Accounting and Finance in CSR Plc - Case Study Example

Performance Assessment of CSR The selected company from the specified website is CSR Plc., and the company chosen for comparison purposes is Bond International Software Plc. (BIS) Overall Assessment The performance of CSR is remarkable during the year 2006. EBIT in 2006 increased by 28.04m on the basis of big jump in turnover, which was 144.84% of the turnover in 2005. The company is performing very efficiently as inventory and assets turnovers have effectively boosted its turnover in the year 2006.CSR is maintaining very high liquidity ratios. In fact the firm should use its liquid resources more towards enhancing the profitability by claiming cash discounts on early payments to trade payables. Long term debts are almost negligible and the firm is very low geared. The company has not declared or paid out dividends but its Earning per share is attractive. The company will be oversubscribed whenever it will go public. Profitability The ratios used in analyzing the profitability are Net Margins, Return on Assets (ROA), and Return on Equity (ROE). Net Margins have shown a decline from 16.59 in 2005 to 15.01 in 2006. The main reason for such decline is tremendous increase in revenue turnover that has gone up from $486.531m to a huge 704.695m. Turnover wise this is a great achievement and that is almost 144.84 % of turnover in 2005. With such big jump in turnover Net Margin ratio was bound to dwindle a little. The overall profitability has shown a tremendous increase from $83.156m in 2005 to $111.197m in 2006. Though CSR Plc.’s net margin at 15.01 seems lower than 17.08 of Bond International Software Plc.(BIS),but its rise in revenue in 2006,that is 144.84% of its revenue in 2005, nullifies this effect when we observe that rise in revenue for BIS was 126.23% of the previous year figure. It may be noted that CSR’s return on Assets (ROA) has increased from 20.79 in 2005 to 21.13 in 2006. This proves that the dwindling is net profit margins is only due to an effort made by the company to push its turnover. Assets have been utilized effectively by CSR when we see that BIS’s ROA in fact gone down from 27.07 in 2005 to 22.5 in 2006. Apparently the company has not been able to keep the upward swing when one looks at the bare figures of Return on Equity (ROE). The return on equity has gone down from 38.45% in 2005 to 32.55%. But that is not the fact. ROE is being calculated on basis average of equity employed during the year; and because of hefty contribution to retained earnings in 2006 for the purpose of calculation of average capital employed, the ratio has dwindled down to 32.55%. These are sort of limitations of ratio analysis. In fact total retained earnings have gone up from 132.138m in 2005 to 246.119m in 2006, almost 86.26% upswing over the retained earnings as on 31st December 2005. This addition to the equity has brought down the ROE, whereas the fact is profitability has increased tremendously by making an addition of 86.26% over the retained earnings of 2005. Now in intra- company comparisons, BIS has not improved upon his performance over previous year. Its ROE both years is the same 0.18 CSR has performed exceptionally well. It has not only improved upon its early year performance but also almost leading in industry when inter- company figures are observed. Efficiency The efficiency in all round performances of an entity may be judged by a review of its Gross Profits, Inventory Turnover and assets Turnover. “Gross Profit margin is one of key performance indicators. The gross profit margin gives an indication on whether the average mark up on goods and services is sufficient to cover expenses and make profits.” (Benchmark your business)1 CSR has maintained its gross profit around 46.64% of sales. It was 46.89% in 2005 and 46.64% in 2006. This appears to be routine fluctuations. On the other hand BIS is stable with its huge G.P. ratio at 94.68% in both the years. Gross profits differ from product to product and it is just not possible to reach any conclusion on intra-company comparisons. However, both companies have maintained their earlier performances with regard to gross ups. Inventory turnover is an indicator of overstocking or under stocking of inventory. On this count CSR is efficient in rotating its turnover 6.62 times in 2006 as compared to 6.98 in 2005. This is a remarkable feat in the industry where every other day there are new inventions blocking the stocks of outdated products. CSR has rotated the inventory so efficiently that the firm saw a great boost in revenue turnover pertaining to 2006. In case of BIS inventory is not involved into the business. So inter-company comparisons is not possible.. Asset Turnover conveys the extent of exploitation and utilization of assets for the business; and whether assets were under utilized or over burdened. CSR’s assets turnover was 0.71 in 2006 and 0.8 in 2005. This is a matter of concern as during the year 2006 all assets appear to be not fully mobilized to their capacity. This may be due to high additions to assets during 2006. But the fact is that assets remained under utilized during 2006. Whereas BIS has performed extremely well. Its assets turnover is 1.39 in 2006 as compared to 0.78 in 2005. CSR has not been able to come up to industry standards when inter- company comparisons are made. Though CSR is maintaining stable efficiency but the performance is mixed bag, particularly because of underutilization of assets in 2006. Liquidity A current ratio of 2.0 is often cited as acceptable, but then everything depends upon the industry the firm operates in. According to this standard CSR is maintaining a fantastic current ratio of 3.98 in 2006. In 2005 this ratio was 2.46. Probably CSR uses its liquidity to pay off creditors to obtain maximum advantage in cost of purchases. Intra Company comparison suggests that CSR is far more superior in maintenance of liquidity as current ratios of BIS are 1.84 in 2006 and 1.23 in 2005, lower than even the standard 2.0. Quick ratio is part of current ratio that is calculated taking into account most liquid of the current assets. A quick ratio of 1.0 or greater is occasionally recommended, but as with the current ratio, an acceptable value depends upon the concerned industry. CSR has quick ratio of 1.28 in 2006 as compared to 0.91 in 2005. This is great achievement on part of CSR as BIS maintains 1.23 for 2006 and 0.62 for 2005. Liquidity position of CSR is strong and reflected the way CSR is handling its short term obligations. Trade payables have come down to 64.801m in 2006 from 95.590m in 2005. Gearing The amount of gearing (leverage) in a firm’s capital structure, i.e., the mix of long term debts and equity maintained by the firm, has a significant effect on its value by way of manipulation in the return and risk. If the firm uses more of debt capital into its capital structure, the firm is called ‘high geared’; and where debts are low as compared to equity there it is called ‘low geared’. CSR is very low geared in both the years 2006 and 2005 as debts are much lower than equity funds. The result is that debt ratios in both the year is meager 0.01. It appears CSR does not believe in manipulations through capital gearing. Time- Interest-Earned ratio is huge 239.57 times the total interest obligations in 2006. This ratio was 155.48 times in 2005. BIS is also very low geared. BIS has debt ratio of 0.3 in both years. Rather CSR is much better placed in the industry. BIS does not have fixed interest bearing long term debt and hence no comparisons can be made on account of coverage ratios, like Time-Interest-.Earned ratio. It appears at present CSR has no significance of any type of capital gearing because of its huge profitability contributing to equity funds by way of retained earnings. Investors’ Ratios Investors are basically interested in Earning per Share (EPS) and its dividend pay out ratio. CSR has not paid dividend during 2005 and 2006. That means its equity investors should only care for EPS. The basic EPS in 2006 rose to 0.86 from 0.67 in 2005. This in itself speaks of the success story of CSR. Even the diluted EPS is 0.82 in 2006 as compared to 0.62 in 2006. Intra company comparison places CSR in a better position as basic EPS of BIS are just 0.11 and 0.07 in 2006 and 2005 respectively. Diluted EPS of BIS is also lower than those of CSR. CSR stands in a very strong and safe position. The fact that its basic EPS in 2006 is 128.35% of its basic EPS in 2005 speaks a lot about the success of CSR; and based on this one can say that CSR will be an all round success story whenever it will go public. References Benchmark your business, ANZ, viewed on Nov.30th, 2007, http://www.anz.com/australia/business/calculator/businessbenchmark/gross_Profit.asp Annexure 1. Ratio Calculations for CSR Plc. 2. Excerpts from published accounts of CSR Plc. 3. Ratio Calculations for Bond International Software Plc. (BIS) 4. Excerpts from published accounts of BIS 1. 2. CSR ANNUAL REPORT AND FINANCIAL STATEMENTS 2006 EXCERPTS FROM THE PUBLISHED ACCOUNTS CONSOLIDATED INCOME STATEMENT For the 52 weeks ended 29 December 2006 Notes 2006 2005 $’000 $’000 Revenue 4,5 704,695 486,531 Cost of sales (376,036) (258,418) Gross profit 328,659 228,113 Research and development (109,313) (60,340) Sales and marketing (47,634) (38,696) Administrative expenses (22,717) (17,141) Operating profit 148,995 111,936 Investment income 4 6,106 3,213 Finance costs 8 (704) (783) Profit before tax 154,397 114,366 Tax 9 (43,200) (31,210) Profit for the period 6 111,197 83,156 Earnings per share $ $ Basic 10 0.86 0.67 Diluted 10 0.82 0.62 The results were all derived from continuing operations. The profit for the period is wholly attributable to equity holders of the parent company, CSR plc. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY For the 52 weeks ended 29 December 2006 Notes 2006 2005 $’000 $’000 At beginning of period 277,037 155,485 Profit for the period 111,197 83,156 Issue of share capital 22 2,954 3,402 Exchange differences on translation of foreign operations – (47) Share-based payments 27 7,836 2,408 Deferred tax (liability) benefit on share option gains and tax losses 18 (5,404) 21,282 Current tax benefit on share options 23 8,188 13,532 Gain (loss) on cash flow hedges 23 8,350 (3,828) Net tax on cash flow hedges in equity 23 (1,886) 936 Transferred to income statement in respect of cash flow hedges 23 (2,063) 711 At end of period 406,209 277,037 CONSOLIDATED BALANCE SHEET 29 December 2006 Notes 29 December 2006 30 December 2005 $’000 $’000 Non-current assets Goodwill 11 51,952 52,697 Other intangible assets 12 31,686 25,508 Property, plant and equipment 13 45,454 22,541 Deferred tax asset 18 11,350 18,137 140,442 118,883 Current assets Inventory 15 106,470 69,672 Cash flow hedges 17 4,522 – Trade and other receivables 16 101,822 75,287 Treasury deposits 16 30,000 25,000 Cash and cash equivalents 16 117,494 99,386 360,308 269,345 Total assets 500,750 388,228 Current liabilities Trade and other payables 20 64,801 95,590 Current tax liabilities 19,023 1,932 Obligations under finance leases 19 3,384 3,806 Cash flow hedges 17 – 3,828 Provisions 21 4,100 4,056 91,308 109,212 Net current assets 269,000 160,133 Non-current liabilities Obligations under finance leases 19 3,233 1,979 Total liabilities 94,541 111,191 Net assets 406,209 277,037 Equity Share capital 22 232 228 Share premium account 23 84,111 81,161 Capital redemption reserve 23 950 950 Merger reserve 23 61,574 61,574 Hedging reserve 23 2,220 (2,181) Share-based payment reserve 23 11,003 3,167 Retained earnings 23 246,119 132,138 Total equity 406,209 277,037 CONSOLIDATED CASH FLOW STATEMENT 52 weeks ended 29 December 2006 Notes 2006 2005 $’000 $’000 Net cash from operating activities 24 65,499 94,969 Investing activities Interest received 6,047 2,878 (Purchase) sale of treasury deposits (5,000) 10,000 Purchases of property, plant and equipment (35,874) (17,250) Purchases of intangible assets (9,797) (1,423) Acquisition of subsidiaries – (64,464) Net cash used in investing activities (44,624) (70,259) Financing activities Repayments of obligations under finance leases (5,235) (3,262) Proceeds on issue of shares 2,959 3,434 Net cash (used in) from financing activities (2,276) 172 Net increase in cash and cash equivalents 18,599 24,882 Cash and cash equivalents at beginning of period 99,386 75,074 Effect of foreign exchange rate changes (491) (570) Cash and cash equivalents at end of period 117,494 99,386 3. 4. EXCERPTS FROM THE PUBLISHED ACCOUNTS Bond International Software Plc. Consolidated Profit and Loss Account Turnover – continuing operations 2 17,209 13,633 Cost of sales (915) (809) Gross profit 16,294 12,824 Administrative expenses (12,716) (10,316) Operating profit – continuing operations 3 3,578 2,508 Net interest receivable 6 78 3 Profit on ordinary activities before taxation 3,656 2,511 Tax on profit on ordinary activities 7 (638) (616) Profit for the financial year 16 3,018 1,895 2006 2005 (restated) Earnings per share (pence) 8 Basic 11.20p 7.51p Diluted 10.96p 7.34p Bond International Software Plc. Consolidated Balance Sheet as at 31 December 2006 2006 2006 2005 2005 (restated) (restated) Note £000 £000 £000 £000 Fixed assets Intangible assets 9 8,141 7,343 Tangible assets 10 2,715 2,647 10,856 9,990 Current assets Debtors 12 4,298 3,479 Cash at bank and in hand 8,770 3,511 13,068 6,990 Creditors: amounts falling due within one year 13 (7,102) (5,680) Net current assets 5,966 1,310 Total assets less current liabilities 16,822 11,300 Creditors: amounts falling due after more than one year 14 (428) (598) Net assets 16,394 10,702 Equity capital and reserves Called up share capital 15 281 252 Share premium account 16 9,180 6,209 Equity option reserve 16 266 189 Profit and loss account 16 6,667 4,052 Equity shareholders’ funds 17 16,394 10,702 The financial statements were approved and authorised for issue by the board of directors on 4 May 2007. Stephen Russell Bruce Morrison Directors Bond International Software Plc. Consolidated Cash Flow Statement for the year ended 31 December 2006 2006 2006 2005 2005 (restated) (restated) Note £000 £000 £000 £000 Net cash inflow from operating activities 19(a) 5,550 3,304 Returns on investments and servicing of finance Interest received 165 86 Interest paid (87) (83) 78 3 Taxation Corporation tax paid (736) (596) Overseas taxation paid (38) (64) (774) (660) Capital expenditure Payments to acquire intangible fixed assets (1,314) (836) Payments to acquire tangible fixed assets (504) (434) Receipts from sale of tangible fixed assets 36 – (1,782) (1,270) Acquisitions Payments to acquire business – (1,114) Cash acquired with subsidiary – 112 – (1,002) Equity dividends paid (252) – Net cash inflow before financing 2,820 375 Financing Issue of ordinary shares 3,100 5 Expenses of share issue (100) – New hire purchase loans 111 62 Repayment of bank loans (86) (341) Repayment of other loans (368) (359) Repayment of hire purchase loans (145) (65) 2,512 (698) Increase/(decrease) in cash 5,332 (323) Reconciliation of net cash flow to 2006 2005 movement in net funds 19(b) £000 £000 Increase/(decrease) in cash 5,332 (323) Decrease in bank loans 86 341 Decrease in other loans 368 359 Loans and HP contracts acquired with subsidiary – (1,081) Decrease in hire purchase loans 34 3 Change in net funds 5,820 (701) Foreign currency translation differences (72) 66 Net funds at 1 January 2006 2,370 3,005 Net funds at 31 December 2006 8,118 2,370 Read More