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RATIO ANALYSIS CASE STUDY The financial statements below were extracted from the books of E. A. Portland Cement Company ltd. The excerpts below were also extracted...

      

RATIO ANALYSIS CASE STUDY
The financial statements below were extracted from the books of E. A. Portland Cement Company ltd. The excerpts below were also extracted from the key managers reports;

The business environment in the year continued to present challenges such as competition, high energy costs and importation of cheap cement into the market which reduced sales in the local and regional markets.

The Group’s performance in the year was affected by these factors resulting to a loss of Kshs 385 million. Earnings per share reduced to a loss of Kshs (4.30) from Kshs 19.73 in the year 2013. Clinker production increased in the year reducing the quantity of purchased clinker by 39%.

Major improvements in production efficiencies however resulted in 3% savings in cost of production. However, the cost of energy increased marginally in the year averaging Kshs.13.36 per kwh compared to kshs 12.70 per kwh in 2013. Power consumption averaged 69.1 million kwh in the current year compared to 67.7 million kwh in the previous year resulting in additional costs of Kshs. 70 million during the year in focus due to the higher production of clinker. As a result of the cost savings, Gross Margin returned an impressive 26% despite a 3% slump in cement prices.

Administrative and Selling Costs increased by Kshs 700m (or 34%) attributed to higher staff and administration expenses incurred in the year. There was an increase in staff costs driven by restructuring management levels and staff compensation.

For the year under review, the Company returned an operating loss of Kshs. 92 million compared to prior year operating profit of Kshs. 340 million while the loss before tax was Kshs. 374 million compared to a profit before tax of Kshs. 1,419 million the previous year.

The previous year’s results included Fair Value Gain on revaluation of the investment property amounting to Kshs. 730 million. Cash flows generated from operations remained relatively stable at above Kshs 700 million similar to the previous year. Investments in long term capital projects used up Kshs. 597 million while servicing of loan obligations used up another Kshs. 541 million during the year.
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Required
a. Calculate the key ratios under each of the categories below to evaluate the financial performance of the company
1. Liquidity ratios.
- Current ratio
- Cash ratio
2. Gearing/leverage/capital structure ratios.
- Debt ratio
- Capital gearing ratio
- Interest cover ratio
3. Profitability ratios.
- Gross profit margin
- Net profit margin
- Return on capital employed
- Return on equity
4. Growth and valuation ratios.
- Earnings per share
- Price-earnings ratio given average share price for 2014 to be sh 53
- Earning yield

b. Provide a detailed analysis of the company performance, indicating whether you concur with the report provided by the management on the financial performance of the company.

  

Answers

Lellah
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If a company loses money, the earnings yield is negative. This gives a more straightforward indication that the company is losing money.
Lellah answered the question on November 8, 2021 at 10:30

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