CHAPTER ONE

1. Introduction
1.1 Background Of The Study

Financial statement is a formal record of firm’s financial activities. It includes income

statement, statement of balance sheet, statement of cash flows and statement of retained
earnings. Financial performance analysis also called financial statement analysis is a process
of reporting what happened to the firms in the past, present and future in terms of sales,
assets, liabilities, earnings, dividends and so forth. This information is one of the inputs that
investors and creditors, government use for the purpose of tax, general investment that
community use to form expectation about the required returns and riskiness of the firms
(pinches, 1994).

Financial performance is also a process of evaluating and assessing the relationship between
the components of financial statement to obtain a better understanding of firms financial
position and financial operation of the firms. Mangers are frequently evaluates and
compensated on the basis of accounting measures of performance such as profit margin and
return on equity and assets. Investors, creditors, and bond holders interested in liquidity of
the firms (Ross, et, al, 1998).

Financial performance also involves the assessment of past performance current

performance, and predict about the future using financial tools of analysis such as ratio
analysis horizontal analysis and vertical analysis. It is the application of analytical tools to
the general purposes of financial statement and related data for making business decision. It
involves the transforming of raw data in to useful information to the users. Financial analysis
also reduce our reliance on hunches of guesses, intuition and reduces our uncertainty in
decision making by providing an effective and systematic basis for business decision. The
main function of financial analysis is the pinpointing in the strength and weakness of a
business in the past and analyzing of figures contained in the financial statement by making
comparison of various complement and examines their content in the form of percentage birr
or dollar.

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Since having a good financial performance is a way of knowing the firms past, present weakness
and strength, profitability, debt ratio, liquidity and asset management and long-term solvency
due attention must be given to it. The factors that mislead the financial performance like,
unskilled man power or personnel that are inadequate knowledge about the assessment of
financial performance leads to many problem must be identified and studied from time to time in
the process of assessing firms financial performance. Unless otherwise the objectives and goals
of the firms is not meet.

Therefore, the aim of this study would be to assess and analyze the financial performance of
Jema Cement Factory in general and to assess the weakness and strength its liquidity (the ability
to pay its short term debt as they come due), solvency (the ability to pay long-term obligation as
they come due) and profitability of the firms using financial ratios.

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1.2 Background Of The Organization

Jema Cement Plc is a new cement producing factory established in 1999 E.C .Jema Cement Plc
is a private owned company which found in Oromia regional state, North shoa in wuchale
wereda near muketurri town. It is established on 20 hectares land of the wereda and far a way
from Addis Ababa 78km.Even though the factory is located in north shoa, wuch
ale wereda the head office of the factory is in Addis Ababa. The main objective of Jema cement
factory is to produce a good quality cement, to increase the countries cement production
capacity, to maximize its wealth and profit, to be compatible factory in the production of
cement. The annual production capacity of Jema cement factory is 120,000 ton/annual.

1.3 Statement of The Problem

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Assessment of financial performance is an analysis of a firms past, present and future financial
position and its weakness and strength. Typically, financial performance of a firm involves the
assessment of firms financial statement in the past, present and future. Financial performance
analysis indicates the growth, profitability, debt capacity and overall liquidity of the firms. A
properly analyzed financial statement provides financial strength and weakness of the firms,
evaluate past performance and set objectives to predict about the future performance and to
assess present financial performance through proper analysis of tools of analysis (ratio analysis,
horizontal analysis, and vertical analysis) ( www. benleycg. com/: accessed, 1/10/2011).

Many internal users, such as management of the firms interested in internal control on finance
area, better financial condition and better performance of firms present financial condition,
evaluation of opportunities in relation to current position, return on investment provided by
varios assets of the firms. Not only internal users, but also external users like bond holders
interested in the cash flow ability of the firm, investors, trader creditors interested in the
liquidity of the firms (www. bentleycg .com: Accessed, 1/10/2011).

Always firms should be able to look their performance activities through assessing of financial
statement. However, assessment of financial performance of a firm is not an easy and one time
task. At the time of assessing many problem may arise; lack of adequate experience how
financial performance could be possible, absence of reviewing the weakness and strength of the
firms are the problem that face many company. Because of those problem the final out comes of
the financial performance of the firm become not clear, management of the organization fail to
make decision and other users of the financial statement become fail to make decision.
Therefore, this idea initiate the researcher to assess the financial performance of Jema Cement
Factory based on the problem arised.So, this study tried to assess the financial performance of
Jema Cement Factory by answering the following basic questions.

1. How assessment of financial performance of the firms could be possible?

2. What tools of analysis are available to assess financial performance of the firms?

3. How weakness and strength, profitability, liquidity, asset management of the firms could
be assessed using financial ratios.

1.4 Objectives Of The Study

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 For the sake of understanding the objectives of the study is classified as general objectives
and specific objectives.

1.4.1 General Objective

The general objectives of the study is to assess and analyze the financial performance of Jema
Cement Factory

1.4.2 Specific Objective

 To assess the factory ability to meet its short term debt ,which is called liquidity.

 To assess the factory strength and weakness using tools of analysis like ratio analysis,
horizontal analysis and vertical analysis.

 To assess the company’s or Jema Cement Factory’s leverage or solvence. Solvence in a

sense ,the ability to meet long term obligation of the firm.

 To assess Jema Cement Factory’s profitability, since business organizations basic

motives it to make profit.

1.5 Significance Of The Study

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The study under the title of assessment of financial performance of Jema Cement Plc has some
significance to the researcher, for the factory and for prospect researcher. It was based on
practical investigation and serve the researcher as a base for further investigation on the title in
the near future.

The study also showed the strength and weakness of the factory’s liquidity, leverage and asset
management of the factory. Therefore, looking these ratio the factory might know its profitability
and liquidity of the firms, and also riskiness of the firms. For prospect researcher, it will be as a
clue when they need to conduct on the factory’s financial performance.

1.6 Scope Of The Study

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The study was focused on the assessment of financial performance of Jema Cement Factory.
This is determined by analysis of different tools like ration analysis, horizontal analysis and
vertical analysis. All of these process were carried out from the balance sheet and income
statement of the factory from year 2000-2003.Descriptive analysis method where used and for
further analysis of both qualitative and quantitative types of data where used. In the case of
quantitative, measurement of data collected in number, percentage and birr times form where
made for qualitative data (things that cannot be expressed in number or quantity) observation
where used. So, almost secondary source of data and quantitative data type were used in this
study.

1.7 Organization Of The Paper

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 This research paper has five chapters. The first chapters deal with introduction; includes
backgrounds of the study, background of the organization, statement of the problem,
objectives of the study, significance of the study and scope of the study. The second chapter
focus on the review of related literature. The third chapter is about methodology and the
fourth chapter deal with about the interpretation, analysis of data and presentation. Finally,
the fifth chapter is about conclusion and recommendation of the whole finding of this
research paper.

1.8 Limitation of the study

Certainly,every study has its own limitation. No study can be perfect and carried out as
intended, due to the reason that arise from restriction of some information and there is no
standardized ratio for each assessed ratio, unwillingness of the respondent to get the
required data.

CHAPTER TWO

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 2. Review of Related Literature

2.1 An overview Of Financial Performance

Financial performance analysis is the process of evaluating business projects and other
finance related entities to determine their suitability for investment. Typically, financial
analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to
be invested in (www. invest podia. com: Accessed 1/11/2011).

Financial performance of a firms involves the assessment of firms financial statement in the
past, present and predict the future. It indicates the firms profitability, risk ness and overall
liquidity( www. Bentleys. com: Accessed 1/10/2011).

Financial analysis and planning is concerned with transforming data into a form that can be
used to monitor the firm’s financial condition evaluating the new for increases or reduced
productive capacity and determining what additional or reduced financing is required. These
functions in compass the entire balance sheet as well as the firms income statements and
other financial statements. Although this activities rely on heavily on accrual based financial
statement, its underlying objectives is to assess the firms cash flows and develops plans that
ensure adequate cash flow is available to support achievement of its goal (Gitman,
1998,P.15).

Investment decisions determine both the mix and types of asset found on the firms balance
sheet. This activity is concerned with the left hand side of the balance sheet. Mix refers to the
numbers of dollars of current and fixed assets. Once the mix is established the financial
manger must determine and attempt to maintain certain optimal level of each of current
assets. The financial manger must also divided which are the best fixed assets to acquire and
to know when existing fixed assets need to be modified, replaced, or liquidated. These
decision are important because they affect the firms success in achieving its goals (Gitman,
1998, P. 15).

Financing decision deals with the right hind side of the firms balance sheet and involve two
major areas. First, the most appropriate mix of short-term and long term financing must be
established. A second and equally important concern is which individual short term or long-
term sources of financing are best at a given point in time. Many of these decisions are

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 defected by necessity. But, some require an in-depth analysis of the available of financing
alternatives, their costs, and their long run implications. Against is the effects of these
decision on the firms goal achievement that is most important (Gitman, 1998, P15).

Evaluation of firms performance predict firms future earning and it is useful both as way to
anticipate future condition and more important as a starting point for planning action that will
influence the future course of events. Financial managers monitors actual against planned
goal and target using the financial performance evaluation. Evaluation of financial
performance gives clues as to where a firms financial situations is improving holding
constant or deteriorating rating overtime. It is also helpful to reveal the relative strength and
weakness of a firm as compared to other firm in the same industry (Vanhorn, 1998).

2.2 Types of Financial Statement

Balance sheet: Refers to the statement of financial position, reports the assets, liabilities and
stockholders equity of a business enterprise at a specific date. if helps in predicting amount,
timing and uncertainty of future cash flows (Ross, et al, 1998, P. 20).

Income Statements: is a measures of performance over some period of time, usually a

quarter or a year. The business and investment community issues this report to determine
profitability, Return on equity, and credit worthiness of the firm (from the research done by
Assenafi , 2009).

Statement of Cash Flows: It involves three components:operating cash flow, capital

spending, and change in net working capital. Operating cash flow refers to the cash flow that
results from the firm’s day to day activities of producing and selling capital spending is
just money spent on fixed assets less money received from the sale of fixed assets. Change
in net working capital is an investment in fixed asset (Ross, et, al, 1998 PP .30-32).

Statements of Owners Equity: As Ashenafi, (2009) Taken from Meigees. Robert; stock
holders equity statements shows, the difference between the assets and liabilities of a given
companies. It represents the cumulative net contribution by the stock holders plus earnings
that had been retained in the owners or stock holders interest in a business enterprise as a
residual interest.

2.3 Method Of Financial Performance Analysis

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 2.3.1 Ratio Analysis

Ratio analysis involves the method of calculating and interpreting financial ratios to assess
the firms financial performance and status. Financial ratio can be divided for convince in to
four basic groups categories: liquidity ratios, activity ratios, debt ratios, and profitability
ratios liquidity is the firms short-term solvency to pay its obligation as they come due.
Liquidity, activity and debt ratio primarily measures risk. profitability ratios measure returns.
In the near term the important elements are liquidity, activity and profitability ratio, because
these provide information that is critical to the short run operation of the firm. If the firm
cannot service in the short run, we need not to be concerned with its long term prospects.
Debt ratios are useful primarily when the analyst is sure that the firm will successfully
whether the short run. As a rule the necessary inputs to effective financial analysis include at
minimum the income statement and balance sheet (Gitman, 1998, P .12).

One of the most common ways of analyzing financial data is to calculate ratios from the data
to compare against those of other companies or against the company’s own historical
performance. For example, return on assets is a common ratio used to determine how
efficient a company is at using its assets and as a measure of profitability. This ration could
be calculated for several similar companies and compared as part of a large analyze (www
investopeida. com/: Accessed 1/12/20011).

2.3.2 Horizontal Analysis

Horizontal analysis is used to evaluate the trend in the account over the years. It is a
technique for evaluating a series of financial statement data over a period of time. Horizontal
analysis shown in comparative financial statement and express financial data from two or
more accounting periods in terms of a single designated base period (Gitman, 1998, P. 110).

2.3.3 Vertical Analysis

In vertical analysis all the data in a particular financial statement are presented as a
percentage of a single designated line item in that statement. For example, we might report
income statement items as percentage of net sales, balance sheet items as a percentage of to
tals assets and items in the statements of cash flows as a fraction or percentage of the change
in cash (Gitman, 1998).

Vertical analysis is also the procedure of preparing and presenting common size statements.
Common size statements is one that shows the items appearing on it in percentage form as
well as in dollar form. Each item is stated as percentage of some total of which that is apart.

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 Key financial changes and trends can be highlighted by the use of common size statements
(www.accounting for management. Com.Accessed 16/11/2011).

2.4 Users of Financial Information

The purpose of financial information is to provide inputs for decision making. Accounting is
the information system that identifies records and communicates the economic events of an
organization to interested users. Many people have an interest in knowing about the on going
activities of the business. These people are users of accounting information. Users of
accounting information can be divided broadly in to two groups. Internal users and external
users of the accounting information (Kieso, et, al, 1998, P. 6)

2.4.1 Internal Users

Financial statement information has a variety of uses within a firm internal users like
mangers who plan, organize and run a business uses for the evaluation of firms performance
financially. Managers are frequently evaluated and compensated on the basis of accounting
measures of performance such as profit margin and return on equity. Firms with multiple
divisions frequently compare the performance of those divisions using financial statement
information. Historical financial statement information is very useful for generating
projections about the future and for checking the realism of assumptions made in those
projections.( Ross, et, al, 1998, P. 67-68).

2.4.2 External Users

Financial statements information are useful to parties outside the firm, including short term
and long-term creditors and potential investors. Investors use accounting information to make
decisions to buy, hold or sale stock. Creditors such as suppliers and bankers use accounting
information to evaluate the risks granting credit or lending money (Stephen A Ross et al,
1998, P 68).

CHAPTER THREE

3. Methodology

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3.1 Area of The Study

The research under the title of assessment of financial performance will be planned was carried
out at Jema Cement Factors which is found in Oromia Region North Shoa (Salale) in Wuchale
wereda.

3.2 Source of Data And Data Types

The researcher was used two types of data sources. These are primary sources of data and
secondary sources of data. Due to the nature of this research topic almost secondary data source
where used. The data types used in this research where almost quantitative type of data. In
addition, quanlitative type of data where used to some extent.

3.3 Method Of Data Collection

For conducting an effective scientific research accurate and reliable data are very important. So,
the necessary information was collected through different method of data collection. In this study
both primary and secondary source of data was used. For the collection of primary data, an
unstructured interview where conducted with the head of financial manger and accountants of
the factory since it enables the researcher to ask further question beyond what the researcher
intended, can generate detailed data and enable in depth understanding of phenomenon.
Unstructured interview selected. Secondary data where obtained from different sources of
documents of the factory. These are audited financial statement (income statement and balance
sheet), other published manuals of the factory’s.

3.4 Method Of Data Analysis

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Once the data planned to collect is completed, the collected data is analyzed using different
techniques such as descriptive method of data analysis with common financial tools like ratio
analysis, horizontal analysis, and vertical analysis. The analyzed data is shown in the form of
tabulation and interpretation of the ratio which is expressed in percentage and times from where
made.

3.5 Method Of Presenting The Outcomes

After the process of data analayzation is completed, the analyzed data is summarized and
presented by a means of tabulation. The analyzed data is presented in the form of percentage, birr
and/ or times.

CHAPTER FOUR

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 4. Data Analysis, Interpretation And Presentation

4.1 An Overview of The Chapter

Under this chapter the researcher presented the data collected from secondary and primary
source which are directly and indirectly related to the financial performance of Jema cement
plc. The analiysation and interpretation is given in the following section by answering all
question arised in the statement of the problem..

4.2. Liquidity Ratio (L/R): Liquidity refers to the ability of firms to meet its short-term
financial obligation as they come due. It includes current ratio and quick (Acid-test) ratio.

4.2.1 Current Ratio (CR): It measures a firms ability to satisfy or cover the claims of short
term obligation of creditor by using only current asses.The researcher presented the current
ratio of Jema Cement Plc based on the data collected in the following table 4.1

Table 4.1 Current Ratios of Jema Cement Plc.

Year Current asset Current liabilities Current ratio of each average current ratio
year
2000 12,653,173 6,983,738 1.81 birr
2001 14,945,826 7,240,034 2.06 birr
2002 13,399,852 7,773,681 1.72 birr
2003 14,312,048 7,696,189 1.86 birr
Total 55,310,899 29,693,642 1.86 birr
Source: Audited annual report of Jema Cement Plc.
As shown in the above table, the current ratio of Jema Cement Plc for the year 2000-2003
were 1.81 Birr, 2.06 Birr, 1.72 Birr, and 1.86 Birr respectively. These ratio shows that Jema
Cement has 1.81 Birr, 2,06 Birr, 1.72 Birr, and 1.86 Birr of current asset for every one birr of
its current liabilities during the year 2000-2003 respectively. During the year 2000 and 2002
the current ratio of Jema Cement were below the average (1.86 Birr).Even though below
average (1.86) Jema Cement can cover all of its current liabilities or short term obligation as
they come due.Comparing to the ideal rule (2:1) Jema Cement can cover all of its short term.
Generally, Jema Cement, almost covered its obligation during 2000-2003 respectively, even
though its current ratio fluctuate (decrease and increase) from year to year.

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 4.2.2 Quick (Acid- test) Ratio: This ratio measures the short term liquidity by removing the
least liquid asset such as inventory and prepaid expense.The researcher presented the quick
ratio of Jema Cement Plc from year 2000-2003 in the following table 4.2 in detail.

Table 4.2 Quick ratio of Jema Cement Plc during year 2000-2003

Year Current asset Inventory Current Quick ratios Average Quick

in birr liabilities in birr Ratio in Birr
2000 12,653,173 4,918,382 6,983,738 1.11
2001 14,945,826 5,822,793 7,240,034 1.26
2002 13,399,852 5,949,335 7,773,681 0.96
2003 14,312,048 5,724,339 7696,189 1.12
Total 55,310,899 22,414,849 29,693,622 1.11
Source: Audited annual report of Jema Cement Plc
Form the above table 4.2 one can understand that during the year 2000-2003.The quick ratio
of Jema Cement is 1.11 Birr, 1.26 Birr, 0.96 Birr,and 1.12 Birr respectively. This shows that
for every one birr of current liabilities Jema Cement has 1.11 Birr, 1.26 Birr 0.96 Birr and
1.12 Birr in quick liquid current assets during the year 2000-2003 respectively for the year
2000, the quick ratio of Jema Cement is equal to the average for the year 2001 and 2003,
quick ratio were greater than the average while in year 2002 it is below the average and ideal
rule (1:1) ratio. This is because of the increment of the number of inventories in the custody
for the year 2002.Therefore Jema Cement can cover all of its current liabilities during year
2000, 2001 and 2003 whereas for the year 2002 it cannot cover all of the short term
obligations they come due.

4.3 Activity Ratio: Activity ratios are used to measure the speed with which various accounts
are converted in to sales or cash and how well the firm manages its assets. It also called asset
managemet or turnover ratio. Activity ratio includes the following ratios.

4.3.1 Inventory Turnover (ITO). This ratio measures the effectiveness or efficiency with which
a firm is managing its investments in inventories and to determine how often the stock turned
over in the business during the given year. Turnover ratio is computed by dividing the cost of
Goods sold by the average inventory.The researcher is presented the inventory turnover of Jema
Cement’s in the table 4.3 below from year 2000-2003.

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 Table 4.3 Inventory Turnover of Jema Cement Plc.
Year COGS Average inventory Inventor turnover Average of the years
ratio in times
2000 20,765,224 4,918,382 4.22
2001 25,975,321 5,370,588 4.84
2002 27,676,968 5,886,064 4.70
2003 33,259,210 5,836,837 5.69
Total 107,676,723 22,011,871 4.89
Source: Audited annual report of Jema cement Plc

The above ratios shows that (table 4.3) the inventory turnover of Jema Cement were 4.22
times, 4.84 times, 4.70 times, and 5.69 times during the year 2000-2003 and on average 4.89
for the year 2000-2003 respectively. This means that Jema Cement Plc is sold out or turned
over its inventories 4.22 times, 4.84 times 4.10 times, and 5.69 times during the year 2000-
2003 respectively and on average during the year 2000-2003 Jema Cement turned over its
inventory for 4.89 times per year. Based on the average calculated starting from year 2000-
2003, the inventory turnover ratio of Jema Cement were below the average except for the
year 2003 which is greater than the average. Generally, the factory is in a good position
during the year 2003 comparing to the average calculated and Jema Cement is in a good
position in selling its stock.

4.3.2 Average Age of Inventory (AAI): The number of days inventory is kept in the
custody before it is sold to customers is called average age of inventory.Based on the
information collected the AAI of Jema Cement Plc during the year 2000-2003 is presented in
detail in the following table 4.4

Table 4.4 AAI of Jema Cement Plc for the year 2000-2003
Year Number days Inventory turnover AAI in days Average in days
in year ratio
2000 365 4.22 86
2001 365 4.84 75
2002 365 4.70 77
2003 365 5.69 64
Total 365 4.89 74.64
Source: Audited annual report of Jema Cement Plc.

Table 4.4 Shows that during year 2000-2003 the AAI of Jema Cement Plc were 86 days, 75
days, 77 days, and 64 days respectively. This means that the inventory of Jema Cement Plc is
remained in stock for 86 days, 75 day 77 days, and 64 days before it sold in the year 2000-

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 2003 respectively and in average the a inventory was remained in stock for 74.64 days from
year 2000-2003.In the year 2000-2002 Jema Cement were stocked inventories in the custody
above the calculated average. During these year AAI were increased because inventory
turnover of those year is below the calculated average. In the year 2003 Jema cement was
remained the inventory for only 64 days which is below the average (74.64 days) AAI ratio.
Generally Jema Cement should have to decrease AAI as much as possible by decreasing the
number of inventory on hand.

4.3.3 Account Receivable Turnover Ratio (A/RTOR): This ratio measures the liquidity of
firms account receivable. It indicates how many times or how rapidly account receivable is
converted into cash during a given year.The following table 4.4 indicates Jema Cement Plc
A/RTOR

Table 4.5 A/RTOR of Jema Cement Plc from year 2000-2003

Year Net sales Average A/R A/RTOR (in times) Average A/RTOR
2000 26,722,093 4,023,957 9.13
2001 32,678,181 4,466,607 7.32
2002 34,313,178 3,800,399 9.03
2003 40,935,231 2,991,829 13.68
Total 134,648,683 15,282792 8.81
Source: Audited annual report of Jema Cement Plc

The above table tells that on average account receivable changed to cash 8.81 times during
the year 2000-2003 and also ARTOR of Jema Cement in the year 2000-2003 respectively
were 9.13 times, 7.32 times,9.03 times,and 13.68 times. This shows that Jema Cement
converted account receivable 9.13times, 7.32times, 9.03 times and 13.68tiems in to case from
year 2000-2003 respectively.Generally, except during the year 2001 and 2003 Jema Cement
is good in A/RTOR.

4.3.4 Average Collection Period: It shows how long it takes for Account Receivables to be
collected and it represents the number of days for which credit sales are locked in with
debtors.The research presented the average collection period of Jema Cement in the
following table 4.6

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 Table 4.6 AAC of Jema Cement Plc

Year Total days in a Receivable turn over Average collection period (days)
year
2000 365 9.13 40 days
2001 365 7.32 50 days
2002 365 9.03 40 days
2003 365 13.68 27 days
Source: Audited annual report of Jema Cement Plc.

According to the above table 4.5 the average collection period of Jema Cement during the
year 2000-2003 is 40 days, 50 days, 40 days, and 27 days respectively.

4.3.5 Fixed Asset Turnover (FATO): FATO measures the efficiency with which the firm
has been using its fixed asset to generate revenue.It also shows a firms efficiency in
managing and utilizing fixed assets. Fixed asset turnover of Jema Cement Plc is presented in
the following table 4.7.

Table 4.7 FATO of Jema Cement Plc.

Year Net sales Average fixed asset FATO in birr Average FATO in birr
2000 26,722,093 11,443,354 2.34
2001 32,678,181 11,490,653 2.84
2002 34,313,178 11,988898 2.86
2003 40,935,231 12,796,692 3.24
Total 134,648,683 47,719,597 2.82
Source: Audited annual report of Jema Cement Plc
From the above table 4.7 one can understand that Jema Cement has generated 2.34 birr, 2.8
birr, 2.24 birr during the year 2002-2003 respectively and on average from year 2000-2003
2.82 birr. These ratio shows that, for every birr one invested in fixed assets Jema Cement
generated 2.34 Birr, 2.84 Birr,2.86 Birr, and 3.24 Birr from year 2000-2003 respectively.
During year 2000, FATO of Jema cement is below the average FATO. This show that the
presence of idle capacity relative to the industry average during this year, and during year
2001, 2002 and 2003 were greater than the average FATO. This indicates that the efficiency
of Jema Cement in managing and utilizing its fixed asset.

4.3.6 Total Asset Turnover (TATO): This ratio measures a firms efficiency in managings
of its total assets in order to generate sales. This ration is important in evaluating company’s

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 ability to uses its assets base efficiently to generate revenue.The researcher calculated the
TATO of Jema Cement in the table 4.8 in detail from year 20000-2003.

Table 4.8 TATO of Jema Cement Plc from year 2000-2003

Year Net sales AverageTotal assets TATO in birr Average TATO in Birr
2000 26,722,093 24,096,527 1.12
2001 32,678,181 26,483,777 1.23
2002 34,313,178 25,839,697 1.33
2003 40,935,231 27,108740 1.51
Total 134,648,683 103,528,741 1.30
Source: Audited annual report of Jema Cement Plc.

From the above table 4.8 the TATO of Jema Cement is 1.12 Birr, 1.23 Birr 1.33 Birr, and
1.51 Birr during the year 2000-2003 respectively and on average 1.30 Birr from year 2000-
2003 showing that Jema Cement generated 1.12 Birr, 1.28 Birr, 1.33.Birr, and 1.51 Birr
from year 2000-2003 respectively in net sales for every birr invested in total assets.
Generally, in the year 2000 and 2001 the factory's TATO were below the average and this
shows that inefficiency in using the assets and Jema Cement is not generating sufficient
volume of sales comparing to the average TATO. It is good that during the year 2002 and
2003 Jema Cement were used its total asset efficiently when compared to the average TATO.

4.4 Debt Ratio: Shows the percentage of assets financed through debt. The debt to ratio for
Jema Cement plc is as presented below

Table 4.9 Debt ratio of Jema Cement Plc from year 2000-2003
Year Total liabilities Total Assets Debt ratios in % Average Debt ratio in %
forms
2000 10.561,351 24,096,527 0.44
2001 11.195,491 26,483,777 0,45
2002 12,76,800 25,839,697 0.49
2003 11,774,134 27,108,740 0.43
Total 46,298,776 103,528,741 0.45
Source: Audited annual report of Jema cement Plc
One can understand from table 4.9 Jema Cement debt ratio were 44%,45%,49%,and 43% from
year 2000-2003 respectively and on average the debt ratio was 45% from year 2000-2003. This
ratio indicates that Jema Cement has financed 44%,45%,49%,and 43% of its assets with debt
during year 2000-2003 respectively and on average Jema Cement financed 45% of its assets
with debt. When compared to average debt ratio, during the year 2000 and 2003 it is below the

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average ratio, and for the year 2001 and 2002, it were better comparing to the average debt to
ratio .

4.5 Profitability Ratio: profitability ratio is an indication of good financial healthy and how
effectively the firm is being managed in the companies ability to earn satisfactory profit and
return on investment. The ultimate or the long term objectives of every business organization is
to maximize wealth and it will have no survival if it fails to make sufficient wealthy and profit.
Profitability ratio includes the following ratios.

4.5.1 Gross Profit Margin (GPM). It tells us the profit of the firm in relation to sales after we
deducted the cost of goods sold. It indicates management effectiveness in pricing policy ,
generating sales and controlling production cost.

Table 4.10 GPM of Jema Cement Plc

Year GP Net Sales GPM in % Average GPM in %
2000 6,914,548 26,722,093 25.86
2001 7,582,414 32,678,181 23.20
2002 7,555,536 34,313,178 23.02
2003 8,575,595 40,935,231 20.94
Total 30,628,093 134,648,683 22.75
Source: Audited annual report of Jema Cement Plc.
As clearly seen from the table 4.10 the GPM of Jema Cement from year 2000-2003 were
25.86%, 23.20%,23.02% and 20.94% respectively and on average Jema Cement GPM were
22.75%. These ratio shows that Jema Cement has generated profit of 25.86%,23.20% and
20.94% for each one birr of sales during the period under research and in average Jema
Cement generated the profit of 22.75% for the year 2003, but Jema Cement has to increase
above this by decreasing its cost of goods sold and has to increase Net sales. This will be
achieved by decreasing idle resource and utilizing the time and resource efficiently and
effectively.

4.5.2 Net Profit Margin GPM: This ratio is one of the very important ratios and it measures
the profitableness of sales after all expenses deducted.

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 Table 4.11 NPM of Jema Cement Plc
Year Net Income Net sales NPM ratio (in %) Average NPM in %
2000 3,206,166 26,722,093 12.00
2001 3,367,010 32,678,181 10.30
2002 3,638,701 34,313,178 10.60
2003 4,407,141 40,935,231 10.77
Total 14,619,018 134,648,683 10.86
Source: Audited annual report of Jema Cement Plc.
Table 4.11 indicates that Jema Cement has NPM of 12%, 10.30%,10.6%, and 10,77% during
the year 2000-2003 respectively and in average the firm under research has 10.86% NPM.
The above table 4.11 shows that Jema Cement were generated 12 cents, 10.3 cents, 10.6
cents, and 10.77 cents for the year 2000-2003 and in average 10.86 cents for the year 2000-
2003 respectively for each birr of sales. Generally comparing to average NPM the NPM of
2001-2003 is below average NPM and during the year 2000 Jema Cement NPM was greater
than the average. So, Jema Cement has to increase its NPM by increasing Net income of
the year. This will achieved by using resource efficiently and effectively and reducing extra
costs.

4.5.3 Retun On Investment (ROI or ROA): Return on assets measures the overall
effectiveness of management in genereting profit with its available assets. The return on
assets for Jema Cement Plc for the year 2000-2003 is presented in the table 4.12.

Table 4.12 ROI of Jema Cement Plc.

Year NI TA ROA in % Average ROI(ROA)%
2000 3,206,166 24,096,527 13.31
2001 3,367,010 26,483,777 12.71
2002 3,638,701 25,839,697 14.08
2003 4,407,141 27,108,740 16.26
Total 14,619,018 103,528,741 14.12
Source: Audited annual report of Jema Cement Plc.
The return on assets of Jema Cement Plc during the year 2000-2003 were 13.31%,
12.71%,14.08%, and 16.26% respectively and on average from year 2000-2003 it was
14.12%. This means that the factory under research were generated 13.31 cents, 12.71
cents, 14.08 cents, and 16.26 cents for every birr invested in assets and averagicaly Jema
Cement generated from year 2000-2003,14.12 cents for every birr invested in assets. During

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 the year 2000-2002 the ROI of Jema Cement was below the industry average (14.12%). In
the year 2003 there was satisfactory return on asset comparing with average ROI which is
16.26%. Generally, it shows an increasing and decreasing trend from year 2000 -2003. This
is because of the unbalanced fluctuation of NI and Total assets.

4.6 Comparative Financial Analysis

The primary purposes of comparative financial analysis is to evaluate the trends in the
companies financial condition and operating results during the last year. In this study two
comparative financial statements are comperative balance sheet and income statements.
Horizontal and vertical analyze used to analysis balance sheet and income statement of firms.

4.6.1Horizontal (Trend) Analysis: Horizontal analysis expresses financial data from two or
more accounting periods in terms of a single designated base period. It compares data in each
succeeding period with the amount for the preceding period. Under horizontal analysis the
balance sheet and income statement items of the base year equal 100% and the subsequent
financial statement items were expressed as percentage of their value in the base year. Year
2000 is the base year for this research and Jema cement comparative financial data (Balance
sheet and income statement) is presented using horizontal analysis in the following table.

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Table 4.13 Horizontal Analysis of Income Statement of Jema Cement Plc

Jema Cement Plc

Horizontal Analysis of Income Statement

for the year ended 2000-2003

Items Years
2000 2001 2002 2003
Net sales 100% 122.29% 128.41% 153.19%
Cost of goods 100% 125.1% 133.29% 160.17%
sold
Gross Profit 100% 112.52% 111.40% 128.86%
Other income 100% 91.84% 95.99% 93.93%
Administration 100% 122.88% 92.43% 70.59%
and general
expenses
Selling and 100% 112.48% 114.27% 140.60%
distribution
expenses
Audit fee 100% 100% 100% 100%
Net income 100% 105.0% 95.49% 137.47%
before tax
Income tax 100% 95.11% 81.08% 89.79%
Net income after 100% 105.07% 113.49% 95.59%
tax
Source: Audited annual report of Jema Cement Plc.
As stated on the table above, net sales and cost of goods sold of Jema Cement is increasing in
percentage in relation with the base year. As a result, the gross profit also increased during
the year 2001-2003 comparing to the base year (2000). All expenses of the firms increased in
every year comparing to the base year. Net income before tax is decreased during the year
2002 and income tax also decreased in comparing to the base year. Finally Net income after
tax is decreased below the base year only in the year 2003.

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Table 4.14 Horizontal Analysis of Balance Sheet of Jema Cement Plc.

1. Balance Sheet

Jema Cement Plc.

Horizontal Analysis of Balance Sheet

June 2000-2003

Particulars Year
2000 2001 2002 2003
Fixed assets 100% 100.83% 108.71% 111.83%
Cash on hand 100% 1113.55% 128.25% 242.71%
and at bank
Stocks 100% 118.39% 120.96% 116.39%
Debtors 100% 122.00% 66.89% 81.81%
Current assets 100% 118.12% 105.90% 113.11%
Total assets 100% 109.90% 107.23% 112.50%
Creditors 100% 122.18% 108.16% 137.39%
Provision for 100% 91.08% 94.72% 107.09%
taxation
Provision for 100% 106.35% 103.02% 113.62%
audit fee
Other current 78.91% 151.735 44.27%
liabilities
Total current 100% 103.67% 111.31% 110.20%
liabilities
Long term 100% 110.56% 139.595 113.99%
debt
Total 100% 106.00% 120.895 11.48%
liabilities
Legal reserve 100% 69.60% 76.88% 85.30%
Capital 100% 82.22% 62.76% 75.63%
Total liability 100% 109.90% 107.23% 112.50%
and equity
Source: Audited annual report of Jema Cement Plc.

In the above table the increase in fixed assets is apparent. The large increase in cash on hand
and at bank is increasing during the whole year. In inventories also increased except account
receivable which is decreased during year 2002 and 2003.Total assets is also increased
comparing to the base year (2000).In addition to this all liability accounts are increasing
except provision for taxation of the year 2001 and 2002 and other current liabilities of the
year 2001 and 2003. The owner equity of the firms shows decrement ratio comparing with

25
 the base year. Total assets and total liabilities of the firms is gradually increasing. Total
liabilities and equity of Jema Cement was fluctuating from year to year.

4.6.2 Vertical Analysis: In vertical analysis, all data in a particular financial statements are
presented as a percentage of a single designated line item in that statement. Income statement
items as percentage of net sales, and balance sheet items a percentage of total assets. Vertical
analysis as used to disclose the internal structure of the firm, by showing the existing
relationships between each income statement account and revenue. And also it shows the mix
of assets that produce the income and the mix of capital. So, the researcher presented Jema
Cement factory’s financial statement (balance sheet and income statement) using vertical
analysis as follows.

Table 4.15: Vertical Analysis of Income Statement of Jema Cement Plc

Income statement

Jema Cement Plc

Vertical Analysis of Income Statement

For the year ended June 30, 2000-2003

Particulars Year
2000 2001 2002 2003
Net sales 100% 100% 100% 100%
Cost of goods 77.71% 79.49% 80.66% 81.23%
sold
Gross profit 22.29% 20.51% 19.34% 18.75%
Other income 3.58% 2.69% 2.68% 2.20%
Administration 5.29% 5.31% 3.81% 2.44%
and general
expanse
selling and 3.41% 3.13% 3.03% 3.13%
distribution
Audit fee 0.03% 0.03% 0.02% 6.24%
Net income 17.14% 14.72% 15.15% 15.38%
before tax
Income tax 5.14% 4.42% 4.54% 4.61%
Net income after 11.99% 10.30% 10.60% 10.77%
tax
Source: Audited annual report of Jema Cement Plc.

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In the above table for Jema Cement, over the four year shows that the GPM is decreasing constantly
from year 2000-2003. The decrement of GPM constantly is affect the selling and distribution expense
to decrease and the end result of net income after tax declined during the year 2000 and 2001,afterthen
start to increase.

Table 4.16: Vertical Analysis of Balance Sheet of Jema Cement Plc

Balance Sheet

Jema Cement Plc.

Vertical Analysis of Balance Sheet

Year ended June 30, (2000-2003)

Particulars Years
2000 2001 2002 2003
Fixed assets 47.40 43.47 48.14 47.21
Cash on hand 15.40 15.91 18.42 19.53
and at bank
Stocks 20.41 21.97 23.02 21.12
Debtors 16.70 18.54 10.42 12.14
Total Current 52.51 56.43 51.86 52.79
assets
Total assets 100 100 100 100
Creditors 13.70 15.23 13.82 16.73
Provision for 9.96 8.26 8.80 9.48
taxation
Provision for 0.13 0.13 0.12 0.13
audit fee
Other current 5.19 3.72 7.34 2.04
liabilities
Total current 28.98 27.34 30.08 28.39
liabilities
Long term debt 14.85 14.94 19.33 15.04
Total liabilities 43.83 42.27 49.41 43.43
Legal reserve 24.80 15.71 17.71 18.81
Capital 56.17 42.02 32.87 37.76
Total liability 100% 100 100 100
and equity
Source: Audited annual report of Jema Cement Plc.

The above table shows that over the four years the percentage of current assets fluctuates from
year to year (once decreased and then start increase).But, the percentage of cash were increased
from the year 2000-2003 and account receivables were fluctuates during the given year. The total
liabilities of Jema Cement were shows a decreasing percentage in the year 2000, 2001, and 2003,
whereas increased during the year 2002.

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 Jema Cement Plc.

Income Statement

For the year June 30, 2000-2003

Note Years
2000 2001 2002 2003
Net sales 26,722,093 32,678,181 34,313,178 40,935,231
Cost of sales 20,765,224 25,975,321 27,676,968 33,259,210
Gross profit 5,956,880 6,702,860 6,636,210 7,676,021
Other income 957,668 879,554 919,326 899,574
Total gross profit 6,914,548 7,582,414 7,555,536 8,575,595
Operating
expense :
Administration 1,413,040 1,736,412 1,306,113 997,521
and general
expense
Selling 911,271 1,025,988 1,041,279 1,281,259
distribution
expense
Audit fee 10,000 10,000 10,000 10,000
Total operating 2,334,311 2,772,400 2,357,392 2,278,780
expense
Net income 4,580,237 4,810,014 5,198,144 6,296,815
before tax
Income tax 1,374,071 1,443,004 1,559,443 1,889,046
Net income 3,206,166 3,367,010 3,638,701 4,407,141
Source: Audited annual report of Jema Cement Plc

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 Jema Cement Plc

Balance Sheet

at Jene 30,2000-2003
Asst Years
2000 2001 2002 2003
Fixed assets 11,443,354 11,537,951 12,439,845 12,796,692
Cash on 3,710,834 4,213,777 4,758,976 5,295,593
hand and at
bank
Stocks 4,918,382 5,822,793 5,949,335 5,724,339
Debtors 4,023,957 4,909,256 2,691,541 3,292,116
Current 12,653,173 14,945,826 13,399,852 14,312,048
assets
Total assets 24,096,527 26,483,777 25,839,697 27,108,740
Current
liability
Creditors 3,301,467 4,033,579 3,570,753 4,535,947
Provision for 2,400,820 2,186,654 2,273,943 2,571,109
taxation
Provision for 31500 33,500 32,450 35,790
audit fee
Other 1,249,951 986,301 1,896,535 553,343
current
liabilities
Total current 6,983,738 7,240,034 7,773,681 7,696,189
liabilities
Other long 3,577,613 3,955,457 4,994,119 4,077,945
tem-debt
Total 10,561,351 11,195,491 12,767,800 11,774,134
liabilities
Legal 5,976,694 4,159,841 4,577,139 5,097,992
reserve
Capital 13,535,176 11,128,445 8,494,758 10,236,614
Total 24,096,527 26,483,777 25,839,697 27,108,740
liability and
equity
Source: Audited annual report of Jema Cement Plc.

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 CHAPTER FIVE

5. Conclusion and Recommendation

5.1 Conclusion
In this research paper ratio analysis has been made to assess the financial performance of Jema
Cement Plc.Jema Cement liquidity ratio, asset management, debt ratio and profitability ratio
have been studied using income statement and balance sheet of four years. All ratios are
expressed in terms of average of the four year. Liquidity ratio of Jema Cement indicate that the
current ratio of the factory was in a good position for the year under research.But,comparing to
the average it is below the average during the year 2000 and 2002. Quick ratio of the factory
also shows that a good position but when compared to the average of the four year, 2002 quick
ratio is below the average. This is because of the increment of current assets and inventory of the
year. Generally, the overall liquidity of Jema cement implies a good financial position except the
above stated years.

Activity ratio of the firm under research also assessed. Those ratios are ITO, AAI,
A/RTOR,ACP, FATO, and TATO, compare to the average of the four year, ITO is below the
average but it increases from year to year. Account receivable turnover of the four years showed
an increasing trend, except during the second year (2001) which is below the average so Jema
Cement is good in changing account receivable in to cash. FATO and TATO of Jema cement
was also showed on increasing trend and this shows that the efficiency and effectiveness of
Jema cement in generating revenue. Generally, Jema cement was in a well financial position in
asset management.

The debt to asset ratio of Jema Cement were good since it is below the average except during
the year 2002.This shows that Jema Cement used its assets to finance almost above 55% on
average.

As determined earlier in profitability analysis the gross profit margin of Jema Cement Plc shows
a decreasing trend. But, comparing to the average of the four year it was good during the first
three years, except the last year. Net Profit Margin of Jema Cement also decreased during the
second year and started to increase. This happend due to the fact that the high increment of cost
of goods sold without increasing sale proportionally.

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In addition to these, return on investment of Jema Cement was assessed and in that it was
showing an increasing and decreasing trend.Generally, except during the last year of under
research, the return on investment of Jema Cement was below the calculated average of the four
years.This implies that the firm was not use its capital investment with efficient and effective
manner.

In General, the assessed financial performance of Jema Cement Plc was in a good financial
position and operating well during the four years under research.

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 5.2 Recommendation
This research paper is conducted to assess the financial performance of Jema Cement Plc in its
operation activity and financial position. Some problems were identified during analysis of
collected data. This section deals with sighting those problems and recommending the way to
solve them in order to improve the financial performance of Jema cement plc.

Those problem were;

 High operating expense

 Cost of goods sold were increased from year to year

 Decrement of net profit margin

 The increased cost of sales is related to the fact that the increase in price of raw material
continuously. This created the problem on Gross profit to decrease. The factory can
improve this by increasing the selling price of the product of the factory without affecting
the customer satisfaction toward the increased price of the product.

 The amount of Net profit margin also decreased because of different expense like cost
of sales, total operating expense.

 These con be improved by using the technology which decrease various cost, training
employee and using specialized person and using cost effective advertising and cost
effective distribution channel like customers, and agent.

 To increase the amount of Net income it is advisable to buy new machine which
decrease the number of worker producing high quality cement product which generate
profit and attract customer, and following good design production.

 Jema Cement Plc can increase TATO by increasing its annual sales volume.

 Jema Cement coverd almost the short term liquidity as theycome due eventhough it were
fluctuated.

 The FATO of Jema Cement also increased from year to year which indicates its
efficiency in managing and utilizig its fixed assets properly.

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  In addition to the above problem Jema Cement can improve its performance by looking
and calculating its financial performance at the end of each fiscal year. This means that
they can learn from the pat mistake.

 In general,the liquidity,assets management of Jema Cement Plc.is in agood financial

position during the years under research, eventhough it showed fluctuating trend

Bibliography

33
 Ashenafi Mebratu, (2009) Research on financial statement Analysis, Saint Mery
University College.

James C.Vanhorne, Financial Management and Policy, 11th edition (1998).

Kieso, Weygandt Financial Accounting, 16th edition.

Lewerence J Gitman, Principles Of Managerial Finance, 8th edition (1998).

George E. Pinches, Financial Management, harper colins.

Stephen A.Ross, Randolph W. Westerfield, Bradford D. Jordan, Fundamentals Of

Corporate Finance, 4th edition (1998), MC Graw Hill

http:// www. bentleycg. com/historical –financial- performance- analysis.

http:// www accounting for management. com/vertical- analysis –full. htm

http:// www investopodia . com/ term/f/ financial- analysis. asp.

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