Analysis of balance sheet and income statement - Essay Example

Analysis of Income ment and Balance Sheet Task Introduction This paper presents to the reader the analyses of income ment and the statement of financial position of two rival companies (AMEC and Carillion Corporation) based on the latest available annual report (for the year 2013). The key items focused on during the financial statement analysis are Assets and revenues. Other factors included in the paper are the products offered, the key market, and the ratio analysis (ROCE and debt/equity ratio).

A brief description of the companies AMEC plc, headquartered in London, United Kingdom, was established in 1982. The company offers consultancy, project management and engineering services to a wide range of client both in the United Kingdom and beyond. The company focuses their services on the following four markets: clean energy, oil and gas, environment and infrastructure and mining (Annual report: AMEC plc 2013, pp. 1-8). On a similar note, Carillion plc is headquartered in Wolverhampton, United Kingdom.

The company was founded in 1999. Carillion plc offers services on management in the following fields: efficient energy, buildings and infrastructure, project management and facility management. Carillion plc operates in the following business segments: construction services, support services, Middle East construction services and support services (Annual report: Carillion plc 2013, pp. 1-6). Comparison of the Income statement and the statement of financial position The key item considered in the analysis of the income statement is the revenue.

Concerning AMEC plc, the revenue levels in the year 2012 and 2013 were £ 4,088 million and £ 3,974 million respectively. The company’s revenue decreased by 2.789% between the periods (Annual report: AMEC plc 2013, pp. 94). Comparatively, the revenue levels for Carillion plc for the same period were £ 4,402.8 million and 4,080.9 million. The company’s revenue decreased by 7.311% between the two periods. Based on the analysis, Carillion plc’s revenue level were higher than that of AMEC plc, during the two years (Annual report: Carillion plc 2013, pp. 76). The analysis of the statement of financial position covers the total assets.

Concerning AMEC plc, the total assets in 2012 and 2013 were worth £ 2,518 million and £ 2,384 million respectively. The company’s total assets decreased by 5.322% between the two years (Annual report: AMEC plc 2013, pp. 96). Comparatively, the total assets for Carillion plc during the same period were worth £ 3,862.4 million and £ 3,639.9 million respectively. The company’s total assets decreased by 5.761% between the two years (Annual report: Carillion plc 2013, pp. 79). Based on the analysis, Carillion plc had a higher value of total assets than AMEC plc.

Ratio analysis Return on capital employed- capital employed can be simplified as the total assets less current liabilities. The ratio indicates the return generated by every pound invested as capital employed. Concerning AMEC plc, the return on capital employed in the fiscal year 2012 and 2013 has been determined to be 15.29% and 12.90% respectively. The ratio interpretation for the year 2013 means that 12.90% of the company’s net profit was generated by the company’s capital employed. The return on capital employed between the two periods decreased.

The decrease is attributed to a decrease in the company’s net profit. Comparatively, the ROCE for Carillion during the same period is 7.123% and 5.373% respectively. The ratio decreased between the two years due to a decrease in the net profit. Based on the analysis, AMEC plc has a higher ROCE than Carillion plc. Therefore, the utilization rate of AMEC plc’s capital employed is higher than that of Carillion plc (Khan & Jain 2007, 6-40).The financial structure The financial structure shows the composition of the Equity and the long-term debt in the company’s capital structure.

Based on the 2013 annual report, AMEC plc’s capital structure is 100% equity. That is, there is no element of fixed charge debt. Therefore, it can be concluded that the company’s financing approach is conservative (Annual report: AMEC plc 2013, pp. 96). On the other hand, Carillion plc’s capital structure has both the equity and fixed charge debt. The debt/equity ratio of the company for 2012 and 2013 has been determined to be 76.94% and 61.65% respectively. That is, in 2012, 76.94 of the company’s capital structure was composed of equity whereas, 23.

06% was fixed charge debt. The ratio decrease between the years due to a decrease in shareholder equity. Therefore, Carillion plc’s approach to obtaining finance is aggressive (Annual report: Carillion plc 2013, pp. 79).Conclusion The market in which the two companies operate presents a lucrative future expansion opportunities due to the growing interest in clean energy as opposed to fossil fuel. As a result, companies should position themselves in order to increase their capacity to seize the growth opportunities.

Based on the above analyses, the main concerning regarding Carillion plc is the low level of return on capital employed. The company should increase the utilization rate of capital employed in order to generate more return. Nevertheless, the company has a stronger capital base than AMEC plc. In addition, the use of debt increases the value of the company. Therefore, it is anticipated that Carillion plc will have a better future performance than AMEC plc. On the other hand, the major concern based on the analysis is the absence of debt in the capital structure of AMEC plc.

Debt is known to have a positive effect on the value of the company. Therefore, since AMEC plc is a conservative, its value is less than that of Carillion. However, the analysis of the return on capital employed show that the utilization rate of the company’s capital employed is higher than that of Carillion. Consequently, higher returns on capital employed are anticipated in the future.List of ReferencesAnnual report: AMEC plc 2013, Viewed 17 January 2015, http://www.amecfw.com/documents/investors/report-and-accounts/2013/annual-report-and-accounts-2013.

pdfAnnual report: Carillion plc 2013, Viewed 17 January 2015, http://www.carillionplc.com/media/166632/carillion_annual_report_2013.pdfKhan, M. Y., & Jain, P. K 2007, Financial management, Tata McGraw-Hill, New Delhi.Appendix 1: Ratio calculationsAMEC plcYear20132012ROCE (Net profit/Net assets)(178/2174.6)= 12.9%(209/1367) = 15.29%Carillion plcYear 20132012ROCE(106.3/1978.3)= 5.37(154.9/2174.6)=7.123Debt/equity ratio(777.6/1010.7)*100(606.4/983.6)*10076.94%61.65%