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Introduction
In corporate finance the roles of financial ratios is very important. Financial ratios are formulated from financial reports; these are formal records of a business entity. Financial reports show a business overview of the firm’s financial position or condition in both the short-run as well as the long run. There are four basic financial statements. These are; the balance sheet, income statement, the statement of cash flows and the statement of retained earnings.
Financial statements or reports are read by different people. Among them are students, financial analysts, internal and external auditors, shareholders, creditors as well as prospective investors. To incorporate the requirements of all these groups financial statements are thus required to be reliable, relevant, and understandable as well as being comparable. The equity assets and liabilities are closely related to a firm’s financial position while the expenses and income are related to the financial performance of the company at stake.
Financial statements are thus supposed to be objective and judgmental at the same time. This in turn means that financial reports should be simple, reliable and easy to use. To understand the financial position or status of a company we make use of different financial ratios. The reliability of the financial ratios depends on how accurate the financial reports of a firm are.
For MCC plc having incremental profitability ratios means that the company is doing well. If this is not the case then there is need for managers to look at the issue before it gets out of hand.
Analysis
The first financial ratio we shall look at is that of the gross profit margin. The gross profit margin is financial ratio used to evaluate the profitability of a firm’s core operations exclusive of its fixed costs. It measures how well each unit of money of the company’s income is available to cater for expenses and profits after taking care of the cost of goods sold. A high margin indicates that a company is in the right path if the overhead costs are minimized. Gross profit margin=revenue-cost of sales/revenue.
The gross profit margins for the 2007 and 2008 periods are given below.
The gross profit margin seems to be higher than 0.5. This shows that the firm is well able to minimize its cost of sales. As a private shareholder or creditor I would not be worried by this situation.
The second ratio I will look at is the net profit margin. This ratio is mainly used to evaluate a firm’s ability to control costs as well as its pricing policy.
The net profit after tax shows that although the ratio is low it is still positive. This could be a reflection of the industry performance. According to the information given most of the firms are price takers and that means they are just making minimum profits. There is no need for alarm although there is room for improvement. As a creditor or as a private shareholder it is also important to know the company returns with respect to total assets. This gives as a picture of how well the managers are at using assets to attract income to the firm.
- ROA=net income/ total assets
From the data above we can see that the ROA is in the range of 20% this is a good indication since this rate is higher than the prevailing interest rate. If this trend continues then it means that the firm can make more money from its assets than from financial loans from financial institutions. Thus as a private share holder or as a creditor there is no cause for alarm since the company can be able to comfortably repay its financial obligations
Apart from this it is also necessary to look at the Return on Equity ratio (ROE). It is used to measure the return rate of shareholders equity of the company’s common stock. The higher the ROE then the more the firm is efficient in generating profits fro the equity of the share holders. ROE=net income after tax/shareholder equity
The return on equity margins for the 2007 and 2008 periods are given below.
The return on equity ratio is very promising. It appears that the company managers have been able to manage the shareholders equity quite efficiently. As a private shareholder this means more pounds in the pocket at the end of the financial period. In case of a creditor, then there is no reason to worry.
Conclusion
MCC plc seems to be doing very well given the nature of the industry. However there is no reason why the company should not improve its operations. In the first instance the company needs to reduce its overhead costs since this seems to heavily hamper on the net profit of the company.
If this is done then MCC Plc may see brighter days ahead. The company appears to have a very clear intention of segmenting the market so that it can be able to differentiate its products. As long as the company has competent managers (and it appears so from the ratios computed above) then the company is in deed headed for better times ahead.
Works cited
Berman, Karen, 2006, Financial Intelligence. Boston: Harvard Business School Press
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