Financial Analysis of Xaar Plc - Report Example

Financial Analysis of Xaar Plc Introduction Xaar Plc was formed in 1990 and it was listed on London Stock Exchange in 1997 (Xaar, n.d Today it isworld leader in the development and manufacturing of innovative inkjet technologies. The products offered by the company include Inkjet Development System, Printheads and Inks, Hydra Ink Supply System, XUSB Drive Electronics, third party products such as fume extraction systems and other services. The company is operating at global level and it is motivated to offer more products across boarder. The current manufacturing plant is in Sweden and by March 2011, the manufacturing capability of Xaar will be transferred to East of England (Xaar, 2009). Ratios Analysis: Table of Ratios Ratio Formula 2009 2008 Profitability Ratios       Earnings Per Share (EPS) Net Income / Weighted Average Number of Common Shares Outstanding  0.00646  0.056 Gross Profit Ratio Gross Profit Ratio = Gross Profit  x  100 / Sales 41.003 49.094 Net Profit Ratio Net Profit  x  100 / Sales 0.948 8 Return on Assets Net Income / Average Total Assets 0.008 0.070   Where Total Assets = (Beginning Total Assets + Ending Total Assets) / 2 48,059 48,730 Return on Equity (ROE) Net Income / Average Stockholders´ Equity 0.010 0.089   Where Average Stockholders´ Equity = (Beginning Stockholders´ Equity + Ending Stockholders´ Equity) / 2 38201 38,340 Liquidity       Borrowing Ratio Total Borrowings (Short-term and Long-term) / Total Equity 0.254 0.262 Current Ratio Current Assets / Current Liabilities 3 4 Net Working Capital Ratio Net Working Capital / Total Assets 0.351 0.399   Where Net Working Capital = Current Assets - Current Liabilities 16,404 19,703 Quick Ratio (Acid Test Ratio) Quick Ratio = Quick Assets / Current Liabilities 2 2.64711   Where Quick Assets = Current Assets - Inventories - Prepayments 19,122 19,983 Efficiency       Inventory Turnover. Inventory Turnover = (Cost of Sales) / (Average Inventory) 3.81 3.75   average inventory 6,518 5703 Accounts Receivable Turnover. Accounts Receivable Turnover = Revenue / (Average Accounts Receivable) 5.52 5.23   average account receivable 7,616 8,036 Accounts Payable Turnover Accounts Payable Turnover = (Cost of Sales) / (Average Accounts Payable) 4.33 3.35   average accounts payable 5,733 6,380 Total Asset Turnover. Total Asset Turnover = (Revenue) / (Average Total Assets) 0.875 0.862   average total assets 48,059 48,730 Capital Structure       Debt to Equity Ratio Debt to Equity Ratio = Total Liabilities/Total Stockholders Equity 0.254 0.262 Interest Coverage Ratio Interest Coverage Ratio =Income Before Interest and Income Tax Expenses /Interest Expense 6.167 77   income before interest and income tax expenses = income before income taxes + interest expense 222 4,409 Profitability Revenues of Xaar have increased by 0.133% in 2009 (£42,071m to £42,073m) however, gross profit has declined from £20628m to £17251m. The net income reported by Xaar in 2009 is £399m as compared to £3431m in 2008. According to Chairman, company remained profitable, cash generative and financially strong in 2009. On the other hand, profitability ratios show a decline from 2008 to 2009 and predict a significant turn down in profitability. Gross profit ratio has declined from 49.094% in 2008 to 41.003 in 2009. As stated by company, decline in gross profit is because of combined effect of reduction in Platform 1 throughput, higher competition in P1 markets and higher costs incurred on new product development (Xaar, 2009). The sales of company declined in China and company expected to regain the lost market shares by launching two new products (Warrier & Kakkrakandy, 2009). Net profit ratio has also declined tremendously from 8% in 2008 to only 0.948% in 2009 because net profit of Xaar has declined from £3431m to £399m. Return on assets has declined from 0.070 to 0.008. The decline in EPS from 5.6p to 0.6p also shows a significant decline in profitability of company. Return on equity has declined from 0.089 in 2008 to 0.010 in 2009. Actually, Xaar generated more revenues in 2009; however, company incurred huge restructuring costs (£553m in 2008 to £2686m in 2009) because of relocation process. Moreover, operating revenue has declined from £3,959m to -£267m because of increased cost of manufacturing and increased administrative expenses. Throughout 2009, company has been showing satisfaction over its level of sales. Xaar Plc showed satisfaction in trading, sales and margins for the third quarter of 2009 (Vargas, 2009). Liquidity According to chairman report, in year 2009, Xaar remained very cash generative. It is also evident from net cash flow of £11,521m in 2009 which is slightly lower than £11,601 in 2008. Borrowing ratio has declined from 0.262 to 0.254. Current ratio has declined from 4.0 to 3.0 because of increase in current liabilities from £7,549m to £8,484m and decrease in current assets from £27,252m to £24,888m. Therefore, current assets have declined against current liabilities. Net working capital ratio has reduced from 0.399 in 2008 to 0.351 in 2009. In 2009 the company did not go for long term borrowing and only paid back long term loan installment of the loan taken in 2008. Because of increase in current liabilities, quick ratio has declined from 2.64 to 2.0. The interest cost has been also low (£36m in 2009 and £57m in 2008) because of decline in long term liability. Therefore, strategy of Xaar to reduce liquidity risk by maintaining appropriate cash reserves and by authorising limits on payback periods remained very effective. Efficiency Inventory turnover has increased from 3.75 to 3.81, which means that efficiency of management to deplete its inventory has increased. Accounts receivable turnover has increased from 5.23 to 5.52, which means that customers are making payments on time. Accounts payable turnover has also increased from 3.35 to 4.33, which apparently shows that Xaar payable period has increased however, trade payables have declined from £6,031m in 2009 to £5435m in 2008 and increase in turnover is because of increase in cost of goods sold by 16.05%. Total asset turnover has increased from 0.862 to 0.875, which indicates increased efficiency of Xaar to generate sales from assets in 2009 as compared to 2008. Capital Structure Debt to equity ratio has declined from 0.262 to 0.254 and it is because of the decline in total liabilities from £10,250£ to £9,466m against the decline in equity from £39,178m to £37,224m. The figures show that because of huge decline in liabilities, financing from equity has increased. Although this increase is not very significant however, it does show a positive sign in capital structure of Xaar. Interestingly, the long term borrowing of Xaar has declined significantly in 2009 because the only long term liability other than deferred tax was sterling loan of £441,000. The interest coverage ratio has largely declined from 77 to 6.167 and it is because of the huge decline in profit before tax from £4,352m in 2008 to -£186m in 2009. The interest cost of Xaar has also reduced because company was liable to pay £36m in 2009 as compared to £48m in 2008 and this year company did not have any interest obligation under finance leases. Since the operating revenue of Xaar was -£267m in 2009 as compared to £3,959m in 2008, therefore, the company paid off interest expenses from other investment income. Conclusion Profitability analysis suggests that Xaar has performed will in year 2009 however; company could not appear profitable because of high administration expenses, less profit margins and higher costs. If the company manages to control these costs in future and maintains the current level of revenues, then it may show better performance in the coming years. Liquidly analysis shows that Xaar remained cash generative in 2009 however, current liabilities have increased against current assets but long term borrowing has declined. Efficiency analysis shows that Xaar collection period has reduced, inventory depletion period has reduced and company’s ability to generate sales from assets has also increased. Capital structure analysis shows that debt to equity ratio has declined and funding from equity has increased against liabilities. The reduction in liabilities has also reduced interest expense of Xaar. Therefore, based on ratio analysis, it can be argued that Xaar has been able to generate significant revenues in 2009, however, higher costs and expenses reduced the profitability of company. Moreover, restructuring process further enhanced financial burden of the company, still the company has been successful in increasing efficiency of its operations, maintaining liquidity and reducing financing costs and liabilities. Bibliography Vargas (2009) Region’s quoted firms on the up. Accessed 8 August 2010, available at: http://www.businessweekly.co.uk/index.php?option=com_content&view=article&id=35712:regions-quoted-firms-on-the-up&catid=268&Itemid=1620 Warrier, G., & Kakkrakandy, J. (2009) UPDATE 2-Xaars FY profit falls, to shift Swedish plant to UK. Accessed 8 August 2010, available at: http://www.reuters.com/article/idUKBNG37570120090323?type=companyNews Xaar (2009) Annual Report 2009. London Stock Exchange. Accessed 7 August 2010, available at: https://www.orderannualreports.com/060/UI/GP/results_grid.aspx Xaar (n.d.) History. Xaar Plc. Accessed 7 August 2010, available at: http://www.xaar.com/history.aspx Read More