Financial Analysis of Halfords: Evaluation, Investment Appraisal and Potential Acquisition

This report evaluates the financial position and performance of Halfords, including profitability and liquidity ratios, investment appraisal techniques, and potential acquisition targets. The report concludes that the company should focus on existing projects and consider acquiring ScS group plc to generate more profits and meet its goals.

Running Head: Financial Analysis
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Project Report: Financial analysis

Financial Analysis
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Contents
Introduction.......................................................................................................................3
Evaluation of financial statement of Halfords..................................................................3
Invest appraisal techniques...............................................................................................5
Potential Target Company................................................................................................6
Conclusion........................................................................................................................8
References.........................................................................................................................9
Appendix.........................................................................................................................11

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Introduction:
The report has been prepared to evaluate about the Halfords limited. Being a chief
financial officer of a company, it is required to evaluate and analyze the financial position
and performance of the company. All the financial decisions of the company are required to
be done by the chief financial officer in such a way that the funds could be raised by the
company in minimum price and invested in the project from where maximum return could be
earned. In the report, financial statement of the Halfords limited has been evaluated firstly to
recognize the profitability and the short term debt obligation position of the company.
Further, the reports lead to the investment project evaluation of the company and lastly, it has
been identified that whether the company should acquire another company for the
diversification or not.
Evaluation of financial statement of Halfords:
Halfords group plc is retailing company which operates its business in UK market and
Ireland market. The company retails the car accessories, car audio, bicycles, ripspeed, tools,
child seats etc. further, various services are also provided by the company such as Bicycle
repair, Audio installation, vehicle part, fitting etc. the company has been founded in 1892 and
currently the revenue of the company is £ 1095 million (Home, 2018). The financial and non
financial position of the company is quite competitive. Being a chief financial officer of the
company, financial statement of the company has been evaluated firstly to identify that
whether the company would be able to make profit or not. The ratio analysis study of the
company is as follows:
Profitability:
Profitability ratios express about the profit making capability of an organization. It
express that whether the company is able to make enough profits for the equity holder and
whether the resources of the company are enough (Kaplan and Atkinson, 2015). The
profitability ratio of Halfords group explains that the profitability level of the company has
been lowered in year 2017. The return on equity ratio evaluates about the total profit in
context of the total equity of the company. On the basis of Return on equity calculations, it
has been found that the return on equity in current year has been lowered due to changes in
the industry. Though, the financial performance of the company is according to the ideal ratio
(more than 15%) (Fridson and Alvarez, 2011).

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Gross profit margin explains about the profit of the company which is generated after
deducting the cost of revenue from total revenue of the company. The gross profit margin
level of the company explains that the performance of the company is quite better. The
material price of the products has impacted on the position of the company.
Figure 1: Profitability ratio
Liquidity:
Liquidity ratios express about the short term debt payment capability of an
organization. It expresses that whether the company is able to pay the short term debt
obligation of the company or not (Brooks, 2015). The liquidity ratio of Halfords group
explains that the liquidity level of the company is quite competitive. The current ratio
evaluates about the total current assets in context of the current liabilities of the company. On
the basis of current ratio calculations, it has been found that the current ratio of the company
is quite better and competitive. The financial performance of the company is according to the
ideal ratio and the industry (Morningstar, 2018).
Acid test ratio explains about the short term debt capability of the company which
eliminates the items that could not be liquidated instantly (Hogarth and Makridakis, 2011).
The acid test ratio level of the company explains that the performance of the company is quite
better. The company is enough able to pay the payment at the time of liquidation.

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Figure 2: Liquidity ratio
Invest appraisal techniques:
Investment appraisal techniques are the process to recognize the investment and
project options of an organization. It is an evaluation process which includes various tools to
identify that whether the project should be accepted by the company or not. It examines the
cash inflow and outflow of the project and on the basis of that a decision is made about the
acceptance or rejection of a project (Brown, 2015). This process is used by every
organization to make better decision about the projects and investment opportunities.
In the given case, Halfords limited is planning to invest into a new project in which
the car parts would be manufactured by the company. The investment opportunity explains
that the company would have to invest £ 3,00,00,000 in the plant and the plant would run for
10 years with no salvage value (Besley and Brigham, 2008). Further, the cash inflow of the
company has been evaluated on the basis of industry position and the production process of
the company and it has been found that the capacity of the plant would be 4,00,000 units to
5,00,000 units and the selling price of the parts would be £ 60. Thus the cash inflow of the
project would be £ 55,00,000 to £ 70,00,000.
The investment appraisal technique of the company examines the net present value
and the internal rate of return of the project further. Net present value is the process which
recognize the net cash flow of the project, if the cash flow is positive than the project should
be accepted otherwise company should reject the proposal (Titman and Martin, 2014). The

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net present value of the project is £ 51,31,380 in case of 5,00,000 units and - £ 23,96,773. It
explains that if the capacity and the sale of the products would be 5,00,000 units than only the
project should be accepted by the company otherwise the project would lead to the company
towards loss (Higgins, 2012).
Further, internal rate of return is the total return percentage of the project where the
net present value of the project is zero (madhura, 2011). The internal rate of return of the
project is compared with the cost of capital of the company. If the cost of capital of the
company is lower than the internal rate of return, project should be accepted by the company
otherwise vice-versa.
. The internal rate of return of the project is -2.83% in case of 5,00,000 units and
3.62% in case of 4,00,000 units. It explains that in both the cases, the cost of capital of the
company (15%) would be higher than the internal rate of return of the project and thus the
proposal should not be accepted (Gibson, 2011).
The study of new project on the company explains that the net present value of the
project is better but the internal rate of return of the company is lower than the cost of capital.
So, the company should not invest into the project. Rather than investing into the new project,
company should focus on the existing project so that more revenue could be generated from
that.
Potential Target Company:
A company always looks for various ways to diversify its market so that the more
revenue could be generated by the company as well as the market share of the company could
also be enhanced. Acquisition is one of the ways through which the company could diversify
its market and meet the goals of the company. In acquisition, a company is targeted by the
potential acquirer to evaluate that the whether the company should be acquired or not. There
are various ways to evaluate that the acquisition process would be beneficial for the company
or not (Koller, Goedhart and Wessels, 2010).
In Halfords plc, if the company wants to diversify its market, than acquisition is a
good option for the company. The main target of the company should be ScS group plc. ScS
group plc has been chosen for the acquisition because of its market share and the better
financial position of the company. The company is operating in the same business and thus, it
would help the company to meet the objectives of more market share and greater revenue.

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The financial performance and the annual report of the company of last few year has
been analyzed to identify that whether the acquisition would be beneficial for the company or
not. The project has explained that the financial performance of the company is quite better.
The company is performing well in terms of financial position as well as non financial
position. If the company would acquire the ScS group plc than the market share of the
company would definitely be greater.
The financial position of the company explains about the continuous growth in the
company. Future performance and position of the company has been evaluated further on the
basis of discounted cash flow technique and it has been found that the cash flow of the
company would be increased by 17.07% in next 5 years on the other hand; the inflation rate
of the company would be enhanced by 3.33% (Brigham and Ehrhardt, 2013). It explains that
the company’s growth is quite higher than the inflation rate.
The estimated cash flow of the company of next 5 years has been calculated
and it has been found that the terminal cash flow of the company after 5 years would be £
56,544.99 (Morningstar, 2018). It explains about better incremental position of the company.
Further, the present value of the terminal cash flows of the company has been evaluated and
it has been recognized that the total worth of the company is £ 5,52,897.85 which includes £
1,16,5000 worth of debt and rest amount is related to the equity of the company (Brigham
and Houston, 2012).
The calculations further explains that the total equity of ScS is £ 4,33,398 and the
number of issued share of the company is 2000 which explains that the per share value of the
company is £ 216.7. Though, the market value of the company is £ 210. It explains that the
intrinsic value of the company is higher and thus the acquisition process would help the
company to generate more profits and meet the goals and mission of the company (appendix).
The Halfords group plc would be required to pay £ 210 to each shareholder of the
company whereas the total worth of per share of the company is £ 216.7. It would lead the
company to great profits and the financial position of the project is also better which would
assist the company to meet its objectives (Vogel, 2014).
On the basis of financial performance, investment appraisal techniques and the
acquisition plan of the company, it has been found that the company should invest into the

Financial Analysis
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acquisition rather than investing into the new plan as it would assist the company to generate
more profits and meet the goals and mission of the company.
Conclusion:
To conclude, the financial position of the company is quite better. The
profitability ratio of the company explains about better position of the company from last 5
years. Though, the current performance of the company has been lowered due to high
material price. Further, the liquidity position of the company is quite competitive and
explains about lower risk position of the company in the industry. In addition, the study of
new project on the company explains that the net present value of the project is better but the
internal rate of return of the company is lower than the cost of capital. So, the company
should not invest into the project. Rather than investing into the new project, company should
focus on the existing project so that more revenue could be generated from that.
Lastly, in case of acquisition, the acquisition of ScS group plc would lead the
company to great profits and the financial position of the project is also better which would
assist the company to meet its objectives. On the basis of financial performance, investment
appraisal techniques and the acquisition plan of the company, it has been found that the
company should invest into the acquisition rather than investing into the new plan as it would
assist the company to generate more profits and meet the goals and mission of the company.

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References:
Besley, S. and Brigham, E.F., 2008. Essentials of managerial finance. Thomson South-
Western.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice.
Cengage Learning.
Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage
Learning.
Brooks, R., 2015. Financial management: core concepts. Pearson.
Brown, R., 2012. Analysis of investments & management of portfolios. Pearson Higher Ed.
Fridson, M.S. and Alvarez, F., 2011. Financial statement analysis: a practitioner's
guide (Vol. 597). John Wiley & Sons.
Gibson, C.H., 2011. Financial reporting and analysis. South-Western Cengage Learning.
Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Hogarth, R.M. and Makridakis, S., 2011. Forecasting and planning: An
evaluation. Management science, 27(2), pp.115-138.
Home. 2018. Halfords group plc. [Online]. Available at: http://www.halfordscompany.com/
[Accessed as on 25th April 2018].
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Koller, T., Goedhart, M. and Wessels, D., 2010. Valuation: measuring and managing the
value of companies (Vol. 499). john Wiley and sons.
Madura, J., 2011. International financial management. Cengage Learning.
Morningstar. 2018. Halfords group plc. [Online]. Available at:
http://financials.morningstar.com/cash-flow/cf.html?
t=XFRA:HDK&region=deu&culture=en-US [Accessed as on 25th April 2018].
Morningstar. 2018. ScS group plc. [Online]. Available at:
http://financials.morningstar.com/income-statement/is.html?t=SCS&region=gbr [Accessed as
on 25th April 2018].
Titman, S. and Martin, J.D., 2014. Valuation. Pearson Higher Ed.

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Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.

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Appendix:
Ratio Calculations 2017 2016 2015 2014 2013
Profitability Ratios: 2017 2016 2015 2014 2013
Return on Equity 2017 2016 2015 2014 2013
Net profit / 56 64 66 56 53
Total Equity
40
8
40
5
36
8
32
6
29
9
Answer: % 13.73% 15.80% 17.93% 17.18% 17.73%
Gross Profit Margin 2017 2016 2015 2014 2013
Gross profit / 559 543 546 504 477
Sales Revenue (note used operating
revenue) 1,095 1,022 1,025 940 871
Answer: 51.1% 53.1% 53.3% 53.6% 54.8%
Liquidity Ratios 2017 2016 2015 2014 2013
Current Ratio 2017 2016 2015 2014 2013
Current Assets / 271.00 235.00 231.00 208.00 197.00
Current liabilities 247.00 223.00 227.00 191.00 183.00
Answer: 1.10 1.05 1.02 1.09 1.08
Acid test ratio 2017 2016 2015 2014 2013
Current Assets - Inventory / 80 77 82 58 64
Current Liabilities 247 223 227 191 183
Answer: 0.32 0.35 0.36 0.30 0.35
Calculation of Net present value
Year Cash outflow Cash inflow PV Factor Present value
0
£
3,00,00,000 1.000
-£
3,00,00,000
1
£
60,00,000 0.870
£
52,17,391
2
£
60,00,000 0.756
£
45,36,862
3
£
60,00,000 0.658
£
39,45,097
4 £ 0.572 £

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60,00,000 34,30,519
5
£
60,00,000 0.497
£
29,83,060
6
£
60,00,000 0.432
£
25,93,966
7
£
60,00,000 0.376
£
22,55,622
8
£
60,00,000 0.327
£
19,61,411
9
£
60,00,000 0.284
£
17,05,574
10
£
60,00,000 0.247
£
14,83,108
Net present value = cash inflow - cash outflow
£
1,12,612
Calculation of Internal rate of return
Year Cash outflow Cash inflow
PV Factor
(20%) Present value
0
£
3,00,00,000 1.000
-£
3,00,00,000
1
£
60,00,000 0.833
£
50,00,000
2
£
60,00,000 0.694
£
41,66,667
3
£
60,00,000 0.579
£
34,72,222
4
£
60,00,000 0.482
£
28,93,519
5
£
60,00,000 0.402
£
24,11,265
6
£
60,00,000 0.335
£
20,09,388
7
£
60,00,000 0.279
£
16,74,490
8
£
60,00,000 0.233
£
13,95,408
9
£
60,00,000 0.194
£
11,62,840
10
£
60,00,000 0.162
£
9,69,033
Internal rate of return 11.31%
Units 10,00,000
Selling Price per unit 32

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Labour cost per unit 10
Materials cost per unit 12
Variable Overheads per
unit 3
Fixed Overhead 10,00,000
Net Cash Flow 60,00,000
Calculation of Net present value
Year Cash outflow Cash inflow PV Factor Present value
0 £ 3,00,00,000 1.000 -£ 3,00,00,000
1 £ 46,00,000 0.870 £ 40,00,000
2 £ 46,00,000 0.756 £ 34,78,261
3 £ 46,00,000 0.658 £ 30,24,575
4 £ 46,00,000 0.572 £ 26,30,065
5 £ 46,00,000 0.497 £ 22,87,013
6 £ 46,00,000 0.432 £ 19,88,707
7 £ 46,00,000 0.376 £ 17,29,310
8 £ 46,00,000 0.327 £ 15,03,748
9 £ 46,00,000 0.284 £ 13,07,607
10 £ 46,00,000 0.247 £ 11,37,050
Net present value = cash inflow - cash outflow -£ 69,13,664
Calculation of Internal rate of return
Year Cash outflow Cash inflow PV Factor Present value
0 £ 3,00,00,000 1.000 -£ 3,00,00,000
1 £ 46,00,000 0.870 £ 40,00,000
2 £ 46,00,000 0.756 £ 34,78,261
3 £ 46,00,000 0.658 £ 30,24,575
4 £ 46,00,000 0.572 £ 26,30,065
5 £ 46,00,000 0.497 £ 22,87,013
6 £ 46,00,000 0.432 £ 19,88,707
7 £ 46,00,000 0.376 £ 17,29,310
8 £ 46,00,000 0.327 £ 15,03,748
9 £ 46,00,000 0.284 £ 13,07,607
10 £ 46,00,000 0.247 £ 11,37,050
Internal rate of return 1.41%

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Units 8,00,000
Selling Price per unit 32
Labour cost per unit 10
Materials cost per unit 12
Variable Overheads per
unit 3
Fixed Overhead 10,00,000
Net Cash Flow 46,00,000
Valuation of equity taking free cash flows of firm
Past
average
FCFF (£M) 10,187.60
Discrete free cash flow growth 17.07%
Applied for next 5
years
Permanent growth rate free
cash flow 3.33%
Applied after 5
years
Estimated Free cash flows for firm
Year FCFF (£M)
2017 11,926.66
2018 13,962.59
2019 16,346.05
2020 19,136.39
2021 22,403.04
2022 26,227.32
Terminal cash
flows 27,100.87
Present value of discrete cash flows for next 5 years
Year FCFF (£M)
PVF
@13.11% PV of Cash Flows
1 11,926.66 0.884 10,544.30
2 13,962.59 0.782 10,913.50
3 16,346.05 0.691 11,295.62
4 19,136.39 0.611 11,691.11
5 22,403.04 0.540 12,100.46

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Total 56,544.99
Present value of terminal cash flows
Terminal cash
flows 27,100.87 4,96,352.86
Total value of Firm (£M) 5,52,897.85
Less: Value of Debt 1,19,500.00
Total value of Equity 4,33,397.85
No of Shares Outstanding 2,000.00
Per share value of value of equity 216.70
210

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