Accounting for Managers
Corporate Finance Analysis report
-----WULIANGYE
YIBIN CO.,LTD
Group members：
ZHANG GUO QI SCM-015852 ZHENG YU
ZHU TENG LIN SCM-015840 XU QING SCM-015847
July 25, 2012
ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD Contents
1. Abstract····································page 3
2. Introduction to the company···················page 3
3. Financial ratios······························page 3
4. Calculations and analysis······················page 5
5. Conclusion·································page 12
6. Appendix ·································page 13
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ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD 1. Abstract
Our group analyse the major ratios of Wuliangye by using techniques of
time-trend analysis and peer group analysis.We choose the year 2006,2008 and 2009 to do the time-trend analysis.As for the peer group analysis, we choose Luzhoulaojiao, Guizhoumaotai, Shanxifenjiu and Tuopaiqujiu to get the industry average level and make a comparison.
2. Introduction to the company
Wuliangye
Yibin Company Limited is located in Yibin Sichuan
province.Wuliangye is one of the most famous white spirit and it is a well-known trademark in China. The company distributes its products all over the domestic market and exports to overseas markets.It also produces other products.As a whole,Wuliangye is a company with deep enterprise culture.
3. Financial ratios
(1)Short-term solvency
Current ratio: (current assets)/ (current liabilities). The higher of the ratio,the richer
of a firm’s capital turnover and the stronger of the firm’s solvency.Current ratio is a firm’s representative indicator to evaluate the solvency.The world’s universally acknowleged criterion is 2:1.
Quick ratio: (current assets-inventory)/(current liabilities). It is a measure of a
company’s liquidity and ability to meet its obligations.The general criterion is 1:1
(2) Long-term solvency
Total debt ratio: (total assets-total equity)/(total assets). For the creditors，The higher
of the firm’s total debt ratio, the more liabilities it has and it may have a high potential profit margin,but at the same time, they have a high loan risk to take on.
(3)Asset Management, or Turnover ,Measures
Inventory turnover : (cost of goods sold)/inventory. The faster this turnover is, the
stronger the liquidity will be, so high inventory turnover ratio shows that the firm is able to change directions quickly.
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ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD Receivable turnover: Sales/(accounts receivable). It represents the ability that
the company receiving their payment. The management efficiency is good when the ratio is high.
Total assets turnover: Sales/(total assets). It measures how efficient a company
use its assets.
(4) Profitability Measures
Profit margin: (net income)/sales. It measures how much the company can earn per
dollar.
ROA: (Net income)/(total assets).It gives the idea that how efficient the management is
at using its assets to generate earnings.
ROE: (Net income)/(total equity).It measures a company’s profitability by revealing
how much profit a company generates with the money of shareholders have invested.
(5) Market Value Measures
Price-earnings ratio: (Price per share)/(earnings per share).It measures how much
investors are willing to pay per dollar of current earnings,high PEs are often taken to mean that the firm has significant prospects for future growth.Of course,if a firm has no or almost no earnings,its PE would probably be quite large.
Market-to-book ratio:( Market value per share)/(book value per share). It compares
the market value of a firm’s investments to their cost.
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ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD 4. Calculations and analysis
(1) Solvency
Solvency is an important index to reflect a firm’s financial condition and
operating ability.A low solvency not only reflects that the firm doesn’t have
enough money to meet the need but also reflects the firm may not have the ability to pay the debt,even with the risk to face bankruptcy.
Short-term solvency Current ratio and Quick ratio
Wuliangye’s current ratio from 2006 to 2009 increases at first and then decreases.The ratio in 2006 and 2009 is about 2,which reflects that the firm has a healthy operating behavior; but the ratio in 2008 is 4.28. For the firm, a high current ratio indicates liquidty,but it also may indicate an inefficient use of cash and other short-term assets,which should draw the firm’s attention.As for the quick ratio,the trend is the same with current ratio.In the year 2006 and 2009,the firm’s ratios are about 1.5.Although it is higher than the general criterion,which equals to 1,it maintains stable in a relative way.
The value is 3.27 in 2008 and this greatly exceeding the general level.It is probably that the firm occupys more cash in quick assets and this will lead to a increase of the opportunity cost to invest.
We should notice: Although the quick ratio exceeds 1, if the most part of
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ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD current assets is accounts receivable,a high quick ratio can’t indicate the firm has a powerful solvency.The reason is that it is uncertain to decide whether the firm can get back the accounts receivable or not.So when we comes to evaluate quick ratio,we should also analyse the quality of accounts receivable.
As we refers to the industry, the industry’s average level in 2009 is 2.26 and Wuliangye’s data is lower than that which indicates that the firm’s solvency is lower than the industry’s average level 1.39,but the firm maintains a relative good quick ratio.
Long-term solvency
Long-term solvency is a firm’s ability to take on the debt and the ability to
pay the debt.It is a important indicator to reflect a company’s financial safety and the stable degree.
Total debt ratio
From the year 2006 to 2009,Wuliangye’s total debt ratio increases first and
then decreases.The first two years’ ratio is lower than 0.2. In the year 2009,the firm’s total debt ratio reach the industry’s average level which equals to 0.3.There is no doubt that Wuliangye corporation and the whole industry are in a normal level
(2) Business efficiency
Firm’s business efficiency means how the enterprise can create higher profit.
If the efficiency is low, the company would’t keep their high profit.
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ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD Inventory turnover ratio
From the graph we find that the inventory turnover ratio of Wuliangye in2009 is about 1.39 times meanwhile the industry’s average level is only 0.78 times. SoWuliangye can control their cash flow better. But we can see the company’s inventory turnover greatly decreases between 2006 and 2009 .So we guess there are some leak in the management process. It’s hard for the firm to keep their competitive advantage if not repairing the vulnerabilities.
Receivable turnover ratio
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ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD
From the graph we find that the receivable turnover ratio of Wuliangye in 2009 is about 206.29 times meanwhile the industry’s average level is only 149.93 times. So we can know that the company has little bad debts, fast cash flow, and good solvency. But the receivable turnover of Wuliangye drops from 1615.71 to 206.23 from year 2006 to 2009. It may make people have no confident with the management of Wuliangye.
Total assets turnover ratio
From the graph, this ratio decreases greatly from 0.74 to 0.63 and then has a little growth that going up to 0.65 in these three years. It indicates that although there are some problems in operating from 2006 to 2008, but the company found a better method to operate in recent years and also used its assets more efficiency. Comparing with the industry average level, Wuliangye’s data is larger, which means that Wuliangye has a healthy operating condition.
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ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD (3) Profitability Measures
Profit margin ratio
According to the data from 2006 to 2009, Wuliangye’s profitability increases stably.
Comparing with the industry average level, it’s easy to see Wuliangye has a higher level.So Wuliangye has more competitiveness in same industry. On the other side, Wuliangye also has a high return on assets and equity.
The return on assets and return on
equity
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ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD Return on assets:
From the graph, ROA increases greatly of about 11% from 2006 to 2009. It indicates that the internal growth rate is in a very good level. So Wuliangye need not to borrow more capital to issue new stock.. Thanks to the 4% larger than industry level, Wuliangye has more ability to develop than others.
Return on equity:
From 2008 to 2009, ROE increases 11% greatly. It indicates that Wuliangye’s earning capacity is on a high level. Due to the larger data , Wuliangye can draw more attention and gain more support from stockholders so that it will acquire more invest and enter a positive circle.
(4) Market value analysis
Market value is the price of an asset and can be accepted by the contracting parties. It can reflect the power of one enterprise in the society and market.
Price-earning ratio
For the P/E ratio of Wuliangye, from 2006 to 2009(except 2007), it increases year by year for 29.84%, 34.82%, 37.03% respectively. It represents that the investors are willing to pay more and more for one dollar of current earnings. According to this situation, we can learn that Wuliangye has a bright future.
Comparing with the industry average in 2009, Wuliangye is less than that. It
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ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD appears to have more space for Wuliangye to develop.
Market-to-book ratio
For the market-to-book ratio of Wuliangye from 2006 to 2009(except 2007),it has a rapid growth in these three years from 3.57% to 8.41%. Every two years has nearly 30% growth. Wuliangye’s market-to-ratios in these three years are all more than 1, so we know this company has been successfully in creating value for its stockholders.
But when you scan the industry average, you will find that the cost what you need to pay of Wuliangye is less than the average level. From the standpoint of
investment, the lower market-to-book ratio of one stock is, the higher an investment they become anyway and vice versa.So there is more value to invest to Wuliangye comparing with the others in the same industry.
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ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD 5. Conclusion
By analysing the datas,we know that the Wuliangye’s total-debt has increased in recent years and it reachs to 0.3 times in 2009.For creditors, the higher of a firm’s total debt ratio, the higher risk they may take on. However,from the standpoint of the firm,an appropriate total debt ratio will helps in bringing a leverage benefit to the firm because any firm can abtain benefit as long as the revenue ratio exceeds the interest ratio and a firm can develop quickly through the way of accumulating capital under the condition of having no effort on the control of the firm.
The debt scale of Wuliangye is safe at present.At the same time,the sales revenue of the firm has a reletive high increase and we can consider to add its debt,but it also may have a financial crisis because of a sustained increasing debt.So the moderate total debt ratio is about 0.4.
On the other hand,the current ratio and quick ratio of Wuliangye go up to 4.2 times and 3.2 times seperately from year 2006 to 2008 and these exceed the general criterion.Although by doing this can make sure a high short-term solvency ,it also increases the firm’s interest burden and wasting of capital.After notice of this problem,Wuliangye enhanced business management and advanced the availiability of capital so that the ratios drop to the average level of the industry which is reasonable in 2009.Generally speaking, the firm’s solvency is at a healthy level compared with the industry average level.
As for the management efficiency,the various indicators of Wuliangye are higher than the industry average level, which means that Wuliangye has a good way to control the cash flow and ensure its high profit.But the indicators were declining during the past few years and this may have something to do with the firm’s multivariant strategies.Wuliangye introduced hundreds of wines besides its major wine.It is obvious that the firm can obtain quick success and instant benefit.But in a long run,the firm will feel short of ability to keep up with the industry level.Without essential adjustment,the firm will decline in the future because of the wrong strategy. Wuliangye’s profit margin,ROA and ROE are increasing in recent years.The profit margin reachs to 41.38% in 2009,which is much higher than the industry’s average level 28.04% and this indicates the firm has a powerful profitbility which results in a rapid increase in the profit margin.Meanwhile, its assets and equity have a high return. The ROE and ROA increase greatly from year 2006 to 2009 and the firm’s internal growth is high so that Wuliangye has enough capital to support its self-development without issuing shares and bonds.
For the market value of Wuliangye’s stocks,PE ratio and Market-to-Book ratio were rising steadily between 2006 and 2009,but they also below the industry level in 2009 and this indicates that the investment risk for Wuliangye is low and it poccesses good prospect and high value to invest.
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ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD 6. Appendix
泸州老窖 1.22 148.41 0.79 38.70 28.27 39.66 32.5333 12.8 1.75 28.72% 1.053 贵州茅台 0.26 344.06 0.54 31.15 16.63 23.78 37.1597 11.0776 3.065 25.888% 2.244 山西汾沱牌曲酒 09行业平均值 酒 0.72 0.31 0.78 50.97 50.97 149.93 0.93 0.07 0.6 21.36 7.61 28.04 26.39 2.48 19.17 40.16 3.97 27.83 52.3537 103.8871 52.5926 11.2736 3.1088 9.3356 2.759 1.606 2.2602 28.56% 36.84% 30.015% 1.631 0.478 1.3944 Ratio Company 五粮液 inventory ratio 1.39 receivable ratio 206.23 total asset turnover ratio 0.65 Profit margin 41.38 Return on assets(ROA) 22.09 Return on equity(ROE) 31.59 Price-earnings ratio 37.0292 Market-to- book ratio 8.418 Current ratio 2.121 Total debt ratio 30.067% Quick ratio 1.566
Company Year Ratio WULIANGYE YIBIN CO.,LTD Industry average level 06 08 09 09 30.015 Total debt ratio 19.7300 15.1190 30.0670
Company Year Ratio Current ratio（%） WULIANGYE YIBIN CO.,LTD Industry average level 06 2.4700 08 4.2840 3.2660 09 2.1210 1.5660 09 2.2602 1.3944 Quick ratio（times） 1.7300
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ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD
Company year Ratio Inventory turnover（times） Receivables（times） Total asset Turn over(times) WULIANGYE YIBIN CO.,LTD Industry average level 09 1.39 206.23 0.65 09 0.78 149.93 0.6 06 2.36 1615.71 0.74
08 1.86 1326.22 0.63 Company year Ratio Profit margin(times) Return on assets(times) Return on equity(times) WULIANGYE YIBIN CO.,LTD Industry average level 09 28.04 19.17 27.83 06 15.8421 11.3229 14.1709 08 09 30.2425 41.3828 17.776 22.0901 20.9425 31.5874
Company year Ratio Profit margin(times) Return on assets(times) Return on equity(times) WULIANGYE YIBIN CO.,LTD Industry average level 06 15.8421 11.3229 14.1709 08 30.2425 17.776 20.9425 09 41.3828 22.0901 31.5874 09 28.04 19.17 27.83 14
ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD Company Year Ratio Market-to-book ratio WULIANGYE YIBIN CO.,LTD 06 08 09 Industry average level 09 52.5926 9.3356 Price-earnings ratio 29.844 34.818 37.0292 3.57 5.36 8.41
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ANALYSIS REPORT OFWULIANGYIBIN CO.,LTD
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