High Debt-Equity Ratio also indicated that Plastichem bore more risk because the cost of debt (interest). The company would make more profit if the incremental profit exceeds the incremental cost of debt; however, the company may lose more money/ make less money if the incremental profit is less than the incremental cost of debt. | Year| | 2004| 2003| 2002| 2001| Plastichem| -19. 331| 5. 076| 4. 862| 1. 355| DCM Molding| 1. 192| 1. 477| 1. 274| 0. 714| To determine the profitability, we calculate the Profit Margin, ROE, and ROA. By looking at the ratios, Plastichem’s profit has dropped in the past four years.
For DCM, on the other hand, we see that it has been fairly constant as well as ROE components. Some of the limitations regarding the various financial analyses above are: Many companies near the year or quarter end improve the appearance of their figures presenting them in the most attractive way possible. The miss misrepresentation of numbers makes the analysis more difficult. The analysis may also be unclear by inflation as general price levels for goods and services go up and subsequently purchasing power goes down, which makes comparison difficult over time.
Many firms also use different accounting methods which make comparing of different companies difficult for instance there are two primary accounting methods used in USA, cash and accrual accounting. Cash accounting reports income and expenses are reported in the year they are received and paid; accrual accounting reports income and expenses in the year they are earned and incurred. Again making it very difficult to analyze different companies. Some additional data Jay and Jack need in order to improve their finding would be to look into the companies accounting practices and see if any off balance sheet items are present.
From there they need to make sure the off balance sheet items are converted to in the balance sheet items to have an appropriate comparison. A statement of cash flows would also useful in analysis, as it would allow in determining the short-term viability of a company, particularly its ability to pay bills. A statement of cash of cash flows also allows us to view cash and cash equivalents coming in and out of company, giving better understanding as to where money is going and coming from.
Also although looking at numbers may allow analysis to quickly spot differences in financials, I believe you must research companies in how they are run and if they are consistently making good business decisions. After collecting, compiling, and analyzing data we have come to conclusion that DCM Molding has shown a better financial condition on average in the past four years, and Plastichem has barely met the acceptable average or is below the average in the past four years. The Plastichem had a relatively high Debt-Equity Ratio, which indicated that was using many debts to finance its growth.
The high Debt-Equity Ratio also indicated that Plastichem bore more risk because the cost of debt (interest) making things difficult. The cost of the sales for both the companies have increased. But, the cost of goods sold for DCM is less that than Plastichem. This indicates that DCM has been better at controlling their cost so they have a higher gross margin as compare to Plastichem. This reduction in the gross profit has lead to the reduction on the expenses occur due to selling the goods, but since DCM has a higher gross profit than Plastichem they can also spend more in selling their goods.
So in comparison we see that DCM Molding is doing far better with its figures showing much better results than Plastichem. Recommendation that Jack would be justified in making in his report to Andrew would be Plastichem needs to increase profit margin after looking at the figures we find that the decrease in return on equity for Plastichem is mostly due to the drop in net profit margin. Plastichem increased their use of debt that resulted in a higher equity multiplier, but poor profit margin ensured the fall of return on equity.
Plastichem had a relatively high Debt-Equity Ratio, which indicated that Plastichem was using many debts to finance its growth. It should be treated as a serious problem being that Plastichem’s main rival is rated as a strong buy while their stock is rated as a hold. The strong drop in price will create fear for potential and current shareholders. If that fear continues, Plastichem’s shareholders might sell their stock at a decreasing rate, causing more issues for the company.
The CFO should do a comparison between Plastichem and DCM’s numbers, and find the strengths and weaknesses amongst his company, in particular within its management teams. He should also begin finding ways to pay off Plastichem’s debt as well as not accumulating anymore, being that Plastichem is already seen as risky. The CFO should also find a tighter way to control the company’s costs. The analysts are very accurate in their recommendations to the two firms. DCM Molding figures showed far better results and stock should rise; While Plastichem might consider selling stocks, if financial performance continues to worsen.