Two Companies Sarin Technologies Accounting Essay

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Two Companies Sarin technologies limited and TPV technologies limited listed in Singapore stock exchange are taken for analysis in order to determine which company to invest. Annual Reports for the two companies are taken for the financial year 2007 and 2008 end of December 31. These two companies are listed in the same country and operate in the same business sector. As investment manager of the company, I have taken two companies financial statement from the annual report for two years. In order to perform the analysis of the financial statements we need to find the financial ratios of the company's activities for the two years. Both the companies currency are US$ in thousands which are used in the calculation.

Financial Ratio which are calculated for analysis purpose are

  1. Profitability Ratio:
    1. Return on Total Assets
    2. Return on Equity
  2. Liquidity Ratio:
    1. Current Ratio
    2. Acid Test Ratio
  3. Activity Ratio:
    1. Fixed Asset Turnover
    2. Total Asset Turnover
  4. Leverage Ratio:
    1. Debt Ratio
    2. Debt to Equity
  5. Investment Ratio:
  1. Earnings Per Share Ratio
  2. Dividends Payout Ratio

These Ratios are calculated from the financial statements of the company. Each ratios are discussed in terms whether which is company is capable to invest.

Cash Flow analyses for the two companies are discussed in the third part of the assignment.

This shows whether the company has sufficient amount of cash to repay their debts. This is interested for the creditors and investors to check whether the company is capable to invest.

I have taken Sarin Technologies as Company 1 and TPV Technology as Company 2.

I Part:

Overview of the Company:

Sarin Technologies Limited:

Sarin Technologies Limited is a Singapore-based company. The Company is engaged in the development, manufacture and sale of precision technology products based mainly on automated three-dimensional geometric measurement (metrology) for the processing of diamonds and gems. Its systems also combine various hardware technologies, like electro-optics, electronics, precision mechanics and lasers. The Group provides smart solutions for every stage and aspect of diamond design and manufacturing, from determining the optimal yield from a rough stone, laser markings for cutting rough stones, measuring and analyzing polished diamonds and inscription on polished diamonds as well as other technology that assists sales in jewellery stores.

Sarin Technologies, established in 1988, is a worldwide leader in the development and manufacturing of advanced planning, evaluation, and measurement systems for diamond grading & gemstone production. Sarin products include diamond cut grading tools (for round and fancy shapes), rough diamond optimization systems, gemology tools, diamond color grading, and laser marking machines. Sarin systems have become an essential tool in every gemology laboratory and manufacturing plant, and a must for diamond dealers and retailers who need accurate diamond grading.

The Group's customers include major industry participants and opinion leaders spanning the entire value chain of the global diamond industry. It operates in Israel, Belgium, India, China, USA, Russia and the Southern Africa.

The Company's DiaMension and DiaVision products are used in all gemmological institutes, such as the Gemological Institute of America (GIA), the American Gem Society (AGS), the International Gemological Institute (IGI), the Hoge Raad voor Diamant or the Diamond High Council (HRD). As of December 31, 2008, the Company acquired Galatea Ltd. and 23% of IDEX Online SA. Its subsidiaries include Sarin Polishing Technologies Limited, Sarin Color Technologies Limited, Sarin Technologies India Private Limited, Sarin Hong Kong Limited, SUSNY LLC, Galatea Limited and IDEX Online SA.

TPV Technology Limited:

Hong Kong monitor manufacturer TPV Technology began in 1967 as the Admiral Overseas Corporation. Their main business was in designing and making television sets in Taiwan, and over the next decade TPV became a major exporter of televisions. In the early 1980's TPV entered the computer monitor business.

Twenty years later, TPV is one of the largest manufacturers of CRT and LCD computer monitors. Their main source of business comes from producing monitors for computer giants like IBM, Dell, Hewlett-Packard and Compaq. TPV also makes and sells monitors under their three brand names - AOC, Envision and A-mark. In all, TPV makes over 100 different models of monitors.

On September 5, 2005, a partnership between TPV Technology Limited and Royal Philips Electronics of The Netherlands became effective. Under the agreement, TPV will be responsible for producing all of Philips' monitors and entry-level flat screen TV products. TPV will also take over Philips' existing OEM (Original Equipment Manufacturer) monitor business.

TPV Technology Limited is an investment holding company. The Company designs, manufactures and sells computer monitors and flat television products. It manufactures mainly in the People's Republic of China (PRC) and sells to Europe, North and South America, the PRC and other Asian countries. Its subsidiaries include Top Victory International Limited, Top Victory Electronics (Fujian) Company Limited, TPV Technology (Wuhan) Company Limited, TPV Display Technology (Wuhan) Company Limited and AOC do Brasil Monitores Ltda. As of December 31, 2008, the Company launched 671 models for monitors and 323 models for television. On March 31, 2008, the Company acquired a business operation from Chi Mei Optoelectronics Corporation (CMO).

II Part:

FINANCIAL RATIO ANALYSIS:

PROFITABILTY RATIO:

Profitability Ratios measure the overall efficiency of the firm in managing its total investment in assets and in generating return to the shareholders. Return on total assets (ROA) and Return on equity (ROE) are the two profitability ratios which gives the overall efficiency of the firm. These indicators are show in percentage.

RETURN ON ASSET RATIO:
  • Return on investment or Return on total assets indicates the amount of profit earned relative to the level of investment in total assets.
  • Return on Investment tells us the earnings obtained from the Total Invested Capital of the firm.
  • From the graph, we can analyze that return on total assets of the company 1 has drastically fall down, their net earnings has decreased for the year 2007. Whereas company 2 net earnings has risen up for the year 2007, Total assets has also been increased which gives high return on investment ratio for the year 2008.
RETURN ON EQUITY RATIO:
  • Return on equity measures the return to common shareholders; this ratio is also calculated as return on common equity if a firm has preferred stock outstanding.
  • From the graph it is clear that return on equity has been decreased for the company 1 due to its decrease in the net income. Whereas for the company 2 return on equity has increased due to its increase in net earnings and return to common shareholders is also increased.
  • This ratio is meaningful to the shareholders who are interested to know what the profits earned by the company and dividends made from the available profit for the shareholders. Higher the ratio greater is the return to shareholders.
  • Investors may also calculate the change in ROE for a period by first using the shareholders' equity figure from the beginning of a period as a denominator to determine the beginning ROE. Then, the end-of-period shareholders' equity can be used as the denominator to determine the ending ROE. Calculating both beginning and ending ROE allows an investor to determine the change in profitability over the period.
LIQUIDITY RATIO:

Liquidity ratio measures the firm's ability to meet the cash needs as they arise; this indicator measures the firm's ability to pay the debt requirements. Current ratio and quick or acid test ratio are the two liquidity ratio which measures the firm's ability to repay their debt.

  • Current ratio is commonly used to measure of short run solvency, company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations.
  • Current liabilities are used as denominator of the ratio because they are considered to represent the most urgent debts, requiring retirement within one year or one operating cycle.
  • The available cash resources to satisfy these obligations must come primarily from cash or the conversion to cash of other current assets.
  • From the graph it is clear that company 1 has higher current ratio for the year 2008 and it has been increased from the year 2007, which shows that company 1 able to repay their debt.
  • Company 2 has slightly lesser current ratio compared to company 1. Their current ratio has reduced for the year 2008 and
QUICK or ACID-TEST RATIO:
  • The quick or acid test ratio is a more rigorous test of short run solvency than the current ratio because the numerator eliminates inventory, considers the least liquid current asset and the most likely source of losses.
  • As the barometer of short-term liquidity, the current ratio is limited by the nature of its components. Accounts receivable and inventory may not be truly liquid. A firm could have relatively high current ratio but not be able to meet the demands for cash because the accounts receivable are of inferior quality or the inventory is salable only at discounted prices. It is necessary to use other measures of liquidity ratio such as quick ratio which reduce the inventory from the current assets.
  • Quick ratio for the company 1 has been increased for the year 2008, whereas the quick ratio for company 2 has been decreased for the year 2008. This shows that company 1 are able to repay their debt even after their inventories where reduced.
LEVERAGE RATIO:

Leverage ratio measures the extent of the firm's financing with debt. The amount and proportion of debt in a company's capital structure is extremely important to the financial analyst because of trade-off between risk and return

DEBT RATIO:

Debt ratio considers the proportion of all assets that are financed with debt. The Higher the proportion of debt, the greater is the degree of risk because creditors must be satisfied before owners in the event of bankruptcy.

  • Use of debt involves risk because debt carries a fixed commitment in the form of interest charges and principal repayment. Failure to satisfy the fixed charges associated with the debt will ultimately result in bankruptcy.
  • A Lesser risk is that a firm with too much debt has difficulty obtaining additional debt financing when needed or finds that credit is available only at extremely higher rate of interest.
  • Debt ratio greater than 1 implies that a company has more debt than assets; meanwhile, Debt ratio less than 1 implies that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's level of risk.
  • If we analyze the Debt Ratio for the two companies in the graph, Both the companies are in risk. Whereas company 2 is slightly lesser risk compared to company 1 because they are able to pay their debt.
DEBT TO EQUITY RATIO:
  • The debt to equity ratio measures the riskiness of the firm's capital structure in terms of relationship between funds supplied by creditors (debt) and investors (equity).
  • While debt implies risk, it also introduces the potential for increased benefits to the firm's owners. When debt is used successfully - if operating earnings are more than sufficient to cover the fixed charges associated with debt-the returns to shareholders are magnified through financial leverage.
  • Debt to equity ratio for the two companies indicates they are of lesser risk

ACTIVITY RATIO:

FIXED ASSET TURNOVER:
  • Fixed asset turnover ratio is the approach to assessing management's effectiveness in generating sales from investment in property, plant, equipment.
  • Fixed asset turnover is extremely important for a capital intensive firm, such as a manufacturer with heavy investments in long lived assets.
  • Fixed asset turnover for company 1 and company 2 has been increased; Company 1 investment in fixed assets has grown at a faster rate compared to company 2.

TOTAL ASSET TURN OVER:

  • Total asset turnover measures the efficiency of managing all of a firm's assets.
  • Generally the higher this ratio, the smaller is the investment required to generate sales and thus the more profitable firm.
  • When the asset turnover ratios are low relative to the industry or the firm's historical record either the investment in assets is too heavy and /or sales are sluggish.
  • The Total asset turnover of the two companies has increased for the year 2008. Asset turnover ratio of the company 1 is comparatively good compared to company 2.
INVESTMENT RATIO:

The investment analyst, in valuing securities for investment decision, must project the future earnings stream of a business enterprise. Pro forma financial statements are projections of financial statements based on a set of assumptions regarding future revenues, expense level of investment in assets, financing methods and costs and working capital management.

MARKET RATIO:

There are four market ratio of particular interest to the investor are earnings per common share, the price-to -earnings ratio, the dividend payout ratio, and dividend yield. These market ratio are the pro forma financial statements which are considered by the investors and creditors at the time of investment.

EARNINGS PER RATIO:
  • Earnings per common share are net income for the period divided by the weighted average number of common shares outstanding.
  • One million dollars in earning will look different to investor if there are 1 million shares of stock outstanding or 100,000 shares.
  • The earnings per share ratio provides the investor with a common denominator to gauge investment returns.
  • An earnings per share for the company 1 has been reduced for the year 2008, whereas for the company 2 has been increased for the year 2008.
DIVIDENDS PAYOUT RATIO:
  • The dividend payout ratio is determined by the formula cash dividends per share divided by earnings per share.
  • Both company 1 and 2 reduced its cash dividend payment in 2008. It is usual for a company to reduce cash dividends because this decision can be read as a negative signal regarding the future outlook.
  • It is particularly uncommon for a firm to reduce dividends during a good year.
  • The explanation provided by management is that the firm has adopted a new policy that will result in lower dividend payments in order to increase the availability of internal funds for expansion; management expects the overall long term impact to be extremely favorable to shareholders.

III Part:

CASH FLOW ANALYSIS:

The Statement of cash flows is an important analytical tool for creditors, investors, and other users of financial statement data in order to help determine the following about a business firm:

  1. Ability to generate cash flows in future;
  2. Capacity to meet obligations for cash;
  3. Future external financing needs;
  4. Success in productively managing investing activities; and
  5. Effectiveness in implementing financing and investing strategies.
Sarin Technologies Ltd:

Cash flow from operations has become increasingly important as an analytical tool to determine the financial health of a business enterprise. Success or the failure of the firm depends on the cash flow from operating activities.

From the graph it is clear that the Profit of the company has reduced for the year 2008, there are some additional facts, however, which are relevant to Sarin Technologies operation but which do not appear on the firm's income statement.

Sarin technologies face a significance negative cash flow in the net cash equivalents for the year 2008. It should be noted that negative cash flow occurred for a year in which company reported positive net income of $1594 thousands. The cash flow crunch was apparently caused primarily by a substantial growth in accounts receivable and inventories. Those increases were partly the result of the firms expansion policies and the company has invested some amount for their investing activities for the year 2008. Company has given some trade receivable in the year 2008 which should be received.

Companies gross profit for the year 2008 and slightly lesser than year 2007. These profits are reduced due to some operating expense and some investing activities.

Companies net cash and cash equivalents for the year 2008 has gone down for about US$ 5278 which is due to their investment plan and companies expansion policy. Company has produced positive cash flow in the operating activities which is good sign and for the year 2007 they have increased their cash equivalents US$ 3070 where they have not made any investment for the company.

TPV Technology:

Even though the companies profit has gone down, their Net cash and cash equivalents has increased for the year 2008.Company has showed a significance positive cash flow for the both the years which is good for the investors and creditors.

From the above table, Change in accounts receivable for the two years has reduced at a faster rate and company has reduced their value of credit to the customers. Company has increased their value of assets; this is one of the reasons for the companies profit to go down for the year 2008. When cash flow of operating activities is analyzed company has made a solid positive cash flow for the year 2008 whereas for the year 2007 company has negative outflow even though they have acquired high profit for the year.

IV Part:

Sarin Technologies:

Company's financial strength over two years:

  • Company was not able to make high returns on the total assets, their profit has gone down for the year 2008.
  • Return on equity of the company is also reduced, which causes low return to shareholders for the year 2008.
  • Company ability to payback their short term debts have increased for the year 2008.
  • Company is slightly under risk when we look up the debt ratio, which shows that companies total liabilities to total assets value is greater than 1.
  • Company is at lesser risk when we look at the debt to equity ratio.
  • Fixed asset turnover of the company has increased at faster rate.
  • Total asset turnover ratio of the company is higher which is good, cause smaller is the investment to generate sales which is more profitable.
  • Dividends for the shareholders have been reduced for the year 2008.

TPV Technology Limited:

Company's financial strength over two years:
  • Company able to make high returns on the total assets, their profit has gone down for the year 2008 due to some investment plan in the year.
  • Return on equity of the company is increased, which causes high return to shareholders for the year 2008.
  • Company ability to payback their short term debts have slightly decreased for the year 2008.
  • Company is slightly lesser risk when we look up the debt ratio, which shows that companies total liabilities to total assets value is lesser than 1.
  • Company is at lesser risk when we look at the debt to equity ratio.
  • Fixed asset turnover of the company has increased for the year 2008, but it is quite lesser.
  • Total asset turnover ratio of the company is higher which is good, cause smaller is the investment to generate sales which is more profitable.
  • Dividends for the shareholders have been reduced for the year 2008.

According to Company's financial strength over two years discussed earlier. It is better to invest in TPV technology (Company 2) compared to Sarin Technology (Company 1), Cause Company has showed sufficient amount of cash in their cash flow operations which is good for investors, and also company's stability to repay their debts and making profit. They are able to make huge profit from their sales. Shareholders investment in the company has also risen for the year 2008. Return to shareholders ratio is quite high which is good for the investors.

Limitation in analysis:

There is one limitation in the calculation of investment ratio, while finding total number of issued shares or ordinary shares we need to limit the value to thousands so the number of shares gets reduced.

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