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4.3 Calculate ratios and analyze the financial performance

and position
of Montezuma
The financial statements provide information in order to give an overview about the
companys operation and financial position. Not only look at the information in the financial
statements, a more sophisticated approach than this has been developed. This is ratio analysis,
which involves comparing one figure against another to produce a ratio, and assessing whether
the ratio indicates a weakness or strength in the companys affairs. Through ratio analysis, the
stakeholders can interpret trends in the performance year on year and the operation business of
company.
External comparison is the comparison with similar businesses and averages for the
business sector within which the company operates.
Internal comparison is the comparison with previous periods and forecasts or budgeted
results.

Liquidity and Working Capital Ratios

Current ratio
The ability of a business is to meet short-term obligations. Based on the calculated result,
the ability of Montezuma is to pay off its current liabilities decreases.
Current ratio

Current asset
Current Liability

2010
1,068
1,105

2009
1,255
1,089

=0.97

=1.15

Based on the figures, the company, in 2009 was able to convert all their current
assets into cash quicker than its figures in 2010. The financial situation of Montezuma in 2010
seem to be worse than 2009, current assets reduced while current liabilities rose. These numbers
made the quick ratio on Montezuma in 2010 decreased.

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Quick ratio
The ability of a company pays off its short-term obligations from current assets,
excluding inventories. Based on the calculated result, the ability of Montezuma is pay off its
current liabilities decreases.
Quick
Ratio
Current assets less stock
Current Liability

2010
1,068354
1,105
=0.65

2009
1,255435
1,089
= 0.75

Current asset-inventory
Current Liability

Both the figures show that the company has very high creditors (less stock and
quick turnover). However, the trend decreased from 3.46 in 2007 to 1.95 in 2008, mainly
because of current liabilities and inventory. From this, it seems that the liquidity is not
improving. Therefore, the company should pay attention to solve these problems.

Efficiency ratios
Stock turnover ratio
Account receivable turnover
=

account receivable
turnover

2010
479
5,371 365

365 days
= 32.55

2009
575
5,576 365
= 37.64

The ratio increases from 37.64 days in 2009 to 32.55 days in 2010. It is a signal
that the product of Montezuma is consumed slowly. The company had no improvement to
manage or control well its liquidity to convert their inventory into cash quickly.
Therefore, the products of Montezuma seemed to be consumed quickly.

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2010
2,340
354
= 6.61 times

The inventory turnover of Montezuma is increased from 6.12 times in 2009 to

6.61 times in 2010. As the same, in the external industry, the inventory turnover is increased
from 6 times in 2009 to 6.6 times in 2010. However, Montezuma have better condition because
the internal industry is more than the external industry by comparison.

Borrowing
Total debts to total assets ratio
2010
747+1,105
1,773+1,068

Total debts to total assets

=
100

Tatal debt
Total assets

100

100

longterm liability+current liability

asset +current assets

2009
1,112+1,087
1,784 +1,255
100

1,852
2,841 =

2,199
3,039

100

100

= 65.19 %

= 72.36%

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The interest cover ratio shows whether a company is earning enough profits
before interest and tax to pay its interest costs comfortably. An interest cover of two times or
less would be low, and should really exceed three times before the companys interest costs can
be considered within acceptable limits1.

2010
525
65

Time interest earned

=

Profit before interest tax

Interest charges

= 8.08 times

2009
488
77
= 6.34 times

The figures of interest cover ratio in 2010 is very high, exceed 8.08
times before the companys interest cost. It is because in the year 2010, the company earned
much profit compared with interest payable and it earned enough profits to pay its interest costs
comfortably. However, in 2009, although interest payable of Montezuma decreased, the
company would meet difficult to generate enough profits before interest and tax to pay interest.
Therefore, the company must try to improve their sales in order to get higher profits.

Profitability and return on capital

Profit margin
A higher profit margin indicates a more profitable company that has better control
over its costs compared to its competitors. Therefore, from the result, the profit margin trend is
good.
2010
Gross Profit Margin
=

Gross profit
Sales

100 %

3,031
5,371

100%

= 56.43%

1 Managing Financial Resources and Decisions book, page 133

2009
2,914
5,576

100%

= 52.26%

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Based on the two figures above, we can see that there is an increased of profit
from 2009 to 2010 (52.26% increased to 56.43%). It leads to a profit in 2010. So, the
Montezuma have the good condition because the gross profit is more.

2010
Net Profit Margin
=

Net Profit
Sales

100 %

525
5,371

2009

100%

= 9.77%

488
5,576

100%

= 8.75%

In the internal industry, the net profit margin is increased from 8.75 percent in
2009 to 9.77 percent in 2010. In the external industry, it is also increased from 4.1 percent in
2009 to 4.6 percent in 2010. According to this, the percent of the internal is extremely more than
the external. So, the condition of the Montezuma is good because the net profit for Montezuma
is good.

Dividend pay-out ratio

=

Ordinary share dividend

Profit after taxless perference dividend

100%

2010
142
291

2009
127
243

100%

100%

= 48.8%

=52.26%

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In internal industry, the dividend pay-out ratio is decreased from 52.26 percent in
2009 to 48.8 percent in 2010. In the external industry, it is decreased from 53.2 percent in 2009
to 51.6 percent in 2010.
2010
Dividend Yield
Dividend onthe share for the year
= Current market value of the share 100%

1.89
62

2009
1.69
56.5

100%

= 3.05 %

100%

= 2.99 %

The company dividend is depended upon the directors. The dividend yield for the
internal industry is 2.99 percent in 2009 and 3.05 percent in 2010. For the external industry, the
dividend yield is 3.6 percent in 2009 and 3.5 percent in 2010. That is good condition for
Montezuma.

P/E ratio
=
Current market price
Earning per share

2010
62
3.88
= 15.98

2009
56.5
3.24
= 17.44

The raise of the PE ratio is good. For internal industry, the PE ration is decreased
from 17.44 in 2009 to 15.98 in 2010. In the external industry, PE ratio is decrease to 14.9 in
2009 to 14.7 in 2010. According to the information, the PE ration is decreased. Therefore, the
condition of the Montezuma is not good.

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