Essay: Financial Reporting &amp Analysis

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SAMPLE EXCERPT:

[. . .] Let's now move towards the next ratio.

Cash Flow and Investment Ratios

Operating Cash Flow to Sales

The amount of net income is not the actual amount which a company earns because lots of items and income has been recorded in the financial statements on accrual bases. Operating Cash Flow to sales ratio is one of the best measures to judge the actual financial performance of the company.

OCF/S

Sales

Operating Cash Flow

Year

33.252

24,991

8,310

2006

28.520

25,470

7,264

2007

30.653

26,311

8,065

2008

19.594

20,858

4,087

2009

27.636

27,960

7,727

2010

27.931

Mean NPM

23.54

Industry Average

Operating Cash flow shows how much the company received on Sales. The OCF of Anglo American is in a very good position according to the above mentioned computed result. The OCF/S of the company was 33.25% in the year 2006 which then decreased for three consecutive years by 4.73%, 2.133%, 11.08% respectively. The average OCF/Sales ratio of the company is 27.93% which shows that the company earn 28$ on average on its sales which is above the industry average of 23.54$. Let's now move towards the terminal value section.

Terminal Value (TV)

Terminal Value is also called terminal value and in this section, the same has been computed with the help of dividend discount model (DDM).

The dividend discount model's equation is mentioned below,

P = D (1+g)/Re -- g - (a)

D = 0.50 $

G = 0.56*5.5% = 3.5%

Re = 3%

= 0.50 (1+3.5%) / 3.8% - 3.5%

= 3,250 $

The computed intrinsic value is $3,250 while the company's shares are trading on 3,015 $, it means that the shares are currently trading below its terminal value so it can be referred as undervalue and should be bought as an effective investment decision.

Part-4

Trend Analysis

In this section, revenue analysis of the company will be analyzed. In this section the revenue of the company has been analyzed. The below mentioned table of the company's revenue will reveal the story.

Sales

Year

24,991

2006

25,470

2007

26,311

2008

20,858

2009

27,960

2010

25,118

Mean Sales

From the above mentioned table, it can be seen that the company's sales were continuously increasing with a reasonable percentage except for one year of 2009 in which the sales of the company decreased by 20.72% as compared to the same period of last year. The overall trend of the company's revenue is quite attractive from the standpoint of an investor and an investor should think to park his money in the stocks of the company.

Vertical Analysis

Vertical analysis is a name of matching the performance against an element of the financial statement like in the income statement, the benchmark would be the sales and in the balance sheet it will be total assets (Masom & Zaigham, 2007).

Vertical Analysis of Income Statement

Cost of goods sold is basically the cost which has been incurred to have a definite amount of sales (Masom & Zaigham, 2009). The companies which are able to control this particular cost are more productive as compared to those companies which do not.

According to this result the company is not proactive in controlling the cost of goods sold. The S/COGS ratio of the company is very high. The average ratio of Anglo is 72.48% showing that the company usually spends a large proportion of their income on the cost of goods sold. That is the main thing why the NPM of the company was not so high.

Balance Sheet Vertical Analysis

Like the analysis of the income statement in which the vertical analysis has been performed by comparing the items with the total revenue while in the balance sheet all the items of the balance sheet will be computed against the total assets of the company.

The company has cash percentage against the total assets of around 10% which shows that Anglo is not very efficient in gaining the Cash percentage against the total assets. Anglo American spent large amount of money on the long-term assets (Property Plan and Equipment) as compared to its major competitors, which can be measured from the percentages of both of the companies.

Part-5

Conclusion/Recommendations

Organization is basically referred to a place wherein hundreds of people work together just to achieve a specific goal. The goal may be of two fold, like the goal can be economical or can be non-economical (Rachev, & Fabozi, 2008). According to the organizational officials and analysts, investment decisions are always tough to take as far as an organization is concerned. The economic decisions include ad hoc research, analysis and lots of study as well. The current corporate environment is very challenging indeed because of the continuous change in this particular field. Organizations have to take numerous actions merely to direct its performance. The main mantra of every organization is to increase its surplus but to do the same effective strategies must be undertaken by the organizations. This particular assignment is all about analyzing the financial position of a company from the standpoint of an investor. All the computed ratios are in the favor of the investment in the company's stocks. The intrinsic value computation clearly indicated that investment should be parked in the stocks of the company in order to get reasonable amount of profit. So I would recommend a buy strategy of the company's stocks for the new investors and a hold strategy for the existing investors. There are three significant points on which I would like to initiate the buy strategy

The Net Profit and Profit Margin of the company is increasing continuously year on year (YOY) which is a clear indication of the company's long-term profitability

The Terminal Value of the company is higher than its actual traded value which highlights that the company's shares are currently trading lower than its terminal value

The company is proactive in meeting its short- and long-term financial obligations which are supportive for the investors indeed.

Bibliography

Bierman, H.Jr. (2007), Lesson on Accounting & Finance, World Scientific Publishers, Cornell University, USA

Bierman, H.Jr. (2008), Lesson on Accounting & Finance, World Scientific Publishers, Cornell University, USA

Cinnamon, R & Larsen, B.H (2006), How to understand Business Finance, McGraw Hill Publications

Cinnamon, R & Larsen, B.H (2007), How to understand Business Finance, McGraw Hill Publications

Cinnamon, R & Larsen, B.H (2008), How to understand Business Finance, McGraw Hill Publications

Christopher, D (2007), Financial Analysis, John Wiley & Sons Professional Publications

Christopher, D (2008), Financial Analysis, John Wiley & Sons Professional Publications

Christopher, D (2009), Financial Analysis, John Wiley & Sons Professional Publications

Erich A. Helfert (2006), Financial Analysis: Tool and Techniques: A Guide for managers, McGraw-hill Professional Publishers, 1999

Masom, S & Zaigham, E (2007), Financial Analysis & Project Management, McGraw Hill Publications

Masom, S & Zaigham, E (2009), Financial Analysis & Project Management, McGraw Hill Publications

Maheen, K & Umi, V (2009), Financial Analysis for Organizations, Oxford University Publications

Mona, S & Zeeshan, A (2006), Financial Analysis, Prentice Hall Publications

Mona, S & Zeeshan, A (2008), Financial Analysis, Prentice Hall Publications

Rachev,… [END OF PREVIEW]

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