The Cash margin on sales ratio expresses the company’s operating cash in relation to sales made for the period. Examining the cash flow ratio there was a 4.5% increase in the ratio moving from 9.5% to 14% in 2003. This could be as a result in an increase in the profit from operating activities, which was not matched, by an equal increase in sales for the period, although sales did increase but by a smaller proportion. The traditional returns on sales ratio showed a similar trend, giving an increase from 12.9% in 2002 to 16.5 in 2003.
The amount of profit available to cover the interest payable (the interest cover on a real cash basis) was 2.94 and 3.77 times for 2002 and 2003 respectively. Although there was on the increase in 2003 I do not consider this at a high or comfortable level. It appears that even a small fall in profit could increase the risk and affect the firm’s ability to pay interest on its loans. This may also make the company appear more risky to potential investors and drive up cost of capital.
In my opinion, based on this ratio the company is just not making enough profit to comfortably cover the interest on its numerous loan. That is it may be over gearing for the type of profit it is making. The interest cover ratio based on the P & L account gives a slightly higher coverage of 3.98 and 4.39 times in 2003. This indicates that the profit is higher because it includes non-cash items as profit. This fact that the company is speedily paying off a 7% loan basically using a 10% loan will contribute to higher interest needs thus a larger cover would be better.
The free cash flow per share capital for Highlow Engineering showed a magnificent increase of over 90% in 2003. This was as a result of doing business during this year that resulted in operating cash flows after tax and preference dividends, which was approximately twice as much as the previous year. There was a significant amount of depreciated fixed asset in 2003, which were non- cash items, which aided the EBITDA, and by extension the operating cash flow. Most companies will invest some of this available cash in fixed assets, as Highlow did, however this ratio should be encouraging to shareholders.
The amount of earnings available for dividends covers the amount paid 1.67 times in 2002 and 2.44 times in 2003. This shows an improvement in the dividends cover of approximately 46%. Despite the fact that the company paid more dividends to ordinary shareholders in 2003 than it did in 2002 the ratio continued to improve. This was as a result of the operating cash position, which the company was in after tax and preference dividends. It had approximately twice as much cash as it had in 2002. The traditional dividend cover ratio also indicated that the earnings available for dividends covered the amount paid however, the coverage was lower.
They were 2.23 times and 2.55 times for 2002 and 2003 respectively. This would have indicated a lower coverage because this takes into account dividends, which were proposed as well as those paid while the CF ratio takes into account only what is paid. The net profit after tax and preference dividends was also materially lower than in the case of the CF cover since all expenses incurred would have been deducted from the earnings while only cash flow is used for the cash flow dividend cover. If the company is expanding, which I think Highlow is doing they may choose to retain more of the earnings and pay low dividends hence showing a higher dividend cover ratio.
The operating cash flow to current liability ratio was a good indicator of how liquid or of Highlow Engineering ability to use cash generated from operating activities to cover its liabilities, which are due in short term. The ratio showed an 18% increase in 2003 from ratios of 0.29 times to 0.34 times in 2003. These are very low ratios and indicate that the firm may not be able to honour its short-term debts. The current ratio, which also indicates the firm’s ability to meet short-term debts, was found to be decreasing from a ratio of 2.75:1 in 2001 to a ratio of 1.6:1 in 2003. This indicated a downward trend in the extent to which the current liabilities were covered by those assets expected to be converted to cash in the near future.
Further examination of the financial statements gave an insight to possible reasons for these trend observed. It appears that there was a significant increase in the firm’s current liabilities moving from 8000 in the year ending 2001 to over 17,000 in the year ending 2003. Such a decline in the ratio could be as a result of the company paying its bills more slowly or was borrowing more in the form of overdrafts to pays its bills. A significant portion of the increase in current liability was as a result of a 250% increase in the bank overdraft between year-end 2002 and 2003.
The cash recovery rate showed an increase from 8% to 11% in 2003. This was an indication that the firm was taking longer to recover its investment in fixed assets. It is possible that fix assets such as plant equipment were not immediately put into service or they were not operated at their maximum capacity hence efficiency losses and reduced revenue recognition. The capex per share ratio indicated an increase in capital expenditure in 2003. the ratio moved from a 48 pence per share for 2002 to 63 pence per share for 2003.This is a 31% increase and this is because in 2003 the company spend a proximately 8 million on purchasing fixed assets compared to approximately ï¿½8 million in 2002. The moment in the number of share was nearly constant.
The ratio that measured how well the firm can service its debt from earnings before interest, tax, depreciation and amortisation showed a 21 % increase in 2003. This shows that the cash available (EBITDA) would be able to service debts including interest 4 and 3.4 times in 2003 and 2002 respectively. These are not particularly large coverage since the company does have a large debt obligation therefore if expected earnings were not recognised the company could easily fail to meet its debt servicing obligations.