Financial Analysis of Accenture - Essay Example

?Financial Analysis of Accenture Introduction The Annual Report of a company is the only comprehensive ment made by a company which is duly verified by statutory auditors and is made available to external stakeholders of an organization. This document contains details of activities of a company during the preceding financial year and also a report of the chief executive authority of the company regarding the achievements and failure during the preceding year and a forecast of activities that the company intends to embark upon in the next fiscal year. The Annual Report is basically a comprehensive communication by the company to its genuine owners – the shareholders (Weetman 2006). But this report is also taken note of by other external stakeholders as suppliers, lenders, investors and also the internal revenue department of the government to assess whether the company has correctly evaluated its tax liability or not. The impression gained by lenders and investors have a direct bearing on the movement of stock prices of a company and, as is commonly known, any downward movement of stock prices immediately generates negative sentiments in the market that have a direct adverse effect on the goodwill of the organization (Arnold 2005). No organization of repute can afford to accept a smear on its goodwill as that has a very great impact on its turnover and profitability. Moreover, a company that does not have goodwill in the market is very rarely is able to gather funds from the market when it is need of it and always has to struggle with high interest rates that it has to pay if it wishes to borrow from commercial banks or institutional lenders. Thus, this report is of vital importance to any corporate entity as it can make or mar its future. To prevent any manipulation of figures, authorities all over the world have made it mandatory that such accounts must be vetted and audited by statutory auditors and submitted to registrar of companies in prescribed formats (Pike and Neale 2009). This assignment examines in detail Annual Report of Accenture and draws important and vital conclusions about the company. Accenture – background details of the company (Oliveira 2008) Accenture is a global management consulting company that has firmly established itself in the Fortune 500 list of companies. It was in 394th position in 2007 and has steadily gained since then in stature and prominence in the global competitive arena as it became a force to reckon with in the field of technology and outsourcing services. This company has a rather checkered past as in its earlier incarnation, Anderson Consulting, it got inextricably smeared in black as the Enron scandal unfolded with all its murkiness and deceit. So before the company went for initial public offering in 2001 it had changed its name to Accenture to get rid of an unenviable past association. This company is an acclaimed global service provider having a highly decentralized organization structure and services clients of international repute and global footprint in areas of increasing productivity, turnover or returns on capital employed. In order to serve a worldwide client base the company had no other option but to decentralize its operations and that is evident when one comes to know that it operates from more than 150 locations in about 50 countries. The company, like most other service providers, values its human resources as its most productive asset and goes to great lengths to maintain it properly. With more and more companies investing heavily in Information Technology to cut costs and increase productivity, one of the core businesses of Accenture has become IT consulting. This is a highly competitive market and the only way to survive and stay ahead of competition is to continuously innovate and provide cutting edge solution to clients especially with competitors as Cap Gemini SA and Atos Origin heavily breathing down Accenture’s neck. Accenture has also built corporate alliances with other leaders as SAP and Oracle and also formed a joint venture Avanade with Microsoft to strengthen its presence in the IT consulting sector. The company has also aggressively entered in new markets in India and China and has elaborated plans in place to fully reap the first mover advantage in these relatively under exploited markets. Relevant figures from Annual Reports of Accenture The Chairman and CEO of Accenture, Bill Green, in the Annual General Meeting of shareholders held on 4th February, 2010 stated that the previous year was full of unprecedented challenges presented by the global economic downturn and though Accenture was not totally impervious to such an enormous economic upheaval, its committed workforce had continued delivering value to its client base and thus the company has been able to position itself as a market leader in several segments. The main focus of Accenture would remain on delivering superior value to its clients and increasing business interactions with them in hitherto unexplored domains while attempting to attract new clients. This twin strategy would not only further cement the already strong position of Accenture in the highly competitive market of IT Consulting but also enable it to substantially increase its market share. Chief Financial Officer, Pam Craig, stated that though Accenture was unable to increase its revenue over the previous year, it did not let it go down either. This in itself is a very big achievement considering the severe stress that global economy had to withstand due to global economic meltdown. Accenture remained firmly committed to returning its shareholders the cash they had invested in the company by paying the fourth annual cash dividend early in Fiscal Year 2009 and repurchased $1.9 billion worth of its own shares during that period. This trend continued in Fiscal Year 2010 when the company declared its fifth annual cash dividend of $0.75 per share which was a phenomenal 50% increase over the previous year’s annual dividend (Accenture 2010). In his letter to the shareholders, Bill Green stated that company could maintain its earlier year’s net revenue of $21.6 billion during 2010 also. The earnings per share were $2.66 while the operating cash flow was $3.09 billion arrived after netting additions of property and equipment worth $238 million. The operating margin (calculated as a percentage of operating profit to net revenues) was a very healthy 13.5% and the company had new bookings worth $25 billion. These figures on their own might not convey the extent of financial strength of Accenture and increase in investors’ net worth in that company. To put matters in perspective, the letter also contains a graphical representation of comparative cumulative total returns on Class A shares of the company during a five year period between Fiscal Year 2005 and Fiscal Year 2010 with its chief competitors Cap Gemini SA, Computer Sciences Corporation, Hewlett-Packard Company and International Business Machines Corporation. The graph also shows how companies comprising S&P 500 Index had performed during the same period. The calculations were done assuming that an investor had put in $100 in Class A shares of Accenture in 2005 as well as in each of the other two categories and the dividends paid out during these years by the companies concerned were reinvested on the date of payment and no commissions of any form were charged on these transactions. It was deducted that as on 31st August, 2010 while the Indexed Price of Accenture was $162, that of its competitors was $155 and the group comprising S&P 500 was way behind at $96 (Green 2010). This comprehensively proved that Accenture though was not a clear market leader was genuinely in the contention for that position. It also demonstrated that IT consulting is by far the most prospering industrial sector across the world. The company has shown strong credentials in 2011 as the data released for the first quarter of Fiscal Year 2011 show net revenues at $6.05 billion which is $0.67 billion higher than the same figure previous year. Though a part of this improvement is surely due to improvement in overall global economic condition, the company can legitimately take pride in its improved performance. Upon analyzing the break-up of net revenues, it is observed that the company has earned consulting net revenue of $3.57 billion which is 14% higher than the same figure in 2010. Outsourcing net revenues which are $2.48 billion during the first quarter of Fiscal Year 2011 also have improved by 10% over previous years’ figures during same period. Earnings per share (EPS) also exhibited a marked increase of $0.14 to reach $0.81 which by itself is an increase of 20% over previous year’s figures during the same period. Operating income, though higher in absolute terms over the previous year, is lower in terms of percentage of net revenues. While operating income of the current period at $827 million is more than $746 million earned during the same period previous year, it has fallen to 13.7% of net revenues as against 13.9% in the previous year. Gross Profit Margin during the first quarter of Fiscal Year 2011 is 32.2% which is a distinct 1% lower than 33.1% earned during same period last year. However, this decrease is not considered by the company as something to be worried about. On the contrary, the company feels this decline actually reflects strong market conditions which have resulted in higher levels of recruitment and training costs of new employees that had to be hired to cater to increased market requirements and also higher subcontracting costs. The other reason for a lower Gross Profit Margin is the increased levels of employee compensation that Accenture has implemented across the board (Taylor 2010). Relative Merits of Forms of Financing Used and Impact on Financial Performance As no source of finance is devoid of limitations, it is always advisable to use a combination of sources, instead of relying on only a single source (Watson and Head 2010). A number of factors affect this decision making it a very complex decision for the business. The factors that affect the choice of source of finance are briefly discussed below: Cost: There are two types of cost viz., the cost of procurement of funds and cost of utilizing the funds. Both these costs should be taken into account while deciding about the source of funds that will be used by an organization. Financial strength and stability of operations: The financial strength of a business is also a key determinant. In the choice of source of funds, business should be in a sound financial position so as to be able to repay the principal amount and interest on the borrowed amount. When the earnings of the organization are not stable, fixed charge funds like preference shares and debentures should be carefully selected as these add to the financial burden of an organization. Purpose and time period: Business should plan according to the time period for which the funds are required. A short-term need for example can be met through borrowing funds at low rate of interest through trade credit, commercial paper etc. For long term finance, sources such as issue of shares and debentures are more appropriate. Similarly, the purpose for which funds are required need to be considered so that the source is matched with the use. For example, a long-term business expansion plan should not be financed by a bank overdraft which will be required to be repaid in the short term. Risk Profile: Business should evaluate each of the sources of finance in terms of the risk involved. For example, there is a least risk in equity as the share capital has to be repaid only at the time of winding up and dividends need not be paid if no profits are available. A loan, on the other hand, has a repayment schedule for both the principal and the interest. The interest is required to be paid irrespective of the firm earning profit or incurring loss. Control: A particular source of fund may affect the control and power of the owners or the management of a firm. Issue of equity shares may mean dilution of control and earning power of real owners. For example, as equity shareholders enjoy voting powers, financial institutions may take control of the assets or impose conditions as part of the loan agreement. Thus, business firm should choose a source keeping in mind the extent to which they are willing to share their control over business. Effect on Creditworthiness: The dependence of business on certain sources may affect its creditworthiness in the market. For example, issue od secured debentures may affect the interest of unsecured creditors of the company and may adversely affect their willingness to extend further loans as credit to the company (Atrill 2009). Flexibility and Ease: Another aspect affecting the choice of a source of finance is the flexibility and ease of obtaining funds. Restrictive provisions, detailed investigations and documentation in case of borrowings from banks and financial institutions might be one of the reasons that a business firm might not prefer them if other options are readily available. Tax Benefits: Various sources may also be weighed in terms of their tax benefits. While the dividend on preference shares is not tax deductible, interest paid on debentures and loan is tax deductible and may, therefore, be preferred by organizations seeking tax advantage (Smith 2005). References Accenture. Report of the 2010 Annual General Meeting of Shareholders of Accenture plc. 2010. http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzY3Njk3fENoaWxkSUQ9MzYzMjEzfFR5cGU9MQ==&t=1 (accessed January 6, 2011). Arnold, G. Corporate Financial Management. Prentice Hall, 2005. Atrill, Peter. Financial Management for Decision Makers. FT Prentice Hall, 2009. Green, William D. Letter from Our Chairman & CEO. December 20, 2010. http://www.accenture.com/Global/About_Accenture/Investor_Relations/Annual_Report/default.htm (accessed January 6, 2011). Oliveira, Pedro. "accenture: High Performance. Delivered." Scribd. 2008. http://www.scribd.com/Accenture-Strategy-Analysis/d/9821307 (accessed January 6, 2011). Pike, R., and W. Neale. Corporate Finance and Investment. Prentice Hall, 2009. Smith, M. Performance Measurement & Management. Sage, 2005. Taylor, Roxanne. Accenture Reports Strong First-Quarter Fiscal 2011 Results. 2010. http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NzE3MDV8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1 (accessed January 6, 2011). Watson, D, and A. Head. Corpoarte Finance: Principles and Practice. Prentice Hall, 2010. Weetman, P. Financial & Management Accounting. Prentice Hall, 2006. Read More