Financial Performance of HBK Holding Company W.L.L

  CHAPTER 1: INTRODUCTION

In this project, I am going to analyze the Financial Statements of a company called HBK Holding Company W.L.L for the years 2015 and 2016. The Financial Statements to be analyzed are the Balance Sheet and the Profit & Loss Statement. To do this, the financial statements were obtained from my time working as an Intern at Laxminiwas & Co. Chartered Accountants. Therefore, the tools for analysis which are going to be used below are Comparative Statement Analysis which includes – Comparative Balance Sheet and Comparative Income Statement, Common Size Statement Analysis in which include the Common Size Balance Sheet and the Common Size Income Statement.

This project also makes use of one of the most commonly used tools for financial analysis, which is Ratio Analysis. Ratio Analysis includes 4 major categories of ratios. They are Liquidity Ratios, under which come – Current Ratio, Quick Ratio;  Solvency Ratios, under which come – Debt to Equity Ratio, Proprietary Ratio, Debt Ratio, Equity Ratio; Efficiency Ratios, which include – Inventory Turnover Ratio, Debtors Turnover Ratio, Asset Turnover Ratio; Profitability Ratios, under which come – Net Profit Ratio, Return on Capital Employed, Return on Equity. The different ratios mentioned above will be calculated in this particular project.

The aim of this analysis is to find out how the Company has performed in those particular financial years, how it is performing currently and to help the management take the best financial decisions which would help the Company in the future.

The selection of data, evaluation of that data and interpreting the results from the evaluation is what we call Financial Statement Analysis. It also helps in identifying the strengths and weaknesses of a company by building a relationship between items of the balance sheet and the profit & loss statement. Since financial statements are extensive, it is more efficient and strategic to just take the amounts and put them in pre-determined formulas which have evolved through the years.

The parties who are interested in this analysis are the investors, creditors, Government and financial executives.

 

OBJECTIVES

The objectives of this analysis are:-

1. Evaluation of Past Performance:

Previous performances will be a great pointer about future performances. Traders and lenders have a keen interest in the pattern of previous sales figures, COGS, working costs, net profit, cash flows and return on capital employed. These patterns offer methods for judging the management’s previous performances and are viable pointers of future performances.

2. Evaluation of Current Position:

Financial Statement Analysis indicates the present day position of the company in terms of the forms of assets owned by company and the distinctive liabilities due against the company.

3. Prediction of profitability and growth prospects:

The analysis facilitates in assessing and predicting the income possibilities and growth rates in income that are utilized by traders whilst comparing investment options and other customers in judging earning capacity of the company.

4. Expectation of Bankruptcy and Failure:

This analysis is a key tool in evaluating and forecasting bankruptcy and possibility of business failure.

5. Evaluation of Operational Efficiency:

This analysis enables us to evaluate the operational efficiency of the management of the company. The real overall performance of the company which can be discovered in the financial statements may be compared with a few standards set in advance and the deviation of any between the set standards and actual overall performance can be used as an indicator of the efficiency of the management.

SCOPE

This study specifically tries to evaluate the financial performance of HBK Holding Company W.L.L. In the future, the different financial parties can make use of this analysis for assessing their overall performance, which would enable them to evaluate financial statements and assist to make use of the resources which the company owns efficiently for the improvement of the company and its employees as a whole. This project looks to create a pattern evaluation model for sales, working capital and income statement. There may be forecasting to assess the overall performance of HBK Holding Company W.L.L. The scope of the study also includes the following dimensions:

• Profitability- to see whether the company can minimize costs and maximize profits
• Liquidity- to see whether the company has the ability to meet its short-term obligations
• Safety or security- to see whether the company can overcome undue risk
• Decision making- to help the company take suitable decisions in areas of working capital, capital budgeting, capital structure, dividend decisions.

IMPORTANCE

1. Shareholding:

The shareholders are the promoters of the company. They have to take decisions whether they should sell their shares or hold on to the shares trusting the company. This analysis provides a significant insight to the shareholders while taking such decisions.

2. Plans:

Taking decisions and making plans and policies for the future is up to the management of the company. Hence, it is important for the company’s management to analyze its performance and efficiency of their plans to realize the company’s goals.

3. Credit Extension:

The loans which the company gets are from banks and creditors. Since they are the ones that provide credit, they need to take the decisions if they want to give loans to the company or not. Thus, they analyze the financial statements to gain valuable information about the company which will help them make the decision.

4. Investments:

There are some investors who possess excess capital to invest and want to invest in profitable situations. Thus, they analyze the financial statements of the company to assess the financial stability of that company and decide whether to invest or not.

CHAPTER 2: COMPANY PROFILE

RESEARCH METHODOLOGY

Under this section, an elaborate explanation about the methods or tools which are going to be used to analyze the financial statements of HBK Holding Company W.L.L. is given. The Secondary Data which is being utilized in this project was acquired from the company’s annual reports for those years.

The data includes the Statement of Financial Position, also known as, Balance Sheet and the Statement of Profit & Loss of HBK Holding Company W.L.L. To analyze these financial statements, the tools which I am going to use are the Comparative Statement Analysis, Common-Size Statement Analysis and Ratio Analysis.

The Comparative Financial Statements are statements of financial position at distinctive durations of time. The factors of financial position are shown in comparative form for us to provide an idea of the company’s financial position at one or more periods. Any statement prepared in a comparative form will be covered in the comparative statements. Comparative financial statements are the whole set of financial statements that a company issues, revealing records for multiple accounting periods. The financial statements which are subject to analysis are the Balance Sheet and the Profit & Loss Statement.

From a realistic point of view, typically, the financial statements are prepared in a comparative form for financial evaluation purposes, not only for the comparison of the figures of different periods but also the relationship among the items of the balance sheet and profit & loss account, allowing an intensive look at the financial position and operative results of the company. The comparative statements usually show Absolute Figures (amount), Changes in Absolute Figures (increase or decrease in amount), absolute data in terms of % and increase or decrease in terms of %. When figures are given in a comparative form, it is easier to draw useful conclusions about the company. For example, when data about sales is provided for a quarter, half year or one year, it tells us only about the present position of sales efforts. But if sales data of previous periods are provided along with the current period data, then it is possible to study the pattern of sales over different periods of time. In the same way, comparative statements indicate the patterns and direction of financial position and operating results.

Comparative Statements include – Comparative Balance Sheet & Comparative Income Statement.

1. Comparative Balance Sheet:

This analysis studies the pattern of similar items, category of items and computed items of 2 or more balance sheets of the same company on different periods of time. The adjustments may be observed by comparing the balance sheet at the start of the year with the balance sheet at the end of the year and those changes can assist in forming an opinion about the development of the company. The following aspects are expected to be reviewed while interpreting the comparative balance sheet:-

1. Current financial position and liquidity position
2. Long term financial position
3. Profitability of the company.

After analyzing the different assets and liabilities, an opinion must be made about the financial position of the company. It cannot be said that if the short term position of the company is excellent then the long term position would also be excellent or vice-versa. A suitable concluding comment about the overall financial position of the company should be provided at the end.

2. Comparative Income Statement:

The income statement provides the results of the operations of the company. The comparative income statement provides an idea about the development of the company over period of time. The changes in absolute information in money values and % may be determined to evaluate the profitability of the company. Similar to the Comparative Balance Sheet, the Comparative Income Statement also has 4 columns. First 2 columns provide data of different items for 2 years, the third column shows the increase or decrease of the absolute data and the fourth column shows the % change of the data between the years.

Guidelines for interpretation of Comparative Income Statement:-

1. The Gross Profit figures should be analyzed in the first step.
2. Analysis of operational profits should be done second.
3. Analysis of Net Profit gives a general idea about the overall profitability of the company.

After analyzing the different items of the income statement, an opinion is supposed to be given about the overall profitability of the company. A comment should be provided below whether the overall profitability is good or bad. The advantages of these statements are:

1. They point out the direction in which the profitability, position and efficiency of the company has been moving in over the years.
2. Monthly or quarterly comparisons are made possible with these statements. This enables the company to pin point the exact problems they have and take appropriate measures.
3. A summary of past activities and their effects on the financial position of the company is provided.
4. Reports are more useful and the nature of changes affecting the company is brought out more clearly.

But there are also certain limitations which they possess, which are:

1. If the accounting principles are not consistent over a certain time period, comparing will lose its purpose and importance and sometimes mislead the analyst.
2. When price levels constantly change, comparing statements will become useless.
3. While comparing 2 successive time periods, if one is a normal period and the other is an abnormal one, analysis of this situation is pointless.

The second tool of financial statement analysis which will be used is the Common-Size Statement Analysis.  This includes:

1. Common- Size Balance sheet:

It is a statement in which different items of the balance sheet are shown as a ratio each asset to total assets and each liability to total liabilities. The total assets and total liabilities are taken as 100 and different assets and liabilities respectively expressed as percentages of the total.

2. Common-Size Income Statement:

In this, the income statement items are shown as percentages of sales. A meaningful connection can be made between the items of the income statement and sales. The rise in sales will not increase administrative expenses or financial expenses but will increase the selling expenses.

The advantages of this method are:

1. Simple:

The percentage of each item to total assets or liabilities or net sales is understood clearly with the help of this method.

2. Trend:

A pattern relating to the percentage of each separate asset in total assets and percentage of each liability in total liabilities is identified.

3. Comparison:

Since the percentage change of every separate component is available to the analysts, they can compare the financial performances.

The limitations are:

1. Due to the fact that it does not recognize the price level changes, it may provide misleading data as it is based on past costs.
2. If accounting principles are not consistent, this method becomes useless
3. It does not recognize the qualitative factors, while evaluating the performance of the company.
4. It can’t evaluate the liquidity and solvency position of the company.

The third tool of financial statement analysis is the Financial Ratios Analysis. By comparing important financial data which appear in the financial statements of the company, and evaluating the results from those comparisons to assess the reasons behind the company’s current financial position and its latest financial performance, construct future expectations for the company is basically what Ratio Analysis is. It is a quantitative analysis of data contained in the company’s financial statements. It is used to assess a company’s operating and financial performance such as its liquidity, solvency, efficiency and profitability.

Ratio analysis is a very useful tool of analysis as it makes the process of comparing financial data of one company with the data of another company simple. It is not efficient to directly compare the financial statements of different companies because of the difference in the size of the relevant companies. This analysis makes it possible to compare the financial statements both among separate companies as well as across separate periods of a single company. The 4 main categories of ratios are- Liquidity Ratios, Solvency Ratios, Efficiency/Activity Ratios and Profitability Ratios. The advantages of using Ratio Analysis are:

1. Planning & Forecasting:

The data relating to costs, sales, income and others’ pattern can be recognized by evaluating ratios of important accounting figures of the previous few years. This evaluation of patterns with the help of ratios may be beneficial for forecasting and making plans for the company’s future activities.

2. Budgeting:

An approximate of future activities based on previous year experiences is a budget. Ratios provide a means to approximate budgeted figures.

3. Operational Efficiency:

Ratio analysis shows how efficient the company is in managing and utilizing its assets. Distinctive efficiency ratios imply the operational performance of the company. Actually, the solvency of the company relies upon the sales revenues generated by making use of its assets.

4. Financial Statements:

Ratio analysis makes it simple to comprehend the connection between different items and helps in comprehending the financial statements.

5. Decision Making:

They aid in taking decisions related to giving credit, investing, providing loans etc.

6. Inter-firm Comparison:

Comparing the overall performance of two or more companies shows the efficient and inefficient companies, thereby allowing the inefficient companies to undertake appropriate actions to enhance their performance. The best method of inter-company company comparison is to compare the important ratios of the company with the average ratios of the industry.

Although ratio analysis is a very helpful tool for analysis, the following limitations should be kept in mind while using it:

1. Financial Statements:

Ratios are usually calculated from the data recorded in the financial statements. However, financial statements have drawbacks of their own which may compromise the quality of analyzing ratios.

2. Accounting Policies:

If the accounting policies of various aspects are different, comparing the accounting data and ratios of 2 companies become difficult.

3. Quantitative Analysis:

Since ratios are tools of quantitative analysis, they ignore the quantitative elements.

4. Window-Dressing:

Ratios cannot be used to catch window-dressing, if any.

5. Price Level:

Fixed assets do not show the changes in price levels due to the fact that they only reflect the position statement at cost, which makes it tough to compare.

Liquidity Ratios:

Liquidity ratio is a measure of how well the company will be able to meet its short-term obligations. Basically they evaluate the ability of the company to pay off its current liabilities. These ratios provide information about how much cash the company has and the company’s ability to convert other assets into cash to pay off the liabilities. Under this project, the Liquidity Ratios which will be analyzed are Current Ratio and Quick Ratio.

Current Ratio:

Current ratio shows the short-term financial soundness of the company and it measures the company’s ability to pay off its short-term liabilities with current assets. A higher current ratio is always favorable because it shows that the company can easily make payments for its short-term obligations. The ideal current ratio is 2:1. Even though a high current ratio is good, it should not be too high. In case it is very high, it means there is idleness of funds.

Current Ratio = Current Assets / Current Liabilities

Quick Ratio:

Quick ratio, also known as Acid Test Ratio is a measure of how well the company will be able to meet its short-term liabilities with only quick assets. Quick assets are those assets which can be converted into cash within a period of 90 days. It is a fairly stringent measure of liquidity. It is based on those current assets which are highly liquid, i.e, can be converted into cash and cash equivalents quickly. A quick ratio of 1:1 is considered to be ideal. Higher the quick ratio better the short-term financial position of the company.

Quick Ratio = Quick Assets / Current Liabilities

Quick Assets = Current Assets – Inventories- Prepaid Expenses

Solvency Ratios:

Solvency ratios, also known as Leverage ratios, measure whether the company will be able to meet its long-term liabilities. It evaluates the company’s ability to sustain operations by comparing debt with assets, equity and earnings. Solvency ratios and liquidity ratios are sometimes considered similar, but solvency ratios prioritize the long-term sustainability of the company rather than short-term payments. In this project, the Solvency Ratios which will be evaluated are Debt to Equity ratio, Debt ratio and Equity ratio.

Debt to Equity Ratio:

Debt to Equity Ratio is a financial ratio which compares the company’s total debt to their total equity. This ratio assesses the long-term financial position and soundness of the company. This ratio shows the % of funds which come from borrowings and investments. In general, lower the debt to equity ratio higher the degree of protection enjoyed by the lenders. A higher ratio shows that funds are provided more from creditors rather than the investors.

Debt to Equity Ratio = Debt / Equity

Debt Ratio:

Debt Ratio measures the amount of assets being financed by total borrowings. It evaluates the company’s total liabilities as a % of the company’s total assets. Basically, this ratio shows the ability of the company to pay off its debts by selling its assets, in the long-term, if the company is unable to meet its interest cost and principal payment.

Debt Ratio = Debt / Total Assets

Equity Ratio:

Equity Ratio evaluates the amount of assets being financed by the owners of the company. This ratio shows how much of the assets are actually owned by the owners. If this ratio is high, it shows potential investors and lenders that investors trust the company and are willing to finance it with their investments.

Equity Ratio = Equity / Total Assets

Efficiency Ratios:

Efficiency Ratios, also known as Activity ratios evaluate how well the company utilizes assets to generate income. They usually look at the time period it takes the company to collect cash, convert inventory into cash or pay cash to creditors. These are used by investors and creditors to see the operations and profitability of the company. The efficiency ratios which will be used are Inventory Turnover Ratio, Debtors Turnover Ratio, Creditor’s Turnover Ratio and Asset Turnover Ratio.

Inventory Turnover Ratio:

Inventory turnover ratio measures how many times average inventory is sold by the company during a period. This shows the company does not overspend by buying too much inventory and wastes resources by storing non- salable inventory. It also shows the company can effectively sell the inventory it buys. This ratio shows how effectively inventory is managed by comparing COGS with average inventory for a period.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Debtors Turnover Ratio:

Debtor Turnover Ratio measures how many times the company can convert its debtors into cash during a period. Basically, this ratio shows how many times the company can collect from its debtors during the year and how efficient it is at collecting credit sales from its customers.

Debtors Turnover Ratio = Net Credit Sales / Average Debtors

Average Collection Period = Number of days in a year / Debtors Turnover Ratio

Asset Turnover Ratio:

Asset Turnover Ratio measures how efficiently the company is able to use its assets to generate sales. A higher ratio shows that the company is using its assets efficiently.

Asset Turnover Ratio = Net Sales / Average Total Assets

Profitability Ratios:

Profitability Ratios measure the company’s ability to generate profit from its operations. In this project, the Profitability ratios which are going to be used are Net Profit Ratio, Return on Capital Employed and Return on Equity.

Net Profit Ratio:

Net Profit Ratio measures how well the company manages its expenses relative to its net sales. Basically, this ratio tells what % of sales are left after the expenses are paid by the company.

Net Profit Ratio = (Net Profit / Net Sales)*100

Return on Capital Employed:

Return on Capital Employed, also known as Return on Investment, measures how efficiently the company can generate profits from its capital employed. To evaluate the longevity of the company, Return on Capital Employed is more useful than others.

Return on Capital Employed = (Net Operating Profit or PBIT / Capital Employed)*100

Return on Equity:

Return on Equity measures the company’s ability to generate profit from shareholders investment. It also shows if the management is effectively using the equity to fund operations and improve the company.

Return on Equity = (Net Income / Shareholders Funds)*100

 

CHAPTER 3: DATA ANALYSIS

RATIO ANALYSIS:

Liquidity Ratios:-

Current Ratio = Current Assets / Current Liabilities

= 2,069,902,288 / 1,653,730,089

Current Ratio = 1.25:1

Quick Ratio = Quick Assets / Current Liabilities

Quick Assets = 2,069,902,288 – 116,431,653 – 190,229,204

Quick Assets = 1,763,241,431

Quick Ratio = 1,763,241,431 / 1,653,730,089

Quick Ratio = 1.1:1

 

Solvency Ratios:-

 Debt to Equity Ratio = Total Debt / Total Equity

= 205,457,676 / 1,301,233,757

Debt to Equity Ratio = 0.16

Debt Ratio = Debt / Total Assets

= 205,457,676 / 3,160,421,522

Debt Ratio = 0.07

Equity Ratio = Equity / Total Assets

= 1,301,233,757 / 3,160,421,522

Equity Ratio = 0.41

Efficiency Ratios:-

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Average Inventory = (100,279,600 + 116,431,653) / 2 = 108,355,627

Inventory Turnover Ratio = 2,197,047,914 / 108,355,627

Inventory Turnover Ratio = 20.28 Times

Debtors Turnover Ratio = Net Credit Sales / Average Debtors

Average Debtors = (391,446,386 + 641,851,725) / 2 = 516,649,056

Debtors Turnover Ratio = 2,457,296,920 / 516,649,056

Debtors Turnover Ratio = 4.8 Times

Average Collection Period = Number of Days in the Year / Debtors Turnover Ratio

= 365 / 4.8

Average Collection Period = 75 Days

 Asset Turnover Ratio = Net Sales / Average Total Assets

Average Total Assets = (2,296,559,005 + 3,160,421,522) / 2 = 2,728,490,264

Asset Turnover Ratio = 2,457,296,920 / 2,728,490,264

Asset Turnover Ratio = 0.9 Times

Profitability Ratios:-

Net Profit Ratio = (Net Profit / Net Sales)*100

= (137,659,983 / 2,457,296,920)*100

Net Profit Ratio = 5.6 %

Return on Capital Employed = (Profit Before Interest & Tax / Capital Employed)*100

Capital Employed = 205,457,676 + 1,301,233,757 = 1,506,691,433

Return on Capital Employed = (137,935,174 / 1,506,691,433)*100

Return on Capital Employed = 9.15 %

Return on Equity = (Net Profit / Equity)*100

= (137,659,983 / 1,301,233,757)*100

Return on Equity = 10.58 %

 

COMPARATIVE BALANCE SHEET:

Particulars	2014	2015	Absolute Change2	% Change3
ASSETS Current Assets
Bank balances and cash	419,313,651	254,900,028	(164,413,623)	(39.21) %
Accounts receivables	391,446,386	641,851,725	250,405,339	63.97 %
Inventories	100,279,600	116,431,653	16,152,053	16.11 %
Retention receivables	159,981,123	204,452,518	44,471,395	27.8 %
Due from related parties	131,047,663	147,406,361	16,358,698	12.48 %
Gross amount due from customers under construction contracts	320,095,054	514,630,799	194,535,745	60.77 %
Prepayments and other debit balances	120,344,520	190,229,204	69,884,684	58.07 %
Total current assets	1,642,507,967	2,069,902,288	427,394,321	26.02%
Non-current assets
Retention Receivables	157,965,798	165,935,971	7,970,173	5.05 %
Advances to subcontractors	3,968	—	(3,968)	(100) %
Available for sale investments	8,342,717	7,927,222	(415,495)	(4.98) %
Investment in an associate	255,000	255,000	—	—
Leased land usage right	6,569,539	6,055,744	(513,795)	(7.82) %
Investment property	48,287,536	46,993,784	(1,293,752)	(2.68) %
Property, plant and equipment	431,619,568	856,605,168	424,985,600	98.46 %
Goodwill	—	6,036,934	6,036,934	—
Intangible assets	1,006,912	709,411	(297,501)	(29.55) %
Total non-current assets	654,051,038	1,090,519,234	436,468,196	66.73 %
Total assets	2,296,559,005	3,160,421,522	863,862,517	37.61 %
EQUITY AND LIABILITIES
Equity
Capital	10,000,000	10,000,000	—	—
Legal Reserve	5,000,000	5,000,000	—	—
Partners current account	66,696,644	56,289,133	(10,407,511)	(15.60) %
Retained earnings	901,354,340	956,063,053	54,708,713	6.07 %
Revaluation reserves	22,256,097	68,642,691	46,386,594	208.42 %
Fair value reserves	702,366	353,350	(349,016)	(49.69) %
Non- controlling interests	185,062,988	204,885,530	19,822,542	10.71 %
Total Equity	1,191,072,435	1,301,233,757	110,161,322	9.25 %
Non-current liabilities
Borrowings	—	101,839,988	101,839,988	—
Retention payables	31,622,617	40,455,571	8,832,954	27.93 %
Employees end of service benefits	51,719,546	63,162,117	11,442,571	22.12 %
Total non-current liabilities	83,342,163	205,457,676	122,115,513	146.52 %
Current liabilities
Due to banks	116,737,373	91,245,650	(25,491,723)	(21.84) %
Borrowings	50,572,220	74,922,929	24,350,709	48.15 %
Bills and post dated cheques	49,017,191	65,529,631	16,512,440	33.69 %
Accounts payable	219,500,375	395,596,744	176,096,369	80.23 %
Retention payables	37,587,922	61,051,177	23,463,255	62.42 %
Due to related parties	10,441,422	36,774,076	26,332,654	252.19 %
Gross amount due to customers under construction contracts	11,418,289	65,506,666	54,088,377	473.70 %
Advances from customers	235,131,213	561,529,636	326,398,423	138.82 %
Provisions	128,409,647	145,694,656	17,285,009	13.46 %
Refundable deposits	5,462,879	5,848,522	385,643	7.60 %
Accruals and other credit balances	157,865,876	150,030,402	(7,835,474)	(4.96) %
Total current liabilities	1,022,144,407	1,653,730,089	631,585,682	61.79 %
Total equity and liabilities	2,296,559,005	3,160,421,522	863,862,517	37.61 %

 

Table No. 3.1 Comparative Balance Sheet

 

 

COMPARATIVE INCOME STATEMENT:-

Particulars	2014	2015	Absolute Change	% Change
Contracts revenue and sales	1,906,543,565	2,457,296,920	550,753,355	28.89 %
Contracts cost and cost of sales	(1,684,771,556)	(2,197,047,914)	512,276,358	30.41 %
Gross profit	221,772,009	260,249,006	38,476,997	17.35 %
General and administrative expenses	(116,126,733)	(126,273,294)	10,146,561	8.74 %
Finance cost	(8,143,624)	(11,794,761)	3,651,137	44.83 %
Discount on long term retentions	(2,170,091)	(143,679)	(2,026,412)	(93.38)%
Depreciation on property, plant and equipment	(13,996,856)	(14,469,605)	472,749	3.38 %
Depreciation on investment property	(1,293,752)	(1,293,752)	—	—
Amortization of leased land use right	(513,795)	(513,795)	—	—
Provision for slow moving inventory	(118,578)	(113,797)	(4,781)	(4.03)%
Impairment of available for sale investment	(295,933)	—	(295,933)	(100)%
PDD	(3,181,593)	(1,718,657)	(1,462,936)	(45.98)%
Other income	32,768,434	34,007,508	1,239,074	3.78 %
PBT	108,699,488	137,935,174	29,235,686	26.90 %
Income tax	(411,163)	(275,191)	(135,972)	(33.07)%
Net profit for the year	108,288,325	137,659,983	29,371,658	27.12 %

 

Table No. 3.2 Comparative Income Statement

 

 

COMMON-SIZE BALANCE SHEET:-

Particulars	2014	%4	2015	%5
ASSETS Current Assets
Bank balances and cash	419,313,651	18.26	254,900,028	8.07
Accounts receivables	391,446,386	17.04	641,851,725	20.31
Inventories	100,279,600	4.37	116,431,653	3.68
Retention receivables	159,981,123	6.97	204,452,518	6.47
Due from related parties	131,047,663	5.71	147,406,361	4.66
Gross amount due from customers under construction contracts	320,095,054	13.94	514,630,799	16.28
Prepayments and other debit balances	120,344,520	5.24	190,229,204	6.02
Total current assets	1,642,507,967	71.52	2,069,902,288	65.49
Non-current assets
Retention Receivables	157,965,798	6.88	165,935,971	5.25
Advances to subcontractors	3,968	0.00017	—	—
Available for sale investments	8,342,717	0.36	7,927,222	0.25
Investment in an associate	255,000	0.011	255,000	0.001
Leased land usage right	6,569,539	0.29	6,055,744	0.19
Investment property	48,287,536	2.10	46,993,784	1.49
Property, plant and equipment	431,619,568	18.79	856,605,168	27.10
Goodwill	—	—	6,036,934	0.19
Intangible assets	1,006,912	0.04	709,411	0.02
Total non-current assets	654,051,038	28.48	1,090,519,234	34.51
Total assets	2,296,559,005	100	3,160,421,522	100
EQUITY AND LIABILITIES
Equity
Capital	10,000,000	0.44	10,000,000	0.32
Legal Reserve	5,000,000	0.22	5,000,000	0.16
Partners current account	66,696,644	2.90	56,289,133	1.78
Retained earnings	901,354,340	39.25	956,063,053	30.25
Revaluation reserves	22,256,097	0.97	68,642,691	2.17
Fair value reserves	702,366	0.03	353,350	0.01
Non- controlling interests	185,062,988	8.06	204,885,530	6.48
Total Equity	1,191,072,435	51.86	1,301,233,757	41.17
Non-current liabilities
Borrowings	—	—	101,839,988	3.22
Retention payables	31,622,617	1.38	40,455,571	1.28
Employees end of service benefits	51,719,546	2.25	63,162,117	1.99
Total non-current liabilities	83,342,163	3.63	205,457,676	6.50
Current liabilities
Due to banks	116,737,373	5.08	91,245,650	2.89
Borrowings	50,572,220	2.20	74,922,929	2.37
Bills and post dated cheques	49,017,191	2.13	65,529,631	2.07
Accounts payable	219,500,375	9.56	395,596,744	12.52
Retention payables	37,587,922	1.64	61,051,177	1.93
Due to related parties	10,441,422	0.45	36,774,076	1.16
Gross amount due to customers under construction contracts	11,418,289	0.50	65,506,666	2.07
Advances from customers	235,131,213	10.24	561,529,636	17.77
Provisions	128,409,647	5.59	145,694,656	4.61
Refundable deposits	5,462,879	0.24	5,848,522	0.19
Accruals and other credit balances	157,865,876	6.87	150,030,402	4.75
Total current liabilities	1,022,144,407	44.51	1,653,730,089	52.33
Total equity and liabilities	2,296,559,005	100	3,160,421,522	100

 

Table No. 3.3 Common Size Balance Sheet

 

 

COMMON-SIZE INCOME STATEMENT:-

Particulars	2014	%6	2015	%7
Contracts revenue and sales	1,906,543,565	100	2,457,296,920	100
Contracts cost and cost of sales	(1,684,771,556)	88.37	(2,197,047,914)	89.41
Gross profit	221,772,009	11.63	260,249,006	10.59
General and administrative expenses	(116,126,733)	6.09	(126,273,294)	5.14
Finance cost	(8,143,624)	0.43	(11,794,761)	0.48
Discount on long term retentions	(2,170,091)	0.11	(143,679)	0.01
Depreciation on property, plant and equipment	(13,996,856)	0.73	(14,469,605)	0.59
Depreciation on investment property	(1,293,752)	0.07	(1,293,752)	0.05
Amortization of leased land use right	(513,795)	0.03	(513,795)	0.02
Provision for slow moving inventory	(118,578)	0.01	(113,797)	0.004
Impairment of available for sale investment	(295,933)	0.02	—	—
PDD	(3,181,593)	0.17	(1,718,657)	0.07
Other income	32,768,434	1.72	34,007,508	1.38
PBT	108,699,488	5.70	137,935,174	5.61
Income tax	(411,163)	0.02	(275,191)	0.01
Net profit for the year	108,288,325	5.68	137,659,983	5.60

 

Table No. 3.4 Common Size Income Statement

 

INTERPRETATION & FINDINGS:

1. As we can see above, HBK Holding Company W.L.L has a Current Ratio of 1.25:1. This means that they have just barely enough of current assets to pay off their current liabilities. Even though they can pay off their current liabilities at the moment, the short term financial position of the company is not really favorable. The ideal situation would be when they have 2 times more current assets than current liabilities. At this point, the day to day activities of the company may not run smoothly which may lead to the company having a short term liquidity crunch. If the current ratio decreases and further, the company may have to sell their fixed assets to pay off their current liabilities which is not a good sign.
2. From the above calculations, it can be seen the HBK Holding Company W.L.L has a Quick Ratio of 1.1:1. This means that they have enough quick assets to pay off their current liabilities if anything comes up within 90 days and still have a few quick assets remaining. This is an ideal quick ratio to have because this shows that they do not have to sell their fixed assets to pay off their current liabilities for a period of 90 days.
3.  The Debt to Equity Ratio of HBK Holding Company W.L.L is 0.16:1. This means that 13.8 % of the company’s finances are being funded by outside debt while 86.2 % is being funded by the investors themselves. This shows that the company is financially stable.
4. HBK Holding Company’s Debt Ratio is 0.07. Such a low ratio shows that the company is stable as only 7 % of the total assets are being financed by outside debt. However, this also tells us that there may be underutilization of a major source of finance which may lead to restricted growth.
5. The Equity Ratio of this company is 0.41. This means that 41 % of the total assets are financed by the investors. This is a good indication that the investors believe in the company and believe that it is worth investing in because it seems more sustainable and less risky.
6. The company’s Inventory Turnover Ratio is 20.28 times. This is a high inventory turnover ratio and it shows that the company is able to sell the inventory it purchases without overspending too much. It also indicates that they take an average of 18 days to completely sell their inventory and complete one turn.
7. Their Debtors Turnover Ratio is 4.8 times. This means that the company is collecting its money from the customers of credit sales every 75 days. This is an indication that the company is efficient in collecting the accounts receivables. From a cash flow perspective, this ratio is favorable as well, because the company is able to collect cash sooner, they will be able to pay bills and liabilities which come within 90 days.
8. Asset Turnover Ratio of the company is 0.9 times. This is a relatively low turnover ratio, which means that the company is not really efficient in using its assets to generate sales, most likely because of managerial or production problems.
9. HBK Holding Company’s Net Profit Ratio for 2015 is 5.60 %. There is not much change in the net profit of the company compared to the 5.68 % of 2014. Although the company is maintaining a consistent margin, it is relatively low. This can be due to inefficient marketing schemes.
10. The Return on Capital Employed which the company is 9.15 %. Compared to the ROCE of 8.53 % from 2014, the company the improved the profits they are getting from the capital employed. This indicates that they are using the capital employed efficiently and following their long term financing strategies.
11. The company’s Return on Equity is 10.58 %. This means that the company is efficiently generating profits on the new investments which they get. They have improved their ROE from 9.09 % in 2014.
12. From table no. 4.1, which shows the comparative balance sheet of HBK Holding Company, we can see that:

• The current ratio for the year 2014 is 1.61:1 and for 2015 it is 1.25:1. The ratio of 2014 was closer to the ideal ratio of 2:1, however in 2015 it reduced, which is not a good sign. This decrease may be due to the decrease in the bank & cash balances and/or an increase in the short-term borrowings, creditors, dues to related parties etc. However, the dues to banks and accruals & other current credit balances seem to have been repaid. This repayment must have been financed by the short term funds.
• There in an increase in non-current assets by 66.73 %, which is mainly due to the purchase of property, plant and equipment. If we compare this with the long-term funds which include an increase in borrowings and other non-current liabilities, decrease in partner’s current accounts and no issue of capital, it is clearly evident that the long-term funds have been financed for the purchase.
• The retained earnings show an increase of 6.07 % which is due to the current year profits.

13. From table no. 4.2, which depicts the comparative income statement of HBK Holding Company, we can see that:-

• The net sales have gone up by 28.89 % while the cost of sales have gone up by 30.41 % which is not a very good sign for the company. This is because the cost of sales have to increase in proportion to sales with sales being on the higher side. Hence, we see a meager increase in the gross profit of the company by 17.35 %.
• With the sales only increasing by 28.89 %, there is a 44.83 % increase in finance costs, which is not really appreciable.
• Although there is a 8.74 % increase in general and administration expenses and 3.38 % increase in depreciation of property, plant and equipment, the profit before tax has increased by 26.90 %. This shows satisfactory operational efficiency by the company.
• The other income has also gone up by 3.78 % which slightly helps.
• Hence, after deducting tax, there is a 27.12 % increase in net profit with a modest increase of 28.89 % change in net sales which is satisfactory.

14. From table no. 4.3, which shows the common-size balance sheet of HBK Holding Company, we can see that:-

• By analyzing the financing patterns of the company for both 2014 and 2015, indication is given that in 2014, out of the total funds, 51.86 % were provided by the investors while 48.14 % of funds were provided by outside borrowings. However, in 2015, the company depended more on outside borrowings as shown in the balance sheet, where the outside funding constituted 58.83 % of the total investments while the investors provided 41.17 % of the finance.
• The company has just the sufficient amount of working capital with them in both the years. This is because the percentage of current assets is more than the percentage of current liabilities in both 2014 and 2015. In 2014, the current assets are more than current liabilities by 27.01 % and 13.16 % in 2015. This indicates that the company had more working capital in 2014 than 2015.
• Upon close observation, the balance sheet shows that the non-current assets constitute 28.48 % of the total assets in 2014 and 34.51 in 2015. This means that the company has not used working capital to finance the non- current assets.

15. From table no. 4.4, which shows the common-size income statement of HBK Holding Company, it can be observed that:-

• The contract revenue and sales and gross profit of the company has gone up in absolute figures in 2015 as compared to 2014, but the percentage of gross profit to sales has decreased in 2015.
• The rise in contracts cost and cost of sales as a percentage of sales has brought the gross profit down from 11.63 % in 2014 to 10.59 % in 2015.
• The operating expenses have decreased during 2015, but the increase in non- operating expenses has led to a reduction in profits.
• Net profits have increased in absolute figures but decreased as a percentage from 2014 to 2015.

 

CHAPTER 5: SUMMARY and CONCLUSIONS

After thoroughly analyzing the financial statements of HBK Holding Company W.L.L., the following can be concluded:

• Although the company’s financial condition for 90 days is good, its financial position for a period of one year is less than satisfactory. If the company keeps going in the same direction in relation to the short term position, it will have problems in the future.
• The overall solvency of the company is very impressive. This is evident from the fact that the company makes use of their own investments more than the funds received from loans and borrowings. This shows that the company is financially stable for the long run.
• The company is quite efficient in terms of selling their inventory to make revenue, collecting payments from debtors at constant durations. But they are not efficient in converting all their assets into revenue.
• The company efficiently uses their capital employed and equity which is quite evident from their increasing ROCE and ROE.
• Even though the contract revenue and sales of the company is increasing, their contracts costs and rising cost of sales is a bit of a concern. Hence, they should look into that.
• From the analysis, it is evident that the operational expenses have decreased when compared the previous year. But the non-operating expenses have increased at a high rate. The management has to look into the non-operating expenses, especially the finance costs.
• Although the net profit of the company increased by 27.12 %, the rate at which it increased has declined. This means that the company has to change their budgeting strategies.

From the above concluded points, it can be summarized that HBK Holding Company W.L.L. is financially stable and the overall financial position of the firm is satisfactory. Therefore, this company can be taken into consideration for investing in by potential investors and creditors giving credit.

 

LIMITATIONS OF THE STUDY

The following limitations of financial statement analysis explain that the analysis is a means to an end and not the end itself. Every party who wants to analyze financial statements of the company must understand the limitations before doing so. The limitations are:

1. Interim Reports:

Financial statements do not provide a final image of the company. The information given in these statements are only approximate estimates. The actual standing can only be evaluated when the company is shut down or sold. However, the statements need to be prepared for distinct accounting durations, typically one year, during the existence of the company. The incomes and expenses are allocated to distinct time periods in an effort to find incomes and so on. The allocation of incomes and expenses will rely on the judgment of the accountant. The life of contingent assets and liabilities also make the statements vague. Thus, financial statements do not provide the final image as they are mostly temporary reports.

2. Exact Position:

Since the financial statements are presented in monetary terms, they seem to provide the final and correct position of the company. The value of fixed assets in the balance sheet neither represents the value the fixed assets may be sold at nor the amount which is required to replace those assets. This is because the balance sheet is prepared on the idea of the going concern concept. The company is expected to survive in the future. Thus, fixed assets are presented at costs less accumulated depreciation. Certain assets like goodwill, preliminary expenses, discount on issue of shares realize nothing when the company is liquidated even though they are presented in the balance sheet.

3. Historical Costs:

The financial statements are prepared on the concept of past expenses or original costs. The value of assets decreases as time goes on and changes in price aren’t taken under consideration. The present economic situations aren’t kept in mind while preparing the statements. The balance sheet loses its importance of being an index of present day economic realities. Further, the profitability shown by the income statement won’t show the earning capabilities of the company. The rise in profits can be because of a rise in prices or because of a few unusual reasons and not because increase in efficiency. The conclusions drawn from the financial statements might not provide the true picture of the company.

4. Ignoring non-monetary factors:

There are certain elements that have an impact on the financial position and operating results of the company, however they do not turn out to be a part of these statements due to the fact that they cannot be measured in monetary terms. Such elements may also consist of recognition of the management, credit worthiness of the concern. Sources and commitments for sales and purchases, employees co-operation, and so on. The financial statements only display the position of the financial accounting for the company rather than the financial position.

5. Lack of Precision:

Financial statements are not always precise due to the fact that the statements address matters which can’t be precisely stated. Traditional techniques are made use of to record information over time. Diverse practices, assumptions, personal decisions and so on are used for developing the information.

 

BIBLIOGRAPHY

1. Objectives of Financial Statement Analysis. (2010, February 11). Retrieved from https://accountlearning.blogspot.in/2010/02/objectives-of-financial-statement.html
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6. Mishra, Smita. Common-Size Statements: Meaning and Types | Method of Financial Analysis. Retrieved from http://www.yourarticlelibrary.com/accounting/financial-statements-analysis/common-size-statements/common-size-statement-meaning-and-types-method-of-financial-analysis/66806/
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APPENDIX

1. The financial statements of HBK Holding Company W.L.L acquired are as follows:-

STATEMENT OF FINANCIAL POSITION

Particulars	2015	2014
ASSETS Current Assets
Bank balances and cash	254,900,028	419,313,651
Accounts receivables	641,851,725	391,446,386
Inventories	116,431,653	100,279,600
Retention receivables	204,452,518	159,981,123
Due from related parties	147,406,361	131,047,663
Gross amount due from customers under construction contracts	514,630,799	320,095,054
Prepayments and other debit balances	190,229,204	120,344,520
Total current assets	2,069,902,288	1,642,507,967
Non-current assets
Retention Receivables	165,935,971	157,965,798
Advances to subcontractors	—	3,968
Available for sale investments	7,927,222	8,342,717
Investment in an associate	255,000	255,000
Leased land usage right	6,055,744	6,569,539
Investment property	46,993,784	48,287,536
Property, plant and equipment	856,605,168	431,619,568
Goodwill	6,036,934	—
Intangible assets	709,411	1,006,912
Total non-current assets	1,090,519,234	654,051,038
Total assets	3,160,421,522	2,296,559,005
EQUITY AND LIABILITIES
Equity
Capital	10,000,000	10,000,000
Legal Reserve	5,000,000	5,000,000
Partners current account	56,289,133	66,696,644
Retained earnings	956,063,053	901,354,340
Revaluation reserves	68,642,691	22,256,097
Fair value reserves	353,350	702,366
Non- controlling interests	204,885,530	185,062,988
Total Equity	1,301,233,757	1,191,072,435
Non-current liabilities
Borrowings	101,839,988	—
Retention payables	40,455,571	31,622,617
Employees end of service benefits	63,162,117	51,719,546
Total non-current liabilities	205,457,676	83,342,163
Current liabilities
Due to banks	91,245,650	116,737,373
Borrowings	74,922,929	50,572,220
Bills and post dated cheques	65,529,631	49,017,191
Accounts payable	395,596,744	219,500,375
Retention payables	61,051,177	37,587,922
Due to related parties	36,774,076	10,441,422
Gross amount due to customers under construction contracts	65,506,666	11,418,289
Advances from customers	561,529,636	235,131,213
Provisions	145,694,656	128,409,647
Refundable deposits	5,848,522	5,462,879
Accruals and other credit balances	150,030,402	157,865,876
Total current liabilities	1,653,730,089	1,022,144,407
Total equity and liabilities	3,160,421,522	2,296,559,005

STATEMENT OF PROFIT OR LOSS

Particulars	2015	2014
Contracts revenue and sales	2,457,296,920	1,906,543,565
Contracts cost and cost of sales	(2,197,047,914)	(1,684,771,556)
Gross profit	260,249,006	221,772,009
General and administrative expenses	(126,273,294)	(116,126,733)
Finance cost	(11,794,761)	(8,143,624)
Discount on long term retentions	(143,679)	(2,170,091)
Depreciation on property, plant and equipment	(14,469,605)	(13,996,856)
Depreciation on investment property	(1,293,752)	(1,293,752)
Amortization of leased land use right	(513,795)	(513,795)
Provision for slow moving inventory	(113,797)	(118,578)
Impairment of available for sale investment	—	(295,933)
PDD	(1,718,657)	(3,181,593)
Other income	34,007,508	32,768,434
PBT	137,935,174	108,699,488
Income tax	(275,191)	(411,163)
Net profit for the year	137,659,983	108,288,325

2. Absolute Change = Amount in 2015 – Amount in 2014
3. % Change = (Absolute Change / Amount in 2014)* 100
4. %  = (Every Asset Amount Respectively / Total Assets Amount)* 100

= (Every Liability Amount respectively / Total Liabilities Amount)* 100

5. % = (Each item amount respectively / Contracts Revenue and Sales amount)* 100