Financial Managment – First Investments, Inc.: Analysis of Financial Statements

Team 4: Nathalie Strookman, Dieter Wolfram, Demis Busropan

Background

Problem Definition

The 1994 Basic Industries annual report shows a decline in the return on owners’ equity. This has got the portfolio people worried. An analysis has to be made of the way the company has achieved its return on equity over the last 10 years. The focus should especially be on the 1993-1994 period and the quality of the returns on equity of 1985 and 1994 should be compared, as well as other key financial ratios. By doing these financial analysis we hope to find out why the return on shareholders’ equity is varying in time.

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Analysis

In order to analyze the company’s financial performance, we make use of financial ratios; leverage ratios to show how heavily the company is in debt; liquidity ratios how easy cash can become available; efficiency ratios to measure the productive use of the assets; profitability ratios to measure the return on investments. This is done for the period 1985-1994 where possible, and the total analysis can be found in the added excel file.

1985-1994

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If the operating profit margin increases than every sales gives you more money which results in a higher return on equity. If the asset turnover increases, more sales are generated for every unit of asset and the return on equity is also higher. Furthermore, when the financial leverage is increased, it entails that the company uses more debt financing relative to equity financing. A higher proportion of debt in the capital structure leads to a higher return on equity because the interest payments to the creditors are tax deductible and the dividend payments to shareholders not. However, an increase in