Financial Statement Analysis of Vullink

The purpose of the study is to analyze the financial statement of a takeover company to reach a decision on whether it would be viable to invest in the company. The analysis will require the preparation of the financial statements of the takeover company to make the in investment decision. The financial statements of a company provide vital information about the strength and performance of a firm. The income statement will provide crucial data on the business ability to make profit. The balance sheet will enable the investing company determine whether the takeover company is financially sound.

Performance

            The performance of Vullink which the company that is being acquired was evaluated using the financial ratios. The methodologies are divided into five main types which are profitability, asset efficiency, working capital, investment returns, and leverage ratios. The assumption made in the forecasted income statement and balance sheet is that the values in the financial statement will grow by 2%

Profitability

            The profitability ratios measure the ability of the firm to make profits and control its level of expenses. Looking at the historical financial statements 2015 to 2017, Vullink recorded a gross profit margin of 30.2%, 30.1%, and 30.8% in the year 2015, 2016, and 2017 respectively. There was an insignificant decline in the profitability in the year 2016 but overall, the company’s indicates ability to manage its cost of goods. The forecasted income statement indicate a growth in gross profit margin at a constant rate of 30.8% for the five years. The net profit margin of Vullink decreased in the year 2016 but later increased in the year 2017. The improvement in the net profit of the firm indicates the ability of the company to control its expenses. The EBIT also indicated an improved performance in the year 2017 which reflects the firm’s ability to control its expenses. The net profit margin for the company is expected to grow at the rate of 12.6 for the financial years that have been projected. The EBIT is expected to grow at the rate of 16.7% for the year 2018 to the 2022.

Asset efficiency

            The ratio measures the firm’s ability to utilize the assets to generate sales. Hence, the ratio would be utilized to measure the efficiency of Vullink management. The asset turnover indicates that the company’s efficiency improved in the year 2016 which symbolizes the company’s efficiency to utilize its assets. The fixed assets turnover is a reflection that Vullink indicated an improved performance in the years 2015, 2016, and 2017. The ratio shows that the management is efficient in utilizing its fixed assets to generate sales.

Working Capital Ratio

            The ratio is imperative to the firms since it indicates the ability of the firm to generate funds required to run the daily operation. Therefore, a firm should ensure that the number of days taken to convert inventory into sales is at the minimum level. In addition, the company should efficiently manage its receivables to ensure that fewer days are taken to collect the debts. The number of days that the firm took to collect the accounts receivable were 88, 87, and 87 in the years 2015, 2016, 2017 respectively. The accounts receivable days are many and it might pose a challenge to the company’s cash flow in future. The management should aim at reducing the number of days taken to collect the amount due from the debtors.

            The number of days taken by Vullink to convert the inventory to cost of sales in the year 2015, 2016, and 2017 were 107, 102, and 112 days. The figures indicate that the company is taking long to sell its stock and, therefore, improvement is required to fasten the process. The number of days that the firm took to pay its creditors was 90, 110, and 108 for the year 2015, 2016, and 2017 respectively. Compared to the debtors’ collection period, the company is taking longer to pay its suppliers which is important for the company’s cash flows. However, the company should ensure that the relationship with the supplier remains intact since it might be affected in future if the firm continues taking longer ro settle debts. The accounts payables days for the forecasted period is expected to be 108 days for the five years projections.

Investment Returns

            The investment returns measure the ability of the company to utilize assets efficiently and generate sales. The return on assets for the years 2015, 2016, and 2017 was 9%, 9% and 10% respectively. The forecasted return on assets is expected to be 10.3% for the five years projection. The return on equity for Vullink for the years 2015, 2016, and 2017 was 13.6%, 12.5%, and 13.4% respectively. The projection indicates that the return on assets will be 13.4% in the five years. The return on assets is a significant ration since it indicates the firm’s ability to generate returns for the money invested by the shareholders. In addition, the investors use the ratio to determine whether it would be viable to invest in the firm.

Leverage ratios

            The leverage ratio measure the ability of the entity to control the debt level and interest expenses. A higher leverage would imply that the firm has a higher financial risk and, therefore, it would not be viable to invest in the firm. The debt to equity ratio for Vullink for the years 2015, 2016, and 2017 was 0.49, 0.39, and 0.30. There has been a significant improvement in the management of debt and an indication that Vullink is currently relying on more equity compared to debt. The debt to total assets also indicates an improvement since there was a decline in the year 2016 and 2017. The ratio also indicates that the company has reduced its reliance on debt to finance assets. The debt to equity ratio for the forecasted five years is expected to be 30% while the debt to total assets ratio is expected to be 23%.        

Forecasted Income Statement

2015

2016

2017

2018

2019

2020

2021

2022

Sales

88.4

91

93.9

95.78

97.69

99.65

101.64

103.67

Cost of supplies

-46.7

-47.6

-50.3

-51.31

-52.33

-53.38

-54.45

-55.54

Production cost

-10.8

-11.5

-9.8

-10.00

-10.20

-10.40

-10.61

-10.82

Design and development

-4.2

-4.5

-4.9

-5.00

-5.10

-5.20

-5.30

-5.41

Gross profit

26.7

27.4

28.9

29.5

30.1

30.7

31.3

31.9

Selling and general cost

-6.9

-7

-6.8

-6.94

-7.07

-7.22

-7.36

-7.51

Depreciation

-6.5

-6.6

-6.4

-6.53

-6.66

-6.79

-6.93

-7.07

Other income(expense)

0.1

-0.2

0

0.00

0.00

0.00

0.00

0.00

EBIT

13.4

13.6

15.7

16.0

16.3

16.7

17.0

17.3

Financial result

-0.8

-0.9

-0.6

-0.61

-0.62

-0.64

-0.65

-0.66

Pre-tax income

12.6

12.7

15.1

15.40

15.71

16.02

16.34

16.67

Taxes

-3.2

-3.2

-3.8

-3.88

-3.95

-4.03

-4.11

-4.20

Net Income

9.4

9.5

11.3

11.53

11.76

11.99

12.23

12.48

Forecasted Balance Sheet

Balance sheet

2015

2016

2017

2018

2019

2020

2021

2022

Cash

7.1

8.5

8.5

8.7

8.8

9.0

9.2

9.4

Accounts Receivable

21.4

21.7

22.4

22.8

23.3

23.8

24.2

24.7

Inventories

13.7

13.4

15.5

15.8

16.1

16.4

16.8

17.1

Properties plant and equipment

61.5

62.1

63.2

64.5

65.8

67.1

68.4

69.8

Total assets

103.7

105.7

109.6

111.8

114.0

116.3

118.6

121.0

Accounts payable

11.6

14.4

15

15.3

15.6

15.9

16.2

16.6

Bank debt

22.8

15.3

10.3

10.5

10.7

10.9

11.1

11.4

Stockholder’s equity

69.3

76

84.3

86.0

87.7

89.5

91.2

93.1

Total liabilities and equity

103.7

105.7

109.6

111.8

114.0

116.3

118.6

121.0

Financial Ratios

2015

2016

2017

2018

2019

2020

2021

2022

Profitability

Gross Margin

30%

30%

31%

31%

31%

31%

31%

31%

EBIT margin

15%

15%

17%

17%

17%

17%

17%

17%

Net profit margin

11%

10%

12%

12%

12%

12%

12%

12%

Asset efficiency

Asset turnover

0.8525

0.8609

0.8568

0.8568

0.8568

0.8568

0.8568

0.8568

Fixed asset turnover

1.4374

1.4654

1.4858

1.4858

1.4858

1.4858

1.4858

1.4858

Working capital

Accounts receivable days

88.36

87.04

87.07

87.07

87.07

87.07

87.07

87.07

Inventory days

107.08

102.75

112.48

112.48

112.48

112.48

112.48

112.48

Accounts payables days

90.66

110.42

108.85

108.85

108.85

108.85

108.85

108.85

Investment returns

Return on assets

0.091

0.090

0.103

0.103

0.103

0.103

0.103

0.103

Return on equity

0.136

0.125

0.134

0.134

0.134

0.134

0.134

0.134

Leverage ratios

Debt-to-equity

0.496

0.391

0.300

0.300

0.300

0.300

0.300

0.300

Debt to total assets

0.332

0.281

0.231

0.231

0.231

0.231

0.231

0.231

Valuation

2015

2016

2017

2018

2019

2020

2021

2022

Earnings before interest and tax

13.4

13.6

15.7

16.0

16.3

16.7

17.0

17.3

Taxes on EBIT

-3.2

-3.2

-3.8

-3.876

-3.95352

-4.03259

-4.11324

-4.19551

Net operating profits

10.2

10.4

11.9

12.1

12.4

12.6

12.9

13.1

Depreciation

6.5

6.6

6.4

6.5

6.7

6.8

6.9

7.1

Capital expenditures

-4.2

-4.5

-4.9

-5.0

-5.1

-5.2

-5.3

-5.4

(Increase)decrease in inventory

0

0.3

-2.10

-0.31

-0.32

-0.32

-0.33

-0.34

(Increase)decrease in accounts receivable

0

-0.30

-0.70

-0.45

-0.46

-0.47

-0.48

-0.48

(Increase)decrease in operating cash

0

-1.40

0.00

-0.17

-0.17

-0.18

-0.18

-0.18

Increase (decrease) in accounts payable

0

2.80

0.60

0.30

0.31

0.31

0.32

0.32

Increase (decrease) in other current liabilities

0

-7.50

-5.00

0.21

0.21

0.21

0.22

0.22

Free cash flow

12.5

6.4

6.2

13.2

13.5

13.8

14.1

14.3

After tax other income

9.40

9.50

11.30

11.53

11.76

11.99

12.23

12.48

(Increase) decrease tax loss carry forward

0

0

0

0

0

0

0

0

(Increase) decrease excess cash

0

0

0

0

0

0

0

0

Interest tax shield

0

0

0

0

0

0

0

0

Cash flow to investors

21.9

15.9

17.5

24.8

25.3

25.8

26.3

26.8

Interest on debt

0

0

0

0

0

0

0

0

(Increase) decrease of debt

0

7.50

5.00

-0.2060

-0.2101

-0.2143

-0.2186

-0.2230

Dividends

0

0

0

0

0

0

0

0

Capital contributors

0

0

0

0

0

0

0

0

Cash flow to investors

21.9

23.4

22.5

24.6

25.1

25.6

26.1

26.6