ASSESSMENT OF FINANCIAL PERFORMANCE OF REPI

SOAP AND DETERGENT S.C

A RESARCH PAPER SUMITTED TO ACCOUNTING

DEPARTMENT FOR THE PARTIAL FULFUILMENT OF
B.A DEGREE IN ACCOUNTING

SUBMITTED BY: ABDLKERIM KEMAL

ADVISOR: ATO ANTENEH G.

ACCOUNTING DEPARTMENT

BUSINESS AND ECONOMICS COLLEGE

JIMMA UNIVERSITY

MAY, 2012

JIMMA, ETHIOPIA

1
 ABSTRACT

Financial performance is the process of measuring the results of firms

operations in monetary terms. The aim of the study is to show the real
financial performance of the Repi Soap and Detergent S.C by using different
accounting tools. The source of the data the researcher used in this study is
both primary and secondary. Especially the secondary source was used in
order to reach the aim of the study. Finally, the researcher conclude that Repi
Soap and Detergent S.C is relatively high ability in fulfilling both short term
and long term obligation of creditors. In addition to these the firm also
profitable in their operation but some improvement needed in effective
utilization of its asset as well as in its credit term.

2
 ACKNOWLEDGEMENT

First of all I would like to express my heart felt gratitude to my Advisor Ato
Anteneh G. for his professional guidance and valuable support for the
completion of this research paper. I am also indebted to all those who devoted
their money and time for the success of this research paper specially staff
members of Accounting Department. Last but not the least my gratitude and
hart felt thanks go to my beloved families for their support.

II

3
 TABLE OF CONTENT

Content Page

Abstract ……………………………………….………………………………………….I

Acknowledgement ....................................................................................II

Table of Content ……………………………………………………………….……….III

List of Tables............................................................................................VII

List of Figure ...........................................................................................VIII

Abbreviation …..………………………………………………………………………..VIIII

Chapter One

1. Introduction

1.1 Background of the Study …………………………………………........….…1

1.2 Background of the Organization …………………………………..………..3

1.3 Statement of the Problem …………………………………………….......….5

1.4 Objective of the Study ………………………………………………….......…6

1.4.1 General Objectives ………………………………………….…..…..…..6

1.4.2 Specific Objectives ………………………………………….……..…….6

1.5 Significance of the Study ……………………………………….….……..…..6

1.6 Scope of the Study............................................................................7

1.7 Limitation of the Study .................................................................... 7

Chapter Two

2. Literature Review

III

4
 2.1 Financial Performance..............................................................8

2.2 Financial Performance Analysis ..............................................8

2.3 Areas of Financial Performance Analysis ..................................9

2.4 Significance of Financial Performance Analysis ......................10

2.5 Types of Financial Performance Analysis ................................10

2.6 Techniques /Tools of Financial Performance Analysis .............11

2.6.1 Ratio Analysis .................................................................11

2.6.2 Common Size Financial Analysis ......................................19

2.6.3 Trend Analysis ................................................................20

2.7 Advantages of Financial Statement Analysis............................20

2.8 Limitations of Financial Statement Analysis ..........................20

Chapter Three

3. Research Methodology and Design

3.1 Area of the Study.....................................................................22

3.2 The Research Design ..............................................................22

3.3 Data Type and Source ............................................................22

3.4 Method of Data Collection ......................................................22

3.5 Method of Data Analysis..........................................................23

3.6 Methods of Data Presentation .................................................23

IV

5
Chapter Four

4 Data Analysis, Interpretation and Presentation

I. Ration Analysis

4.1 Liquity Ratios ........................................................................24

4.1.1. Current Ratios ..................................................................24

4.1.2 Quick Ratio ..........................................................................25

4.1.3 Cash Ratio ...........................................................................26

4.2 Asset Turnover Ratio ................................................................ 27

4.2.1 Receivables Turnover ...........................................................27

4.2.2 Inventory Turnover ……………………………………………………28

4.2.3 Fixed Assets Turnover Ratio .................................................29

4.3 Profitability Ratio .......................................................................30

4.3.1 Gross Profit Ratio .................................................................30

4.3.2 Net Profit Ratio .....................................................................31

4.3.3 Return on Equity Capital .....................................................31

4.3.4 Return on Asset ...................................................................32

4.4 Financial Leverage Ratio ............................................................33

4.4.1 Debt of Equity Ratio ............................................................33

4.4.2 Debt Ratio ...........................................................................34

4.4.3 Time Interest Earned ..........................................................34

6
II. Vertical Analysis ............................................................................35

III. Horizontal Analysis .......................................................................42

Chapter Five

5. Summary of Finding, Conclusions and Recommendation ................48

5.1 Summary of Findings ................................................................48

5.2 Conclusion ................................................................................50

5.3 Recommendations......................................................................51

References .................................................................................52

Appendix ...................................................................................53

VI

7
 List of Tables
Title Page

Table 4.1 Current Ratio ………………………………………………….…..24

Table 4.2 Quick Ratio …………………………………………………….…..25

Table 4.3 Cash Ratio ……………………………………………………….….26

Table 4.4 Account Receivable Turnover ……………………………….….27

Table 4.5 Average Collection Period …………………………………….….27

Table 4.6 Inventory Turnover Ratio …………………………………….….28

Table 4.7 Inventory Period ……………………………………………….….28

Table 4.8 Fixed Asset Turnover Ratio ………………………………….…29

Table 4.9 Gross Profit Ratio ………………………………………………...30

Table 4.10 net Profit Ratio …………………………………………………..31

Table 4.11 Return on Equity Capital ……………………………………..31

Table 4.12 Return on Asset Ratio ………………………………………….32

Table 4.13 Debt to Equity Ratio …………………………………………….34

Table 4.14 Debt Ratio …………………………………………………………34

Table 4.15 Time Interest Earned Ratio…………………………….……...35

Table 4.16 Vertical Analysis of Balance Sheet …………………….……37

Table 4.17 Vertical Analysis of Income Statement …………….………40

Table 4.18 Trend Analysis (Balance Sheet)……………………….……..43

Table 4.19 Trend Analysis (Income Statement )……………….……….46

VII

8
 List of Figures
Title Page

Figure 4.1 Liquidity Ratio ………………………………………………………26

Figure 4.2 Asset Turnover Ratio ………………………………………………30

Figure 4.3 Profitability……………………………………………………………33

Figure 4.4 Financial Leverage Ratio ………………………………………….35

VIII

9
 Abbreviation
S.C = Share Company

CR= Current Ratio

QR = Quick Ratio

ART= Account Receivable Turnover

ACP =Average Collection period

ITO = Inventory Turnover

FAT = Fixed Asset Turnover

GPR = Gross Profit Ratio

NPR = Net Profit Ratio

ROEC = Return on Equity Capital

RDA = Return on Asset

TIER = Time Interest Earned Ratio

NI = Net Income

NFA= Net Fixed Asset

COGS= Cost of Good Sold

NS = Net Sale

EBIT = Earning Before Income and Tax

VIIII

10
 CHAPTER ONE

Introduction
1.1 Background of the Study

Financial performance refers to the act of performing financial activity. In

broader sense, financial performance refers to the degree to which financial
objectives being or has been accomplished.

The word performance is derived from the word ‘parfourmen’, which means to
do, to carry out or to render. It refers the act of performing, execution,
accomplishment, fulfilment etc. In broader sense, performance refers to the
accomplishment of a given task measured against preset standards of
accuracy, completeness, cost and speed. In other words, it refers to the degree
to which an achievement is being or has been accomplished. Performance is
used to indicate firm’s success, conditions and compliance. (www.Shodhganag
inflibnet. ac)

It is the process of measuring the results of a firm’s policies and operations in

monitory terms. It is used to measure firm’s overall financial health over a
given period of time. It can also be used to compare similar firms across the
same industry or to compare industries or sectors in aggregation.
(Www.Shodhganaginflibnet. ac)

The analysis of financial statements is a process of evaluating the relationship

between component parts of financial statements to obtain a better
understanding of the firm’s position and performance.(www.Shodhganag
inflibnet. ac)

The financial performance analysis identifies the financial strengths and

weaknesses of the firm by properly establishing relationships between the

11
items of the balance sheet and the income statement. In short financial
performance analysis is the process of selection, relation and evaluation.

Generally, financial statements capture and report on four key business

activities planning, financing, investing, and operating activities. Knowing what
information is to be found plus where to find it and how to use it in financial
statement is imperative to intelligently understanding, analyzing, and
interpreting financial data. Financial statement analysis is useful as a tool in
selecting investment or merger candidates, as a forecasting tool or future
financial conditions, as an evaluation tool for managerial and other business
decisions (Pamela P, 2010).

To sum up, analysis of financial statements provides the essential concepts

and tools needed by security analysts who make decisions on the basis of
information found in financial statements (Pamela P, 2010).

12
1.2 Background of the Organization

Repi Soap and Detergent S.C is a government owned public enterprise which
had been initially established in 1975 G.C with the name of Bianil Ethiopia S.C
with initial capital of 400,000 Birr later on as of February 23, 2006 the
enterprise asset and capital restructuring and established as a share company
to facilitate the privatization process as part of the countries economics
transformation package. Repi soap and Detergent S.C found in the capital city
of Ethiopia located in south west of Addis Ababa on the main road of Jimma.
The major input for the company are labours, factory and office buildings and
different foreign and local raw materials etc. By using these input the company
produce Rol, detergent powder, Detergent bar soap, liquid detergent of different
formation for household general clearing purposes and for industrial
application as bottling industries and water well drilling.

The major customers of the products are Agents, Retails and End users that
constitute 70%, 10% and 20% of the total sale respectively.

The general business objective is to fulfil the expectations of owners,

governmental agencies; employees, customers and the country at large have
from the company.

The major vision of the company is to be one of the best regarded detergent
manufacturing companies in the nation and world wide by providing quality
products and standard services.

The mission of the company is by using modern technologies, to produce

standard powder, bar and liquid detergent and hence guarantee maximum
customer satisfaction, generating income for the company and ascertain its
vision.

13
Repi soap and detergent S.C under the supervision of Board of Director’s
organized with a general manager, vice general manager, three departments
and two services namely:-Finance and administration department, Production
and technical department, Commercial department, Audit service and , Quality
control service.

The ultimate goal of Repi Soap and detergent S.C is:-

 To maximize profit through effective activities.

 To maximize owners wealth and economic welfare.
 To ensure company’s survival and to maximize owners’ long term interests.
 To maintain sufficient working capital investment in current assets.
 To invest sufficient funds in fixed assets needed for operations.

14
 1.3 Statement of the Problem

Financial analysis (also referred to as financial statement analysis or

accounting analysis) refers to an assessment of the visibility, stability and
profitability of a business, sub –business or project. It is performed by
professionals who prepare reports using ratios that make use of information
taken from financial statements and other reports. Those reports are usually
presented to top management as one of their bases in making business
decisions such as continue or discontinue its main operation or part of its
business, make or purchase certain materials in the manufacture of its
product, Acquire or rent/ lease certain machineries and equipment in the
production of its goods, make decisions regarding investing or lending capital
and other decisions that allow management to make an informed selection on
various alternatives in the conduct of its business. (Www. Wikipedia.org)

Generally, when we assess different researches worked in Repi Soap and

Detergent S.C there is no enough research that shows the real financial
performance of the company. As a result the researcher assesses the exact
financial performance of the company by using different accounting
techniques. In addition to assessing the financial performance of the company
the researcher find out any problem related to the financial performance of the
company such as insuffient profit, cash shortage, loan repayment and shortage
of inventory etc.Thus in order to know the exact performance of the company
related to finance the following three questions is carefully answered:-

1) The firm able to earn income and sustain growth in both short term and
long term? (Profitability).
2) Up to what extent the firm able to pay its obligation to creditors and
other third parties in the long term? (Insolvency).
3) The firm able to maintain in positive cash flow, while satisfying
immediate obligations? (Liquidity).

15
1.4 Objectives of the Study
1.4.1 General Objectives

The overall objective of this study is to assess the financial performance and
evaluate financial healthiness of Repi soap and Detergent S.C by using
different analytical tools.

1.4.2 Specific Objectives

A careful review of the main objectives leads to the development of the following
specific objectives.

 To evaluate the company profitability.

 To measure the short term liquidity position of the company.
 To analyze the long term liquidity position of the company.
 To find out the attractiveness of the company as investment by
examining its ability to meet its current and expected financial
obligation.

1.5 Significance of the Study

The study under the title assessment of financial performance of Repi soap and
Detergent S.C try to show the current position of the company, identify the
company current strength and weakness, and help the management to take
corrective actions for the problem faced relating to the profitability, the
solvency and the liquidity. In general the researcher quietly sure that the
manager of the company used as guide line in overcoming the problem that
face related to the financial performance of the company. The last but not least,
this study also helps for other researchers who conduct their research on the
same title.

16
1.6 Scope of the Study

The study mainly focuses on assessing the financial performance of Repi soap
and Detergent S.C. The report is proposed mainly based on secondary data
even though the primary data used in some extent. The secondary data was
collected from the annual Audited financial statement of the company.
Particularly income statement and balance sheet not include statement of
retained earnings and statement of cash flow for the period of (2007-2011 GC).
In addition to this extra secondary information also search from recent audit
report.

1.7 Limitation of the Study

When conducting this research work, there are various problems hinders.
Some of them are The shortage of time especially for analysis part due to the
change in teaching curriculum, Un willingness of the company to provide the
detail documents, The shortage of fund and The researcher was used
secondary resource only (i.e. the secondary source is not absolute by itself).

17
 CHAPTER TWO

Literature Review

2.1 FINANCAIL PERFORMANCE

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. (Www.Shodhganaginflibnet.ac)
2.2 FINANCIAL PERFORMANCE ANALYSIS
In short, the firm itself as well as various interested groups such as managers,
shareholders, creditors, tax authorities, and others seeks answers to the
following important questions:
1. What is the financial position of the firm at a given point of time?
2. How is the Financial Performance of the firm over a given period of time?
These questions can be answered with the help of financial analysis of a firm.
Financial analysis involves the use of financial statements. A financial
statement is an organized collection of data according to logical and consistent
accounting procedures. Its purpose is to convey an understanding of some
financial aspects of a business firm. It may show a position at a moment of
time as in the case of a Balance Sheet, or may reveal a series of activities over a
given period of time, as in the case of an Income Statement. Thus, the term
‘financial statements’ generally refers to two basic statements: the Balance
Sheet and the Income Statement. (Www.Shodhganaginflibnet.ac)

The Balance Sheet shows the financial position (condition) of the firm at a
given point of time. It provides a snapshot and may be regarded as a static
picture. “Balance sheet is a summary of a firm’s financial position on a given
date that shows Total assets = Total liabilities + Owner’s equity.”

18
The income statement (referred as the profit and loss statement) reflects the
performance of the firm over a period of time. “Income statement is a summary
of a firm’s revenues and expenses over a specified period, ending with net
income or loss for the period.” However, financial statements do not reveal all
the information related to the financial operations of a firm, but they furnish
some extremely useful information, which highlights two important factors
profitability and financial Soundness. Thus analysis of financial statements is
an important aid to financial performance analysis.
The analysis of financial statements is a process of evaluating the performance
analysis includes analysis and interpretation of financial statements in such a
way that it undertakes full diagnosis of the profitability and financial
soundness of the business. Relationship between component parts of financial
statements to obtain a better understanding of the firm’s position and
performance.

The financial performance analysis identifies the financial strengths and

weaknesses of the firm by properly establishing relationships between the
items of the balance sheet and profit and loss account. The first task is to
select the information relevant to the decision under to consideration from the
total information contained in the financial statements. The second is
arranging the information in a way to highlight significant relationships. The
final is interpretation and drawing of inferences and conclusions. (Pamela P,
2010)
In short, financial performance analysis is the process of selection, relation,
and evaluation.

2.3 AREAS OF FINANCIAL PERFORMANCE ANALYSIS

Financial analysts often assess firm's production and productivity
performance, profitability performance, liquidity performance, working capital

19
performance, fixed assets performance, fund flow performance and social
performance.
2.4 SIGNIFICANCE OF FINANCIAL PERFORMANCE ANALYSIS
Interest of various related groups is affected by the financial performance of a
firm. Therefore, these groups analyze the financial performance of the firm. The
type of analysis varies according to the specific interest of the party involved.
Trade creditors: interested in the liquidity of the firm (appraisal of firm’s
liquidity)
Bond holders: interested in the cash-flow ability of the firm (appraisal of firm’s
capital structure, the major sources and uses of funds, profitability over time,
and projection of future profitability)
Investors: interested in present and expected future earnings as well as
stability of these earnings (appraisal of firm’s profitability and financial
condition)
Management: interested in internal control, better financial condition and
better performance (appraisal of firm’s present financial condition, evaluation
of opportunities in relation to this current position, return on investment
provided by various assets of the company, etc)(Pamela P,2010)
2.5 TYPES OF FINANCIAL PERFORMANCE ANALYSIS:
Financial performance analysis can be classified into different categories:-
1. External analysis
This analysis is undertaken by the outsiders of the business namely investors,
credit agencies, government agencies, and other creditors who have no access
to the internal records of the company. They mainly use published financial
statements for the analysis and as it serves limited purposes.
2. Internal analysis
This analysis is undertaken by the persons namely executives and employees
of the organization or by the officers appointed by government or court who
have access to the books of account and other information related to the
business.

20
3. Horizontal Analysis
In this type of analysis financial statements for a number of years are reviewed
and analyzed. The current year’s figures are compared with the standard or
base year and changes are shown usually in the form of percentage. This
analysis helps the management to have an insight into levels and areas of
strength and weaknesses. This analysis is also called Dynamic Analysis as it
based on data from various years.
4. Vertical Analysis
In this type of Analysis study is made of quantitative relationship of the various
items of financial statements on a particular date. This analysis is useful in
comparing the performance of several companies in the same group, or
divisions or departments in the same company. This analysis is not much
helpful in proper analysis of firm’s financial Analysis as it based on position
because it depends on the data for one period. This analysis is also called
Static data from one date or for one accounting period. (Www.Shodhganag
inflibnet.ac)
2.6 TECHNIQUES/TOOLS OF FINANCIAL PERFORMANCE ANALYSIS:
An analysis of financial performance can be possible through the use of one or
more tools / techniques of financial analysis. One of the most common
techniques is accounting techniques. It is also known as financial techniques.
Various accounting techniques such as Comparative Financial Analysis,
Common-size Financial Analysis, Trend Analysis and Ratio Analysis may be
used for the purpose of financial Analysis.(Modern corporate finance, 1994)
2.6.1 Ratio Analysis
In order to evaluate financial condition and performance of a firm, the financial
analyst needs certain tools to be applied on various financial aspects. One of
the widely used and powerful tools is ratio or index. Ratios express the
numerical relationship between two or more things. This relationship can be
expressed as percentages (25% of revenue), fraction (one-forth of revenue), or
proportion of numbers (1:4). Accounting ratios are used to describe significant

21
relationships, which exist between figures shown on a balance sheet, in a profit
and loss account, in a budgetary control system or in any other part of the
accounting organization. Ratio analysis plays an important role in determining
the financial strengths and weaknesses of a company relative to that of other
companies in the same industry. The analysis also reveals whether the
company's financial position has been improving or deteriorating over time.
Ratios can be classified into four broad groups on the basis of items used: (1)
Liquidity Ratio, (ii) Capital Structure/Leverage Ratios, (iii) Profitability Ratios,
and (iv) Activity Ratios. (Pamela P, 2010).
2.6.1.1 Liquidity Ratios

Liquidity ratios provide information about a firm’s ability to meet its short-term
financial obligations. These ratios are calculated to comment up on the short-
term paying capacity of a concern or the firm’s ability to meet its current
obligations. Two frequently used liquidity ratios are the current ratio (or
working capital ratio) and the quick ratio cash ratio is the most conservative
liquidity ratio.

A. Current Ratio

Current ratio may be defined as the relationship between current assets and
current liabilities. This ratio is also known as ‘working capital ratio’. It is a
measure of general liquidity and is most widely used to make the analysis for
short term financial position or liquidity of a firm. It is calculated by dividing
the total of the current assets by total of the current liabilities.

Formula: Current Ratio = Current Assets

Current Liabilities

A relatively high current ratio is an indication that the firm is liquid and has
the ability to pay its current obligations in time and when they become due. On
the other hand, a relatively low current ratio represents that the liquidity

22
position of the firm is not good and the firm shall not be able to pay its current
liabilities in time without facing difficulties. An increase in the current ratio
represents improvement in the liquidity position of the firm while a decrease in
the current ratio represents that there has been deterioration in the liquidity
position of the firm. A ratio equal to or near 2:1 is considered as a standard or
normal or satisfactory. The idea of having doubled the current assets as
compared to current liabilities is to provide for the delays and losses in the
realization of current assets. However, the rule of 2:1 should not be blindly
used while making interpretation of the ratios. Firms having less than 2:1 ratio
may be having a better liquidity than even firms having more than 2:1 ratio.
This is because of the reason that current ratio measures the quantity of the
current assets and not the quality of the current assets.

B. Quick Ratio (Acid Test)

It is an instrument to measure the liquidity position of the company. This ratio

is the same as the current ratio except that not include inventory account and
prepaid expenses. The two components of quick ratio are liquid assets and
liquid liabilities. Liquid asset include all current asset except inventory and
prepaid expenses. Inventories can’t be termed as liquid assets because it can’t
be converted in to cash immediately without a loss of value. In the same
manner, prepaid expenses are also excluded from the list of liquid assets
because they are not expected to be converted in to cash similarly, liquid
liabilities means current liabilities.

Formula: Quick Ratio = Liquid Assets

Current Liabilities

C. Cash Ratio

The cash ratio is the most conservative liquidity ratio. It excludes all current
assets except the most liquid cash and cash equivalents.

23
Formula: - Cash Ratio = Cash + Marketable securities

Current Liabilities

2.6.1.2 Financial Leverage Ratio (insolvency)

Long term solvency or leverage ratios convey a firm’s ability to meet the interest
costs and payment schedules of its long term obligations.

A. Debt to Equity Ratio

It is a significant measure of solvency since a high degree of debt in the capital

structure may make it difficult for the company to meet interest charges and
principal payment of a maturity. This ratio reflects the relative claims of
creditors and share holders against the asset of the company.

Formula: Debt to Equity = Total Debt

Total Equity

B. Debt Ratio

The debt ratio compares total liabilities from total asset. It shows the
percentage of total funds obtained from creditors. Creditors would rather see
low debt ratio because there is a great cushion for creditor’s losses if the firm
goes bankrupt. It tells the amount of other people’s money being used in
attempting to generate profits. A high ratio indicates more of firms asset are
provided by creditors relative to owner.

Formula: Debt Ratio = Total debt

Total Asset

24
C. Time Interest Earned

This ratio serves as one measure of firm’s ability to meet its interest payment
and thus avoid bankruptcy. In geranial the high the ratio, the great the
probability that the company could cover its interest payment without
difficulty. It also shows light on the firm’s capacity to take on new debt.

Formula: Time Interest earned = EBIT

Interest Expense

2.6.1.3 Profitability Ratio

Profitability ratios measure the results of business operations or overall

performance and effectiveness of the firm some of the most popular profitability
ratio are:-

A. Gross profit Ratio

Gross profit ratio is the ratio of gross profit to net sates expressed as a
percentage. It expresses the relationship between gross profit and sales.

Formula: - Gross profit ratio = Grass Profit x 100

Net sales

B. Net Profit Ratio

Net profit ratio is the ratio of net profit (after taxes) to net sales. It is expressed
as percentage.

25
Formula: – Net profit x 100

Net sales

C. Return on Equity Capital (ROEC)

ROEC is the relationship between profits of accompany and its equity. It is the
bottom line measure for shareholders, measuring the profits earned for each
birr invested in the firm’s stock.

Formula: - Return on Equity = NI

Shareholder equity

D. Return on Asset (Investment)

It is the ratio of net income to share holder’s investment. It is the relationship

between net income and share holder’s. This ratio establishes the profitability
from the share hobbler’s point of view. The ratio is generally calculated in
percentage.

Formula:- Return on asset = Net profit after tax

Total assets

2.6.1.4 Asset Turnover Ratio (Activity Ratio)

Asset turnover ratios indicate of how efficiently the firm utilizes its assets. They
sometimes are referred to so efficiency ratios, asset utilization rations, or asset
management ratios. Two commonly used asset turnover ratios are receivables
turnover and inventory turnover.

A. Receivables Turnover

26
Receivables turnover is an indication of how quickly the firm collects its
account receivables. In simple words it indicates the number of times average
debtors (receivable) are turned over during a year.

Formula:- Receivable Turnover = Annual credit sales

Accounts receivable

B. Inventory Turnover/Stock Turnover

Every firm has to maintain a certain level of inventory of finished goods so as to

be able to meet the requirements of the business. But the level of inventory
should neither be too high nor too low. A too high inventory means higher
carrying costs and higher risk of stocks becoming obsolete whereas too low
inventory may mean the loss of business opportunities. It is very essential to
keep sufficient stock in business inventory turnover ratio indicates the number
of time the stock has been turned over during the period and evaluates the
efficiency with which a firm is able to manage its inventory. This ratio indicates
whether investment in stock is within proper limit or not.

Formula:- Inventory Turnover Ratio = COGS or NS

Inventory Inventory

C. Fixed Assets Turnover Ratio

Fixed assets turnover ratio is also known as sales to fixed assets ratio. This
ratio measures the efficiency and profit earning capacity of the concern. Higher
the ratio, greater is the intensive utilization of fixed assets. Lower ratio means
under utilization of fixed assets.

Formula: - FAT = Sales

NFA

Advantages of Ratios Analysis:

27
Ratio analysis is an important and age-old technique of financial analysis. The
following are some of the advantages / Benefits of ratio analysis:

1. Simplifies financial statements: It simplifies the comprehension of

financial statements. Ratios tell the whole story of changes in the
financial condition of the business
2. Facilitates inter-firm comparison: It provides data for inter-firm
comparison. Ratios highlight the factors associated with successful and
unsuccessful firm. They also reveal strong firms and weak firms,
overvalued and undervalued firms.

3. Helps in planning: It helps in planning and forecasting. Ratios can

assist management, in its basic functions of forecasting. Planning, co-
ordination, control and communications.

4. Makes inter-firm comparison possible: Ratios analysis also makes

possible comparison of the performance of different divisions of the firm.
The ratios are helpful in deciding about their efficiency or otherwise in
the past and likely performance in the future.

5. Help in investment decisions: It helps in investment decisions in the

case of investors and lending decisions in the case of bankers etc.

Limitations of Ratios Analysis:

The ratios analysis is one of the most powerful tools of financial management.
Though ratios are simple to calculate and easy to understand, they suffer from
serious limitations.

1. Limitations of financial statements: Ratios are based only on the

information which has been recorded in the financial statements.
Financial statements themselves are subject to several limitations. Thus
ratios derived, there from, are also subject to those limitations. For

28
 example, non-financial changes though important for the business are
not relevant by the financial statements. Financial statements are
affected to a very great extent by accounting conventions and concepts.
Personal judgment plays a great part in determining the figures for
financial statements.
2. Comparative study required: Ratios are useful in judging the efficiency of
the business only when they are compared with past results of the
business. However, such a comparison only provide glimpse of the past
performance and forecasts for future may not prove correct since several
other factors like market conditions, management policies, etc. may
affect the future operations.

3. Ratios alone are not adequate: Ratios are only indicators; they cannot be
taken as final regarding good or bad financial position of the business.
Other things have also to be seen.

4. Problems of price level changes: A change in price level can affect the
validity of ratios calculated for different time periods. In such a case the
ratio analysis may not clearly indicate the trend in solvency and
profitability of the company. The financial statements, therefore, be
adjusted keeping in view the price level changes if a meaningful
comparison is to be made through accounting ratios.

5. Lack of adequate standard: No fixed standard can be laid down for ideal
ratios. There are no well accepted standards or rule of thumb for all
ratios which can be accepted as norm. It renders interpretation of the
ratios difficult.

6. Limited use of single ratios: A single ratio, usually, does not convey
much of a sense. To make a better interpretation, a number of ratios
have to be calculated which is likely to confuse the analyst than help him
in making any good decision.

29
 7. Personal bias: Ratios are only means of financial analysis and not an end
in itself. Ratios have to interpret and different people may interpret the
same ratio in different way. (Www.accounting for management. Com)

2.6.2 Common-Size Financial Analysis

Common-size statement is also known as component percentage statement or
vertical statement. In this technique net revenue, total assets or total liabilities
is taken as 100 per cent and the percentage of individual items are calculated
like wise. It highlights the relative change in each group of expenses, assets
and liabilities.

2.6.3 Trend Analysis

Trend analysis indicates changes in an item or a group of items over a period of
time and helps to drown the conclusion regarding the changes in data. In this
technique, a base year is chosen and the amount of item for that year is taken
as one hundred for that year. On the basis of that the index numbers for other
years are calculated. It shows the direction in which concern is going.

2.7 Advantages of Financial Statement Analysis:

There are various advantages of financial statements analysis. The major

benefit is that the investors get enough idea to decide about the investments of
their funds in the specific company. Secondly, regulatory authorities like
International Accounting Standards Board can ensure whether the company is
following accounting standards or not. Thirdly, financial statements analysis
can help the government agencies to analyze the taxation due to the company.
Moreover, company can analyze its own performance over the period of time
through financial statements analysis. (Www.accounting for management.
Com)

30
2.8 Limitations of Financial Statement Analysis:

Although financial statement analysis is highly useful tool, it has two

limitations. These two limitations involve the comparability of financial data
between companies and the need to look beyond ratios.

A) Comparison of Financial Data

Comparison of one company with another can provide valuable clues about the
financial health of an organization. Unfortunately, differences in accounting
methods between companies sometimes make it difficult to compare the
companies' financial data. For example if one firm values its inventories by
LIFO method and another firm by the average cost method, then direct
comparison of financial data such as inventory valuations and cost of goods
sold between the two firms may be misleading. Sometimes enough data are
presented in foot notes to the financial statements to restate data to a
comparable basis. Otherwise, the analyst should keep in mind the lack of
comparability of the data before drawing any definite conclusion. Nevertheless,
even with this limitation in mind, comparisons of key ratios with other
companies and with industry average often suggest avenues for
further investigation.

B) The Need to Look Beyond Ratios:

An inexperienced analyst may assume that ratios are sufficient in themselves

as a basis for judgment about the future. Nothing could be further from the
truth. Conclusions based on ratios analysis must be regarded as tentative.
Ratios should not be viewed as an end, but rather they should be viewed as
starting point, as indicators of what to pursue in greater depth. They raise
many questions, but they rarely answer any question by themselves.

In addition to ratios, other sources of data should be analyzed in order to make

judgment about the future of an organization. The analyst should look, for

31
example, at industry trends, technological changes, changes in consumer
tastes, changes in broad economic factors, and changes within the firm itself.
(www.accounting for management. Com)

CHAPTER THREE

3. Research Methodology and Design

3.1 Area of the Study

The study conducted on the assessment of financial performance of Repi soap

and detergent S.C which is located in Addis Ababa on the main road of Jimma.

3.2 The Research Design

For this research project descriptive design type of the research was used
because the researches conduct in order to describe the existing financial
performance of Repi Soap and detergent S.C.

3.3 Data Type and Source

For this study, the researcher used both quantitative and qualitative data type
especially the first one because the research mainly focus in the financial
statement of the company. The researcher also use both primary and
secondary source of data

3.4 Method of Data Collection

32
For primary method of data collection unstructured interview was used use
rather than other method of data collection with individuals that are worked on
the finance department of the company in order to overcome some draw backs
of secondary data. On the other hand the secondary
data collected by reviewing the company annual audited financial statement
and audit report. .

3.5 Method of Data Analysis

After the relevant data collected from the company financial statement, in order
to describe the real financial performance of the company the researcher used
different accounting tools such as ratio analysis including liquidity ratio, debt
ratio, profitability ratio and asset management ratio, Horizontal analysis and
vertical analysis.

3.6 Methods of Data Presentation

Finally, the analysis was presented in the form of tables, percentages and
graphs in order to compare the financial performance of the company in
different year.

33
 CHAPTER FOUR

4. Data analysis, Interpretation and presentation

This chapter is devoted to present action, analysis and interpretation of

financial statement of Repi soap and Detergent S.C. For these purpose the
balance sheet and income statement (From 2007 to 2011) have been used. The
data are then tabulated and also discussed the performance by using ratio
Horizontal and vertical analysis. The detailed analyses are given in the
following paragraph.

I. Ratio Analysis

Financial rations are useful indicators of a firm’s performance and financial

situation. Most ratios can be calculated from information provided by the
financial statements. Financial ratios can be used to analyze trends and to
compare the firm’s financials to those of other firms.

4.1 Liquidity Ratios

4.1.1 Current Ratio

34
This ratio is general and quick measure of liquidity of a firm. It represents the
margin of safety or cushion available to the creditors. It is an index of the firm’s
financial stability. It is also an index of technical solvency and an index of the
strength of working paper. The year wise details about the current ratio of the
company are given in the table 4.1

Table 4.1 Current Ratio

Year 2007 2008 2009 2010 2011 AVG

Current ratio 2.62 2.34 1.98 2.33 1.85 2.22

Source: Financial statement of Repi Soap and Detergent S.C

From the above table the current ratios for the five years are highly fluctuate at
high rate. The lowest CR in sample years was 1.85 in 2011 and the highest CR
was 2.62 in 2007 on an average the CR of the company was 2.22. From this we
conclude that the Repi soap and Detergent S.C have ability to meet its short
term financial obligations.

4.1.2 Quick Ratio (Acid Test)

The quick ratio is very useful in measuring the liquidity position of firm. It
measures the firm’s capacity to pay off current obligations immediately and is
more rigorous test of liquidity than current ratio. It is used as a complementary
ratio to the current ratio. Liquid ratio is more rigorous test of liquidity than the
current ratio because it eliminates inventories and prepaid expenses as a part
of current assets. Usually high liquid ratios an indication that the firm is liquid
and has the ability to meet its current or liquid liabilities in time and on the
other hand allow liquidity ratio represents that the firm’s liquidity position is
not good. As a convention, generally, a quick ratio of one to one (1:1) is
considered to be satisfactory.

Table 4.2 Quick Ratio

Year 2007 2008 2009 2010 2011 AVG

35
Quick ratio 0.51 0.38 0.23 0.34 0.56 0.41
(QR)

Source: Financial statement of Repi Soap and Detergent S.C

Table 4.2 gives clear picture about the quick ratio of the company for the
periods of five years. The lowest QR in sample years was 0.23 in 2009 and the
highest QR was 0.56 in 2011. On average the QR of the company was 0.41.
From this we conclude that the QR of the company is less than the standard
(1.1)

4.1.3 Cash Ratio

The cash ratio is an indication of the firm’s ability to pay off its current
liabilities if for some reason immediate payment were demanded.

Table 4.3: Cash Ratio

Year 2007 2008 2009 2010 2011 AVG

Cash ratio 0.4 0.26 0.02 0.09 0.04 0.16

Source: Financial statement of Repi Soap and Detergent S.C

The table 4.3 explains the amount of cash ratio. The lowest cash ratio was 0.02
in 2009 and the highest cash ratio was 0.4 in 2007. This indicates in 2007 the
company was high ability to pay immediate payment when demanded the
others especially comport to 2009 performance.

To sum up Liquidity Ratio of Repi Soap and Detergent S.C graphically show
below:-

36
 Year

Figure 4.1 Liquidity Ratio

4.2 Asset Turnover Ratio (Activity Ratio)

4.2.1 Receivables Turnover

Account receivable turnover ratio indicates the number of times the debtors are
turned over a year. The highest the value of debtor’s turnover the more efficient
in the management of debtors or more liquid the debtors are. Similarly low
debtor’s turnover ratio implies inefficient management of debtors or less liquid
debtors. These in no rule of thumb which may be used as a norm to interpret
the ratio as it may be different from firm to firm.

Table 4.4 Account receivable turnover

Year 2007 2008 2009 2010 2011 AVG

ART 25.74 24.86 14.23 18.74 7.49 18.21

Source: Financial statement of Repi Soap and Detergent S.C

The table 4.4 shows that the ART of the company highly fluctuate. The largest
ART was 7.49 in 2011 and the lowest ART was 25.74 n 2007 on average the
ART was 18.21 times.

The receivables turnover often is reported in terms of the number of days that
credit sales remain in accounts receivable before they are collected. This
number is known as the collection period.

37
Table 4.5 Average Collection Period

Year 2007 2008 2009 2010 2011 AVG

ACP 66.38 66.35 66.31 66.28 66.23 66.31

Source: Financial statement of Repi Soap and Detergent S.C

The table 4.5 indicates almost in the sample year the ACP is 66 days. This
means the company has 66 days wait before its debtors are converted in to
cash.

4.2.2 Inventory Turnover/Stock Turnover

Inventory turnover ratio measures the velocity of conversion of stock in to

sales. Usually a high inventory turnover indicates efficient management of
inventory because more frequently the stocks are sold; the lesser amount of
money is required to finance the inventory. Alow inventory turnover ratio
indicates an inefficient management of inventory. A low inventory turnover
implies over investment in inventories, poor quality of goods, stock
accumulation and low profits as compared to total investment. The ITO ratio is
also an index of profitability, where a high ratio signifies more profit; a low ratio
signifies low profit.

Table 4.6 Inventory Turnover Ratio

Year 2007 2008 2009 2010 2011 AVG

ITO 1.15 1.22 1.38 1.75 2.73 1.65

Source: Financial statement of Repi Soap and Detergent S.C

Table 4.6 clearly shows the inventory turnover ratio is too low (i.e. there is over
investment in inventory). So the company must modify there inventory
maintenance program.

The ITO often is reported as the inventory period, which is the number of day’s
worth of inventory on hand.

38
Table 4.7 Inventory period

Year 2007 2008 2009 2010 2011 AVG

Inventory 317.4 299.2 264.5 203.6 133.7 244.7

period

Source: Financial statement of Repi Soap and Detergent S.C

The above table explains the number of day’s worth of inventory on hand. The
lowest day was 133 in 2011 and the largest day was 317 in 2007. These
indicate the company has not in good position in inventory management.

4.2.3 Fixed Assets Turnover Ratio

Table 4.8 Fixed Asset Turnover Ratios

Year 2007 2008 2009 2010 2011 AVG

FAT 2.61 3.67 4.56 8.03 2.02 4.12

Source: Financial statement of Repi Soap and Detergent S.C

Table 4.8 indicate the lowest FAT was 2.02 in 2011and the largest FAT was
8.03 in 2010 on average the company FAT was 4.12. This indicates the
company uses the fixed asset properly.

39
In short the Asset turnover Ratio of Repi Soap and Detergent S.C graphically
show below.

Year

Figure 4.2 Asset turnover Ratio

4.3 Profitability Ratio

4.3.1 Gross profit Ratio

Gross profit ratio may be indicated to what extent the selling prices of goods
per unit may be reduced without incurring losses on operations. It reflects
efficiency with which a firm produces its products. As the gross profit is found
by deducting cost of good sold from net sales, higher the gross profit better it
is.

Table 4.9: Gross Profit Ratio

Year 2007 2008 2009 2010 2011 AVG

GPR 19.67 16.94 19.49 21.22 10.02 17.47

40
Source: Financial statement of Repi Soap and Detergent S.C

Table 4.9 shows that the company GPR on average was 17.47. So the status of
the company is in good position.

4.3.2 Net Profit Ratio

NP ratio is used to measure the overall profitability and hence it is very useful
to proprietors. The ratio is very useful as if the net profit is not sufficient, the
firm shall not be able to achieve a satisfactory return on its investment. This
ratio also indicates the firm’s capacity to face adverse economic conditions
such as price competition, low demand, etc. obviously, higher the ratio the
better is the profitability.

Table 4:10 Net profit Ratio

Year 2007 2008 2009 2010 2011 AVG

NPR 9.94 7.77 10.35 10.81 4.7 8.71

Source: Financial statement of Repi Soap and Detergent S.C

The table 4:10 explain the percentage of NPR. The lowest NPR was 4.7 in 2011
and the highest NPR was 10.81 in 2010. On average the company NPR was
8.71. This indicates from time to time the profitability of the company increase
except in 2008 and 2011.

4.3.3. Return on Equity Capital (ROEC)

This ratio is more meaningful to the equity shareholders who are interested to
know profits earned by the company and those profits which can be mode
available to pay dividends to them. If the ROEC ratio is high the better the
profitability and vice versa.

Table 4.11 ROEC

Year 2007 2008 2009 2010 2011 AVG

ROEC 0.11 0.10 0.18 0.26 0.09 0.15

Source: Financial statement of Repi Soap and Detergent S.C

41
The return on equity presented on the measure of profitability table 4.11 has
an increasing trend except in 2008 ad 2011. The ROEC decreased from 0.11 in
2007 to 0.10 in 2008. But in 2009 the company ROEC was 0.18 (i.e. It shows
gradual change). The highest ROEC was 0.26 in 2010. On average the
company gets 0.15 birr from each birr invested in the firm’s share.

4.3.4 Return on Asset (Investment)

This ratio is one of the most important ratios used for measuring the overall
efficiency of a firm. As the primary objective of business is to maximize its
earnings, this ratio indicates the extent to which this primary objective of
businesses being achieved. This ratio is of great importance to the present and
perspective shareholders as well as the management of the company. As the
ratio reveals how well the resources of the firm are being used, higher the ratio,
better are the results.

Table 4.12 Return on Asset Ratio

Year 2007 2008 2009 2010 2011 AVG

ROA 0.08 0.07 0.11 0.16 0.05 0.09

Source: Financial statement of Repi Soap and Detergent S.C

The above table 4.12 clearly shows that, from time to time ROA of the firm’s
change. The lowest ROA ratio was o.05 in 2011 and the higher ROA ratio was
0.16 in 2010. On average the company ROA was 0.09.

42
Generally the graph below clearly shows the profitability ratio of Repi Soap and
Detergent S.C.

Year

Figure 4.3 profitability ratio

4.4 Financial Leverage Ratio (insolvency)

4.4.1 Debt to Equity Ratio

Debt to equity ratio indicates the proportionate claims of owners and the
outsiders against the firm’s assets. The purpose is to get an idea of the cushion
available to outsiders on the liquidation of the firm. The owners want to do the
business with maximum of outsider’s funds in order to take lesser risk of their
investment and to increase their earnings by paying a lower fixed rate of
interest to outsiders. The outsiders on the other hand want that shareholders
should invest and risk their share of proportionate investments. A ratio of 1:1
is usually considered to be satisfactory ratio although there can not be rule of
thumb or standard norm for all types of business.

43
Table 4.13 Debt to equity ratio

Year 2007 2008 2009 2010 2011 AVG

Debt to 0.38 0.47 0.62 0.63 0.95 0.61

Equity

Source: Financial statement of Repi Soap and Detergent S.C

The table 4.13 gives clear picture about the debt to owner’s equity ratio. The
lowest debt to equity ratio was 0.38 in 2007 and the highest debt to equity
ratio was 0.95. In 2011 on average the company debt to equity ratio was 0.61.
Generally the debt to equity ratio of the company increase time to time. This
shows claim of creditors increase as a result for share holders the risk
minimized.

4.4.2 Debt Ratio

Table 4:14 gives a detail about the year wise debt to total asset ratio of the
company.

Table 4.14: Debt Ratio

Year 2007 2008 2009 2010 2011 AVG

Debt Ratio 0.27 0.32 0.38 0.38 0.49 0.37

Source: Financial statement of Repi Soap and Detergent S.C

As shown in the above table 4.14 the debt ratio of Repi soap and detergent
share company was increase time to time. The lowest debt ratio was 0.27 in
2007 and the highest debt ratio was 0.49 in 2011 on average the company debt
ratio was 0.37.

4.4.3 Time Interest Earned

Table 4:15: gives a detail about the year is time interest earned ratio.

Table 4:15 Time interest earned ratio

44
Year 2007 2008 2009 2010 2011 AVG

TIER 69.42 12.78 15.52 16.38 6.67 24.15

Source: Financial statement of Repi Soap and Detergent S.C

From the above table 4;15 we can understand that the time interest earning
ratio of Repi Soap and detergent S.C was 69.42, 12.78, 15.52, 16.38 and 6.67
for the year 2007, 2008, 2009, 2010 and 2011 respectively. This shows the
time interest earned not improved as compared to the base year.

In short the graph below shows the financial leverage ratio of Repi Soap and
Detergent S.C.

Year

Figure 4.4 financial leverage ratio

II. Vertical analysis

In vertical analysis, a significant item on a financial statement is used as abase

value and all other item on the financial statement are compared to it. In
performing vertical analysis for balance sheet total assets are assigned 100
percent. Each asses account is then expressed as percentage of total asset. The
liabilities and stockholders equity is also assigned 100 percent. Each liability
and equity account is then expressed as a percentage of total liabilities and

45
stockholders equity. In the income statement net sales is given the value of 100
percent and all other accounts are evaluated in comparison to net sales. A
competitive common size of financial statement of the last five years (2007-
2011 GC) of Repi Soap and Detergent is made. This is shown below by using
the two financial statements (i.e. Balance sheet and Income statement).

46
Table 4.16 Vertical analysis of (balance sheet)

Percentage in year
Items 2007 2008 2009 2010 2011
2007 2008 2009 2010 2011

Current asset

Stocks and goods in transit 16,248.690 22,078,650 30,534,706 43,391,921 49130213 55.8 62.8 64.22 67.6 32.57

Debtors and prepayments 902,121 1,309,383 3,669,611 5,146,703 19902756 3.1 3.72 7.72 8.02 13.2

Cash at bank and on hand 3,058,057 2,898,023 389,738 1,929,478 1544839 10.5 8.24 0.82 3 1.02

Total current asset 70577808 69.4 74.76 72.75 78.68 46.8

Fixed assets (net) 8,903,734 8,872,459 11,456,589 12,006,149 73702181 30.6 25.23 24.1 18.72 48.86

Lease hold land 1,498,495 1,663,369 6544287 - - 3.15 2.6 4.34

Balance 8,903,724 8,872,459 80246468 30.6 25.23 27.24 21.31 53.2

Total Asset 150824276 100 100 100 100 100

Current liabilities

Creditors and accruals 908,617 1,599,109 5,944,985 5,136,886 3858174 3.12 4.54 12.5 8.01 2.56

Bank overdraft 7,764,593 7,983,739 9,151,077 26141648 - - - - -

Provision for taxation 790,454 629,287 1,459,911 3,698,261 111181 2.72 1.79 3.07 5.76 0.07

Dividend payable 4,778,839 778,243 306,551 - 16.41 - - - -

Payable to major 1,242,390 1,242,390 - 4.27 3.53 1.64 0.47 -

stockholders

Term loan –current maturity 1,096,440 3,015,240 7580568 - - 2.31 4.7 5.03

47
Lease payable –current 164,874 329,748 494621 - - 0.35 0.51 0.33
maturity

Total current liability 38,,186,192 26.52 31.96 36.65 33.74 25.32

Long term loan 271,028 794,937 2,742,181 35,324,145 0.93 0 1.67 4.27 23.42

Total liability 73,510,337 27.45 31.95 38.32 38.01 48.74

Total capital 21,121,264 23,923,010 29,326,010 39,757,676 77,313,939 72.55 68.04 61.67 61.99 51.26

Total liability and capital 100 100 100 100 100

Source: Financial statement of Repi Soap and Detergent S.C

48
a) Vertical Analysis of Balance Sheet

Balance sheet items are usually expressed as a percentage of total asset or

total liability and owner’s equity to apply vertical analysis. Table 4.16 shows
the five year balance sheet of Repi Soap and Detergent S.C with each items
expressed as a percentage of total assets or liability and owners equity. In all
five year accounting periods, the total current assets balance as percentage of
total asset was 69.4% 74.76% 72.75% 78,68% and 46.8% in 2007 to 2011,
Beside that the total current liability of Repi Soap and Detergent S.C, During
the five accounting periods was less than the current assets according to the
analysis table 4.16 shows that the total liabilities as percentage of total asset
was 26.52%, 31.95%, 36,65% 33.73% and 25.32% in 2007 to 2011.

Total long term loan as a percentage of total assets according to the analysis
was 0.93% 0%, 1.67%, 4.27% and 23.42% in the year 207, 2008, 2009,
2010and 2011 respectively. This figure implies that only small part of Repi
Soap and Detergent S.C total asset was financed by long term loan. The
cumulative effect of long term loan and current liabilities together gave the
percentage of total liability form total asset of Repi Soap and Detergent S.C.
The balance were 27.45%, 31.96% 38.32%, 38.01% and 48.74% in 2007, 2008,
2009, 2010and 2011 respectively.

49
Table 4.17 Vertical Analysis (Income Statement)
Percentage in year
Items 2007 2008 2009 2010 2011
2007 2008 2009 2010 2011

Sales 23,220,668 32,561,133 52,211,659 96,457,309 149,130,546 100 100 100 100 100

COGS 18,651,896 27,042,911 42,030,490 75,987,460 134,189,737 80.32 83.05 80.50 78.77 89.98

GP 4,568,772 5,518,222 10,181,169 20,469,849 14,940,809 19.67 16.94 19.49 21.22 10.01

Other Income 312,965 671,055 581,256 1,211,066 1,976,471 1.34 2.06 1.11 1.25 1.32

Expenses

Selling and Distribution 174,497 407,790 349,224 458,798 769,628 0.75 1.25 0.66 0.47 0.51

Administration 1,297,485 1,771,566 2,092,894 3,278,209 4,168,596 5.58 5.44 4.00 3.39 2.79

Board Members Fee 36,925 69,125 41,250 76,000 142,000 0.15 0.21 0.07 0.07 0.09

Interest On Bank 48,213 307,686 533,018 1,042,151 1,774,836 0.20 0.94 1.02 1.08 1.19
Overdraft

Audit Fee and 26,022 7,979 8,000 9,000 9,000 0.11 0.02 0.01 0.01 0.01
Consultancy

Provision For Stock 791,326 0.82

Total Expenses 1,583,142 2,564,146 3,024,386 5,655,484 6,864,061 6.81 7.87 5.79 5.86 4.60

Net Profit Before Tax 3,298,595 3,625,131 7,738,039 16,025,431 10,053,219 14.20 11.13 14.82 16.61 6.74

Provision For Taxation 989,578 1,094,287 2,335,165 5,593,765 3,036,829 4.26 3.36 4.47 5.79 2.03

Net Income 2,309,017 2530844 5,402,874 10,431,666 7,016,390 9.94 7.77 10.34 10.81 4.70

50
b) Vertical analysis of Income Statement

Income statement items are expressed as a percentage of net sales when

vertical analysis is applied. Table 4.17 demonstrates the five years income
statement of Repi Soap and Detergent S.C with each item of income statement
account expressed as a percentage of sales.

Cost of good sold as percentage of sale increased from 80.3 percent to 83

percent in 2008, during which gross profit decreased from 19.68 percent 16.95
percent and net income also decreased from 9.94 percent to 7.78 percent in
this accounting period. Cost of good sold decrease to 80.5 percent in 2009 and
also decreases to 78.78 percent in 2010. But in 2011 the cost of good sold
increase to 89.93 percent

The reason for this increase is the sale of the company decrease in high rate
when compare to the cost of good sold. During 2009 gross profit increase to
19.45 percent due to the increase of the sale balance. The same is true in
2011. But in 2011 the gross profit decrease to 10.1 percent. The net income of
the company increase from 7.78 percent to 10.36 percent in 2009. The reason
for the increasing of net income in 2009 was that the amount by which total
expense decreased was greater than the amount by which total revenue
increased. The same is true in 2010. But in 2011 the net income is decreased
to 4.7 percent due to decrease in sale. Total expenses increased from 6.82
percent in 2007 to 7.87 percent in 2008. But from 2009 to 2011 total expenses
relatively decrease because of decrease in sales.

51
III. Horizontal Analysis (Trend Analysis)

Trend analysis also called horizontal analysis which is used to evaluate the
trend in the accounts over the years. Trend analysis stresses the trend of the
various accounts. It is relatively easy to identify a reas of wide divergence that
require further attention. It is important to know and to show the extent and
direction of changes.

In this method of analysis, the year 2007 was chosen as a base year. Each
account of the base year is assigned an index for each respective account’s by
the base year amount and multiplying by 100.

52
Table 4.18 Trend Analysis (Balance Sheet)

Percentage in year
Items 2007 2008 2009 2010 2011
2007 2008 2009 2010 2011

Current Asset

Stocks and goods in 16,248,690 22,078,650 30,534,706 43,391,921 49,130,213 100 135.87 187.92 267.04 302.36
transit

Debaters and 902,121 1,309,383 3,669,611 5,146,703 19,902,756 100 145.14 406.77 570.51 2206.21
prepayment

Cash at bank and on 3,058,057 2,898,023 389,738 1,929,478 1,544,839 100 94.76 12.74 63.09 50.51
hand

Total Current Asset 20,208,868 26,286,056 34,594,055 50,468,102 70,577,808 100 130.07 171.18 249.73 349.24

Fixed Asset(Net) 8,903,724 8,872,459 11,456,589 12,006,149 73,702,181 100 99.64 128.67 134.84 827.76

Lease hold land 1,498,495 1,663,369 6,544,287 100

Total Fixed Asset 8,903,724 8,872,459 12,955,034 13,669,518 80,246,468 100 99.64 145.50 153.52 901.26
balance

Total Asset 29,112,592 35,158,515 47,549,139 64,137,620 150,824,276 100 120.76 163.32 220.30 518.07

Current Liability 100

Creditors and Accruals 908,617 1,599,109 5,944,985 5,136,886 3,858,174 100 175.99 654.28 565.35 424.62

Bank overdraft 7,764,593 7,983,739 9,151,077 26,141,648 100

Provision for taxation 790,454 629,287 1,459,911 3,698,261 111,181 100 79.61 184.69 467.86 14.05

State dividend payable 4,778,839 100 0 0 0 0

53
Payable to major 1,242,390 1,242,390 778,243 306,551 100 100 62.64 24.67
shareholders

Term loan current 1,096,440 3,015,240 7,580,568 100

maturity

Lease payable current 1,648,874 329,748 494,621 100

maturity

Total current liability 7,720,300 11,235,379 17,428,192 21,637,763 381,86,192 100 145.53 225.74 280.27 494.62

Long term loan 271,028 794,937 2,742,181 35,324,145 100 0 293.30 1011.77 13033.39

Total Liability 7,991,328 11,235,379 18,223,129 24,,,379,944 73,510,337 100 140.59 228.03 305.08 919.87

Total Capital 21,121,264 23,923,136 29,326,010 39,757,676 77,313,939 100 113.26 138.84 188.23 366.04

Total liability and 29,112,592 35,158,515 47,549,139 64,137,620 150,824,276 100 120.76 163.32 220.30 518.07
capital

Source: Financial statement of Repi Soap and Detergent S.C

54
a) Trend Analysis – Balance Sheet

The extent and direction of changes in the five years balance sheet items of
Repi Soap and Detergent S.C of the base year, 2007 are compute and directly
presented below. Based on the analysis the total current assets increase by
30.1%, 71.2%, 149.7%, and 249.3% in 2008, 2009, 2010 and 2011
respectively. The cash on hand and at bank balance of Repi Soap and detergent
S.C decrease by 5.3%, 87.3%, 36.9% ad 49.5% in 2008, 2009, 2010 and 2011
respectively.

The total current liabilities of Repi Soap and Detergent S.C increased by
45.53%, 125.75% 180.3% and 394.62% in 2008, 2009, 2010 and 2011.
According to table 4.18, the capita balance increased throughout the year
continuously by 13.27%, 38.85%, 88.23% and 266.1% in 2008, 2009, 2010
and 2011 respectively.

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Table 4.19 Trend Analysis (Income Statement)

Percentage in year
Items 2007 2008 2009 2010 2011
2007 2008 2009 2010 2011

Sales 18,651,896 32,561,133 52,211,659 96,457,309 149,130,546 100 140.22 224.85 415.39 642.23

COGS 27,042,911 42,030,490 75,987,460 134,189,737 100 144.98 225.34 407.39 719.44

GP 4,568,772 5,518,222 10,181,169 20,469,849 14,940,809 100 120.78 222.84 448.03 327.02

Other Income 312,965 671,055 581,256 1,211,066 1,976,471 100 214.41 185.72 386.96 631.53

Expenses 100

Selling and Distribution 174,497 407,790 349,224 458,798 769,628 100 233.69 200.13 262.92 441.05

Administration 1,297,485 1,771,566 2,092,894 3,278,209 4,168,596 100 136.53 161.30 252.65 321.28

Board Members Fee 36,925 69,125 41,250 76,000 142,000 100 187.20 111.71 205.82 384.56

Interest On Bank Overdraft 48,213 307,686 533,018 1,042,151 1,774,836 100 638.18 1105.54 2161.55 3681.23

Audit Fee and Consultancy 26,022 7,979 8,000 9,000 9,000 100 30.66 30.74 34.58 34.58

Provision For Stock 791,326 100

Total Expenses 1,583,142 2,564,416 3,024,386 5,655,484 6,864,061 100 161.96 191.03 357.23 433.57

Net Profit Before Tax 3,298,595 3,625,131 7,738,039 16,025,431 10,053,219 100 109.89 234.58 485.82 304.77

Provision For Taxation 989,578 1,094,287 2335165 5,593,765 3,036,829 100 110.58 235.97 565.26 306.88

Net Income 2,309,017 2530844 5,402,874 10,431,666 7016,390 100 109.60 233.99 451.77 303.86

Source: Financial statement of Repi Soap and Detergent S.C

56
b) Trend analysis – Income Statement

According to table 4.19 the trend percentage indicates the Repi Soap and
Detergent S.C sales increase by 40.23%, 124.85%, 315.4% and 542.2% in
2008, 2009, 2010 and 2011.

The trend analysis of total expenses also shows continuous increase by

61.96%, 91.08%, 257% and 333.57% in 2008, 2009, 2010, and 2011. on the
other hand the Gross profit of the Repi Soap and Detergent S.C show high
increment in 2010 (348.1%). The minimum increment was 20.8% in 2008. The
remaining was 122.8%, 227.1% in 2009 and 2011 respectively.

The net income of Repi Soap and Detergent S.C was increase time to time
especially in 2010 (351.78%). The minimum increment was 9.6% in 2008. On
average the net income increase by 174.81%. The reason is that the amount by
which the total revenue increased was some what higher than the amount by
which total expenses increased during this accounting period.

57
 CHAPTER FIVE

5. Summary of Finding, Conclusions and Recommendation

5.1 Summary of Findings

This chapter is focus in summarizing the major finding obtained from the
analysis part. Then based on the findings conclusions and recommendation
were drawn. The main objective of the study is to assess the financial
performance of Repi Soap and Detergent S.C over the last five accounting years
(from 2007 to 2011 G.C).

The financial performance of Repi Soap and Detergent S.C is assed by using
ratio analysis, trend analysis and vertical analysis. The profitability, liquidity,
solvency and activity of the company are examined with ratio analysis. All
changes in total sales, total cost of good sold, gross profit and net income are
studied with both trend analysis and vertical analysis.

Profitability

The profitability of the company were used to examine the profitability of Repi
Soap and Detergent S.C such measures of profitability are gross profit ratio,
Net profit ratio, return on equity capital and return on asset.

The profitability in relation to sales indicates that the company covers its all
operating expenses and income taxes as indicate in the net profit ratio. Thus
the ability of the company in generating profit from sales in high. Even though
the net profit ratio is declining in 2011.

The profitability in relation to return on equity and investment is very good in

2010 when compare to the other sample year. But it indicates an improvement.

58
Liquidity

Current ratio, quick ratio and cash ratio are indicators used to assess the
liquidity of the company.

When you see the company current ratio and quick ratio on average the
company meets short term obligation easily. But when immediate payment
needed the ability of the company was less.

Insolvency

Debt to equity ratio, debt ratio and time interest earned ratio is used as
indicator of the company ability to meet the long term obligation.

The debt to asset ratio is used to analysis the debt utilization of the company.
The debt ratios of the company were less than 50% (i.e. the enterprise not
depends on loan). The time interest of the company also in a good position
especially in 2007 to pay the debt to its creditors.

Activity Ratio

Receivables turnover, inventory turnover and fixed asset turnover is used as

indicator. The receivable turnover of the company decrease time to time but the
inventory turnover increase. Thus the company credit sale increase but the
company can not collect the credits quickly.

The fixed asset turnover of the company in generating profit is in a good

position even though is show little decline in 2011.

Generally when you see the net income, cost of good sold and gross profit of
Repi Soap and Detergent S.C in relation to sale increase time to time with some
exception. But the common feature is decline in 2011.

59
5.2 Conclusion

The study examines the financial performance of Repi Soap and Detergent S.C.
The financial statement analysis to Repi Soap and Detergent S.C was used to
indicate the performance of its financial position for management, creditors
and other interested parties.

The performance of Repi Soap and Detergent S.C is attractive and performance
gap is no highly widened from year to year.

According to the study, all variables used as an indicator of the financial

performance of the company, some of them indicates on increasing trend and
the remaining part indicates the amount fluctuate from one year to another
year.

As examined in ratio analysis, the company ability in meeting both short term
and long term obligation was good but for immediate payment demand the
company performance need some improvement. When you see the trend of
profitability, from time to time the company profit increase. On the other hand
the firm’s ability to use its assets is less efficient.

The performance of Repi Soap and Detergent S.C is relatively attractive and it
has an increasing trend in revenue, gross profit, and net income and in other
performance factory.

To sum up the performance of Repi Soap and Detergent S.C in terms of

liquidity, insolvency and profitability is in good position with some
improvement needed in some indicators relatively.

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5.3 Recommendation

As indicated in the analysis part of this paper the company faces different
difficulty regarding solvency, liquidity, profitability and asset management. In
order to overcome these difficulties the researcher recommends the following
points:-

The liquidity position of Repi Soap and Detergent S.C is relatively high but for
the immediate payment some modification is needed. In order to modify the
researcher advice the managers to improve the cash management practice of
the firm

Although the profitability of the company is satisfactory, the firm must be try to
improve by decreasing different operating as well as administrative expenses

The ability of the firm in fulfillment of long term obligation is satisfactory so the
firm expect to go in this trend

Repi Soap and Detergent S.C was less efficient in utilizing its asset.Inorder to
use its asset efficiently the researcher advice to increase the sales volume of
the company by applying different marketing strategy.

The inventory turnover of Repi Soap and Detergent S.C is too low. This is
because of over investment in inventory. So the manager of the company is
advised to decrease investment in inventory. On the other hand the receivable
turnover of the firms is somewhat good but it need some modification including
changing of credit term.

61
 References

Chambers and Lacely, Modern Corporate Finance, 1994.

Weston J.F and Brigham E.F Managerial Finance 7th edition 1981.

Brealy, R, and Mayerss, Principles of Corporate Finance 2nd edition, 1984.

Pamela P. Financial Performance Analysis.

En. Wikipedia .Org.

Ross, Westerfield and Jordan, Fundamentals of Corporate Finance, 4th

edition, 1998.

WWW. Accounting for management .com

62
 A. Liquidity Ratio

Year Current Asset Current Liability Current Ratio

2007 20208863 7720300 2.617627294

2008 26286056 11235379 2.339578932

2009 34594055 17428192 1.984948008

2010 50468102 21637763 2.332408484

2011 70577808 38186192 1.848254678

Year Current Inventory Current Liability Quick Ratio

Asset

2007 20208868 16248690 7720300 0.512956491

2008 26286056 22078650 11235379 0.374478333

2009 34594055 30534706 17428192 0.232918538

2010 50468102 43391921 21637763 0.327029231

2011 70577808 49130213 38186192 0.561658387

Year Current Asset Current Liability Current Ratio

2007 3058057 7720300 0.39610598

2008 2898023 11235379 0.257937271

2009 389738 17428192 0.022362503

2010 1929478 21637763 0.089171787

2011 1544839 38186192 0.040455435

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 B) Asset Turnover Ratio

Year COGS Inventory Inventory Turnover

2007 18651896 16248690 1.147901523

2008 27042911 22078650 1.224844409

2009 420303490 30534706 1.376482551

2010 75987460 43391921 1.751189121

2011 134189737 49130213 2.731307861

Year Sales Account Resevable Resevable Turnover

2007 23220668 902121 25.74008143

2008 32561133 1309383 24.86753914

2009 52211659 3669611 14.22811818

2010 96457309 5146703 18.74157281

2011 149130546 19902756 7.492959568

Year Sales Net fixed Asset Fixed Asset

Turnover

2007 23220668 8903724 2.607972574

2008 32561133 8872459 3.669910788

2009 52211659 11456589 4.557347654

2010 96457309 12006149 8.033992332

2011 149130546 73702181 2.023421071

64
 C) Profitability Ratios

Year Net Income Sales Net Profit Margin

2007 2309017 23330668 0.0994380009

2008 2530844 32561133 0.077725919

2009 5402874 52211659 0.103480221

2010 10431666 96457309 0.10814801

2011 7016390 149130546 0.047048644

Year Net Income Total Asset Return on Asset

2007 2309017 29112592 0.079313343

2008 2530844 35158515 0.071983814

2009 5402874 47549139 0.113627168

2010 10431666 64137620 0.162645044

2011 7016390 150824276 0.046520296

Year Net Income Total Equity Return on Equity

2007 2309017 21121264 0.109321914

2008 2530844 23923136 0.105790646

2009 5402874 29326010 0.184234882

2010 10431666 39757676 0.262381181

2011 7016390 77313938 0.090751942

D) Financial Leverage Ratio (Insolvency)

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Year Total Asset Total Equity Debt Ratio

2007 29112592 21121264 0.274497303

2008 35158515 23923136 0.319563525

2009 47549139 29326010 0.383248349

2010 64137620 39757676 0.38011925

2011 150824276 77313938 0.487390624

Year Total Liability Total Equity Debt Equity Ratio

2007 7991328 21121264 0.378354629

2008 11235379 23923136 0.469644908

2009 18223129 29326010 0.621398172

2010 24379944 39757676 0.613213509

2011 73510337 77313938 0.950803166

Year Total Asset Total Equity Debt Ratio

2007 3346808 48213 69.41712816

2008 3932817 307686 12.78191728

2009 8271057 533018 15.51740654

2010 17067582 1042151 16.37726395

2011 11828055 1774836 6.664308702

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