FIVE-YEARS FINANCIAL ANALYSIS OF ROAD NIGERIA PLC BETWEEN

2009- 2013

AN ASSIGNMENT

BY

EJETWU, BETTY OMASIRUCHI

16/BA/AC/1622
DEPARTMENT OF ACCOUNTING
FACULTY OF BUSINESS ADMINISTRATION

SUBMITTED TO

DR. NTIEDO, B. EKPO

COURSE LECTURER
FBA 314: FINANCIAL MANAGEMENT
DEPARTMENT OF BANKING AND FINANCE
FACULTY OF BUSINESS ADMINISTRATION
UNIVERSITY OF UYO, UYO

JANUARY, 2018
 CONTENTS

 INTRODUCTION

 CONCEPTUAL AND THEORETICAL CLARIFICATIONS

 CONTENTS OF FINANCIAL STATEMENTS

 USERS OF FINANCIAL INFORMATION

 TECHNIQUES FOR ANALYSING FINANCIAL STATEMENTS

 CASE STUDY

 CONCLUSION

 REFERENCES
 CONCEPTUAL AND THEORETICAL CLARIFICATIONS
1. FINANCIAL STATEMENTS: Financial statements otherwise known as

financial report; is an official, organized and well structured record of the

financial activities and position of a business entity. Pertinent financial

information obtained as a result of various activities carried out by an entity is

presented in a structured manner and in a form that would make it easy for one

to comprehend the true financial position at a given period of time. Thus,

financial report includes management discussion or notes from the

management and analysis; that is providing a narrative explanations, through

the management activities of how an entity has performed in the past, its

financial condition and its future aspects.

2. FINANCIAL STATEMENT ANALYSIS: Financial statement analysis is a

method or process involving specific techniques for evaluating risks,

performance, financial health, and future prospects of an organization. It is

used by a variety of stakeholders, such as credit and equity investors, the

government, the public, and decision-makers within the organization. These

stakeholders have different interests and apply a variety of different techniques

to meet their needs.

3. ORGANISATIONAL PERFORMANCE: Organisational performance has to

do with the management's evaluation on the business performances. It is an

area or a subset of business intelligence involved with monitoring and

managing an organization's activities, according to key performance indicators

such as revenue, return on investment, overhead and operational costs. It is also

a set of management and analytic process that enables the management to

achieve one or more preselected goals.

 CONTENTS OF FINANCIAL STATEMENTS

I. Balance sheet: A balance sheet or statement of financial position, reports on a

company's assets, liabilities, and owners equity at a given point in time.

II. Income statement: An income statement or statement of comprehensive

income, statement of revenue & expense, P&L or profit and loss report, reports

on a company's income, expenses, and profits over a period of time. A profit

and loss statement provides information on the operation of the enterprise.

These include sales and the various expenses incurred during the stated period.
III. Statement of changes in equity: A statement of changes in equity or equity

statement or statement of retained earnings, reports on the changes in equity of

the company during the stated period.

IV. Cash flow statement: A cash flow statement reports a company's cash flow

activities; particularly its operating, investing and financing activities.

USERS OF FINANCIAL INFORMATION

I. Suppliers and trade creditors are interested in information that will help them

determine whether the amounts owing to them will be paid on time.

II. Lenders want information that will enable them to decide whether their loans

will be paid when due, and whether or not to issue new loans to the entity.
III. Investors who supply risk capital in the form of funding, this group are

concerned with the risk inherent in, and the return provided by their

investments
IV. Customers will be interested in the continuance of the entity, especially if they

depend on it themselves.
V. Employees wish to know about the stability and profitability of their

employers. This may give them confidence about their jobs and could be used

to discuss salary and conditions of employment.

VI. The Government and government agencies are interested in the allocation of

resources and the activities of the entities in general.

VII. The General public may be affected by an entity in a number of different ways,

especially how an entity may contribute to the local economy.

TECHNIQUES FOR ANALYSING FINANCIAL STATEMENTS

 HORIZONTAL ANALYSIS: This compares financial information over time,

typically from past quarters or years. Horizontal analysis is performed by

comparing financial data from a past statement, such as the income statement.

When comparing this past information one will want to look for variations such

as higher or lower earnings.

 VERTICAL ANALYSIS: This is a percentage analysis of financial statements.

Each line item listed in the financial statement is listed as the percentage of

another line item. For example, on an income statement each line item will be

listed as a percentage of gross sales. This technique is also referred to as

normalization or common-sizing.
 FINANCIAL RATIOS: These are very powerful tools to perform some quick

analysis of financial statements. There are four main categories of ratios:

liquidity ratios, profitability ratios, activity ratios and leverage ratios:

1. Liquidity ratios are used to determine how quickly a company can turn its assets

into cash if it experiences financial difficulties or bankruptcy. It essentially is a

measure of a company's ability to remain in business. A few common liquidity

ratios are the current ratio and the liquidity index. The current ratio is current

assets/current liabilities and measures how much liquidity is available to pay for

liabilities.
2. Profitability ratios are ratios that demonstrate how profitable a company is. A few

popular profitability ratios are the breakeven point and gross profit ratio. The

breakeven point calculates how much cash a company must generate to break

even with their start up costs. The gross profit ratio is equal to (revenue - the cost

of goods sold)/revenue. This ratio shows a quick snapshot of expected revenue.

3. Activity ratios are meant to show how well management is managing the

company's resources. Two common activity ratios are accounts payable turnover

and accounts receivable turnover. These ratios demonstrate how long it takes for

a company to pay off its accounts payable and how long it takes for a company to

receive payments, respectively.

4. Leverage ratios depict how much a company relies upon its debt to fund

operations. A very common leverage ratio used for financial statement analysis is

the debt-to-equity ratio. This ratio shows the extent to which management is

willing to use debt in order to fund operations. This ratio is calculated as: (Long-

term debt + Short-term debt + Leases)/ Equity.

 DUPONT ANALYSIS: The DuPont Analysis uses several financial ratios that

multiplied together equal return on equity, a measure of how much income the

firm earns divided by the amount of funds invested (equity).

 DIVIDEND DISCOUNT MODEL (DDM): This may also be used to value a

company's stock price based on the theory that its stock is worth the sum of all of

its future dividend payments, discounted back to their present value. In other

words, it is used to value stocks based on the net present value of the future

dividends.

A CASE STUDY OF GUINNESS NIGERIA PLC FOR THE FIVE-YEAR

PERIOD: 2013 TO 2017
1. LIQUIDITY RATIO

Current Ratio Acid Test or Quick Ratio

Current assets Current assets-inventories
Current liabilities Current liabilities

2013 44,422,511 44,422,511 – 17,433,924

(N’000) 36,588,640 36,588,640
= 1.21 = 0.74

2014 37,622,976 37,622,976 – 21,998,519

(N’000) 38,996,801 38,996,801
=0.96 =0.40

2015 32,238,519 32,238,519 – 12,400,102

(N’000) 51,275,097 51,275,097

= 0.62 = 0.38

2016 40,840,041 40,840,041 – 13,469,248

(N’000) 44,248,479 44,248,479

=0.92 =0.62

2017 33,511,512 33,511,512 – 10,750,598

(N’000) 46,100,344 46,100,344

=0.72 =0.49

INTERPRETATION
This ratio analyzed the ability of the company to pay off its current liabilities as they

became due, and also its non-current liabilities as they became current. This means
that Guinness Nigeria Plc needs to have more current assets at the end of the

accounting period than current liabilities.

From the computed financial ratios, in the year 2013, Guinness had a current ratio of

1.21; this is greater than 1.0 and it indicates that the company was able to pay off all

its current liabilities with its current assets. This is a welcome position for its creditors

because it implies that the company is credit-worthy and will not run into debt very

quickly. However, in the remaining four years of the analysis, 2013 to 2017, Guinness

had a liquidity ratio of less than 1.0; 0.96 in 2014, 0.62 in 2015, 0.92 in 2016 and 0.72

in 2017. This indicates that the company was not able to convert all its current assets

into cash to settle its current liabilities. This is very usual to businesses because it is

not always possible for a company to convert all its current assets into current

liabilities; there are different types of current assets and not all of them can easily be

converted into cash. The quick ratio also indicates this as it shows that Guinness

Nigeria Plc had quick ratios less than 1.0 in the five years being analyzed.

The inability of a company to convert all its current assets into cash to settle all its

current liabilities is not necessarily a sign of weakness, but it only shows that either

the company’s sales are decreasing, the company is having a hard time collecting its

account receivables or perhaps the company is paying its bills too quickly.

2. PROFITABILITY RATIO
Gross Profit Operating Profit Net Profit Margin
Margin Margin
Gross Profit Operating Profit Net Profit
Sales Sales Sales

2013 55,043,605 26,538,501 17,927,934

(N’000) 123,663,125 123,663,125 123,663,125
 = 0.44 x 100% = 0.21x 100% = 0.15 x 100%
= 44% = 21% = 15%

2014 56,199,939 22,861,423 14,671,195

(N’000) 126,288,184 126,288,184 126,288,184

= 0.45 x 100% = 0.18 x 100% = 0.12 x 100%

= 45% = 18% = 12%

2015 56,078,434 20,933,616 11,863726

(N’000) 122,463,538 122,463,538 122,463,538

= 0.46 x 100% = 0.17 x 100% =0.09 x 100%

= 46% = 17% = 9%

2016 51,333,214 16,123,378 9,573,480

(N’000) 109,202,120 109,202,120 109,202,120

= 0.47 x 100% = 0.14 x 100% = 0.08 x 100%

= 47% = 14% = 8%

2017 54,943,920 15,667,379 7,794,899

(N’000) 118,495,882 118,495,882 118,495,882

= 0.46 x 100% = 0.13 x 100% = 0.06 x 100%

= 46% = 13% = 6%

INTERPRETATION
The profitability ratios are ratios that demonstrate how profitable a company is. The

information is very relevant to existing shareholders and future investors in the

company because it shows whether or not there would be profit in their investment

and how much profit there would be. Profitability ratios are measured in percentages,

showing the percentage of profitability per year.

The Gross Profit Margin, the Operating Profit Margin and the Net Profit Margin show

the percentage of gross profit made on sales, the percentage of operating profit made

on sales and the percentage of net profit made on sales, respectively.

From the computed financial ratios, Guinness Nigeria Plc makes a substantial profit

from the sales of its inventory and this is shown in the ratios as 44% in 2013, 45% in

2014, 46% in 2015, 47% in 2016 and 46% in 2017. However, due to the expenses and

liabilities incurred by the company in the course of the financial year(s) under review,

the net profit margin does not show a substantial percentage. In 2013, Guinness

Nigeria Plc made 15% net profit from its sales, 12% in 2014, 9% in 2015, 8% in 2016

and 6% in 2017.

This position may not be readily acceptable by the investors and shareholders because

the profit made is not on the high side, however, the company did not make net profit

less than 1.5 in the financial years.

3. FINANCIAL LEVERAGE RATIO

Debt to Equity Interest Coverage Equity Ratio
Ratio
Total Liabilities Operating Profit Capital Employed
Total Assets Interest Expenses Total Assets

2013 18,133,997 675,476 13,357,752

(N’000) 40,283,492 40,283,492 40,283,492
= 0.45 x 100% = 0.02 = 0.41
= 45%

2014 10,852,303 522,072 14,165,048

(N’000) 102,534,172 102,534,172 102,534,172
= 0.10 x 100% = 0.0005 = 0.19
= 10%
 2015 15,138,749 31,611 13,357,752
(N’000) 121,060,621 121,060,621 121,060,621
= 0.12 x 100% = 0.0003 = 0.11
= 12%

2016 19,218,236 25,570 15,595,224

(N’000) 132,328,273 132,328,273 132,328,273
= 0.14 x 100% = 0.0002 = 0.16
= 14%

2017 15,503,824 27,804,912 14,365,422

(N’000) 122,246,632 122,246,632 122,246,632
= 0.13 x 100%
= 0.22 = 0.11
= 13%

INTERPRETATION
The debt to equity ratio is a leverage ratio that compares a company’s total liabilities

to its shareholders’ equity. It is a measurement of the percentage of the company’s

balance sheet that is financed by suppliers, lenders and creditors against what the

shareholders have committed. A lower percentage of the debt to equity ratio indicates

that a company is using less leverage and has a stronger equity position.

From the computed financial ratios, it can be deduced that Guinness Nigeria Plc has a

strong equity position. This is indicated in the 45% obtained from the analysis in

2013, 10% in 2014, 12% in 2015, 14% in 2016, and 13% in 2017. Also, we can see

that the ratio reduces as the years increase, supporting the deductions from the

liquidity ratio that the company uses less liability as the year increases.

The interest coverage ratio, on the other hand, is used to determine how easily a

company can pay their interest expenses on outstanding debt. The lower the ratio, the

more the company is burdened by debt expense.

From the computed financial ratios, it can be concluded that the ability of Guinness

Nigeria to meet interest expenses may be questionable because the value for the

interest coverage ratio for the five years being analysed is lower than 1.5. This is not a

margin of safety for the creditors because if the company runs into financial difficulty

within the years analyzed, the creditors may be unlikely to receive interest on their

loans.

The interest coverage ratio does not contradict the deductions of the debt to equity

ratio because the debt to equity ratio only show whether the company will be able to

settle off its debts within the financial year(s) being analyzed, while the interest

coverage ratio shows whether the company will be able to pay off both its debts and

the interest charged on them.

4. ACTIVITY RATIO
Inventory Turnover Accounts Receivable Total Assets
Turnover Turnover
Cost of Goods Sold Sales on Credit Sales
Inventory Account Receivables Total Assets

2013 68,619,520 11,032,758 123,663,125

(N’000) 17,433,924 18,133,997 40,283,492

= 3.94 = 0.60 = 3.06

2014 70,088,245 4,471,619 126,288,184

(N’000) 21,998,519 10,852,303 102,534,172

= 3.18 = 0.41 = 1.95

2015 66,385,104 9,066,066 122,463,538

(N’000) 12,400,102 15,138,749 121,060,621
= 5.33 = 0.59 = 1.01
 2016 57,868,906 15,491,921 109,202,120
(N’000) 13,469,248 19,218,236 132,328,273
= 4.29 = 0.81 = 0.83

2017 63,551,962 12,310,899 118,495,882

(N’000) 10,750,598 15,503,824 122,246,632
= 5.91 = 0.79 = 0.97

INTERPRETATION

The activity ratios are meant to show how well management is managing the
company's resources. This implies that a higher activity ratio indicates proper
management of resources and vice versa.
From the computed financial ratios, since the inventory turnover ratios for the five

years are more than 1.5, that is; 3.9 in 2013, 3.18 in 2014, 5.33 in 2015, 4.29 in 2016

and 5.91 in 2017, we can deduce that Guinness Nigeria Plc has a very good inventory

management system. This is an acceptable position to the shareholders and potential

investors; because it shows that the company has a good management system.

Also, the accounts receivable turnover shows how quickly the company can collect its

debts from outstanding debtors within the financial year(s) being analysed. From the

computed financial ratios, in 2013, the company had accounts receivable turnover of

0.6, which indicates that it takes less than a year for the company to collect its total

accounts receivable for the year. Also, the same deductions could be made for the

years 2014 to 2017 which had accounts receivable turnover of 0.41, 0.59, 0.81 and

0.79 respectively. This position is acceptable by the investors and shareholders

because it indicates that the company does not make too much loss from selling on

credit.
The total assets turnover, however, indicates how well the total assets of Guinness

Nigeria Plc are being managed. The higher the yearly turnover rate on these assets, the

better the company is at managing them and using them to generate sales. Also, a

higher yearly turnover rate on total assets may indicate high sales. From the computed

financial ratios, in 2013, Guinness Nigeria Plc had a total assets ratio of 3.06, which

indicates that the company was able to use most of its total assets to generate sales.

However, this figure reduces from 1.95 in 2014 to 1.01 in 2015, 0.83 in 2016 and 0.97

in 2017. The ratios indicate that although the company was able to make a lot of sales

from its total assets in the initial year, it was unable to keep up the pace in the

following years, thereby the reduction in the ratios.

CONCLUSION
Analysis and interpretation of financial statements is an important tool in

assessing company’s performance. It reveals the strengths and weaknesses of a

firm. It helps the clients to decide in which firm the risk is less or in which

one they should invest so that maximum benefit can be earned. It is known

that investing in any company involves a lot of risk. So before putting up

money in any company one must have thorough knowledge about its past

records and performances. Based on the data available the trend of the

company can be predicted in near future.

Short term liquidity position of Guinness Plc was good in 2013. The ratios that

were found to be satisfactory are operating profit margin, gross profit margin,

net profit margin, return on capital employed, return on assets and return on

net worth. Current ratio, quick ratio and debt-equity ratio were undesirable. In
2014, current assets position improved further that resulted in better current

ratio and quick ratio. Debt-equity ratio was very low due to less investment. In

2013, return on capital employed, return on assets, return on investment and

return on net worth remained unsatisfactory.