"Return on capital employedARM has been having a steady ROCE over the last three years. It was the highest in 2009 and lowest in2010. In 2011, there is a slight increase of 0.2%. ROCE shows how well a company is gaining from itscapital employed. Ideally it should be higher than the rate at which the company borrows otherwise anyincrease in borrowing will reduce shareholders’ funds.BCL’s ROCE was about three times that of ARM. This means BCL is gaining more from its capitalemployed than ARM. Thus it is a negative thing for ARM and could have achieved better ROCE.Limitation of this ratio is that it uses book value of the assets in getting the capital employed. This meansthat any revaluation, depreciation and amortization will affect the ratio. Companies may use this loopholeto manipulate the ratio. It also ignores inflation in the sense that the book values of capital employed donot take into account inflation.One reason why ARM has a lower ROCE is due to the revaluation of property, plant and equipment in2009 which is visible from the financial statements. A revaluation upwards of KES 2,140 million is done.This is a large figure that has a material effect on the return on capital employed ratio.Asset turnover Asset turnover (times) 1.2 1 0.8 0.6 ARM asset turnover 0.4 BCL asset turnover 0.2 0 2009 2010 2011 Chart 4Chart 4 shows the asset turnover of ARM and BCL in 2009, 2010 and 2011. It is visible that ARM’s assetturnover is way below BCL’s. ARM’s asset turnover was at an average of 0.39 times while BCL had anaverage of 0.95 times. This makes the shareholders of ARM at a disadvantage as the company is notutilizing the assets at their optimum level to generate revenue which would in turn lead to higher profitsand increase in shareholder wealth. However, even this ratio uses the uses book value of assets and is therefore distorted by revaluations,depreciation and amortization. Liquidity ratiosCurrent ratioThe liquidity of a company is very essential to its survival. A company should be able to meet itsobligations as and when they fall due in order to survive.ARM’s average current ratio during 2009 to 2011 was 1.03, meaning the current assets and currentliabilities were almost equal. This is not a healthy sign and shows poor performance regarding liquidity.BCL on the other hand appears to be better off. Its average current ratio during 2009 to 2011 was 2.3.This means that current assets were twice the current liabilities and BCL would not have a problem inmeeting its short term obligations. Chart 5 shows the current ratio of the two companies over 2009, 2010and 2011.Current Ratio3 2.5 2 1.5 ARM current ratio BCL current ratio 1 0.5 0 2009 2010 2011 Chart 5Quick ratioQuick ratio eliminates inventory from calculation of the liquidity ratio. The ratio is usually calculatedwhen inventory is not very liquid that is slow inventory turnover.ARM’s quick ratio was 0.7, 1.0 and 0.5 in 2009, 2010 and 2011 respectively. Comparing this with BCLwhich was 1.7, 1.3 and 1.8 in 2009, 2010 and 2011 respectively it is noticeable that ARM was in worseliquid position than BCL even though BCL held more inventories.TimesQuick ratio 2011 2010 BCL quick ratio ARM quick ratio 2009 0 0.5 1 1.5 2 Chart 6Cash flow analysisARM cash flows (KES) 4000000 3000000 2000000 Cash flow from operating1000000 activities 0 Cash flow from investing2009 2010 2011 activites -1000000 Cash flow from financing-2000000 activities -3000000 -4000000 -5000000 Chart 7ARM seems to have a healthy cash flow from operating activities which steadily increased from 2009 to2011. The cash flow increased by 44% in 2010 and 154% in 2011.This is attributable to the increase inrevenue during the three financial years. ARM’s cash flows from investing activities shows that the company is increasingly investing in property,plant and equipment which is a good thing as the company is investing to meet future economic growthand demand. The company commissioned a cement grinding plant in Athi River in 2011 that increased itsproduction capacity and therefore revenue (ARM, 2011)Cash flow from financing activities shows that the company is borrowing funds to finance its investingactivities. This may prove to be dangerous if the expected economic growth is not met and the companyends up having difficulties in repaying its debts.ARM is therefore in a strong cash flow position except for the fact that it is increasing its debts whichmay be dangerous if there is an economic downturn.ARM’s liquidity in light of the statement of cash flows deteriorated. The net change in cash and cashequivalents in 2009 was KES 191 million, KES 105 million in 2010 and negative KES 1,270 million in2011. This means that the company had become less liquid and may be facing liquidity problems.BCL cash flows 10000000 8000000 6000000 Cash flow from operating4000000 activities Cash flow from investing2000000 activities 0 Cash flow from financingactivities 2009 2010 2011 -2000000 -4000000 -6000000Chart 8BCL’s cash flow from operating activities is decreasing with a sharp fall in 2011. This is because oflosing market share to competitors like ARM. However, BCL had a negative cash flow for both investingand financing activities which means that it is financing its growth from operations and paying off loansreducing the company’s obligations. At the end of years 2009, 2010 and 2011 BCL had a positive amount of cash and cash equivalents whichsuggests that the company is not facing liquidity problems like ARM. Efficiency ratiosReceivables Days 120 100 80 60 40 20 0 2009 2010 2011 ARM Receivables days 98 113 83 BCL Receivables days 24 22 15 Chart 9ARM performed poorly when it comes to debt collection. Average receivables days during 2009 to 2011were 98 days, comparing to BCL which has an average of 20 days. This means that BCL was moreefficient in debt collection and required working capital financing for a shorter period than ARM.However, this is acceptable if ARM is giving longer credit periods for getting customers which seems tobe the case. One limitation of this ratio is that instead of using credit sales, the entire revenue figure was used tocalculate the receivables days.ARM took longer to pay its creditors than BCL which was good for ARM as long as its reputation wasnot damaged. However, if it damaged the company’s reputation then it is a sign of poor performance andARM may face problems in future.The difficulty in getting the correct scene is the limitation when using this ratio. It was difficult to knowwhether ARM was able negotiate better terms with creditors and pay after a longer period or simplydelaying in payments to creditors which damaged its credit image. Also, instead of using credit purchases,the cost of sales was used to calculate this ratio.Days"