Financial Statement Analysis in Kingfisher Plc - Book Report/Review Example

PART I INTRODUCTION: Financial ment analysis(Larson, 1995) is the best way to determine whether to increase investments in the business or to withdraw investments from the business. The following paragraphs explain in detail the importance of regulatory framework(Meigs, 1995) for companies producing financial reports in the international context. The following paragraph criticizes the provisions of significant accounting standards(Meigs, 1995) to transactions and items in the financial statements. ANSWER: Financial Statement Analysis shows different finding as follows: As for the percentage change in the net income from the year 2005 - 2006, Table 1 in the appendix shows that the difference between the net income of 2006 or 10,900,000 and the net income of 2005 at 5,200,000 is 5,700,000. When the difference is divided by the prior year 2005's net income, the there is an increase in net income of 110 percent. This shows that investing in Kingfisher Plc(Hall, 2000). As for the percentage change of profit from the year 2005 - 2006, Table 2 in the appendix shows that the difference between the profit of 2006 or 139,000,000 and the profit of 2005 at 446,500,000, When the difference if -307,500,00 is divided by the prior year 2005's profit, the there is an decrease in profit of 69 percent. This shows that investing in Kingfisher Plc. is not good. As for the percentage change of net assets from the year 2005-2006, Table 3 in the appendix shows that the difference between the net assets of the year 2006 of 4,320,400 and the 2005 net assets of 4,387,300 was -66,900. When this amount is divided by the net assets of 2005, the resulting decrease is 2 percent(Pettigrew, 2006). As for the current ratio for the year 2006 shown in Table 4 in the appendix, when the current assets of 2,180,700,000 was divided by the current liabilities of 2,221,200,000, the resulting current ratio is 98 percent. This test of liquidity shows that there are more than enough assets to pay for the liabilities of the company. This will impress on the investor to pump in additional capital or just simply maintain their current investments. As for the current ratio for the year 2005 shown in Table 5, when the current assets of 1,944,800 was divided by the current liabilities of 1,996,500,000, the current ratio result is 97 percent. This test of liquidity(Moyer, 2005) shows that there are more than enough assets to pay for the liabilities of the company. This will impress on the investor to pump in additional capital or just simply maintain their current investments. This is good for the investor. As for the acid test ratio or quick ratio for the year 2006 shown in table 6 below, when the sum of the cash and cash equivalents of 234,100,000 and marketable securities of 0 was divided by the current liabilities of 2,221,200,000, the quick ratio or acid test ratio was 11 percent. This shows that the company will be able to pay its short term debts from its most liquid asset of cash without having to rely on receivables(Noe, 2005) and borrowings to pay for the debt. As for the acid test ratio or quick ratio(Hansen, 2006) for the year 2005 shown in table 7 below, when the sum of the cash and cash equivalents of 162,100,000 and marketable securities of 0 was divided by the current liabilities of ,996,500,000, the quick ratio or acid test ratio was 8 percent. This shows that the company will be able to pay its short term debts from its most liquid asset of cash without having to rely on receivables and borrowings to pay for the debt. As for the financial leverage ratio shown in table 9 in the appendix below, when the sum of the share capital of 2006 of 2,450,000 is added to the share capital of 2005 of 2,434,900 which is 4,884,900 is divided by two, the average is 2,442,450. When the average total assets found of table 8 of 8,043,400 is divided by the average share capital in table 9 of 2,442,450, the financial leverage result is 3.29 percent. This is good for the investor. As to the total debt ratio for the year 2006 as shown in table 10 in the appendix, when the total liabilities of 4,037,800 is divided by the total assets of 8,358,000, the result is 48 percent. This shows that there will be enough assets to pay the creditors in case of payment demands. This is good for the investor. As to the total debt ratio for the year 2005 as shown in table 11 in the appendix, when the total liabilities of 3,341,300 is divided by the total assets of 7,728,600, the result is 43 percent. This shows that there will be enough assets to pay the creditors in case of payment demands. This is good for the investor. As to the total debt to equity ratio for the year 2006 as shown in table 12 in the appendix, when the total liabilities of 4,037,800 is divided by the total assets of 4,320,400, the result is 93 percent. This shows that there more money infused by the owners than the creditors. This is good for the investor. As to the total liabilities to equity ratio for the year 2005, as shown in table 13 in the appendix, when the total liabilities of 3,341,300 is divided by the total assets of 4,387,300, the result is 76 percent. This shows that there more money infused by the owners than the creditors. This is good for the investor. As a financial advisor to a shareholder of this company, who currently holds 20,000 shares in the group with shareholdings that has a large, balanced portfolio of shares and wanting safe investments I will recommend that she should not look for an immediate sale his or her part of the company's shares. Based on the performance of appropriate financial analyses on the accounts provided, the financial statement analysis above using many relevant and timely computations the investor will find it more profitable to hold on to his or her hard earned money by continuing to allow the company Kingfisher to use his money for its continued operations in European and Asia. The explanation or result of the different financial statement ratios above undoubtedly shows that the investor had made to right decision to invest in the Kingfisher Ltd. Based on the financial statement analysis above, Since the various business activities of the group such insuring that accomplishing its objectives in the field of home improvement retail by continuing to be the third largest in the world, operating over 700 stores in 11 countries in Europe and Asia. Another good reason for investing in the company, Kingfisher Plc, is that it is one of the leading market positions in the UK, France, Poland, Italy, China and Taiwan. Also, based on the financial statement information, it has been successful in it main retail brands namely B&Q, Castorama, Brico Depot and Screwfix Direct. Kingfisher also has a 21% interest in, and strategic alliance with, Hornbach, Germany's leading DIY warehouse retailer, with 123 stores in Germany and neighbouring countries. Also, Based on the financial statement analysis above, Kingfisher has successfully achieved its objectives spelled out clearly for its stakeholders such as a) Superior and sustainable long-term growth and returns for shareholders such as b) outstanding value, choice and service for customers c)Rewarding careers and personal development for staff and d) Unrivalled growth opportunities for suppliers and E)Responsible growth that is socially and environmentally sustainable. Based on the financial statements, and the financial statement analysis above, the company has been successful in implementing its company strategies in order to attain its objectives. As shown by the financial statements and the financial statements analysis above, the company was able to a) Consolidate the strong leadership positions of its more developed operations in the UK and France. After years of rapid store expansion to achieve market leadership, the main priority for these businesses now is to drive profits and economic returns from their existing assets. Operational focus is on increasing sales and margin productivity per square metre of selling pace and driving improved cost productivity throughout each business b) Drive its proven developing operations in the rest of Europe and Asia. These businesses have achieved leadership positions in their markets but still have significant scope to expand their store network and grow market share. Investment will also be needed in infrastructure to support this growth, c) Expand rapidly its emerging operations in new markets as the local retail concepts and economic models become established and proven and finally d) Harness its two key competitive advantages, buying power and international diversity, to the advantage of all its stakeholders. Also, The investor should continue to keeping his or her money in the coffers of Kingfisher Plc because the company continues to expand into uncharted territories. Currently it has been successful in its expansion program to eleven European and Asian home improvement markets is forecasted to generate additional estimated to be worth around 114 billion, four times the size of the UK market alone. Furthermore, its markets outside the UK are expected to grow faster, particularly China, Poland and Russia, where wealth is increasing and, consequently, the demand for better homes is rising fast. International expansion also boosts Kingfisher's overall buying scale, a key factor in home improvement retailing. Many of Kingfisher's products, such as power tools and paint, are manufactured by big international suppliers. In fact, the expansion Kingfisher Plc outside the UK has already doubled Kingfisher's scale, thereby enabling the Group to work more as partners with these big suppliers to get the best products, at the best prices, for its customers. Importantly, Kingfisher's size enables it to work together with suppliers on a shared social and environmental agenda. Generally, international expansion has brought another important benefit which is the ability of Kingfisher's businesses to tap into a vast international pool of ideas to accelerate its own local development. Furthermore, since more and more Kingfisher companies are adapting their format, improving in-store displays and introducing new products and services in their local markets based on the best ideas and experiences from around the Group. CONCLUSIVELY, keeping the money invested in Kingfisher will be a better choice because the company is doing good net income wise and is forecasted to increase the investor's earnings per share. PART II - (1,000 - 1,500 words) All companies listed on EU Stock Exchanges have had to publish their financial statements using International Accounting Standards from 1st January 2005. Critically evaluate for whom this requirement will be of benefit. The financial statements will benefit all stakeholders of the company. FIRST, managers will benefit from financial statements. The managers will use the financial statements to determine whether they were able to meet the standards in terms of quality of service and products and in terms of quantity output of products and services. The manager will determine if he or she has been able to generate income for the business. Based on the financial statements, the manager can decide which of the actual expenses he had incurred that is over the budget. In terms of variance analysis, the manager will try to scrutinize why he had overstepped the maximum allowed expenses based on the pre approved budget. SECOND, the board of directors will use the financial statements in order to explain to the all interested and affected parties that the decisions and plans such as expansion to uncharted territories and intruding into the competitors' main source of income , closing down unproductive market segments in some locations, the setting out of its plan for next five or more years, the decision to grant dividend payments for income generated this year but at the same time promoting to a later year the distribution of cash dividends to its stockholders on record because the retained earnings amount will be used to set up a large manufacturing facility in a far away place because feasibility studies have shown that the return on investment will take only from five to eight years. THIRD, the customers will be interested to see the financial statements also. The customers need to know if the company is making profits or it is on the inevitable road to bankruptcy. The customer needs to know that the company will be able to supply them their much needed raw materials which the customers will, in turn use to produce their own finished products. The customer also needs to know if the company is generating huge profits. In this case, then the customer could ask for a five or more percent purchase discount. In case the customer sees that the company is on the road to bankruptcy, the customer may start to look around for competitors of the company, in our case Kingfisher Plc. FOURTH, Suppliers are interested to see the financial statements. The suppliers, just like in the case of the customers above, is interested to know if the company, in our case Kingfisher Plc, will continue to generate profits for the next five or more years to come. The suppliers will not survive until the next five or more years if their customer, in our case Kingfisher Plc, will close shop. The financial statements will also indicate that the company has been increasing its sales or decreasing its sales. When the supplier sees by looking at the financial statements that the company has been generating an big and continuous increase in sales during the past year or two, the suppliers will then increase its production output to meet the supply needs of the customers. On the other hand, if the supplier sees in the financial statements that the company has been decreasing its sales because its competitors have been producing better and lower priced products, then the supplier will then reduce the number of units it will produce. Also, the supplier will not have to look for other customers to replace the decline in sales brought by its current customers. FIFTH, Creditors are also interested in the financial statements. The creditors will use the financial statements to determine whether to approve the company's new loan application, Also, the creditor is interested to know whether the company will continue to generate income until the next five or more years. Based on the financial statements, the creditors will known whether the company will be able to pay their maturing payables when the time to collect the payments arrive. Creditors are also interested in the financial statements to determine whether to collect all future collectibles now because, based on the financial statements, the customers are now near the end of the road named bankruptcy. Some creditor companies state that, in case their loan applicants fail to pay two consecutive monthly dues, the creditor companies will not wait for the next two or more years to collect the amounts due. SIXTH, Government regulating agencies are also interested in the financials statements. The government agencies are determined to know if the company has not violated any laws of the land. One such law that should not be violated is the pollution law. The government wants to know if the manufacturing plants do not pollute the air with their smoke emissions. Also, the government is interested to know if the company has been polluting the rivers and lakes near its plant sites. The pollution of water would kill the fishes and other aquatic life forms living on and in the river. In this case, the government will order a stop to the company's production and even file an environment case against the polluting company Also, the government regulating agencies are interested to know if the any labor laws have been violated. The financial statements will show whether the workers are being underpaid. SEVENTH, government tax agencies are interested to get a copy of the financial statements. The financial statements will show how much income the company has been generating for the past year or years of operations. After the company knows how much the company has been generating in terms of income or loss for the past year or years in operation, then the government tax agencies will now determine if the company has been complying with tax laws of the land. Meaning, the government tax agencies will determine if the surcharges or fines will be imposed on companies that do that pay the correct amount of taxes. The government tax agencies, in a worse case scenario, will file cases in court to force the companies to pay the correct amount of taxes to the government. EIGHT, the community is also interested in the financial statements. The community will use the financial statements to determine whether the company can afford to hire new employees from the community. Also, the community use the financial statements to determine if the company has not been polluting their rivers and waters as well as polluting the air. In case of pollution, the community will also determine, based on the financial statements, if the company could spend some advertising and promotions money to help the community defray the expenses of their community activities like setting up lessons for out of school youths, setting up free medical and dental outreach missions to the very poor in the community. NINTH, the Employees, especially those without labor unions, are interested in the financial statements. The employees need to see the financial statements in relation to their salaries and wages. The employees, upon seeing the company' financial statements, will ask for an increase in salary if the net income and sales will be able to pay for those increases in salaries. In case the net income of the company has been on the road to bankruptcy, the employees will have to think twice before asking for an increase. TENTH, the Labor unions are interested in the financial statements. The labor unions are interested in the financial statements in relation to the salaries and fringe benefits that the employees will be allowed to receive. The labor unions need to see the financial statements in relation to their members' salaries and wages. The employees, upon seeing the company's financial statements, will ask for an increase in salary if the net income and sales will be able to pay for those increases in salaries. In case the net income of the company has been on the road to bankruptcy, the labor union employees will have to think twice before asking for an increase. ELEVENTH, the stockholders are determined to get a hold of the financials statements. In reality, the companies automatically send the balance sheet and income statements to the stockholders as part of their agreement. The stockholders will use the financial statements for their decision making activities. If the stockholders will see that he financial statements show that the company has generated a continuous net income trend for the last couple of years, then the investors would decide to keep their investment in the company. Also, the investor may decide to double or triple their current investments in the company because the net income is divided by the number of shares outstanding. This means that if the stockholder with more stocks will receive more dividends because the total dividends is divided by the total number of shares outstanding. CONCLUSION: Based on the above paragraphs, it is very important that the regulatory framework for companies producing financial reports in the international context must be put into place. Also, the above paragraphs show the importance of implementing provisions of significant accounting standards to transactions and items in the financial statements. Further, financial statement analysis is the best way to determine whether to increase investments in the business or to withdraw investments from the business. In conclusion, these frameworks and accounting standards must be followed to ensure that accounting is the true language of communication among all interested parties the company. BIBLIOGRAPHY Larson K., Miller P., Financial Accounting, Irwin Press, London, 1995 Meigs et al., Financial Accounting, McGraw Hill London, 1995 Meigs R., Meigs W., Financial Accounting, McGraw-Hill, London, 1992 Meigs et al., Financial Accounting, McGraw-Hill, London, 1995 Hall, J., Information Systems Auditing and Assurance, South Western College Publishing, London, 2000 Pettigrew et al., Strategy and Management. Sage, London, 2006 Moyer et al., Contemporary Financial Management Fundamentals, Thompson, UK 2006 Noe et al., Human Resource Management, McGrawHill, London, 2005 Hansen D., Mowen, M., Management Accounting, Thompson, UK, 2006 Links which are provided you with Kingfisher plc's Annual Report and Accounts for the year ended 28th January 2006: http://www.kingfisher.com/managed_content/files/reports/annual_report_2006/index.asppageid=9 http://www.kingfisher.com/managed_content/files/reports/annual_report_2006/index.asppageid=48 http://www.kingfisher.com/managed_content/files/reports/annual_report_2006/index.asppageid=19 http://www.kingfisher.com/managed_content/files/reports/annual_report_2006/index.asppageid=24 http://www.kingfisher.com/managed_content/files/reports/annual_report_2006/index.asppageid=26 http://www.kingfisher.com/managed_content/files/reports/annual_report_2006/index.asppageid=27 http://www.kingfisher.com/managed_content/files/reports/annual_report_2006/index.asppageid=30 APPENDIX Table 1 Net Income recognized under equity Net income under equity 2006 10,900,000.00 Net income under equity 2005 5,200,000.00 DIFFERENCE 5,700,000.00 Divided by Net Income under equity 2005 5,200,000.00 INCREASE 1.10 Table 2 Profit for the financial year Profit 2006 139,000,000.00 Profit 2005 446,500,000.00 DIFFERENCE (307,500,000.00) Divide by Profit 2005 446,500,000.00 DECREASE (0.69) Table 3 Net Assets Net assets 2006 4,320,400.00 Net assets 2005 4,387,300.00 DIFFERENCE (66,900.00) Divide by Net assets 2005 4,387,300.00 DECREASE (0.02) Table 4 CURRENT RATIO Current Assets 2006 2,180,700,000.00 = 0.98 Current Liabilities 2,221,200,000.00 Table 5 Current Assets 2005 1,944,800,000.00 = 0.97 Current Liabilities 1,996,500,000.00 Table 6 2006 Cash & Cash equivalents 234,100,000.00 Marketable Securities - TOTAL 234,100,000.00 Current Liabilities 2,221,200,000.00 ACID TEST RATIO = 0.11 Table 7 2005 Cash & Cash equivalents 162,100,000.00 Marketable Securities - TOTAL 162,100,000.00 Current Liabilities 1,996,500,000.00 CURRENT RATIO = 0.08 Table 8 FINANCIAL LEVERAGE RATIO 2006 Total Assets 2006 8,358,200.00 Total Assets2005 7,728,600.00 TOTAL 16,086,800.00 Divide by 2 A 8,043,400.00 Table 9 Share Capital 2006 2,450,000.00 Share Capital 2005 2,434,900.00 TOTAL 4,884,900.00 Divide by 2 B 2,442,450.00 Table 10 TOTAL DEBT RATIO 2006 Total Liabilities 4,037,800.00 = 0.48 Total Assets 8,358,200.00 Table 11 2005 Total Liabilities 3,341,300.00 = 0.43 Total Assets 7,728,600.00 Table 12 DEBT TO EQUITY RATIO 2006 Total Liabilities 4,037,800.00 = 0.93 Equity 4,320,400.00 Table 13 2005 Total Liabilities 3,341,300.00 = 0.76 Equity 4,387,300.00 XXXXXXXXXX Required You are a financial advisor to a shareholder of this company, who currently holds 20,000 shares in the group. The shareholder has a large, balanced portfolio of shares, and wants safe investments. She is not looking for immediate sale of the company's shares. By performing appropriate financial analyses on the accounts provided, you are required to prepare a report as at 20th March 2006 for this shareholder, which provides her with information as to the performance of her investment, and which comments on the various business activities of the group. This is a test of your interpretation of these financial statements, with all its limitations, not of your research skills, or expertise in other subjects. PART II - (1,000 - 1,500 words) All companies listed on EU Stock Exchanges have had to publish their financial statements using International Accounting Standards from 1st January 2005. Critically evaluate for whom this requirement will be of benefit. Read More