As we near the end of the first rigorous semester in the Corporate Financial Accounting, we were assigned our group capstone project. We knew what to come as the facilitator has already told us about the capstone project at the beginning of his session during the introductory class. So I can say that my group was well prepared for the project and we decided to give it our all. The first task was to choose our sector and the companies that we intend to study. We eventually got a company in the FMCG sector and that was a big boost for us! We got the company last ten (10) year financial statements and did same for the benchmark company.
The instruction was to gain an understanding of business activities of the company and the impact of their operational and strategic activities on overall financial performances and position of the company over the last five (5) years. We are also to use ratio analysis and other relevant evaluation tools to perform an in-depth evaluation of the operating performances and financial position of the companies (main and benchmark company). We are also to highlight the strength and weaknesses of the company performance and position over the last five (5) years and recommend to management, some improvements for performance of the company. Finally, to recommend whether the company would be suitable investment for shareholders.
We started with the company’s overview where we compared the date of incorporation and product offerings. We also compared the major shareholder of the two companies together with the leadership of the companies. The next thing we did was to do a comparator analysis using the following ratios:
- Solvency ratios – we used two (2) ratios under this, and they are interest coverage ratio and debt ratio.
- Performance ratios – we computed both the gross and net profit margin ratio under this category.
- Liquidity ratio – we used the current and acid test ratio.
On the interest coverage ratio which measures how many times the company’s earnings will cover its interest payments, we noticed that for the main company, the ratio dropped significantly which was due to some borrowing of over N68billion made over the last three years. In comparison to our benchmark company, the target company performed poorly. Though the benchmark also experienced extreme drop from sixty to six. We reckon that the target company may not be able to get further credit from her bankers if the interest coverage ratio declines further. We at this point recommended that the target company work on improving its cost of sales which grew by about 41% compared to revenue that only grew by about 35% in the current year of analysis.
The debt ratio assesses the proportion of total debt to total assets. It measures how much a company’s operations are funded using debt versus the funding received from the owners of the business. For both the main and the benchmark companies, their debt ratio hovers around 79% to 82%. Our conclusion as to this was that the debt ratio experience was typical of the sector for the company operates. For the current year a growing debt and decreasing interest coverage ratio should require the attention and monitoring of their respective management. Though our target management was proposing to increase the authorised share capital from about 970million to 1900million. We felt though the decision to increase the authorise share capital maybe strategic, we are however worried by the dwindling revenue which may impact the ability of the company to pay dividend moving forward.
…to be continued
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