Ratio analysis of the critical ratios of a company: Case study of CEMEX

This Assignment Is Published With Permission From The Author For Online Review Only
All Rights Reserved @ ChinaAbout.Net

 

1.          Brief introduction of CEMEX

 

CEMEX, a Mexico origin multinational company has established itself as a industry leader through 105 years’ effort in the building industry with more than 50,000 employees working in its business network throughout 50 countries to provide products such as ready-mix concrete, cement and a range of complementary building materials (CEMEX USA 2010), and with help of its wide range of product and service CEMEX is able to provide complicated and integrated building solutions to various builders in a global scale. (CEMEX official website 2010)With such multiple businesses in five continents, CEMEX has developed a complicated hierarchy system to ensure the consistency of its products and service and management with strict corporate policies to make sure that the management teams and all the employees are working under different law systems globally and the code of ethics of the company. And under the excellent management during the past ten years, the company grows dramatically with an average growth rate of 18% of the revenue. But with only such descriptive, qualitative and to some extent subjective information it would not safe to come to the conclusion that CEMEX is currently and in the near future still in good situation in term of operation and finance. Below through ratio analysis of the critical ratios in the last two accessible years’ annual reports, quantitative information will be extracted to see whether this conclusion is safe or not.

 

 

2.          Financial ratios

 20072008
Gross Profit Margin33.0%32.0%
Operating Profit Margin13.0%-9.0%
Net Profit Margin11.0%-9.4%
Cash Flow Margin5%5%
Return on Assets5.6%-4%
Return on Equity15%12%
Cash Return on Assets2.3%2.3%
Solvency Ratio25.6%18.1%
Liquidity Ratio3.362.23
Fixed Asset Turnover90%105%
Accounts receivable turnover14.4216.30
Earnings Per ShareUSD 3.22USD 0.27

(Resource: 2007 and 2008 annual report of CEMEX)

 

3.          Report on the profitability

 

With gross profit margin is 33% and 32% respectively in year 2007 and 2008, this ratios show that CEMEX in these two years’ term had kept good performance in controlling its inventory cost and transferring the cost to its customers by maintaining good marketing and sale ability. The stable digits of the gross profit margin in these two years indicate that CEMEX was doing well in keeping good sale.

 

The indicator of net profit margin was 11.0% in 2007 shows the company in this financial year earned 11 dollar by making every 100 dollar sale. The digit is considerable in the building material industry considering the low average industrial net profit margin. In contrast in year 2008, this indicator was changed dramatically into minus 9.4% which means the company was losing despite the fact that it was keeping a 32% of gross profit margin, this could be understood as that there were other expenses that offset the profit. And from the income statement the reason is clear as the total comprehensive financial cost was more than the operating income in 2008 which was mostly contributed by the heavy loss in the column of financial instrument.

 

4.          Report on the long & short term solvency

 

The solvency ratio is one of the most used indicators to mark the long term solvency ability of a company; it calculates result of a company’s after-tax income and minus the non-cash depreciation expense as compared to aggregate liability. (Investopedia.com 2009) 25.6% and 18.1% of the solvency ratio are both healthy for the company to utilize the liability to generate profit and at the same time maintain good ability to meet the long term obligations. On the other hand the more than 1 of the liquidity ratios in these two years means short term solvency of the company had excellent ability to pay the short term debts.

 

5.          Report on the efficiency

 

The fix asset turnover reached 90% in 2007 and increased to 105% in the later financial year. This indicates that CEMEX was making good use of its fix asset in creating revenue despite the influence of the way of the depreciation of the fix asset. And on the other hand another indicator, the accounts receivable turnover which measures the times that accounts receivable compared to the total sales, also indicates that the efficiency ratio was increasing from 2007 to 2008 with the account receivable turnover grew from 14.42 to 16.30.

 

 

 

6.          Report on the earning per share

 

Earnings per share had dropped dramatically from USD 3.22 in year 2007 to only USD 0.27 in 2008, this is correlated to the drop of the net income margin as mentioned above, and what’s more the bad performance of the company in the stock market also accompanied with the low digit in the earning per share in 2008. And on the other hand, the fast drop of the company’s stock price in the term of 2007 to 2008 also contributed to the heavy loss in the financial instrument which further offset the income of the company in 2008 financial year.

 

 

Figure 2.0 Stock price of CEMEX ADR NYSE in the last five years

(Resource: CEMEX official website, available: http://investor.cemex.com/phoenix.zhtml?c=101857&p=irol-stockchart)

 

7.          Discussion of the ratio analysis

 

There are advantages and disadvantages in using the ratio analysis in understanding the financial situation of the particular company. The advantages are apparent: Firstly, the ratio analysis has relatively credible data resource which is directly or indirectly deprived from the company’s officially issued documents such as the income statement and balance sheet. This resource is relatively credible because such documents are in most case well regulated by the various laws and policies under strict monitoring but the data could be false and it does not happen in rare situations. Secondly, the ratio analysis provide quantities and objective financial information about the particular company to various investors who can compared the appropriate ratios between competitive companies because such ratios virtually could accessed from the annual reports of these listed companies and such ratios are systematic and could be compared from company to company and thus become useful for the investors to decide whether a particular company is worth in investing in.

 

On the other hand, the disadvantages of using the ratio analysis are also critical. There are critical defects of the discussion above as there are just two years’ data are utilized and the most important is that just years’ key financial ratios comparison could not providing very useful information for the investors, these ratios have to be analyzed against the industry average level. On the other hand, ratio analysis is all about quantitative analysis, base only on this the investors would omit the practical events which influence the company’s financial performance a lot and should be taken into consideration such as the economic crisis. (Finpipe.com 2008)

 

Reference

 

CEMEX official website, 2010, Company profile, accessed on 11th April 11, 2010 [online] available: http://www.cemex.com/ic/ic_cp.asp

 

 

CEMEX USA official website, 2010, CEMEX product, access on 12th April 12, 2010, [online] available: http://www.cemexusa.com/ce/ce_pr.html

 

 

Finpipe.com 2008, Financial Ratio Analysis, access on 12th April 12, 2010, [online] available: http://www.finpipe.com/equity/finratan.htm

 

 

Investopedia.com, 2009, Solvency Ratio, accessed on 11th April 11, 2010 [online] available: http://www.investopedia.com/terms/s/solvencyratio.asp

 

Appendix 1.0 2007 & 2008 income statement

 

Appendix 2.0 2007 & 2008 quarterly balance sheet