The Financial Position of Aytoun - Report Example

Manchester Money Universal plc (MMU) holds 20% equity investment in Aytoun plc (Aytoun) which was acquired through a share exchange transaction during the year 2002. Aytoun is a recognized name in the medium-sized supermarket chain industry and enjoys a considerable market share. The company is listed on London Stock Exchange (LSE) and has been classified as small and medium sized entity by the Securities and Exchange Commission (SEC). The company prepares its Financial Statements in accordance with the relevant International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). Since the last many years, Aytoun has been servicing the customers through its products and services which are considered synonym for high quality and customer satisfaction. With convenient stores spread throughout the London City, Aytoun is ready to facilitate its customer round the clock. However recently, the company has been facing financial and operational difficulties owing to the uncertain and volatile market conditions and augmented competition in the industry. It has always been observed that in the times of tough economic environment, the already aggravated financial position of medium sized entities is further downgraded due to the lack of enough cash flows and weak asset backing ability. This notion aptly justifies the poor financial and operational outlook of Aytoun in the past few years. The company had to lay off a considerable number of its work face in order to curb its operational expenses. Moreover, as the company was facing severe liquidity problems, its supply chain management was adversely affected. Suppliers are unwilling to conduct business with the company and those who do, are providing unfavorable credit terms. The company is unable to upgrade its Information Technology strategy in line with the latest trends in the industry and thus have lost competitive edge. This report elaborates on and analyzes the financial position of Aytoun which has been prepared keeping in consideration the feasibility for MMU of increasing its equity investment in Aytoun. As per International Accounting Standard 28 ‘Investment in Associate’, through holding of 20% voting shares, MMC is able to enjoy significant influence but not significant control.[1] In order to significantly control the operations of Aytoun, MMC requires increasing its holding in company to above 50% in total. In order to revive the company financially and operationally, Aytoun has reorganized its management to certain extent. Most notably, a new finance manager, John Smith was appointed on March 2008 who brings with him a diverse experience in accounting and financial reporting. Shortly after his appointment, four new super markets were acquired with a view to increase the market share of the company and to boost its turnover. The Board of Directors of Aytoun, in the annual general meeting of 2009, has decided to rebrand the acquired sites in order to create a new and differentiated outlook. Aytoun has declared its financial results for the half year ended June 30, 2010 which shows signs of improvement and stability owing to the changed corporate and business strategy. The ratio analysis of the financial statement of Aytoun has been enclosed (Appendix B). The current ratio of Ayton has improved owing to the increase in its current assets by 4% since the year ended December 31, 2009. The company incurred expenditure amounting to £3 million during the current financial year on account of rebranding expenditure which has started to deliver positive results. The customer base of the acquired supermarket sites has caused the turnover for the current half of the financial year to increase substantially as compared to the prior period which is reflected in the increase of Trade Receivables of the company which has increased by 17%. Although the cost of sales increased marginally, the trade payables of the company have decreased by 9%. Ayton has implemented new and improved integration methodologies with the suppliers which has enabled the company to make timely payment and avail attractive terms. Other payables, which reflect the tax payable, and Cash and cash equivalent have decreased by 80% and 20% respectively. The investment in rebranding and focus on operational management is delivering favorable results for Aytoun. The financial results for the half year ended June 30, 2010 is showing stable financial outlook of the company which can is represented by the improvement in gross profit ratio by 7%. For the half year ended June 30, 2010, Aytoun earned a gross profit of £109 million. Extrapolating this figure, the company is expected to report a gross profit of £218 million (£109 x 2) as at December 31, 2010 which is £21 million higher than the gross profit reported on December 31, 2009. Following the same trend, the net income ratio of the company has increased by 3%. The company has shown this result not only by increasing their sales but also through managing its operating expenses on sound and prudent policies. Better marketing strategy and effective logistics management has able the company to increase its turnover. During the current half of the financial year, Aytoun opened two new stores during the year which are expected to further enhance its operating results. One of the major concerns of the management during the current half of the financial year was the management of operating cash flows. The operating cash flow to sales ratio has shown improvement of 3% as compared to the prior period. Opening of new stores and implementation of e-commerce has enabled the company to reach out to its customer more conveniently and efficiently. The company recently implemented the renowned supply chain management software JDA, which has been used by more than 6,000 organizations worldwide, offering optimization of resources. [2] With the implementation of state of the art information system, the company has been able to decrease its debtor turnover ratio and thus boosting its operational cash flows. Moreover, during the year the company incurred heavy capital expenditure on the renovation of the acquired sites and also on the purchase of furniture and fixture, which has caused the free cash flow ratio of the company to decrease by 54%. In the annual general meeting of the company pertaining to the year ended December 31, 2009, the Board of Directors of Aytoun declared a dividend of 12p per share which was paid during the year in March. An interim of 2p per share has been proposed during the current year which will be paid in December 2010. The increase in dividend per share advocates the strengthening financial condition of the company. Although the company is showing promising results, its market price has been decreased from 0.91p per share to 0.87p from February 2010 to October 2010. As per the financial market analysts, the decrease in the share price is due to the overall turbulence in the market. The company’s positive fundamentals are in place and its share price is expected to hit higher in coming periods. Dividend yield, which is one of the most important ratio as far as investment in a company is concerned, has increased considerably by 74% during the current year. Apart from that, market price to earnings and market price to cash flow have also improved. The debt ratio of the company has marginally decreased but improvement in the interest coverage ratio has been observed. As per latest development, the company is under negotiation for obtaining loan faculties from several banks and financial institution which is expected to increase its finance charge in the future periods. Overall Aytoun’s financial analysis shows promising results and the company is on the inclining trend. The company has reorganized its management and operational structure and is adopting policy which will allow it to gain competitive advantage in the future. The company has acquired 3 stores in August which shows its firmness towards achieving higher market share. Increasing the holding in the company will be beneficial for MMU as the profit margins of the company are rising and also we will be able to exercise sufficient control over its operations. Consolidating the financial results of Aytoun as a subsidiary will substantially enhance the financial outlook of MMU. However, there are certain areas which must be investigated before making such decision. As per the scrutiny of financial results, taxation related issue is in progress with HMRC which can cause penalties and increased tax expenses in future. The company has recently reassessed the useful life some property plant and equipment from 4 to 5 years. It must be ensured that the company has reasonable justification for doing so as the same type of assets are depreciated over a useful life of 4 years by similar companies. Moreover, it must be ensured that the company does not have any related party relation with the bank from which the debt facilities will be acquired, as defined by International Accounting Standard 24 “Related Party Disclosure”. In case of any such relation, proper disclosure will be required in the financial statements. [4] APPENDIX A References [1] Deloitte 2010, “IAS 28 investment in associates” [online], 20th November 2010 [2] JDA Software – The Supply Chain Company 2010,”About JDA” [online], 20th November 2010, < http://www.jda.com/company/company-index/> [3] Richard Loth, “Financial Ratio Tutorial, article” [online], 20th November 2010, [4] Deloitte 2010, “IAS 24 Related Party Disclosures” [online], 20th November 2010 APPENDIX B Aytoun plc Ratio Analysis Liquidity Measurement Ratio June 30 2010 December 31 2009 1 Current Ratio 0.650 0.641 2 Quick Ratio 0.138 0.141 3 Cash Ratio 0.050 0.064 Profitability Indicators Ratio 4 Gross Profit Ratio 0.427 0.400 5 Net Profit Ratio 0.129 0.126 6 Return on Assets (ROA) 0.114 0.225 7 Return on Equity (ROE) 0.238 0.611 Cash Flow Indicators Ratio 8 Operating Cash Flow/Sales Ratio 0.235 0.228 9 Free Cash Flow/ Operating Cash Flow 0.333 0.723 10 Dividend Coverage 5.000 9.333 Investor Ratios] 11 Price/Book Value Ratio 0.584 0.711 12 Price/Cash Flow Ratio 1.450 0.813 13 Price/Earnings Ratio 0.026 0.015 14 Price/Sales Ratio 0.341 0.185 15 Dividend Yield 0.230 0.132 Debt Ratios 16 Debt Ratios 0.503 0.540 17 Debt -Equity Ratio 1.013 1.172 18 Interest Coverage 7.375 5.353 Read More