The quantitative financial analysis of Forge Group Ltd has shown that for the year 2013, the value of assets has amounted to 464,210 (250,784 in liability and 213,426 in equity). As compared to the other years in the selected time period, the value of equity in 2013 is by far the highest. As suggested by Robinson (2020), there might be two possible reasons for a positive change in equity observed in the financial statement by Forge Group Ltd. Firstly, the change may be attributed to an increase in the company’s earnings or capital. Secondly, Forge Group Ltd could have sold shares of its stock or significantly decreased its operating expenses.
2011 was the only year in the selected time period when the debt-to-equity (D/E) ratio was bigger than one, meaning that Forge Ltd Group generated revenue primarily from equity and not debt. In 2013, the D/E ratio was close to one, which is still acceptable as it signifies the equal amount of financing generated from equity and debt. In 2010, 2012, and 2014, the company derived more than two-thirds of its financing from debt and only one-third from shareholders’ equity. Such a situation subjects the company to potential risk if debt levels increase beyond reasonable, which makes the business unit a risky investment.
It is often recommended to keep comprehensive income segregated on the income statement. Comprehensive income provides extra information about a company’s equity that is not reflected in the income statement. It is important because it helps to put together a fuller picture of the company’s performance by demonstrating unrealized gains and losses (Schroeder, Clark & Cathey, 2019). For Forge Group Ltd, the only type of comprehensive income logged for the years 2010-2014 is foreign exchange difference. It is kept separately on the balance sheet because this gain had not been realized at the moment of creating the balance.
During the time period from 2010 through 2014, the largest expense (materials, plant, and other Contractor Cost) exceeded the amount of cash, accounts receivables, payables, and inventory balances. This situation is far from being extraordinary: it is typical for a business to have labor costs as its largest expense. Some sources suggest that on average, businesses spend as much as 70% of total business costs on labor.
In 2010 and 2011, Forge Group Ltd showed an approximately equal net profit and net cash flow ($29,450 vs $30,451 and $38,832 vs $38,183). However, in subsequent years, the net cash flow was different from the net profit. In 2012, the net cash flow exceeded the net profit ($91,259 vs $49,302), and in 2013, Forge Group Ltd has seen the opposite situation ($39,196 vs $62,919). Generally, the net cash flow to the net profit ratio less than one (example: the year 2013) suggests that the business takes in less cash and cash equivalents as compared to what it makes in profits. The ratio can be indicative of faults in the company’s current approaches and practices, but it is difficult to tell what causes these problems without additional information. For instance, a low ratio might reveal that the company is not collecting enough cash for short-term obligations.
The reconciliation of cash flows for Forge Group Ltd draws on multiple variables such as trade debtors and receivables, inventories and WIP, current assets, tax assets, deferred tax liabilities, and others. In other words, the analysis is based on three key factors: non-cash items, current assets, and current liabilities. The year 2013 when the net cash flow to the net profit ratio was the lowest is characterized by a significant, almost tenfold decrease in inventories and WIP. For the first time in four years, the company saw a decrease in trade and payables. On the other hand, the year 2013 was characterized by the most significant increase in trade debtors and receivables (from $-154,393 in 2012 to $139,000 in 2013).
When deciding on the size of dividends, any company needs to take several factors into consideration. The debt to equity ratio suggests that Forge Ltd Group has sold part of its stock to shareholders. However, based on its net cash flow to the net profit ratio, the company did not have adequate cash reserves to handle economic stress. Thus, it was not exactly appropriate for Forge Group Ltd to allow a high dividend payout on an accelerated basis.
As far as the analysis has shown, in 2013, Forge Ltd Group has not been divesting any of its assets. However, it has undertaken some investment activities such as investment in associates and investment in property. Investment in associates means investing in an entity over which Forge Group Ltd has significant control over. However, this type of relationship is different from the one between a parent and a subsidiary. Investment in property might be advantageous if Forge Ltd Group plans to earn a return either through rent or future resale. However, it appears that in the case of Forge Ltd Group, investment in property is likely to be justified by the need to increase production.
References
Robinson, T. R. (2020). International financial statement analysis. John Wiley & Sons.
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial accounting theory and analysis: Text and cases. John Wiley & Sons.