Financial Analysis of AKQA Ltd - Case Study Example

Financial analysis of AKQA Ltd For a long time, many firms have used various financial ratios to help analyse the productivity and growth of a business. Notably, the ratios that are used by the firms are often got from calculations arising from the firm’s financial statements and records. In order to analyse the results of an organization’s performance, financial ratios are some of the most significant elements that an analyst needs to consider so as to create the best financial reports. WPP is a group of companies that operate various individual companies across the world. In order to carry out an effective analysis, one of the companies under WPP was selected for the analysis. Notably, the company that was selected is AKQA that mainly deals in ideating and designing of digital products. This analysis would be aimed at creating the best use of financial ratios in ensuring that the company’s performance is effective. Executive summary AKQA is an affiliate company that is under the WPP group of companies in the United Kingdom. Notably, the company mainly deals in creating innovative ideas and implementing the ideas to come up with the most digital products for their clients. In addition, the company deals in content creation, e-commerce, digital marketing, as well as product designing. Currently, the company’s major headquarters are found in London, United Kingdom and San Francisco, United States of America. As a company that mainly deals in digital products, AKQA has a social media team of practitioners who have unique expertise in innovation and leadership hence providing the company’s clients with a strong and stable competitive advantage. Notably, this helps the company to successfully traverse through multiple geographical regions, financial platforms and economic channels in delivering continuous solutions to its clients. Evidently, the company has branches in several countries such as Netherlands, Germany, China, USA, UK, India and France. The company keeps financial records that can be used to analyse the various ratios that evaluates the company’s performance over a specific period [20]. Comparison of the company’s annual returns Looking at the company’s annual report, it is evident that the company recorded a negative margin in billings between 2011 and 2012. Notably, the company recorded a decrease of -0.9% which resulted from a reduction in billings from £44,792m in 2011 to £44,405m in 2012. In addition, the company recorded a +3.5% increase in the amount of revenue. Evidently, the increase was as a result of the rise in the amount of revenue from £10,022m in 2011 to £10,373m in 2012, it is worth concluding that the company had a more favourable economic situation in 2012 than in 2011. From the company’s earnings before interest and tax (EBIT), it is clear that the company is recording continuous important increase in efficiency and effectiveness [3]. From the financial data recorded in 2012 and 2011 it is evident that AKQA made a significant amount of profit from the sales of the designs between the two years. In 2012, the company had an EBIT of £1,756m compared to 2011’s £1640m hence recording a significant gain of +7.0%. Based on the company’s financial summary, it is worth noting that the company is experiencing a positive achievement in its financial reports. Admittedly, looking at the company’s after-tax return that is calculated on average capital employed, it is evident that the company recorded a rise of its revenues to 11.6%, with the weighted average cost on capital increasing to 6.3%. in addition, the company’s marketing department ensured that the company achieves the basic marketing advantages that mainly resulted from increased marketing standards for the company’s digital products [5]. Ratio analysis Ratio analysis is one of the most effective ways through which the company can ensure that it is either masking profits or loses is through the use of various financial ratios. There are a number of financial ratios that can be used to ensure that the company achieves the best financial results. Basically, there are a number of ratios that can be used to help ensure that the company achieves the best strategies. In order to analyse AKQA Ltd’s financial reports and changes between 2011 and 2012, it is of great importance to analyse ratios such as: a Liquidity ratios b. Solvency ratios c. Working capital management ratios d. Profitability ratios e. Asset efficiency ratios First and foremost, it is of great significance to understand the various ratios that are present under the liquidity ratios for any business firm. Liquidity ratios are often used to gauge the company’s ability to take care of its short-term maturing financial compulsions as and at the time when they fall due. In addition, the ratios can be used to measure the liquidity risk for the company. Basically, the lower the level of liquidity ratios, the higher the level of liquidity risk within the company and vice versa [7]. In case a company fails to meet its short term liabilities as a result of lack of liquidity, the credit worthiness of the company might be pout at stake, hence leading to litigation by creditors as well as insolvency. Some of the liquidity ratios include current ratio, acid test or quick ratio, and debt ratio. Current ratio This ratio is achieved by dividing the total current assets by the aggregate current liabilities. Notably, this ratio represents the company’s ability to use its current assets in settling its current debts. A current ratio that is above one shows that the company is able to finance all its current liabilities using current assets hence creating the best strategy for business activities [12]. For AKQA, the current ratio can be calculated as: Current ratio in 2012 = 11,424.7= 0.94446. From the current ratio above, it is evident that the company cannot service its short term liabilities using the short term assets. For 2011, the current ratio is 11,288.7 which give 0.9569. From the ratio analysis above, it is evident that 2011 was more productive for AKQA than 2012 as far as assets and liabilities are concerned [10]. Acid test or quick ratio This ratio is calculated by dividing current assets less stock by the current liabilities. A company that has an agreeable current ratio might be at high liquidity risk in case inventories form a huge amount in the total current assets [14]. For a company like AKQA, the acid test ratio in 2012 = {(11,424.7= 0.9157. For 2011, the ratio is {(11,288.7-333.9)} which equals 0.9286. Debt ratio/ capital gearing ratio This is the ratio of debt finance to the capital employed by the company. In case the ratio is more than 50%, then we can say the company is highly geared. Debt ratio for AKQA in 2012 is calculated as % = 81% From the result above, it is evident that the company was highly geared in 2012. The ratio for 2011 is given by Comparing the ratios in 2011 and 2012, it is evident that in 2011, the company was more geared than 2012. Solvency ratios These are ratios that indicate a company’s ability to service its debts. They are also known as leverage ratios. In case a companys solvency ratio is lower, then there is a higher probability that the company will default on its long-term and short-term obligations to its creditors. The ratio can be calculated by Solvency ratio= which gives 0.2168 For 2011 the ratio = giving 0.2221 Working capital management Working capital can be referred to as the amount that is arrived at after subtracting current liabilities from current assets. Notably, working capital management ratios are essential in understanding any organization’s ability to run its operations [16]. Working capital ratio= For AKQA, the working capital ratio in 2012 = which gives 0.94446. For 2011, the working capital ratio= which equals 0.9569 Working capital management can be used to ensure that various aspects of the company’s financial management are taken care of. In addition, it helps in the management of the company’s assets and liabilities in a manner that helps the company in achieving high profitability [18]. Profitability ratios These are ratios that are used to show the effectiveness of a company in terms of generating returns from sales and investments. In addition, the ratios indicate the company’s profit creation abilities and help in creating a valid profit analysis tool. They include gross profit margin, net profit margin and net assets turnover among other ratios. Gross profit margin This ratio to indicate how the company has managed its cost of production in relation to administrative and distribution costs [19]. Gross profit margin= ×100% For AKQA, in 2012, the GP margin was which gives 9.17% For 2011, the margin was giving 8.3% Net profit margin This ratio shows the company’s ability to control operating, production and financial costs Net profit margin is For AKQA, in 2012, the NP margin is which gives 0.086% For 2011 the NP margin is giving 0.082% From the ratios above, it is evident that the company was more profitable in 2012 than 2011. Asset efficiency ratios Asset efficiency ratios are those ratios that indicate the rate at which a company uses its assets in productivity. One of the ratios that are associated with assets is the assets turnover ratio [13]. Net Assets turnover ratio This is the ratio of net sales against the capital employed. Specifically, the ratio determines how a company uses its assets to affect the sales. For AKQA Ltd, the net assets turnover ratio is given by which equals 66.16. For 2011, the net assets turnover ratio = which equals to 67.16 From the ratios above, the assets in 2011 obviously generated more sales than the other years. In comparing the variables in the ratios above, it is evident that the company needs to come up with the most appropriate ways in maintaining a continuous production schedule [16]. Measurement against the organisation’s KPIs;  Using the key performance indicators of the company, it is evident that the ratios above show the best ways through which the performance of the company can be ascertained. In addition, the indicators include the company’s assets and liabilities as well as profits. It is worth noting that these indicators clearly show the ways through which the company can achieve the best strategic plans for increased profitability. Despite being effective, the techniques used can sometimes be extremely hard to analyse [17]. In conclusion, from the results above, the company needs to analyse various errors in previous performances in ensuring that the future operations all run smoothly and appropriately. The data provided on the company’s website also indicate that the company needs to put extra effort in creating the most productive financial schedule. References [1] Ahmed, N. (2008). Financial accounting. , : Atlantic Publishers & Dist. [2] Albrecht, W., Stice, E., & Stice, J. (2010). Financial accounting. , : Cengage Learning. [3] Debarshi, B. (2011). Management accounting. , : Pearson Education India. [4] Gupta, A. (2008). Financial accounting for management: An analytical perspective. , : Pearson Education India. [5] Libby. (n.d.). Financial accounting. , : Tata McGraw-Hill Education. [6] Loughran, M. (2011). Financial accounting for dummies. , : John Wiley & Sons. [7] Ltd, P. R. 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