The paper carried out a comprehensive financial statement analysis of Saudi Cement Company. The paper focused on coming up with the common-size statements for the company and ratio analysis. The ratios that were calculated are the short-term solvency ratio, long-term solvency ratios, coverage ratios, asset management ratios, profitability ratios, and market value ratios. The analysis covered six years that is between 2009 and 2014. The paper aims to carry out a detailed analysis of the company for each year. Thereafter, an analysis of the trend of performance over the six years is carried out. The outcome of the analysis is discussed further in the paper.
Saudi Cement Company (SCC) was established in 1955. The company deals with the production of cement and other cement-related products. The company also invests in companies that deal with the production of cement and other related products. At the moment, the company has two cement plants; these are Hofuf and Ain Dar plants. They are located in the Eastern Province of Saudi Arabia. Further, the company is located in King Abdul-Aziz Port in Dammam. It is a Saudi Joint Stock Company. The company is listed on Tawadul with the ticker symbol 3030. The current production capacity of the company is 14,325 tons daily. However, the capacity is expected to increase to 34,325 tons daily after all the expansions are completed. The company has an authorized capital of 1,530,000,000. However, the issued shares are 153,000,000. Finally, the chairman of the board is Khalid A. S. A. Al-Rajhi. The board of directors has eleven other members. The chief executive officer of the company is Mohammed Ali Al-Garni.
- Common size statements
- Income statement
- Saudi Cement Company
- (Saudi Joint Stock Company)
- Common Size Statement of Income
- Year ended December 31, 2012
|Income statement||2012 |
|Cost of sales||(974,237)||-44.21%|
|Selling and distribution expenses||(32,935)||-1.49%|
|General and administrative expenses||(54,218)||-2.46%|
|Company’s share in profit (loss) of associated companies||2,139||0.10%|
|Islamic Murabaha income||371||0.02%|
|Islamic loans charges||(14,585)||-0.66%|
|Net income before Zakat||1,142,452||51.85%|
|Earnings per share (SR)|
|Earnings per share from net income||7.2||0.00%|
|Earnings per share from continuing main operations||7.1||0.00%|
|Earnings per share from continuing other operations||0.1||0.00%|
|Weighted average number of shares||153,000,000|
The common-size income statement shows that gross profit is 55.79% of sales. Further, selling and distribution expenses and general and administrative expenses are 1.49% and 2.46% of sales respectively. Further, the operating income is 51.83% of sales. The value is high and it shows that the operating segment of the business is profitable. Finally, the net profit margin of the company is 50%.
- Balance sheet
- Saudi Cement Company
- (Saudi Joint Stock Company)
- Common Size Balance Sheet
- As of December 31, 2012
|Cash and cash equivalents||226,682||5.23%|
|Prepaid expenses and other debit balances||46,777||1.08%|
|Total current assets||801,607||18.50%|
|Fixed assets, net||3,345,805||77.21%|
|Capital work in progress||88,244||2.04%|
|Total non-current assets||3,531,555||81.50%|
|Liabilities and shareholder’s equity|
|Islamic Tawarruq loans||400,000||9.23%|
|Saudi Industrial Development Fund SIDF loan – current portion||85,000||1.96%|
|Dividends and other payables to shareholders||110,664||2.55%|
|Accruals and other credit balances||138,831||3.20%|
|Total current liabilities||767,386||17.71%|
|Saudi Industrial Development Fund SIDF loan||335,000||7.73%|
|Total non-current liabilities||407,922||9.41%|
|Paid up capital||1,530,000||35.31%|
|Voluntary reserve – appropriated for trauma Center||50,000||1.15%|
|Voluntary reserve – unappropriated||20,000||0.46%|
|Total shareholders’ equity||3,157,854||72.88%|
|Total liabilities and shareholders’ equity||4,333,162||100.00%|
The common-size balance sheet shows that the total current assets account for 18.50% of the total assets while the non-current assets account for 81.50% of the total assets. This shows that the company keeps the assets in non-current form. Further, it can be observed that the current liabilities are equivalent to 17.71% of the total assets while non-current liabilities are 9.41%. This shows that the current liabilities exceed non-current liabilities. Finally, the shareholders’ equity is 72.88% of the total assets. The ratio shows that a significant proportion of assets are financed through equity.
The reported financial statements of the company do not give an in-depth analysis of the financial strengths and weaknesses. Therefore, it is important to carry out an in-depth analysis of the financial statements to have a better view of the company. Further, analysis of the company helps in making an informed decision. Ratio analysis breaks down the financial data into various components for better understanding. Ratio analysis for Saudi Cement Company will focus on the key aspects of the financial results of the company (Collier 145).
Liquidity ratios show the ability of an organization to maintain positive cash flow while satisfying immediate obligations. Businesses need to maintain optimal liquidity ratios since either low or very high ratios are not favorable. Calculations of various liquidity ratios for the year 2012 are presented below.
Current ratio = Current assets / current liabilities = 801,607 / 767,386 = 1.045 times
Quick ratio = (Current assets – inventory) / current liabilities = (801,607 – 322,714) / 767,386 = 0.6241 times
Cash ratio = Cash / current liabilities = 226,682 / 767,386 = 0.2954 times
Net working capital to total assets = Net working capital / total assets = (801,607 – 767,386) / 4,333,162 = 0.0079
The current ratio for the year 2012 was 1.045. This ratio shows the ability of the company to meet short-term obligations using current assets. The ratio is lower than the standard level of 2. This indicates that the company is facing liquidity problems. Further, the quick ratio was 0.6241. This shows that the company’s quick assets cannot pay short-term obligations. Further, the cash ratio was 0.2954. The value is less than one and it indicates that the current liabilities cannot be paid off using cash. The ratio of net working capital to total assets is quite low. All four short-term solvency ratios indicate that the company is facing problems in managing liquidity. The company needs to come up with strategies that can raise the level of liquidity otherwise it may face problems with short-term creditors (McLaney and Atrill 261).
Long-term solvency ratios
These three ratios calculated below focus on the leverage of the company. A company’s leverage is explained by the amount of debt financing it holds. The ratios are vital since they show the investor the extent of exposure of equity financing. A high leverage ratio is not favorable because it shows that the company has a high-interest expense. This reduces the amount of profit attributed to the equity shareholders. Further, it reduces the ability of the company to attract new capital providers. On the other hand, very low ratios are not favorable because they show that the management of the company is not quite aggressive and thus not willing to exploit the potential of the company. Therefore, the company needs to maintain a suitable level of liquidity ratios.
Total debt ratio = (Total assets – Total equity) / total assets = (4,333,162 – 3,157,854) / 4,333,162 = 27.12%
Debt to equity ratio = Total debt / Total equity = 1,175,308 / 3,157,854 = 0.3721 times
Long term debt ratio = Long term debt / (long term debt + total equity) = 335,000 / (335,000 + 3,157,854) = 335,000 / 3,492,854 = 9.59%
The total debt to total assets is 27.12%. This ratio is significant because it shows the proportion of total assets that is financed using debt. This shows that only 27.12% of the total assets are financed using debt. The ratio is low and it gives the company room to borrow more and expand the asset base. The total debt to equity ratio was 0.3721 times. This ratio gives more information on the proportion of total debt and total equity in the company’s balance sheet. The value of the ratio is quite low. This shows that the proportion of equity exceeds the proportion of debt. It shows that the company has low leverage level. The long term debt ratio gives information on the proportion of long term debt in the total of long term debt and total equity. The value is quite low, at 9.59%. This shows that the proportion of total equity is much higher than long term debt. The three ratios consistently show that the company has low leverage level. This implies that the company has a low interest expense and has a potential of borrowing more to expand the business. However, this needs to be done with caution so as not to significantly reduce the amount of profit attributed to shareholders (Deegan 141).
The coverage ratios give information on the solvency of the company. That is the ability of the company to repay debt. High ratios are preferred to low ratios because they show that the company has a high potential of repaying the debt with much ease. The two ratios are calculated below.
Times interest earned = Earnings before interest and tax / interest = 1,142,057 / 14,585 = 78.30 times
Cash coverage ratio = (Earnings before interest and tax + depreciation) / interest = (1,142,057 +7,550) / 14,585 = 78.82 times
The value of times interest earned ratio and cash coverage ratio are 78.30 times and 78.82 times respectively. The value of the ratio is quite high. It indicates that the company has the ability to pay debt (McLaney and Atrill 268).
Asset management ratios
Asset management ratios focus on the internal operations of the company. These ratios show the level of activity in a company, that is, how well a company manages resources to generate high level of sales and returns. Thus, they focus on efficiency of the company. There is a direct connection between the asset management ratios and sales. Favorable asset management ratios translate to high returns. Therefore, it is important for a business to closely monitor these ratios. Calculation of the efficiency ratios is presented below.
Inventory turnover = cost of goods sold / Inventory = 974,237 / 322,714 = 3.0189 times
Day’s sales in inventory = 365 / inventory turnover = 365 / 3.0189 = 121 days
Receivables turnover = Sales / accounts receivable = 2,203,447 / 205,434 = 10.72 times
Days’ sales in receivables = 365 / receivables turnover = 365 / 10.7258 = 34 days
Total asset turnover = Sales / total asset = 2,203,447 / 4,333,162 = 0.5085
Net working capital turnover = Sales / net working capital = 2,203,447 / 34,221 = 64.39 times
Fixed asset turnover = Sales / net fixed asset = 2,203,447 / 3,345,805 = 0.6586 times
The first category of the asset management ratio is the inventory ratio. The inventory turnover ratio was 3.02 times. This implies that the company replenishes stock about 3 times a year. The day’s sales in inventory ratio were 121 days. It shows that the company replaces stock after 121 days. The inventory ratio shows that the commodities of Saudi Cement Company are selling at a slow pace. It indicates that the company is not managing inventory efficiently. Besides, low inventory ratios result in high storage and inventory handling costs. In most cases, a high inventory turnover and a low day’s sales in inventory ratio are often preferred. The management needs to review the inventory policy to improve inventory ratios.
The second category of asset management ratio is receivables ratios. The value of receivable turnover was 10.72 times. This shows that the company is in a position to collect money from debts 10.72 times in a year.
Further, the days’ sales in receivables are 34 days. Generally, the ratio gives information on the efficiency of the company is collecting money for goods sold on credit. A review of this ratio for a year may not give much information on the efficiency of the company in handling accounts receivables. Therefore, it is important to monitor the ratio over some time to determine whether the efficiency of the company in handling debt is improving or deteriorating.
The final category of asset management ratio that is estimated above is the asset turnover ratio. The total asset turnover ratio was 0.5085. This indicates that the company can generate only 0.5085 sales from a unit of total assets. The value is quite low and it shows that the company is not efficient in using the assets to generate sales. A higher value of the ratios is often preferred because it indicates that the management is in a position to generate a value of sales from the total assets. Thus, the low value of the ratio shows that there is inefficiency in managing total assets. The networking capital turnover ratio is 64.39 times. The ratio gives information on the efficiency of the company is using the working capital to generate sales. A business needs to maintain a relatively high ratio as compared to those of the competitors. This will give the business a competitive advantage over the other companies. In this case, the value of the ratio is extremely high and misleading. On the surface, it appears that the company is operating at high efficiency. However, the working capital of Saudi Cement Company is extremely low. The ratio indicates that the company may run out of funds to run the business. Finally, the fixed asset turnover ratio is 0.6586 times. The value shows that the company can generate only 0.6586 sales from a unit of a fixed asset. The value of the ratio is quite low. A higher value of the ratio is often preferred because it indicates efficiency using fixed assets to generate sales (Hansen, Mowen, and Guan 171).
This category of ratios gives information on the earning capacity of the company. The ratio gives information on how the company makes use of available resources to generate profit. Some of the profitability ratios are calculated below.
Profit margin = Net income / sales = 1,101,789 / 2,203,447 = 50.00%
Return on assets = Net income / total assets = 1,101,789 / 4,333,162 = 25.43%
Return on equity = Net income / total equity = 1,101,789 / 3,157,854 = 34.89%
The profit margin for the year 2012 was 50.00%. The value of the ratio is quite high. It shows that the company is efficient in managing sales and the costs of running the business. The return on asset was 25.43%. The ratio is high and it indicates that the company is efficient in using assets to generate profits. Finally, the return on equity was 34.89%. The ratio is also high and it indicates that there is a high level of efficiency in using shareholder’s equity. Thus, the profitability level of the company is high (Brigham and Michael 246).
Market value ratios
Price earnings ratio = Price per share / earnings per share = 89 / 7.20 = 12.36 times
Market to book ratio = Market value per share / book value per share = 89 / 20.64 = 4.31 times
The price earnings ratio of the company was 12.36 times. This value is low. The ideal price to earnings ratio is 20 times. The low ratio may indicate that the company is performing extremely well or the shares are undervalued. Further, the market to book ratio was 4.31 times. The value of the ratio is low and it indicates that the shares of the Saudi Cement company are undervalued (Arnold 105).
Summary of ratio analysis for the year 2012
Various categories of ratios were calculated and analyzed. The first category shows that the company has low liquidity level. It shows that the company may run of funds to run the business. Further, the long term solvency ratio shows that the company had a low leverage level in 2012. Further, the coverage ratios indicate that the company is solvent. The asset management ratio shows that the company has a low level of efficiency. Further, the company has a high level of income as indicated by the profitability ratios. Finally, the shares of the company are undervalued as indicated by the market value ratios.
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Brigham, Eugene and Ehrhardt Michael. Financial Management Theory and Practice, USA: South-Western Cengage Learning, 2009. Print.
Collier, Peter. Accounting for Managers, London: John Wiley & Sons Ltd, 2009. Print.
Deegan, Craig. Financial Accounting Theory, London: McGraw-Hill, 2009. Print.
Hansen, Don, Maryanne Mowen and Liming Guan. Cost Management: Accounting & Control, USA: South Western Cengage Learning, 2009. Print.
McLaney, Evans, and Peter Atrill. Financial Accounting for Decision Makers, London: Financial Times Prentice Hall, 2008. Print.