Using the following information complete a memo to Mr. Techo TECHNOGYM Income St
ID: 2576312 • Letter: U
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Using the following information complete a memo to Mr. Techo
TECHNOGYM Income Statement For the Years Ended December 31 All amounts are in SThousands (except per-share amounts) 2015 2014 2013 $108,840 57,850 $50,990 46,560 $4,430 17,600 17,400 $4,630 1,574 $3,056 1,620 $78,420 42,300 $36,120 35,730 $390 12,450 12,190 $650 221 $429 (250) Sales Revenue Cost of Goods Sold $62,736 33,840 $28,896 28,584 $312 9,960 9,752 $520 Gross Profit Operating Expenses Operating Income Other Revenues Other Expenses Income Before Taxes & Other Items Income Tax Expense/(Benefit) $343 Income from Continuing Operations Discontinued Operating Results Loss on Sale of Discontinued Oper Tax Expense/(Benefit) from Disc. Ops. (200) 551 $1,069 $4,125 68 ($132) $211 85 Discontinued Operations Total ($165) NET INCOME $264 $20.37 $4.29 $3.43 EPS Continuing Operations EPS Discontinued Operations EPS Net Income $7.13($1.65)($1.32) $2.64 $27.50 $2.11Explanation / Answer
The ratios have been categorised into their nature and assessed : 1 Profitability ratios Profitability ratios compare income statement accounts and categories to show a company’s ability to generate profits from its operations. Profitability ratios focus on a company’s return on investment in inventory and other assets. These ratios basically show how well companies can achieve profits from their operations. 2016 2015 Increase/(decrease) % Net profit margin 1.7 3.8 -55.26 Return on equity 28.8 68.4 -57.89 Analysis of the financial statements of Technogym: As shown above, we can see that the profitability ratios have dropped by around 55%. In the year 2016, there is a loss on sale of the discontinued operation to the tune of 1.25 lakhs and there is a new stream of revenue from building whose construction cost is more than the revenue earned resulting in an additional loss of around 2 lakhs. The revenue of the company has increased by 41%. There is also an interest expense which should be on account of a debt incurred for an expansion activity which ' is expected to provide positive margins in the future profits of the Company On an assessment of the above margins and the financial statements of the Company, the fall in the profitability ratios are only temporary in nature and the margins should stabilise/increase in the future years. 2 Efficiency ratio Profitability ratios compare income statement accounts and categories to show a company’s ability to generate profits from its operations. Profitability ratios focus on a company’s return on investment in inventory and other assets. These ratios basically show how well companies can achieve profits from their operations. 2016 2015 Increase/(decrease) % Accounts receivable turnover 10.6 22 -51.82 Inventory turnover 5.2 24.1 -78.42 Analysis of the financial statements of Technogym: We can note that there has been a significant reduction in the accounts receivable and inventory turnover ratios. The accounts receivable ratio indicates that the Company had debtors equivalent to 16.5 days (365/22) as at the end of any period during 2015 which has increased to 34.4 days (365/10.6). Similarly, the company was holding 15 days' inventory as at the end of 2015 which has increased to 70 days in 2016. This indicates that there is a huge build up of working capital which results in shortage of cash flows which could impact the company's future operations if necessary action is not taken on an appropriate basis. If this scenario continues, the company will have to fund its operations through additional debt which could further reduce the operating margins and question the liquidity and going concern of the company. 3 Liquidity ratio These ratios show the cash levels of a company and the ability to turn other assets into cash to pay off liabilities and other current obligations. 2016 2015 Increase/(decrease) % Current ratio 2.3 0.5 360.00 quick ratio 1.4 0.4 250.00 Times - interest earned ratio 4.3 n/a n/a Analysis of the financial statements of Technogym: It is seen that there is a huge increase in the liquidity ratios of the company. This indicates that the company has been able to retain adequate liquid assets in order for it to meet its short term obligations. When we assess the liquidity ratio of the company along with the efficiency ratio, we can conclude that there is no conern about the going concern of the company, however, the management will have to take necessary actions to collect/utilise its debtors/inventory respectively in order for it to generate more profits and improve the profitability ratios of the company. 4 Solvency ratio 2016 2015 Debt to assets ratio 0.9 0.9 Solvency ratios, also called leverage ratios, measure a company’s ability to sustain operations indefinitely by comparing debt levels with equity, assets, and earnings. There is no change in the solvency ratios of the company. The current levels indicate that there are adequate assets available with the company to pay off its total debt as the ratio is less than 1 which is favourable. The management should ensure that this ratio reduces and not increase in future.
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