Financial Resources - Research Proposal Example

1- MAIN SECTIONS OF ANNUAL REPORT The main sections of the companies' annual reports are described and evaluated below: DIRECTORS' REPORT A director's report is a statement of the company's board of directors' on the company's position and performance for a particular year. However, as this statement comes from a company's person it may not contain straightforward information on the company' position. For instance, the director's report of Caf Nero Plc contains indication to the company's financial results (profit) for the year 2005 and 2004. But, Coffee Republic's director's report doesn't show any information on the company's financial results (loss). AUDITOR'S REPORT Every company as a mandatory requirement by government prepares the auditor's report. This report satisfies the company's various stakeholders i.e., government, investors, lenders, suppliers and a general reader of financial statements that the company's annual report has been prepared fairly. Both the companies' auditor report gives a true and fair view of the company's performance. PROFIT AND LOSS ACCOUNT The profit and loss statement is important for the stakeholders interested in reviewing the financial performance of the company over the year. Caf Nero Plc's profit and loss statement is much well defined showing profit than that of Coffee Republic Plc showing loss for the period. BALANCE SHEET It is of importance to the stakeholders who are interested in the financial position of the company for a particular point in time. Caf Nero Plc's balance sheet show an increasing net worth of the company, while the balance sheet of Coffee Republic Plc shows a declining net worth of the company. STATEMENT OF CASH FLOWS This statement shows the company's position in terms of cash availability. Cafe Nero Plc's cash flow statement shows an increase in total cash available in the company, whereas the Coffee Republic Plc's cash flow statement shows a severe decrease in cash for the year 2005. NOTES TO ACCOUNTS The notes provide an insight into the company's financial position and performance by showing breakdowns of facts and figures stated in its financial statements. Therefore, this section is important for the company's stakeholders in a thorough analysis of financial statements. 2- OPERATING AND FINANCIAL REVIEW STATEMENT Although, there has been a practice for the companies listed in the London Stock Market, but the companies under consideration has no such trend. None of the company has included an operating and financial review statement in its annual report. Hence, their relevance cannot be figured out in terms of providing information to the companies' stakeholders. 3- CAF NERO PLC - FINANCIAL PERFORMANCE EVALUATION The financial performance of Caf Nero Plc has been analysed with the help of financial ratios on the basis of data obtained from the company's annual report for the year 2005, 2004 and 2003. PERFORMANCE 2005 2004 2003 Return on Capital Employed 13.31% 7.16% 4.14% According to this ratio, the return generated by the company on the capital employed by the company has been increasing for the three years. It was 4.14% in 2003 and increased to 13.31% in the year 2005. This shows that the company has been performing well over the years to generate return on the capital it has employed by the company. 2005 2004 2003 Return on Equity 31.37% 23.93% 6.29% The return generated by the company on the funds invested by shareholders has also been increasing over the years. The company generated 6.29% return on its equity in the year 2003, which increased to 31.37% in 2005. This exhibits brilliant performance on the part of the company's management. PROFITABILITY 2005 2004 2003 Net Profit Margin 8.57% 4.66% 2.90% This ratio shows that the company has been getting more and more profit for the last three years on its sales after accounting for various costs such as cost of sales, operating costs etc. This ratio has almost quadrupled over just three years, showing a remarkable improvement in company's profitability. LIQUIDITY 2005 2004 2003 Current Ratio 0.47:1 0.54:1 0.89:1 According to current ratio, the company's investment in liquid assets has been declining over the three years and it has reached a situation where it doesn't have enough current assets to meet its liabilities. The current assets kept by Caf Nero Plc were 89% of current liabilities in 2003, which decreased to 49% in 2005. It shows that poor position of company in terms of liquidity. 2005 2004 2003 Quick Ratio 0.43 0.49 0.85 This ratio shows the same position of the company in terms of liquidity. If we keep stock out of the company's liquidity analysis, it is seen that the company cannot meet more than 43% of its current liabilities out of all the current assets it currently keeps. EFFICIENCY 2005 2004 2003 Stock Turnover Ratio 2.82 2.94 3.15 The stock turnover ratio shows that the company efficiently sells all of its stock in around 3 days. It is obviously a sign of any company's efficiency to empty its stock completely and generate sales in just 3 days. 2005 2004 2003 Debtor Day's Collection Period 10.86 16.39 12.42 This ratio shows that the company collected all its debts in a period of around 11 days in the year 2005. It has improved especially in 2005 from 16 days in 2004. This is another sign of the company's improving efficiency. INVESTMENT 2005 2004 2003 Dividend Per Share Nil Nil Nil The company has not paid any dividend for the years 2003, 2004 and 2005. Therefore, the company loses worth for the investors that are attracted by the dividends paid by any company. 2005 2004 2003 Earning Per Share 7.49p 3.75p 0.76p The Earnings per Share of the company has increased dramatically over the last three years as evident from the above ratio. It has increased from 0.76p in the year 2003 to 7.49p in 2005. Thus, it is an attractive reason for investment by the investors interested in the market price of the company. COFFEE REPUBLIC PLC - FINANCIAL PERFORMANCE EVALUATION The evaluation of Coffee Republic Plc's financial performance for the three years i.e., 2003, 2004 and 2005 is provided below: PERFORMANCE 2005 2004 2003 Return on Capital Employed -15.02% -15.86% -84.84% This ratio shows that the company has been incurring losses over the three years. But as seen from the ratios, the company has reduced the extent of losses over the years. Although it has been incurring losses but the company's management is putting its effort in minimising them. 2005 2004 2003 Return on Equity -119.11% -68.06% -375.24% According to this ratio, the company incurred about three times loss on the funds invested by its shareholders. This loss was minimised to around 68%, due to increased funding by the shareholders. But again in the year 2005, the company incurred more than 100% loss on its equity as the shareholders started to withdraw their funds. PROFITABILITY 2005 2004 2003 Net Profit Margin -6.39% -7.17% -31.74% This ratio exhibits the company's poor position in terms of profitability. It is not making any profits out of its activity. It loses its entire turnover in meeting various costs. However, it has been able to minimise the losses over the years. LIQUIDITY 2005 2004 2003 Current Ratio 0.42 0.53 0.41 The company's position in terms of liquidity is also not satisfactory. In the year 2003, it had current assets to meet only 41% of its current liabilities. In 2004, its current assets could cover 53% of its current liabilities and finally in 2005, this position worsened as the company decreased its investment in current assets. 2005 2004 2003 Quick Ratio 0.39 0.51 0.38 The company's liquidity position, after keeping the stock out of the consideration is further unsatisfactory. If the company does not consider its stock, it would be able to meet only 39% of the company total current liabilities and obligations. EFFICIENCY 2005 2004 2003 Stock Turnover Ratio 2.04 1.74 1.87 This ratio shows the company's efficiency in selling its entire stock and generating sales. The company finishes its stock through and through in just about 2 days. 2005 2004 2003 Debtor Day's Collection Period 27.59 24.39 20.14 This ratio shows the declining efficiency of the company in collecting cash from its debtors and credit sales. In 2003, the company collected all its money out of credit sales in just 20 days, which increased to about 28 days in the year 2005. INVESTMENT 2005 2004 2003 Dividend Per Share Nil Nil Nil The company has not offered any dividends to its shareholders over the three years. It has nothing to provide its investors that keep their money invested in the company on a long-term basis. This makes the company unattractive for the investors interested in gains out of the dividends paid by the company. 2005 2004 2003 Earning Per Share (0.33p) (0.60p) (4.37p) As the company has been iuncurring losses over the three years, it is unable to offer any earning per share to its investors. Its profit and loss statement rather shows a negative earning per share for the year 2003, 2004 and 2005. Although the company has covered the extent of losses borne by its investors, still the company is not a feasible investment choice. 4- COMPARISON OF FINANCIAL POSITION AND PERFORMANCE CAF NERO PLC & COFFEE REPUBLIC PLC As evident from the analysis of the annual reports, there is a great difference in both the companies financial position and performance for the last three financial years. A discussion on similarities and differences between these companies' position and performance is given below: The major difference reflected by the companies' annual reports and financial statements is the result of the companies' operation. Caf Nero Plc has had an increasing trend in making profit out of its sales whereas Coffee Republic Plc has bene incurring losses for the last three financial years. Although the extent of losses borne by the company has been improving, but still it is very far from the way of making profits for its shareholders. Caf Nero Plc has increased its Earning Per Share by around 100% as shown by the company's annual report, reflecting a remarkable performance of the company over the year. On the other hand, Coffee Republic Plc has offered loss per share to its investors. Here again, the trend has been improving over the years. In terms of liquidity, both the companies are facing the unsatisfactory situation. Caf Nero Plc is unable to meet more than 47% of its liabilities out of its current assets in the year 2005 and same is the case with Coffee Republic Plc, as it can only meet 42% of its short-term debts and liabilities whenever a need arises. It shows a lack of invesment in the current assets on the part of both the companies. Coffee Republic Plc is more efficient than the Caf Nero Plc in generating sales out of its stock. It finishes its entire stock in just two days and converts it into turnover. Whereas, Caf Nero Plc takes around three days to convert its entire stock into sales. On the other hand, Caf Nero Plc collects cash out of its credit sales more efficiently than Coffee Republic Plc. It recovered all its money from its debtors in a period of just 10 days in the year 2005 from 16 days in 2003, whereas Coffee Republic Plc took around 28 days to collect its money from all the debtors in the year 2005 from 24 days in 2004 and 20 days in 2003. Both the two companies have not been offering any dividends to theri shareholders for the last three financial years. Therefore, the investors that are generally attracted by the dividends paid by the company might not consider these two companies a feasible option for investing their money. However, Caf Nero Plc is indeed an unattractive investment opportunity for the investors that are interested in the market price of the company, as the Earning per Share of the company has improved by 100% in 2005 compared to the last year's Earning per Share. Coffee Republic Plc, on the other hand, has been offering loss per share to its investors over the last three financial years. 5- DIFFERENCE IN CORPORATE REPORTS The corporate reports produced by the companies from an identical sector may be different from each other in terms of presenting the company's facts and figures and concealing some facts in order to hide the real position of the company. When the annual reports of Caf Nero Plc and Coffee Republic Plc are compared with each other, it will be seen that the former company has actually highlighted its financial results for the year 2005 in a separate section named as "financial highlights". It has also emphasised and compared its financial reuslts (profits) for the year 2005 with that of the year 2004 in the director's report. The profit and loss account of this company is also showing elaborated figures (incomes and expenses). On the contrary, the latter company i.e., Coffee Republic Plc has refrained from showing its financial results where it is not necessary to discuss them. It has not even discussed its financial results in the director's report for the year 2005, let alone comparing them with that of the previous year. Therefore, it can be said that although the companies have produced the annual reports with same number of sections, but the contents are different in terms of providing relevant information to its various stakeholders depending on the financial position and performance of the particular company. 6- CORPORATE REPORTS AND INFORMATION NEEDS OF STAKEHOLDERS Both the companies' annual reports and financial statements meet the information needs of the various stakeholders such as goverment, management, investors, lenders, suppliers and general public. Government can rely on the information provided by these companies' financial statements and the tax figure shown because of the auditors' report. Management can assess and evaluate its performance for the financial year by reviewing the company's financial statements. These annual reports could guide and assist the investors in making the right investment decision for the company i.e., in which company to invest and for how long to invest etc. The lenders could also find required information after analysing these companies' annual reports that could assist him to assess the security of the money lended to the company. The reports can also be beneficial to the suppliers in deciding the credit terms as well as influence the confidence regarding the cash collection. The general public, on the whole, can review the financial statements and analyse the companies' financial position and performance that will enhance their understanding of financial statements and financial information provided by a company. References Annual report 2005, accessed December 20 from the World Wide Web: http://www.caffenero.com/downloads/May2005AnnualReport.pdf Annual report 2004, accessed December 20 from the World Wide Web: http://www.caffenero.com/downloads/annual1104.pdf Annual report 2005, accessed December 20 from the World Wide Web: http://www.coffeerepublic.co.uk/uploads/1129192990.pdf Annual report 2004, accessed December 20 from the World Wide Web: http://www.coffeerepublic.co.uk/uploads/1129192756.pdf Stickney Clyde P., Brown Paul, Wahlen James M. (July 18, 2003), "Financial Reporting and Statement Analysis : A Strategic Approach", South-Western College Pub; 5 edition CAF NERO PLC 2005 2004 2003 Return on Capital Employed Profit before interest and tax (PBIT) x 100 6,009 2,356 1,142 Capital Employed 45,761 32,901 27,608 13.31% 7.16% 4.14% Return on Equity Profit After interest and tax (PAIT) x 100 4,953 2,470 519 Ordinary Shareholder's Funds 15,790 10,321 8,248 31.37% 23.93% 6.29% Net Profit Margin Profit before interest and tax (PBIT) x 100 6,009 2,356 1,142 Turnover 70,117 50,547 39,396 8.57% 4.66% 2.90% Current Ratio Current assets 6,611 5,849 7,348 Current liabilities 14,006 10,919 8,203 0.47 0.54 0.89 Quick Ratio Current Assets- Stock 6,069 5,441 7,008 Current Liabilities 14,006 10,919 8,203 0.43 0.49 0.85 Stock Turnover Ratio Stock 542 408 340 Turnover/ 365 192.10 138.49 107.93 2.82 2.94 3.15 Debtor Day's Collection Period Debtors x 365 761,755 828,550 489,465 Turnover 70,117 50,547 39,396 10.86 16.39 12.42 Dividend Per Share Nil Nil Nil EPS 7.49p 3.75p 0.76p COFFEE REPUBLIC PLC 2005 2004 2003 Return on Capital Employed Profit/ Loss before interest and tax (PBIT) x 100 (1,123) (1,571) (9,617) Capital Employed 7,479 9,907 11,336 -15.02% -15.86% -84.84% Return on Equity Profit/ Loss After interest and tax (PAIT) x 100 (1,396) (1,748) (9,820) Ordinary Shareholder's Funds 1,172 2,568 2,617 -119.11% -68.06% -375.24% Net Profit Margin Profit/ Loss before interest and tax (PBIT) x 100 (1,123) (1,576) (9,617) Turnover 17,553 21,970 30,302 -6.39% -7.17% -31.74% Current Ratio Current assets 1,483 2,096 1,930 Current liabilities 3,535 3,938 4,621 0.42 0.53 0.41 Quick Ratio Current Assets- Stock 1,385 1,996 1,774 Current Liabilities 3,535 3,938 4,621 0.39 0.51 0.38 Stock Turnover Ratio Stock Turnover/ 365 98 105 156 48.03 60.19 83.02 2.04 1.74 1.87 Debtor Day's Collection Period Debtors x 365 484,355 535,820 610,280 Turnover 17,553 21,970 30,302 27.59 24.39 20.14 Dividend Per Share Nil Nil Nil EPS (0.33p) (0.60p) (4.37p) Read More