ISSN: 2249-7196 IJMRR/ December 2014/ Volume 4/Issue 12/Article No-2/1129-1137 Dr. Riyas Kalathinkal et al./ International Journal of Management Research & Review AN ANALYTICAL STUDY ON FINANCIAL PERFORMANCE OF MAJAN GLASS COMPANY (SOHAR BRANCH, SULTANATE OF OMAN) USING RATIO ANALYSIS TECHNIQUE Dr. Riyas. Kalathinkal* 1, Muhammad Imthiyaz Ahmed 2 1 Faculty, Department of Business Studies, Shinas College of Technology, Ministry of Manpower, Sultanate of Oman. 2 Faculty and OJT Coordinator, Department of Business Studies, Shinas College of Technology, Ministry of Manpower, Sultanate of Oman. ABSTRACT Finance is regarded as the life blood of every business organization. Financial management deals with procurement of funds and their effective utilization and management of money (funds) in such a manner as to accomplish the short term and long term goals of the corporation. It is the responsibility of finance manager to see that the funds are procured in a manner that the risk, cost and control considerations are properly balanced in any given situation and this becomes possible because of optimum utilization of funds. Hence, in this paper the analysis gives a major focus on the financial viability, structure and optimum utilization of funds ofthe company as this analysis is taken for four years periodstarting from 2010 to 2014. The study is mainly based on the Secondary Data of Majan GlassCompany (Sohar Branch, Oman). Further, to measure the effectivenessof the above mentioned company,ratio analysistechnique is used as tool by the researcher to provide suitable suggestions and recommendations for this study. Keywords: Financial management, financial analysis, working capital, ratio analysis. 1. INTRODUCTION The performance is a general term applied to a part or to all the conducts of activities of an organization over a period of time of the with reference to past or projected cost efficiency, management responsibility or accountability or the like. Thus, not just the presentation, but the quality of results achieved refers to the performance. Performance is used to indicate firm s success, conditions, and compliance. In broader sense, financial performance refers to the degree to which financial objectives being or has been accomplished. It is the process of measuring the results of a firm's policies and operations in monetary terms. It is used to measure firm's overall financial health over a given period of time and can also be used to compare similar firms across the same industry or to compare industries or sectors in aggregation. Majan Glass Company SAOG was promoted in the year 1994 and established in the year 1997 with a sole objective of catering to the huge demand for Glass Containers within *Corresponding Author www.ijmrr.com 1129
Sultanate of Oman, GCC and Globally. The Company commenced the commercial production in the year 1997. The Project was envisaged to cater to the needs of Soft Drink, Food & Beverages Industry sector mainly within the Sultanate and was promoted by leading and well reputed Industrial groups and by well-known and respected personalities of the Sultanate. The Company is publicly listed on the Muscat Securities Market and with the Ministry of finance, Sultanate of Oman holding share of 75.3 % and balance by the Public. The Company s shares are listed on Muscat Security Market. The Company is located at Sohar Industrial Estate which is about 200 kms away from Muscat and Dubai, is one of the most high-tech manufacturing companies in the Sultanate. The Company has installed capacity of producing 250 MT per day of Glass and has two Furnaces, five Production Lines and equipment's are designed to produce Glass containers in 88ml to 1000ml range, in different sizes. 2. OBJECTIVES OF THE STUDY The main important objectives of this study are to: To study the financial performance of MAJAN GLASS COMPANY. To analyze the financial changes over a period of four years by using financial ratio. To evaluate the financial position of the company. To suggest some improvement of their financial performance. 3. REVIEW OF LITERATURE Jeffre Y. S. Bracker and John N. Pearson (2011) 3, This article develops a classification scheme of planning process sophistication in small firms, categorizes small firms according to planning process sophistication, and examines the relationship between planning process sophistication and the financial performance of a select group of small, mature firms. The study overcomes several methodological shortcomings of prior research on strategic planning and firm performance. Multivariate analysis of variance is used to identify statistically significant differences between the financial performance data of firms that employ structured, strategic plans and those that do not. The results confirm previous research on strategic planning and financial performance. Finally, recommendations are made for future research. Altman and Eberhart (1994) 7 reported the use of neural network in identification of distressed business by the Italian central bank. Using over 1,000 sampled firms with 10 financial ratios as independent variables, they found that the classification of neural networks was very close to that achieved by discriminant analysis. They concluded that the neural network is not a clearly dominant mathematical technique compared to traditional statistical techniques. José F. Molina-Azorín, Enrique Claver-Cortés, Maria D. López-Gamero, Juan J. Tarí, (2009) "Green management and financial performance: a literature review" 5 Purpose The purpose of this paper is to carry out a literature review of the quantitative studies that have analyzed the impact of green management on financial performance. Design/methodology/approach An examination of the literature was undertaken to review Copyright 2012 Published by IJMRR. All rights reserved 1130
the quantitative studies that analyze the influence of environmental management on financial performance. A total of 32 studies were identified, examining the environmental variables used, the financial performance variables, the statistical analyses, and the main findings obtained by these studies. Findings Results are mixed, but studies where a positive impact of environment on financial performance is obtained are predominant. In addition, the findings show that the set of firms, industries and countries are varied. Some studies use environmental management variables and other works employ environmental performance variables, and regression analysis prevails. Research limitations/implications The study does not consider studies that analyze the influence of environmental management on environmental performance. Implications for future research are suggested. Practical implications The paper offers interesting implications for managers, pointing out that a real commitment to green management may result in a positive influence on financial performance. Originality/value The findings are derived from an exhaustive literature review of quantitative studies that have studied the green management-financial performance link. In addition, ideas for improving future research in this field are provided. 4. RESEARCH METHODOLOGY This study is an analytical research. The research has to use facts or information already available and analyze these to make critical evaluation of the study. A sample size of the study is five years from 2010 to 2014. In data collection as basically used the secondary data, as available in the records of the unit as from the publication of the financial statements in the company annual reports as include the balance sheet and profit and loss account of the company. Analysis of data is made using certain financial tools and techniques as ratio analysis, common size income statement. 5. LIMITATION OF THE STUDY The study is short term period of five accounting year from 2010 to 2014. The main constraint of this study is considered as the data used is secondary. The data was collected based on the company annual report. So we cannot say it was accurate. 6. SCOPE OF THE STUDY The scope of the study includes establishment of cause and effect of relationship between various items in the income statement and balance sheet for the period 2010 to 2014. This study helps to control the short terms assets and liabilities. From this study the organization can know about the proportion of investment in current assets and current liabilities. 7. DATA ANALYSIS AND FINDINGS Ratio analysis is one of the most powerful tools of financial analysis. It is the process of establishing and interpreting various ratios. It is with the help of ratio that the financial statement can be analyzed more clearly. Copyright 2012 Published by IJMRR. All rights reserved 1131
Current ratio Current ratio, also known as liquidity ratio and working capital ratio, shows the proportion of current assets of a business in relation to its current liabilities. Current ratio is a measure of liquidity of a company at a certain date. It must be analyzed in the context of the industry the company primarily relates to. The underlying trend of the ratio must also be monitored over a period of time. Current ratio is the primary measure of a company's liquidity. Quick Ratio Quick Ratio, also known as Acid Test Ratio, shows the ratio of cash and other liquid resources of an organization in comparison to its current liabilities. Quick ratio is a measure of a company's ability to settle its current liabilities on a very short notice. Current ratio may provide a misleading indication of a company's liquidity position when a considerable portion of its current assets is illiquid. Quick ratio is therefore a more reliable measure of liquidity for manufacturing companies and construction firms that have relatively high levels of inventory, work in progress and receivables. Net Working Capital Ratio Net Working Capital Ratio (NWC), sometimes referred to as simply working capital, is used to determine the availability of a company's liquid assets by subtracting its current liabilities. It is a measure of the operating liquidity available to a business. However, companies that do business on a cash basis (such as a grocery store) need very little working capital (it may even be negative such that the business is partly funded by its suppliers. Current Liabilities to Inventory Ratio Indicates reliance on the available inventory for payment of debt. Expressed usually as a percentage, it is one of the measures of the solvency of a firm. This ratio provides an indication of the ability of your firm's inventory sales to generate the cash needed to meet the short-term obligation of creditors. A ratio that is low usually indicates that your firm will be able to meet short term obligations and a high ratio may be cause for concern and signal a potential cash shortage. Inventory Turnover Ratio Inventory turnover is the ratio of cost of goods sold by a business to its average inventory during a given accounting period. It is an activity ratio measuring the number of times per period. A business sells and replaces its entire batch of inventory again. Inventory turnover ratio is used to measure the inventory management efficiency of a business. In general, a higher value of inventory turnover indicates better performance and lower value means inefficiency in controlling inventory levels. Fixed-Asset Turnover Ratio The fixed-asset turnover ratio measures a company's ability to generate net sales from fixedasset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. This ratio is often used as a measure in Copyright 2012 Published by IJMRR. All rights reserved 1132
manufacturing industries, where major purchases are made for PP&E to help increase output. When companies make these large purchases, prudent investors watch this ratio in following years to see how effective the investment in the fixed assets was. Total asset turnover ratio The total asset turnover ratio measures the ability of a company to use its assets to efficiently generate sales. This ratio considers all assets, current and fixed. Those assets include fixed assets, like plant and equipment, as well as inventory, accounts receivable, as well as any other current assets. Asset to Equity Ratio The asset/equity ratio shows the relationship of the total assets of the firm to the portion owned by shareholders. This ratio is an indicator of the company s leverage (debt) used to finance the firm. Return on Assets (ROA) Ratio Return on assets is the ratio of annual net income to average total assets of a business during a financial year. It measures efficiency of the business in using its assets to generate net income. It is a profitability ratio. Return on assets indicates the number of cents earned on each dollar of assets. Thus higher values of return on assets show that business is more profitable. This ratio should be only used to compare companies in the same industry. Return on Equity (ROE) Ratio Return on equity or return on capital is the ratio of net income of a business during a year to its stockholders' equity during that year. It is a measure of profitability of stockholders' investments. It shows net income as percentage of shareholder equity. Return on equity is an important measure of the profitability of a company. Higher values are generally favorable meaning that the company is efficient in generating income on new investment. The profit margin ratio The profit margin ratio, also called the return on sales ratio or gross profit ratio, is a profitability ratio that measures the amount of net income earned with each dollar of sales generated by comparing the net income and net sales of a company. In other words, the profit margin ratio shows what percentage of sales are left over after all expenses are paid by the business. The profit margin ratio directly measures what percentage of sales is made up of net income. In other words, it measures how much profits are produced at a certain level of sales. Gross profit ratio Gross profit ratio (GP ratio) is a profitability ratio that shows the relationship between gross profit and total net sales revenue. It is a popular tool to evaluate the operational performance of the business. The ratio is computed by dividing the gross profit figure by net sales. Gross profit is very important for any business. It should be sufficient to cover all expenses and provide for profit. There is no norm or standard to interpret gross profit ratio (GP ratio). Copyright 2012 Published by IJMRR. All rights reserved 1133
Debt Ratio Debt ratio is a solvency ratio that measures a firm's total liabilities as a percentage of its total assets. In a sense, the debt ratio shows a company's ability to pay off its liabilities with its assets. In other words, this shows how many assets the company must sell in order to pay off all of its liabilities. Interest Coverage Ratio Interest coverage ratio, also known as times interest earned, is a measure of how well a company can meet its interest-payment obligations. The Debt to Equity Ratio The debt to equity ratio is a financial, liquidity ratio that compares a company's total debt to total equity. The debt to equity ratio shows the percentage of company financing that comes from creditors and investors. A higher debt to equity ratio indicates that more creditor financing (bank loans) is used than investor financing (shareholders). Table 1: Different Ratios Of Majan Glass Company (Sohar Branch) S. No Particulars 2010-2011 2011-2012 2012-2013 2013-2014 1 Current Ratio 4.33 2.74 2.04 1.62 2 Quick Ratio 3.33 1.77 0.77 0.58 3 Net Working Capital Ratio 0.31 0.21 0.18 0.15 4 Current liabilities to 1.00 1.03 0.78 0.95 Inventory Ratio 5 Inventory Turnover 4.13 3.35 1.42 1.51 Ratio 6 Fixed Assets Turnover 1.02 0.81 0.66 0.73 Ratio 7 Total Assets Ratio 0.61 0.54 0.43 0.44 8 Assets to Equity Ratio 7.25 4.84 4.43 3.99 9 Return on Assets Ratio 17 7 5 4 10 Return on Equity Ratio 82% 32% 22% 21% 11 Profit Margin Ratio 28% 12% 13% 11% 12 Gross Profit Margin 37% 28% 29% 13% Ratio 13 Total Debt Ratio 0.18 0.19 0.23 0.29 14 Interest coverage Ratio 67.4 76.3 30.8 6.98 15 Debt Equity Ratio 1.33 0.95 1.03 1.18 8. FINDINGS Liquidity: The current ratio shows increase trend only in the year 2010 as 4.33 and it decreased from 2011 to 2013. The quick ratio shows increase trend only in the year 2010 as 3.3 and it decreased from 2011 to 2013. Copyright 2012 Published by IJMRR. All rights reserved 1134
The net working capital ratio of MGC shows increase trend only in the year 2010 as 0.3 and it decreased from 2011 to 2013. The current liabilities to inventory ratio shows increase trend in the year 2011 as 1.03 and it decreased 2010, 2012 and 2013. Assets: The inventory turnover ratio of the company stood at 4.13, which is the highest value in the year 2010. Fixed assets turnover ratio in 2010 was 1.02, which is the highest value when compared with rest of the three years data. The total assets of the company in the year 2010 are 0.61 it shows increase, but in next following years it has decreased in 2011-2012. The assets to equity ratio for the last four years is in continues decrease trend. It stood at 7.25 which is the highest value and the lowest value in 2013 is 3.99. Profitability: The return on assets ratio shows increase in the year 2010 as 17%. It decreased from 2011 to 2013 due to decline in their sales. The return on equity ratio in the last four years shows increase in 2010 as 82 %. But it is decreased from 2011 to 2013 due to decline in their sales. The profit margin ratio shows increase in 2010 as 28%. This shows that the company is in good position. But it decreased from 2011 to 2013 except 2012 as 13% but, 2011 as 12% and 2013 as 11%. The Gross profit ratio for the last four year is increased in the year 2010 as 37%. But it decreased from 2011 to 2013 except 2012 as 29% but, due to decline in their cost of sales it declined in the year as 28%, and 2013 as 13%. Debt: Total debt ratio for the last four years is in increase trend. It stood at 0.18 in 2010, which is lesser when compared to the previous years and it also stood as 0.29 in 2013 which is higher in value. The interest coverage ratio in 2010 to 2011 is increased, but in 2012 to 2013 it decreased. The debt to equity ratio of the company in the year 2010 is 1.33 and for 2011 it is 0.95 shows decrease and it has increased in the next years. 9. SUGGESTIONS AND RECOMMENDATIONS From the results of the analysis the observation shows that the working capital of the company is not really sufficient, so the company can try to increase the net working capital by increasing current assets and decreasing its current liabilities. The current ratio is decreased slightly, because there is a gap between the ideal limit and the actual, if the excess current liabilities are adjusted proportionate manner the current ratio can be improved. Copyright 2012 Published by IJMRR. All rights reserved 1135
The company can try to maintain an increase trend in their inventory ratio to make better performance. Because the lower inventory turnover ratio may be an indication of overstocking which may pose risk of obsolescence and increased inventory holding costs. The company can also try to improve their fixed assets turnover ratio to be more efficient in utilizing their investment in fixed assets to generate reasonable revenue. A higher total asset turnover ratio is more favorable than a lower one, so the company can try to increase their total assets ratio by analyzing their financial statements to find out the reason for the decline. Increase of the return on assets ratio will decrease its expenses. Whenever expenses are cut the revenue increases this creates a higher return for the company. Return of equity ratio increases, when the return on equity is positive and it decreases when the return is negative. The owner will be benefited from higher return of equity value and the manager can seek ways to increase its return on equity. The company should try to maintain the increase trend in the net profit margin ratio, which will have a great impact in motivating the investors to invest more in the organization. Increase on selling price will increase the gross profit margin this can be done by finding suppliers who supply at cheap price, cheaper raw materials and using labor-saving technology and outsourcing can help the company to increase its gross profit margin. The company can try to make a balance between assets and liabilities or try to make the level of liability lower when compared with the assets because, companies with higher levels of liabilities compared with assets are considered highly leveraged and more risky for lenders. High inventory turnover ratio means that the company is efficiently managing and selling its inventory. So that the company can try to increase its inventory turnover ratio because if a company has a low inventory turnover ratio, then there is a risk of holding obsolete inventory, which will be very difficult for the company to sell and manages its inventory. The company can try to decrease its debt to equity ratio because normally companies with a higher debt to equity ratio are considered more risky to creditors and investors than companies with a lower ratio. 10. CONCLUSION Ratios need to be interpreted carefully. They can provide clues to the company s performance or financial situation. But on their own, they cannot show whether performance is good or bad. The study undertaken has brought in to the light of the following conclusions. Financial Statements are the sources of information on the basis of which conclusions are drawn. The balance sheet and profit and loss account or income statement of a business will reveal the net effect of the various transactions on the operational and financial position of the company. A proper analysis and interpretation of these statements by using ratio analysis technique will enable a person to judge the profitability and financial strength of the business. The overall financial performance of the company is good. Copyright 2012 Published by IJMRR. All rights reserved 1136
REFERENCES Principles & Applications of Financial Management 10th Edition by Keown, Martin, Pelty, Scot. JR. Pearson Prentice Hall. Analysis for Financial Management 9th Edition by Robert C. Higgins McGraw. HILL International Edition. Introduction to Finance 13th Edition by Ronald W. Melicher, Edgar A Norton Wiley ISBN 978-0-47012892-3. http://www.free-management-ebooks.com/faqfi/performance-01.htm https://www.ietd.inflibnet.ac.in/bitstream/10603/.../12_chapter3.pdf https://www.valuationup.com http://www.investopedia.com/terms/a/assetturnover.asp http://bizfinance.about.com/od/financialratios/f/total_asset_turnover.htm http://accountingexplained.com/ http://www.myaccountingcourse.com/ http://www.financeformulas.net/ http://www.free-management-ebooks.com/faqfi/performance-01.htm http://www.majanglass.com/ http://www.businessdictionary.com/definition/financial-performance.html http://www.msm.gov.om/ Copyright 2012 Published by IJMRR. All rights reserved 1137