- Sonargao Plumbing is well enough to manage its Debt.
- Sonargao Plumbing is doing well in collecting the Receivables with compared to the Industry Average.
- Sonargao Plumbing has a high Growth Prospect in the stock market. It is not a risky firm.
Weakness of Sonargao Plumbing:
- Sonargao Plumbing has weak Liquidity.
- It has excessive inventories.
- It has low sales volume.
- It has high cost.
Recommendation: Though Sonargao Plumbing has some problematic areas, it can overcome the problems thus:
- By increasing the sales volume giving more emphasize on marketing and sales department performances.
- By minimizing the cost to earn the maximum profit.
- Keeping the inventory to optimal amount.
Conclusion: In a nutshell we recommend Sonargao Plumbing to be more efficient in managing the asset, maintaining sufficient liquidity, maintaining healthy sales volume and minimizing the cost.
কোন মন্তব্য নেই:
একটি মন্তব্য পোস্ট করুন