Carclo Chemicals Financial Reporting and Analysis - Example

Financial reporting and analysis: Carclo chemicals al Affiliation Due Analysis of CARCLO Chemicals Introduction The CARCLO Chemicals (CAR) is a British Company that is listed in the London stock exchange as a Small market Capitalization and is currently trading at 183.25p yet in last year Carclo price per share ranged from 159.25p to 424.00p. The company has got its headquarters at Chesterfields in the Great Britain. Carclo operates in the Chemicals sector and the main rivals include Northern Cast Acrylics Ltd, A&A Plastics Ltd, Penspell Ltd and Ted Head. The company has been the market policy trend leader in past years with its strength being the ability to develop new products and identification of new market niches. The executive summary This is an analysis report that has been created from the financial statement of Carclo Chemicals (CAR) and those of its four main rivals in the industry. This analysis looks at the financial statement and evaluates the actual and the prospective liquidity, profitability and financial stability of the company in relation to the chemical industry. The financial statements have been analyzed using methods such as trend analysis, the vertical analysis and the horizontal analysis (Kelly, 2012). The statements have been analyzed using all forms of ratios that include profitability ratios, the gearing or leverage ratios and the returns on asset ratios. The analysis has cut across the industry as it looks at the company’s strong and weak points, the opportunities and the threats that the company is facing. This analysis also looks at the accounting principles that have been used and how any changes in the accounting principles have affected the financial statement presentation. The financial statements that have been used in this analysis are those for the year ended 31 March 2013 and as has been provided by the company. The statement includes the statement of financial performance, the balance sheet and the cash flow statements. Published financial statements analysis The trend analysis We shall look at the trend in financial performance of the business across a four years period that dates from March 2010 to March 2013. The trend will look at the company’s ability to reduce the expenses over the years and the rate at which the profits of the company have increased over the years in relation to its rivals (Kelly, 2012). The company showed an upward trend in its revenues over the first three years but the revenues dropped in March 2013. The revenues of $86.5 though was the industries highest was below the industry average of $87.9. The closest rival in terms of revenue in the year 2013 was A&A Plastics Ltd who managed increased revenue of $79.5. This means that Carlco is still the market leader in revenue generation. But the company has not been able to keep its expenses down since the trend has shown a rise from $38.4 in 2010 to $42.6 in 2013. The rise means that the company has not been able to maximize the operating income though the operating income has shown that it is increasing every year. Ted Head has shown the greatest ability to reduce the expenses since they have cut the expenses from $29.8 in 2010 to $ 27.8 in 2013. No other company has achieved such a reduction over the four years period. The following is the income statement for Carclo over the four year period Particulars in million March March March March British pounds 31, 2010 31, 2011 31, 2012 31, 2013 Revenues 81.2 88.6 93.3 86.5 Cost of goods 37.4 41.4 44.9 37.6 Gross profit 43.7 47.2 48.4 48.9 Selling and distribution 23.2 24.5 24.4 26.0 Depreciation & Amortization, 3.4 3.5 3.7 3.9 Other operating Expenses 11.9 12.2 12.3 12.7 OPERATING INCOME 5.3 7.0 8.0 6.3 Interest Expense -0.4 -o.5 -0.7 -0.6 Interest and Investment Income 0.0 0.1 0.0 0.0 EBT, EXCLUDING UNUSUAL ITEMS 4.8 6.5 7.3 5.7 Merger and Restructuring -0.3 -0.3 -2.1 -0.3 Gain (Loss )on sale of asset 0.1 Other unusual Items 0.5 0.3 -0.4 Legal Settlement -0.4 EBT, INCLUDING UNUSUAL ITEMS 4.6 6.8 5.5 5.0 Income Tax Expenses 0.9 0.8 0.9 0.8 Minority Earnings - - 0.0 0.0 Earnings from continuing operations 3.7 6.0 4.6 4.2 EARNINGS FROM DISCOUNTED OPERATIONS -0.2 -0.1 0.0 -0.1 NET INCOME 3.5 5.9 4.6 4.2 The board of directors at Carclo have declared unchanged dividend from the interim dividend by declaring dividends of 0.4 pence for every ordinary share. The shares will be traded in 2014 excluding the right to dividends. Ratio analysis and their implications Current ratios This is calculated through = Current assets/Current liability Penspell 0.59, Carclo1.11, Northern Cast 0.52, Ted Head1.15, industry 1.37 Quick ratio Is calculated using the formulae= (Current assets- inventory)/Current liabilities Penspell 0.37, Carclo 0.39, Northern Cast 0.19, Ted Head 1.00, Industry 1.13 Total Debt to equity Debt-Equity Ratio= Total Liabilities/Shareholders Equity Penspell 1.72, Northern Cast 1.55, Ted Head 1.20, Carclo 0.66, Industry 0.93 Interest coverage Penspell 5.89, Carclo 13.07, Ted Head 6.38, Northern Cast 2.92, Industry, 0.39 Receivable turnover (Total debt/Total sales)*365 Penspell 32.8, Carclo 39.71, Ted Head 124.0, Northern Cast 191.05, Industry 15.73 Inventory Turnover Inventory turnover=Cost of sales/ Average inventory Penspell 21.07, Ted Head 41.85, Carclo 15.65, Northern Cast 30.79, Industry16.47 Asset turnover Penspell 1.31, Carclo 1.46, Northern Cast 1.40, Ted Head 1.60, Industry 0.79 Return on Asset Return on Asset= Net Income/average Total asset Penspell 9.92, Carclo 17.21, Northern Cast 8.16, Ted Head 8.34, Industry 5.05 Return on Equity Return on Equity= Income attributable to ordinary share holder/Average total assets Ted Head 35.45, Carclo 77.10, Northern Cast 24.02, Penspell 14.87, Industry 10.15 P/E Ratio Penspell 18.12 Ted Head 22.56 Northern Cast 14.75, Carclo 80.49 Industry 15.56 Potential investors always want to base on the Return on Equity than return on assets. The return on equity shows how much in dollars the company is earning per dollar put in by the investor. Carclo is the more profitable of the other two companies that have been shown here. This is so in the two ratios that I have used to calculate profit. By comparing the three companies to the industry average we are comparing them to smaller companies performances therefore we are narrowing down to more reduced ratios. We also have to look at whether the profits are coming from sound management or whether the higher profits are just pushed up by the heavy financial leverage. The leverage ratio comes in at this point Penspell is the most levered of the other three companies. Penspell is pushing up its Return on Equity by the use of debt more than Ted Head, Carclo and Northern Cast. Carclo is impressive when compared to Penspell since they have a higher ROE but a lesser leverage base to back it up. The profits of Penspell have been higher due to the leverage that has helped it rank above Northern Cast and Ted Head. Higher debt will always mean higher risk for the companies and Penspell is at a more risk than any other company here. The average debt Equity ratio of the four companies is above that of the industry average and therefore it’s important that as an analyst we look at the ability of the four companies to support such as high debt levels. Are they at a position that they can be able to pay the principle and the interest with ease. Therefore to understand this we have to look at the interest coverage ratio that measures the ability of the companies to pay the interest as well as the principle. As analysts we use the thumb rule that minimum of three is the requirement to support the debt levels as safely as possible. Carclo appears to be the safest when it comes to its ability to safely pay its debt levels compared to the three others (David, 2012). So far we can say that Carclo is the strongest of the four companies financially. They have the highest levels of profitability and are using the leverages appropriately to increase the earnings. Liquidity Ratios All the four companies have shown lower ratios than the industry average. The above statement is not surprising since they can be explained as under, The stability of sales and cash flows; these four companies are the market leaders therefore their sales and cash flows are more stable than the small players in the industry and therefore they don’t need much cash in hand. When you predict the cash flow accurately on e has no need to keep much cash in hand since they don’t have a risk of facing uncertain cash requirements. Access to credit; the top four companies can easily access the credit market with ease. They are said to be the companies that are pre approved for loans. They can pick the phone at any time and have the banks approve their loans at the go. Turnover ratios The receivable turnover is much higher than the industry’s for the four companies therefore it means that the four companies have no problems with collecting the receivables. This ratios are good since the chemical industry is not a more cash industry but is more of a debt industry therefore the receivable ratio is very important for this industry (David, 2012). Inventory Turnover is widely varied among the four companies with Carclo enjoying an advantage over the three other companies. This is quite surprising since operating in the chemical industry means that the competition is cut throat that the return in inventory should not be such varied. Asset Turnover shows that all the four companies are below the industry ratios. The companies offer great ease of analyzing these ratios since none of them is franchised. The number of stores and the assets that we are dealing with are company owned. Valuation Ratios P/E Ratio is the price earnings ratio. In the measures as given investors are more optimistic about Carclo brand future growth than the rest of the competitors. The investors are most likely to pay much more premium to buy shares in Carclo than they would in any other company. We have to pay 50% more of a dollar to buy a share from Carclo as compared to the rest of the companies (David, 2012). Beta measures the volatility of stock price with 1 measuring the average for all the companies. Penspell stock is 50% more risky and volatile than the three other competitors. Forecasts as projected by Carclo Year Ending Revenue (£m) Pre-tax (£m) EPS P/E PEG EPS Groh. Div Yield 31-Mar-14 97.23 5.13 6.00p 30.5 n/a -19% 2.77p 1.5% 31-Mar-15 110.57 8.88 10.50p 17.5 0.2 +75% 3.10p 1.7% 31-Mar-16 126.90 16.20 20.40p 9.0 0.1 +94% 4.00p 2.2% The company has given its projections that are intended to improve beyond those of the competitors and that of the industry. The most important target growth area is the revenue and the earnings per share. The targeted growth in Revenue is an increase of more than 10million pounds per annum. This is attainable with the growth of sales that has been experienced since the company invested in technologies with acquisition of 20% Conductive Inkjet Technology that has increased operation. The increased Earnings per share are a strategy to ensure that the shares of the company trade well in the London stock exchange. Currently financial specialists have rated the company’s shares as well performing. The earning per shares growth projections of up to 94% shows how much the company is intended to attract more investors into buying their shares in the traded market (Clement, 2013). The changes in accounting principle and their implications The results as presented have been prepared under the international financial reporting standards that were adopted by the European Union and the information in the analysis has been presented in the same form comparable basis. The prior financial statements have been prepared on the basis of the accounting policies that had been set by Carclo Plc restatement under the IFRS. The management has to adopt the new regulations that preparation of financial statement needs them to make judgments and assumptions estimation and application of policies for assets and liabilities and the income and expenses (Duncan, 2010). Importance of the statements to the shareholders The financial statements are the assertion of the management as to how the finances of the company have been utilized. The management is the stewards of the shareholders equity and therefore they have to report to them on how they have been able to operate the assets and the profitability that they have been able to accrue from the utilization of the asset. The financial statement is important to the shareholders in the following ways (Martin, 2011). They can be able to determine the financial position of the company by looking at the consolidated balance sheet of the company. The balance sheet will always show the financial health of a company at any time in the year. The financial performance of the company; which is provided by the statement of financial performance which shows what the business has been doing in the financial year in terms of revenue and expenses. It is from this statement that the shareholders can be able to determine the amount of profit attributable to them for that year. The cash flow statement is important in providing the business with information about how well they are able to meet their obligations and whether the cash as appears in the bank and in hand is the real figure that was presented in the balance sheet. References Business Planning & Financial Statements Template Gallery, http://www.score.org/resources/business-plans-financial-statements-template-gallery Brett, J.(2012). The Principles of Accounting, Vol 2, 2nd Ed. New York NY: McGraw-Hill Brent, E. (2013). Business management, Oxford: Oxford University Press Clement, W.(2013). Financial Analysis, New York NY: McGraw-Hill Carclo plc (CAR: London); Bloomberg Business week, Financial statement Duncan, J.(2010). An introduction to financial accounting, New York NY: McGraw-Hill David, B.(2012). A Comparative Ratios, New York NY: McGraw-Hill Kelly, M.(2012). Financial Statements and Significance, Journal Business Daily http://finance.yahoo.com/q/bs?s=CAR Martin, D.(2011). Financial Accounting, New Jersey NJ: Prentice Hall Appendixes 1 Balance sheets Currency in Millions pounds TedHead Northern Pespell Carclo Mar, 2013 Mar, 2013 Mar, 2013 Mar, 2013 Assets Cash and Cash equivalents 10.2 11.0 9.5 16.1 Accounts receivables 13.6 14.6 12.2 13.3 Other Receivables 6.8 5.3 4.6 6.1 TOTAL RECEIVABLES 20.4 19.9 16.8 19.4 Inventory 10.3 12.3 11.7 12.6 Other Current Assets 0.2 0.2 0.4 TOTAL CURRENT ASSETS 41.1 42.4 38.3 48.1 Gross Property Plant and Equipment 65.9 71.9 71.6 80.3 Accumulated Depreciation -39.6 -42.0 -43.6 -38.4 NET PROPERTY PLANT AND EQUIPMENT 26.2 30.0 28.0 33.4 Goodwill 21.5 21.3 21.4 21.6 Long Term investment 0.6 0.7 3.0 10.0 Deferred tax 9.2 6.6 10.8 9.7 Other tangibles 13.3 15.1 19.5 22.9 TOTALS ASSETS 111.9 116.2 117.9 135.8 LIABILITY & EQUITY Accounts Payable 9.6 10.3 8.0 7.3 Accrued Expenses 3.1 4.0 3.1 10.9 Short Term borrowing 5.9 11.9 8.3 4.3 Current Taxes payable 1.9 2.0 2.2 2.5 Other Current liabilities 2.9 1.8 2.6 1.2 TOTAL CURRENT LIABILITIES 23.6 28.6 25.0 30.2 Long Term Debt 18.3 16.0 20.5 14.6 Minority interest - - 1.1 1.5 Pension & other Post-Retirement Benefits 20.1 9.1 22.6 15.5 Deferred Tax Liability Non Current 4.9 5.1 5.9 6.7 TOTAL LIABILITIES 67.3 61.9 72.7 60.7 Common Stock 3.1 3.0 3.4 3.8 Additional Paid Capital 8.0 8.2 8.3 20.9 Retained Earning 24.9 34.7 25.0 31.5 Comprehensive Income and Other 8.6 8.3 7.8 8.4 TOTAL COMMON EQUITY 44.6 54.3 44.2 64.0 TOTAL LIABILITIES AND EQUITY 111.9 116.2 117.9 135.8 Appendix2 Statement of financial performance Particulars in million British pounds 31, 2010 31, 2011 31, 2012 31, 2013 Revenues 81.2 88.6 93.3 86.5 Cost of goods 37.4 41.4 44.9 37.6 Gross profit 43.7 47.2 48.4 48.9 Selling and distribution 23.2 24.5 24.4 26.0 Depreciation & Amortization, 3.4 3.5 3.7 3.9 Other operating Expenses 11.9 12.2 12.3 12.7 OPERATING INCOME 5.3 7.0 8.0 6.3 Interest Expense -0.4 -o.5 -0.7 -0.6 Interest and Investment Income 0.0 0.1 0.0 0.0 EBT, EXCLUDING UNUSUAL ITEMS 4.8 6.5 7.3 5.7 Merger and Restructuring -0.3 -0.3 -2.1 -0.3 Gain (Loss )on sale of asset 0.1 Other unusual Items 0.5 0.3 -0.4 Legal Settlement -0.4 EBT, INCLUDING UNUSUAL ITEMS 4.6 6.8 5.5 5.0 Income Tax Expenses 0.9 0.8 0.9 0.8 Minority Earnings - - 0.0 0.0 Earnings from continuing operations 3.7 6.0 4.6 4.2 EARNINGS FROM DISCOUNTED OPERATIONS -0.2 -0.1 0.0 -0.1 NET INCOME 3.5 5.9 4.6 4.2 Read More