PRINCIPLES OF ACCOUNTING
US SILICA HOLDINGS FINANCIAL ANALYSIS
Introduction
Financial report as a formal record has the advantage of showing all the financial activities undertaken by the company within the trading period as well as its financial position. Thus the relevant financial information is presented in a form which is easy to understand and it comprises of the balance sheet, income statement, statement of change in equity, and cash inflow statement (Fridson & Alvarez, 2002). In analyzing the financial health of the company, all these parameters will be used in determining the owner/s’ equity income, profits, losses, investing and financing activities and so on.
On the other hand, financial statement, for instance quick ratio, current ration, stock turnover ratio, profitability ratio, will be used in analyzing its current financial health as compared to the previous years. Additionally, it is this ratios which will assist in coming up with financial comparisons between 2014 and 2013. The following are the financial ratios which can be calculated from the company’s 2014 financial data together with its implication to the daily operating activities;
Profitability ratio = Considering the financial status of the company, profitability ratio will be important in that it will assist in measuring the general use of the assets of the company as well as the general control of its expenses in generating acceptable rate of return.
Gross margin = (Net sales – Cost of goods sold)/Net sales
= (876.7-566.6)/876.7
=0.3537 or 35.37%
This is a relatively low operating ratio. Then what this means is that the company has more cash for settling its daily operating expenses for instance rent, utilities and employees wages and salaries. Since this ration is used for measuring the profits of the company from selling its inventory, it can also be used for measuring the sales which are in return used for funding other parts or activities of the business (Troy, 2008).
Operating margin = operating income/net sales
=176.2/876.7
=0.2009 or 20.09%
This then implies that a higher operating margin, as the one obtained in this case, will be more favorable unlike a lower operating ratio. This is advantageous in the sense that it indicates that the company is in the position of making enough money from its initial ongoing operations. It is this cash which will be used in the long-run for settling it’s fixed as well as variable costs. Therefore, this means that it is a key indicator for the potential investors as well as creditors to see the extent at which the firm is operating or handling its activities which assists in supporting its operations (Leach, 2010). Moreover, in case the firm will have the capacity of making adequate money for such operations which are aimed at supporting the business, it them means that the firm will be considered as being more stable. In contrary to that, in case the firm will end up acquiring operating and non-operating income for covering its operational expenses, it will indicate that the firm’s operating activities are not much sustainable as expected.
Stock turnover = Cost of goods sold/average inventory
= 566.6/876.7
=0.6463 or 64.63%
This ration is essential because the total turnover to be realized largely depends on two components of the company’s performance. One of these components is the purchasing of stock. For instance, in case huge amounts of inventory were ultimately purchased during that year, it then means that the firm will be forced to sell huge volumes of its inventory so as to be able to improve its turnover (Gibson, 2009). On the other hand, in case the firm will not manage to sell a considerable amount of inventory, it will be burdened with both storage costs and other forms of holding expenses.
The second component to be relied upon for this turnover is the volume of sales. For the company to realize profitable turnover ratio, sales record for that trading period should at least match with the inventory purchases (Robinson et al, 2015). If that will not be the case, it means that the inventory will not end up turning effectively as desired. This suggests that the sales department and the purchasing department ought to be in tune or harmony with each other.
Return on assets = net income/total assets
=121540/1238153
=0.0982 or 9.82%
9.82% is a relatively higher return on asset ratio. This is a good indicator for the firm because in indicates the amount of cents earned by the firm on each dollar of assets. Therefore, the higher the value becomes, the more the firm becomes profitable. This ration will be used by the management of the firm to compare the performance of rival companies in the industry. This because companies in that industry can be asset-insensitive i.e. they will be forced to have relatively expensive plant and equipments which will give them the capacity of generating more income as compared to their competitors (Gibson, 2009). Their return on assets (ROA) will ultimately remain to be lower as compared to that of other competitors with low asset-insensitive. As the firm will continue experiencing an increase in its ROA, it will mean that its profitability will also continue improving and vice versa.
Current ratio = current assets/ current liabilities
=562325/146261
=3.8447
Current ratio basically measures the liquidity of the company at a particular date. Since a more profitable current ratio should be at least 1, it then means the above ratio is desirable. In most cases, business organizations do desire to maintain a current ratio of 1. The reason for that is to ensure that the company’s value of the current assets is in the position of covering its short term obligations (Bull, 2008). For this case, we can say the company has the capacity of providing additional cushion against any form of unforeseeable contingencies that can arise in the short term.
Therefore, the firm should analyze its working capital requirements as well as any form of risk they might be willing to encounter.
Debt ratio= total liabilities/total assets
=834337/1238153
=0.7639 or 76.39%
This ratio is used for measuring the total liabilities of the firm as a percentage of the total assets available. Since the debt ratio is above 0.5, it hen means that the firm is not that much stable as it can perceived to be. Thus the company has a higher overall debt.
Return on equity = net income/average shareholders’ equity
=121540/403816
=0.3009 or 30.9%
Return on equity ratio assists in measuring the capacity of the firm in generating profits from the investment s of the shareholders. Since the ROA is less than 1, it implies that every dollar of the equity of the common shareholders cannot manage to generate an equivalent of 1 dollar of its net income. This is an essential measure because it will be used by the investors in analyzing how efficient the company will be using their money in generating net income (Bull, 2008).
This then means that all the company’s forwarding looking statement is basically subjected to uncertainties and risks which might cause its actual results to differ materially from the expected ones. Some of them include; demand fluctuation in commercial silica, the cyclical nature of its customers, the level of activity in both the natural gas and the oil industries and the operating risks which are beyond the control of its managers (Fridson & Alvarez, 2002).
In addition to that, there are issues which deal with the company’s ability of succeeding in the present competitive markets, the decrease, or loss of business from its largest base of customers and the ability of the company to be able to implement extra expansion plans within its current budget and timetable hence securing demand for its increased production capacity (Fridson et al, 2011). The reason for this consideration is because the company’s actual operating costs are the one which will determine the extent of its expansion. This what will keep on attracting and retaining their key personnel or potential investors.
Regardless of the fact that in the recent years a huge number of attractive new end markets have been developed for the company’s high profit margin, its segment remained to be complimentary. This is due to its ability of selling their product to a wide range of customers thus enabling its management to maximize its recovery rates in all of its mining operations, optimization of its asset utilization as well as reducing the cyclicality of its earning (Fridson et al, 2011). Typically, as from the financial statement of the company in 2014, the company obtained an approximate of $876.7 million from sales, $246.2 million from adjusted EBITDA and $121.5 million as its net income. A clear analysis of the this data this results represents an increase of 61%, 53% and 62% as compared to the previous year 2013.
Key business strategy
As a means of maintaining their portfolio, it then means that the company will try and maintain its financial strength as well as flexibility. The reason for this is because it is the one which will the management to pursue the acquisition and other new opportunities as the business continue to rise (Robinson et al, 2015). From the above financial data, this then implies that the sale of ground silica products amounted for approximately 8% in 2014, 12% in 2013, and 14% in 2012. This shows a continuous decline it the sales return.
Conclusion
With respect to the above financial statements, various stakeholders will be dependent on them for various reasons. Typically, as to any business organization, managers, and owners of the company will require the financial ratios require it for the purpose of making important business decisions which affects its daily operations. Financial analysis is done also so as to provide more detailed understanding of the figure by the management. They are in turn used as part of the annual report of the management to the stockholders.
Nonetheless, this report is the one will enables the employees to make collective bargaining agreement (CBA) with their management authority, when it comes to discussing their promotion, ranking, and compensation through their labor unions (Fridson et al, 2011). Prospective investors cannot also be left out. With the statement, they use it in assessing the viability of investing in the company. This then provides a clear or strong basis of making relevant investment decisions. Various financial institutions for example banks as well as other money lending institutions will depend on it for the purpose of determining whether it will be in the position of granting the company with fresh working capital or just extending its debt securities.
Reference
Fridson, M. S., & Alvarez, F. (2002). Financial statement analysis: A practitioner's guide. New York: John Wiley & Sons.
Troy, L. (2008). Almanac of business and industrial financial ratios. Chicago, IL: CCH.
Leach, R. (2010). Ratios made simple: A beginner's guide to the key financial ratios. Petersfield, Hampshire: Harriman House
Gibson, C. H. (2009). Financial reporting & analysis: Using financial accounting information. Mason, OH: South-Western Cengage Learning.
Bull, R. (2008). Financial ratios: How to use financial ratios to maximise value and success for your business. Amsterdam: Elsevier/CIMA Pub.
Fridson, M. S., Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: A practitioner's guide. Hoboken, N.J: Wiley.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis.
