Assignment on Finance (PDF)

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Project Report: Finance

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Introduction:
In this report, the financial analysis study has been done on Smiths Group to identify
the company’s performance in the industry, Hitachi limited and industry performance have
also been assessed in the report. In the report, the overall financial performance of the
company has been evaluated through study over the financial statement along with that, the
valuation study has also been performed on the company so that the better result could be
made. A new project of the company has also been studied to recommend the top level
management that whether the project should be accepted or not.
Company brief:
Smith Group plc is British company which is operating its business at multinational
level. The company is operating its business under the engineering industry. Headquarter of
the company is in London, UK. The company has its operation under the engineering
industry. It is world’s largest manufacturer of sensors for explosive detection, chemical
agents, narcotics, biohazards and contraband (Home, 2018). The company has 5 divisions
which are John Crane Inc, Flex-tek, Smiths Medical, Smiths Detection and Smiths
Interconnect.
Financial analysis:
In order to evaluate the performance and the financial changes in Smith Group plc,
ratio analysis method has been applied on the company and it has been compared with the
ratios of Hitachi plc, one of the main competitors of Smith group plc. The ratio analysis study
of Smith group plc and the competition analysis is as follows:
Profitability analysis:
Profitability analysis is an analysis process which evaluates the profitability level of
the business in order to determine the efficiency and performance level of the business. It
evaluates the total earnings of the business on various bases to make the decision about profit
level (Gapenski, 2008). Profitability analysis measures the margin and return of the business
mainly.
In case of Smith group plc, ROCE and profit margin ratio have been calculated.
Return on capital employed ratio brief that how much return have been generated by the
business against the total capital of the business (Barlow, 2006). The ratio analysis briefs the

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11.63% ROCE of the company which is quite higher than the ROCE of Hitachi limited i.e.
9.29%. On the other hand, net profit ratio brief the total profit earned by the company against
the sales revenue of the business. It briefs the 17.38% net profit level of the business which is
higher than 3.87% net profitability ratio of Hitachi limited (Performance appendix).
The profitability analysis expresses that Smiths group plc’s performance is quite
better and thus it is a good option in order to make an investment as higher earnings per share
could be achieved by each of the shareholders of the company.
Liquidity analysis:
Liquidity ratio analysis is an indicator to recognize whether the company has enough
current and quick assets in order to meet the short term obligation of the company. It
evaluates whether the entire short term debt obligation could be met by the company through
the available current assets or not (Higgins, 2012). It is mainly calculated to identify the
liquidity risk and working capital efficiency level of the business.
In case of Smith group plc, the current ratio and quick ratio has been calculated by the
company. Current ratio of the business indicates whether the business is capable to meet the
short term obligations. 2:1 and 1.3:1 current ratio and quick ratio are normal for the industry
(Madura, 2014). On the basis of study over Smith group plc, it has been found that the current
assets of the company are 2.34 times of current liabilities of the business which is quite
higher than the Hitachi current assets level i.e. 3.87% (Annual report, 2017). Further, the
quick assets define about the total quick assets (those assets which could be easily converted
into cash) against the current liabilities of the business. The calculations explain that the
quick ratio of the business is also higher than Hitachi limited. Quick assets of the company
are higher than 1.82 times of current liabilities of the business (Performance appendix).
Through the calculations, the liquidity risk of the business is least as the level of
current assets and quick assets of the business are higher. However, it has also been found
that in order to maintain the higher current assets, business has to bear higher expenses which
could be reduced through reducing the level of current assets a bit.
Capital structure analysis:
Capital structure ratio analysis is an indicator to recognize that how much funds have
been generated by the business and what is the proportion of different funds in the total
capital of the business. It evaluates that whether the leverage risk and capital risk of the

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business is moderate or higher (Hillier, Grinblatt and Titman, 2011). It is mainly calculated to
identify the efficiency level and capital management level of the business.
In case of Smith group plc, the gearing ratio and interest coverage ratio have been
calculated by the company. The gearing ratio of the business indicates that how much funds
have been generated by the debt and what is the proportion of total debt against the total
resources of the business (Weaver, Weston and Weaver, 2012). In case of Smith group plc, it
has been found that the gearing ratio of the company is 42.7% of total assets of the business
which is quite higher than the Hitachi gearing level i.e. 30%. The gearing ratio of the industry
is around 40% in the industry. Further, the interest coverage ratio defines about the total
earnings before interest and tax against the total interest expenses of the business
(Performance appendix). The calculations explain that the interest coverage ratio of the
business is lower than the Hitachi limited i.e. 29.25. Interest coverage ratio of the company is
7.56 times higher than the interest expenses (Annual report, 2017). Interest coverage ratio
must be positively higher than 1.
On the basis of the calculations, capital structure level of Smith is quite better as the
financial leverage position of the company is good. The company could easily manage the
leverage and financial risk in the market and all the other factors have also been managed by
the company at better level.
Asset efficiency ratio:
Asset efficiency ratio analysis is an indicator to recognize about the total assets and
working capital management of the business. It evaluates that whether the business is able to
manage the operations and daily activities in minimum capital requirement (Ward, 2012).
In case of Smith group plc, the creditor’s turnover ratio and stock turnover ratios have
been calculated. Both the ratios define that creditor’s turnover ratio of the company is quite
lower than the Hitachi limited and stock turnover ratio of the company is quite higher than
Hitachi limited i.e. 81.70 and 73.10 (Annual report, 2017). It expresses that the working
capital requirement of the company is quite average.
On the basis of the calculations, it has been determined that the company could
improve the working capital requirement through improving the creditor’s turnover days and
reducing the stock turnover days (Performance appendix).
Shareholder ratio: