Question Tag: Operating performance

Report
From: Financial Analyst
To: ICAG Research Department
Date: May 2018
Subject: Financial Performance Comparison of Fordland Ltd and Fiatland Ltd

Introduction
This report provides a comparative analysis of the financial performance of Fordland Ltd and Fiatland Ltd in the garment industry. The analysis focuses on operating performance, liquidity, gearing, and investment ratios based on the data provided.

1. Operating Performance

• Return on Capital Employed (ROCE):
  Fiatland Ltd outperforms Fordland Ltd with a ROCE of 30%, compared to Fordland’s 24.10%. This indicates that Fiatland is generating higher returns from its capital investments.
• Net Asset Turnover:
  Fiatland’s asset turnover ratio of 2.5 times is better than Fordland’s 1.9 times, suggesting that Fiatland is more efficient in utilizing its assets to generate revenue.
• Gross Profit Margin:
  Fordland has a higher gross profit margin (35%) compared to Fiatland (20%), which indicates that Fordland is better at controlling its cost of sales relative to revenue.
• Net Profit Margin:
  Fiatland’s net profit margin (38%) is significantly higher than Fordland’s (10.50%), implying that Fiatland is more efficient at converting revenue into profit after all expenses.

2. Liquidity

• Current Ratio:
  Fiatland has a current ratio of 2.0:1, which is stronger than Fordland’s 1.0:1. This indicates that Fiatland is in a better position to cover its short-term liabilities with its current assets.
• Quick Ratio:
  Similarly, Fiatland’s quick ratio (1.0:1) is higher than Fordland’s (0.8:1), suggesting that Fiatland has a better ability to meet its short-term obligations without relying on inventory sales.
• Efficiency in Working Capital Management:
  Both companies have similar receivables collection periods (58 days for Fordland and 60 days for Fiatland). However, Fiatland has a longer inventory holding period (90 days vs 60 days), which may indicate slower inventory turnover. Both companies have the same payables payment period (50 days), showing consistency in their credit management policies.

3. Gearing

• Debt to Equity Ratio:
  Fordland is more leveraged with a debt to equity ratio of 50% compared to Fiatland’s 30%. This indicates that Fordland has a higher financial risk due to its greater reliance on debt financing.

4. Investment Ratios

• Dividend Yield:
  Fordland has a higher dividend yield of 3% compared to Fiatland’s 2%. This suggests that Fordland is offering a better return on dividends to its shareholders.
• Dividend Cover:
  Fordland’s dividend cover (2 times) is stronger than Fiatland’s (1.5 times), indicating that Fordland has a better ability to sustain its dividend payments from its earnings.

Conclusion
In summary, Fiatland Ltd outperforms Fordland Ltd in terms of return on capital employed, asset turnover, and net profit margin, suggesting better overall efficiency. However, Fordland Ltd has stronger gross profit margins and better dividend returns, which could appeal to income-focused investors. Additionally, Fordland’s higher debt levels indicate greater financial risk compared to Fiatland’s more conservative capital structure. Fiatland’s higher liquidity ratios reflect better short-term financial stability.

Signature
Financial Analyst