finance

The finance essay below has been submitted to us by a student in order to help you with your studies.

MG fabrications leading company in structural fabrication

MG Fabrications (Bolton) Ltd. is a leading company in the field of Structural Fabrication. This company was formed in the year 2000 and currently it has a work force of 25 employees. It has a large workshop which is equipped with a range of sophisticated machines, which include the Peddinghaus Cutting and Drilling Line and Ficep Tipo A Fittings Machine. The company has a capacity of manufacturing single item measuring 20 meters in length and weighing 15 tonnes.

MG Fabrication boasts about the ability to provide detail and design, erection and steel fabrication for most conventional buildings structure along having the capability to deal with smaller structures such as stair-cases, handrails and mezzanine floors etc. Additionally the company acknowledges its ability to meet strict deadline along with excellent customer services has built up its goodwill in the Greater Manchester area and contributed to a lot of repeat business.

Statement of Comprehensive Income

£

Total sales

421764.1097

664278.4728

917336.94

Less: cost of sales

337411.2877

553565.394

780263.6

-----------

-----------

-----------

Gross profit

84,353

110,713

137,073

Less: expenses

42176.41097

52720.51371

63264.616

Less: loan interest

0

0

233.3395

-----------

-----------

-----------

Net profit

42,176

57,993

73,575

========

========

========

Statement of Assets and Liabilities’ at 31 March:

2008

2009

2010

£

£

£

Fixed assets

2077

2170

2357

Current assets:

Inventory

583

1167

2333

Accounts Receivable

1167

2450

5600

Cash at bank

42503

58319

73622

Current Liabilities: due in less than 1 year

Trade accounts payable

1307

2613

3873

Bank overdraft

0

0

0

Dividends

513

747

840

Non-Current Liabilities: due in more than 1 year

Loan

0

0

2333

-----------

-----------

-----------

44509

60746

76866

========

========

========

Equity Capital

Capital brought forward

2333

2753

3290

Add: profit for year

42176

57993

73575

-----------

-----------

-----------

Capital carried forward

44509

60746

76866

========

========

========

Ratios:

In order to properly analyse the financial health of MG Fabrications (Bolton) Ltd. we should look into its key financial ratios over a span of three years to determine if its performance has improved or deteriorated over time.

The formulae for these key ratios are as follows:

Profitability Ratios

Gross Profit Ratio = Gross Profit X 100

Sales

Net Profit Ratio = Net Profit X 100

Sales

Return on Capital Employed = Net Operating Profit X 100

Sales

Liquidity Ratios

Current Ratio = Current Assets

Current Liabilities

Liquid Ratio = Current Assets – Stock

Current Liabilities

Efficiency Ratios:

Fixed Asset Turnover Ratio = Sales Revenue

Net Book Value of Fixed Assets

Stock Turnover Ratio = Cost of Goods Sold

Average Stock

Stock Turnover in Days = Stock X 365

Cost of Goods Sold

Debtor Days = Debtors X 365

Credit Sales

Creditor Days = Creditors X 365

Credit Purchase

Total Assets turnover Ratio = sales

Total Assets

Debt Ratio = Total Liabilities

Total Assets

Inventory to Cost of Sales Ratio = Average inventory during a period x 100.

cost of sales during that period

Investors Ratios:

Dividend payout ratio = dividends

Net Income for the same period

Profitability Ratios

Gross Profit Ratio

MG Fabrications(2008)

MG Fabrications(2009)

MG Fabrications(2010)

=84353 × 100

421764

=20.0%

= 110713 × 100

664278

=16.66%

=137073 × 100

917336

=14.94%

Net Profit Ratio

MG Fabrications(2008)

MG Fabrications(2009)

MG Fabrications(2010)

=379588 × 100

421764

=90.0%

= 611558 × 100

664278

=92.1 %

=854072 × 100

917336

=93.1 %

ROCE

MG Fabrications(2008)

MG Fabrications(2009)

MG Fabrications(2010)

=42176 × 100

44509

=94.75%

= 57993 × 100

60746

=95.46%

=73808 × 100

76866

=96.02%

Liquidity Ratios

Current Ratio

MG Fabrications(2008)

MG Fabrications(2009)

MG Fabrications(2010)

= 44253

1820

= 24.31

= 61936

3360

= 18.43

= 81555

4713

= 17.30

Liquidity Ratio

MG Fabrications(2008)

MG Fabrications(2009)

MG Fabrications(2010)

= 43670

1820

= 23.9

= 60769

3360

= 18.08

= 79222

4713

=16.80

Efficiency Ratios

Fixed Asset Turnover Ratio

MG Fabrications(2008)

MG Fabrications(2009)

MG Fabrications(2010)

= 421764

44510

= 9.47

= 664278

60746

= 10.93

= 917336

76866

= 11.93

Stock Turnover Ratio

MG Fabrications(2008)

MG Fabrications(2009)

MG Fabrications(2010)

= 337411

583

= 578.7

= 553565

1167

= 474.3

= 780263

2333

= 334.4

Stock Turnover in Days

MG Fabrications(2008)

MG Fabrications(2009)

MG Fabrications(2010)

=583 × 365

337411

=0.63 Days

= 1167 × 365

553565

=0.76 Days

=2333 × 365

780263

=1.09 Days

Debtor Turnover in Days

MG Fabrications(2008)

MG Fabrications(2009)

MG Fabrications(2010)

=1167 × 365

421764

=1.009 Days

= 2450 × 365

664278

=1.34 Days

=5600 × 365

917336

=2.22 Days

Creditor Turnover in Days

MG Fabrications(2008)

MG Fabrications(2009)

MG Fabrications(2010)

=1307 × 365

337411

= 1.41 Days

= 2613 × 365

553565

= 1.72 Days

=3873 × 365

780263

= 1.81 Days

Total Assets turnover Ratio

MG Fabrications(2008)

MG Fabrications(2009)

MG Fabrications(2010)

= 421764

46330

= 9.10

= 664278

64106

= 10.36

= 917336

83790

= 10.94

Debt Ratio

MG Fabrications(2008)

MG Fabrications(2009)

MG Fabrications(2010)

= 1820

46330

= 0.039

= 3360

64106

= 0.052

= 7046

83790

= 0.084

h) Inventory to Cost of Sales Ratio

MG Fabrications(2008)

MG Fabrications(2009)

MG Fabrications(2010)

=583 × 100

337411

=0.17%

= 1167 × 100

553565

=0.21%

=2333 × 100

780263

=0.30%

a) Dividend payout Ratio

MG Fabrications(2008)

MG Fabrications(2009)

MG Fabrications(2010)

= 513

42176

=0.012

= 747

57993

= 0.012

= 840

73575

= 0.011

Analysis of Financial Statements:

Profitability Ratios:

ROCE: It is an indicator of how efficiently a company uses its capital to generate revenue.

On careful examination of MG Fabrications ROCE we see that there is stable increase over the span of three years to 94.75%, 95.46% and 96.02%. This shows that the company’s efficiency in the utilisation of its fixed assets has constantly improved.

Gross profit ratio: The gross profit ratio is the ratio of gross profit of a company to its total sales. MG Fabrications gross profit ratio has fallen over the year from 20% to 14.94%.

The reason for this fall is, although sales have increased over the span of three years, the increase in the cost of sales has even been higher.

Net Profit Margin: Net profit margin indicates how effective a company is in controlling the costs and expenses associated with their normal business operations. The figures for MG Fabrications shows that its net profit ratio has increased steadly between 2008 to 2010. The reason is that increase in other expenses is less than the increase in sales.

Liquidity Ratios:

Current Ratio: The current ratio measures firm’s capacity to meet its current obligations. The ideal industrial standard is 2:1, on looking at MG Fabrications ratios we see that, although the current ratio is falling it is still excessively high. This shows that the company has idle resources.

Liquid Ratio : The acid test ratio is also known as the liquid or the quick ratio. The idea behind this ratio is that stocks are sometimes a problem because they can be difficult to sell or use. In this case as well, even though the liquid ratio is falling over the years it is still excessively higher than the standard 1:1. This is again depicts the existence of idle resources.

Efficiency Ratios:

Inventory Turnover Ratio: This ratio tells us the "number of days that on average money is tied up in stocks". (Khan, Khan & Jain, 2007 ). The longer this is the worse it is for the business as the money is not available to be used elsewhere. From figure stock turn over of MG fabrications is falling from 2008, 0.63 to 2009,0.76 and 2010, 1.09.

Debtor Days: The debtor’s day’s ratio measures how quickly cash is being collected from debtors. The longer it takes for a company to collect, the greater the number of days debtors. By reducing its debtors days a company can significantly to imrove its cash flow and reduce the chances of bad debts. On looking at MG Fabrications debtors ratio we see that it has gone up between 2008 to 2010. An effort must be made to speed up its debt collection by offering incentives ( such as offering discounts).

Creditors Days: Creditor days, a similar measure to debtor days. It is the average time that a company takes to pay its creditors (http://moneyterms.co.uk/creditor_days/). Lengthening creditor days may mean that a company is heading for financial problems as it is failing to pay creditors, on the other hand it may mean that a company is simply getting better at getting good credit terms out of its suppliers (improving its working capital management), or that its pattern of purchasing has changed. According to above table in 2010 company is taking more time to pay its creditors. It is very good for company as this will improve its cash flow.

Stock Turnover: In accounting, the stock turnover is an equation that measures the number of times stock is sold or used over in a period such as a year. The equation equals the cost of goods sold divided by the average inventory. The stock turnover is falling over the years, this is an unhealthy sign. Rectifactory effort should be made to correct the sign.

Asset Turnover: Asset turnover measures a firm's efficiency in using its assets for generating sales or revenue. A higher ratio indicates better efficiency. The figures of MG Fabrications show that the company’s fixed assets improving over the years.

Inventory to Cost of Sales Ratio: Percentage of cost of sales attributable to average inventory. A decreasing number indicates higher efficiency in use of resources; an increasing number suggests potential cash flow problems due to greater sums tied up in inventory. From the figures calculated in the table we see the ratios increased over the years, this indicates that company may face cash flow problems in the future.

Investor Ratios:

Dividend payout Ratio: Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividend. In case a company has a high ROI it should declare fewer dividends and retained its profit for future investment. On looking at MG Fabrications financial data we see that its ROI was increasing over the years, this increase can justify the sebtle fall in the dividend it declare in 2010.

Limitations of Ratios Analysis:

Economic regulate trade in only portion of the knowledge essential to evaluate whole functionality and effectiveness of the company’s other geometric process such as threat must be occupied into explanation to get hold of a full image of a company’s pecuniary rank.

Additionally, assessments of proportions may be deceptive on a number of calculations. A company can have assumed new secretarial principles; that is, it can have transferred from a “First In First Out” to a “Last In First Out” assessment of records. It can have transformed from a direct-line process to a hasten reduction. All through combination, they can be recognized with a new trade. In addition, the rate of the company’s asserts can be understated as of shrill increase some business statistics may also be deformed, particularly if the averages take in many small businesses with particular monetary flaws.

You must be cautious to resolve the kind of sum unpaid acquired by the company you’re examine. If supply were inflate by concerning translatable debentures that is owing to identified or cannot be transformed quickly, the explanation of the D/E proportion will be dissimilar than while the money owing correspond to directly union subjects. In addition a few concerns economics their savings with diminutive -term charter. As a consequence, some monetary relation will be inconspicuous as a outcome of these fiscal whereabouts. This is particularly factual in the container of ROI. Also be cautious when by means of reported facts, as business statistics occasionally symbolize only the finest and most economically Resonance Corporation. In addition the classification of the firm’s ratios with industry ratios

Conclusion:

Thus ratio analysis is a very powerful tool in the hands of the managers to monitor the financial health of a company. By looking at the changes in the financial ratios of a concern over a period of time, an experience manager can determine whether its financial health has improved or detoriated. In case the position has improved the factors which have let to such an improvement may be given emphasis to in the future. If however, the financial position has detoriated immediate rectifactory steps must be taken to control the factors responsible for the fall in performance.


Request Removal

If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on the link below to request removal:

Request the removal of this essay


More from UK Essays