Financial Statement Analysis

This document provides an analysis of financial statements, focusing on Codan Limited. It covers various aspects such as profitability, efficiency, liquidity, and capital structure. The analysis includes ratios like return on capital employed, return on equity, gross profit margin, net profit margin, asset turnover, inventory turnover, trade receivables turnover, current ratio, and quick ratio.

FINANCIAL STATEMENT
ANALYSIS

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
INTRODUCTION...........................................................................................................................1
REPORT..........................................................................................................................................1
Codan Limited.............................................................................................................................1
Profitability..................................................................................................................................2
Efficiency.....................................................................................................................................4
Liquidity......................................................................................................................................6
Capital Structure..........................................................................................................................6
Market performance.....................................................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8
APPENDICES.................................................................................................................................9
Ratio Analysis..............................................................................................................................9

INTRODUCTION
Financial statement provides the detailed information about the health and position of the
company. The financial analysis is conducted to assess the performance of the company. This
shows the investors and the company the efficiency of the company in managing its financial
resources. Company is concerned with increasing its productivity and efficiency where the
investors are concerned with the returns over their investment and wealth maximisation.
Codan limited is the manufacturer & supplier of the metal detection, communications and
mining technology. It is headquartered in the Adelaide, South Australia. The report will provide
the analysis of financial statement of the company. It will cover the different financial aspects
that could impact the company. Financial statement provides the details about the assets,
liabilities and equity position along with the performance of company.
REPORT
Codan Limited
Codan Limited is deals in both manufacturing and supplying of the communications and
metal detection. Company is performing well from the last few years. It has performed
excellently well in the year 2019. Company has made the record sale of 271 million with
statutory net profit of 45.7 million. It has also paid the annual dividend of 9 cents. The financial
figures show that the company is effectively performing during the years. The financial position
of the company is also strong as it is having the net cash available of 37.5 million. Company has
adopted various investments plans for increasing the sales and business expansion
Financial Analysis
Financial analysis is done by the company using the various tools and techniques.
Companies conduct the financial analysis using tools such as ratio analysis. Financial statement
comprises of income statements, balance sheet and cash flows.
Income statement is used by the analysts for assessing the performance of the business. It
represents the incomes and expenses the profits generated in carrying out the business. It do not
represents the performance and not the financial position of the company. Balance contains the
assets, liabilities and capital structure of company that shows position of company. This requires
the company to assess the various obligations of the enterprise (Otekunrin and et.al., 2018).
Liquidity position of the company is assessed by the cash flow statements for the business.
Analysts assess the inflow and outflow of the cash of the business.
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Financial analysis of Codan Limited.
The financial statement of the company shows the financial analysis of 2019 and 2018.
Profitability
Profitability of the company is assessed using various profitability of the ratios. It requires
the company to have adequate profitability and sustainability of the business.
Return on Capital Employed
It shows the return of company over the capital employed. Codan is having ROCE of
28.71% that shows increase from the last year of 27.33%. There has been upward movement in
the returns of the company from last year. ROCE shows the efficiency of company in managing
its available resources for the generation of the positive returns. It should effectively use the
resources of company by applying effective strategies for increasing the productivity of the
existing resources. The above return of the company is adequate and however it could be further
increased by taking more effective steps for the utilisation of the resources.
High returns helps the company in getting approval of the project for its expansion plan.
Experts and analysts measures the efficiency of company in managing the resources to generate
adequate returns. It is influenced by the market forces affecting the functioning of company.
Company should write off assets from the balance sheet that are not productive (Khalilov and
Garcia Osma, 2019). Returns will be increased by reducing the unproductive assets. Return over
the capital employed is required to be high for representing the efficient management of the
existing resources of company.
Return on Equity
This is the ratio that shows the management and the users of financial statements the
return over the equity investments of company. This return is required for generating the
adequate returns over the equity. Return on equity of company is 29.97% in 2019 that was
28.28%. Net income of the shareholders has increased from last year. Share capital shows that
company has issued new class of equity shares of the company (Patil and Mohanthy, 2017).
Company is gibing adequate return to its investors over their investments in equity capital of the
company. A firm with high returns on equity gets higher confidence of the people.
Return shows that the company is performing well and is generating adequate returns
over the business. The rate from last two years shows that the company is managed consistency
in its operations and the strategies adopted by the company in its operations are adequate.
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Company is required to ensure that enough returns are generated over the equity investments.
Company should be aware that every investor invests its money with the motive of earning
returns and adding value to their funds. A company giving high return attracts number of new
options for raising funds from company (oncharov, Mahlich and Yurtoglu, 2018). It also attracts
the new investors who agree on making investments in the company. This will increase the
proposed option for expansion plan. ROE of the company represents the ability of company to
add value to the investments of company by carrying out proposes business fro which the funds
have been raised from the public. Return is increased by increasing the profits of company by
increasing the revenues.
Gross profit margin
Gross profit for the company shows that business is having enough returns after carrying
out the production activities and other operations related with the sales. Higher the gross profits
is more efficient the company is managing its activities effectively. For increasing the returns it
shows that company is having adequate returns over the sales. Gross profit of company is
56.62% in 2019 and 57.28% in 2018. There has been adequate gross profit of the company
showing that the company is efficiently managing its business activities. Gross profits shows the
returns with respect to business operations and trading activities. Gross profit is also the amount
left with the company for carrying out its further operation of the business. Gross margin of the
company between 50%-60% shows that the company is carrying out its production activities
very effectively in the cost efficient manner.
The strategies implemented by the business are adequate and it is required to keep the
strategies of the business to work with same efficiency and effectiveness. This could be achieved
by implementing the internal control and monitoring procedures. This will enable the company
to maintain sustainability in the margin rates. It should also analyse the external factors that may
impact the organisation such as inflation, prices, market conditions, demand and supply and such
other factors. It should adopt measures for mitigating the risks associated with factors that are not
within the control of the organisation. Efficiency of the management in carrying outs business
activities will provide the company with enough returns for the growth and success of the
organisation.
Net profit margins
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Net profit represents the amount left with the company after carrying out all the business
activities and expenses. It is calculated for measuring whether company has earned profits or
suffered losses. Net profits show the return generated by Codan on carrying the business for the
given period. Company is having net profits of 23.37% in 2019 and in 2018 it was 23.14%.
There is no movement in the profit margins of the company from last year. It requires the
company to have high profits. There has not been significant growth in the profit margins of the
company from last year (Miller, Williams and Yohn, 2019). This shows that the enterprise has
been stable in the current year. it is not showing that the expenses have increased with the same
proportion to last year as against the gross profit.
A company with good profits will have high returns over all the other assets employed in
the company. This increases the possibility of expansion and growth. Company with high profits
get the investments from venture capitals, angel investors seeing their organisational
performance. Higher profit is required for increasing the share prices of entity. The demand is
increased of shares that are generating higher returns which increases the share prices. With the
increase in share prices of shares wealth of existing shareholders is maximised which build more
confidence in the company. It could be analysed that company is performing well in the market
and generating enough returns that will help it in growth and adopt for expansion projects. It
should further increase the profits by eliminating the unproductive costs and expenses that are
consuming unnecessarily cost of company.
Efficiency
Efficiency ratio shows the efficiency of the management in operating the business. This
reflects the utilisation of resources for generating returns over the assets of company. An
enterprise with efficiency management of the business resources generate adequate returns over
assets. These ratios show the efficiency of management in managing its resources. It is analysed
using asset turnover ratio, inventory turnover and the receivables turnover ratio.
Asset turnover ratio
It assesses the efficiency of management in using the assets for producing sales. Asset
turnover is calculated for identifying the amount of sales generated of its assets. Company has
asset turnover ratio of 1.28 in 2019 and 1.22 in 2018. Ratio is increased from the last year at very
slow rate. From the above ration it could be interpreted that for every $1 of assets company is
generating $1.28 of sales or revenues. Based on the industry standards company is required to
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increase the turn of sales. It do not represents adequate ratio and company is required to increase
the turnover. It could adopt for adequate measures for increasing the turnover. Turnover is also
low when the companies are assent intensive. The ratio is suggested to be over 3 to 4 for the
industry. Ratio is also represents the profitability of the enterprise assessing the profits generated
over assets.
Inventory turnover ratio
Inventory turnover ratio of company is 3.20 for the current year and no significant change
is seen in the ratio from last year that was 3.11. It is an activity ratio used for evaluating liquidity
of the entity’s inventory. This measures the number of times inventory has been sold and
replaced in the given period of time. Thus is used for identifying how efficiently the inventory is
being managed by the enterprise. Ratio is low when the companies are over stocking its products
or there is deficiency in product line or the marketing efforts (Ariesta, Marlina and Hidayati,
2019). The storage costs of inventories are also high which requires that the business enterprise
to have high inventory turnover. Company is having high inventory turnover ratio that reflects
the efficiency of the management in managing its inventories. This is not always a indicator of
good performance it shows only the efficiency of the company in generating returns. It requires
the business to manage inventories adequately by taking the steps that reduce the costs associated
with inventory management.
Trade Receivables turnover ratio
Trade receivables turnover of the company is 14.25 in the current year which was 7.72 in
2018. There has been upward movement in the turnover from last year which shows that the
business is having outstanding bills more than the last year as against its sales. This is used for
assessing the efficiency of entity in collecting the receivables from its customers. Company is
having high turnover that shows that it gained success in managing its collectibles effectively.
This requires the company to have adequate management of the cash cycle. There should be
effective management of the operating cash cycle that is reflected by the cash cycle. An
enterprise with high turnover shows that operating cycle is managed efficiently (Guay, Samuels
and Taylor, 2016). Low turnover reflects high requirements of cash funds for running the
operations of business.
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Overall efficiency of the Codan limited is highly effective. It is seen that the resources of
the company are efficiently utilised for generating returns. Company is required to focus over
increasing the assets turnover by taking new measures.
Liquidity
Liquidity position of the company is analysed for identifying the ability of company to
meet its obligations. A company along with adequate profits is also required to have strong
liquidity position of the company.
Current Ratio
Current ratio is the metric used for assessing how strong the company is terms of its
liquidity. It is used for assessing the ability of company in meeting the short term obligations and
liabilities with the available current assets. Codan limited is having current ratio of 1.90 which
was 1.60 in 2018. There has been upward movement in the ratio. This reflects that position of
company have become more strong as compared with last year. Standard current ratio is 2:1
where of the enterprise is below the standard (Perobelli, Famá and Sacramento, 2016). Though it
is having enough resources for meeting short term obligation it is required to further strengthen
its liquidity position. A company with low liquidity may face difficulty in the long run. It should
increase the current assets by making short term investments on which returns could be
generated by company and from which funds could be withdrawn when in demand.
Quick Ratio
Quick ratio is another method for assessing the liquidity of company by excluding the
inventory as it is not considered current assets by most of the analysts and experts. Inventory is
not saleable on urgent basis, therefore it is not considered current in nature. Quick ratio of
company is 1.22 presently and in last year it was 1.07. This shows that the liquidity position of
company is strong but company is required to further more strengthen its liquidity position (Gao,
Jiang and Zhang, 2019).
Capital Structure
Capital structure refers to the proportion of debt and equity of company. A company is
required to have ad equate capital structure with low cost of capital.
Debt Equity Ratio
It is the ratio used for assessing the ratio of debt against its equity. Cordan is having debt of
3.83% against its equity. It was having slight lower debt in last year from the current year. the
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ratio reflects company only depends over equity capital for meeting its funds requirement. Cost
of equity is higher therefore it should have appropriated mix of debt and equity that keep its cost
of capital to minimum (Franklin, Graybeal and Cooper, 2018).
Market performance
Market performance is assessed of the company by earning per share of the company. It
is having the earning per share of 25.5 that is adequate as per the market standards. Company
with high EPS is considered profitable. This shows company is generating high returns over its
equity investments. This will helps the company in increasing its market capitalisation with
increase in market prices.
CONCLUSION
The above research shows that the Codan limited is having strong financial position and is
performing well in the market. The financial statements are analysed using ratio analysis that
shows the effectiveness of company in managing its resources and generating higher returns over
the business operations. From the investor point of view company is generating high returns over
the investment and also the wealth of the shareholders is maximised with the growth.
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REFERENCES
Books and Journals
Moradi, H., Abtahi, A. and Zilouchian, A., 2017, June. Financial Analysis of a Grid-connected
Photovoltaic System in South Florida. In 2017 IEEE 44th Photovoltaic Specialist
Conference (PVSC) (pp. 638-642). IEEE.
Otekunrin, A.O. and et.al., 2018. Financial Ratio Analysis and Market Price of Share of Selected
Quoted Agriculture and Agro-allied Firms in Nigeria AfterAdoption of International
Financial Reporting Standard. The Journal of Social Sciences Research.4(12).pp.736-744.
Ariesta, V.E., Marlina, M. and Hidayati, S., 2019. FINANCIAL RATIO ANALYSIS OF BANK
PERFORMANCE. Journal of Economics, Business, and Government Challenges.2(2).
pp.119-127.
Goncharov, I., Mahlich, J. and Yurtoglu, B.B., 2018. Accounting Profitability and the Political
Process: The Case of R&D Accounting in the Pharmaceutical Industry. Available at SSRN
2531467.
Khalilov, A. and Garcia Osma, B., 2019. Accounting Conservatism and the Profitability of
Corporate Insiders. Available at SSRN 3362468.
Miller, B.P., Williams, B. and Yohn, T.L., 2019. Accounting and Small Business
Profitability. Kelley School of Business Research Paper.(18-7).
Perobelli, F.F.C., Famá, R. and Sacramento, L.C., 2016. Return and liquidity relationships on
market and accounting levels in Brazil. Revista Contabilidade & Finanças.27(71).pp.259-
272.
Gao, P., Jiang, X. and Zhang, G., 2019. Firm value and market liquidity around the adoption of
common accounting standards. Journal of Accounting and Economics.68(1).p.101220.
Franklin, M., Graybeal, P. and Cooper, D., 2018. Use Information from the Statement of Cash
Flows to Prepare Ratios to Assess Liquidity and Solvency. Principles of Accounting,
Volume 1: Financial Accounting.
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APPENDICES
Ratio Analysis
CODAN
2019 2018
Liquidity ratio
Current assets 102507 95398
Current liability 53829 59702
Inventory 36703 31588
Quick Assets 65804 63810
Current ratio
Current assets /
current liabilities 1.90 1.60
Quick Ratio
(Current Assets -
Inventory) / Current
Liabilities 1.22 1.07
Profitability ratio
Employed Capital 220488 194600
Net operating profit 63302 53192
Return on capital
employed
Net operating
profit/Employed
Capital 28.71% 27.33%
Net Income 63302 53192
Shareholder's Equity 211214 188065
Return on Equity
Net Income /
Shareholder's Equity 29.97% 28.28%
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Cost of Sales 117478 98209
Sales 270811 229914
Gross Margin
Total Sales –
COGS/Total Sales 56.62% 57.28%
Operating profit 63302 53192
Sales 270811 229914
Net profit ratio
Operating Income/
Net Sales 23.37% 23.14%
Efficiency Ratios
Inventory 36703 31588
Trade Receivables 19007 29784
Net Assets 211214 188065
Cost of Sales 117478 98209
Sales 270811 229914
Asset turnover ratio Sales / Net assets 1.28 1.22
Inventory turnover
ratio Sales / Inventory 3.20 3.11
Account receivable
turnover ratio
Sales / Accounts
Receivable 14.25 7.72
Debt
Debt 8082 5994
Equity 211214 188065
Debt equity ratio Debt/ Equity 3.83% 3.19%
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Market
Performance
Net profit 45665 41575
Number of Shares 178994.483 177951.688
EPS 0.255 0.234
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