A global economic and financial boom in the 20th and 21st century - Essay Example

?Introduction: There was a global economic and financial boom in the 20th and 21st century. This resulted in tremendous growth of opportunities for businessmen, investors, governments, financial intermediaries and other financial institutions to invest their money. Investors had two options. They could either invest in firms with high rates of return, or they could choose to invest in firms that are safe and stable. The investment decision was based on the risk appetite of the investors. However, soon investors realized they need to merge risky assets with safe assets when investing. In other words, they needed to create a portfolio of assets that lead to high returns with assets that do not yield very high returns, but are safe. The major objective behind this investment strategy was to maximize the wealth and at the same time make sure that the investment would not lead to credit risk or risk of default. Before making any investment, investors are required to price the assets clearly. This requires knowledge of financial statement analysis and security analysis. Those investors who lack the financial guile and knowledge suffered in the long-run. Investment analysis is a detailed field of study. It combines theory of financial evaluation with the practical implications. The task is tough, but it is by no means impossible. Analysts combine various financial techniques such as NPV, security valuations, IRR and other tools of investment appraisal to evaluate the investment opportunities they have. The investment decision is usually based on the return on investment and safety of investment. However, there is a negative correlation between the two. High yielding assets are usually not very safe. Safe assets usually do not have very high yields. Investors face a dilemma, either to go for riskier assets and earn high rate of return or to go for safe assets at the cost of high rates of return. The final decision is based on the risk appetite of the investors. However, in the modern world, very few investors choose to invest in one kind of asset. Investors usually create portfolios to make sure that their investment is safe and at the same time it earn them sufficient rate of return (Investopedia.com, 2011). The other considerations for making investment decisions include liquidity of the security, obligations, credit rating, past performance trends and risk mitigation. All of these measures are assessed carefully in order to make rational investment decisions. There are three types of financial statements that are usually used for making the financial decisions. These include balance sheet, profit and loss (income statement) and cash flow statement. These statements give accurate picture of the financial position of the firm along with its financial performance and the liquidity of the firm. Balance sheet consists of three main sections. The firm section gives the picture of the short-term and long-term assets of the firm. These assets enable the firm to earn money in the future. The second part of the balance sheet describes the liabilities of a firm. These represent the long-term and short-term obligations of the company. This money is owed by the firm to its creditors and failure to meet these obligations can result in bankruptcy of the firm. The third part of the balance sheet represents the owner’s equity. This part represents the claim on the assets by the owner’s. The second statement used by the financial analysts is the income statement. Income statement usually describes the profitability of the firm. It is calculated by deducting revenues from expenditures. The third statement used by the financial analysts is the cash flow statement. This statement represents the liquidity position of the organization. This statement shows the actual movement of the cash in the organization. Since most of the organizations are using the accrual based accounting system, the profit figure becomes irrelevant without using the cash flow statement. Hence, income statement and cash flow statements are used together in determining the accurate position of the organization. This paper is going to use the above means of analysis and going to compare the profitability, trends, and common size analysis of the UK based firm Morson Group PLC with a US company Kforce INC. Understanding the Industry: Companies are often faced with a pressure from their stakeholders to constantly enhance their performance. One way to achieve this constant improvement is through training and development of employees. If the employees of the company are not well trained and motivated, their productivity is usually low which results in high overhead costs for the organization. Many companies, in the recent years, have started outsourcing their fringe functions in order to focus more on their core competencies. As a result we see rise in the outsourcing company. We also see a rise in the training and development organizations that cater to the needs of the large and growing organizations. Many companies are trying to nurture and develop team leader in order to improve the overall morale level of the employees in the organization. These strategies have been successful for some organizations while other organizations are not quite content with the results of these activities. All in all, the industry is developing and the focus on decreasing costs and improving productivity is increasing with the passage of time. Companies struggle and need for hiring high level staff is never ending. Companies are constantly looking to improve their pool of talent. As a result, there is a rise in the specialist recruitment and selection organizations. Many companies are using the services of these specialist recruitment and selection organizations for improving the quality of their staff. Recruitment and Selection of high quality staff is vital for the growth and profitability of the organization. As a result, many firms are willing to spend high amount of money on human resource development. They are prepared to offer lucrative packages to high quality staff in order to attract retain them. The US Company (Kforce Inc): Kforce is a specialist recruitment and selection organization. It specializes in fulfilling the staffing needs of the organization. The company is involved in Financial and Accounting, Technology, Government Solutions and Health and Life Sciences. The company’s core competencies include Finance and Accounting and Technology, whereas HLS is used as an ancillary or support services for the main services provided by the organization. Government Solutions was introduced in 2009 to assist the government on projects that require technical expertise and consultancy services. www.kforce.com UK Company (Morson Group PLC): Morson Group PLC is one of the many recruitment companies present in the United Kingdom. It specializes in human resource development and engineering management. It contracts organizations that are in need to high quality skilled people. www.morson.com The Process and Methodology: The analysis methodology: The paper is going to use Thomson One Bankers’ database for its data needs. The data for the five years is going to be analyzed from 2006 to 2011. The paper is going to use only the income statement and balance sheets for analysis. Three types of analysis including profitability analysis, common-size analysis and trend analysis is going to be used for this paper. For profitability analysis, the paper is going to use Return on Common Equity Approach (ROCE). The model used for calculation ROCE will be following: ROCE = RNOA + (FLEV x Spread) Where, ROCE = Return on Common Equity RNOA = RN represents return on Operating Assets. It is calculated by multiplying profit margin with turnover of the operating assets FLEV = FLEV is going to represent the leverage ratio of the organization. Leverage ratio is going to be calculated by dividing the Net Financial Obligations of the organization with its Common Equity Spread = Spread is going to be calculated by subtracting the return on Net Operating Assets from borrowing costs The second analysis used in this paper is going to be common size analysis. The rationale behind using the common size analysis is that they reduce the impact of size. The company’s own assets base is used to compare all other financial figures of the organization (Penman, 2010). This gives a fair picture of organization as compared to other organization as all the size differentials are removed from the analysis and the firm’s own assets and liability bases are used to compare its performance against the similar organizations. The third type analyses used in this paper are trend analysis. Trend analysis are used to compare the performances changes that have occurred in the organization from the base year. The base year used in this paper is FY 2006. The Analysis Process: The analysis process will start by reformulating the financial statements with the focus on the items and figures that are needed for our analysis. Then using those items and figures, profitability analysis is going to be conducted. Other than that a trend analysis and common size analysis is going to be conducted to give us an insight about the true performance of the company. The paper will end with analytical comment on the performance of both Kforce INC and Morson Group PLC to understand which company has outperformed the other or whether the performance of the both companies is at par. Figure 1: ROCE The two companies have a like to like performance other the year 2008. The main reason for the Kforce’s decline in the performance is its impairment in the intangible assets. Other differences include debt structure. The debt structure of Morson is short-term and there is no long-term debt, Kforce is financed primarily by long-term debt having long-term debt to debt ratio of ninety-five percent. Other difference is in Accounts Receivable and Accounts Payable. Morson has 59% accounts receivable as compared to Kforce’s 39%. Also Morson has 50 percent less accounts payable than Kforce. Figure 2: RNOA Kforce is a larger organization than Morson and as a result there are different RNOA for both firms. For example, the average margin of Kforce is 10 times greater than Morson. RNOA remained pretty similar for the two organizations before 2008. Kforce’s RNOA declined in the year 2008 owing largely to its large expenses as it is a bigger organization as compared to Morson. Morson might also be window dressing its financial results by treating some of the costs and general expenses differently than Kforce INC. Figure 3: FLEV The graph shows shift in the industry and investors attitude towards capital structure for better utilization of financing sources available. Kforce is highly leverage and is continuously looking to bring down its FLEV. However, Morson Group tried to increase its FLEV from 2006 to 2007, but later started decreasing it. Although, Morson Group is not as highly leveraged as Kforce INC, it is trying to improve its debt structure by mixing long-term debt with short-term debt. Figure 4: Spread Morson Group has remained a much more stable company than Kforce INC. In the year 2006 alone, the leverage of Kforce went from $4.1m to $90m. This shows that Kforce is a more aggressive company that is utilizing debt financing for its expansion purposes. However, Morson group lack ambitious growth and is trying to remain stable. However, the margin of both companies have remain similar throughout the period of five years except 2008 when the company margins fell due to very high financing costs. Figure 13: Profit Margin Both companies have experienced same profit margins apart from the FY 2008. Morson has been the more stable of the two company, whereas Kforce Inc is more aggressive and is trying to expand which is going to be very beneficial for its stakeholders in the future. Figure 14: Asset Turnover The final result of asset turnover shows that the business environment is very similar in both the United States of America and the United Kingdom. Both companies have shown same period of growth and decline in Asset Turnover. This means that both company have failed to generate sales when the business condition were weak and maintained very similarly Asset Turnover throughout the period of five years. Trend Analysis: Morson Group: Reformulated Income Statement GBP GBP GBP GBP GBP (in millions) 12/31/10 12/31/09 12/31/08 12/31/07 12/31/06 Operating Income           Revenues 457.64 436.63 431.45 393.98 326.83 Cost of sales 421.72 401.05 393.93 359.68 299.54 Gross margin 35.92 35.58 37.51 34.30 27.29 Operating expenses 27.30 24.48 25.05 22.03 18.59 Other operating income (expense) 1.08 -1.10 -2.91 0.00 -0.04 Operating income from sales(before tax) 9.70 9.99 9.55 12.27 8.66 Operating income from sales (after tax) 7.83 7.56 7.48 9.02 6.19       Comprehensive income to Common 6.98 7.19 5.81 6.87 3.62 Morson Group has shown signs of continuous growth. The company grew at a decreasing pace after 2008. This shows that the financial turmoil of 2008 has affected the company’s performance. However, the company was also able to cut back its financing cost by 42% which improved its growth position. Overall Morson Group has shown impressive financial results over the five years period. REFORMULATED BALANCE SHEETS GBP GBP GBP GBP GBP (in millions) 12/31/10 12/31/09 12/31/08 12/31/07 12/31/06 Total operating assets 125.86 106.45 112.84 112.15 93.87 Total operating liabilities 40.58 38.09 32.07 27.38 27.95 Net operating assets (NOA): 85.27 68.37 80.77 84.77 65.92 Net financial assets (obligations) (NFA/NFO) -23.23 -11.00 -27.85 -34.74 -22.76 Common Shareholders' Equity (CSE) 61.39 57.27 52.87 50.00 43.13 The company increased its NOA base in the year 2006 and 2007. After which it suffered a decline because of the financial turmoil. NOA decreased due to slow growth of sales. However, the company restructured its capital and increased its equity by 15 times and dropped its leverage ratio which has stabilized the performance of the company over the five years period. KforceInc: Reformulated Income Statement USD USD USD USD USD (in millions) 12/31/10 12/31/09 12/31/08 12/31/07 12/31/06 Operating Income           Revenues 990.81 910.14 997.02 1,036.92 938.45 Cost of sales 678.39 624.16 652.37 664.57 612.35 Gross margin 312.41 285.98 344.65 372.34 326.10 Operating expenses 277.79 262.07 300.30 300.86 268.74 Other operating income (expense) -0.04 -0.68 -129.29 0.00 0.10 Operating income from sales(before tax) 34.58 23.23 -84.94 71.49 57.46 Operating income from sales (after tax) 21.89 14.21 -89.18 45.41 36.97       Comprehensive income to Common 20.63 12.87 -91.44 40.37 32.52 The company has a weaker record than Morson group. It sales grew negatively and the company recorded a loss of €129m in the years 2008 due to impairment of intangible assets. However, the company was able to improve its position after that and grew steadily. There was curtailment of profit margin by 3% during the five years period because of competition and inflationary pressures. REFORMULATED BALANCE SHEETS USD USD USD USD USD (in millions) 12/31/10 12/31/09 12/31/08 12/31/07 12/31/06 Total operating assets 381.08 326.63 339.53 475.05 441.03 Total operating liabilities 113.90 97.94 92.11 106.81 88.17 Net operating assets (NOA): 267.18 228.70 247.42 368.24 352.86 Net financial assets (obligations) (NFA/NFO) -13.36 -1.97 -41.57 -55.78 -90.94 Common Shareholders' Equity (CSE) 253.82 226.73 205.84 312.47 261.93 The company faced difficult times from 2008 to 2010. It recovered from 2010 onward and its CSE and NOA started increased. The company might have made a mistake by increasing its long-term debt and the expense of CSE in the year 2008. Conclusion: Morson is more stable in its business policies whereas Kforce is an aggressive and ambitious firm. Morson has remained more stable over the five years period due to its better capital structure and sales advantage. The 2008 financial turmoil did more damage to Kforce than Morson due to its highly leveraged position and high financial costs. Morson Group PLC Ratios Definition 12/31/10 12/31/09 12/31/08 12/31/07 12/31/06 RNOA Return on Net Operating Assets (RNOA) 10.19% 10.13% 9.03% 11.97% 18.78% NBC Net Borrowing Cost (NBC) -1.75% -1.60% -5.27% -7.49% -22.31% PM Operating profit margin 1.71% 1.73% 1.73% 2.29% 1.89% Net Comprehensive Profit Margin   1.53% 1.65% 1.35% 1.74% 1.11% OLLEV Operating Liability Leverage 51.20% 47.04% 35.91% 36.72% 42.40% FLEV Financial Liability Leverage (FLEV) -28.85% -35.27% -60.84% -61.73% -52.76% SPREAD   11.95% 11.73% 14.30% 19.46% 41.08% ATO Asset Turnover (ATO) 595.74% 585.54% 521.26% 522.90% 991.57% ROCE Return on Common Equity 11.77% 13.06% 11.29% 14.76% 16.79% KforceInc Ratios Definition 12/31/10 12/31/09 12/31/08 12/31/07 12/31/06 RNOA Return on Net Operating Assets (RNOA) 8.83% 5.97% -28.97% 12.59% 20.96% NBC Net Borrowing Cost (NBC) -16.35% -6.15% -4.64% -6.87% -9.80% PM Operating profit margin 2.21% 1.56% -8.94% 4.38% 3.94% Net Comprehensive Profit Margin   2.08% 1.41% -9.17% 3.89% 3.47% OLLEV Operating Liability Leverage 42.72% 39.92% 32.31% 27.04% 24.99% FLEV Financial Liability Leverage (FLEV) -3.19% -10.07% -18.78% -25.54% -34.72% SPREAD   25.18% 12.11% -24.33% 19.47% 30.75% ATO Asset Turnover (ATO) 399.62% 382.32% 323.89% 287.59% 531.91% ROCE Return on Common Equity 8.59% 5.95% -35.28% 14.06% 24.83% Morson Group PLC Reformulated Income Statement (in millions) 12/31/10 12/31/09 12/31/08 12/31/07 12/31/06 Operating Income Revenues 457.64 436.63 431.45 393.98 326.83 Cost of sales 421.72 401.05 393.93 359.68 299.54 Gross margin 35.92 35.58 37.51 34.30 27.29 Operating expenses 27.30 24.48 25.05 22.03 18.59 Other operating income (expense) 1.08 -1.10 -2.91 0.00 -0.04 Dirty surplus items Equity Earnings 0.00 0.00 0.00 0.00 0.00 Operating income from sales(before tax) 9.70 9.99 9.55 12.27 8.66 Taxes Tax as reported 1.87 2.43 2.08 3.25 2.47 Other tax adjustments 0.00 0.00 0.00 0.00 0.00 Tax on financial items 0.00 0.00 0.00 0.00 0.00 Operating income from sales (after tax) 7.83 7.56 7.48 9.02 6.19 Financing Expense (Income) Interest expense 0.30 0.31 1.68 2.17 2.56 Interest income 0.00 0.00 0.03 0.01 0.02 Other interest adjustments 0.00 0.00 0.00 0.00 0.00 Tax effect 0.00 0.00 0.00 0.00 0.00 Net interest expense 0.30 0.31 1.65 2.15 2.54 Preferred dividends 0.00 0.00 0.00 0.00 0.00 Net Financial Expense 0.30 0.31 1.65 2.15 2.54 Minority interest 0.55 0.05 0.02 -0.01 0.03 Comprehensive income to Common 6.98 7.19 5.81 6.87 3.62 Comprehensive Income to Common as per Thomson Analytics 6.99 7.19 5.81 6.87 3.62 Morson Group PLC REFORMULATED BALANCE SHEETS (in millions) GBP GBP GBP GBP GBP 12/31/10 12/31/09 12/31/08 12/31/07 12/31/06 Net operating assets (NOA): Operating assets Accounts receivable, less allowance for doubtful account 68.14 53.15 65.11 65.93 46.30 Inventories 0.00 0.00 0.00 1.78 1.95 Property, plant and equipment, net 3.75 3.28 2.35 2.26 2.43 Other assets 53.96 50.02 45.38 42.17 43.19 Total operating assets 125.86 106.45 112.84 112.15 93.87 Operating liabilities Accounts payable 4.81 3.97 4.10 4.41 5.15 Income taxes payable 0.60 1.18 1.38 1.80 1.24 Other liabilities 35.17 32.94 26.59 21.17 21.56 Total operating liabilities 40.58 38.09 32.07 27.38 27.95 Net operating assets (NOA): 85.27 68.37 80.77 84.77 65.92 Net financial assets (obligations) (NFA/NFO): Financial assets Cash equivalent 1.70 0.13 0.12 0.48 0.24 Total financial assets 1.70 0.13 0.12 0.48 0.24 Financial liabilities Current portion of long-term debt 24.93 11.13 27.97 35.13 22.73 Long-term debt 0.00 0.00 0.00 0.09 0.26 Preferred Stock 0.00 0.00 0.00 0.00 0.00 Total financial liabilities 24.93 11.13 27.97 35.22 23.00 Net financial assets (obligations) (NFA/NFO) -23.23 -11.00 -27.85 -34.74 -22.76 less minority interest 0.65 0.10 0.05 0.03 0.04 Common Shareholders' Equity (CSE) 61.39 57.27 52.87 50.00 43.13 CSE as per Thomson Analytics 61.39 57.27 52.87 50.00 43.13 KforceInc Reformulated Income Statement (in millions) 12/31/10 12/31/09 12/31/08 12/31/07 12/31/06 Operating Income Revenues 990.81 910.14 997.02 1,036.92 938.45 Cost of sales 678.39 624.16 652.37 664.57 612.35 Gross margin 312.41 285.98 344.65 372.34 326.10 Operating expenses 277.79 262.07 300.30 300.86 268.74 Other operating income (expense) -0.04 -0.68 -129.29 0.00 0.10 Dirty surplus items Equity Earnings 0.00 0.00 0.00 0.00 0.00 Operating income from sales(before tax) 34.58 23.23 -84.94 71.49 57.46 Taxes Tax as reported 12.69 9.02 1.93 26.08 20.49 Other tax adjustments 0.00 0.00 2.32 0.00 0.00 Tax on financial items 0.00 0.00 0.00 0.00 0.00 Operating income from sales (after tax) 21.89 14.21 -89.18 45.41 36.97 Financing Expense (Income) Interest expense 1.27 1.44 2.33 5.22 4.63 Interest income 0.02 0.10 0.07 0.18 0.17 Other interest adjustments 0.00 0.00 0.00 0.00 0.00 Tax effect 0.00 0.00 0.00 0.00 0.00 Net interest expense 1.25 1.34 2.26 5.04 4.45 Preferred dividends 0.00 0.00 0.00 0.00 0.00 Net Financial Expense 1.25 1.34 2.26 5.04 4.45 Minority interest 0.00 0.00 0.00 0.00 0.00 Comprehensive income to Common 20.63 12.87 -91.44 40.37 32.52 Comprehensive Income to Common as per Thomson Analytics 20.63 12.87 -91.44 40.37 32.52 KforceInc REFORMULATED BALANCE SHEETS (in millions) USD USD USD USD USD 12/31/10 12/31/09 12/31/08 12/31/07 12/31/06 Net operating assets (NOA): Operating assets Accounts receivable, less allowance for doubtful account 154.18 123.39 132.92 167.15 135.52 Inventories 0.00 0.00 0.00 0.00 0.00 Property, plant and equipment, net 38.13 11.41 14.69 13.36 12.61 Other assets 188.77 191.84 191.93 294.54 292.90 Total operating assets 381.08 326.63 339.53 475.05 441.03 Operating liabilities Accounts payable 18.15 14.89 16.81 15.78 24.17 Income taxes payable 0.25 0.28 4.13 2.87 1.40 Other liabilities 95.50 82.77 71.17 88.16 62.60 Total operating liabilities 113.90 97.94 92.11 106.81 88.17 Net operating assets (NOA): 267.18 228.70 247.42 368.24 352.86 Net financial assets (obligations) (NFA/NFO): Financial assets Cash equivalent 1.06 2.81 0.66 1.08 1.59 Total financial assets 1.06 2.81 0.66 1.08 1.59 Financial liabilities Current portion of long-term debt 12.32 0.00 1.92 3.86 14.01 Long-term debt 2.10 4.78 40.32 53.00 78.52 Preferred Stock 0.00 0.00 0.00 0.00 0.00 Total financial liabilities 14.42 4.78 42.23 56.86 92.53 Net financial assets (obligations) (NFA/NFO) -13.36 -1.97 -41.57 -55.78 -90.94 less minority interest 0.00 0.00 0.00 0.00 0.00 Common Shareholders' Equity (CSE) 253.82 226.73 205.84 312.47 261.93 CSE as per Thomson Analytics 253.82 226.73 205.84 312.47 261.93 Read More