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Asia Water Technology Ltd. (AWT) is an engineering company specialized mainly in the field of water purification and wastewater treatment in the Peoples Republic of China (PRC). AWT has first had good reputation in supplying water decontamination treatment systems to the power generation industry for more than a decade. AWT is one of the only three water decontamination treatment system providers for nuclear power plants that receive licences in the PRC.
AWTs technological expertise and investment capacity were strong foundation for the company to actively engage in water decontamination and wastewater treatment industry. Nowadays, AWT offers inclusive and integrated engineering solutions for water refining, water supply and wastewater treatment systems. The services it provides include the design, procurement, installation and management of water refining, water supply and wastewater treatment systems and facilities. While growth is always its utmost goal, the companys primary mission is to balance between growth and environmental protection and preservation of water resource. (http://www.asiawatertech.com/index.html).
The company was put on the list of Singapore. Exchange in 2005. AWT is not only seen as a specialist in the filed of water treatment and management but also an efective investor in environmental infrastructure assets. New investors including S.I. Infrastructure Holdings, Ltd. and Litebay Pte,.Ltd. ventured with AWT in 2010. This creates favourable conditions for AWT to further develop its potential in this huge potential market.
AWTs revenue actually is derived from five main business segments. They include 1) power plant EPC (Engineering, Procurement and Construction contract), 2) municipal EPC, 3) water decontamination treatment, 4) wastewater treatment and 5) consulting services. The company obtains a stable and growing income by providing long term wastewater treatment and water refining projects mainly to municipal governments and major industrial areas (http://www.asiawatertech.com/corporate_profile.html).
For more information on the company, please visit: http://www.asiawatertech.com
For more information, please contact:
WeR1 Consultants Pte Ltd
29 Scotts Road
Singapore 228224 Tel: (65) 6737-4844 Fax: (65) 6737-4944
Earnings per share
(Adapted from AWTs Annual Reports 2009,2010 and 2011)
2. The financial ratio
2.1. Liquidity ratios
Liquidity ratios show the abilities of the company to meet its obligations and to pay its liabilities using different types of assets (http://www.financialratioss.com/liquidity-ratios)
1.1.1. Current ratio:
Current ratio shows the ability of the company to pay for its short-term debts. It is acceptable if the current ratio ranges from 1.2 to 2, it is good if the ration is 2 to 3. Although lower value proves that the company may have difficulties in covering its obligations, higher value indicates that the company may not use its assets effectively.
AWTs current ratio from 2009 -2011 (using data from its financial statements and balance sheets over this period)
Amount expressed in RMB,000
Current ratio (2009) = 550,894/866,975 = 0.64
Current ratio (2010) = 454,982/633561= 0.72
Current ratio (2011) =948,955/1,256,469= 0.76
AWTs current ratio is less than 1 over the examined period. This shows that the company got problems in covering its short-term debt. However, this indicator has risen from 0.64 (2009) to 0.76 (2011). This indicates that the companys capacity to pay off its short term liabilities is better but it is still less than 1. This could create doubt from its creditor and force them to take collection actions hence may lead the company to financial crisis.
2.1.2. The quick ratio
Quick ratio assesses the asset more strictly by excluding the inventory which is very difficult to cash in the short period of time, without experiencing losses from current assets. As such it is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets the company has to cover current liabilities (Richard Loth, 2011)
AWTs quick ratio from 2009 -2011 (using data from its financial statements and balance sheets over this period)
Quick ratio (2009) = (550,894 - 8,353) /866,975 = 0.63
Quick ratio (2010) = (454,982 7,215) /633561= 0.71
Quick ratio (2011) = (948,955 16,749) /1,256,469 = 0.74
There is a very light difference between the companys current ratio and quick ratio over the studied period, this means inventory is not a main cause of the companys lack of capacity to cover its short-term liabilities.
2.2. Asset management ratio
2.2.1. Inventory turnover ratio
Inventory turnover ratio (stock turnover) shows how many times the companys inventory is sold and replaced over a period of time. This ratio can be calculated for the period of one year or for other periods. It is important for the companys owners because it indicates how effective their assets are used in a form of inventory. High levels of inventory indicate that a stock is being well managed while low value may result in an ineffective management of inventory (http://www.financialratioss.com/efficiency-ratios-1/inventory-turnover-ratio-definition )
AWTs inventory turnover ratio from 2009 - 2011 (using data from its financial statements and balance sheets over this period)
Inventory turnover ratio (2009) = 264,089 /8,353= 31.6
Inventory turnover ratio (2010) = 205,016 /7,215= 28.4
Inventory turnover ratio (2011) = 331,231 /16,749= 19.8
It seems that AWT has effectively managed its stock over this period. This effectiveness seems to decline over the studied period.
2.2.2. Days Sales Outstanding - DSO
This ratio calculates the average number of days the company needs to collect revenue after it has sold a product/service.A lowDSO number means that the company takes fewer days to collect its accounts receivable. On the contrary a high DSO numbershows that the company is sellingits product to customers on credit and taking longer to collectmoney.
In general there is no norm for this ratio, as it depends on the industry. A very low value of this ratio shows that the company mainly works on cash basis.
Note: Accounts receivable here means the average accounts receivable
AWTs DSO from 2009 - 2011 (using data from its financial statements and balance sheets over this period)
DSO (2009) = (4,785+3,456+ 64,831+ 111,972+ 600 + 67,281+ 64,265 )/2/321,889 /365 = 359.67
DSO(2011)=37,135+4,666+229,719+59,781+10,518+5,540+43,837+75,831)/2/519,464 /365 = 328,16
In the period of 2009-2011, AWTs DSO ranges from 270 days to 356 days, this means that AWT takes relatively long days (almost a year) to collect its debts (selling products in credit). This implies that AWTs ability to turn sales into cash is weak thus less chance to put the cash to use again.
2.2.3. Fixed-Asset Turnover
Fixed asset turnover is to calculate the productivity of a company's fixed assets (property, plant and equipment or PP&E).It shows how much sales (revenues) are generated for one dollar of fixed assets (efficiency of the use of PP$E). There are no common norms for the ratio, however the higher value of this ratio is better (Richard Loth, 2011; http://www.financialratioss.com/efficiency-ratios-1/fixed-asset-turnover-ratio-definition)
AWTs fixed asset turnover from 2009 - 2011 (using data from its financial statements and balance sheets over this period)
Fixed asset turnover ratio (2009) = 319,276 /45,492= 7.02
Fixed asset turnover ratio (2010) = 282,394/35,391= 7.98
Fixed asset turnover ratio (2011) = 519,464 /109,624= 4.74
AWT seems to efficiently use their fixed assets (one RMB of fixed asset generated more than 7RMB of sales in 2009-2010). AWT by its nature of business is not very capital intensive thus being able to generate good level of sales on a relatively low base of capital investment. In 2011, it seems that AWT invests more in projects that need more PP&E. As a result, the ratio is down to only 4.74.
2.2.4. Total asset turnover
Total asset turnover is a ratio to measure the productivity of the companys total assets. This ratio shows how much revenues (sales) are generated for one dollar of total assets. In other words it measures the ability of a company to use its assets to efficiently generate sales - the higher the number the better. This ratio considers all assets, current and fixed. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, whilethose with high profit margins have low asset turnover.
Note: total assets here mean average total assets
AWTs total asset turnover from 2009 - 2011 (using data from its financial statements and balance sheets over this period)
Total asset turnover ratio (2009) = 319,276 /(867,806+871,629)/2 + (647,002+550,894)/2 = 0.37 or 37%
Total asset turnover ratio (2010) = 282,394/(983,387+871,629)/2+(454,982+550,894)/2= 0.30 or 30%
Total asset turnover ratio (2011) = 519,464/(2,471,719+983,387)/2+(948,955+454,982)/2 = 0.30 or 30%
In contrast to the fixed asset turnover ratio, the total asset turnover ratio is relatively low. This reveals that AWT puts its capital heavily into other assets rather than in PP&E such as intangible assets and non-current financial receivables.
2.3. Debt management ratio
2.3.1. Total debts to total assets or the debt ratio
The debt ratio is used to compare the company's total debt to its total assets. It shows the proportion of assets, bought from borrowed funds. It is an useful indicator while analyzing companys capital structure. This ratio is used to evaluate company's financial risk, because the more funds the company is borrowing, the greater business risk appears. . A low percentage means that the company is less dependent on leverage, i.e., money borrowed from and/or owed to others. The lower the percentage, the less leverage the company is using and the stronger its equity position. (http://www.financialratioss.com/leverage-ratios-1/debt-ratio-definition )
Note: total assets here mean average total assets
AWTs debt ratio from 2009 - 2011 (using data from its financial statements and balance sheets over this period)
Debt ratio (2009) = 1,196,400/(867,806+871,629)/2 + (647,002+550,894)/2 = 0.54 or 54%
Debt ratio (2010) = 1,004,100/(983,387+871,629)/2+(454,982+550,894)/2= 0.47 or 47%
Debt ratio (2011) = 2,123,300/(2,471,719+983,387)/2+(948,955+454,982)/2 = 0.67 or 67%
AWT debt ratio ranges from 47% to 67% in the period of 2009-2011 which is not too high taking into account the scope of business the company is conducting. This ratio has been increased rapidly from 2010 to 2011 perhaps the company has to borrow more money for the new projects it has obtained during this period.
2.3.2. Times Interest Earned - TIE
TIE is a ratio to measure the capability of the company to pay off short term financial liabilities such as interest payments. If the company fails to meet these obligations it could be forced into bankruptcy. This ratio is an important information for the companys creditors when they are to make a decision for the extension of the companys loans. In short, TIE helps to understand how many times the company can cover its interest payments. http://www.investopedia.com/terms/t/tie.asp#ixzz1y839gBol
Generally speaking, if the ratio value is equal to or below 1.5, it is likely that the companys ability to cover its interest payment is uncertain. If TIEval ue is less than it is likely that the company cannot cover its interest payments, because it makes less money than the amount it has to pay as interests (http://www.financialratioss.com/leverage-ratios-1/times-interest-earned-definition )
AWTs TIE from 2009 - 2011 (using data from its financial statements and balance sheets over this period)
TIE (2009) = (168,993) / 181,087 = - 0.93
TIE= (2010) = 32,573/ 60,903 = 0.53
TIE (2011) = 150,206/ 75,049 = 2.00
The TIE from 2009-2011 shows that AWT has spectacularly moved from a very critical financial risk in 2009 where they experienced a dramatic loss and were incapable of paying the interests of their debts to a relatively healthy financial situation in 2011 where the TIE ratio is around 2, indicating that the company is now able to cover its short term liabilities.
2.4. Profitability ratios
Profitability ratios show how successfully the company is running its activities, how profitable are its processes and what the further tendencies of its business are. The most common used profitability ratios are as follows:
- Profit margin on sales or Gross Profit Margin
- Returns on assets (ROA)
- Returns on equity (ROE) and
- Break even point (BEP)
2.4.1. Profit margin on sales or Gross Profit Margin
Gross Profit Margin is the most general profitability ratio. It is the comparison between the revenue of the sale of the product or service and the cost needed to produce it. This is seen as the first indicator of the company profit. Investors use this ratio to compare companies in different industries to determine what are the most profitable. Managers mostly use it to compare companies in the same industry to know about their competitive level ( http://www.investopedia.com/terms/p/profitmargin.asp#ixzz1y812H0gQ).
Generally speaking, the higher the gross margin values the more competitive the company is.
AWTs Gross Profit Margin from 2009 to 2011 (using data from its financial statements and balance sheets over this period)
Gross Profit Margin ratio (2009) = 55.2/ 319.3 = 0.17 or 17%
Gross Profit Margin ratio (2010) = 77.4/ 282.4 = 0.27 or 27%
Gross Profit Margin ratio (2011) = 188.3/ 519.5 = 0.36 or 36%
The stable increase of GPM ratios over this period (17% to 36%) shows that AWT becomes more profitable over the last three years. This also means that the company is now more competitive in the field of water purification and wastewater treatment.
2.4.2. Returns on Assets (ROA)
This indicator shows the company's ability to turn assets into profit. This is a very common and simple ratio depicting the relationship between companys income and the assets used to generate this income .
It is an important ratio for companys owners, investors and creditors, as it is one of the most general ratios that shows how efficiently the asset is being managed. It indicates how much net income is generated per one dollar of assets. As for investors and managers, it is not acceptable if ROA is less than 5%. As for banks that are interested only in safety of their credits, a value of ROA as low as 1.5% is rather reasonable http://www.financialratioss.com/profitability-ratios-1/return-on-assets-definition
Note: Assets here mean average total assets
AWTs ROA from 2009 to 2011 (using data from its financial statements and balance sheets over this period)
ROA ratio (2009) = (180.5)/ (1,514.8 +1,422.5)/2 = -0.12 or -12%
ROA ratio (2010) = 19.9/ (1,422.5+1,438.4)/2 = 0.01 or 1%
ROA ratio (2011) =136.2/ (3,420.7+1,438.4)/2= 0.05 or 5%
AWTs ROA ratios over the past three years show that the company experienced a very difficult financial situation in 2009 with a negative percentage of ROA (-12%). This means that its use of assets was not efficient and the company suffered from a heavy loss of profit. The income statement of 2009 reveals that although the company received a positive gross profit, it had to pay off very high amount of suspended interests to its creditors (almost three times of its gross profit). The situation was improved in the following two years. In 2010, ROA rose to 1%, which still was not acceptable by both the banks and its creditors. The company may have difficulty in borrowing money. Nevertheless, in 2011 this ratio reached 5%, an obvious evidence of efficient management of AWTs assets. This percentage would make its creditors and banks feel more secure about their credits to this company.
2.4.3. Return On Equity (ROE)
ROE ratio shows how profitable the company is in operating its assets. It also indicates how much income a company receives in comparison with the shareholders equity. This ratio is essential to the companys owners/shareholders since it reveals how much they earn from their investment in the company (company earnings performance). The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors. ROE is normally expressed in percentages. Generally speaking, a ROE of at least 10% per year is not bad, 15% is good (Richard Loth, 2011).
ROE norms can differ depending on the industry the company is operating in. Also it depends on the economic situation of the specific country. During the economic crisis, ROE value of 5% can be consider as a good result.
Note: Equity here means average shareholders equity
AWTs ROE from 2009 to 2011 (using data from its financial statements and balance sheets over this period)
ROE ratio (2009) = (180.5)/ (405.5+226.1)/2 = - 0.3 or - 30%
ROE ratio (2010) = 19.9/ (226.1+434.3)/2 = 0.03 or 3%
ROE ratio (2011) =136.2/ (434.3+1,297.4)/2= 0.08 or 8%
AWTs ROE over the past three years once again reaffirms the loss the company underwent in 2009 (ROE was -30%) and its spectacular effort to revive its business in the following two years and eventually came up with a promising ROE percentage of 8% in 2011. However, an ROE of 8% in 2011 was still low proving that the company needs to make more effort to manage and utilize its equity
2.4.4. BEP (break even point)
BEP is the position where the company is able to cover its costs but makes neither a profit nor a loss. To establish the BEP, the nature and extent of the companys costs (variable costs and fixed cost) should be determined.
Break-Even (Quantity) Point is the volume of sales for the total revenue to equal to total operation costs (gross profit is zero).
QBE = FC /(P-V)
QBE : volume of sales at the BEP
FC: fixed cost
P: price per unit
V: variable cost per unit
Break-Even (Sales) Point is calculated based on dollar sales instead of units. It is useful when it is impossible to come up with Break-Even (Quantity) Point because the company sells various products and/or services.
SBE = FC [1- (VC/S)]
SBE: sales at the BEP
FC: fixed costs
VC: total variable costs
(J.Horne and J. M.Wachowicz, 2008)
In the case of AWT its business involves with the implementation of water purification and wastewater treatment projects and consulting services, it is impossible to use QBE but SBE.
AWTs Break-Even (Sales) Point from 2009 to 2011 (using data from its financial statements and balance sheets over this period)
SBE (2009) = 264.1[1- (11.4+79.4)/319.3)] = 369.05
SBE (2010) = 205.0[1- (14.0+38.6)/282.4)] = 237.5
SBE (2011) = 331.2[1- (17.2+90.4)/519.5)] = 417.7
The BEPs (Sales) of AWT shows that the company went through a loss in 2009 since its revenue was less than the SBE (2009) while it made profit both in 2010 and 2011 since its revenues were higher than the SBE in 2010 and 2011. In 2011, the operation of AWT was better as the positive distance between its revenue and the BEP is larger than that of 2010 (519.5- 417.7= 101.8 (2011) and 282.4-237.5= 44.9 (2010)).
2.5. Market value ratio
2.5.1. Price to earnings ratio
Price to earnings ratio shows the amount of net income (earnings) per one share. This ratio is important for the owners and investors because it indicates how much the investor pays for one dollar of the earning of the companys share she/he is purchasing. The higher value of the ratio enables share buyers to expect a possible growth of the companys market value ( http://www.investopedia.com/terms/p/price-earnings-ratio).
Share price shows the current market price of the share.
AWTs P/E from 2010 to 2011 (using data from its financial statements and the balance sheets over this period to calculate the share price of the respective years).
Share price (2009) = no available
Share price (2010) = 2.44
Share price (2011) = 2.68
P/E ratio (2011) = 2.44/1.14 = 2.14
P/E ratio (2011) = 2.68/3.2 = 0.84
In 2009, although the data of the companys stock price is not available, from the income statement and balance sheet of this year, it shows that the company endured a heavy loss and shareholders might not get any income from their shares.even loss. In 2010, to gain one RMB of the earnings of the companys share the investor is buying, she/he has to pay 2.14 RMB. In 2011, this ratio was down to 0.84 showing that shareholders can gain one RMB of the earnings of the purchased share by only paying 0.84 RMB (very profitable).
2.5.2. Price to book value ratio definition
This ratio shows the companys shares value by comparing market value with its book value. For investors who own or wish to own stocks, this indicator is essential because it shows the proportion between the stocks price and the book value. This ratio can be calculated using a conservative method by deducting intangible assets from the companys assets.
In general, there are no norms for this ratio.A lower P/B value ratio could mean that the stock is undervalued. However, it could also implies that there is something fundamentally wrong with the company..
AWTs P/B from 2010 to 2011 (using data of earnings per share, net profit from its financial statements and total equity from the balance sheets over this period to calculate equity per share of the respective years).
Share price (2009) = not available Equity per share (2009)= 11.42
Share price (2010) = 2.44; Equity per share (2010)= 2.55
Share price (2011) = 2.68; Equity per share (2011)= 3.06
P/B (2010) = 2.44/2.55 = 0.96
P/B (2011) = 2.68/3.06 = 0.86
In this period, AWTs P/B was less than 1. This means that either the asset value was overstated or it was earning a poor return on its asset. Look back the ROA over this period, it was 1% (2010) and 5% (2011) which are relatively low but not too much to lead to P/B ratios less than 1. Therefore, it could be either its stock was undervalued or its assets were overstated.
3. Description and evaluation of AWT performance in the period 2009-2011
Generally speaking, AWT Ltd. encountered difficult financial situation in 2009 where its revenue decreased 16.8% to RMB 319.2 million compared to that of 2008 and the company suffered from a heavy loss of RMB180.5 million due to very high finance expenses reflecting tightened liquidity conditions within the industry and the risk premiums being demanded by lenders. However, the company went through a remarkable management and financial reform in 2010 and as a result its financial situation becomes healthier in 2011.
Lets look at the companys financial performance more in details using the principal financial ratios.
In terms of liquidity management, AWTs current and quick ratios are less than 1 in spite of a significant increase of those ratios over this period. This implies that AWTs ability to cover its short term liabilities is problematic, thus creating doubt from its creditors and may force them to take collection action leading the company back to financial crisis. The comparison between current and quick ratios indicates that inventory is not a main cause of the companys lack of capacity to cover its short-term liabilities.
The inventory turnover ratios over this period also shows that AWT managed quite well its stock although this effectiveness of inventory management seemed to decline over time. A deeper look at AWTs DSO also reveals that it took long times for the company to collect its debts (270-356 days). It is clear that AWT was selling its product mainly in credit. That explains why it face difficulty in paying off its sort-term debts.
Regarding its asset management, AWT seems to efficiently use their fixed assets (one RMB of fixed asset generated more than 7RMB of sales in 2009-2010). However, the relatively low total asset turnover depicts that AWT puts its capital heavily into other assets rather than in PP&E such as intangible assets and non-current financial receivables.
As for debt management, the debt ratio implies that AWTs demand on capital investment has been dramatically increased over this period, from 47% (2009) to 67% (2011). However, this percentage rate is still acceptable for a company with large-scale and long-term investment projects as AWT. Looking more profoundly to the TIE ratio, it reflects the huge effort and effective structural and financial reform of the company to move from a critical financial risk in 2009 where TIE is negative to a relatively healthy situation in 2011 where the TIE is around 2, showing that the company is now able pay off their due interests. Nevertheless, the demand of cash to cover short-term liabilities is always a high concern of the company.
With regards to profitability, the steady rise of Gross Profit Margin ratio from 17% (2009) to 36% (2011) was a good evidence of the companys increasing profitability. This also reflects higher competitiveness of the company in this industry. The ROA and ROE ratios by contrast reveal the difficulty the company encountered in managing its assets and equity. Low return of its assets in 2009 and 2010 might create difficulty for the company to borrow money from its creditors and /or banks. Fortunately, ROA ratio in 2011 of 5% seems to help the company to regain the trust of its creditors and/or banks. Although ROE ratios moved from negative (2009) to 8% (2011) this return is still low that it cannot attract potential investors. A deeper consideration of AWTs profitability using BEP (sales) reconfirms the lucrative situation of the company, the revenue made in 2011 is far beyond the SBE (2011) which is 101.8 RMB million.
To analyse the market value of AWT, P/E and P/B ratio are used. P/E ratio shows that the company did overcome the financial crisis in 2009 and in 2011, investor could gain 1 RMB from the share by only paying 0.84 RMB. This means the value of share is quite high thus attracting more investors. By contrast, the P/B ratio was less than 1 over the studied period. This means that either the asset value was overstated or it was earning a poor return on its asset. Looking back the ROA over this period, it was 1% (2010) and 5% (20121) which are relatively low but not too much to lead to P/B ratios less than 1. Therefore, it could be either its stock was undervalued or its assets were overstated.
In conclusion, AWT, by their effort and smart strategy of organizational restructuring has overcome the very critical financial crisis in 2009 and moved to a healthier financial situation in 2011. This will provide the company with more favourable conditions to attract more investors and better access to creditors and banks. However, liquidity, assets and equity management is the area the company needs to focus on for further improvements.