Financial Analysis of Abacus Distribution Plc - Case Study Example

Abacus Abacus Distribution Plc is a group of companies that mainly deals with various electronic components and their distribution. “Abacus Group plcdistributes electronic components and electromechanical products primarily in the United Kingdom, Scandinavia, Italy, France, Germany, and Austria. The company also offers a range of electromechanical sub contract manufacturing services. Its products include flat-panel displays, interface kits, single board computers, panel PCs, printers, and card readers. The company also provides switches, relays, fans, heatsinks, motors, batteries, cable, wire and heat shrink, filters, and transformers. Its passive components include capacitors, resistors, potentiometers, inductors, ferrites, transformers, varistor, thermistor, fuses, piezo sounders, resonators, and crystals.” (ABU: London Stock Exchange. 2007). Task1 Investments The financials of the company has been analyzed by comparing the financial data during the years from 2002 to 2006. Out of a total of £146.3 million worth assets for the year 2006, the fixed assets included £89 million and the remaining in other types of assets. The fixed assets mainly consist of investments made by the company. The company has made an investment in Deltron of France for acquisition. It also invested in the Axes technology in 2006 in order to explore the offshore market. When we compare the total investment of the company during the period from 2002 to 2006 we find that until 2005 there was no big increment in the assets employed. But in 2006 the company had a tremendous increase in the total assets employed in the form of fixed assets. This is clear from their investment of £56.7 million in 2006, as against the £5.6 million in 2005. Financing and capital structure The company has employed a right mix of debt and equity for its capital structure. Total fund of the shareholders in the capital structure is £80.2 million. The funds of the shareholders have appreciated up to 100% from the year 2002. The balance sheet of the company in September 2006 shows that the capital structure includes £10 as creditors. There is no debt financing in the capital structure of the company. Dividends Abacus group distributed a dividend of 3.6p per share held for the year 2006. The company has also distributed a similar amount as interim dividend making a total of 7.2p per share as total dividend. The dividend amount was paid by the company in the early days of 2007. Altogether the company paid an amount of £5.3 million as dividends for the year 2006 which was £4.2 million 2005. Dividend distribution was carried out by the company satisfactorily over years. “£4.2 million dividends have been paid in 2006, £5.3 million Dividends have been declared out of 2006 profits.” (Annual reports and accounts. 2006). There is always a close relationship between investment capital structure and dividends of a company. Better investment made by the company yields them greater income which will enhance the divided paid. Similarly, a proper capital structure will help the company reduce problems like overcapitalisation and undercapitalisation and it will also enhance the dividend policy of the company. Task 2 Financial Manager holds a key position in an organization for making the most relevant and appropriate decision about the current and future running of the entity. His main role is to analyze the over all financial structure of the company. Market Value Added (MVA) concept should make a differentiation between the market value of both debt and equity. A higher MVA is more beneficial to the organization. “Market-to-Book Ratio is the ratio of the current share price to the book value per share. It measures how much a company is worth at present, in comparison with the amount of capital invested by current and past shareholders into it. The formula is: Market capitalization / ord cap, reserves Alternatively, the calculation could be as follows: Share price / NAV per share-basic.” (Market-to-Book Ratio. 2007). The impact of these accounting ratios widely affects the over all financial structure and financial viability of the organization. The Financial and operational highlights of the Abacus group has been massive in the recent few years. Total shareholder return attained by Abacus is also crucial in nature. Likewise, non current asset revaluation is also taken into consideration in the market avenues which is relevant on the debt level in the capital structure. Total shareholder return enables us to compare the performances of various companies in relation to stock and shares. “The graph below compares the cumulative total shareholder return on the Common Stock since the initial public offering of the Common Stock ("IPO") with the cumulative total return on the Nasdaq US Index and the Nasdaq Computer and Data Processing Index over the same period (assuming the investment of $100 in the Common Stock, the Nasdaq US Index and the Nasdaq Computer and Data Processing Index on September 26, 1996, and the reinvestment of all dividends). CUMULATIVE TOTAL RETURN NASDAQ COMPUTER ABACUS AND DATA MEASUREMENT PERIOD DIRECT NASDAQ US PROCESSING (FISCAL YEAR COVERED) CORPORATION INDEX INDEX 9/26/96 100 100 100 12/31/96 134 105 104 12/31/97 293 129 127 12/31/98 325 180 228”. (Performance Graph. 2007). Task 3 How risky do you think this company is as an investment? The concepts of investment and risk are related to each other. Even though Abacus group is one of the leading groups dealing with electronic components, the investment decision taken by the group involves a certain amount of risk. However, the benefit derived from it is mostly remarkable in nature. “Alternative investment products, including hedge funds and managed futures, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Alternative investment performance can be volatile.” (Articles on Hedge Funds. 2005). Therefore, it is clear that making the investment of funds is a very complex and risky concept. Still, the benefit derived from the company is worthy enough from a shareholder’s point of view, for further investment in the company. How well do you think the directors have been able to increase the shareholders’ wealth? One of the important factors that a Director takes into consideration is the maximization of the shareholders’ wealth. “Shareholders wealth is basically the wealth shareholders get to accrue from their ownership of shares in a firm. Shareholder’s wealth increases by 2 possible means: either by increase in share prices that bring about capital gain or increase in dividend payments. Knowing this fact, a firm can maximize shareholders wealth through this way. However, an optimal point needs to be struck as a firm needs to balance the risk and return involved”. (Shareholders’ Wealth. 2007). It is necessary to maximize the total wealth of shareholders effectively, for the overall attainment of financial performance. What do you think the market’s assessment of the value of the company is based on? It is necessary to obtain appropriate market position for the existence of any products. Abacus is one of the leading electronic components company, which occupy a prominent position in the market place. As far as the competitors are concerned, Abacus group commands a great position in the market. “Avolution Pty Ltd was formed to commercialize the ABACUS technologies. IT is a spin-off company from UTS which has gained investment from ITem3, the BITS-funded IT industry incubator in Sydney. ITem3 has invested a program of capital and services into Avolution which has supported its entry into the Australian market, is developing alliance partnerships and which will position the company for international growth. ITem3 has identified a large and accessible international market for ABACUS, and has gained strong interest from both IT industry partners and the investment community.” (ABACUS winner 2003 consensus award winner) Bibliography ABACUS winner 2003 consensus award winner. (2003). Potential. [online]. ABACUS. Last accessed 14 November 2007 at: http://www.consensus.com.au/SoftwareAwards/CSAarchive/CSA2003/ABACUS.htm ABU: London Stock Exchange. (2007). Abacus Group plc. ABU Details. [online]. Business Week. Last accessed 14 November 2007 at: http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?capId=921944 Annual report and accounts. (2006). Dividend. P. 12. [online]. Abacus group. Last accessed 14 November 2007 at: http://www.abacus-group.co.uk/jkcm/cache/fl0000297.pdf Articles on Hedge Funds. (2005). Risks. [online]. ABACUS. Last accessed 14 November 2007 at: http://chinese-school.netfirms.com/abacus-hedge-funds.html Market-to-Book Ratio. (2007). ADVFN. http://www.advfn.com/Help/market-to-book-ratio-108.html. Performance Graph. (2007). Abacus Direct Corp. [online]. EDGAR Online. Last accessed 14 November 2007 at: http://sec.edgar-online.com/1999/04/30/15/0000950134-99-003448/Section13.asp Shareholders’ Wealth. (2007). [online]. Ask Me Help Desk. Last accessed 14 November 2007 at: http://www.askmehelpdesk.com/finance/what-shareholders-wealth-21349.html   Read More