In this century the uses of financial analytical tools such ratio analysis, trend analysis and common sized analysis is inevitable in any organization or company operations. So in order for the company to succeed it must effectively use financial analysis tool. This is because financial analytical tools help to know the health of the business, how to plan for future, if the business have inventories to support production target, or if the firm have ability to pay creditors and also to provide indicators of how well the firm and its business units are performing. The financial analysis is also undertaken by shareholders, investors, suppliers of funds and suppliers of inventories and so on (Arora 2012). This report is about the interpretation of financial statements at Tanga Cement Company by using financial analysis tools. This report is divided into four parts. Part one is about background of the case study (Tanga Cement), part two is concerned with financial analysis and tools used in analyzing the financial performance of Tanga Cement, part three is about limitation on analytical tools used and part four comprises of conclusion. The study revealed that Tanga Cement Company Ltd has been doing well in production and it is making reasonable profit year after year. This revelation has been resulted from the Company financial Statements and Financial Analytical tools (Ratio Analysis, Common sized analysis and Trend Analysis).
According to Tanga Cement Website (2011), Tanga Cement is a cement company based in Tanzania. The company was founded in 1980 in alliance with the government of Denmark in 1989, as a state company of the Tanzanian government, entered into a management contract with Holcim Cement of Switzerland. In 1996 the government began to privatize the company and as of 2007 it is owned by public and by Holcim Mauritius. Currently company ownership is as follows: 62.5% Afrisam Mauritius 36.25% Tanzania General Public & Institutions 0.75% Employees Share Trust Moreover company production capacity is more than 1,250,000 tones/year where it targets the market demand of Tanzania. With 15000 Tanzanians being the shareholders, Tanga cement shares trade under its brand name Simba, at Dar es Salaam Stock Exchange. The Company produces its financial report in annual bases where those financial reports are uploaded to the website so that every shareholder can check the company financial position online. In our analysis we have taken the yearly financial reports from 2006 up to 2008 as a company financial reports study analysis.
Financial statements are the summary report that shows how a firm has used the funds entrusted to it by its shareholders and lenders, and what is current financial position (businessdictionary.com 2012). There are three (3) financial statements such as balance sheet, income statement and cash flow. Balance sheet is the financial statement which contains information about resources and the obligations of the entity and about its owners’ interests in the business at a particular point of time i.e. assets, liabilities and owners’ equity. Income statement (profit and loss account) is the financial statement which shows the summary of revenues, expenses and net income/loss of a firm during the accounting period. It serves as a measure of the firm’s profitability. Cash flow statement is the financial statement which shows inflows and outflows of cash during the specific period.
Financial Analysis is an assessment of the effectiveness with which funds (investment and dept) are employed in a firm, efficiency and profitability of its operations, and value and safety of debtors’ claims against the firm’s assets (businessdictionary.com 2012).There are three (3) techniques and tools that were used in the analysis of financial statements of Tanga cement, such tools includes Trend analysis, Common sized and ratio analysis.
This is the financial analytical tool which compares two or more year’s financial data to study the trends. According to a lecture delivered as part of module ARUM58EKM, It involves the calculation of percentage relationship that each statement item bears to the same item in the “BASE YEAR” (Arora 2012).
The trend Analysis for Tanga cement
The analysis and interpretation of the financial statements of Tanga cement made with calculation of trend percentages comes out with the following: Sales and cost of goods sold have shown a positive increase throughout the three years. This situation is viewed as favorable because it enhances the increase the in gross profit. So Tanga cement should try to maintain the strategy is using in increasing its sales. Net profit was tremendously increasing from year to year accompanied with the increase of fixed assets and capital and reserves. The analysis shows that the situation is favorable and the company has a good policy of manufacturing and trading.
Ratio analysis is the financial analytical tool which is used to explain the important association between figures shown on a balance sheet, in income statement, cash flow statement or in any other part of accounting organisation. Ratios show how one number is related to another. It may be expressed in the form of co-efficient, percentage, proportion, or rate (accountingformanagement.com 2011)
When calculating the financial ratios, may find getting two types of answers. Some ratios might be good and some might be bad ratios compared to industry standard, which will make it difficult to judge if the company is I a good position or not. Financial ratios are giving the actual financial picture of the company whether the company is going at the right or wrong direction. These ratios do not give a solution of what to do if things go wrong. In analytical tools, the data which is used is only accounting data instead of economic data. In doing financial ratios analysis, data that is used are obtained from bank statement, balance sheet and cash flows of previous years. This shows that they are using historical data which is bad because they do not reflect the actual economic situation. In financial analysis ,data obtained cannot be used alone, the data obtained must be compared with other data so as to get actual interpretation Different accounting practices can distort comparison even within the same company. A good example is one can use LIFO and one use FIFO; the answers will definitely be different. The set standard industry financial ratios are not authentic because the levels of business differ from place to place. A good example is on IT industry. The level of technology in third world countries is very low, so logically third world countries won’t be able to meet the set standard due to our level of technology.
Tanga Cement Company Limited has been doing well in production and making sound profit year after year. Tanga Cement is also the second largest cement producer in Tanzania with a production of 1.25 million tpa capacity. Tanzania Portland Cement in Dar es Salaam is the major (largest) producer with a production capacity totaling 1.4 million tpa. This revelation has been resulted from the Company financial Statements and Financial Analytical tools (Ratio Analysis, Common sized analysis and Trend Analysis). Generally the performance of Tanga Cement Co. LTD is good.
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