ACCG350 FINANCIAL STATEMENT ANALYSIS SEMESTER 1, 2012 INDIVIDUAL ASSIGNMENT 42505054 Sangeun HA OROTON GROUP

Substract
To determine OROTONs performance, this report will explore the value of the financial report by the CEOs view and measure the values of the financial ratio followed by four categories; Profitability, Investment, Financial and Prospective management

Ratio analysis Contents; 1) Profitability management The Dupont model Profitability ratio 2) Investment management Working capital management Active ratio 3) Financial management Liquidity ratio Leverage ratio 4) Prospective management Sales growth NOPAT margin

1. PROFITABILITY management
1) The DuPont model The DuPont analysis of the return on equity will help determine what has affected the profitability of the company. It will be separated into three components followed by Net profit Margin, total asset turnover and equity multiplier. 6 NPM TAT AE ROE 7 0.090401 3.141221 1.66147 0.471809 8 0.138145 3.87589 1.353488 0.724703 9 0.145096 4.58916 1.994433 1.328027 10 0.158074 4.893641 1.075666 0.832092 11 0.151738 4.765804 2.219423 1.604985

OROTONs ROE has been fluctuated through the financial years. The highest value represented the amount of 1.60 in 2011, on the other hand, the lowest value pointed 0.47 in the first financial year. Even though, in the middle of financial years there was a decline amounted at 0.83, still the ROE represents that OROTON is spending wisely and profitably. It is obvious to predict their stock price will be high. 2) Profitability Ratios

Profitability ratios measure the company's ability to generate earnings such as gross profit margin and return on Total asset . 6 Gross profit margin Return on Total asset=NI/TA 7 0.680105 0.22095 8 0.702608 0.35422 9 0.672355 0.371611 10 0.702608 0.397556 11 0.680105 0.376229

To get Gross profit margin, divide the gross margin (net sales-the cost of goods sold) by sales. There was no big difference in the gross profit margin around between 0.68- 0.70 through financial years. These means there was no particular change in the companys pricing policy and cost of goods offered for sale. Return on total assets measures the rate of return on total investment. It is calculated by dividing net income by total assets. This ratio from the first year to the second last year has been increased by 0.18 to 0.40. A higher return on asset ratio attracts more investors and they readily buy stocks of such companies. (E. Eldon, Beverly L., p28) Therefore, it is a great sign for OROTON group. Nevertheless the ratio declined at the end of the year, but the difference between 2010 and 2011 is tiny it can be skipped since no effect specially.

2. INVESTMENT MANAGEMENT
1) Working capital management Working capital can be calculated as the subtraction of current liability from current asset divided by sales. By this definition, Working capital is related to the efficiency and the ability to pay debt. Working capital to sale ratio represents that the amount of cash which need to maintain the transactions of the company. There was a big decline around 0.10 between 2007 and 2008. This is not great signal to company since it means that they dont have enough working capital to cover up the investment financial problem. After 2008, the value of ratio has been increased slowly which means the power is not changed so much compared to the first year but it is positive omen. (Palepu, 2010) 6 Working capital CA CL Sales WC to sales 17,626,000 36,654,000 19,028,000 7 8 9 10 11

17,220,000 7,603,000 8,792,000 32,663,000 29,862,000 28,516,000 15,443,000 22,259,000 19,724,000 108870000 121170000 133953000 0.15817029 0.06274655 0.06563496

12,631,000 14,574,000 30,877,000 37,681,000 18,246,000 23,107,000 145324000 163367000 0.08691613 0.08921018

2) Activity Ratios Activity ratios represents that measure how effectively a firm is using its assets such as accounts receivable turnover, asset turnover, and inventory turnover ratios. (Businessdictionary, 2009) 6 Total asset turnover=Sales/Avg TA Fixed asset turnover 7 3.141221 0.068044 8 3.87589 0.107304 9 4.58916 0.178442 10 4.893641 0.189626 11 4.765804 0.203839

Total-asset-turnover ratio was found by dividing net sales by total cooperative assets. This ratio has been grown from 3.14 in 2007 to 4.90 in 2010. Increased ratios reflect favorably on the firm's ability to employ assets effectively. At final year, the value has been decreased slightly. (Answer, 2008) However the change between 2010 and 2011 is too small, it can not be interpreted as

effective influence.

Fixed-asset-turnover ratio represents net sales divided by net property, plant, and equipment (PP&E). It is related to examine a companys fixed asset for efficiency. There was a steady increase of fixed asset turnover ratio and peaked the highest amount of 0.23 in 2011. A high ratio mean the PPE is operating fully therefore, more fixed asset will be needed. Even though it can reduce depreciation but in somehow there is a possibility to increase costs which need to operate PPE. E. Eldon said the improvement of the ratio can be held by stopping investments in fixed assets; reconsidering production, or redesigning the operation of fixed asset.

3. Financial management
1) Liquidity ratio 6 Current ratio Quick Ratio 1.926319109 0.467521547 7 2.1150683 0.7773749 8 1.34157 0.337796 9 1.445751 0.197779 10 1.692261 0.403157 11 1.630718 0.323408

Liquidity ratios, measure the companys ability to meet short-term obligations. The current ratio is current assets divided by current liabilities. According to Berman, the value of ratio also has implicated the danger of liquidation when it is less than 1. For reducing this danger, liquidation can be improved by borrowing long term debt to repay the short-term debt, figuring out the asset which is not useful, selling the capital, trying to reduce useless payment or saving more. (E. Eldon, Beverly L., p23) The current ratio was fluctuated during the years from 1.93 to 1.63 between 2006 and 2011, which means, the OROTON group is losing its liquidating. It can be assumed by the OROTON group is trying to expand their business to ASIA region, in these days. Quick ratio is current assets minus inventories, divided by current liabilities. The table shows the quick ratio fluctuated during years. However, same as the current ratio, it declined at 0.32 in final year compared to 0.47 in 2006. By basic theory, a high current ratio is a favorable condition financially because it indicates the ability to pay current liabilities from the conversion of current assets into cash. On the other hands, in this case, it represents the case of vice-versa. Therefore, the OROTON group will have a problem to convert to cash when they face the emergency situation. 2) Leverage Ratios By definition, leverage ratio represent that any ratio used to calculate the financial leverage of a company to get an idea of that company's methods of financing or measure its ability to meet its financial obligations. There are several ratios, but the main factors evaluated by a ratio include debt, equity, assets, and interest expenses. (FinancialDictionary, 2008) 6 7 8 9 10 11

Debt ratio=TD/TA Debt ratio to equity ratio=TD/TE

0.039534 0.065684

0.023912 0.051217

0.107912 0.215223

0.166243 0.334646

0.149162 0.331054

Debt-to-equity ratio is calculated by dividing long term debt by member equity. Palepu suggest that Debt to equity ratio provides dollars of debt financing the organisation is using for each dollar invested by its shareholders. The value of ratio went down from 0.07 in 2007 to 0.05 in 2008. This declined debt-to-equity ratio, which means low risk, results in fewer possibilities of large losses or large gains in earnings. However, the ratio has been increased from 0.22 in 2009 to 0.33 in 2011. It is more risky since they have more liabilities and less equity. For an unfavorable impact, the manager of the company can reduce debt left, try to pay the the principal of the loan or increasing equity through savings. (E. Eldon, Beverly L., p24)

4. Prospective analysis
1) OROTON sales growth behaviour 6 Sales sales growth rate 7 8 108870000 121170000 0.11297878 9 10 11 133953000 145324000 163367000 0.10549641 0.08488798 0.12415706

The Oroton sales have been increased steadily over the last five years by the amount of 54497000. As the CEO mentioned in exhibit 1, they achieved solid growth in sales. However, the amount increased between two different years resulted in the amount of sales growth rate between 2008 and 2010. Nevertheless this amount decreased, this is not seriously relevant to figure out whether Orotons financial report is right or not. 2) NOPAT margins 6 Sales NOPAT NOPAT MARGIN 7 108870000 9966600 8 121170000 16969300 9 133953000 19759000 10 145324000 23415100 11 163367000 25555500 0.15643

0.09154588 0.14004539

0.14750696 0.16112342

NOPAT margin is a measure of how profitable a companys sales are from an operating. Through the years, there was an increase in NOPAT margin ratio at maximum at 0.16 in 2010. It means that they succeed to reduce the cost of sales which is not related.

Conclusion
Through the ratio analysis, this report has been working with 4 different sections followed by Profitability, Investment, Financial and Provision management. In Profitability, using Dupont method, the value of ROE has been risen up during the financial years. Moreover, the value of return on asset for OGL was enough to attract investors as a increased ratio. Similarly, in investment, active ratio section represented the great impact on OGL has been working. On the other hand, in the financial management, the value showed the liquidating problem of OGL from expansion of stores in ASIA region. Thus, OGL need to make new policy for liquidation or try to reduce it. Finally, with sales growth and NOPAT margins, it can not be relevant to OGLs financial ratio analysis since the value of growth was too small as well as NOPAT margin. In conclusion, some of points is consist with CEOs opinion but the other of points represented the opposite side with CEOs opinion.

Bibliography

Answer, 2010. Total asset turnover. Available at:< http://www.answers.com/topic/total-assetturnover#ixzz1tWanhBWf>[accessed 19 April 2012] Berman, Karen, and Joe Knight, with John Case. Liquidity ratios: Can we pay our bills? In Financial Intelligence: A Managers Guide to Knowing What the Numbers Really Mean. Boston, MA: Harvard Business School Press, 2005 Business Dictionary, 2008. Activity-ratio at: < http://www.businessdictionary.com/definition/activity-ratios.html#ixzz1tWKryHnG>[accessed 28 April 2012]. Palepu, Healy and Benard. 2010, business analysis and valuation using financial statements,1st ed. Sydney. Cengage learning Financial dictionary, 2008. Leverage ratio at: www.financial-dictionary.thefreedictionary.com/leverage[accessed 25 april 2012]