Strategic Financial Analysis - Methods and Contemporary Approaches

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Strategic financial analysis

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Executive Summary
The present report is developed for providing an insight into different methods of
strategic financial analysis adopted by business companies for financial evaluation. This has
been carried out by conducting strategic financial analysis of the two companies that are Booker
and Tata&Lyle. The financial analysis is carried out with the use of trend analysis, ratio and du-
Pont analysis that Booker financial performance is better than that if its competitor Tate&Lyle.
However, it is recommended to the financial managers of both the companies to adopt the use of
contemporary methods such as EVA, CAPM and efficient market hypothesis for conducting
financial analysis to overcome the drawbacks presents in the traditional methods.

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Contents
Executive Summary.........................................................................................................................2
1.0: Introduction..............................................................................................................................4
2.0: Brief Introduction of Two Companies......................................................................................4
3.0: Financial Analysis Method.......................................................................................................5
3.1: Ratio Analysis...........................................................................................................................6
3.1.1: Profitability Ratio Analysis...................................................................................................6
3.1.2: Liquidity Analysis.................................................................................................................8
3.1.3: Efficiency Ratios.................................................................................................................10
3.1.4: Investors Analysis................................................................................................................12
3.2: Common Size Analysis..........................................................................................................14
3.2.1: Vertical – SOPL, SOFP and SOCF.....................................................................................14
3.2.2: Horizontal – SOPL, SOFP and SOCF.................................................................................17
3.3: Du-Pont Analysis of Booker for last five years......................................................................20
4.0: Merits and Demerits of each of analytical methods used to analyse the performance of
company.........................................................................................................................................22
4.1 Ratio Analysis..........................................................................................................................22
4.2 Trend Analysis (Horizontal &Vertical Analysis)....................................................................23
4.3: Du-Pont Analysis....................................................................................................................24
5. Contemporary Methods.............................................................................................................24
5.1 Capital Asset Pricing Model....................................................................................................24
5.2 Economic Value Added (EVA)...............................................................................................24
5.3 Efficient Market Hypothesis....................................................................................................25
6.0: Conclusion and Recommendation..........................................................................................25
7.0: References..............................................................................................................................26
8.0: Appendixes.............................................................................................................................28

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1.0: Introduction
The process of Strategic Financial Analysis (SFA) can be described as the task of
preparing the financial plan for development of business goals and objectives to be achieved.
The financial plan is developed for determining the ways that a business can adopt for achieving
its strategic goals and objectives. It can be regarded as a value-creating framework that helps
senior executives to examine the business strategy, evaluate its performance and thereby valuing
the business. The financial analysis is regarded to be very important for businesses to undertaken
an overview of the financial position of a company that can assist in its future financial planning
process. The financial management decisions help a company to make important investment
decisions regarding its future growth and development. The financial analysis enables a company
to develop adequate financial strategy that results in maximization of shareholder value. The
financial strategy developed though conducting financial evaluation helps a company to gain an
insight into the financial resources possessed for achieving its strategic goals and objectives
(Ehrhardt and Brigham, 2016).
The main objective of the report is to conduct a critical assessment of the principal
method used for analyzing the financial position of a company as an outsider. The method of
financial analysis includes calculation of financial ratios, vertical and horizontal and DuPont
analysis. Also, it intends to present the major drawbacks that re present within the financial
analysis methods and proposed more effective methods that can be sued for overcoming these
drawbacks. The overall financial analysis is carried out by presenting working examples from the
selected listed companies that are Booker Group PLC & Tate &Lyre PLC.
2.0: Brief Introduction of Two Companies
Booker Group PLC is recognized as the largest food wholesale operator within the UK
that is involved in providing both branded and private label goods to about 40,000 customers. It
operates convenience stores, grocers, pubs and restaurants and as such the group comprises of
Booker Wholesale, Booker Direct, Classic Drinks, Family Shopper and many other business
units. The major product of the company includes grocery, fresh food, beers, wines, tobacco and

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alcoholic products. The non-food product items of the company include stationery, furniture,
office equipment and clothing (Booker, 2017).
On the other hand, Tate & Lyle PLC is recognized as a global supplier of food and
beverage ingredients to industrial markets. The company is headquartered within the UK and has
attained a leadership position within the food and beverage industry at a global level with the use
of its innovative technology to transform the raw materials and developing large-scale
manufacturing plants. The high manufacturing capabilities of the company has enabled it to
produce high quality ingredients for the customers. The company aspired to attain a global
position in providing special food ingredients and solutions.
3.0: Financial Analysis Method
Ratio Analysis
The method of ratio analysis has proved to be very effective for gaining an analysis of the
financial position of a company. It is regarded to be a quantitative method of analysis that can be
effectively sued for evaluating different financial aspects of a company such as determination of
its efficiency, liquidity, profitability, solvency and others. The different financial ratios are
calculated with the use of financial information disclosed by a company in its financial
statements.
Vertical Analysis
Vertical analysis can be regarded as a method of comparing the financial statement in
which each line item can be expressed as a percentage of base figures such as income statements
can be expressed as a percentage of gross sales (Gibson, 2008).
Horizontal Analysis
It is also known as trend analysis that involves expressing the financial items in the
financial statements as a percentage of the amount in the baseline year and taking the baseline
amount to be 100%.
DuPont

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The method of financial analysis involves analyzing decomposing the different metrics of
return on equity for assessing the financial performance of a company (Monks and Lajoux,
2010).
3.1: Ratio Analysis
3.1.1: Profitability Ratio Analysis
Net Profit margin
Net profit margin can be described as the amount of profit realized by a company after
meeting all the operational expenses and is calculated as: (Arnold, 2013)
Net Profit Margin=Net Income/Total Revenue
2013 2014 2015 2016 2017
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
1.90%
2.25% 2.48% 2.56% 2.89%
B o o k e r - 5 y e a r s n e t p r o fi t m a r g i n
BK
2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7
1.90%
2.25%
2.48%
2.56%
2.89%
7.83%
8.90%
0.17%
5.14%
9.26%
N et P r o fi t M a r g i n
BK T&L
(Booker, 2013 to 2017) and (Tate & Lyle, 2013 to 2017)

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The comparison of the net profit margin ratio’s of both the companies over the financial
year 2013-2017 have depicted that its net profitability have increased over the selected financial
period. The comparison of the ratio with its competitor Tate &Lyle have revealed that its net
profitability is higher than Booker over the selected financial period. This means that Booker
need to reduce its operational costs for realizing higher profitability for outperforming its
competitors.
Return on Capital Employed
It is a financial ratio that is sued for measuring the profitability and effectiveness of a
company in using the capital base. It is calculated as: (Ackert and Deaves, 2009)
ROCE=Earnings before interest and tax (EBIT)/Capital Employed
2013 2014 2015 2016 2017
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
18.07% 19.74% 21.28% 22.61% 25.18%
B o o k e r - 5 y e a r s r o c e
BK
2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7
18.07%
19.74%
21.28%
22.61%
25.18%
15.19%
12.78%
1.95%
7.07%
11.22%
RO CE
BK T&L
(Booker, 2013 to 2017) and (Tate & Lyle, 2013 to 2017)

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The ratio of the company BK has increased from 2013-2017 stating that its efficiency to
use capital for generating profits is on increase. On the other hand, the ratio of the company Tate
&Lyle is lower in comparison to BK depicting that its efficiency to utilize capital base is not so
effective in comparison to Booker. Booker is having high capital turnover which indicates that it
trades more for each dollar of capital invested. Tate & Lyle has realized a constant decrease in its
ROCE despite of increase in the net profitability which can be linked to its poor management by
the Chief Financial Officer.
3.1.2: Liquidity Analysis
Current Ratio
It measures the ability of a company to meet effectively its financial obligations from the
asset base and can be calculated as: (Moles and Kidwekk, 2011)
Current Ratio=Current Assets/Current Liabilities
2013 2014 2015 2016 2017
0.75
0.80
0.85
0.90
0.95
1.00
1.05
0.87
0.98 0.99
0.95
1.01
Booker - 5 years current ratios
BK