The Reliability of Conducting Financial Analysis Using Publicly Available Corporate Information - Literature review Example

THE RELIABILITY OF CONDUCTING FINANCIAL ANALYSIS USING PUBLICLY AVAILABLE CORPORATE INFORMATION

Most companies provide much financial information to the public, and this mainly comes in the form of annual reports. Although this practice is common across most organizations, it is worth being reviewed. The use of publicly available financial information is not necessary a positive thing for those looking to use such information for a variety of purposes. A review of the literature suggests that this information, while being useful on some occasions, may prove not be reliable.

In order to understand this concept, we consider the agency problem, which refers to the idea of information asymmetry (Schuster & O'Connell, 2006). According to this concept, the information that is held by managers is not necessarily the same as that held by stakeholders. In all cases, managers tend to hold more information than the stakeholders, and therefore information that is made available may not necessarily be a true reflection of what the management knows. Managers of companies understand that when all information regarding the health of a company is made available, stakeholders will get to understand the inner functioning of the company, and this may not necessarily be a good thing. Information that is made available to the public is meant to make the public trust the management and running of the company. If there are issues within the company that could damage its reputation, it is unlikely that such information will be made public.

In the modern competitive global market, it is difficult to fully forecast the future of a company. This then makes managers look for ways of winning the confidence of stakeholders in order to remain attached to the company (Petrova et al., 2012). For example, a company may decide to underestimate its value. This could be as a result of the company not understanding its real value, or the company is in need of liquidity. When such information is made available, using it to undertake a financial analysis may prove to be a misguided adventure.

Publicly available financial information is also provided in order to meet certain regulatory requirements. Across all countries, it is demanded that companies must provide their information to the public to promote transparency and accountability. Whereas this might seem a good idea on the face of it, such disclosures are in most cases misleading. Companies that provide such information only do so to satisfy the government demands, and this might lead them to manipulate some of this information (Owusu-Ansah, 1998). Take for instance a company that decides to report lower profits for purposes of avoiding heavy taxes. When this information is made available to the public, it does not necessarily reflect the health of the company. The financial analysts using the information then make a wrong picture of the organization. Also, due to mandatory regulatory requirements, this information may be collected in a hurry or simply doctored in order to meet specific deadlines. Companies present information in order to beat the strict deadlines and in the process, end up giving wrong information that does not reflect the true standing of the company.

Publicly available information does not cover all things related to the functioning of the company. Take for instance the issue of human capital. In financial reports made public, the company does not include such information and therefore using it does not reflect the true future performance of the company (Kolton et al., 2001). Another factor could be the customer relations. In order to truly understand how a company is doing it is worth understanding how it relates to the customers. Such information is not made available and hence the true nature of the organization is not well understood. Putting all these factors into consideration, it is clear that publicly available information can be misleading.

Lookers Plc Company and Market Overview

Founded in 1908, Lookers Plc is a leading company in a car dealership in all the four countries the United Kingdom as well as the Republic of Ireland (Lookersplc.com, 2016). The company is based in Manchester and has a network of car dealerships throughout the UK. Some of the brands the brands that the company deals in include Audi, Bentley, Chrysler, Jeep and Mazda among others (Referenceforbusiness.com, 2016). Also, Lookers Plc is involved in motorcycle leaderships with companies such as BMW and Honda. Furthermore, the company is also involved in the selling of agricultural machinery and equipment, and also runs the FPS Automotive Parts Distribution, which is a leading parts distributor in the UK (Lookersplc.com, 2016). Finally, Lookers Plc is involved in the leasing of vehicles to customers. However, the automotive sector, through its leaderships, forms the core of the company’s business.

Lookers Plc operates in highly competitive but promising market. Since the economic recession of 2008/2009, the UK industry has been experiencing upward growth, and this provides companies such as Lookers with opportunities to tap into the market. In Britain for instance, the automotive industry recorded its best results in 12 years at the start of 2016 (Thomas, 2016). This year, more than 83000 new cars were registered in the country in the month of February alone. With the availability of cheap loans and low fuel prices, more people are buying both used and new cars in high numbers. According to a report by PWC (2015), the UK used car market was posting impressive figures. For instance, in 2014 alone more, than 7 million used cars were sold in the UK, and this provides the largest market in the entire of Europe (PricewaterhouseCoopers, 2015). With the promising market, the number of car dealers entering the fray continues to grow, and this makes it a highly competitive market.

The company has established itself in the UK market and is thus one of the leading companies in the car market. In the last six years, the new car market in the UK has varied between 1.9 million and 2.6 million new cars every year, and Lookers Plc accounts for nearly 5% of these sales (Lookersplc.com, 2016). When it comes to the used car market, the UK has used car transactions of about seven million vehicles, and Lookers Plc commands a huge fraction of this. The company has been growing organically as well as through acquisitions. It currently has 161 franchise dealerships in 105 locations. The latest acquisition done by the company was that of Benfield Motor Group, which took place in September 2015 at a cost of £87.5 million. The company’s business strategy also involves working with a variety of manufacturer partners within a large geographical area. Lookers Plc business strategy is to provide the best brands, have the best locations and ensure they have an excellent execution.

This strong position in the market has been reflected in its financial performances. According to its annual report of 2015, the company recorded impressive results, a trend that has been witnessed for the last seven years. The profit before tax for 2015 stood at £72.1 million compared to £65 million in 2014, which represents an increase of about 11%. The motor division posted the greatest performance in 2015, increasing its profits by 11% from £58.3 million in 2014 to £64.5 million in 2015. Similarly, the parts division posted significant figures of before-tax profits of £12.6 million. There are a number of factors that have contributed to the success of the company over the last several years, and these include increased growth in user car turnover, improved after sales turnover and the improved turnover in the parts division.

The success Lookers Plc has enjoyed has come against stiff competition in the market. The car market in the United Kingdom has a number of established players with some having operations outside of the UK. Some of these competitors include Bilia AB, Pendragon Plc, Vertu Motors Plc, Marshall Group Holding Plc and Andersen & Martini A/S among others (Financials.morningstar.com, 2016).

Lookers Plc Financial Performance compared to Vertu Motors Plc and Pendragon Plc.

This section of the report examines the current and historical performances of Lookers Plc and compares these performances to those of Vertu Motors Plc and Pendragon Plc. These tow companies are among the leading competitors of Lookers Plc and hence this comparison will give a better overview of the financial performance of Lookers Plc. Vertu Motors Plc was started in 2006 and is among the established car dealers in the UK (Vertumotors.com, 2016). The company currently sells a variety of car brands through dealers such as Macklin Motors, Bristol Street Motors, and Farnell. The Pendragon Plc, on the other hand, is a multinational company which operates franchised motor dealers in the UK. It has outlets in the United States. It started in 1989 and had since grown into various divisions, including the Evans Halshaw retailer and the Stratstone (Pendragonplc.com, 2016).

The first financial measure to be compared is the gross profit. In accounting, gross profit is an important measure of profitability because it shows how efficient the management is in the use of labour and the supplies in producing goods and services (Lan, 2012). The gross profit before tax for Lookers Plc for the financial period ending 31 December 2015 was £72.1 compared to £65 million in the same period in 2014 (Lookers PLC, 2016). Compared to the other two companies, Pendragon Plc had the highest profits standing at £548.9 million as of December 2015, and £522.6 million in 2014 (Pendragon PLC, 2016). For Vertu, it recorded the lowest figures at £27.4 million as of February 2016 compared to £22 million in the same period in 2015 (Vertu Motors PLC, 2016). It is, however, clear that all these three companies continue to show improved performances over the years, with each having posted positive growth between 2014 and 2015.

For Lookers Plc, the biggest share of the cash flows comes from operating activities (Lookers PLC, 2016). In 2015, the cash flow from operating activities was £32.9 million, and this was a drop of £1.7 million from 2014 (Lookers PLC, 2016). For Pendragon Plc, the operating incomes amounted to £74.5 million in 2015, an increase of £5.4 million from the £69.1 posted in 2014 (Pendragon PLC, 2016). For Vertu Plc, the net cash from operating incomes was 56.6 million as of February 2016 and 20.9 million at a similar period in 2015 (Vertu Motors PLC, 2016). It is clear that although Vertu posts the lowest figures, it is showing tremendous growth in incomes compared to the other two.

Looking at the balance sheet of Lookers Plc, the company had net assets worth £297.8 million in 2015 December compared to £256.9 million in 2014 (Lookers PLC, 2016). The total Equity was at £297.8 million in 2015 and £256.9 million in 2014. Compared to the other two companies, Pendragon has a higher value of net assets standing at £395.1 million in 2015 and £339.9 million in 2014. The total shareholder equity for Pendragon was £395.1 million in 2015 and £339.1 million in 2014 (Pendragon PLC, 2016). Vertu Plc, on the other hand, posted smaller figures with net assets of £197.8 million as of February 2016 compared to £179.6 million in February 2015. The total shareholder’s equity for Vertu was £197.8 in February 2016 and 179.6 in February 2015. Based on the values of the shareholders equity, it can be argued that Lookers Plc has a relatively high net worth, although other key competitors in the market such as Pendragon have higher figures. From the balance sheet, one important financial ratio that can be obtained is the current ratio (Lan, 2012). For Lookers Plc, the current ratio is 1.05 which suggests that it has enough current assets to pay its current liabilities. This ratio suggests that Lookers Plc is in more stable compared to the other two companies. Pendragon has a current ratio of 0.12 while Vertu has a ratio of 0.997, which suggests that these two companies are at a higher risk compared to Lookers Plc. However, for Lookers Plc, the current ratio as of December 2014 stood at 1.1, which suggests that there has been a slight decrease in the value of current assets against the current liabilities.

The shareholder’s equity is an important financial measure that helps to show the net worth of a given business (El-Dalabeeh, 2013). This figure helps to show the proportion of the company that is owned by the investors. Investors and loan providers look for this value when making decisions on whether or not to make investments or lend money to business. For Lookers Plc, the shareholder’s equity as of December 2015 was £297.8 million while in 2014; this figure was £152 million (Lookers PLC, 2016). This indicates that Lookers Plc is continuing to grow in its overall value, and this makes it an attractive investment company. It also means that Lookers Plc can get loans from financial service providers. Overall, with this figure, the future profitability of the company looks bright. Vertu Plc had a shareholder’s equity of £179 million as of February 2016 up from 163 million the previous year (Vertu Motors PLC, 2016). Pendragon, on the other hand, had a shareholder’s equity of £398.6 million as of December 2015, an improvement from £353.5 in 2014 (Pendragon PLC, 2016). It is thus clear that although Pendragon has higher figures, Lookers plc is showing positive signs of net worth improvement. Looking at the three companies, Lookers Plc shows a higher percentage of net worth improvement over the last one year.

Another measure that helps in analyzing the financial position of a company is the return on equity (ROE) ratio. This is defined as the net income/shareholder’s equity (Inc.com, 2016). For Lookers Plc, the ROE as of December 2015 was 16.7% compared to 19.4% in 2014. This suggests that Lookers Plc can generate profits without having to rely on capital. Although there is a fall in this ratio between 2014 and 2015, it is clear that Lookers Plc is deploying the shareholder’s capital in an effective manner. This makes it an attractive investment opportunity for the future. Compared to the other two companies, Lookers is doing well. As of February 2015, the ROE for Vertu Plc was 9% while that of Pendragon was 17%. This shows that although Pendragon may be showing a higher ratio, Lookers Plc is still operating at a comparable level of efficiency. Furthermore, considering that Pendragon is multinational and hence has big market share, Lookers Plc is doing well.

Lookers Plc has a variety of intangible assets that have contributed to the success of the company define its financial position. For the last two financial years, the company has had intangible assets of about £5.7 million (Lookers PLC, 2016). These intangible assets occur within the brands that have been acquired through subsidiary undertakings. The trading activities undertaken through such brand names contribute significantly to the company’s revenue and the operating profit. For example, the company acquired franchise lines worth £29.1 million through the acquisition of the Addison Motors Limited and the subsidiaries.

The growth of Lookers Plc has been pegged on its ability to engage in acquisitions. During the 2015 financial year, Lookers Plc acquired four companies. One of these was the Addison Motors Limited, which was acquired in September 2015 at a cost of £87.5 million (Lookers PLC, 2016). Secondly, In May 2015, the company acquired the Vikings Canterbury Limited for a total of £4.3 million. Third, Lookers Plc acquired the Amersham Jaguar for a total value of £2.6 million in August 2015. Finally, In October 2015, the company acquired the trade and the assets of the Eccles Skoda with the goodwill amounting to £0.3 million. These acquisitions further point to the idea that Lookers Plc is a growing company aiming to promote its financial stability and performance.

The financial growth of Lookers Plc is largely due to the success it has witnessed on the motor division. The new cars segment has been of tremendous importance to the growth of Lookers Plc over the last several years. The new car market in the UK accounted for 2.63 million cars in 2015. The company’s new car turnover increased by 11% in 2015 compared to the figures in 2014 (Lookers PLC, 2016). The company is investing in the fleet sector in order to boost its turnover. In 2015, the gross profit from the new cars increased by 12% compared to the figures posted in 2014. These figures further demonstrate that Lookers Plc is on a general upward trend with growth being experienced across its business sectors. Also, the used car segment has also contributed to the company’s growth over the year. In 2015, the company’s sales in this segment increased by 7% compared to the figures posted in 2014. This contributed to an increase in 7% of gross profit from the sale of used cars in 2015. The company continues to place efforts on growing this sector by sourcing for high quality used cars. Finally, the after-sales business experienced an increase in the gross profits of 6% in 2015 compared to the values posted in 2014. For this segment, the company has focused on improving service delivery in order to promote customer retention and loyalty. These figures show that the motor division continues to be the major driver behind the success of the company. Investments that are being made in the various segments of this division demonstrate that Lookers Plc looks to further cement its position in the UK car market sector.

Conclusion

Lookers Plc operates in a highly competitive environment. The UK car market is one that is experiencing tremendous growth, and this provides good investment opportunities for companies such as Lookers. However, despite this competition, this company has maintained impressive figures over the years. In this report, an analysis of these figures has been given, and these figures have been compared to the performances of Vertu Motors Plc and Pendragon Plc. From the analysis, it can be concluded that Lookers Plc is performing well compared to these two companies. Although Pendragon Plc has better results of the three companies, it has a bigger market share due to the internationalization of its operations. Lookers Plc has diversified its business model and has maintained growth through acquisitions. The future of Lookers Plc looks bright, and the company has a chance to even post better figures in the future. With the growth currently witnessed in the car market in the UK today, Lookers Plc has the potential to establish itself as a major player in the industry in the years to come.