Empire Limited Ratio Analysis, Case Study Example

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Case Study

The following ratio analysis was completed to rate and review the overall performance of  Empire Company Limited based upon the information contained in their 2011 annual report. This ratio analysis will include a comparison of current year versus past performance, and ratios of liquidity/efficiency, solvency, profitability, and market.

Liquidity and efficiency: ratios that measure available cash resources and how efficient the business is operating are generally favorable. With assets of $6,555.4 (millions) compared to liabilities of $3,306.4 in 2011, there is a nearly 2 to 1 current ratio (1.98) that compares favorably to previous year’s 1.9 to 1 ratio, showing strong ability to pay short-term debts. Additionally, efficiency standard ratios reflect comparable performance to previous year, with Accounts Receivable Turnover flat to last year with little or no change. This was accomplished while increasing sales by 3.3%. Cash and cash equivalence increased to $616.9 million from $401.0 million previous year. This increase was helped in part through the sale of Wajax for $121.3 million. Another factor was an overall decrease in investment activity.

Solvency: measuring the overall health of the company, solvency ratios also indicate that the company performed well and improved its position in 2011 as compared to performance in 2010. The 2011 debt ratio is 50.4%, which compares favorably to previous year ratio of 52.8%. In addition, equity ratio increased from 47.2% last year to 49.6% in 2011. Two accomplishments that undoubtedly contributed to these numbers are the stock repurchase of non-voting A-class shares in the amount of $27.6 million, and a significant reduction of long term debt due within one year as compared to previous year. Although the company accumulated $218.3 million in long term debt issue, they also repaid $272.7 million, showing a net gain of $54.4 million.

Profitability: In this ratio category, Empire Company Limited also shows favorably in their 2011 numbers as compared to previous year. Profit margin increased to $2.31 versus $1.95 per dollar last year, indicating that net income generating by sales increased substantially. Return on total assets increased from $4.83 per dollar to $5.64, showing a respectable increase in the profitability of the company’s total assets. Compared to last year, operating earnings per share increased from $4.16 to $4.52, while retained earnings increased from $2,652.2 to $2,944.2. These are all indications that overall profitability of the company is growing and should be viewed favorably.

Market: as a publicly traded company, how the market responds to the company is a strong indicator of how successful the company is being for their investors. Empire Company Limited ended 2011 with a price to earnings ratio of 9.99 as compared to 12.04 previous year, while dividend yield shows as 1.48 versus 1.4. The year end stock price of $54.14 in 2011 improved from 2010’s level of $52.98 at year end close, showing that the market views the performance of the company favorably. Shareholder equity increased by approximately 10%, showing that Empire Company Limited is maintaining its commitment to their shareholders through improved performance in its financials.

In summary of the ratio analysis that has been conducted on Empire Company Limited, the company shows marked improvement as compared to past performance. In addition to all of the ratio comparisons conducted between 2011 and 2010, it should also be noted that 2009 numbers performed in a similar fashion as compared to 2010. This indicates a consistent positive trend over the three year period and further reinforces that the company continues to find ways of becoming more successful financially.

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