Financial Analysis of Aberdeen - Term Paper Example

Course: Date: Executive Summary With the passing of the Gramm-Leach-Bliley Act of 1997, financial institutions were allowed to diversify their services to include the banking and investment function all under one roof. This law allowed companies like Aberdeen to reach out to more clients as the doors had already been opened. Aberdeen is an asset management company that offers diversified financial services in the management of its customer’s portfolio. The company pools together resources from a number of investors and channels these resources to a variety of portfolios. The customers are able to sit back and relax even if they have limited financial knowledge regarding the market trends and financial markets operations. Aberdeen’s strategic and accounting analysis The company offers financial consultancy services as well as financial management on behalf of its customers at a fee. The customers work is only to bring in more capital and to follow up his or her investment. The company selects the best and most suitable investments that allow the customer to achieve his or her financial objectives. They perform an asset allocation at the request of the customer to enable the customers to diversify their portfolio. It happens that different customers have different tastes and preferences when it comes to investments, and Aberdeen enables the investors to choose the best company to invest in depending on the particular industry that the investor wants to invest in. Some investors would want to invest in the blue chip companies while others prefer the retail sector and other prefer the automobile industry. Aberdeen stands at the Centre of these preferences to advice its customers accordingly on the best choice of company to invest in. It accumulates information regarding the different companies and shares this information with the investors in the consultation sessions. This company is all about financial data. It helps to bridge the information asymmetry that exists between the investors and the market trends. Most investors lack the financial knowledge of how the markets operate, and Aberdeen jumps into the bandwagon to help them get the highest returns out of their investments. The company gets its revenues from the financial services it offers its clients. It also has investments as shown by the statement of cash flows. It runs its financial year from December to November, effectively closing its books of accounts before the normal year-end in order to accrue the outstanding payables for the year. This allows the company to reduce the workload it has for its employees before the Christmas season kicks in. Financial analysis of Aberdeen Financial analysis enables the decision makers and the policy makers to get a perspective of the company’s performance. A company like Aberdeen has a wide range of stakeholders who include the suppliers, the lenders and other creditors, the employees, the shareholders, the government and the competitors. Aberdeen’s competitors would be some of the keen stakeholders who follow up its financial performance to check where the company beats them in terms of financial performance and business in general. Other keen stakeholders are the shareholders, and their main concern is the return on their investments. They are interested with the going concern of the business, and they pay attention to not only the profitability but also the changes in the stock prices of the company. The financial analysis of financial statement includes the ratio analysis, the horizontal analysis, and the vertical analysis. Each of these is then followed by a commentary on the performance of the company and a conclusion to summarize the financial analysis (Paramasivan & Subramanian, 2009). The most commonly used financial statements are the statement of comprehensive income, the statement of financial position and the statement of cash flows. In performing financial analysis, it is crucial to carry out a year-by-year comparison of the financial statements to gauge the performance of the company. The recent year’s financial performance would be helpful in determining the analysis of the company. These include the years 2012, 2013 and 2014. The company’s financial year starts at December and ends at November. These three years will shed more light on the current market trends and the historical market trends. The Statement of Comprehensive Income Horizontal analysis of the consolidated statement of comprehensive income The horizontal analysis is a method of comparison, which compares the financial performance of the company in different years by applying a base year upon which the performance of the other years is, evaluated (Paramasivan & Subramanian, 2009). It is an easy and simple method of financial analysis. Further, it allows the users of financial statements to understand the financial performance of the organization in a better and simplified way. The horizontal analysis enables the users who may not be conversant with the financial terms to scan through the analysis to catch a glimpse of the performance (Kimmel & Weygandt, 2007). It performs a comparison on the individual items of the statement of comprehensive income that help the managers to note any unusual changes of specific items such as expenses and incomes. Any unusual changes are investigated for validity (Stittle & Wearing, 2008). This method does not fully disclose the weaknesses and strengths of the company. The total turnover grew by 24.1% in 2013 and further by3.6percentage in the year 2014. This showed a remarkable improvement especially in the year 2013 where the turnover stood at 1,078.50 million Euros. The operating expenses grew by 14.65 in the year 2013 and further by 11.4% in the year 2014. The operating profit increased by 44.5% in the 2013 but it decreased by 9.8% in the year 2014. The interest expense increased by 32.7% in the year 2013 but it decreased by 49.2% in the following year. The profit for the year increased by 47% in 2013 but it decreased by 6.6% in 2014. Vertical analysis of the consolidated statement of income The vertical analysis is also called common size method of financial analysis. It uses a base item of the financial statements, and all other items are measured as a percentage of it. In the statement of comprehensive income, the gross profit figure is used as the base while the total assets figure of the statement of financial position is used in the balance sheet. This method of analysis measures individual items as a percentage of the base (Kimmel & Weygandt, 2007). The operating expenses represented a smaller proportion of the total turnover in the year 2013 at 63.2% as opposed to 68.4% in the year 2012 and 68% in the year 2014. These changes in the operating expenses also affected the operating profit in that this item represented a larger proportion of the total turnover in the year 2013 at 36.8% as opposed to 32% in the year 2014 and 31.6% in the year 2012. The interest expense of the year 2014 took a smaller proportion of the total turnover at 0.3% as compared to the previous years when it took 0.6% of the total turnover. The tax expense represented a larger proportion of the total turnover 2013 at 5.7% as compared to 5.3% in the year 2012 and 4.3% in the year 2014. The profit for the year took a larger proportion of the total turnover at 30.5% in the year 2013 as compared to 25.7% in the year 2012 and 27.5% in the year 2014. The Statement of Financial Position Horizontal analysis The total non-current assets rose by 3.7 percent in the first year and further by 47.1 percent to settle at 1,676.1 million Euros. The total assets rose by 10.2 percent in the first year and by a further 19.9 percent in the second year to settle at 5,378.90 million Euros. The total current liabilities increased by 8.1 percent in the first year and by a further 6.7 percent in the second year to settle at 3,114.20 million Euros the long-term liabilities fell by 8.6% in 2013 but they rose by 192.7% in the year 2014. The total liabilities increased by 7.7 percent in the first year and by a further 10.7 percent in the second year to settle at 3,303 million Euros. Vertical analysis The tangible assets represented a bigger proportion of the total assets at 5 percent in 2012 as compared to 4 percent in 2013 and 2014. The intangible assets and goodwill represented a larger proportion of the total assets in 2014 at 28.9% as compared to 20% in 2013 and 24.4% in 2012. The investment showed a declining trend in proportion from 21% in 2012, to 20% in 2013 and 19% in 2014. The total non-current assets represented a higher proportion at 31.2 percent in 2014 compared to 25.4 percent in 2013 and 27 percent in 2012. The cash and receivables represented a larger proportion of the total assets at 12.2% in 2014 as compared to 9.5% in2013 and 8.5% in 2012. The total liabilities showed a declining trend in their proportion to the total assets from 68.1% in 2012 to 66.5% in 2013 to 61.4% in 2014. The current liabilities showed a declining trend in their proportion to the total assets from 66.3% in 2012 to 65% in 2013 to 57.9% in 2014. Ratio Analysis Solvency ratios Another name for financial leverage ratios is long-term solvency ratios. These ratios include the debt to equity ratio, total debt ratio, equity multiplier, cash coverage ratio and times interest earned ratio. They enable financial analysts to evaluate the ability of a firm to pay interest on its debts by measuring its indebtedness (Elliot & Elliott 2008). The total debt ratio measures the ratio of total debts to total assets. It reduced over the two-year period. It is less than one, which is good for the company. The ratio decreased over the three-year period, from 0.68 to 0.66 and further to 0.61. This indicates that the company’s debt decreased for that period as compared to the increase in the total assets (Hoggett, 2012). The times interest earned ratio increased from 56.04 times to 61.05 times and further to 108.45 times. This shows prudence in the coverage of the interest expenses. This is an indicator of an improvement in the solvency of the company. The debt to equity ratio decreased over the three-year period, indicating a lag in the debt payment and a decrease in the growth of equity for the period. It decreased from 2.13 to 1.98 in 2013 and decreased further to 1.59. The equity multiplier fell from 3.13 times to 2.98 times and further to 2.59 times in the year 2014. This means that the total assets increased at a lower rate than the total equity for the company, over the three-year period. Liquidity ratios The current ratio increased from 1.10 to 1.15 and further to 1.19 brought about by the increase in current assets and a decrease in the current liabilities. The cash ratio also rose, from 0.13 in 2012 to 0.15 in 2013 and further to 0.21 in 2014. This was brought about by an increase in cash and cash equivalent items over the two-year period. The receivables turnover ratio decreased from 1.69 times to 1.08 times but it increased in the final year to settle at 1.65 times. This trend in the final year was brought about by the increase in credits sales, which caused the total sales also to go up. Profitability ratios The company’s profitability fluctuated over the years. The return on assets increased from 0.057 in 2012 to 0.073 in 2013 but it fell to 0.055 in 2014. The return on equity rose from 0.172 to 0.219 but it fell by a slight margin to settle at 0.148 in 2014. The profit margin rose from 0.257 in 2012 to 0.305 in 2013 and but it fell to 0.275 in 2014. The asset turnover rose slightly from 0.249 to 0.252 but it fell to 0.227, representing a decrease in the efficiency of the company’s assets to raise incomes. Statement of Cash Flows Analysis The total cash flows from the operating activities rose by 28.2% in 2013 to stand at 472.9 million Euros but they fell by 3.7% to settle at 455.2 million Euros. The cash flows before financing fell by 1 percent to stand at 343 million Euros but they rose by 53 percent to settle at 524.8 million Euros. The total cash flows for the company fell by 38.2 percent, which represented a decrease of cash by 84.8 million Euros in 2013. This decrease was covered for by a huge increase by 181.6 percent, which represented an increase of cash by 238.8 million Euros. Statement of Owner’s Equity Horizontal Analysis The share capital of the company rose by 4.2 percent in the year 2013 to stand at 119.9 million Euros and it rose by a further 9.6 percent to settle at 131.4 million Euros in 2014. The minority interests increased by 73.9% in the year 2013 but they decreased by2 percent to settle at 361.7 million Euros. The other equity decreased by 20.7 percent in the year 2013 but it later increased by 295.7 percent in 2014 to settle at 656.1 million Euros. The total equity increased by 15.6% in 2013 and increased further by 38 percent in 2014 to settle at 2,075.90 million Euros. The Asset Based Valuation Model versus The Cash Based Valuation Model The asset based valuation method takes into account the net value of a company’s assets by subtracting the total liabilities from the total assets. The main challenge in applying this method of valuation is the selection and inclusion of assets and liabilities. Different accountants may have reservations on some assets especially the intangible assets such as goodwill and copyrights and patents. Others may wish to only include the long-term liabilities instead of the total liabilities, thereby omitting the current liabilities. The cash based approach uses the prevailing market conditions coupled with the market trends to forecast the expected future cash flows from the business. The business is valued at the expected net incomes that it is likely to bring in for the investors. These two valuation methods collide in the sense that one applies the market value of the assets and liabilities while the other uses a forecast of the expected future cash flows. Aberdeen uses the asset based valuation model as shown in its net assets figure of its statement of financial position. The cash based valuation method presents a challenge of fluctuating market conditions. Recommendations The company needs to find a way to boost its incomes either by increasing the number of customers or providing additional services to its existing customers. The company also has to look into its operating expenses, as they seem to have taken a larger proportion of the total turnover in the year 2014 as compared to the year 2013. In order to become more profitable, the company has to check its expenses and work on how to reduce them to a manageable level. Conclusion The profitability ratios are mostly considered by the shareholders, both existing and future shareholders. They are interested with the returns that the company is yielding for each year. The financial lenders and other creditors are interested with the solvency of the company. They are interested with the ability of the company to pay its financial obligations when they fall due (Hoggett, 2012). The company had a normal solvency. The liquidity ratios are a concern of the managers, as they have to monitor the company’s assets to ensure that it stays afloat despite paying its financial obligations (Elliot & Elliott 2008). They have to ensure the company has enough liquidity to pay of its short term financial obligations lest it runs into financial difficulties. The company’s profitability fluctuated over the years. References Aberdeen-asset.com, (2015). Report and Accounts - Group - Annual. [online] Available at: http://www.aberdeen-asset.com/doc.nsf/Lit/ReportGroupAnnual20140930 [Accessed 15 Aug. 2015]. Aberdeen-asset.com, (2015). Report and Accounts - Group - Interim. 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