Financial Ratios at Barclays Bank - Essay Example

Barclays bank: Introduction: The company of choice is Barclays bank, this company is in the finance industry and it provides financial services to consumers, other banks and also companies. Over the years the company has gained profits and this has enabled investors to benefit from the company. The government has also benefited from the tax paid by the company. In 2005 the company recorded a 5, 280 million pounds profit, in 2006 the profit was 7,136 million pounds and in 2007 the profit was 7,760 million pounds. Therefore from the profit levels this is a company that can be a a good option to investors. Gearing ratio: Financial ratios are important in that they aid in determining the financial performance of the company, they also help to identify the strength and the weaknesses of the company, financial ratios include debt ratio, sales turnover ratio, return on assets, and return on equity gearing ratio, current ratio and price earning ratio. All these ratios are important but in order to identify the strength and the weaknesses of the company we need to identify the profitability, efficiency and the leverage of the company. The gearing ratio is a financial indicator of the relationship between long term liabilities and capital employed, it is an important indicator to investors, this is because shares in a financial year may earn dividends while in some years dividends may not be paid, it is also important to investors in that long term liabilities are in form of loans and that they need to be paid back with interest and if the ratio is not appropriate investors end up loosing finally share holders have voting rights while long term liabilities do not have the voting rights that are used in making decisions of the company. Therefore the gearing ratio shows the relationship between long term liabilities and it is calculated by dividing long term liabilities by the shareholders equity. In our case we use the balance sheet to derive this ratio and according to our company accounts the long term liabilities are summarized below: long term liabilities trading portfolio liabilities 71874 debt securities 111137 183,011 The shareholders equity is summarized in the table below: equity shareholder equity excluding minority interest 25421 minority interest 1685 27106 Because we derive the gearing ratio by dividing the long term liabilities by the total share holder equity we substitute our values as follows: Gearing ratio = 183,011/27106 = 6.75 Therefore our gearing ratio is 6.75, this means that the company finances more using long term debts than equity through sale of share, this means that the company has to pay interest earned by these liabilities while it would have been possible to raise capital through equity, therefore there is a problem of having to pay high interest levels for the debts and therefore the company needs to minimize the costs of debts by raising funds through the sale of shares. Dividend history: The following table summarizes dividends paid over the past 3 years, form the table it is evident that dividends paid have increased over the years: year dividends paid (million pounds) 2005 1894 2006 2215 2007 2559 The following chart shows the dividends paid by the company in the past 3 years: From the above chart it is evident that the companies dividends have increased, this is an indication that in 2008 the dividends are likely to increase, this is an indication that the bank has increased its profit levels and therefore it is likely that the dividends will increase in the future, therefore investing in this company is much more profitable due to the high anticipated divided levels in the future. Cash flow statement: We analyze the company's performance using the 2007 cash flow statement, according to this statement we will be in a position to analyze the financial position of the bank and also indentify the source of the high profits gained by the bank. Assets purchases: During the year 2007 there were major changes in the level of assets held by the company, the company purchased intangible assets worth 263 million pounds, purchased property and other assets worth 1,241 million pounds, investment increased in other financial activities at 26,899 million pounds and acquired other subsidiaries at a cost of 270 million pounds. From this therefore it is evident that the bank invested heavily in other investment activities and this explains why more profits were gained from investment activities. There was a decrease in other financial instruments worth 2,144 million pounds, a decrease in trading assets worth 18 227 and a decrease in financial investment worth 4,379 million pounds and a decrease in other assets worth 1,299 million pounds. Financial activities: The company gained 3,358 million pounds from financial activities, however the the bank realized a los in its foreign currency activities amounting to 550 million pounds Liabilities: In this year there were changes in the levels of liabilities held by the company, there was a 77,987 million pound increase in the loans to consumers and other banks, there was also an increase in deposits by consumers and other companies amounting to 90,589 million pounds. There was also a decrease in trading liabilities amounting to 6,472 million pounds. Sales: Through sales of its investments and property the company was able to gain from the activity, the company gained 617 million pounds from the sale of assets, it also sold investment and gained 38, 423 million and finally the company disposed off some of its subsidiaries and gained 383 million. Investments: The company increased investment in subsidiaries and this amounted to 668 million pounds, however there was a decrease in this subsidiaries amounting to 57 million, joint ventures and acquisitions were also evident where the company invested 220 million in joint ventures and acquisitions, finally there were also disposal of joint ventures amounting to 145 million pounds. Cash flow from investment: The company gained 10,064 million from investment activities, proceeds from borrowing amounted to 4,625 million pounds. the company also paid 683 million pounds for its borrowings from other financial institutions. The company issued shares wotrth 2494 million in the year 2007 and repurchased shares worth 1,802. Finally the company paid 2,559 million pounds as dividends to investors. As a result of this there was a net increase in cash equivalents of 2,125 million pounds and the cash at the end of the year amounted to 33,077 million pounds where only 5,801 million pounds was held by the central bank. Profits: In this year the company made a profit of 7,076million pounds before tax, the tax paid for the year amounted to 1,583 million pounds, divided amounting to 2,559 million pounds were also paid out. The company gains its profits from joint ventures, financing services to consumers and companies, investing activities and operating activities. The company also gained profits in 2007 through the disposal of property, disposal of joint venture and the disposal of subsidiaries. The following chart summarizes the profit levels over the past three years, It is evident that profits levels are still expected to be high in 2008 and therefore will be the dividends paid and share prices. From the above discussion therefore it is evident that Barclays bank involves itself in many investment activities that helps in gaining high profits,, these activities include joint ventures, acquisitions and other financial activities. Profits are gained from these financial activities and the disposal of these joint ventures and investment at a profit, financial activities to consumers also help in realizing these high profit levels. References: barclays bank consolidated cash flow and balance sheet 2007, retrieved on 11th August, available at http://www.barclaysannualreport.com/financial_statements/consolidated_cash_flow_statement Read More