Evaluation of the Financial Performance of a Chemical Company Essay

Evaluation of the Financial Performance of a Chemical Company The Lee Chew Cheng Wong Chemical Company produces high quality speciality chemicals, and it exports around 85% of its output to many countries and regions. Since the establishment in the mid 1980 this company has emphasized the shareholder value. To keep this focus, a new Chief Executive Lee Shan Loke Teo has proposed a lot of new policies. This assignment evaluates the financial rations with Sun See Chemical Company and average industry, and presents the financial effect of the proposal that Lee Shan Loke Teo adopts. That final section shows the recommendation of costing system and capital expenditure budget. Evaluate the financial performance As the profit and loss account shows, the Lee Chew Wong Chemical CompanyÂ’s net sales decreased from $5.6m to $4.2m, and the gross profit reduced from $1.8m to $1.5m, while in 20x9 the retained profit of the company reached the peak of $0.4m during this period. Although the sale volumes decreased, the profits went up. From the financial statement it can be found that the difference is due to the large operation expenses which eliminate the profit between 20x8 and 20x9, and the less retained profit also results the decrease of Earning per share. Therefore, the EPS and Retained Profit in 20x9 were higher than 20x8 and 20x7. As regards the balance sheet, in 20x9 the total asset of the company increased significantly compared to 20x8 and 20x7, because the fixed assets increased apparently but it also resulted the shortage of cash in 20x9. In the liability section, as follows as the increasing retained profit, in 20x9 shareholders equity (reserves) also climbed a lot. As far as we considered the financial ratios (Table1), from 20x7 to 20x9 the profitability ratios improved dramatically due to the less cost of sales and operating expense. The liquidity ratios become worse, because the growing fixed assets resulted in the lack of liquid asset. The following part is going to compare financial performance with its major rival, Sun See Chemical Industry. Table 1 ======= The Lee Chew Wong Chemical Performance Ratios 20x9 20x8 20x7 20x9 Industry averages Gross profit to sales (%) 35.71 33.33 32.14 44 Operating profit to sales (%) 21.43 13.33 14.46 30 Return on capital ... ...1998), Costing, an Introduction, 4th Edition Dyson, J.R. (1997), Accounting for Non-accounting Students, Pitman Publishing. Elliott, B. and Elliott, J. (2002) Financial Accounting, Reporting and Analysis, International Edition, Istvan D.F. (1970). Capital-Expenditure Decisions: how they are made in large corporations. Indiana University. Jones R.L., Trentin H.G. (1971). Budgeting: Key to planning and control. American Management Association, Inc. Lewis, R. and Pendrill, D. (1996), Advanced Financial Accounting, 6th edition Louderback, J.G., Maurice, L. and Hirsch, J.R. (1982), Cost Accounting, Accumulation, Analysis, and Use, Wadsworth International Student Edition Pike, R. and Neale, B. (year), Corporate Finance and Investment-Decision and Strategies, 4th edition, Financial Times/Prentice Hall. Pike R.H., Wolfe M.B. (1988). Capital Budgeting for the 1990’s. A Review of investment trends in larger companies. The Chartered Institute of Management Accountants. Wood’s, F. (1993), Business Accounting, Pitman Publishing. http://teachmefinance.com/costofcapital.html http://www.dod.mil/comptroller/icenter/learn/abconcept.pdf http://www.expectationsinvesting.com/tutorial8.shtml