Financial Reporting and Analysis for Subsidiaries of Impressions Adcocorporation Inc - Case Study Example

FINANCIAL REPORTING AND ANALYSIS FOR SUBSIDIARIES OF IMPRESSIONS ADCOCORPORATION INC (ESSAKANE PLC AND WESTWOOD PLC) INTRODUCTION Impressions Adco Corporation Inc. (IAC) is a global Information Technology Company based in New York that conducts business in computer systems’ design development and distribution across the world through its subsidiaries. IAC has recently has undergone change in the organizational structure of its two subsidiaries namely Essakane Plc and Westwood Plc with expectation of improvement in subsidiaries’ financial assessment. The underlying report, thereby, develops the assessment of the financial reporting elements of two subsidiaries to explore the performance. For the purpose, Ratio analysis technique has been employed and vertical analysis of the subsidiaries has been developed. The report also develops the comparison between the understudy subsidiaries. In the concluding note, it contains comment on the usefulness of Ratio analysis as contrasted by Elliot and Elliot (2011). RATIO ANALYSIS Given below is the assessment of the financial position of two subsidiaries. The comparison provides assessment of firms vertically as well as between two subsidiaries. PARTICULARS INDICATOR Essakane Plc Westwood Plc COMPARITIVE COMMENT           1 PROFITABILITY RATIOS       1.1 Return on Capital Employed (%) 10.45% 17.96% WW gains considerably higher return from capital employed as compare to Essakane Plc.  Efficiency in utilizing invested capital Net Profit Margin (%) 38.45% 46.53% Both firms are fetching considerable high net profit margin with WW taking up near to fifty percent net from every dollar of sales.  1.2  % of earning company earned on sales Gross Profit Margin (%) 82.73% 122.47% Both firms are generating sizable profit for meeting its expenses with WW charging more than 100% than cost.  1.3  Margin between sales and initial cost of sales Return on Equity (%) 9.63% 16.75% Firm are generating high returns on equity invested; attractive for investors. WW generated near to double than that of Essakane Plc.  1.4  Return generated from equity invested Return on Assets (%) 9.39% 17.03% Though both companies are generating attractive return in assets invested; WW’s efficiency appear much higher than Essakane Plc.  1.5  Return generated from utilizing total assets 2 ASSET UTILISATION RATIOS       Asset Turnover (times) Sales generated from asset utilization 0.27 0.38 Unlike return on assets, assets TO ratio do not give healthy sign. It reflects that firms are generating high returns from high price and not by high sales. Though WW’s performance is better in any case as compare to Essakane Plc; however, not attractive if vertically viewed 2.1 3 LIQUIDITY RATIOS     3.1 Current ratio Position of firm to pay of current liabilities with current asset 2.29 5.22 Both firms’ position to pay of current liabilities is very sound. Alike other measures, CR of WW is more than double of Essakane Plc.   3.2 Quick (or Acid-Test) ratio 2.03 3.94 Though both firms are sound solvent position even after excluding the inventory; however, it reflects critical situation related to heavy investment in inventory by WW    Similar to current ratio but evaluates liquidity of firm by taking off inventory impact 3.3 Inventory Turnover Period (days) Number of days firm take to replenish inventory 71.55   149.45   Strategy of both firms is quite different with respect to inventory replenish. It also asserts the huge investment of WW in inventory that drops acid test ratio.     Inventory Turnover Rate Number of times firm replenish inventory every year 5.10 2.44 WW replenishes inventory nearly twice a year only that require it to retain sizable huge investment in inventory. Essakane Plc. has comparatively better position. 3.4     3.5 Accounts receivable collection (days) Number of days firm takes to collect receivable from debtors 109.42 206.14 In contrast to policy, both firms’ performance is must deteriorated in credit collection. Essakane Plc. receipts are 79 days while WW receipts are delayed by 110 days.              3.6 Accounts payable payment (days) Number of days firm take to pay off its account payable 96.19 114.13 Essakane Plc. and WW payments are delayed 3.2 and 3.9 times in contrast to given period of 30 days.             4..0 GEARING RATIOS         4.1 Gearing Share of debt (long term in capital structure) 0.49% 0.00% Equity oriented firms; only minimal debt is acquired by  Essakane Plc           4.2 Interest Cover      Times earnings of firm held capacity to pay of interest on debt. 89.52 97.44 Since minimal or no debt; both firms retain high capacity to acquire and pay off debt.          4.3 Shareholder’s Ratio  Portion of equity in capital structure 99.51% 100.00%  Highly / all equity.             5 INVESTMENT RATIOS                5.1 Earnings per share (EPS) Final earning generated by firm for every share amount invested 0.11 0.26  Attractive earning for equity investors; with WW taking lead.              5.2 Price / Earnings ratio  Times share firm is priced with respect to its earnings 53.03 29.73 Unlike the overall performance, shares of Essakane Plc is priced 53 times with respect to its earning whereas WW valuation is much lesser.              5.3 Dividend Cover  Times earnings of share can pay dividend to share holders at given rate 8.72 61.35 Firms have high capacity to pay off dividends.               5.4 Dividend Yield  Dividend paid by company with respect to its price 0.22% 0.05% Essakane Plc pays comparatively higher dividend as compare to WW with respect to price. COMMENT ON THE OVERALL POSITION OF TWO SUBSIDIARIES Overall assessment of two subsidiaries refers the mixed results. It can be safely stated that WW is comparatively larger subsidiary as compare to Essakane Plc. However, despite being large in size WW performance has much room for improvement; fact that is also reflected in the valuation from investors in terms of price. The profitability of the WW is much higher as compare to Essakane Plc. However, this profitability is not generated from high sales instead premium pricing of product is real factor working behind. WW charges price much more than 100% of the cost and after accounting all operational costs, WW is left with high net return of near to 50%. Essakane Plc is also charging considerably high prices. Hence, it reflects the firms are following premium pricing strategy. Moreover, high price strategy is also the motif that fetches attractive return in assets; fact also asserted by low assets utilization ratio. Therefore, in case cheaper competitor jumps into the market it would affect the profitability of the firm immensely. Solvency ratios reflect attention acquiring position of the both firms. The current and quick ratio position of Essakane Plc is sound. However, performance is not appreciable for WW. The stark difference in current and acid test ratio is questionable. Firm is investing huge investment in inventory incurring carrying cost wile foregoing opportunity cost. Moreover, both firms are showing extremely negligent performance in payment to creditor as well as collecting payment from debtors. Essakane Plc is replenishing its inventory near to 5 times a year still not paying on time while WW is investing huge amount in inventory for which it cannot pay on time. This delay can easily be curtailed by collecting on time payments from debtors; lending triple benefits to both firms; first, timely payment will improve reputation with creditors; opportunity cost of amount un-recovered from debtor will be saved and finally cost (interest) incurred from delayed payments to creditors will also be saved. This necessary improvement will also reflect its impact on pricing especially for WW. Another area of possible improvement is the capital structure of both firms that are almost totally debt oriented. Equity incurs high cost of capital and both firms are forgoing cost saving that can benefit the business by developing capital structure mix of equity and debt. Further, debt also benefits firm with tax benefit. However, it is conditional to the fact banks are charging cost to capital lesser than equity that is usually the case. Hence, cost saving through capital structure is also another area of proposed improvement. Both subsidiaries are generating attractive earning for every pound or per share invested; specifically WW; however, this performance is also for the reason of no debt in structure; hence cannot be attributed as efficiency of the firm only. Moreover, despite high earning specifically WW’s market valuation is much less than in comparison with Essakane Plc. Apart from other factors affecting, this low market valuation can be attributed to efficiency lacking that is reflected in fundamentals of the firm. Further, Essakane Plc comparatively has much better valuation and further improvement can be witnessed upon improvement in identified factors. WW has extremely conservative policy with only 2% dividend pay-out of earning whereas Essakane Plc is paying 11%. This conservative policy will also get some ease specifically WW will be able to pay off higher dividend upon adding some debt to the structure facilitating business with cash. Moreover, it will also have positive impact on price as investors will be able to gain some return from investing even in case if capital gain is not generated for any of the market or other factors. Hence, the overall assessment reflected certain areas of improvement with which businesses will be able to generate more income; reputation among creditors; value among investors reflected in price appreciation and basically in its fundamentals. COMMENTS ON THE LIMITATION OF FINANCIAL RATIOS Argument from Elliot and Elliot (2011) is valid. Literature holds immense debate on the factors that are ignored in financial ratios and hence leading technique’s applicability in combination with other assessment tools for comprehensive overview of the firms. For instance, in case of above subsidiaries, financial ratios did not address many factors such as reasoning behind the complete equity structure as against the highly suggested capital structure of debt and equity (Schoenebeck, and Holtzman, 2010). Since different companies operate in different environment, therefore, there always remain differences in performance of firms (Fridson, and Alvarez, 2011). Upon the financial statement analysis using ratio these differences are not accounted and hence, judgments are developed over the performance and policies of firms (McLaney, 2009). Moreover, financial accounting is developed by following various standards and accounting techniques. These accounting techniques are though explained in financial statement’s notes section but due to fact that ratios are developed from financials only and hence the impact of accounting policies are also ignored (Mulford, Comiskey, and Comiskey, 2002). This can lead to misguided picture of firms in case presented in form of ratios only. Financial ratios also lack predictability of the fraudulent acts in financial statement and therefore, firm with miss-guided numbers can be easily taken successful firm using ratio analysis only (Kaminski, Wetzel, and Guan, 2004). Ratios usually makes sense with trends developed for past and so does not provide information related to future whereas investors are more concerned with future information (Britton, and Waterston, 2006). McLeay, and Trigueiros, (2002) develop a view on the proportionality factor that impact the symmetric results from ratio and discusses the impact that ratio results receive in case the size of the firm is changed. Therefore, analysis of factors that shape the future of the firm as well as investors’ decision may leave ratios estimation of least or no importance (Gitman, 2003). However, despite of factors that calls for the issues with ratios analysis, this financial assessment technique still provide considerable insight about the firm’s performance. CONCLUSION The report presented financial analysis using financial ratios of Essakane and Westwood. Overall financial performances of the two companies have been analyzed and the comments have been made on the performances of the companies. In addition to this, the report also discusses the comment made by Elliot and Elliot (2011) that financial ratios are useful tools to analyse and evaluate the performances of the organization but these ratios have limitations and ignore different factors. Different comments of different scholars and authors have been presented to analyze the comment and limitations of the financial ratios. References Britton, A., and Waterston, C. (2006). Financial accounting. Harlow: Financial Times/Prentice Hall, 4th edition. Fridson, M. and Alvarez, F. (2011). Financial statement analysis: a practitioners guide. Hoboken, NJ: Wiley, 4th edition. Gitman, L. (2003). Principles of Managerial Finance. Addison-Wesley Publishing: Boston. Kaminski, K., Wetzel, S., and Guan, L. (2004). ‘Can financial ratios detect fraudulent financial reporting?’, Managerial Auditing Journal, Vol. 19, no. 1, pp.15 – 28. McLaney, E. (2009). Business Finance: Theory and Practice, Pearson Education: New Jersey. McLeay, S. and Trigueiros, D. (2002). ‘Proportionate Growth and the Theoretical Foundations of Financial Ratios’. Abacus, vol. 38, pp. 297–316. Mulford, C., Comiskey, E., and Comiskey, E. (2002). The Financial Numbers Game: Detecting Creative Accounting Tactics. London, John Wiley & Sons. Schoenebeck, P. and Holtzman, M. (2010). Interpreting and analyzing financial statements: a project-based approach. Upper Saddle River, N.J.: Prentice Hall, 5th edition. Read More