Corporate Reporting for Users - Interpretation of Financial Data and Recommendation to the Investor - Example

Name: .......................................................................................................xxxxx Institution: .............................................................................................xxxxx Title: .................................................... Corporate reporting for users Course: ..................................................................................................xxxxx Tutor: ...................................................................................................xxxxx @2012 Corporate reporting for users The main aim of this report is to prepare a report for an investor for Serco PLC who is concerned that funds should be invested in a firm with sound social and economic polices. Data for the company will be analyzed for the past five years. Serco PLC is an international company which combines commercial know-how with a deep public service ethos. The company improves services by managing people, technology, processes and assets more effectively. Environmental reporting Environmental reporting has been carried out by many different bodies and organisations and it manifests itself in different forms from the country level environment reporting to the corporate environmental reporting. Company have for a number of years began to produce environment or sustainability reports which shows the company’s impacts on the environment and the way or the means in which it monitors and measures the impacts to the environment. Investors are the main users of corporate environmental reports in order to check whether there are any environmental liabilities which may cost them or lead to heavy losses in returns on their investments and dividends if not well managed. Several aspects which are included in environmental reporting include environmental performance, public relations, corporate governance, corporate social responsibility, global operating standards and impacts and outcomes of all environmental strategies used. Arguments for Environmental reporting has the following benefits: It leads to an improvement in the reputation of the organization Leads to enhanced transparency, responsible governance and accountability Enhanced communication between stakeholders Improved customer confidence Improvement on competitive advantage Identification of potential opportunities Improved management of risks Arguments against It is believed that some types of environmental reports may release which other parties may use for their own gains. For example, if a company analyses the environmental statistics of its competitors, could gain valuable insights into their technology being used and gain competitive advantage. There may be calls from some quarters looking for more information in the environmental report to help them obtain a better picture to be built on environmental performance. Social reporting Social reporting is the disclosure of information to the public. Social reporting is a key element in making corporations socially responsible. The social report is used to measure how well an organization lives up to the shared values tow which it has committed itself. It also enhances dialogue process leading to the integration of values into the organization. The main purpose of social reporting is the external evaluation of performance of a company towards the achievement of their set societal goals. Sustainability reporting is therefore the practice of measuring, disclosing and being accountable for organizational performance toward the goals of sustainable development. Social reporting includes three aspects which are disclosure, development and dialogue. Arguments for Social reporting has a role of encouraging corporations to work toward sustainable development and to determine if actions should be taken to place social reporting on a more constructive trajectory. Argument against The social reporting discloses the performance of the company and this may be used by its competitors to compete with the company in the market. A critical analysis of social and environmental data by Serco Group Plc Environmental data Serco Plc has had contracts which are aimed at helping their customers to improve their environmental performance. For example, the company provides environmental services to UK local authorities which are aimed at helping the customers to reduce the volumes of waste sent to landfill sites. The activities of the company are managed at the local level and the company is united the strategy of measuring the impact and reducing the environmental footprint. The company’s environmental efforts were reflected in the recognition they have received over time. For example, the company has achieved Carbon Trust Standard certification at the beginning of 2011. The company’s score rose from 78% in 2010 to 88% and the company was placed in the Carbon Disclosure Leadership Index. The 2011 objectives include the aim of working towards the achievement of a 15% reduction in CO2 tones. This information is very useful to the investors as they will be able to determine whether the company faces any environmental liability. This information will help the investor to invest in Serco Plc with much confidence as there are no chances of environmental liabilities which would cost the company high cost or high losses. Social data The structure of Serco involves the integration of communities in their operations. This is done by employing the local people. Providing training opportunities and work experience and by suing suppliers where possible. The commitment of the company is to reinvest 1% of its pre-tax profits into the society. Some social activities by Serco include volunteering to help the homeless people, raising money to help in international disasters like floods. They also support organisations whose work touches their own such as the Military Child Education Coalition in the US, Which helps children affected by their parent’s relocation and deployment. The company has a scheme which targets the creation of employment to over 10,000 people with 1,000 placements and 500 apprenticeships. In 2011, the company was awarded the Community Corporate Responsibility Index and the UK’s leading benchmark of corporate responsibility reflects the differences made by the company. Serco was also rated Gold the sixth and the community investment in the company was rated 100% across all five areas that were measured. With this information, the investor will have enough evidence to invest in the company. This is because the company has a positive public outlook and the customers have positively accepted the company and its products in the market and therefore, the investors will not face any losses if he invests in this company. Interpretation of financial data Ratio analysis 1. Profitability ratios Profit margin This ratio will measure the income produced by each dollar of assets in the company. It is obtained by dividing net income with net sales. Profit margin 2007 2008 2009 2010 2011 82.4/2,810.7 =0.03 99.6/3,123.5 =0.03 130.2/3,970 =0.03 156.8/4,326.7 =0.036 175.2/4,646.4 =0.037 The profit margin for Serco Plc was constant from 2007 to 2009 and slightly increased to 0.036 in 2010 and 0.037 in 2011. The margin during these years was below 10% which means that the company was not in a healthy position during the five years. This means that the company is not in a better position to control costs. This ratio will be important to investors as it will enable them to determine the profitability of the company. Return on Assets (ROA) This ratio is used to measure the profitability of the assets employed in the business. It’s a key indicator of a company’s profitability. It is obtained by dividing net income by total assets. Return on Assets 2007 2008 2009 2010 2011 82.4/ 1,740.4 =0.05 99.6/2,505.6 =0.039 130.2/2,531.5 =0.051 156.8/2,517 =0.06 175.2/3,182.1 =0.055 The company recorded a fluctuation in the Return on Assets during the five financial years with 2008 having the lowest value of ROA. In the five financial years, the company did not have healthy returns obtained from its assets. Asset turnover This is the measure of how efficiently assets are able to produce sales. It is obtained by dividing net sales by total assets. Asset turnover 2007 2008 2009 2010 2011 2,810.7/ 1740.4 = =1.6 3,123.5/2,505.6 =1.24 3,970/2,531.5 =0.38 4,326.7/2,517 =1.72 4,646.4/3,182.1 =1.46 Asset turnover for Serco plc also fluctuated during the five financial years analyzed. In most cases, the assets of the company were able to produce sales since the ratio for the financial years is more than one with the exception of the 2009 financial year which had a ratio less than one meaning that the company was not in a position to generate sales from its assets. 2. Liquidity ratios Current ratio This ratio measures short term liquidity of a company. It is obtained by dividing current assets by current liabilities. Current ratio 2007 2008 2009 2010 2011 806.4/ 708.1 =1.13:1 1,025.5/819.7 =1.25:1 1,107.6/931.5 =1.09:1 1,138.8/1,061.6 =1.07:1 1,129/994 =1.13:1 The current ratio for Serco Plc was more than 1 in the five financial years and this means that the company had more current assets than its current liabilities and therefore it experienced short term liquidity during this financial years. A ratio higher than one indicates that the company is liquid. In all the five financial years, the company is considered to be liquid and was in a position to pay for its short-term debts. This is given by the fact that the company’s current ratio was more than 1:1 for all the years. Quick ratio This ratio is used to measure a company’s ability to pay its short term debts. It is obtained by dividing current assets less inventories by current liabilities. Quick ratio 2007 2008 2009 2010 2011 1,740.4-46.3/ 708.1 =2.39 1,025.5-50.2/819.7 =1.19 1,107.6-65.9/907.9 =1.15 1,138.8-65.4/994 =1.08 1,129-58.8/1,061.6 =1.00 Quick ratio for Serco PLC was more than one through out the five financial years. Higher ratio in the company means that the company is in a liquid position. In both years, the company experienced short term liquidity. 3. Shareholder and long-term solvency ratios Return on Equity (ROE) It is used to measure the efficiency of a firm in generating profits from each unit of the shareholders funds. It is measured by dividing the net income after tax by the shareholders equity. ROE 2007 2008 2009 2010 2011 82.4/ 498.5 =0.16 99.6/685.3 =0.15 130.2/692.1 =0.18 156.8/841.3 =0.19 175.2/1003.8 =0.17 Serco Group Plc has had a favorable return on equity an indication that it was able to generate profits from their shareholders funds. Recommendation to the investor The investor should invest in the company. From the financial ratios of the company, it is evident that the company’s assets were able to cover the liabilities with the company experiencing short term liquidity. The company is also able to cater or pay for its short term liabilities. From the social and environmental reporting, it is clear that the company has a better standing in the society and the society has fully accepted the company. Any investment in the company is worth the trouble as the investor will not stand to loose from any environmental liabilities. Though the company did not have healthy returns from its assets, it was able to efficiently use the assets to generate sales and hence the company is good for investment as the investor is assured of returns on his investments. The company also enjoyed some financial strengths in almost all the periods studied. Though the financial ratios exhibited cyclical patterns during the five year period, one can conclude that Serco PLC is a company worthy to be invested in. 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Pages 108-111 Serco Annual report and accounts 2009. Pages 82 to 84 Serco Annual report and accounts 2007. Pages 73 to 74 Read More