Financial Accounting: Funding Methods - Case Study Example

Financial Accounting Submitted by: XXXXX Number: XXXXXX of XXXXXX XXXXXXX XXXXXXXX XXXXXX of Submission: XX – XX – 2009 Introduction: Finances of a company play a major role in the success or the failure of the company. Any entity, to ensure its achievement of goals and objectives, has to be assessed and monitored effectively in financial terms. Also, financial statements provide summarized information about an organization’s transactions. (Arnold, 1985, p17) They play an important role in decision-making and ‘stewardship’ – Keeping track of what has been done with the financial resources. (Britton, 1996, p3) The traditional method of doing it was using the Profit and Loss Account and the Balance Sheet. Ratios are calculated from these statements and these were used for the analysis of the organization’s performance and for predicting future success or failure (Pendlebury and Groves, 2004). This paper aims at analyzing two companies for their long term funding. The paper will firstly discuss each of these companies individually including all discussions regarding the company’s assets, liabilities. Further the paper will deal with the comparison of the two companies and an attempt will be made to gain a better understanding of the different funding methods that are adopted by the companies. Companies Chosen: As discussed earlier, there have been two companies that have been chosen for this study. The companies that have been chosen for this study include: a) Barclay PLC and b) e2v. These companies are both listed on the London Stock Exchange and the companies have been chosen as both these companies have shown a positive growth in the London markets. The companies have performed well and they have been able to make it into the top ten risers in the market. Barclay PLC: Barclay PLC has two main business clusters. Firstly it deals with the global retail banking and secondly it deals with Investment Banking and wealth management. Both these businesses and brands are world renowned and have made a major impact across the world in the banking sector. The company also has two major areas of business. These are divided into Group centre and Absa. The company has been established over 300 years ago and has grown to become a major company with a wide range of products and services to be offered to meet the needs and requirements of all the customers across the world (Gillespie, Lewis and Hamilton, 1997). The company also provides a committed and ensures sustainability of the communities in all markets that it operates in. The company also aims and tries to secure the sustainable relationships with the customers and the clients across the world. The bank also aims at having a successful relationship with the shareholders and in the words of the chairman, Marcus Agius, ‘It is very important to us to have good relationships with all of our shareholders, and we are keen to encourage your interest in the development of Barclays’ (Barclays, 2009). The table below provides a clear view of the financial details of the company and presents the trend over the past three years. Period ending 30-Sep-08 30-Sep-07 30-Sep-06 Short-term money* 203934m 172398m 158908m * The Short Term money includes all inflow of money from, ‘Deposits from banks’, Commercial papers’ and, ‘Negotiable Certificates of deposit’. Barclays has a strong capital structure and the company has been able to keep the borrowings low and the net debt at an overall low. The company has a long term debt to capital ratio which totals to almost 0.45. The company also has a total debt equity ratio of 0.81. The company’s average of five years of debt ratio has been totaled to almost 2.17. The company’s return on invested capital is has been a total of 6.6% in terms of the year 2008 and an average of 5.8% over the past five years. Barclays has a clearly strong capital structure as the company has been able to very effectively allocate the capital under its control and into the most profitable investments. The return on the investments is better the higher the level it is. Here in the case of Barclays, the company has a high return on investment and this simply gives a sense that Barclays has been very effective in using the money to generate returns. Barclays although has a high level of debt also has proven to give excellent results and this in turn makes the company’s capital structure very effective and efficient. It is also essential to gain a brief overview on the main mission and vision of the company. Barclays mission as the company has set it out reads, : ‘Our mission is to be an innovative customer – focused Group that delivers superb products and services, ensures excellent careers for our people and contributes to the communities in which we live and work’ (Barclays, 2009). e2v: e2v on the other hand are the manufacturing company that have been chosen for this research. The company is engaged in the manufacturing process of sensors, semiconductors, subsystems, electronic tubes and also in the niche markets like medical, industrial and commercial market items. This company is also listed on the London Stock exchange and has been recognized to be a top riser in the markets for several days (e2v, 2006). The company has a total market capitalization of 108.50 pounds. Considering the capital structure of the company it is essential to gain a clear perspective of the total company performance over the years. However before moving into the capital structure it is also essential to gain a better perspective on the other elements of the business (e2v, 2007). These have been discussed in the next paragraph. e2v’s main purpose has been highlighted in the annual report and the company explains its main purpose as, ‘the overall purpose of the business is to grow sustainable shareholder value whilst appropriately meeting the expectations of our customers, our people, our partners, our suppliers, and the wider community’ (e2v, 2009). The company works with the vision of ‘Creating value through bright ideas in technology and materials science’ and a mission of ‘Our people work together to place the customers at the heart of our business, providing enabling products of premium quality that extend technical barriers and enhance the competitive position of our partners. By doing this, we will be a FTSE company by 2009’ (e2v, 2009). e2v has seen a number of ups and downs in its capital structure. The company had faced a fall in the income from a gain of 11.80 million to a loss of 21.30 million; this was in spite of the 13.97% increase in the revenues. The company has also been faced with a major increase in the selling, general and administration costs. The company however in 2009, has been able to improve the overall performance. e2v has also earned almost 41.75 million in terms of the operations and the company has additional capital of almost 10.93 million. The company’s debt to capital ratio has been as much as 0.73% quite stable from the previous year. The overall performance of the company has been excellent making it one of the top risers in the London Stock Exchange. The company a percentage growth on almost 15% on the exchange over the past few days, which clearly indicates the overall capital structure performance and also the overall effective performance by the company. Comparison: The Capital structures of these two entities are completely different. The balance sheet of the bank is completely different from that of e2v group as the assets and liabilities of Barclay bank are invariably monetary in nature. It is obvious from the statements that Barclay seeks liabilities in order to build assets whereas e2v tries to build assets and reduce its liabilities. The debt ratio of e2v is relatively much lower than that of Barclay, as Barclay is a bank (Forbes, 2009). The short term money is comparatively lesser. Hence liquidity can be calculated for a bank using its short term money or short term money and the loans and deposits it holds. A manufacturing company such as e2v group also includes non-tangible assets such as goodwill, etc.., in its asset calculations whereas Barclay bank assets are completely monetary in nature. Both the e2v group and Barclay bank show constant steady growth over the three year period as far as the value of the companies are concerned. The most important difference between the two companies is that there are no operational costs in the case of Barclay bank as opposed to that of e2v. Also, the important measures that help decide whether a bank is doing well are its loans and deposits which are quite well for Barclay bank. However, it will be the exact opposite in the case of e2v. The gearing ratio is about 35% as of the December 2009. The maximum it can go up to is around 50% after which it is not good for the company’s prospects. The gearing ratio is a financial leverage and this helps demonstrate the degree to which the capital of the company is funded by the owners and the amount of the capital that is funded by the creditors. A company with a high gearing ratio is one where the amount of risk is high. In the case of two companies it is clear that the two companies have very high gearing ratios. In terms of the bank this is acceptable as the amount of funds that are used within a bank is normally very high as the amount of investment is mainly from that received from others and lesser in terms of the owners. The below table presents the various ratios of Barclays and this allows to get a clearer and more informative view on the company. The percentages are a clear indication of the company and the overall performance (Barclays, 2006, Barclays, 2007, Barclays, 2008). EBITDA Margin 48.9% Pre-Tax Profit Margin 14.7% Assets Turnover 0.0% Return on Assets (ROA) 20.0% Return on Equity (ROE) 12.0% Return on Capital Invested (ROCI) 6.6% Current Ratio - Leverage Ratio (Assets/Equity) 56.1 Interest Cover 1.3 Total Debt/Equity (Gearing Ratio) 0.81 LT Debt/Total Capital 45.0% The figure below also provides a clear view of the overall balance sheet at a glance. The company has a clear high level of short term liabilities and these form a major part of the total liabilities and hence the company’s debt ratio is high (ADVFN, 2009). In terms of e2v, the company has a very strong capital structure as well; however the company is faced with a few ratios where the company is faced with several disadvantages. The company is a very diversified and this leads it to be more difficult for the company to gain a meaningful set of averages. Also in terms of the ratios the company has seen a balanced ratios and this brings out the effectiveness of the capital structure that is being put to use (ADVFN, 2009). The main difference among the two companies is that the banks have a more leveraged than that of non financial companies. The banks are a form where the funds are not mechanical and the main role of the bankers is to be providers of loans and deposits. As has been developed over years, it is essential that the deposit taking financial companies have relatively higher levels of substantial liabilities and this is above their deposit base. Barclays bank needs to have a higher level of non deposit liabilities which the company can utilise for the loans and the daily processes. The other difference that is seen in the two companies is that the manufacturing company have all the projects and own them all (FT, 2009). In the case of banks they do not own the projects that they invest in and they are still faced with the possibility of being drained by all the competition that they face. Also the banks are recognised to be lenders who are sophisticated and they need to conduct a number of risk analyses before they provide loans. In the case of e2v the company is a manufacturing plant and the capital structure of this company is completely based on the needs of the manufacturing unit (Berry and Jarvis, 1996). The success of the company can also be checked looking at the amount of assets that the company owns and the total amounts that they owe. e2v shows immense growth and availability of funds that allows the company to be more successful each year. The assets and investments made by the company belong completely to the company and thereby making the overall worth much higher. The two companies although have several similarities, they also have numerous differences. These differences are simple and are the main factors that differentiate the banks and financial institutions from other non financial units and manufacturing companies. The manufacturing industries unlike the banks do not have a relatively opaqueness in terms of the financials of the company. Hence the manufacturing industries have easier and more flexible modes for risk shifting and the companies can also easily create a difference in the overall structure unlike the banks (Arnold, Hope and Southworth, 1985). Banks need to continue on with the capital structure without making drastic changes as the effect of this will not only be borne by the banks but also by every lender and every borrower. Hence considering Barleys current capital structure this is relatively a very balanced one as compared to that of e2v. The company has a more balanced and strategic money usage than e2v. Also e2v lacks a clearness and opaqueness in terms of the amounts that the company spends and the continuous restructuring that the company makes. These are some of the major differences in the capital structure of the two firms (e2v and Barclays). Bibliography ADVFN, 2009, Barclays PLC ADR, Accessed on 2nd December 2009, Retrieved from http://www.advfn.com/p.php?pid=financials&symbol=NYSE%3ABCS Arnold, J., Hope, T. and Southworth, A., 1985, Financial Accounting, 1st edn, Prentice Hall, Exeter Barclays, 2007, Annual Report, 2007, Accessed on 3rd December 2009, Retrieved from http://www.barclaysannualreport.com/downloads/full_annual_report.pdf Barclays, 2008, Annual Report, 2008, Accessed on 3rd December 2009, Retrieved from http://www.barclaysannualreport.com/ar2008/files/pdf/Annual_Report_2008.pdf Barclays, 2009, An introduction to Barclays, Accessed on 2nd December 2009, Retrieved from http://www.investor.barclays.co.uk/results/2001results/annual_report/website/lblue/lblue.html Barclays, Annual Report, 2006, Financial Statements, Accessed on 3rd December 2009, Retrieved from http://www.investor.barclays.co.uk/results/2006/annualreport/annualreview2006/downloads/pdf2/section_three.pdf Berry, A. and Jarvis, R., 1996, Accounting in a Business Context, 2nd edn, Chapman and Hall, London Britton, A. and Watterston, C., 1996, Financial Accounting, 1st edn, Addison Wesley Longman, New York e2v, 2006, Annual Report, Accessed on 4th December 2009, Retrieved from http://online.hemscottir.com/ir/eev/pdf/annual_report2006.pdf e2v, 2007, Annual Report, Accessed on 4th December 2009, Retrieved from http://online.hemscottir.com/ir/eev/pdf/2007/e2v_AR07_WEB.pdf e2v, 2008, Annual Report, Accessed on 4th December 2009, Retrieved from http://online.hemscottir.com/ir/eev/pdf/2008/e2v_AR08_WEB.pdf e2v, 2009, e2v technologies PLC, Accessed on 5th December 2009, Retrieved from http://online.hemscottir.com/servlet/HsPublic?context=ir.access&ir_client_id=4679&ir_option=PDF_TEARSHEET Forbes, 2009, BARCLAYS PLC (NYSE:BCS), Accessed on 2nd December 2009, Retrieved from http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=bcs FT, 2009, E2V Technologies, Accessed on1st December 2009, Retrieved from http://markets.ft.com/ft/tearsheets/financialsSummary.asp?s=E2V%3ALSE Gillespie, I., Lewis, R. and Hamilton, K., 1997, Principles of Financial Accounting, 1st edn, Prentice Hall, Europe Pendlebury, M. and Groves, R., 2004, Company Accounts – Analysis, Interpretation and Understanding, 6th edn, Thomson Learning, London Read More