Financial analysis of annual reports of “KazanOrgSintez”

 

 

Notes to analysis of income statement 

As seen from the tables above OJSC “Kazanorgsintez” has been experiencing annual growth of revenues during the last years. In 2005 this entry increased by 13,07%, and in 2006 – by 16,42%. This may be explained by the fact that the company is following a planned politics of increasing the nomenclature of its production and, therefore, the expanding its sales market.

 

However, with the growth of revenues the growth of cost of goods, services, and sales is seen as well. This entry changed by 15,81% in 2005 and by 18,15% in 2006. 

 

Certainly, in this situation we can see that the profits of the company are constantly growing as well, but its growth is not that reasonable.

 

The vertical analysis shows that there were no sever changes in the structure of the Income statement. The main entries of the statement are administrative expenses and other operating expenses. It is worth mentioning that there was a significant change exactly on the other operating expenses entry in 2005, but it is mainly caused by the changes in accounting politics of the company.

 

Analysis of financial ratios

Analysis of financial condition

 
 

Own current capital (OCC)

An absolute parameter, which is calculated as a difference between shareholder’s equity and fixed assets. Increase of OCC in dynamics is positive tendency, decrease – negative tendency. 

OCC = Shareholder’s equity – Fixed assets 

As seen in the table, dynamics of this ratio in “Kazanorgsintez” is negative. Furthermore, we can see that this ratio even goes below zero. This means that the company has a shortage of own current capital, so the shareholder’s equity is not enough for financing fixed assets. 

Own current capital and long-term liabilities (OCCLTL)

It is calculated as a difference between shareholder’s equity plus long-term liabilities and fixed assets. It is an absolute parameter which characterizes the presence and amount of own current capital, which a company has, but which (unlike short-term liabilities) are not available at any time. 

OCCLTL = OCC + Long-term liabilites 

Inventories and expenses (IAE)

An absolute parameter, which shows whether a company has inventories and expenses in progress for conducting normal financial and economical activities. 

IAE = Inventories + VAT 

Financial ratio 1 (F1) 

F1 = OCC – IAE 

Shows whether OCC is enough for financing IAE 

Financial ration 2 (F2) 

F2 = OCCLTL – IAE 

Shows whether OCCLTL is enough for financing IAE 

The analysis of financial ratios F1 and F2 shows that the financial condition of the company may be called as sound. However, the fact that F2 went below zero in 2006 indicates that problems may arise.

Analysis of bankruptcy opportunity

 
 

Current ratio (R1)

Measures whether or not a company has enough resources to conduct economical activity and pay its debts in the next 12 months. 
 
 

Own capital security ratio (R2)

Characterizes whether or not a company has enough own capital for financial stability. 
 
 

As K1<2 and K2<0.1 (which are normative ratios), we calculate the solvency recovery ratio (R3) for the 6 months period. 

Solvency recovery ratio (R3)

It shows whether or not a company has the ability to recover its solvency in a certain period of time (6 months). 
 
 

If R3 is over 1, this indicates that the company has the real ability to recover its solvency. An in contrast, if R3 is less than 1, than the company doesn’t have the real ability to recover its solvency in near future. 

 

Analysis of financial stability

 
 

Autonomy ratio (R5)

It characterizes the part of owners of the company in the whole amount of capital used in financial and economical activities. 
 
 

The decrease of R5 means that the company becomes less financially stable and more dependent from external credits. 

Financial dependence ratio (R6)

Characterizes the part of total liabilities in the total amount of assets used in financial and economical activity. 
 
 

The growth of R6 means the growth of borrowed capital for financing the enterprise. 

Equity and liabilities ratio (R7)

Gives the most complete overview of the financial stability of a company. Its value, for example 0.17, means that for each ruble of own capital in total assets there are 0.17 rubles of borrowed capital. 
 
 

The growth of R7 shows that the company is becoming more dependent from external credit and investors, and therefore, that the financial stability is falling.

 

Analysis of business activity

 

The business activity of the company characterizes the efficiency of the current activities and is connected with the effectiveness of using material, labour, and financial resources of the company, as well as with the turnover ratios. 

Analysis of profitability

 

One of the most important results of company’s activity for the current period is the profitability ratio, which is calculated as a quotient of received profits and expenses on gaining these profits. 

 

 

Conclusion 

Based on conducted analysis several conclusions can be made. OJSC “Kazanorgsintez” has been developing constantly and actively for the last three years: construction of new plants is organized, and as a result in future we will be able to see a wider range of production nomenclature and sales market. Also an annual growth of revenues and profits is shown by the company. 

Nevertheless, some negative tendencies are presented as well. A huge amount of borrowed capital has been taken by the company to build those new plants. And therefore the financial independence of the company is in danger. Expenses of the company are in the negative area as well, because these expenses are growing in larger percentage than the gained revenues. 

Thus, to make a conclusion of all the above, we can say, that OJSC “Kazanorgsintez” is a prospective company, although they need to have a strict control over their financial flows to save their stability. 

 

References 

1. A. Kinserdal “Basic accounting understanding” Bergen, 2003.
2. O. Efremova “The analysis of financial statements” Moscow, 2004.
3. Official web-site of OJSC “Kazanorgsintez” www.kazanorgsintez.ru.
4. “Financial analysis” http://en.wikipedia.org/wiki/Financial_analysis.
5. Participant course materials “Financial analysis” CGAP.
6. “Financial analysis revised”.
7. “Financial statement analysis method” http://www.associatedcontent.com.