Wolseley Accounts Report - Essay Example

?Introduction Financial ments reflect the financial performance of the company usually in a period of one year. The financial ments are very important for different stakeholders including shareholders, investors, customers, suppliers, economists, management, and governmental agencies and other stakeholders that are directly or indirectly affected the operations and performance of the company. This report will analyse the financial performance of Wolseley Group and how the group has performed in the last year or so. The report has been divided into three sections; the first section of the report will discuss and analyse how the group has performed in the last three years, the second section of the report will analyse the financial performance of the company using financial ratios of the year 2010 and 2009. The third section of the report will discusses about one of the items in the current assets of the company’s balance sheet, financial receivables. Section 1: Analysing the performance of Wolseley Group Wolseley Group is the leading trade distributor of heating and plumbing products to different professional contractors. The group operates in 25 countries and has more than 4000 branches around the world with more than 47,000 employees working for the Wolseley Group (Wolseley Group, 2011). The financial crisis has made a huge impact on different industries therefore the industries to which the Wolseley Group has been offering its products were affected as well. The demand of the products had reduced considerably around the world and therefore it influenced the sales of the company negatively. One of the most important industries to which the group has been offering its products is the construction industry. The clients of the Wolseley Group include large construction companies, professional contracts, individual contracts etc. However, with the economic crunch, the overall demand of the of construction projects has reduced to a great extent. There have been several factors that have lead to the reduction in the demand of construction industry as currently the economy is suffering with more unemployment and lower credit available, large number of housing inventory remained unsold etc. Therefore all these have resulted in reduction in overall construction in both the commercial as well as the residential sector. The following image reflects different sectors of the group and it can be seen that most of them are directly or indirectly related to the construction industry. (Wolseley Group, 2010) In several countries including United States of America, United Kingdom, Nordic region, France and Central and Eastern European countries, the sales have reduced however only in Canada the sales of the Wolseley Group grew in the year 2010. But the problem is that Canada only contributes 6% of the total sales of the company as it has been shown in the image below. (Wolseley Group, 2010) All in all, the overall performance can be said to have improved as the sales declined by almost 14% in the year 2009 however in 2010 this figure has reduced to 6% and therefore it can be considered as a positive sign for the group. (Wolseley Group, 2010) Section 2: Analysing The Financial Performance Of The Group Using Financial Ratios Financial ratios are used to analyse the financial performance of the company. Financial ratios are used to analyse and compare one company from the other and it is also used to compare the performance of the company with its past performances (Ross, Westerfield, and Jordan, 2009). This section of the report will analyse the compare the financial performance of the company in the year 2009 and 2010 using financial ratios. Different types of financial ratios like the profitability ratios, liquidity ratios and the efficiency ratios are used in this report to analyse the performance of the company in the two years under study. Profitability Ratios Profitability ratios are used to analyse the profitability of the company. The higher the value of the profitability ratios, the more profits the firm is making and the better it is performing. Different profitability ratios have been used in this report including gross profit, operating profit, net profit margin, return on assets and return on equity. Gross Profit Margin Gross profit margin shows the ratio of the profits after deducting the cost of goods sold or it is the ratio of the gross profit and sales (McLaney, 2009). Gross profit of the company is calculated in the table below: 2010 2009 Average Gross Income Margin 27.62% 27.54% 27.58% Change 0.30% The gross profit margin of the company is 27.5 to 27.6% in both the years. There has only a small change of 0.3% in between 2010 and 2009 in the gross profit margin. Operating Profit Margin Operating profit margin shows the ratio of the operating profit of the company and its sales (Khan, 1993). The operating profit margin of the company is shown in the table below: 2010 2009 Average Operating Income Margin -1.49% -4.20% -2.84% Change 64.44% The operating profit margin of the Wolseley Group has changed from 2009 to 2010. The operating profit margin was -4.2% in the year 2009 showing that the company was in an operating loss. There have been improvements in the operating profit margin but still the company is suffering from operating loss. The operating profit margin of the Wolseley Group in the year 2010 is -1.49% and the company are still suffering from loss in the year 2010. There has been a change of operating income margin of 64.44% and this change has been positive therefore it shows that the profitability of the company is improving. Net Profit Margin The net profit margin of the company shows ratio of the net profits that have been generated and total revenue the company generated (Levy, & Brooks, 1986). The following table shows the net profit margin of the company in the year 2010 and 2009: 2010 2009 Average Profit Margin -2.58% -8.12% -5% Change 68.30% The net profit margin of the Wolseley Group shows similar kind of results as operating profit. The Wolseley Group has been suffering from losses however the losses have reduced in the year 2010 by 68.3% which is a positive sign for the company. The net profit margin has improved from -8.12% to -2.58% in the year 2010 showing that the losses of the company have lessened. Return on Assets Return on assets shows the return that the company generated using its total assets (Kaplan, and Atkinson, 1998). Return on assets have been calculated in the table below 2010 2009 Average Return on Assets -4.21% -12.95% -9% Growth 67.51% The returns on assets also are in negative and these are indicating that the Wolseley Group has suffered from losses in 2009 and 2010. The return on assets in the year 2010 has improved by 67.5% as the ratio has jumped from a negative 12.95% to a negative 4.2% showing that the company has performed well in 2010 in comparison to 2009. Return on Equity Return on equity shows the returns or profits the company generated using its total equity of the shareholders (Gitman, 2003). Return on equity of the company can be found in the table below for the years 2010 and 2009 2010 2009 Average Return on equity -11.11% -34.75% -23% Change 68.01% Return on equity has improved as well like other profitability ratios of the company. the Wolseley Group has improved its return on equity ratio by 68% as the ratio has increased from -34.75% to -11.11%. Liquidity Ratio Liquidity ratios of the company show the liquidity position of the company. Liquidity ratio shows how the assets of the company are liquid and how quickly they can be converted into cash (Arnold, 2008). Current Ratio The current ratio reflects the current assets to current liabilities. The higher the value of the current ratio, the firm has better liquidity position (Friedlob, & Plewa, 1996). Current ratio of the company for the year 2009 and 2010 can found in the table below: 2010 2009 Average Current Ratio 1.27 1.49 1.38 Change -14.86% The current ratio of the company has reduced by 14.8% as the value has reduced from 1.49 in 2009 to 1.27 in 2010. Therefore it shows that the liquidity position of the company has worsened and the ratios of current liabilities have increased in the year 2010 in comparison to current assets. Quick Ratio Quick ratio is used to calculate the liquidity position as well but in quick ratio, inventories are not considered from the current assets. Quick ratio of the company has been shown in the table below 2010 2009 Average Quick Ratio 0.78 0.98 0.88 Change -19.67% The quick ratio of the company has reduced by almost 20% as the values have reduced from 0.98 to 0.78. Thus, it is indicating that the liquidity position of the company is getting worse. Efficiency Ratios Efficiency ratios show how efficient the firm has been in using its resources. Total assets turnover This ratio reflects how efficient the firm has been in using its total assets. Following table shows the value of the total assets turnover ratio of the company 2010 2009 Average Total Assets Turnover 1.63 1.59 1.61 Growth/ Change 2.48% The above table shows that the ratio has improved and the firm has become more efficient in terms of using its total assets as the value has increased. Fixed Assets Turnover Fixed assets turnover shows how productive and efficient the company is in using its fixed assets. Fixed assets turnover of the company has been calculated in the table below: 2010 2009 Average Fixed Assets Turnover 3.52 3.39 3.45 Growth 3.84% The above table shows that the firm has become more efficient in using its fixed assets as the value of the ratio has improved from 3.39 to 3.52. Construction loans Construction loans that have been used and reported in the financial statements of the company are basically the loan receivables however these loans are secured loans. Construction loans are given to different builders so that they can finance their projects related to construction. It can either to buy the land to equipments or any other purpose. The construction loans are financed from bank facilities and these loans have a clause that says that the group is allowed to borrow capital for the construction projects as construction loans receivables however it needs to have sufficient receivables so that the borrowings are compensated. With the inclusion of this clause, it would mean that the borrowings would be repayable in both the cases whether the receivables are paid back or the party defaults. As a result of this, the group limits the borrowed amount as the construction loan borrowings that can be recovered. This amount needs to be disclosed in the financial statements of the company however the company cannot use it as its debt (Wolseley Group, 2010). The borrowings related to the construction loans are regarded and recorded as the current liability because of the reason that the amount has to be repaid once the receivables are received and the receivables are considered to be as current assets of the company (Wolseley Group, 2010). The value of the construction loan receivables are recorded initially at their fair value and with the passage of time they are amortised by using effective interest method after deducting the provision for impairment if there is any. Provision for impairment with respect to the construction loan receivables is created when objective evidence is present that the party will not be able to pay the amount and therefore the group would not be able to collect the remaining dues in accordance to the terms of the loan. There can be several factors or reasons that can lead to such a situation for instance, the financial problems and issues faced by the debtor, default of payments, borrower getting bankrupt. If the amount is not received, then the remaining amount is recorded as a loss in the profit and loss statement of the company. When it has been believed that the amount recovery would be difficult the construction loans are written off against the provision. However, if the amount is received after they have been written off then the received amount is credited to the profit and loss statement (Wolseley Group, 2010). References Arnold, R. (2008). Economics, Mason, South-Western Cengage Learning. Friedlob, G., & Plewa, J. (1996). Understanding balance sheets. New York: John Wiley & Sons. Gitman, L. (2003). Principles of Managerial Finance. Boston: Addison-Wesley Publishing. Kaplan, R., and Atkinson, A. (1998). Advanced Management Accounting. New Jersey: Prentice-Hall. Khan, M. (1993). Theory & Problems in Financial Management. Boston: McGraw Hill Higher Education. Levy, H., & Brooks, R. (1986). Financial Break-Even Analysis and the Value of the Firm. Financial Management, vol. 15, no. 3, pp. 22-26. McLaney, E. (2009). Business Finance: Theory and Practice, New Jersey, Pearson Education Ross, S., Westerfield, R., and Jordan, B. (2009). Fundamentals Of Corporate Finance Standard Edition, New York, McGraw-Hill. Wolseley Group. (2010). Annual Report. Available at http://annualreport2010.wolseleyplc.com/PDFs/pages/Group_income_statement.pdf [Accessed 22nd July, 2012] Wolseley Group. (2011). Company Profile. Available at http://www.wolseley.com/files/pdf/Corporate_Profile.pdf [Accessed 22nd July, 2012] Read More