AB Dynamics plc is a company whose activities revolve around industrial engineering. The Group majors in the global automotive test systems market providing advanced testing equipment to the global motor industry. This company’s performance will be analyzed and compared to the performance of 600 Group, which is also in the industrialization engineering industry. The comparison will involve the analysis of ratios so as to establish profitability, asset use, efficiency and effectiveness of the operations (Raiyani, Raiyani and Bhatasna 12)
The management and the shareholders of AB Dynamics can use the available financial ratios to assess the performance of the enterprise. In doing so, they assess the profitability, liquidity, solvency and efficiency of the company (Bhattacharyya 59). For the management, the result of the ratio analysis provides insight into areas which need corrective actions (Leach 22).
Profitability assessment from the perspective of the shareholders
The ratios that effectively help in the measurement of an entity are gross profit margin, net profit margin and return on assets . For managers, the above ratios are important in establishing whether the entity needs to adjust so that it becomes profitable (Bhattacharyya 63)
AB Dynamics registered a gross profit margin of 32.4% for the year ending 2015 implying that 32.4% of the total revenue was available to cater for the operating expense after the deduction of the cost of sales (Thukaram Rao 84). The figure represents an increase from the 29.1% registered in the year 2014. The increase signals an increase in the profitability of the company in 2015. According to creditguru.com, the average gross margin for the industry is 2.38% which is less than that of the company indicating that the company performed better than most of its peers (Leach 44). The performance is, however, lower than that of 600 Group that registered a gross profit margin of 32.9%.
The net profit for AB Dynamics for the year ended 2015 was 19.6 % implying that the entity earned 19.6 pence from every pound of total revenue earned in the financial year (Leach 18). The year 2014 reported a net profit margin of 15.5% indicating an improvement in the year 2015. The trend is a sign of improvement in the profitability of the company. AB Dynamics has registered a better net profit margin than 600 Group, which is a competing entity. The 600 Group recorded a net profit margin of 5.4%. This implies that AB Dynamics had a better performance than 600 Group. According to investment.com, the net profit margin for the industry was 2.3% suggesting that AB Dynamics performed better than most of its peers (Bull 71)
A quick look at the rate of return of assets for a company also provides an insight into its performance. It gives a picture of how efficient the company is in using its assets in the generation of its profits (Thukaram Rao 83). Therefore, high return on assets signals high efficiency and high profitability of the firm (Bhattacharyya 69). In the year 2015, AB Dynamics registered a return on assets of 19.2% implying that a net profit of 19.2 pence was realized for every pound of assets utilized in the generation of profits in the financial year (Bull 102). The figure represents an increase from 15.8% in the year 2014 signaling an increase in the efficiency and profitability of the entity. The 600 Group realized a rate of return on assets of 5.4% in the period ending 2015. The figure achieved by the 600 Group is lower than that realized by AB Dynamics indicating that the latter was more profitable and more efficient (Pandikumar 115)
The analysis of the three ratios above suggests that the profitability of AB Dynamics improved in the year 2015. For the managers, the company is profitable since the ratios are positive (Thukaram Rao 87). There is also increase in the profitability in the period ending 205 signaling an improvement in the performance of the enterprise. Also, the particular ratios of the company are above those of the industry. The company, therefore, performs better than most of those it shares the industry with.
Profitability from the perspective of the shareholders
The analysis of the performance of the company has the primary role of establishing whether the company is performing well in improving their welfare by maximizing wealth (Walsh 52). Through analysis of the return on equity, return on capital employed and the earnings per share the shareholders can evaluate the profitability of their investments.
AB Dynamics’ return on equity or the period ended 2015 was 23.8%. The figure means that for every pound of equity employed the company realized 23.8 pence. The return realized is positive indicating that the business is profitable (Bull 137). The figure is higher the 20.8% achieved in the year 2014. The comparison between the two years shows that the profitability of the company is improving (Gibson 25). The return on equity by 600 Group was 6.8% implying that it was less profitable than AB Dynamics. The industry rate of return on equity is 3. 90% according to investment.com. The industry figure indicates that both companies performed better than most of their peers
The earnings per share realized by AB Dynamics increased from 12.11 pence to 18.26 between the period ending 2014b and that ending 2015 (Walsh 54). Such trends serve as an indication that the profitability of the company is on the rise. 600 Group, on the other hand, realized earnings per share of 2.58 pence. The figures indicate that AB Dynamics is more profitable than the goo Group.
Also, from the analysis above it is evident that the shareholders of the entity are generating a positive return on their investment. The improvement in the performance between the period ending 2014 and 2015 are proof that managers are taking measures to ensure that the welfare of the shareholders is improved through strong performance and profits.
This analysis assesses the ability of the enterprise to pay its short-term obligations when they are due using its current assets. The firms’ liquidity affects the availability of funds. Also, it determines its ability to finance its daily operations, and its access to credit. Ratios that help assess the liquidity are the current, the quick and the cash ratios (Walsh 30)
The current ratio for the AB Dynamics in the period ending 2015 was 4.64 implying that the firm had £ 4.64 worth of current assets for every pound of current liabilities (Gibson 64). The company had more current assets available than its short-term obligations to others hence it could settle all its debts as soon as they are due. At the end of the period ending 2014, the ratio was 3.88 indicating an improvement in the year 2015. The increase implies an improvement in the liquidity of the company (Gibson 65). The 600 group has a current ratio of 1.75 for the period ending 2015. This implies that AB Dynamics had a stronger liquidity than 600 Group. The industry, on the other hand, realized a current ratio of 1.54. The value is lower than that realized by AB Dynamics signaling stronger liquidity for AB Dynamics than those of its peers (Walsh 66)
Long-term financial stability/gearing analysis
The debt ratio recognized by AB Dynamics for the period ended 2015 was 19.3%. The value implies that only 19.3% of the total assets were financed by the outsiders (Troy 26). A debt ratio of less than 50% is an indication of strong solvency. In the period ending 2014, the debt ratio was 24.0% which is higher than the value registered in 2015. The decrease is an indication that the company has become relatively more financially stable (solvent) (Troy 30). 600 Group, on the other hand, had a debt ratio of 51.4 %. The figure is higher than that of AB Dynamics implying that the latter has stronger solvency. 600 Group had its debts at more than 50% of its total assets
Through the analysis of the total asset turnover, the relationship between the sales of the company and its assets can be established (Troy 36). It determines the effectiveness with which an entity uses the assets available to it to generate revenue (Pandikumar 126). In the period ending 2015, AB Dynamics registered a total asset turnover ratio of 0.98. This implies that for every £ of total assets used by the company, it generated 98pence as revenue. The ratio represents a decline from 1.02 realized in the year 2014 implying a reduction in the efficiency with which the assets of the company are used (Reddy 164). 600 Group, on the other hand, realised an asset turnover of 0.61implying that it is less efficient than AB Dynamics in the use of its assets (Troy 38).
A quick look at the company’s accounts receivable turnover reveals the frequency with which the company converts its receivables into cash available for use (Reddy 158). In the period ending 2015 AB dynamics had accounts receivable turnover of 5.8 implying that the firm turned its accounts receivable more than 5 times (Troy 42). This is an increase from the previous 3 times registered in the period ending 2014. However, 600 Group converts its receivables into cash more frequently and efficiently than AB Dynamics. It registered an account receivable turnover of 6.2
Through the inventory turnover, the entity can establish the number of times that the stock is converted into sales in a particular period, say one year (Pandikumar 128). AB Dynamics has an inventory turnover of 4.4 times implying that stock is converted into sales 4.4 times in one year. This value is a fall from 4.9 realized in the period ending 2014. The figures indicate a drop in activity for the company. 600 Group, on the other hand, achieved an inventory turnover of 2.2 which is lower than that of AB Dynamics implying more moderate activity for 600 Group than for AB Dynamics (Reddy 160)
The level of activity of the enterprise can be established through the analysis of the Days’ inventory outstanding (Raiyani, Raiyani and Bhatasna 17). This ratio indicates the number of days an entity spends to sell the stock available to it (Pandikumar 130). AB Dynamics took 83 days in the period ending 2015 and 74 in the previous cycle indicating a fall in the level of activity. 600, on the other hand, takes 135 days to convert its stock into sales. The values imply that AB Dynamics is more active than 600 Group (Raiyani, Raiyani and Bhatasna 90)
The company’s profitability ratios indicate that it is profitable and that it offers a real return on shareholders’ investment. The profitability improved in the year 2015. It is also evident that the company performs better than its peers. It is more profitable, and efficient and, therefore, likely to improve the wealth of its shareholders
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Reddy, R. Jaya Prakash. Management Accounting. New Delhi: A.P.H. Publishing, 2004. Print.
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Troy, Leo. Almanac Of Business And Industrial Financial Ratios. Chicago, IL: CCH, 2008. Print.
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AB Dynamics plc Ratios calculation
600 group ratio calculation