Finance and Accounting Class - Essay Example

? Finance & Accounting Introduction to Finance & Accounts With work Assignment Word Count 660) ID Report for Go Ahead Group Plc February 2013 Table of Contents Executive Summary 3 Introduction 4 Ratio Analysis Current & Previous Year 5 Comparison with Prior Period Results 6 Comparison with Industry Average 8 Key Performance Indicators 8 Advantages and Limitations 9 Appendix 1 11 Ratio Analysis (Go Ahead Group Plc., 2012; 2011) 11 Appendix 2 11 Annual Movements (Go Ahead Group Plc., 2012; 2011) 11 References 12 Executive Summary The financial position and performance of a company may be analyzed by a number of ways. Financial reports are analyzed through complex tools like a closer look at the operational side or a rather simplistic approach comprising ratio analysis. This paper, however, aims at analyzing and assessing the financial performance of Go ahead Group Plc with the industry and its prior period annual reports using ratio analysis. The paper uses Profitability, efficiency, liquidity and shareholder ratios as the basic tools. The more complex tools like IRR, WACC etc are ignored to keep the analysis simple and meaningful. In addition, the paper identifies the Key Performance indicators (KPIs) of the company and highlights the basic steps taken by the company to achieve the KPI targets. The company’s current year’s results with respect to the KPI targets are also discussed and highlighted. To:             Board of Directors of Go Ahead group Plc. From:         Robert Frost, Accountant Re:             Ratio Analysis and KPI discussion Date:        February 25, 2013 With regard to your concerning the analysis of organizational financial performance and position, I would like to present this report which summarized, analyzes and properly interprets the basic financial ratios of the company. I hope it will be of great help for you to understand and target the areas where improvement is required and further take strategic actions to improve and sustain the strong growth areas of our business. Introduction Go Ahead Group Plc is a leading company in the public transport industry. The company has a high regard in the industry for having social, financial and environmental aims working together at its core strategic plans. The company aims at providing transportation in the urban and other areas with less delays, high environmental targets and social responsibility. The company has captured the highest share of the transportation industry by focusing on the KPIs it has set. The company has also improved its efficiency and effectiveness in operations by reducing waiting times, increasing punctuality, spending more on security and comfort of the people and availability of their services with proper schedules and plans. The company’s financial analysis and discussion on its core competences is given below. Ratio Analysis Current & Previous Year The Return on Net Assets ratio reveals that the company is using the net assets very efficiently in carrying out its operations. The company is employing and making higher than expected profits by properly allocating the assets. The Return on Shareholders’ Funds in 2011 and 2012 shows significant returns to meet the company’s profit demands. Moreover, it completely satisfies the shareholders on the use and allocation of their shareholdings as per the returns generated in the two years under consideration. The operating profit margin, although slightly lower than previous year, is satisfactory. Moreover, if the one-off benefit is eliminated, the company shows an increase of ?8.1m in operating profit. Hence, the actual operating profit margin is higher than the previous year further showing a strengthened financial position of the company. The ROCE of 17.6% and 19.2% is satisfactory in 2012 and 2011 respectively (Appendix 1). The slight reduction is not worrying, yet it should be stopped from recurrence to maintain the position that the company holds. The net asset Turnover has increased by 3 days in 2012. This is due to an increase in both net assets and revenues. The company must have increased its operations and captured more market. This directs towards a healthier growth with stable stock turnover days. The debtor’s collection period has been reduced from 32 days in 2011 to 29 days in 2012 (Appendix 1). This might be due to company’s change in policy for offering discounts etc on early payments or may be due to some other factors. Whatsoever is the reason, this reduction may help the company in improved cash position. The creditors’ period however show a deteriorated position by a significant increase in credit payments from 72 days in 2011 to 82 days in 2012. There is a need to properly investigate the reasons behind this delay. The credit ratings are of significance to any company holding a top ranking in the industry to attain the ease of credit purchasing options. As per the company’s records, the gearing ratio has fallen significantly from 29.3% to 13.1% in 2011 and 2012 respectively. This is basically for the increase in shareholder’s funds by more than 200%. There is a need to properly analyze this data and ensure that the company does not have any liquidity and solvency problem. Currently, the company is able to meet its interest obligations as shown by the interest cover ratio of 6 and 5.6 times in 2011 and 2012 respectively (Appendix 1). The current and acid test ratios show value that is under 1, this clearly expose some trouble that the company may face in having cash to fulfill the current and urgent obligations (Ray, 2012, p. 44). The poor current and acid test ratios may indicate higher chances of company bankruptcy and liquidity issues. However, the Go-ahead Group Plc. is doing quite well financially. There is a need to further investigate the issues of its liquidity status. The company’s Earnings per share have been reduced significantly as compared to the year 2011. It has gone down to 129p during 2012 from 157p in 2011 (Appendix 1). However, the current EPS is acceptable when compared to the industry average rankings. This huge reduction, if analyzed closely, seems to be a result of a reduction in PAT. The price Earnings ratio and Dividend cover show a satisfactory performance of the company. The company is able to meet the dividends required with the resources and earnings it holds. The company has also maintained its dividend yield during 2011 and 2012. Comparison with Prior Period Results The turnover of Go ahead Group Plc has been increased by ?126.8m from ?2,297m in 2011 to ?2,423.8m in 2012 (Go Ahead Group Plc., 2012). The 6% increase in revenue is slightly higher than the previous year’s growth in revenue of 5.5%, however, it indicates the stability in revenue generation by the company. The operating profit has been reduced by 4.3%. This reduction in itself is not that incredible, however, the 14% increase in 2011 turning in to a reduction of 4.3% casts significant doubts on the company’s strategy to earn and retain operating profits. A closer look at the formulation of operating profit figure shown in 2011 reveals that it was artificially inflated by the one-off benefits from rail contract management of ?13m. If this amount is deducted, the operating profit growth last year becomes 1% showing a much comparable and stable figure. Moreover, if the operating profit is reduced by ?13m, the current year’s operating profit growth rate changes to an increase of 7.9% (Appendix 2). Hence, the company is still generating operating profits and the financial position remains good during 2012 as well. The net finance cost in 2012 has been reduced by 9%. This indeed is a very good sign as the last year’s finance cost showed an increase of 31.6% which was an overwhelmingly high growth in company’s costs. The increased rate last year was a result of a full year charge on the ?200m sterling bond. Hence, the results this year show a remarkable improvement in finance cost management. The tax expense shows a worryingly higher rate of growth at 84% of the previous year’s figure. This is translated by the new corporation tax rules enactment. The profit for the period has been reduced by 11 percent; this is mainly due to the higher tax expense and shows that company’s operations are not causing any issues. The net profit figure is still positive and shows a positive financial position and performance of the company (Appendix 2). Comparison with Industry Average Go ahead Group plc has ?1511.523m higher revenue than the industry average. This is a significant amount and is almost 166% higher than the industry. The company seems to be a key player and leading company in the industry. The company’s profits are ?55.5m in 2012 which are significantly higher than the second most profitable competitor at ?34.856m. The profit margin at 3.49% and number of employees at 22,972 are also higher than the industry averages of 3% and 5,194 respectively. The profit margin of Stagecoach South Western Trains Limited, a competitor, at 5.96% is higher which indicates the prospects and space for improvement. In addition, the solvency ratio is significantly lower than the industry average at 3.49% as compared to 15.36% of industry average (Appendix 1). Key Performance Indicators There are a number of indicators and factors that distinguish a service and product from its competitors. For Go Ahead Group Plc. the KPIs include provision of safe services, socially and environmentally sound practices, high quality of services, punctuality, availability in all areas and financially stable environment to increase shareholder wealth. The company aims at keeping its punctuality over 90% and has sustained this performance in 2011 and 2012. Go Ahead Group plc uses CCTV as a measure to achieve the safety demands of people. As a result there is a reduction of 39% bus accidents,3% of crimes on railway an 20% of SPADs (Go Ahead Group Plc., 2012). The company has a sustainable and stable plan to reduce carbon emission by 20% till 2015. In the current period it has reduced it by 2% more compared to previous year. In addition, the environmental stability and social viability factors are highly upheld by the company. The use of energy saving LED lights has reduced the energy consumption by 6% in 2012 (Go Ahead Group Plc., 2012). Following the Reporting of Injuries, diseases and dangerous occurrences regulation (RIDDOR) the company has reduced employee injuries and accidents to 1.01 percent in 2012 compared to 1.14 percent in 2011 (Go Ahead Group Plc., 2011; Go Ahead Group Plc., 2012). The bus accidents have also been reduced significantly at 31.15% in 2012 from 57.08% in 2008. The company’s continuous focus and practically applicable plans to achieve the KPIs are leading to more customers and higher market share captured by the company. Advantages and Limitations Ratio analysis is a simple and meaningful tool to the users. It enables comparison of the company’s data with other firms in the industry as well as tracing the trends of the company’s past performance. However, the analysis does not incorporate any environmental, social or structural differences that exist between firms. At times, the industry averages and companies used as benchmarks are not comparable to the targeted company. For instance, Go ahead Plc had a high asset base and revenue directing towards a larger firm than all others provided as a base to form industry averages. Such incomparable information may provide overly positive or negative results leading to wrong or flawed decisions made by the users. The accounting policy mismatch is not incorporated when comparing to companies using ratio analysis. Ratio analysis provides an insight to the past performance comparing it to the present, whereas, users like employees, shareholders, investors, banks etc are more interested in the future prospects. When used for future prospects, ratio analysis tends to ignore any changes in performance and operations over time. Moreover, this analysis is more prone to creative accounting techniques being used and manipulation of results by incorporating or ignoring exceptional gains and losses (Ray 2012, p. 48). Regards, Robert Frost. Senior Accountant. Appendix 1 Ratio Analysis (Go Ahead Group Plc., 2012; 2011) Details Formula 2012 2011 Profitability Ratios Operating Profit Margin PBIT/Sales (100.5/2423.8)*100=4.15% (102.3/2297)*100=4.45% Net Profit Margin Net profit / sales 66.5/2423.8=2.7% 79.4/2297=3.5% ROSF* (PAT-Pref, Div)/Ord Shares+Reserves 66.5/111.3=59% 79.4/70.8=112% Return on Net Assets PBIT/Net Assets (100.5/53)*100=190% (115.1/31.4)*100=325% Return on Capital Employed Operating profit / capital employed 100.5/568.1= 17.6% 102.3/533.1=19.2% Efficiency Measures Net Asset Turnover Net Assets/Sales*365 53/2423.8*365=8 days 31.4/2297*365=5days Stock Turnover Stock/Sales*365 15.2/2423.8*365=2.3days 15.5/2297*365=2.5days Debtors collection Period Debtors/Sales*365 194.5/2423.8*365=29days 201.4/2297*365=32days Creditors collection period Creditors/Cost of Sales*365 519.6/2313.6*365=82days 428.2/2181.9*365=72days Liquidity Ratios Gearing Ratio Long-term Debt/Shareholders’ funds*100 515.1/39.2=13.1% 501.7/17.1=29.3% Interest Cover PBIT/Loan interest Payable 100.5/17.8=5.6 115.1/19=6 Current Ratio Current Assets/Current Liabilities 465.7/ 554.9=0.83 460.2/475.4=0.97 Acid Test Ratio Liquid Assets/Current Liabilities 253.7/554.9=0.45 228.6/475.4==0.48 Shareholder Ratios EPS PAT/Ordinary Shares 55.5/42.851=129p 67.4/42.913=157p Price/Earnings Ratio Market Price per share/EPS 168/129=1.3 168/157=1.07 Dividend Yield Dividend per share/Market price per share (81/168)*100=48% (81/168)*100=48% Dividend Cover EPS/Dividend per share 129/81=1.6 157/81=1.9 * Return on Shareholders’ Funds Appendix 2 Annual Movements (Go Ahead Group Plc., 2012; 2011) 2012 ?m 2011 ?m Turnover (126.8/2297)=^5.5% (129.7/2167.3)=^6% Operating Profit (4.9/115.1)=v4.3% (14.1/101)=^14 % Net Finance Cost (1.5/17.5)=v9% (4.2/13.3) =^31.6% Total Tax Expense (8.2/9.8)=^84% (4.7/14.5)=v32.4% Profit for the Period (8.5/75)=v11% (23.7/51.3)=^46.2% References GO AHEAD GROUP PLC. (2011). Annual report and Accounts 2011 [online], Go Ahead Group Plc. [Accessed 24 Feb 2013] GO AHEAD GROUP PLC. (2012). Annual report and Accounts 2012[online], Go Ahead Group Plc. [Accessed 24 Feb 2013] Proctor, Ray. Managerial Accounting: Decision Making and Performance Management. Harlow, England: Pearson, 2012. Print. Read More