An Analysis of the Financial Performance of Turkish Sub-Basic Metals Sectors Using Ratio Analysis

Transcription

1 An Analysis of the Financial Performance of Turkish Sub-Basic Metals Sectors Using Ratio Analysis Serhan Gurkan, Faculty of Business, Karabuk University, Turkey. Nurdan Gurkan, Faculty of Economic and Administrative Sciences, Bulent Ecevit University, Turkey. Hakan Vargun, Faculty of Business, Karabuk University, Turkey. Abstract Basic metal sector is one of the most important sectors due to both its contribution to the economy and the positive impact on employment. The aim of this study is to measure financial performance of Turkish sub-basic metal sectors which are (I) manufacture of basic iron and steel and of ferro-alloys, (II) manufacture of tubes, pipes, hollow profiles and related fittings, of steel, (III) manufacture of other products of first processing of steel, (IV) manufacture of basic precious and other non-ferrous metals and (V) casting of metals performing ratio analysis. We used Central Bank of the Republic of Turkey company account data for the period to calculate financial ratios. 11 financial ratios bunched into four categories (liquidity ratios, asset management ratios, profitability ratios, leverage ratios) were calculated. The results of the study indicate that financial performance of the sub-basic metal sectors show variability in general during the period of analysis. The results showed that casting metals subsector had more attractive financial performance than other sub-basic metals sectors. Key Words: Ratio Analysis, Financial Performance, Basic Metals JEL Classification: M41, L

2 1. Introduction Business decision makers at all management levels need to get accurate information. One of the tools which provide financial information to decision makers is industry analysis. Industry analysis serves to provide an investor with an idea of how well a given group of companies are expected to perform as a whole. Thus decision makers get an idea of current condition and future prospects of a given industry of the economy. Having said that an industry analysis is a complicated and complex process. In this study, we focused on just financial analysis of a sector by analyzing consolidated sub-sector financial statements. A sector has sub-parts. Therefore, it is important to focus on all sub-sectors separately. Without this, it will be impossible to draw an accurate industry analysis report. This study evaluates sub-basic metals sectors performing ratio analysis. Ratio analysis involves studying various relationships between different items reported in a set of financial statements. Analysts calculate many different ratios for a wide variety of purposes. Ratio analysis is used to evaluate various aspects of a sector s operating and financial performance such as its liquidity, asset management, profitability and solvency. The trend of these ratios over time is studied to check whether they are improving or deteriorating (Edmonds, 2012). Metals are commodities without which a modern industrialized economy could not exist. The sector is dominated by SMEs, mostly sub-suppliers to other sectors such as the automotive sector and the construction and food sectors. Basic metals sector is heterogeneous in terms of both organizational structure and outputs. Therefore, we have reorganized the data and analysis NACE classification of Basic Metals sector. NACE (Nomenclature of Economic Activities) is the European statistical classification of economic activities. This article presents an overview of statistics for the basic metals manufacturing sector in the EU, as covered by NACE Rev. 2 Division 24. This NACE division is composed of five groups: the manufacture of basic iron and steel and of ferro-alloys (Group 24.1); the manufacture of tubes, pipes, hollow profiles and related fittings, of steel (Group 24.2); the manufacture of other products of first processing of steel (Group 24.3); the manufacture of basic precious and non-ferrous metals (Group 24.4); the casting of metals (Group 24.5) as semi-finished products. Basic metal sector is one of the most important sectors due to both its contribution to the economy and the positive impact on employment. Financial performance analysis of sectors can provide useful information for both executives and investors. Turkey is one of the most important worldwide actors in basic metals sector. In addition, basic metals sector is leading sector for Turkey. According to specialists, growth in the basic metals sector in Turkey is expected to continue in 2017, but market participants have different opinions about prospects for the longer term (Metalbulletin, 2017). Different opinions about 1075

3 prospects sensitize executives and investors to analyses. However, we did not find any study which analyze financial performance of basic metals sector for Turkey. Our research contributes to the literature by providing evidence about basic metals sector s financial performance. The remainder of the paper proceeds as follows. Section 2 discusses research question and research design. Section 3 discusses the results of the analysis. Section 4 draws conclusions. 2. Methodology 2.1 Research Questions In economy literature, it is mentioned that different sub-sectors are affected differently by the framework conditions according to who their customers and suppliers are and their relative importance. In the line with economy literature, we tried to find out the following questions. Research Question 1: Is there any difference between financial ratios of sub-basic metals sectors? Research Question 2: Which sub-basic metals sector has better liquidity ratios? Research Question 3: Which sub-basic metals sector has better asset management ratios? Research Question 4: Which sub-basic metals sector has better profitability ratios? Research Question 5: Which sub-basic metals sector has better leverage ratios? 2.2 Ratio Analysis Ratio analysis involves studying various relationships between different items reported in a set of financial statements. Analysts calculate many different ratios for a wide variety of purposes. Ratio analysis is used to evaluate various aspects of a company s or industry s operating and financial performance such as its efficiency, liquidity, profitability and solvency. The trend of these ratios over time is studied to check whether they are improving or deteriorating. Ratios are also compared across different sectors (Edmonds, 2012). In this study we used 11 financial ratios bunched into four categories which are liquidity ratios, asset management ratios, profitability ratios and leverage ratios. The ratios used for the analysis is as follows: Table 1: Financial Ratios Used for the Analysis Current Ratio Quick Ratio Inventory Turnover Ratio Asset Turnover Ratio Receivables Turnover Ratio Liquidity Ratios Current Assets / Current Liabilities [Current Assets - (Inventories+Prepayments and Accrued Income for the Next Months + Other Current Assets)] / Current Liabilities Asset Management Ratios Cost of Goods / Inventories Total Revenue / Total Assets Net Sales / (Short-Term Trade Receivables + Long-Term 1076

4 Trade Receivables) Profitability Ratios Return on Assets Ratio Return on Equity Ratio Return on Sales Ratio Gross Profit Margin Ratio Equity to Debt Ratio Debt Ratio Net Income/ Total Assets Net Income / Stockholders Equity Net Income / Net Sales Gross Income / Total Sales Leverage Ratios Stockholders Equity / (Current Liabilities + Long Term Liabilities) (Current Liabilities + Long Term Liabilities) / Total Assets 2.3 Data We used Central Bank of the Republic of Turkey company account data for the period to calculate financial ratios. Data is obtained from official web site of Central Bank of the Republic of Turkey ( 3. Results and Discussion Ratio Analysis provides tools to decision makers by highlighting the major important parameters that expose the strongest and weakness of the sector-specific results. In this section we analyzed financial performance of sub-basic metal sectors by financial ratios bunched into four categories which are liquidity ratios, asset management ratios, profitability ratios, leverage ratios. 3.1 Liquidity The liquidity ratios indicate the firm s ability to quickly realize its current assents as cash and its risk level. Generally current ratio and quick ratio are acceptable of short term creditors for any company. We used current ratio and quick ratio for liquidity analysis. The results of liquidity analysis are shown in Table 2. From the table 2 it can be seen that basic iron and steel and of ferro-alloys has the worst performance for liquidity for given period followed by tubes, pipes, hollow profiles and related fittings. Average current ratio is high for casting of metals followed by other products of first processing. Average quick ratio is high for other products of first processing followed by casting of metals. Table 2: Liquidity Analysis Results CURRENT RATIO Basic iron and steel and of ferro-alloys Tubes, pipes, hollow profiles and related fittings Other products of first processing

5 Basic precious and other non-ferrous metals Casting of metals QUİCK RATIO Basic iron and steel and of ferro-alloys Tubes, pipes, hollow profiles and related fittings Other products of first processing Basic precious and other non-ferrous metals Casting of metals Graph 1 shows the trend of current ratio and quick ratio respectively, during Graph 1: Trend of Liquidity Ratios A: Basic iron and steel and of ferro-alloys B: Tubes, pipes, hollow profiles and related fittings C: Other products of first processing D: Basic precious and other non-ferrous metals E: Casting of metals In general, current ratios over 2 and quick ratios between 0.5 and 1 are considered satisfactory. Of course, this will depend on the nature of the sector. Casting of metals and other products of first processing are considered to be good as their ratio is under control. As seen from the graphs, basic iron and steel and of ferro-alloys and tubes, pipes, hollow profiles and related fittings have a problem for liquidity which answers the question, Does the business have enough current assets to meet the payment schedule of current liabilities with a margin of safety? 1078

6 3.2 Asset Management Asset management ratios are used to analyze that how effectively a company uses and controls its assets. The firm s profitability depends on the ability to shorten Accounts Receivable balances collecting time and how fast Inventory can be sold to customers. We used inventory turn ratio, receivable turnover ratio and asset turnover ratio for asset management analysis. The results of analysis are as follows: Table 3: Asset Management Analysis Results INVENTORY TURNOVER RATIO Basic iron and steel and of ferro-alloys Tubes, pipes, hollow profiles and related fittings Other products of first processing Basic precious and other non-ferrous metals Casting of metals RECEIVABLE TURNOVER RATIO Basic iron and steel and of ferro-alloys Tubes, pipes, hollow profiles and related fittings Other products of first processing Basic precious and other non-ferrous metals Casting of metals ASSET TURNOVER RATIO Basic iron and steel and of ferro-alloys Tubes, pipes, hollow profiles and related fittings Other products of first processing Basic precious and other non-ferrous metals Casting of metals The inventory turnover ratio measures the number of times inventory turned over or was converted to sales during a time period. It is a good indication of purchasing and production efficiency. In general, the higher the ratio, the more frequently the inventory turned over. Other products of first processing have higher average inventory turnover ratio than other sub-basic metal sectors. It supports its liquidity performance. Tubes, pipes, hollow profiles and related fittings has a minimum (4.63) during A low turnover implies weak sales and, therefore, excess inventory. Inventory turnover ratio significance depends on the amount of cash sales and receivables turnover ratio. 1079

7 The receivable turnover ratio measures the number of time accounts receivable turned over during a time period. A higher ratio indicates a shorter time between making a sale and collecting the cash. As seen from Table 3, basic iron and steel and of ferro-alloys receivable turnover ratio (10.15) is as much again than other sub-basic metal sectors. Other sub-sectors are almost same scores. High score indicate that the sector has a high proportion of quality customers that pay off their debts quickly. A high ratio can also suggest that the sector has a conservative policy regarding its extension of credit. The asset turnover ratio is an efficiency ratio that measures a company's ability to generate sales from its assets. Higher turnover ratios mean that assets are used more efficiently. Other products of first processing has highest score for asset turnover ratio and casting of metals has lowest. The asset turnover ratio is based on sector standards. So, asset turnover ratio cannot be suitable ratio to comparing different sectors. But, trend in asset turnover ratio can use to comparing different sectors. Graph 2 shows the trend of inventory turnover ratio, receivable turnover ratio and asset turnover ratio respectively, during Graph 2: Trend of Asset Management Ratios 1080

8 A: Basic iron and steel and of ferro-alloys B: Tubes, pipes, hollow profiles and related fittings C: Other products of first processing D: Basic precious and other non-ferrous metals E: Casting of metals It can be seen from the Graph 2 that inventory turnover ratio of casting of metals has decreased due to increase in the amount of cost of goods sold from the year 2013 to This is considered to be unfavorable for casting metals when it is compared to other sub-basic metal sectors. On the other hand, basic iron and steel and of ferro-alloys inventory turnover ratio has increasing trend from 2013 to From the Graph 2, it can be noticed that basic iron and steel and of ferro-alloys has remarkable positive trend for receivable turnover ratio from 2013 to 2015 while other sub-basic metal sectors have almost stable trend. Increase in receivable turnover overtime generally indicates improvement in the process of cash collection on credit sales. Graph 2 show that asset turnover ratio of sub-basic metal sectors decreased from 2014 to 2015 except tubes, pipes, hollow profiles and related fittings. It means that firms in these subsectors could not use their assets to generate sales efficiently. This negative trend may give investors and creditors an idea that companies are managed ineffective. By comparison with other sub-sectors, we can say that firms in basic iron and steel and of ferro-alloys has worst performance to use asset effectively during Profitability Profitability ratios indicate the ability to measure management s ability to produce profit. Profitability ratios are very important for long-term investment decisions. We used return on assets ratio, return on equity ratio, return on sales ratio and gross profit margin ratio for profitability analysis. The results of analysis are shown in Table 4. As seen from Table 4, casting of metals have highest scores for all profitability ratios during 2013 to On the contrary basic iron and steel and of ferro-alloys have lowest scores for all profitability ratios during 2013 to The higher return on assets (ROA) number, the better, because the sector is earning more money on less investment. Return on equity (ROE) is a profitability ratio from the investor's point of view. Investors want to see a high return on equity ratio because this indicates that the company is using its investors' funds effectively. Return on 1081

9 sale (ROS) is characterized as both an efficiency and profitability ratio because it is an indicator of both metrics. Higher ROS indicates the more efficient management. Gross profit margin ratio shows how profitable a products produced at given sector are. Table 4: Profitability Analysis Results RETURN ON ASSETS RATIO Basic iron and steel and of ferro-alloys (0.64) 0.56 (2.43) (0.84) Tubes, pipes, hollow profiles and related fittings Other products of first processing Basic precious and other non-ferrous metals Casting of metals RETURN ON EQUITY RATIO Basic iron and steel and of ferro-alloys (8.07) 3.63 (12.55) (5.66) Tubes, pipes, hollow profiles and related fittings Other products of first processing Basic precious and other non-ferrous metals Casting of metals RETURN ON SALES RATIO Basic iron and steel and of ferro-alloys (0.60) 1.04 (1.55) (0.37) Tubes, pipes, hollow profiles and related fittings Other products of first processing Basic precious and other non-ferrous metals Casting of metals GROSS PROFIT MARGIN RATIO Basic iron and steel and of ferro-alloys Tubes, pipes, hollow profiles and related fittings Other products of first processing Basic precious and other non-ferrous metals Casting of metals Profitability ratios for public companies can vary substantially and will be highly dependent on the sector. This is why when using profitability ratios as a comparative measure, it is best to compare it against an sectors previous profitability ratios. Graph 3 shows the trend of profitability ratios, during 2013 to

10 Graph 3: Trend of Profitability Ratios A: Basic iron and steel and of ferro-alloys B: Tubes, pipes, hollow profiles and related fittings C: Other products of first processing D: Basic precious and other non-ferrous metals E: Casting of metals 1083

11 From the Graph 3 it can be noticed that basic iron and steel and of ferro-alloys profitability ratios, except gross margin ratio, are high volatile than other sub-sectors. In addition, it can be clearly witnessed that 2015 were challenging year for basic iron and steel and of ferro-alloys. For Tubes, pipes, hollow profiles and related fittings and Basic precious and other nonferrous metals, profitability ratios trend is quite consistent during the period of the study. From the Graph 3 it can be also noticed that other products of first processing and casting metal have volatile trend for profitability. So that, these sub-sectors might be more attractive for investors who willing to take more risk. Another significant remark is the gross profit margin ratio for each sub-sector for any year have increasing trend. In general, an sectors' gross profit margin should be stable unless there have been changes to the business model. So that, increasing trend on gross profit margin might be valued as a good indicator for each sub-sectors. 3.4 Leverage The ratios in this category indicate the ability to raise funds from outside sources for the business activities. We used equity to debt ratio and debt ratio for leverage analysis. The results of analysis are as follows: Table 5: Leverage Analysis Results EQUITY TO DEBT RATIO Basic iron and steel and of ferro-alloys Tubes, pipes, hollow profiles and related fittings Other products of first processing Basic precious and other non-ferrous metals Casting of metals DEBT RATIO Basic iron and steel and of ferro-alloys Tubes, pipes, hollow profiles and related fittings Other products of first processing Basic precious and other non-ferrous metals Casting of metals A low equity to debt ratio generally means that a company has been aggressive in financing its growth with debt. Aggressive leveraging practices are often associated with high levels of risk. This may result in volatile earnings as a result of the additional interest expense. A lower debt to equity ratio usually implies a more financially stable industry. It can be seen from Table 5 that casting metals is considered to be more financially stable sector as its ratio is quite high than other sub-sectors, followed by other products of first processing. 1084

12 The debt ratio shows a company's ability to pay off its liabilities with its assets. This ratio is usually important for investors and lenders. Each sector has its own benchmarks for debt, but.5 is reasonable ratio. A debt ratio of.5 is often considered to be less risky. A debt ratio of 1 is often considered to be risky. As seen from Table 1, casting metals is considered to be less risky than other sub-sectors which have almost same debt ratio. Keep in mind that different industries rely on different amounts of capital to operate and use that capital in different ways, a relatively low E/D ratio or debt ratio may be common in one sector while a relatively high E/D or debt ratio may be common in another. In other words, each sector has different debt to equity ratio benchmarks, as some industries tend to use more debt financing than others. So, trend in leverage ratios could be more suitable to compare industries. Graph 4 shows the trend of leverage ratios, during 2013 to Graph 4: Trend of Leverage Ratios A: Basic iron and steel and of ferro-alloys B: Tubes, pipes, hollow profiles and related fittings C: Other products of first processing D: Basic precious and other non-ferrous metals E: Casting of metals When basic iron and steel and of ferro-alloys is compared to other sub-basic metal sectors, it showed opposite trend for both E/D ratio and debt ratio during study period. Basic iron and steel and of ferro-alloys E/D ratio increased (decreased) in 2014 (2015) while others E/D ratios decreased (increased). In addition, basic iron and steel and of ferro-alloys debt ratio decreased (increased) in 2014 (2015) while others E/D ratios increased (decreased). On this 1085

13 basis, we may say that although all of them are sub-sector of basic metal sector, different factors affect financial structure of basic iron and steel and of ferro-alloys. 4. Conclusions and Recommendations After analyzing period data we find out that liquidity position of casting of metals and other products of first processing sub-sectors are overall satisfactory. From the liquidity ratios we observed that they declined in both 2014 and 2015 for Basic iron and steel and of ferro-alloys and Tubes, pipes, hollow profiles and related fittings. Companies in these sub-sectors might have a difficulty of paying its obligations. As Basic iron and steel and of ferro-alloys has low liquidity ratios it has increased the leverage portion. So Basic iron and steel and of ferro-alloys should take measures to increase liquidity. Increasing trend in receivables turnover ratio of Basic iron and steel and of ferro-alloys may help improving its liquidity position. Asset turnover ratio declined in 2015 for all sub- basic metals sectors except Tubes, pipes, hollow profiles and related fittings. It might happen because of decrease in global steel demand and increasing production capacity of China. While global demand remained buoyant in the wake of the economic and financial crisis, the economic slowdown in China and other emerging economies had a negative impact on global steel demand since In addition, the spare production capacity in certain third countries, notably in China, has increased dramatically (EU Commission, 2015). During 2013 to 2015, profitability ratios of casting of metals and other products of first processing sub-sectors are also overall satisfactory. Contrary to these sub-basic metals sectors, basic iron and steel and of ferro-alloys had negative profitability ratios for study period. In addition, its profitability ratios dramatically decreased in According to the Is Bank sectoral report, sales in the steel sector were the most behind the target. At the same time, the basic metals sector saw job losses amid the intense pressure on the steel industry. According to sectoral reports the steel sector contracted on 2015 (Is Bank Report, 2016). Leverage position of sub-basic metals sectors had been almost stabile during study period, except Basic iron and steel and of ferro-alloys which had increasing debt ratio trend. In response to negative profit scores, Basic iron and steel and of ferro-alloys had difficulty of internal financing. So that, firms in this sub-sector had to take loan. As a result, we can say that sub-basic metals sectors have different driving factors in keeping with findings of Uygurturk and Korkmaz (2012). So, our findings can provide executives with useful information about financial performance of sub-basic metal sectors. In addition, the study has helpful assessments for potential investors. 1086

14 References International Review of Research in Emerging Markets and the Global Economy (IRREM) European Commission, 2016, Steel: Preserving sustainable jobs and growth in Europe, Brussels. Is Bank, 2016, Monthly economic review March 2016, Istanbul. Metalbulletin (2017), 2017 OUTLOOK, (Accessed: ). Thomas E., F. McNair and P. Olds, 2012, Fundamental Financial Accounting Concepts, 8th Edition, McGraw-Hill Education. Uygurturk, H., and T. Korkmaz, 2012, Finansal performansin TOPSIS cok kriterli karar verme yontemi ile belirlenmesi: ana metal sanayi işletmeleri üzerine bir uygulama. Eskisehir Osmangazi Universitesi IIBF Dergisi, 7(2),