Financial Management for Purchaser

This document focuses on the financial analysis of Capita PLC and Serco Group PLC to evaluate their financial viability. It also includes a case study on the collapse of Carillon and the associated financial risks. The analysis includes liquidity ratios, profitability ratios, long-term solvency ratios, and working capital ratios.

Running head: FINANCIAL MANAGEMENT FOR PURCHASER
Financial Management for Purchaser
Name of the student:
Name of the university:
Author Note:

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Executive Summary
Financial analysis of the capita PLC and the Serco group PLC is done so that valuable
comparative analysis can be performed. The critical analysis of the collapse of Carillon is
evaluated in detailed process which has been discussed in task A and task B.

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Table of Contents
Introduction:...............................................................................................................................3
Discussion:.................................................................................................................................4
Task A:...................................................................................................................................4
Financial Analysis of Capita PLC and Serco Group PLC.................................................4
Liquidity Ratios:.................................................................................................................4
Profitability Ratio:..............................................................................................................5
Long Term Solvency Ratio:...............................................................................................6
Working Capital Ratio:......................................................................................................8
Overall Financial Analysis:................................................................................................9
Limitations of such analysis:............................................................................................10
Task B..................................................................................................................................10
Case Study on the collapse of Carillon............................................................................10
Financial Risk...................................................................................................................10
Strategic Supplier.............................................................................................................11
Ethical issues and the things learned from such collapse................................................12
Critical analysis and recommendation of the scandal......................................................13
Conclusion................................................................................................................................16

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Introduction:
The aim of the assignment is to concentrate on the financial analysis of Capita PLC
and Serco Group PLC for performing a comparative analysis regarding the acceptance of the
project. As a director of company the comparative financial analysis is performed to
understand the financial viability of both the business (Karadag 2015). In task A, the financial
analysis of both the company is evaluated accordingly and the strength and weakness of both
the business has been evaluated accordingly with the help of some of the key financial tools.
The financial tools used for performing the analysis is the fundamental ratios which are the
liquidity, profitability, long term solvency and the working capital ratio of both the company
has been measured in the conducted study accordingly. The financial ratios played a
significant role regarding accepting the contract of the business.
In task B, the collapse of the Carillion has been discussed which happened during the
year 2018 and the significance of analyzing the financial performance of the company in
various perspective. The role played by the upper level management of the company have
been depicted which is such a major collapse took place during that year. The reason
associated with such collapse are also discussed in the conducted study. The ethics and the
payments of the company has been critically analyzed during the conducted study. The lesson
learned from the winding up of Carillion has been discussed in a detailed basis so that the
companies going through such a major crisis may take a turn by bringing major changes in
the system in order to bring long term stability in the financial position of the business.

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Discussion:
Task A:
Financial Analysis of Capita PLC and Serco Group PLC
The financial analysis of both the company is performed because analyzing the
financial situation of the company is needed before accepting any kind of projects. Hence,
before accepting any project it is needed to analyze the financial position the business. For
that purpose, ratios are needed to be calculated in order to understand whether the business of
the company is sound. Evaluating the project in various dimensions by collecting the data
from the annual reports. In this case, the financial analysis of Capita PLC and Serco Group
PLC is performed in order to understand the performance of the business of both the
company (Capita.com., 2019). The business objective of the Capita PLC deals with the
process outsourcing, this company outsource the professional services. The computed key
ratio analysis of business of both the company is analyzed in the conducted study. The
liquidity, profitability, working capital and long term solvency ratios have been evaluated for
both the company in order to understand the financial viability of the business (Allen, Gu and
Kowalewski, 2018).
Liquidity Ratios:
The liquidity ratio of the company gives information’s regarding the company’s
ability meet the liabilities or the financial obligations. Liquidity means that the time taken by
the assets of the company to get quickly converted into cash.

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Current Ratio:
As per the current ratio of both the company, it is measured that the company ability
to pay off its current liabilities with the current assets. The higher the ratio the better is the
financial performance of the company in terms of the current ratio (Strouhal 2015). The
Current ratio of Serco group PLC is much higher than the Capita PLC, which further
indicates that as per the comparison of both the company in terms of the current ratio, the
liquidity position of the business of Serco group PLC is much higher than the Capita PLC.
The current ratio is much favorable of Serco Group PLC in the year 2016 which was 1.01
more than the other two years. This indicates that the liquidity position of the Serco group
PLC is much better than the Capita PLC as the current ratio of Capita PLC is slightly low
than the Serco group PLC. In case of current ratio analysis the Serco group PLC will be a
better option (Serco.com., 2019).
Quick ratio:
The quick ratio evaluates the intensity of the liquidity position of the business. As per
the evaluation of both the companies in terms of the quick ratio of the company, the

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performance of Serco Group PLC is much higher than the Capita PLC. This ratio measures
that the Serco PLC is able to meet its short term obligations of the business much quickly.
Profitability Ratio:
The profitability ratio of the company is to understand the profitability position of the
business of the company (Appelbaum et al. 2017). While taking contract of any big projects,
it is needed to understand the profitability position of business of that particular company. It
measures that the company’s ability to generate revenue regarding the expenses incurred by
the company (Rahman, Ibrahim and Ahmad 2017).

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Return on Asset Ratio:
Return on asset ratio measures percentage of the revenue generated by a company by
utilizing the total asset of the company. In terms of comparison, Serco group PLC will be a
better choice as per the financial year 2016 and 2017 the return generated out of the asset is
positive.
Operating Profit Margin:
Operating Profit margin of the company measures the profitability position of the
company in that case. In the year 2015, the company is showing profit which is a positive
situation for Capita PLC but after that it is running at a loss. In case of the Serco Group PLC
the business performance of the company is improving gradually.
Long Term Solvency Ratio:
Solvency ratio also plays an important role in case of project evaluation, as this
particular ratio measures the strength of the business in order to meet up its long term
obligations or the liabilities of the business. It indicates the cash flow of the business in

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meeting its short and long term obligations. Higher the ratio better the flow of cash of the
company in order to meet up its obligation.
Debt to Equity ratio:
This ratio measures the financial leverage of the business of the company in terms of
debt to equity ratio. This ratio measure the company’s ability to finance its debt in the
business. It measures the financial leverage in terms of financing where greater the ratio the
company is obtaining aggressive measures for financing its debts. In case of comparison of
both the companies, the debt equity ratio of Serco group PLC is much better than the Capita
PLC because the ratio of Serco group PLC is much low than the other company. This

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indicates that the low debt equity ratio of the company is much preferable rather than the
aggressive measures (Collier 2015). Serco group PLC ability to finance its debts out of the
equity is much better than the Capita PLC.
Total Asset to debt Ratio:
This ratio is used for analyzing the financial leverage of the company in terms of
financing the liabilities of the company by utilizing the assets. From the evaluation of the
ratios of both the company it can be interpreted that Serco group PLC is much better than the
Capita PLC in the three financial year. This indicates that the financing capacity of Serco
group PLC in much better which means that the return generated by the company is higher
than the Capita PLC. This ratio is also evaluated by the investors of the company while
proposing any kind of investment decisions. The ability of the company in terms of
generating fund out of the asset of the company (Turner 2017).
Working Capital Ratio:
The working capital ratio of the company is needed to be evaluated in order to
identify the flow of cash in the business of the company. The working capital ratio denotes
that the current assets divided by the current liabilities. Positive working capital ratio of the
company indicates that the business of the company is able to generate positive flow of cash
from the operations of the business (Tayeh, Al-Jarrah and Tarhini 2015). If the operation of
the business is carried on smoothly then the working capital management of the company will
be strong in that case, which will further ensure that the company is able to pay off its
liabilities quickly. Strong working capital ratio of the company ensures that the company is
able to generate revenue out of the expenses incurred by the company.

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As per the evaluation of working capital ratio of both the company it can be
interpreted that the performance of Serco group PLC is much better than the Capita PLC. In
this case both the company is able to generate the positive flow of cash by considering the
expenses in the cash flow of the company. Serco group PLC is able to generate more positive
cash flow than the Capita PLC where in this analysis the company is performing better than
the last three financing year as per evaluation of the annual report 2015, 2016 and 2017.
Overall Financial Analysis:
Hence, from the above ratios evaluated it can be interpreted that the overall
performance in terms of all the evaluated ratio, the overall performance of Serco group PLC
in all the financial year which is the 2015, 2016 and 2017 evaluated from the annual reports

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of the company (Serco.com., 2019). The balance sheet and the profit and loss statements of
the company has also been thoroughly identified for analyzing the conduced ratios. The
financial analysis is important in that case to identify the financial strengths and the glitches
of the company and the recommendations made of improving the loopholes of the business of
the company.
The liquidity, profitability, long term solvency and the working capital ratio of the
both of the companies has been evaluated accordingly (Smith 2017). In case of biding
contract for the project, the business of the Serco group PLC will be a better option in that
case. While going for the big projects the financial performance of the company’s matters a
lot. As per analyzing the current three financial year 2015, 2016 and 2017 of both the
companies, it can be said that the business of Serco group PLC can be taken for granted in
order to start this project (Leuz and Wysocki 2016). In case of the Serco group PLC is staying
ahead to get accepted in such contract based biding project because the overall financial
performance of the company is much sounder than the other company.
The financial leverage of Serco group PLC is much better which means that the
leverage is not much aggressive of the company as per evaluation. If the risk of financing is
aggressive, then the company will be in a huge trouble to recover the debt of the company in
terms financing equity. Hence, the leverage of the company is evaluated which means that
degree of leverage plays an important role in the evaluation of the financial position of the
company (Williams and Dobelman 2017).
Limitations of such analysis:
The only limitations to such kind of analysis is that the analysis is restricted to only
three financial years which is 2015, 2016 and 2017. Hence, more the financial year
comparisons, the better is the picture of the financial analysis of the company (Feinstein

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2017). The comparisons in terms of company is also restricted in this conducted study which
is the Serco group PLC and the Capita PLC. Both the performance of the company is
analyzed accordingly from the balance sheet and the profit and loss statement in the annual
reports of the companies.
Task B
Case Study on the collapse of Carillon
In the year 2018, there has been a collapse of carillon which means that the company
has gone into liquidation due to some of the major financial crisis (Gitman, Juchau and
Flanagan 2015). On 10 July 2017, the announcement made by the board of directors of the
company is that the company would generate the revenue of £845 million. In that year, the
chief executive of the company resigned and thus it created a big impact on the performance
of the company. The company lost the value of the shares which is about 70% of the shares.
Financial Risk
The financial risk associated in the collapse of Carillon is that in the year 2017, the
company paid dividend of about £333 million more than the company able to generate cash
flow out of operations. This kind of poor decision made by the company created a big impact
in the performance of the company which finally led the company into liquidation. The
payment of such huge dividend in order to satisfy the investors of the company was a huge
decision. The resignation of the chief executive also a huge loss for the company in such
managerial decision making system. There was another reason for such kind of liquidation
which means that due to the aggressive accounting and the declaration of profit. The
company’s ability to generate cash was low than the amount of profit declared by the
company. The aggressive accounting system of the company, led the company to huge
borrowing which means that the leverage of the company is very high and risky (Barnes

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2016). This is another reason for such liquidation which happened in the year 2018. Hence, it
can be clearly noted that the dividends paid by the company is from the borrowings of the
company where the risk of the company became very high in that case. Due to certain crisis
the upper level management of the company ordered the liquidation of the company.
Strategic Supplier
Carillon acted as a strategic supplier to the government which further means that the
company takes various projects or contracts related to the government (Christensen, Nikolaev
and Wittenberg‐Moerman 2016). The company received major contracts from the
government when the company was going through some of the problems regarding the profit
of the company. The company was going through loss at that time which further signifies that
the company was undergoing with some of the major contracts. The NHS had a number of
contracts with the Carillon. Hence, before bidding for the contracts it is needed to analyze the
financial ratios, the liquidity strength of the company and the overall performance of the
company.
Due to the collapse of Carillon in terms of the liquidation of the company, there are
major contracts of the government hampered due to such liquidity crisis of the company.
There are further investigation regarding the liquidation of the company (Modarres 2016).
There were payment made to the creditors of the company during the time of winding up of
the company. The payment made to the suppliers of the company was also huge in that case
there has been a report regarding the insolvency of the company and further investigation of
such liquidation was carried out during the process.

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Ethical issues and the things learned from such collapse
The issues was in the policies of the company and auditing played a significant role in
such practices (Robinson et al. 2015). The duty of the auditors is to notice the financial
statements of the company and the company’s overall performance on the current basis.
Hence, the policy setter of the company in terms of accepting the contracts or in other words
it can be said that while bidding for the contracts it is important to go through the policies of
the company. There must be transparency in the financial system of the company which
means that the company must be free from the material misstatements. The record of
accountability of the company must be kept into record in order to track the performance of
the company. Such collapse just like the liquidation of Carillon can happen with any
company if the financial statement of the company is not properly audited. The government
must also take a note of the financial performance of the company before handing them any
sort of long term or the short term projects of the company. The workplace of the companies
must be satisfactory or otherwise there can be some of the ethical issues associated with the
employees of the company in that case. In case of performing the liquidation of the company
there are certain consideration which the companies have to undertake as per ethics of the
company during the time of winding up of the company (Getmansky et al. 2016).
The insolvency scandal of Carillon is one of the major scandal in UK. This affected
the number of stakeholders of the company including the governmental entities. There were
many shortcoming in the upper level management of the company which means there were
glitches in the executive directors of the company (Chang 2016). The directors of the
company are responsible for such kind of decision of the company. Hence, there are certain
things which can be learned from the scandal of Carillon. The contracts of the company must
be revised in that case which means that the company thought that by financing the degree of
leverage of the company the company will be able to manipulate the losses and further bring

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into the profitability of the company. Such kind of scandal in that case must be avoided in
order to ensure the smooth and effective performance of the company.
Critical analysis and recommendation of the scandal
From the above scandal it can be said that the efficiency and the liquidity performance
of the company must be analyzed in order to hand major contracts of the government
(Reinhart and Sbrancia 2015). Hence, it falls under the ethics of the directors and the upper
level management of the company in order to bring the transparency in the accounting and
the financial management of the company. The company must ensure that the annual reports
of the company must be free from such kind of material misstatement happens in the
company. Such fraudulent activities will hamper not only the performance of the company
but also will disturb the stakeholders of the company in various perspective.
In that case, the management system of the company must be strong in order to
deliver the financial performance from where the stakeholders of the company will get
confidence to further invest in the business proposals of the company (Balazs et al. 2016).
The borrowings of the company must be kept in record and the company must try to make
early payments with the process of generating cash into the system (Chen, Filardo and Zhu
2016). However it can be said that, the working capital management of the company must be
strong in that case. If the working capital of the company is strong and effective then the
company will be able to generate positive flow of cash into the system.
In order to ensure smooth flow in the business performance of the company it is
required to bring positive inflow of cash into the system. The management of any business
must be strong and the accuracy must be maintained. The main loopholes in such kind of
scandals is due to the lack of transparency in the management system of the company. Hence
the company must concentrate to constantly improve the profitability out of the business

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operations of the company. This will automatically attract the potential investors if the
financial performance of the company is strong and efficient.
Attracting the potential investors will automatically increase the valuation of the
company and shareholders fund. The process to increase the valuation of the company is by
seeking advice from the top level management. The responsibility or objective of the
management is to increase the profitability of the company. Increasing the sales of the
company is significant which will automatically increase the revenue and will definitely put
an impact on the overall performance of the business in that case.
The performance of the company must be improved in order to avoid the liquidation
or the winding up of the company (Otley 2016). Before payment of any dividend or any kind
of payment scheme it is important to take a note of the cash operation or the cash flow of the
company. As financial leverage plays significant role in such financial crisis where the big
companies tries to leverage or finance by opting for the debenture or the long term
borrowings of the company. Thus it can be said that if the borrowings of the company is not
meet according to the terms of the company then the liability side of the company will
automatically increase. Thus in order to decrease the liabilities of the company the company
must take into account that the operations of the company or the working capital of the
smooth and effective. If the liabilities of the company is not maintained properly by the upper
level management of the company then the company will face such long term difficulty
which is the crisis in the financial system of the company. While accepting any kind of long
term contracts, the company must take into consideration the financial performance of the
company for the last three or five annual reports of the company. The annual report of the
company will automatically give some of the past performance regarding the strength and
weakness in the financial management of the company.

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It is the duty of the company’s executives to revise the policies of the company
otherwise such collapse like the Carillon may happen in that case (De Grauwe and Grimaldi
2018). The interest of the stakeholders of the company must be improved in that case by
improving the performance of the company. Critical financial analysis must be done in order
to improve the performance of the company. The auditors of the company must be
independent while performing the audit duties and thus will ensure smooth flow of business
only if the financial statement of the company is properly audited. The auditor of the
company must be independent otherwise there will be a chance of material misstatement. In
that case, any kind of fraudulent activities and the material misstatement of the company
must not be ignored while performing the audit of the company. The duty and responsibilities
of the management system of the company must be strong which will improve the
performance of company’s business (Barr and McClellan 2018). The business performance is
important which will automatically eliminate such kind of collapse or the possibility of
winding up of the company just like the collapse of Carillon. The company must keep notice
regarding the production of the company on interval basis. The production report of the
company must kept into notice as it will definitely impact the performance of the business of
the company. Such collapse will also put an impact on the government in the ongoing
contracts which is undertaken by the authorities of the company (Nia 2015).
However the government must keep in mind while handing the projects of the
company by considering some of the significant parameters which are the ratio analysis,
analyzing the cash flow system of the company and further the balance sheet of the company.
The only duties of higher authorities of the company is to improve the overall financial
performance of the company by taking some significant measures (Pilbeam 2018).

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Conclusion
From the above discussion it can be concluded that, it is the duty of the government to
analyze the current financial performance of the company before settling for any long term
projects (Investors.capita.com., 2019). As the project is such a huge business that if the
company goes for winding up during such takeover of contract then it will be a problem for
the government because it is also the loss incurred by the government in such project. Hence
the financial viability of any kind of business is important otherwise the company may end up
like the collapse of Carillion.

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Appendices

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Appendices
Lists of Formulas
Return on Asset = Net Income
Total Asset
Operating Profit Margin = Operating Profit
Revenue
Debt Equity Ratio = Debt
Equity
Total Asset to Debt Ratio = Total Asset
Debt
Current Ratio = Current Asset
Current Liabilities
Quick Asset Ratio = Current Asset−Inventories
Current Liabilities
Working Capital Ratio = Current Asset
Current Liabilities