This report is presented to the XYZ Client Limited for the purpose of making investment decision regarding one of the two companies in Taiwan’s shipping industry – Evergreen Marine Corporation (EMC) and Wan Hai Shipping Ltd (WHS). The information presented in this report is largely based on the financial results reported by the companies in their annual financial statements for the financial years ending 2015 and 2016. The report is solely intended to be used by XYZ Client in making an informed investment decision based on all publicly available historic financial information. The report will analyze the two companies from the perspective of favorable or adverse financial ratios and draw conclusions therefrom.
Both the companies are engaged in the local and international marine transportation, providing services as shipping agents, providing containers and warehouses on rent for storage and distribution thereof. EMC was founded in 1968 and is now considered of the leading international shipping companies with operations spread around the world. It has subsidiaries in UK, Hong Kong and Singapore. WHS was started in Taiwan in 1965 as a log transportation company. In response to the rapid development in international trade opportunities it soon grew into a full-scale vessel shipping company. It now operates in all of the major cities of Asia with over 66 full-container vessels.
Financial ratios express inter-relationships between different line items in the financial statements of the company, and this information can vary significantly from company to company and based on the accounting policies adopted. Since report is prepared with the object of investment in mind, the ratios selected are the ones that are most suited to the current business environment of the Taiwan shipping industry and the ones that are most likely to be consistent and comparable between different players in such industry irrespective of the accounting and financial policies adopted.
An in-depth analysis of the various financial ratios we will be able to identify certain trends and relations in the financial statements, that when interpreted correctly, will provide us valuable information regarding various aspects of the two companies including their short term solvency, financial stability, performance evaluation and profitability, efficiency of operations and asset utilization as well as their market performance versus shareholder expectations. These trends may be reflective of certain strengths or weaknesses in shipping business operations. The analysis is presented in two broad ways. First, relevant ratios computed for each of the two companies are presented for the years 2015 and 2016 to determine the current trend therein and to make an assessment of what may lie ahead of the investment, also called the inter-temporal analysis. Secondly, a comparison of the ratios of the two companies is made to determine which has the better financial position and prospects, also called the cross-sectional analysis.
The financial information and supporting notes publicly disclosed by the company is often relied by the investors in drawing conclusions about the financial stability, capital structure, profitability and future prospects of the company. Calculation of ratios is a technique that assists in this process. However, a like versus like comparison is essential and ratios need to be interpreted in order to make any valuable and appropriate conclusion.
Calculations for the ratios for EMC and WHS are presented in the appendix to the report. These ratios are broadly classified to make inferences about the following five aspects of the business. Interpretation of these ratios is made taking into account the nature of business and operational characteristics of both the companies.
In assessing the short-term solvency and financing capability following ratios have been calculated:
Average collection period (days)
These ratios are also indicative of the companies’ short-term financing policies (Srinivasa Raghavan & Mishra, 2011). These ratios mainly represent a company’s ability to repay or meet its short-term financing obligations using readily available liquid funds. Therefore, higher the availability of liquid funds, which may comprise of cash and equivalents, short term ready-market investments, term deposits with maturity less than a year, and receivables.
Evergreen Marine Corporation
Wan Hai Shipping Limited
Average collection period
Current ratio indicates the ability of a company to repay its current liabilities out of current assets. It is a bird’s eye view of the overall short-term financing and working capital management of the company. The ratios are clearly better in case of, for both years, in case of WHS which has 2.13 Taiwan Dollars available to repay every dollar of its current liability. In contrast EMC has only 1.28 Taiwan Dollars to repay every dollar of liability. This assumes that the assets are realized at their book values. Ideally it should be at least 2 and therefore this ratio is indicative of an adverse financial situation of EMC.
Quick ratio is another variant to assess short term liquidity position of a company. It eliminates the illiquid and subjectively valued inventories form the current ratio formula. It therefore, presents a clearer insight into the company’s ability to address all its liabilities. (Obstfeld, 2012). Again, WHS is the winner since its Quick Ratio is well above 1:1 which is acceptable in most cases. Analysis tells that both companies are better off in the short-term payment to their creditors and meeting other financial obligations, but WHS has a stronger ability to do so.
Average collection period dictates the average time it takes a company between the events of making a sale on credit terms and eventually realizing its cash receipts. His is one step of the entire business cycle that essentially sheds light on the company’s ability of managing its trade payables effectively. Analysis above, shows that WHS has colossally improved its ability to collect receivables from around 62 days in 2015 to just 16 days in 2016 on average. This is consistent with the reduced Quick Ratio due to significantly reduced receivables in 2016. Whereas the ratio has deteriorated from 31 days to 37 days in case of EMC. Hence, the receivables collection and turnover is better in case of WHS.
Based on the above analysis WHS clearly has a better short-term solvency position when compared with its competitor. It has a sound current ratio with an exceptionally low receivables turnover. A further analysis can be made from inquiries with the management of WHS to identify any changes in the credit policies and reasons for a drastic change in receivables turnover.
Gearing ratios help in assessing the long-term debt capacity and solvency of a company. These ratios also hint at the financing and capital structure of the company. Capital structure of a company represents the sources of financing the company uses to operate, i.e., composition of debt and equity in financing its assets (Fan et al., 2012). Debt Ratio is computed to hint at the capital structure of the two companies as follows.
Evergreen Marine Corporation
Wan Hai Shipping Limited
Times Interest Earned Ratio
The computed debt ratio tells that EMC is more debt intensive as compared to WHS. In 2016 over 71% of the assets of EMC are finance through debt. This is very alarming based on the fact that the company is currently running in losses and incurring gross loss from operations. As evident from the negative Times Interest Earned ratio, the company is not able to earn enough money to pay back its debt financers. With interest rates going a little up the company would be in very deep trouble. This shows that it is highly likely that the company can soon become insolvent and bankrupt unless further capital is injected and invested in profit making avenues.