Multinational Running and Risks Management of Domino Print Plc - Essay Example

Domino Printing plc Table of Contents Introduction 3 Business and Key Market Study 3 Corporate and financial actions 4 Profitability 5 Liquidity 7 Efficiency 8 Financial leverage 10 Investment 11 Risk Management 11 Exchange Rate Risk 12 Political Risk 13 Conclusion and Recommendation 14 Reference List 16 Introduction Domino Printing Sciences plc is a commercial printing company that provides printing solutions and equipments to several business customers. It was established in 1978 and is headquartered in Cambridge. Domino printing offers its services to more than 120 countries through a global network of 25 subsidiary units. The company runs its manufacturing operations through six different countries which are US, UK, China, Sweden, Germany and India. Domino Printing is best known for its technologies like scribing laser, continuous ink jet, thermal transfer overprinting, drop on demand valve jet, etc (Marketline, 2014). Domino Printing owns seven distinct business units or subsidiaries which are, Graph-Tech, Citronix, Domino UK, PostJet Systems, Mectec Elektronik, Wiedenbach Apparatebau and Purex International (Marketline, 2014). The commercial printing industry has recorded a valuation of $383.2 billion, which is a 2.1% growth in the year 2011. The market has been forecasted to perform well in the coming five years (Marketline, 2014a). As of the fiscal year 2013, the company has earned revenue of $524.2 million, which is a 7.6% increase over the previous year. The operating profit of 2013 is $27.1 million which is a 66% decrease from 2012 (Morningstar, 2015). This paper is focused on the financial structure and activities of Domino Printing Sciences plc, along with the involved political and exchange rate risk in overseas transaction. Business and Key Market Study Figure 1: Financial Data in £ million Particulars 2010 2011 2012 2013 2014 Revenue 300 314 312 336 350 Gross Profit 149 157 155 161 168 Operating Expenses 100 99 104 146 114 Net income 37 41 41 6 45 Source: (Morningstar, 2015a). The above table indicates that the revenue of Domino Printing has increased steadily over the past five years. This suggests that the company has successfully been able to make increased cash generation in the recent years. The gross profit has also increased over the years in a steady manner. The consistent increase of revenue and gross profit suggests that the company has been performing well over the years. However, according to the graph it can be stated that the company’s net income decreased severely in the year 2013 as it took a deep plunge from £41 million in 2011 to £6 million in 2012. It has managed to increase the net income in the next year to £45 million. Thus it can be stated that Domino Printing Sciences has been successfully restores its loss making and rejuvenated its profitability. Corporate and financial actions Domino Printing was established in 1978 and got listed in the LSE (London Stock Exchange) in 1985. Ever since the inception of the company it has expanded exponentially by making several corporate and financial activities. Domino printing sciences has bought 5,331,451 shares of Montaro, which represent 4.76% of the company’s rights (Reuters, 2014). Moreover according to the Annual Report of Domino (2014) the company has made recommendations go its final dividends of 14.76 p. This dividend will be paid on 10th April of 2015. It will be paid to those share holders who will appear at the close business on 6th March. The company has also made a confident statement in September 2014 that it will meet its forecasted figures in the next quarter (4-trader, 2014). The company has also declared an interim dividend of 7.98 p for each share which is an increase by 5 pct for six months till April 2014 (Reuters, 2014). Domino Printing has stated that it has made an application that block the listing of 230,000 ordinary shares of £0.05 per share. It has also mentioned that these shares will be ranked pari passu with the previously existing ordinary shares of the company (Domino, 2014). The board of directors has declared that the total dividend of 21.66 p per share is the result of the final dividend of 14.06 p and the interim dividend of 7.60 p. They also mentioned that the dividend cover is almost 1.6 times that of the company’s earnings per share (4-trader, 2014). Financial trends Profitability Gross Profit Margin Figure 2: Gross Profit Margin Source: (Morningstar, 2015a). A rough measure of the profitability of a company can be attained by the Gross profit margin. It can be calculated by subtracting the cost of goods sold from the total revenue (McBride, 2014). The graph mentioned above indicates that the gross profit margin of the company has started to fall slightly from year 2011 to 2013. This fall has been the result of high competitiveness in the industry and increased operating costs. However, from the reports of 2014, it can be stated that the company has managed to stabilize the profitability fall and has slightly increased the gross profit margin from 48.04% in 2012 to 48.07% in 2014. Net profit Margin Figure 3: Net Profit Margin Source: (Morningstar, 2015a) The net profit margin gives a more accurate assessment of the profitability of an organization than the gross profit margin. The net profit margin can be measured by deducting the cost of goods, operational expenses and taxes from the total revenue (Drake, 2014). The above graph shows that the net margin took a deep plunge in 2013 and again recovered in 2014. The sudden plunge in 2013 was due to the company’s attempts to design its business structure, which as a result severely increased it operating costs (4-trader, 2014). Liquidity Current Ratio Figure 4: Current Ratio Source: (Morningstar, 2015a) The current ratio is measured by the current asset divided by the current liabilities. The current ratio gives a measure of the liquidity of a company (Drake, 2014). The sudden rise of current ratio from 1.74 in 2013 to 2.04 in 2014 suggests that the liquidity or cash availability of the company has increased suddenly. Efficiency Asset Turnover Ratio Figure 5: Asset turn over ratio Source: (Morningstar, 2015a) The asset turnover ratio measures of a company’s efficiency which can be measured by dividing the revenue by total assets. It measures the generation of revenues per unit value of the assets (Drake, 2014). The above figure shows that the asset turnover ratio has increased sharply from 2012 to 2014 after taking a plunge in 2012. The sudden plunge which has also affected the net profit margin of the company is due to internal restructuring of Domino Printing. The graph also suggests that the revenue generation of the company has become more efficient in the past two years. Inventory Turnover Figure 6: Inventory turnover ratio Source: (Morningstar, 2015a) Inventory turnover ratio is a measurement of how well a company is able to generate sales from its inventories (Drake, 2014). The inventory turnover ratio of Domino printing has reduced over the past five years, which his caused by the reduced sales of the company owing to the rise in competitiveness in the industry. Financial leverage Total debt/Equity Figure 6: Inventory turnover ratio Source: (Morningstar, 2015a) The debt of equity ratio suggets the whether the company is dependent on its debt balance or the equity balance (Drake, 2014). The ratio has increased from 2010 to 2013, this because the company’s debt balance was getting high. However, in 2014, due to the rise in the share prices the company’s debt to equity ratio took a deep plunge. Investment Earnings per share Figure 6: Inventory turnover ratio Source: (Morningstar, 2015a) The earnings per share of a company indicate how much earning is yielded from per unit of shares. Form the above graph, it can be clearly stated that the company had a steady earnings per share ratio from 2010 to 2012. However, it suddenly dropped in 2013 due to the fall in share prices of the company. Risk Management Every business firm faces certain degree of risk involved in its operational activities. The most influential risks are the political risk and the financial risk. These risks often pose as barriers to the firm’s activities, revenue generation or can even cause loss for the organization. The following section focuses on the exchange rate risk and political risk faced by Domino printing. Exchange Rate Risk The change of potential loss or gain causing from the fluctuation of the currency exchange rate is known as exchange rate risk (Papaioannou, 2006). The difference in currency exchange rate between the host country and the home country leads to unpredictable changes in the revenue generation of a firm. With the depreciation of the home currency with respect to that of the host country, the earnings of the company decreases. The revenue generated by the domestic sales and overseas export is often influenced by the change in the currency values. The currency fluctuation affects the present value of future cash flow (Giddy and Dufey, 2014). Exchange rate risks are mostly three types which are translational, transactional and economic risks. The translational risk comes during translating the revenue from one currency to another (Holton, 2003). It is often termed as the risk of cash flow which affects the business activities such as import and export contracts, fund repatriation, etc. Secondly the transactional risk is characterized by the fluctuation of the balance sheet values of any subsidiary present in a foreign country (Watkins, 2014). This is mostly measured in terms of the net assets of the company. Thirdly the economic risk is causes severe financial downfall of the company caused from the exchange rate risks (Papaioannou, 2006). Domino Printing operates in several overseas locations which count to more than 120 countries. Therefore it creates significant exchange rate risk for the company. Due to the difference in the exchange rate in the operating countries, Domino faces transactional exchange rate risks. In the year 2008, the company came across severe changes in the exchange rates which have affected the financial figures of the company (Phx Corporate, 2008). The fluctuation of exchange rate between the British sterling pound and the currencies of the countries in which the company operates, has created unexpected changes in its financial reports. In 2013, the growth of revenue was 7.6 % of the previous year. The change in exchange rate acted in favour of the company and accounted for 1.4 % of this growth (Domino, 2014). Firms employ several risk management techniques to mitigate the risks caused from change in exchange rates. The most commonly used technique used by most of the firms is the hedging process. The hedging process involves employing strategic hedging to mitigate long term risks and tactical hedging to mitigate the risks on short term receivables (Frenkel and Johnson, 2013). The balance sheet risk or the translational risk is mostly mitigated by hedging infrequently or in a random and in a non-systematic manner (WU, 2014). Another technique employed by the firms is value-at-risk method. It helps the firm to measure any potential currency rate fluctuation risks. It is calculated on the basis of the holding period of the foreign currency, confidence level of the estimation made and denomination currency. This process helps a firm to make rough estimations of the impact of exchange rate fluctuations (Holton, 2003). Domino generally uses the process of hedging to reduce the exchange rate risks. It utilized techniques like natural hedging of foreign currencies, which is mostly done by forward contracts (Domino, 2014). Political Risk Moran (2014) has discussed that Political risk can be the most unavoidable form of risk for any company. It is present in every realm in the global business market. The political risks arise from different political regulations imposed in the trading activities. Bekaert et al (2014) further added that these regulations are mostly dependent on the political scenarios of a particular nation. As political scenarios vary across several countries, a firm which is operating in multiple overseas locations need to be proper knowledge about the all the regulations imposed by the government of the host nations. Ignoring these regulations may lead to deterioration of relationship with the host country and can even cause penalty for the firm. Busse and Hefeker (2007) stated that, in order to enter in to a new country, a firm must get a clear idea of its political scenario and ensure that all the operational activities of the firm are in line with the local political structure and does not form conflict with it. Moran (2014) pointed out some examples and explained that the political risk is a growing concern for the multinational firms. Based on the trend of the past decade, the political scenario of most of the countries like Libya, Sudan, Brazil, etc. have not improved as expected. However, in countries Zimbabwe, Columbia, Georgia, etc have improved over the years thereby attracting several multinational firms. Domino printing owns its operations in both developed as well as developing countries (Marketline, 2014). This as result allowed political issues to hamper the business activities of the firm. The performance of the company gets dependent on the changing political regulations of the host countries (Rapoza, 2013). These changes make overseas trading more difficult thereby increasing the operating cost of the Domino Printing. Although the political structures of a nation poses some hurdles for the company, but it makes sure that its employees follows all the given rules and regulations so as to avoid any local dispute in political grounds. The impact of political risk mostly includes bad debt, reduction of sales and added cost to overtake the barriers to trade. The company has designed its own regulations so that any form of political disputes can be avoided. Domino Printing maintains a close relationship with their suppliers and distributors and also with the local political authority. The close relation with the local business partners allows the company to have a clear idea with the political scenario of the region and make necessary amendments where ever required. It also enables the company to anticipate the issues regarding fiscal controls or goods imports. Domino has developed its own regulatory and risk management department, which specialize in mitigating imminent risk factors. The teams respond quickly to the changing scenarios and instantly communicate with the authority so the required changes in the compliance can be made. In order to pacify the impact of the risk factors of the company, it has taken high levels of insurance on material default and distributor’s debts (Domino, 2014). According to the study of Erb, Harvey and Viskanta (1996), applying proper risk management techniques its impact can be easily countered. The instability in the political structure of a company can be the result of several issues and they mostly vary across nations. Diamonte, Liew and Stevens (1996) The political instability of countries in the Middle East and North African region has been the primary determinant of the high levels of unemployment and corruption. Rajwani (2011) mentioned that political risks can be mitigated by the company if it maintains a good business relations with the local government by signing contracts, then it may protect itself from any political disputes. Moreover local sourcing can also allow the company to help the local population to improve their economic structure. Conclusion and Recommendation Domino printing has not only expanded itself in terms of geographic diversification but also expanded in terms of product portfolio and business subsidiaries by making several strategic acquisitions. Owing to its huge overseas operations Domino faces significant political and exchange rate risks. The risk arising from the change in currency exchange rates often leads to reduction in revenue generation and increase in operating cost. Although in the recent years owing to the fairly stable exchange rates, the company has made added revenue. Owing to the good financial strength of the company it should form a lobby with the local government of the host countries. This as a result will allow the company to leverage the political support to avoid any disputes and facilitate ease of operations. Moreover, the company should focus more on mitigating the currency exchange rate risks by paying off the liabilities in the same currency. This as a result will nullify any differences in the exchange rates. Moreover, in case of making overseas deal, it should use forward currency exchange contracts. This as a result will ensure its sustainable growth in the overseas business operations. Reference List 4-trader, 2014. Domino Printing Sciences : Half Yearly Report. [online] Available at: [Accessed 2 February 2015] Bekaert, G., Harvey, C. R., Lundblad, C. T., and Siegel, S., 2014. Political risk spreads. Journal of International Business Studies, 45(4), pp. 471-493. Busse, M., and Hefeker, C., 2007. Political risk, institutions and foreign direct investment. European journal of political economy, 23(2), 397-415. Diamonte, R. L., Liew, J. M., and Stevens, R. L. 1996. Political risk in emerging and developed markets. Financial Analysts Journal, 52(3), pp. 71-76. Domino, 2014. Annual Report. [online] Available at: [Accessed 2 February 2015] Domino, 2015a. History. 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[online] Available at: [Accessed 2 February 2015] WU, 2014. Currency Hedging. [online] Available at: < http://business.westernunion.com/resource-center/fx-101/hedging/ > [Accessed 2 February 2015] Read More