Financial Statement Analysis Essay

I. INTRODUCTION Financial analysis is the selection, evaluation and interpretation of financial data, along with other pertinent, to assist in investment and financial decision-making. Moreover, it is also the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and profit and loss accounts. When looking a specific company, the financial analyst will often focus on the income statement, balance sheet, and cash flows statement. One of the most common ways of analyzing financial data is to calculate ratios from the data to compare against those of other companies or against the company’s own historical performance. For example, return on assets is a common ratio used to determine how efficient a company is at using its assets and as a measure of profitability. This ratio could be calculated for several similar companies and compared as part of a larger analysis. Financial analysis converts raw information of financial statements in useful financial information. Only after financial analysis, we can use financial statements for decision making. This financial information is useful for planning for example; we can estimate our future ability of earning on advertising if we did financial analysis of our advertising expenses with direct return on the investment in advertising. Like this, we can do financial analysis of each and every item of profit and loss account, balance sheet and cash flow statement. II. STATEMENT OF OBJECTIVES This study aims to analyze the financial statement of Dr. Yanga’s Colleges, Inc and Far Eastern University for the periods of 2007 to 2011 using financial statement analysis. This analysis are to apprehend the information contained in financial statements with a view to know the weaknesses and strengths of the firm and to make a forecast about the future prospects of the firm thereby, enabling the analysts to take decisions regarding the operation of, and further investment in, the firm. To be more specific, the analysis is undertaken to serve the following purposes (objectives): * Assessment of Past Performance. Past performance is a good indicator of future performance. * Assessment of current position. Financial statement analysis shows the current position of the firm in terms of the types of assets owned by a business firm and the different liabilities due against the enterprise. * Prediction of profitability and growth prospects. Financial statement analysis helps in assessing and predicting the earning prospects and growth rates in earning which are used by investors while comparing investment alternatives and other users in judging earning potential of business enterprise. * Prediction of bankruptcy and failure. Financial statement analysis is an important tool in assessing and predicting bankruptcy and probability of business failure. * Assessment of the operational efficiency. Financial statement analysis helps to assess the operational efficiency of the management of a company. RESEARCH AND DISCUSSION Dr. Yanga’s Colleges, Inc. Dr. Yanga’s Colleges, Inc. (DYCI) started as a non-sectarian secondary institution. It was established in 1950 as the Francisco Balagtas Academy (FBA). In 1987, the name of the institution was changed to Dr. Yanga’s Francisco Balagtas Colleges (DYFBC). Through the years, the school has been an integral part in the formation of many young men and women of Bulacan, metamorphosing into successful practitioners in their various fields of interest. In 2001, the name of the institution was changed again and became Dr. Yanga’s Colleges, Inc. Dr. Yanga’s Colleges, Inc. (formerly Dr. Yanga’s Francisco Balagtas Colleges, Inc.) was registered with the Securities and Exchange Commission on April 2001, primarily to own, operate, maintain, or otherwise administer a school or colleges of any nationality providing therein education in different courses. Far Eastern University.The Far Eastern University, Incorporated (the University or FEU) is a domestic educational institution founded in June 1928 and was registered and incorporated with the Securities and Exchange Commission (SEC) on October 27, 1933. On October 27, 1983, the University extended its corporate life for another 50 years. The University became a listed corporation in the Philippine Stock Exchange on July 11, 1986. The University is a private, non-sectarian institution of learning comprising the following different institutes that offer specific courses, namely, Institute of Arts and Sciences; Institute of Accounts, Business and Finance; Institute of Education; Institute of Architecture and Fine Arts; Institute of Nursing; Institute of Engineering; Institute of Tourism and Hotel Management; Institute of Law; and Institute of Graduate Studies (PSE website). In November 2009, FEU entered into a Joint Venture (JV) Agreement to establish a joint venture company (JVC) for culinary arts. The registration of the JVC was approved by the SEC on May 7, 2010. In 2010, the University established the FEU Makati Campus (the Branch) in Makati City. The Branch started its operations in June 2010 (PSE website). III. FINDINGS/ANALYSIS FINANCIAL RATIOS Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company’s financial statements the level and historical trends of these ratios can be used to make inferences about the company’s financial condition, its operation and attractiveness as an investment. There are four categories of ratio used in financial statement analysis. These are: (1) Liquidity Ratio(2)Activity Ratio(3)Leverage Ratio(4)Profitability Ratio This part of the study is organized the calculation and comparison of ratios of Dr. Yanga’s Colleges, Inc. and Far Eastern University using the four categories of financial ratios. Specific ratios for each category are also presented and analyzed 1. Liquidity ratio. Which measure a firm’s ability to meet cash needs as they arise. * Current ratio. The current ratio indicates a company’s ability to meet short-term debt obligations. The current ratio measures whether or not a firm has enough resources to pay its debts over the next 12 months. This ratio shows the current assets available to cover current liabilities at the balance sheet date. There should be a reasonable buffer of current assets over current liabilities as an indicator of the ability of the firm to pay its debts as and when they fall due. As presented, the current ratio of FEU is insignificantly increasing, which could mean more current assets may still be invested in other wealth-generating activities. This implies that FEU has to revisit its capital budgeting initiatives. As to the current ratio of DYCI is generally decreasing which has 4.36 in 2007 that reflects inefficient working capital management to 1.56 by 2011 which falls into a healthy mark of business current assets and liabilities that indicate both account are well functioning and helpful to the operation. * Quick or acid-test ratio. The quick ratio is a measure of a company’s ability to meet its short-term obligations using its most liquid assets (near cash or quick assets). Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values.As a supplement to current ratio, quick or acid-test ratio aims to show the more liquid current assets available to pay the more immediately payable liabilities. With reference to current assets, FEU has its quick asset for the year 2010 of 2.26 and 1.92 for the year of 2011. The acid test ratio of FEU is steadily decreasing from 2007 to 2011 which could be interpreted as a deterioration of liquidity.While quick ratio of DYCI is same as their current ratio decreases because the only current assets they have arecash and cash equivalent and trade receivables which are both included in the quick assets. DYCI is less liquid than their previous. * Working Capital to total assets. Working capital to total assets ratio is useful while evaluating the company’s level of liquidity. Working capital measures a company’s ability to cover its short term financial obligations by comparing its Total Current Assets to its Total Assets.FEU’s working capital to total assets shows that from 0.57 in 2007 has its increased up to 4.26 in 2011 which indicates a positive sign, showing that FEU’s liquidity is improving over time. While DYCI has decreased its working capital to total assets between years 2007 with 0.21 down to 0.08 in 2011 that indicates the company may have too many total current liabilities, reducing the amount of working capital available. * Cash-flow liquidity ratio. Cash-flow liquidity ratio measures how well a company can handle its Short Term Debt with its cash and other liquid assets. It seems like quick ratio of FEU has become inconsistent with considerable decline in the liquidity ratio. This just confirms the discussion presented in the current ratio portion that not all current assets of FEU fall under the immediately realizable current assets when needed to pay off maturing debts. In the financial ratio of DYCI the cash flow liquidity ratio is unstable where it goes from 2.44 in 2007 it went down to 1.72 by 2008 and escalate to 2.36 and 3.57 by 2009 & 2010 but drastically recede during 2011 to 2.71 it shows that DYCI can provide cash payment to its short term obligation. 1. Activity ratio. Which measure the liquidity of specific assets and efficiency of managing assets. * Trade Receivable turn-over. Trade Receivable turn-over measures how many times a company’s accounts receivable have been turnover into cash during the year.FEU’s converted trade receivables into cash 3.14 times in 2011, low from 20.17 in 2007. The turnover if receivable doesn’t improve which may indicate a not do good quality of receivable and no improvement of the firm’s collection and credit policies. While the DYCI has a 41.92 times in 2011, up from 26.09 times in 2007. The receivable has improved and this may indicate better quality of receivable and improvement of the firm’s collection and credit policies. Generally, a high turnover of DYCI is good because it could indicate efficiency in the collection of receivable, but a very high turnover may not be favorable because it may indicate that credit and collection policies are overly restrictive. * Average Collection Period. This helps evaluate the liquidity of accounts receivable, the ability of the firm to collect from the customers.The ratio for FEU, indicate that during 2011, the firm collected its accounts in 116 days on average. No improvement over the 18 days collection period in 2007. This is one of the main reasons why it has significantly higher current assets.While the DYCI’s financial ratio reflects that decreased their average collection turnover by 5 days from 14days in 2007 to 9days by 2011 which signifies that there’s an excellent credit term management and falls into outstanding receivables. Hence, cash is circulating wellalthough out the operations that generates revenue.FEU has the longest collection period. Whether the average of 18 days taken to collect an account is good or bad, it depends on the credit terms FEU is offering. * Working capital turn-over. Working capital turn-over measures how well a company is utilizing its working capital to support a given level of sales. FEU’s financial ratio shows that working capital turnover in 2007 with 2.04 down to 1.07 in 2011 indicates a decreasing ratio which is a low ratio that FEU is investing in too many accounts receivable to support its sales, which could eventually lead to an excessive amount of bad debts and obsolete inventory. On the other hand DYCI has a working capital turnover between year 2011 with 17.11 and 9.62 in 2007 that means a high, or increasing Working Capital Turnover is usually a positive sign, showing the company is better able to generate sales from its Working Capital. But an extremely high working capital turnover ratio can indicate that DYCI does not have enough capital to support it sales growth. This is a particularly strong indicator when the accounts payable component of working capital is very high, since it indicates that management cannot pay its b ills as they come due for payment. * Asset turn-over ratio. Asset turn-over ratio measures how efficiently a company’s assets generate revenue For FEU, the total asset turnover has decreased relative to the industry. As reflected in the financial ratio of asset turnover in 2007 with 0.58 times that there is no improvement primarily in 2011 with 0.49 times. Like DYCI also has no improvement on their asset turnover ratio like FEU. The year 2007 and 2011 the ratio is low from 1.41 down to 0.84. But similar to the previous financial ratio, as a rule of thumb, to be considered effective, it should be at least 0.30 times. Using this, it can be said that the two firms both FEU and DYCI keep an effective mechanism on utilizing their total assets. * Capital intensity ratio. Capital intensity ratio measure of a firm’s efficiency in deployment of its assets.As reflected on the financial ratio of FEU. The capital intensity in 2007 was 1.72 and has an improvement with 2.05 in 2011. So FEU’s capital intensity ratio is high, it is said to be capital intensive. Like DYCI also a high ratio in 2007 with 0.71 up to 1.19 in 2011. This means that both firms have to make a significant investment in assets relative to the amount of sales revenue those assets can produce. Hence, FEU is more capital intensive than DYCI 1. Leverage ratio. Which measures the extent of a firm’s financing with debt relative to equity and its ability to cover interest and other fixed charges. * Debt ratio. Debt ratio measures the proportion of all assets that are financed with debt.Total debt includes all current liabilities and long term debt. Creditors prefer low ratios because the lower the ratio, the greater the cushion against losses in the event of liquidation. As presented, in 2007 with a 0.15 down to 0.12 in 2011 it seems like FEU will be highly favored because they have the lowest ratio and lower the risk. On the other hand DYCI will also be highly favoredbecause of its 0.89 in 2007 up to 0.91 in 2011. They both have the lowest ratio and indicate lower the risk because they didn’t have reached the generally considered maximum ratio of 50%. To much debt would pose difficulty in obtaining additional debt financing when needed or that credit is available only at extremely high rates of interest and most onerous terms. * Debt to equity ratio. Debt to equity ratio measures the riskiness of the firm’s capital structure in terms of relationship between the funds supplied by the creditor and the investor.As reflected from the financial ratio of FEU. FEU’s debt to equity ratio has increased between 0.88 of 2011 and 0.85 0f 2007, implying a slightly riskier capital structure. On the other hand the financial ratio of DYCI’s debt to equity ratio decreases from 0.11 in 2007 and 0.9 in 2011 which implies a no risk capital structure. 1. Profitability ratio. Which measure the overall performance of a firm and its efficiency in managing assets, liabilities, and equity * Operating Profit Margin. A ratio used to measure a company’s pricing strategy and operating efficiency.FEU’s operating profit margin doesn’t have an improvement because of its 34% in 2007 down to 26% in 2011. This is unfavorable because it indicates the ability of the company that there is no control in operating expenses while sharply decreasing sale. Unlike the operating profit margin of DYCI is consistently in equal level which is 1% in 2007 until 2011 with 1% as well. * Cash Flow Margin. Cash flow margin is cash from operating activities as a percentage of sales in a given period.FEU’s cash flow margin between 0.32% in 2011 decreased from the operating margin of 0.43% in 2007. On the other hand the DYCI’s cash flow margin in 2011 of 0.21 was higher than the operating margin. This indicates a strong positive generation of cash. The performance in 2011 represent a solid and impressive improvement over 2005 which is -0.01 when the firm failed to generate cash from operations and had a negative cash floe margin. * Rate of Return on Assets (ROA). It gives an idea as to how efficient management is at using its assets to generate earnings.This ratio measures efficiency with which assets are used to operate the firm. As a rule of thumb, a higher return on total assets is preferred since lower ROAmay mean higher degree of leveragetherefore higher interest expense and lower net income. Referring to financial ratio of FEU between 2011 from 2008 FEU consistently showed the highest ratio than DYCI with 1% in 2011. * Rate of Return on Equity. It gives an idea as to how efficient management is at using its assets to generate earnings. This ratio measures the rate of return on common shareholders’ investment. This is considered as the most important accounting ratio as this has something to do with the DuPont equation. As a rule of thumb, the higher the ROE, the better since low ROE but high ROA may mean that the firm is using greater debt. Reflected inthe financial ratio of FEU between the year 2007 to 2011 is inconsistently showed the highest ratio than DYCI with its low ratio of 7% in 2007. Summary of Financial Statements Analysis of FEU and DYCI Short-term liquidity and Activity Short-term liquidity and activity analysis is of particular significance to trade and short-term creditors, management and other parties concerned with the ability of a firm to meet near-term demand for cash. Both FEU and DYCI’s current and quick ratios are insignificantly decreasing indicating a deterioration of short-term liquidity. On the other hand the cash flow liquidity ratio of both firms doesn’t improved and has become inconsistent with considerable decline in the liquidity ratio. The average collection periods for accounts receivable of FEU doesn’t improved. There is no improvement that may be the result of poor day-to-day credit management or such temporary problem concerned by a depressed economy. While the DYCI decreased their average collection turnover by 5days which signifies that there is an excellent credit term management and falls into outstanding receivables. Presently, there appears to be no major problem in DYCI’s short-term liquidity position but FEU seems that there is a problem in average collection period that must have been improved. Long-term Solvency The debt ratios for FEU and DYCI shows a steady decreased in the use of borrowed funds. Total debt has decreased relative to total assets implying a slightly riskier capital structure. Given the decreased level of borrowing, the times earned and fixed charged coverage improved slightly in 2011. These ratio should however be monitored closely in the future particularly if the both firms continues to expand. Operating Efficiency and Profitability FEU and DYCI both decreased from 2007 to 2011 that means inefficient utilization or obsolescence of fixed assets. The assets turnover in 2011 of both firms also decreased implying that the company is not using its assets optimally and no progress traceable to improved management of receivables. Operating profit margin of FEU doesn’t have an improvement, unfavorable and manage to improve its operating margin in 2011 principally due to the ability of the firm that there is no control in operating expenses. Unlike DYCI that is in the stable level from 2007 to 2011. Referring to financial ratio of FEU and DYCI both firm increased considerably in 2011. These ratios measure the overall success of the both firm in generating profits from its investment and management strategies. Conclusion: It appears that Far Eastern University and Dr. Yanga’s Colleges, Inc. doesn’t have any major problems and is well proportioned for future growth but FEU must improve their average collection period. Close monitoring the firm’s management of receivables is important considering the size of the company’s capital tied up. The both firm should however be cautious of the increased risk associated with debt financing. IV. RECOMMENDATION The analysis of the Dr. Yanga’s Colleges Inc., financial statements shows that there is no consistent ratio on the increase of their comprehensive income unlike the Far Eastern University who maintains the increase of their profit. Therefore, it is advised that a stronger and more effective policy shall be developed and implemented regarding the ratio of the revenue and all expenses. When it comes to their cash every end of the year, Dr. Yanga’s improve better than FEU. For the past 5 years, FEU keeps on decreasing their cash on hand. It is observed and analyze that FEU’s cash on hand decrease, while their account receivables increase. So, the expected cash to be use in the entire year was still receivable that affects their accounting plans. It shows that FEU has a weak credit and collection policy, so it is advised to focus on those credit accounts, and also in accepting creditors and promissory notes. As reflected in the financial ratio of Far Eastern University and Dr. Yangas colleges, Inc. there is no major problems for both firms and is well proportioned for future growth. However the Far eastern University has a problem in their average collection period. Therefore, possessing a lower average collection period is seen as optimal, because this means that it does not take a company very long to turn its receivables into cash. Ultimately, every business needs cash to pay off its own expenses. In that case it is advised that FEU must improve an excellent credit term management to fall into outstanding receivables. Hence, cash is circulating well although out the operations that generates revenue.