Financial Management - Precision Castparts Corp - Case Study Example

PRECISION CASTPARTS CORP ANALYSIS al Affiliation) Table of Contents Profits, earnings and dividends (including a comprehensive ratio analysis) 3 1. Percentage gross profit 4 Percentage profit margin 4 Percent Rate of Return on Assets 5 Percent Rate of Return on Equity 5 Activity ratio 6 Operating Cycle Days 6 1b.Earnings 7 1c.Dividends 7 2. Financial stability and liquidity (including a comprehensive ratio analysis) 8 2a.Financial stability 8 Percent Owners Equity 9 Debt to Total Assets 9 Equity Multiplier 10 Sales to Assets 10 Sales to Net Fixed Assets 10 Net Fixed Assets to Equity 11 2b.Liquidity 11 Cash Flow to Current Long Term Debt 12 Current Ratio 12 Introduction Precision Castparts Corp. is a Portland, Oregon company based in United States. It deals in industrial goods as well as metal fabrication. It manufactures cast metal parts which are used in the aerospace, defense, industrial as well as in automobile industries. 1.    Profits, earnings and dividends (including a comprehensive ratio analysis) 1a.Profits Over the past few months the Precision Castparts Corp. has had ups and downs trend in terms of its profits though the gap between the profits is very small, for example the difference in profits between February 2014 and January 2014 is less than 1%. This is an indication that the company maintains its standards of high performance over the period. The difference in the profits is also caused by a number of factors like: Increase and decrease in sales over the years. Difference in retirement obligations which depends on number of employees retiring every year. Operational expenses. Changes in cost of sale which mainly depend on the market prices of goods The company has never experienced any losses over the past 3 months and this is a good indicator of excellent performance and a company worth investing in. Below is some profitability ratio analysis for Precision Castparts Corp.: 1. Percentage gross profit These measures the gross profit earned on sales and how much of this is able to cover for operating expenses and also to contribute to profit for the company. Formula used :( Sales-Cost of sales)/Sales) For example the percentage gross profit for January 2014 and February 2014 is 45.45%, this was seen in both months, an indication of financial health for the company although not at a very good standards, but it shows that the Precision Castparts Corp. is capable of paying for the operational expenses without financial constraints. Percentage Gross Profit = {(2.2-1.2)/2.2} = 0.454545 = 45.45% Percentage profit margin This shows how much profit a company makes on every sale made and how well it can deal with higher cost and lower sales given the circumstances (Grabel, Ilene 2003) Formula used: Earning before taxes/sales*100 There is an increase in percentage of profit margin from = 0.11%to 0.055%in the Month of January 2014 and Month of February 2014 respectively this is an indication that sales are increasingly contributing to the bottom line of the company. January percentage profit margin = {(0.22)/200)} x 100% = 0.11% February percentage profit margin = {(0.11)/200)} x 100% = 0.055% Percent Rate of Return on Assets This measures how effectively a companys assets are being used to generate profits. This is usually considered mainly when evaluating the success of a business. A higher number reflects a well managed company with a healthy return on assets. Formula: Earnings before Taxes / Total Assets * 100. The percent rate of return on assets for Precision Castparts Corp. is 0.022% in February, although there is a slight increase, there is still a need for improvement in this area to ensure the company can remain competitive and continue to operate successfully. = {(0.11/500) x 100} = 0.022% Percent Rate of Return on Equity This shows the rate of return on equity capital employed and also measures the ability of a companys management to realize an adequate return on the capital invested by the owners in a company. A higher number is preferred for this ratio. Formula: Earnings before Taxes / Total Equity * 100 The percent rate of return on equity for Precision Castparts Corp. is 0.055% in February 2014 and 0.0275%in January 2014 there is a slight increase an indication that the management may not be effectively managing the profits earned based on the owners investment in the company. The management should utilize budgets to track expenses on a regular basis, and identify those that are out of line. Assign specific individuals or departments to be responsible for different cost centers. Percentage Rate of Return on Equity for February = {(0.11/400) x100 = 0.0275% Percentage Rate of Return on Equity for January = {(0.22/400) x100 = 0.055% Activity ratio This shows the average number of days a company takes to collect the cash from its debtors and the same to pay off the creditors. (Keil, Stanley.R. 2005) The following are suggestions Precision Castparts Corp. should consider in improving the accounts receivable turnover and days sales in receivables ratios: Prepare schedules to determine how long debts have been outstanding. They should review these on a regular manner to look for movement in the debtors’ accounts. Communicate with customers and apply increasing pressure on them to pay as the number of days outstanding increases. Develop a strategy to deal with problem a rising with debtors and their accounts. Do the invoicing and submit to customers in advance. Use credit policies to give references to new customers; this will help in evaluation of the current credit. Operating Cycle Days This shows the total conversion period for a company, the average number of days it takes to convert inventory into cash from sales. (Iggers, J. 200) Evaluating this ratio can be helpful in analyzing the effectiveness of marketing, determining credit terms to extend to debtors, and collecting outstanding accounts. Formula: (Inventory / (Cost of Sales / Days)) + (Trade Accounts Receivable / (Sales / Days)) The operating cycle days for Precision Castparts Corp. is 5.08 days, which compared to the baseline of 5.01 days, indicates the company may not be successfully minimizing the amount of time it takes to convert products and services into cash. 1b.Earnings This is normally the profit shared to shareholders after paying taxes and all the operating expenses. Precision Castparts Corp. has experienced a positive income over the 2 months, a good indication the company is doing well. Formula: Formula: Profit after tax/number of ordinary shareholders January Earnings = 115.38/300 =2.6 February Earning = 65.22/ 300 = 4.6 The earnings per share increased from 2.6 in January to 4.6 in February 2014. This is an indication of additional earnings to the shareholders of the company. 1c.Dividends Precision Castparts Corp. has been able to give its shareholders dividends every year for the past five years this is a good indication of good performance on the company and this has attracted many investors, this is shown in the increase in the number of shareholders in the company over the years. The company provides both interim dividend and final dividend which is favorable for many shareholders as they would want to see how their investment is doing both in the middle of the year and the end of the year. The dividends are always issued after the board meeting which is done annually and half yearly, in each of the meetings they normally involve all the stakeholders and is open for all the stakeholders to give his/her opinion this is an indication of transparency in the Precision Castparts Corp..I would recommend this for any potential investor. 2. Financial stability and liquidity (including a comprehensive ratio analysis) 2a.Financial stability This term shows the financial position of the company, the main area of focus is the balance sheet of a company which consists of: Noncurrent assets Current assets Noncurrent liabilities Current liabilities Equity Based on the balance sheet of Precision Castparts Corp. for the 2 months, there has been changes on the financial position based on different parts of the balance sheet which is caused by different factors, for example there was a decrease on the non current asset from 2262.1 in January to 2237.7 in February this is caused by the disposal of some assets and the value of the assets have also depreciated over the years. Below is some ratio analysis of the financial position of Precision Castparts Corp. Percent Owners Equity Total Equity / Total Assets * 100 It measures what proportion of total assets was provided by the owner’s equity. The higher the number the more total capital has been contributed by owners and the less by creditors. Formula: Total Equity / Total Assets * 100 The percent owners equity ratio for Precision Castparts Corp. for the month of February 2014 was 12.5%, which compared to January 2014 which was 5.1% indicates that the company owns an adequate portion of its asset base in February compared to January an indication of some growth. February Percent Owners Equity= (500/400) x 100 =12.5% Debt to Total Assets It measures what proportion of debt a company is carrying relative to its assets. If the ratio value is greater than one, this indicates that a company has more debt than assets. Formula= Total Liabilities / Total Assets The debt to total assets ratio for Precision Castparts Corp. for the month of February and January is 0.80, this is an indication that the company should be able to withstand losses without harming creditor interests; it is also able to obtain additional financing if desired. Debt to Total Assets = (400/500) = 0.80 Equity Multiplier This shows the extent to which a company uses debt to finance its assets. The higher the number is, the more a company is relying on debt to finance its assets Formula: Total Assets / Total Equity = (500/500) = 1 Sales to Assets It measures a companys ability to produce sales in relation to total assets to determine the effectiveness of the companys asset. This means that the company is using its assets to successfully generate sales. Formula: Sales / Total Assets Sales to assets for Precision Castparts Corp. in February 2014 is 7.6, which compared to January which is 8.2 4 indicates the companys performance in this area is lacking and management should consider taking measures to improve this ratio. = (3800/500) = 7.6 Sales to Net Fixed Assets It shows a companys ability to effectively utilize its fixed assets to generate sales. It is similar to the sales to assets ratio, but the difference is it excludes long term investment, assets that are intangible as well as current assets and other non-current assets. A higher number is desired, indicating that a company productively uses its fixed assets to produce sales. In addition, Formula: Sales / (Property and Equipment - Accumulated Depreciation. There has not been a conclusive verification of accumulated depression that can be used to arrive calculation of Sales to Fixed Assets. Net Fixed Assets to Equity Measures the extent to which investors capital was used to finance productive assets. Lower ratio indicates a proportionally smaller investment in fixed assets in relation to net worth, which is desired by creditors in case of liquidation. Formula: (Property and Equipment - Accumulated Depreciation) / Total Equity Net fixed assets to equity for Precision Castparts Corp. have not been conclusively arrived at. This is because it takes time for the yielding of such result particularly accumulated depression. 2b.Liquidity The financial meaning of this term is the ability of a company to meet its maturing short-term obligations. Is a company able to convert its assets to cash without a loss in value if necessary to meet its short-term obligations? Liquidity is a key predictor of a company’s ability to make timely payments to creditors and to continue to meet obligations to lenders when faced with an unforeseen event. The main area of focus is the cash flow statement of a company including: Cash from operating activities Cash from finance activities Cash from investment activities There has been a positive cash flow over the years for Precision Castparts Corp. this is an indication that the company is able to meet its short term obligations and is operating within the required standards. Below is some liquidity ratio analysis of Precision Castparts Corp.: Cash Flow to Current Long Term Debt This shows how well cash flow from operations covers current maturities; this ratio reveals a companys capability to repay existing debt and to take on extra debt and increased number of the ratio is needed. Formula: (Net Income + Depreciation Expense) / Current Portion of Long Term Debt The cash flow to current maturities long-term debt ratio for Precision Castparts Corp. in 2014 expected to be slightly higher than that of 2013, which was 1.12. the expectation is based on the increased net income Current Ratio Reflects the number of times short-term assets cover short-term liabilities and is an accurate indication of a companys ability to service the current needs. There was increased number is necessary simply because it indicates a strong ability to service short-term obligation Formula: Current Assets / Current Liabilities For example the current ratio for Precision Castparts Corp. is for the year 2014 is 1.25, which indicates that the companys ability to service short-term needs was satisfactory that year compared to the previous year which was 0.7. = (500/400) = 1.25 Work Cited Grabel, Ilene .,2003.International private capital flows and developing countries, in Ha-Joon Chang : Rethinking Development Economics. London: Anthem Press. Keil, Stanley.R., 2005.The Impact of Wal-Mart on Income and Unemployment Differentials in Alabama. Review of Regional Studies.New York:Routlege. Iggers, J.,2001.Good News, Bad News - Journalism Ethics and the Public Interest Critical Studies in Communication and in the Cultural Industries .New York: Westview Press. Prashad,Vijay.,2006.A middle Class the size of France :Wall Mart in India. 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