FINANCIAL RATIOS AND INTERPRETATION

Financial Ratios and Interpretation

Financial Ratios and Interpretation

Answer (a)

A detailed financial analysis of Higginson Chemicals Plc and Henry Group Plc is provided here onwards, which encompasses various aspects of financial information. Financial ratio analysis will cover the profitability, efficiency, liquidity and the leverage of the organization. (Guilding, 2002, pp 64 - 87)

Higginson Chemicals Plc 2011 (All figures in £ millions)

Profitability Ratios

Return on Assets = Net income/Total assets

Return on Assets = 3,830/25,616

Return on Assets = 0.15 or 14.95%

Return on equity = Net income/Shareholders' equity

Return on equity = 3,830/14,519

Return on equity = 0.26 or 26.38%

Gross profit margin = Gross income/Sales

Gross profit margin = 16,413/21,740

Gross profit margin = 0.75 or 75.50%

Net profit margin = Net income/Sales

Net profit margin = 3,830/21,740

Net profit margin = 0.18 or 17.62%

Efficiency Ratios

Inventory Turnover = Cost of Goods Sold/Inventory

Inventory Turnover = 5,327/3,020

Inventory Turnover = 1.76 times

Debtor Turnover = Net Credit Sales/Average Debtors

Debtor Turnover = 21,740/3,636

Debtor Turnover = 5.98 times

Creditor turnover = Net Credit Purchases/Average Creditors

Creditor turnover = 5,327/6,178

Creditor turnover = 0.8622 times

Net Asset Turnover = Sales/Net Assets

Net Asset Turnover = 21,740/25,616

Net Asset Turnover = 0.85 or 84.87%

Return on Capital Employed = EBIT/Capital employed x 100

Return on Capital Employed = 5,130/14,519 x 100

Return on Capital Employed = 0.353 or 35.3%

Liquidity Ratios

Net Working Capital = Current Assets - Current Liabilities

Net Working Capital = 14,440 - 7,782

Net Working Capital = £ 6,658

Current Ratio = Total Current Assets/Total Current Liabilities

Current Ratio = 14,440/7,782

Current Ratio = 1:1.86

Quick Ratio = (Current Assets - Inventory)/ Current Liabilities

Quick Ratio = (14,440 - 3,020)/7,782

Quick Ratio = 1:1.47

Debt Management

Total Debt to Assets Ratio = Total Debt/Total Assets

Total Debt to Assets Ratio = 11,097/ 25,616

Total Debt to Assets Ratio = 0.43 or 43.32%

Capital Gearing Ratio = Total Debt/Shareholder's Equity

Capital Gearing Ratio = 14,519/11,097

Capital Gearing Ratio = 13:10

Times Interest Covered = Net income/Interest Expense

Times Interest Covered = 3,830/46

Times Interest Covered = 83.2 times

Shareholders Ratios

Earnings per Share = Net Income/No. of Shares Outstanding

Earnings per Share = 3,830/423

Earnings per Share = £ 9.05

Price Earnings Ratio = Market Value per Share/EPS

Price Earnings Ratio = 48.70/9.05

Price Earnings Ratio = £ 5.38

Dividend Yield = Annual Dividend per Share/Price per Share

Dividend Yield = 0.25/48.70

Dividend Yield = 0.005 or 0.5%

Dividend Coverage Ratio = EPS/Annual Dividend per Share

Dividend Coverage Ratio = 9.05/ 0.25

Dividend Coverage Ratio = 36.2 times

Higginson Chemicals Plc 2010 (All figures in £ millions)

Profitability Ratios

Return on Assets = Net income/Total assets

Return on Assets = 19,051/20,523

Return on Assets = 0.149 or 14.9%

Return on equity = Net income/Shareholders' equity

Return on equity = 19,051/10,207

Return on equity = 0.299 or 29.9%

Gross profit margin = Gross income/Sales

Gross profit margin = 14,420/ 19,051

Gross profit margin = 0.75 or 75.60%

Net profit margin = Net income/Sales

Net profit margin = 3,830/19,051

Net profit margin = 0.201 or 20.1%

Efficiency Ratios

Inventory Turnover = Cost of Goods Sold/Inventory

Inventory Turnover = 4,631/3,022

Inventory Turnover = 1.53 times

Debtor Turnover = Net Credit Sales/Average Debtors

Debtor Turnover = 19,051/3,260

Debtor Turnover = 5.84 times

Creditor turnover = Net Credit Purchases/Average Creditors

Creditor turnover = 4,631/3,260

Creditor turnover = 1.420 times

Net Asset Turnover = Sales/Net Assets

Net Asset Turnover = 19,051/12,741

Net Asset Turnover = ...