Financial statement interpretation essay

Financialstatement interpretation

FinancialStatement Interpretation

Itis critical that investors and users of financial statements caninterpret their financial statements to enable them to draw validconclusions. Furthermore, financial statements provide informationabout the financial position of the company, the performance and anychanges in the financial situation of a company and help in takingimportant business decisions. In particular, shareholders use thefinancial statements to assess the risk and actual return on theirinvestment in the company. Hence, the interpretation of thisfinancial statements is very crucial. Typically, interpretation ofthe financial statements involves ratio analysis which majorlyentails comparisons to prior years, forecasts and competitors.Therefore, ratios are the biggest tool that helps investors,shareholders, managers, suppliers and lenders to understand andcompare financial statements and results.

Inmy study, I have decided to select the Chevron Company, the AdcockIngram Corporation, and the Coca-cola Company

1.Chevron Corporation.

Thecompany has its headquarters in San Ramon, California. It is anAmerican energy firm that is active in more than 180 countries. Thecompany is involved in the oil, natural gas, and geothermalindustries. The company also refines markets and transports oil andoil products. In the New York Stock Market, it is traded as NYSE:CVX. Its subsidiaries include Citgo Petroleum Corporation (Lalc,2010).

CurrentRatio

Thatis a ratio that gauges a company’s ability or inability to honor itis short-term or long-term financial obligations. It is derived bycomparing a company’s total current assets to its total currentliabilities.

Forthe year ended 1/12/2015

TotalCurrent Assets= 12,020,000

TotalCurrent Liabilities = $ 11,050,000

Currentratio = 1.09

QuickRatio

Theratio compares a company’s cash balances the securities held andthe accounts receivable balances to some current liabilities.

Forthe year ended 1/12/2015

Cash,Accounts Receivable, Short-term securities =$15,030,000

Totalcurrent liabilities = $11,050,000

Quickratio = 0.73

NetProfit Margin

Itis the rate of Net profits to revenues of a company. Usually, it isexpressed as a percentage.

Forthe year ended 1/12/2015

Netprofit= $1,030,468

Revenues= $127,472,000

NetProfit Margin (%) =1.02

AssetUtilization

Theratio of a company’s net income compared to the total value of itsassets.

Netincome = $1,295,000

TotalAssets = $100,000,000

Returnon Assets (%) = 1.29

FinancialLeverage

Impliesthe extent to which a company is using debt and preferred equity. Itis the percentage change in earnings per share (EPS) divided by thepercentage change in Earnings before interest and taxes (EBIT).

Financialleverage = 1.79

TheCompany’s working Capital stands steadfast at 970,000. That isusually the difference between the company’s current assets and thecompany’s current liabilities.

Thus,the company employs the use of a hedging (maturity matching)strategy. As the financial leverage (1.79) shows, each of the assetswould be financed by a debt instrument with almost the same maturitydate. Thus, long-term assets are purchased through long-term sources.Fixed assets and temporary working capital are funded by short-termsources of funds. That ensures minimal strain on the temporaryworking capital in case of a financial crisis (Lalc, 2010).

Ata current ratio of 1.09, the Chevron Corporation can be seen to havea clean bill of health in matters financial. The company is deemed tobe able to meet all its financing needs. The company operates in arelatively capital intensive sector thus it is significant that thereexist no cash flow shortages. The Company also has a defined uniquemarket which is under contractual obligations to purchase the oil andoil products. That ensures little working capital goes towardsadvertising and marketing. Most finances go towards the actual corebusiness of production of geothermal energy and supply of oil and itsproducts (Lalc, 2010).

Unlikeother industries, this sector delivers the bulk of its goods firstthen payment comes after a while thus the temporary working capitalshould always be in finance from internal sources or short-termsources. In this sector, the firms tend to have a small net profitmargin thus it is imperative that the company purchases and sells itsproducts in bulk. At 1.02% net profit margin it is easy to see thisunique aspect (Lalc, 2010).

Thissector employs a vast amount of resources before even procuring agiven product such as geothermal wells thus requiring a significantamount of equity or reserves.

2.The Coca-Cola Company

TheCoca-Cola Company is a manufacturer, marketer, and retailer ofbeverages and syrups. The company operates a franchised distributionsystem whereby the parent company only produces syrup after that soldto various bottlers who hold predefined territories in any part ofthe world. The company`s headquarters is in Atlanta, Georgia. In theNew York Stock Exchange where it is on the list, it is referred to asNYSE: KO. Its subsidiaries include Minute Maid and Energy Brands(Hays, 2005).

Forthe year ended 1/12/2015

TotalCurrent assets = $40,000,000

TotalCurrent Liabilities = $33,950,000

CurrentRatio = 1.18

Cash,Accounts receivable, Short-term securities = $40,000,000

Totalcurrent liabilities = $33,950,000

QuickRatio= 0.85

NetProfit =$7,450,000

Revenue=$44,294,000

NetProfit Margin% =16.6

AssetUtilization=8.7

Netincome = $7,351,000

TotalAssets = $84,560,000

FinancialLeverage= 3.59

Ata financial leverage level of 3.59, it implies that the companyemploys the use of an aggressive strategy which is direct. The focusis primarily profitability. The long-term funds are utilized tofinance fixed assets and a small part of the permanent workingcapital. Short-term funds are in usage for temporary working capital.This aspect ensures the firm saves on interest costs at the expenseof high risk.

Ata current ratio of 1.18, this implies that the company can quicklymeet its financial obligations in time. Thus, the firm has a cleanslate and is not at risk of the situation deteriorating at the centeris Paribas. The firm also has a remarkable net profit margin at16.6%. The aspect implies that the company’s management is doingwell regarding maintaining a lean expense account. Thus, it is safeto say that this sector does not require a lot of operating expenses(Hays, 2005).

Theasset utilization level is also relatively high implying that thecompany is running a very efficient system. The aspect indicates thatthe corporation has a brilliant future set for growth if the currentsituation is in maintenance in the long term. Owing to the firm’shigh leverage it is easy to comprehend why the company’s net profitmargins are astronomical (Hays, 2005). That shows the advantages ofemploying leverage when doing business.

Fiscalyear ends in December

3.The Adcock Ingram.

Thecompany is a pharmaceutical company that manufactures, markets andsupplies various kinds of healthcare products. The company is in thelist on the Johannesburg Stock Exchange as JSE: AIP. The firm’sheadquarters are in Johannesburg, South Africa. Its subsidiariesinclude Adcock Ingram Critical care and the Adcock IngramPharmaceuticals. The company serves the greater southern Africa,Ghana, India and other emerging markets (Elmore, 2016).

Forthe year ended 1/09/2015

TotalCurrent Assets=2,841,000 Zar

TotalCurrent Liabilities = 1,722,000 Zar

Currentratio = 1.65

Cash,Accounts Receivable, Short-term securities =1,900,000 Zar

Totalcurrent liabilities = 1,722,000 Zar

Quickratio = 0.90

Netprofit= 198,809 Zar

Revenues= 5,294,511 Zar

NetProfit Margin (%) =3.58

AssetUtilization

Netincome = 198,000 Zar

TotalAssets = 5,457,952 Zar

Returnon Assets (%) =3.63

FinancialLeverage =1.81

Thus,the company employs the use of a hedging (maturity matching)strategy. As the financial leverage (1.81) shows, each of the assetswould be financed by a debt instrument with almost the same maturitydate. Thus, long-term assets are purchased through long-term sources.Fixed assets and temporary working capital are financed by short-termsources of funds. That ensures minimal strain on the temporaryworking capital in case of a financial crisis (Mcgregor, 2012).

ADCOCKINGRAM HOLDINGS LTD (AIP) Cash-Flow INCOME STATEMENT

Fiscalyear ends in June.

Thecurrent ratio which stands at 1.65 implies that the firm is verystable and can honor its financing needs without any problemwhatsoever. The company has a relatively small appetite forshort-term (current liabilities) funds. The company has an averagenet profit margin thus implying an average amount of capital requiredto achieve sufficient earnings. The firm also has an excellent assetutilization rate at 8.7% thus indicating that it employs theavailable resources to come up with stellar revenues and profits.Thus, the firm is deemed to be operating at a very efficient level toensure maximum results are attained. That aspect is in support of thefact that the products sold by the firm (healthcare products) commanda higher markup thus ensuring a greater amount of profit for theenterprise (Mcgregor,2012).

Dueto the 1.81 financial leverage and high asset utilization at 8.7% thefirm is qualified for a stellar future if the situation remainsconstant (Elmore, 2016).

Inconclusion, the use of ratios puts all the companies on an equalscale in the eyes of the users of financial statements rather thantheir sales volume, size, and market share. That helps to rid theuser of biased decisions in the course of doing business. Asdiscussed above, we can easily see that Coca-Cola stands a betterchance of future growth mainly due to its high net profit margin andasset utilization. The aggressive strategy employed by Coca-Cola onits working capital is high risk but has a higher reward (highprofits) if used. Therefore, financial interpretation is a hugestepping stone towards the greater understanding and comparison ofthe state of a company’s financial state. Therefore to give abusiness a clean bill of health the critical analysis of a company’sfinancial statement is a prerequisite.

References

Elmore,B. J. (2016). Citizen Coke: The Making of Coca-Cola Capitalism. W. W.Norton, Incorporated.

Hays,C. L. (2005). The Real Thing: Truth and Power at the Coca-ColaCompany. Random House.

Lalc,b. (2010). Chevron Corporation: Gulf Oil, Texaco, Baku-tbilisi-ceyhanPipeline, Chevron Corporation, Sam Nunn, Cobasys, Unocal Corporation.General Books Llc.

Mcgregor,R. (2012). Who Owns Whom: The Southern African Edition. SpringerScience &amp Business Media.

Appendix.

CHEVRONCORP (CVX) Cash Flow INCOME STATEMENT

Fiscalyear ends in December.