The Analysis of the Financial Statements of Arriva - Essay Example

Arriva Plc Table of Contents Table of Contents 2 Introduction 3 Financial Review 3 Financial Ratio Analysis; the Issues, Comments and Suggestions 4 The Share Price Observation 5 Conclusion 6 References 6 Appendices 7 Appendices 1: Financial Ratios of the Arriva Plc. 7 Appendices 2: The Moving Stock Prices of Arriva Plc 7 9 Introduction The financial statement of any organisation includes the financial activities of that organisation and the analysis of the statement demonstrates its financial capability to sustain in the industry. It helps the management to maintain the financial benchmarks and provides a clear idea to the organization for making important decisions. From the investors’ point of view, it portrays the overall performances in terms of profit on their investments so that they can decide whether the organisation’s share should be included in their portfolio. This report deals with the analysis of the financial statements of Arriva, one of the largest transport-service providers in Europe. The financial analysis will be done by comparing the ratios of the last two years and will include suggestions and comments on the company’s performance. Financial Review The 2009 annual report of Arrive records the financial activities for the year which has been compared with the previous year’s performance. The income statement and the balance sheet indicate a substantial growth in 2009 as compared to 2008. In spite of the global crisis and the increasing fuel price there has been a growth in the revenue. It has increased to £3147.8 millions in 2009 from £3042.2 millions in 2008. The EPS of the company shows a growth of 4% from last year. The cash flow, operating profit and the PBT have risen with a decent rate in 2009. The next part will consider and calculate the financial ratios to evaluate the financial activities. Financial Ratio Analysis; the Issues, Comments and Suggestions The current ratio of the company has moved upward from 0.62 to 0.69 which indicates a good sign for the company. The liquidity of the company and its capability to pay short term debt has increased substantially. The debt/equity ratio, which measures the volatility of the company, along with its leverage has fallen from 3.15 to 2.78; although excess debt over equity is a drawback for the company. For rectifying it, the company should pay back the large part of debt by issuing equity or preferred shares. The company can sell its unused and unproductive equipments and units like old buses or offices to pay the borrowings. This will result in decreased volatile earnings. “Net profit margin is the percentage of profit you earn for each dollar you make in sales. Downward trends in the net profit margin are not a good sign” (Biafore, 2006). The company’s net profit margin shows a very little increase of 0.001. The global economic condition in 2008 was worst but in 2009 it recovered a bit. If we compare it with the small increase in the net profit margin, it will not be justified. The company should formulate strategies to attract more customers and to cut down the unnecessary expenses. The revenue earning should be such that it covers all expenses and helps to increase the net profit margin. The company should buy high productive vehicles which would bring down the average cost of fuel by providing extra mileage. The return on equity (ROE) calculates the value of the shareholders on their investments. The ROE of the company did not show much changes; it decreased by merely 0.005, pointing out that there is hardly any volatility in the shareholders’ return. It will motivate the investors to buy the shares of this company. However, the company must take heed to ensure that the ROE does not decrease further. The management has efficiently increased the return on asset (ROA) by generating sufficient amount of income in respect to the total assets. “If a company raises its return on asset by finding ways to reduce working capital without impairing competitiveness (thereby improving asset turnover), then it is likely to be able to perform at higher level” (Fridson, 2002). For further developing the ROA, the management should focus on the working capital turnover such as inventory and cash turnovers. Selling out unnecessary equipments will also enhance the ROA. In the year 2008, the interest coverage ratio was good with 5.20, but in 2009 the ratio became 3.65, and the company was more burdened with the debt expenses. This was due to high debt in the capital structure. By increasing the revenue or by paying back the unnecessary borrowing the management can increase the ratio. The Share Price Observation Arriva is listed in the London Stock Exchange and currently its shares are traded at £763 (London Stock Exchange, May 11, 2010). In the year 2009, the company declared the dividend per share (DPS) at £25.26 which is 5% higher than the DPS in 2008 but the adjusted EPS has declined around 4% (annual report, 2009). The adjusted closing stock prices of Arrive for the last two years have been taken. During the last two years there has been much volatility in its share prices. At beginning of 2008, the share price stood at near about 700 and in the mid of the year it bounced to £790 but after that it started declining at a rapid rate. During this period, till March 2010, the performance of the share prices had been dismal. In June 2009, the share prices crossed its lower limit and went down below £400. This was the effect of the global economic crisis of 2008. The initial two months of 2010 also experienced a bleak performance. The global economy is at a recovery stage now and this has pulled up Arriva’s share prices from March 2010. Now the shares are traded at a good price. The sudden rise in March 2010 can be attributed to the publication of annual report 2009, which showed a substantial financial growth of the company. Conclusion Arriva Plc. is one of the largest transport service providers in Europe. The financial performance of the company in 2009 when compared to that of 2008 is quite commendable. The financial ratios and its analysis bear sufficient evidence to support this. However in a recovering economy, to grab a large market share, the management should consider certain aspects like high debt that will influences its profitability, leverage and the interest coverage ratio. Investment on ‘owned capital’ is very necessary for the company which will help it to pay back its debt and issue more shares. Inspite of lower stock prices in 2009, the company declared a higher DPS indicating their concern for the investors. Some rectifications in financial structure will enable the company to sustain in the market with higher profitability. References Biafore, B. 2006. QuickBooks 2006: the missing manual. OReilly Media, Inc. Fridson, M.S. Álvarez, F. 2002. Financial statement analysis: a practitioners guide. 3rd ed. John Wiley and Sons Appendices Appendices 1: Financial Ratios of the Arriva Plc. Appendices 2: The Moving Stock Prices of Arriva Plc Read More