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Sustainability of any company depends on the extension of earnings retained and the return earned on the earnings retention. During the last 5 years company recorded its highest sustainable growth rate in the year of 2010. But after the year 2010 it has gradually declined and again increased after 2013.
Following reasons can be highlighted for this decline:
All the ratios regarding return on invested capital provides good evidence to the declining pattern of sustainable growth rate.
As per the ratio analysis (based on the calculations) Current ratio of the company has decreased from year 2012 to 2013, but again increased in year 2014. Quick ratio has also taken the same pattern as current ratio. When comparing with the expansion of current assets over last two years, current liabilities show a considerable decrease than current assets. That is the direct reason for the rise of current and quick ratios in year 2014. Trade and other payables and other non- financial liabilities have a greater impact on this. Anyway we can conclude thatthe company is maintaining a positive liquidity position only by looking at the current and quick ratios but it is not enough since the ratios are below 1. Normally if a company maintains a Current/Quick ratio around 2 is considered to be a healthy one.
According to the asset composition analysis we can see that Dialog has successfully maintained their inventory level as lower as possible within past three years. However this isobvious for a company operating in telecommunication sector since most of their inventories consist of mobile accessories, mobile phones & scratch cards. Therefore there is no any huge variance between the current ratio and the quick ratio. They have a greater portion of liquid assets in their asset portfolio.
Company’s account receivable period has increased from year 2012 to 2013 and decreased in year 2014. Their credit sales have been increasing over past three years and account receivables has increased from year 2012 to 2013 and considerably declined in year 2014.This indicates that the company is following more aggressive credit policy. Also when consider about the telecommunication industry, we know that most of these accounts receivable balances are either corporate customers or individual customers using post paid packages.
Debtor’s outstanding period has been becoming lower over the past two years and that is a good sign of the company’s credit policy. Company’s success in managing current liabilities is varied. Their credit purchases have been rising over recent years. Creditor’s outstanding period has increased from year 2012 to 2013 and also increased in year 2014.Creditors may have offered more flexible credit terms to the company and this also indicates that the company has strong negotiation ability with the creditors.
These findings are consistent with the company’s improving liquidity. They are maintaining positive liquidity position over recent years. As there is a tendency of losing the company’s profitability when they are more focusing on the liquidity, company should also beware of profitability status.
1.1 Capital Structure and Solvency
Analysis of solvency involves several key elements. Analysis of capital structure is one of these. Simply capital structure refers to the sources of financing for a company. In accordance with our computations on capital structure we can see they have been maintaining a low debt to equity ratio in 2012 but it has increased over past three years (from 30% to 53%). It seems to be they have given less protection to their equity holders by increasing the debt proportion. The total debt to equity capital ratio also has different increasing percentages over the past three years since they had been more into debt capital.
However they should be mindful when investing funds collected from long term sources. It is necessary to have a proper trade off when collect & invest funds between long term and short term sources in order to reap maximum benefits to the entity. Over the past three years since the company has taken lot of debt, interest coverage ratio has decreased from 28 times to 15.5 times over the past 3 years. This indicates that the company’s interest cost has increased significantly. So they should now try to look into equity capital since currently the company’s gearing is around 53%.
The detailed Prospective income statement and Balance sheet are provided in the workings of the report. (Refer Annexure)
2.1 Prospective Income Statement
Income statement was prepared for 2 years assuming the sales growths of 6.3% for 2015 and 7% for 2016. This is based on the forecasted levels of GDP growth, Market growth and forecasted rates of subscriber penetration. Key cost items were forecasted based on historical averages as a percentage of sales. It was also assumed that there will be no acquisitions and disposals into the future.
2.2 Prospective Balance Sheet
Working Capital components were forecasted based on the existing levels of turnover ratios. 2014 retention ratio was assumed to continue in both 2015 and 2016.It was also assumed that 50% of the incremental capital investments are compensated through debt. Since a debt moratorium on current liabilities will be enforced in 2015 It was assumed that 50% of the current liabilities will be paid in 2015.
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