· First Investments Inc. owned stock of Basic Industries (BI), a diversified multinational corporation with major shares in various electrical related markets
· The BI annual report of 1994 shows a decline in the return on owners’ equity (ROE)
· Fred Aldrich, a trainee in First Investment, was asked to conduct a financial analysis on BI
· Three years financial statements (1994, 1993 and 1985) and reported 10 year financial highlights (1985 to 1994) were available for the analysis assignment
· The focus was on the 1993-1994 period and comparison of the quality of the returns on equity of 1985 and 1994, along with the other key financial ratios
· The analysis should not focus on the financial information …show more content…
The Operating Profit Margin shows decrease from 1985 to 1994 thus sales generate less money and result is lower return on equity.
The Gross Margin has decreased over the years from 1985. In 1993, it was very high (0.93) as the cost of sales (materials, engineering & production costs) were unbelievably low $855.2M while in 1994, it was 8.4% of the $10,137.6M. The cost of materials were heavily understated in 1993 to increase profit margin.
Return on Asset
Return on investments accesses financial rewards to the suppliers of equity and debt financing.
The Return on Asset (ROA) decreased from 8.89% in 1985 every year till 1990, the years 1992(8.91%) and 1993(9%) showed some positive increase and it dropped again in 1994(8.86%). The average total assets was not available for 1985 (beginning balance not available). The 1985 total asset figure is used in this calculation.
Asset Utilization and Efficiency
The Asset Turnover increased from 1.44 in 1985 to 1.46 in 1992 and 1.51 in 1994. It assesses effectiveness and intensity of assets in generating sales.
Various ratios were calculated to access the efficiency and utilization of assets. Limitations were that average figures were not available for all the years. For Account Receivables, Inventory and Accounts Payable, we calculated averages for 1994(using 1993 data as