Business

Enka Engineering Financial Analysis

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With the scope of this study my aim is to see company’s operations, are they successful with their core business or not. Are they passive company or aggressive company, are they balanced or not, is there any bankruptcy risk, their liquidity power, are they have profit or not and, if they have profit, is it increasing or decreasing, can they collect their receivables or can they sell their  inventories and more we will be looking for. And after all, according tomy findings my aim is to help the company by myrecommendations; what is the reason they are unsuccessful and what should they do. For this study I choose the company of ENKA Şirketler Grubu and I will do vertical, horizontal and ratio analysis to see company’s organizations.

Balanced Sheet of ENKA for 4 years

Balanced Sheet2015201620172018
ASSETS    
1. Current Assets2.689.1812.468.2112.086.2812.521.452
   Cash992.2981.049.060874.079716.769
   Marketable Securities855.187729.812668.989945.407
   Accounts Recceivables608.097424.535319.441552.194
   Inventories233.599264.804223.772307.082
2. Fixed Assets4.455.6055.118.4105.945.0085.274.829
TOTAL ASSETS7.144.7867.586.6218.031.2897.796.281
LIABILITIES    
3. Current Liabilities953.833851.737949.558913.251
4. Long-term Liabilities1.013.6011.006.381797.918701.812
5. Equity5.177.3525.728.5036.283.8136.181.218
TOTAL LIABILITIES7.144.7867.586.6218.031.2897.796.281
(Amounts are expressed as thousands of U.S. Dollars (“USD”) unless otherwise stated.)

Income Statement of ENKA for 4 years

INCOME STATEMENT2015201620172018
Net Sales4.554.7553.506.1132.899.5842.881.443
(COGS)-3.779.566-2.713.548-2.148.974-2.152.766
Gross Profit775.189792.565750.610728.677
(Operating Expenses)-154.320-164.647-112.216-67.266
Operating Profit620.869627.918638.394661.411
Nonoperating Income195.704273.138405.438203.160
(Nonoperating Expenses)-292.651-317.725-334.905-532.853
Ordinary Profit523.922583.331708.927331.718
Extraordinary Income31.51627.31223.24154.265
(Extraordinary Expense)-20.130-11.213-18.172-51.983
Net Profit535.308599.430713.996334.000

VERTICAL ANALYSIS BLANCE SHEET

Balanced Sheet2015201620172018
ASSETS    
1. Current Assets37,6432,5325,9832,34
   Cash13,8913,8310,889,19
   Marketable Securities11,979,628,3312,13
   Accounts Recceivables8,515,603,987,08
   Inventories3,273,492,793,94
2. Fixed Assets62,3667,4774,0267,66
TOTAL ASSETS100,00100,00100,00100,00
LIABILITIES    
3. Current Liabilities13,3511,2311,8211,71
4. Long-term Liabilities14,1913,279,949,00
5. Equity72,4675,5178,2479,28
TOTAL LIABILITIES100,00100,00100,00100,00

Comment:According to balance sheet of Enka during 2015 to 2018;firstly,I made my calculations year by year and then I sum them up and here are the vertical analysis of balance sheet.

For 2015; we first checking is it aggressive or passive company. We are looking for current and fixed assets; fixed assets are more than 60 so we can say that it is aggressive company and they are making aggressive investment in 2015. Now we comparing total debt and equity. Sum of total debts are 27,54. Total debt include interest and if it is above 90 it means bankruptcy risk but there is no bankruptcy risk here and either there is no financial burden. Total equity is 72,46 which is above 60 and it is now more certain that there is no financial burden at all because company has low debt and so lower interest payment but the problem may not be using it’s real capacity efficiently. It’s time to compare current assets and current liabilities to check liquidity. Here current assets are bigger than current liabilities so there is no liquidity risk because short term liquidity is enough to pay short term debt. Finally we are checking two current asset items which are more risky than others; accounts receivable and inventories. Receivables are 8,51 and inventories 3,27 so there is no problem to collection of receivable and there is no problem to selling inventories.

Recommendation: As a result, we can say that because it is also aggressive company and equity is much more higher than it’s debt; they should increase it’s investment by taking some debt so that maybe the capacity of the company can be used more effectively.

For 2016; in this year it is again aggressive company because it is above 60 and they are making aggressive investment in 2016. If we looking for total debt and equity; sum of debts are 24,5 and equity is 75,51 which is more than 60 so there is no financial burden and bankruptcy risk. Here, current assets are much more higher than current liabilities so there is no liquidity risk and they can pay their short term debt with short term liquidity.

Finally, if we look account receivable and inventories it’s appear that, there is no problem for both.

Recommendation: As a result, again for 2016 they should use their own capacity by taking some debt because they don’t have any debt problem and it would not be problem if they do more investment.

For 2017; fixed assets are bigger than 60 and it’s aggressive company in 2017. Again we are checking total debt is 21,76 and equity is 78,24 more than 60 hence there is no neither financial burden nor bankruptcy risk. In liquidity analysis; current assets are much more higher than current liabilities sowe can say there is no liquidity risk. Finally, for accounts receivable and inventories, there is no problem for both, plus these two are more lower than other years.

Recommendation: For 2017 again for company they should use their own capacity by taking some debt because they don’t have any debt problem at all and it would not be problem if they do more investment.

For 2018, firstly again we start to check company and here fixed assets are bigger than 60 and it’s aggressive company in 2018. If we check total debt and equity; sum of total debt is 20,71 and equity is 79,28 which there is no interest and more than 60 also much more bigger than other years. For this reason, there is no neither financial burden nor bankruptcy risk. They have low debt and lower interest. In liquidity analysis; we compare current assets and current liabilities. In 2018; current assets more than current liabilities sowe can say there is no liquidity risk because short term liquidity is enough to pay short term debt. Finally, when we compare current asset items which are more risky than other current asset items. For accounts receivable and inventories, there is no problem for both and they can easily collect its receivables and they can easily sell their inventories.

Recommendation: In 2018 we can say that for this company they should use their own capacity by taking some debt and because they are also aggressive company and equity is more than their debt; they should increase it’s investment by taking some debt so that maybe the capacity of the company can be used more effectively.

VERTICAL ANALYSIS INCOME STATEMENT

INCOME STATEMENT2015201620172018
Net Sales100,00100,00100,00100,00
(COGS)-82,98-77,39-74,11-74,71
Gross Profit17,0222,6125,8925,29
(Operating Expenses)-3,39-4,70-3,87-2,33
Operating Profit13,6317,9122,0222,95
Nonoperating Income4,307,7913,987,05
(Nonoperating Expenses)-6,43-9,06-11,55-18,49
Ordinary Profit11,5016,6424,4511,51
Extraordinary Income0,690,780,801,88
(Extraordinary Expense)-0,44-0,32-0,63-1,80
Net Profit11,7517,1024,6211,59

Comment:According to income statement of Enka during 2015 to 2018; firstly, I made my calculations year by year and then I sum them up and here are the vertical analysis of income statement.

For 2015; First in first, to understand whether the company has profit or not we look at the Net Profit. In 2015 net profit is positive 11,75 so this company has a profit. So where this profit comes from? For this we will be looking at three group; operating activities, non-operating activities, extraordinary activities. Let’s start with operating profit; it is positive 13,63. So there is operational success hence we can say that, the company is successful with it’s core business. The reason of positive net profit clearly seen there. Now we looking for second group of nonoperating income and expense. In 2015 nonoperating expense is more than it’s income but amounts are low and these are small so we can say it’s not affect net income much. Finally for third group; we are looking for extraordinary income and expense. But as we can clearly see, extraordinary income and expense are not big enough to affect net profit.

Recommendation: We can say that this company is ideal company and everything looks balanced.

For 2016; as we can see net profit is 17,10 and it is positive, so company has a profit. But where this profit comes from? Firstly in operating profit; it is positive 17,91. Hence there is operational success and the company is successful with it’s core business. The reason of positive net profit is also clearly seen there. Secondly, in nonoperating income and expense; amounts are small so we can say it’s not affect net income much. Third and last one is; extraordinary income and expense.

Here as we can clearly see, extraordinary income and expense ,again, are not big enough to affect net profit.

Recommendation: In 2016 it is seen that it is ideal company and everything looks balanced.

For 2017; net profit is positive 24,62 which is highest value between 2015-2018 company has a profit here. But where this profit comes from? We are again checking operating profit; it is positive 22,02 and definitely there is operational success and the company is successful with it’s core business we can say the reason of positive net profit may comes from here. Secondly, in nonoperating income and expense; nonoperating income is more than it’s expense it is not too much but there is a pie to affect positive net profit. Lastly;extraordinary income and expense clearly shows that not big enough to affect net profit.

Recommendation: We can say that it is ideal company and everything looks balanced.

For 2018; In 2018 and our last year on table; net profit is positive 11,59 so we can understand this company has a profit but where is it comes from? Let’s start with first onee; operating profit is positive 22,95. So there is operational success so we can say that, the company is successful with it’s core business. The reason of positive net profit clearly seen there. Second group of nonoperating income and expense we can see nonoperating expense are much more higher than nonoperating income and even operating profit is higher than other years, our net profit is lower than other years because of the reason comes from nonoperating expense in 2018. Finally for third group; again extraordinary income and expense are not big enough to affect net profit.

Recommendation: We can say that eventhough company having positive net profit, it is not big enough because of the nonoperating expenses. We can not say they are wholly unsuccessful because they are successful but they should manage nonoperating expenses more effectively. In nonoperating expenses there is interest payments on debt or costs arising from currency exchange. Company should first understand which one is important and then should and take precautions.

HORIZONTAL ANALYSISBALANCE SHEET

Balanced Sheet2015201620172018
ASSETS    
1. Current Assets1009285121
   Cash1001068382
   Marketable Securities1008592141
   Accounts Recceivables1007075173
   Inventories10011385137
2. Fixed Assets10011511689
TOTAL ASSETS10010610697
LIABILITIES    
3. Current Liabilities1008911196
4. Long-term Liabilities100997988
5. Equity10011111098
TOTAL LIABILITIES10010610697

Comment:In Horizontal Analysis I selected 2015 as a base year, and I did my calculations. Important thing about HA is; it only shows the way of the problem. It doesn’t give the final results.

First in first we have to look at the ‘Total Assets’it gives us the information about the size of the company. Our aim is to understand whether the company is growing or not. If total assets are higher so we can say it’s bigger company and the company is growing. In here, in total assets as we can see there is no growing, it is decreasing. It is time to scan all of the balance sheet; in cash we can see over the years it is decreasing but in marketable securities there isincrease but we can’t say it is extraordinary increase.But in accounts receivablesit is clearly seen that there is extraordinary increase. For fixed assets and inventories there is no extraordinary increase or decrease. Now, in liabilities side we continue scanning and in current and long-term debt we see there is decreasing but we cannot say it is extraordinary decrease.

Recommendation: This company is not growing but why and what should company do? We observed there is almost extraordinary increase in marketable securities and companies are usually hold these securities as they provide a profit opportunity and can be exchanged for cash if the need arisesso we see company holds lots of securities they should do investment. In this table, most important and risky items are receivables and inventories. Here receivables are increased extremely so he company can’t collect it’s receivables which is bad case. And also inventories are highbut not extremely they should more afford to sell their inventories. They should immediately collect it’s receivables and they should do more investment on advertisement, improve quality and decrease price.

HORIZONTAL ANALYSIS INCOME STATEMENT

INCOME STATEMENT2015201620172018
Net Sales100778399
(COGS)1007279100
Gross Profit1001029597
(Operating Expenses)1001076860
Operating Profit100101102104
Nonoperating Income10014014850
(Nonoperating Expenses)100109105159
Ordinary Profit10011112247
Extraordinary Income1008785233
(Extraordinary Expense)10056162286
Net Profit10011211947

Comment:In Horizontal Analysis of Income Statement I selected 2015 as a base year, and I did again my calculations. Here we will be looking at the trends of net profit and we will understand the profit of the company performance. And see whether profit increasing or decreasing. And observe which one is the main reason of increaing or decreasing.

First in first, we can see there is high decreasing which is big problem. So what could be the main reason? We will be looking three part; operating, non-opeerating, extraordinary. In first group; operating profit we can say it is same during years because there is little increase during year and it shows that the company is successful with it’s core business. But we are looking for profit decrease and it is not the reason. So we are looking for second part; in nonoperating income there is extraordinary decrease and in nonoperating expense there is extraordinary increase. We can clearly say, expenses are much more higher than it’s income and we can say it is the reason why net profit decrease so much. And finally; extraordinary income increased radically but at the same time extraordinary expenses are increased radically which is the problem but this problem is nonpredictable and unusual.

Recommendation: We reach the reason why net profit is decreased so much. That is because of the nonoperating expenses and extraordinary expenses. The company should manage nonoperating expenses more effectively. If the problem is about interest so they shouldn’t get high interest from bank as a debt. But we know that the problem is not about interest because the company’s debt is not high so it could be the problem about currency, it arising from currency exchange so they should distribute its investments piece by piece to other investment instruments.

RATIO ANALYSIS

Ratio TypeRatios2015201620172018
Liquidity RatioCurrent Ratio2,822,902,202,76
 Liquidity (Quick) Ratio2,572,591,962,42
 Cash Asset Ratio1,942,091,631,82
Financial Structure RatiosDebt Ratio0,280,240,220,21
 Equity Ratio0,720,760,780,79
Activity RatiosReceivables TurnoverRatio7,498,269,085,22
 Inventory Turnover Ratio16,1810,259,607,01
Profitability RatiosReturn on Equity (ROE)10,34%10,46%11,36%5,40%
 Return on Asset (ROA)7,49%7,90%8,90%4,28%

Now; it is time to do Ratio analysis; with respect to the ratio analysis is usually used to evaluate a number of issues with an entity, and here we compare results with the standards (accepted ratio in the literature, sector average or biggest competitors.)

In Liquidity Ratio; let’s start with the Current Ratio; for each year for 2015, 2016, 2017, 2018 current ratio is around 2 and 2 is acceptable for current ratio because as I mentioned above it is accepted in the literature and we can say it is balanced company.

For Liquidity (Quick) Ratio; 1 is accepted ratio and if we look our ratios; for 2015 it is 2,57 and it’s much more than 1 so we can instantly get rid of our current liabilities. For 2016 as you can see it is 2,59 which is also higher than 1 and again we can say we don’t have problem about current liabilities. For 2017; it is 1,96 more than accepted ratio of 1 so we can pay curent liabilities. Lastly for 2018; 2,42 and we can say again more than 1 so we can instantly get rid of our current liabilities. So I can say our liquidity is powerful.

In Cash Asset Ratio; here we eliminate inventories and receivables we have just left marketable securities and cash which is the %100 liquid assets. This is the worst case scenario because we assume that we cannot sell any item and cannot collect any item. But here as you can see for each year a ratio above 1; so that a company will be able to pay off its current liabilities with cash and cash equivalents, and have funds left over. Creditors prefer a high cash ratio, as it indicates that a company can easily pay off its debt.

For Financial Structure; here we will sum Debt Ratio and Equity Ratio for each year and sum of  Debt Ratio and Equity Ratio should be equal to 1. For each year sum of debt and equity ratio is 1 and we can say it is balanced company. It would mean that investors and creditors have an equal stake in the business assets. It’s stable business.

For Activity Ratios; let’s first start with Receivables Turnover Ratio; we see that, between 2015 and 2017 it is increasing but in 2018 it is critically decreased. Until 2017, it is increasing so company could collect it’s receivables but at the end of the year we see it decreased and we can say the company couldn’t collect it’s receivables in 2018.

In Inventory Turnover Ratio; between years it should be going up to be successful to selling item but as you can see within year it’s decreasing through year and we can say they can’t sell item.

For Profitability Ratio; for ROE we should first consider the year’s interest rate whether is it above it’s interest or not. But first because Turkey’s Central Bank anounced the interest rates of 100 basis points; I converted my ROE results to a percentage to compare easily. In 2015 interest rate about %10 and my ROE is %10,34 which is good and more than interest. So I caninvested in this company.In 2016 interest rate is 8,50% and my ROE is 10,46% so it is higher than interest. I can also invested in this company. In 2017 interest rate is 11,22% and my ROE is 11,36% it is higher than interest. I can still invested in this company. In 2018 interest rate is 14,85%  and my ROE is 5,40% as we can see it is lower than interest rate which is bad in 2018 I can’t invest in this company.

In ROA;  it shows how effective the company is in converting the money it invests into net income. The higher the ROA refers better, because the company is earning more money on less investment. And accepted is %5 and over are generally considered as good.To compare with %5 I convertes my ROA results to a percentage to compare easily. So, if we look each year we can see through 2015 to 2017 it is good but in 2018 it is lower than %5 and we can say company can’t earn money on less investment.

DISCUSSION & CONCLUSION

As a conclusion, if I sum all results; it is aggressive company and generally there is no financial burden, bankruptcy risk, liquidity risk.For collecting receivables and selling inventories; I reached that there is big problem in 2018 both collecting receivables and selling items. They should first collect it’s receivables and sell items by decreasing the prices because it could be overpriced or becauseof the problem about quality, they should increase quality without increase cost because it also lead overpriced. Or they should advertise more and solve the problem about salaries, raw materials, equipments and suppliers. Moreover, becuase they don’t have big problem about debt, I advise Enka to increasing investment by taking some debt so they could use capacity more effectively. But we can say they are balanced company. In addition, they have problem about currency exchange. Expenses arising from currency exchange so they should distribute its investments not only to one type of currency, but logically to different investment instruments piece by piece. Also, their cash asset is successful and they can converting the money it invests into net income.As a result, big problems are arising from year 2018, there shouldn’t be any investment on their company in 2018 and they should improve theirselves with respect to the problems.

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