Financial Ratio Analysis of Two Companies

This assignment delves into a comparative financial analysis of two companies: Wolseley Plc and T&L. Students are required to utilize diverse financial ratios, including liquidity, profitability, solvency, and activity ratios, to evaluate the financial health and performance of both entities. The analysis extends to common-size and horizontal analyses of the selected companies' financial statements (SOCI, SOFP, SOCF) for a comprehensive understanding of their financial position and trends over time.

Strategic Financial analysis

Table of Contents
INTRODUCTION................................................................................................................................3
SFA and its significance....................................................................................................................3
Objectives.........................................................................................................................................3
Company overview...........................................................................................................................3
Analysis methods..............................................................................................................................3
RATIO ANALYSIS..............................................................................................................................4
Profitability.......................................................................................................................................4
Liquidity...........................................................................................................................................8
Efficiency/activity.............................................................................................................................9
Leverage.........................................................................................................................................12
Investors..........................................................................................................................................13
COMMON-SIZE................................................................................................................................15
Vertical analysis..............................................................................................................................15
Horizontal analysis.........................................................................................................................15
Du-Pont analysis.............................................................................................................................15
Segmental analysis..........................................................................................................................15
ADVANATAGE AND DISADVANTAGE........................................................................................17
Ratio analysis..................................................................................................................................17
Common-size..................................................................................................................................17
Du-pont...........................................................................................................................................17
Segmental analysis..........................................................................................................................18
CONCLUSION AND RECOMMENDATION..................................................................................18
Conclusion......................................................................................................................................18
Recommendation............................................................................................................................18
CONTEMPORARY METHODS.......................................................................................................19
Capital-assets-pricing-model..........................................................................................................19
Efficient market hypothesis (EMH)................................................................................................19
Economic value added....................................................................................................................19
REFERENCES...................................................................................................................................20
APPENDIX........................................................................................................................................22

INTRODUCTION
SFA and its significance
In the modern corporate world, companies are require to examine and interpret their
performance as well as financial health so as to frame better strategies and make solid decisions for the
success. SFA make use of both the internal as well as external resources for the performance evaluation
and enable managers to manage their cost of capital, creditworthiness/liquidity, financial risk and
optimal utilization of business assets (Vogiatzi, 2015). This process involves identifying, measuring,
monitoring and evaluating financial risk by adopting various techniques like horizontal, vertical and
ratio analysis method. It is very important for the directors and decision-making authority to assess and
analyze their financial performance and make better decisions to achieve set goals.
Objectives
The aim of the present assignment is to illustrate the answers with worked examples of dynamic
analysis of 2 companies. In this regard emphasizes is given on financial performance evaluation of two
companies, named Tate & Lyle Plc and its competitor, Wolseley Plc. In order to make both the internal
and external analysis, ratio analysis and horizontal and vertical analysis of SOPI, SOFP and SOCF have
been done. In addition to this, importance of contemporary methods like CAPM, EMH and EVA will
be discussed to measure corporate performance. Moreover, the report also highlight the major
shortcomings associated with associated contemporary analysis techniques like ratio analysis,
horizontal analysis of SOPI, SOFP and SOCF, Du-pont and segmental analysis of Tate & Lyle Plc and
Wolseley Plc. In addition to this, importance of contemporary methods like CAPM, EMH and EVA will
be discussed to measure corporate performance.
Company overview
Tate & Lyle (T&L) is a UK-based public limited company founded in the year 1921, listed on
LSE and headquartered in London, England, UK. It is a global agriculture business which manufacture
variety of products like corn, tapico, oats and others using different ingredients henceforth, operates in
food processing industry. Another company that has been chosen for comparative analysis is Wolseley
plc that is a multinational material distribution company for construction of building. It is one of the
leading distributors of heating and plumbing products in the world. Moreover, its product portfolio
consists of pipe, air conditioning, heating, ventilating, plumbing, waterworks and refrigeration and
carrying out operations in UK, US, Canada, Denmark and other geographical region.

Analysis methods
Key performance indicators (KPIs) common-size statement, ratio analysis and Du-pont analysis
technique have been used for the performance evaluation. Moreover, trend analysis will be done by
applying horizontal analysis method, in which, performance will be evaluated by comparing current
performance with the base year to determine that whether it has been increased or decreased.
RATIO ANALYSIS
This is considered as an effective way to measure corporate performance by computing different
ratios. Moreover, it also helps to examine performance over the years via comparing ratios of current
year with the previous. In such respect, number of ratios has been computed regarding profitability,
solvency, assets utilization efficiency and liquidity position to assess that whether company’s
performance has been increased or decreased (Masubuchi, 2013). In addition to this, comparative
evaluation assists decision-maker to identify such company that is performing excellent in the market.
Profitability
The surplus of revenues remains after subtracting incurred expenditures is a measure of profit or
loss, presented below:

Interpretation: In all the years, T&L’s GM is comparatively higher than Wolseley and also
increasing rapidly over the period of 5 years ranging from 30.21% to 37.54%. It indicates that T&L is
earning more profitability due to maximum revenue and effective control over direct cost. Strong brand
position in China, Innovative and Commercial development (ICD), globalized operations, M&A, high
customer demand are the reasons for higher gross margin.
Interpretation: T&L’s NM is got decreased from 10.01% to 6.92% due to higher operating
expenses whereas Wholseley’s NM got increased from 0.42% to 4.57% at the end of the year.
Although, T&L profitability got decreased but still, it is comparatively larger than that of Wolseley

representing that company is earning more yield on their sales turnover and operating well in the
market (Catita and et.al., 2014). Firm Tough market competition, external market forces and volatility
in market conditions are the reasons for decline in performance.
Interpretation: T&L’s OM dropped down from 13.08% to 5.39% whereas Wolseley’s OM
shows rising trend as it got enhanced from 1.58% to 5.39%. Control over operating expenditures and
rising operational income are the most important reasons for better and increased return in Wolseley. At
the end of the year 2016, both the company’s OM shows a very little bit differences of 0.07% only but
still, declined trend in T&L cannot be considered good. Supply issue, ineffective monitoring of the
managers, irregular supervision, intense competitive age are the reasons for poor perofmrnace in T&L.
Interpretation: ROCE of T&L shows volatile trend as till 2015, it got decreased from 18.26%

to 1.90% whereas in the next year, it got enhanced to 7.01% which is good. However, on the contrary
to this, Wolseley’s return got improved from 4.35% to 17.70% in the year 2016. Volatility in revenues,
cost and operational expenditures are the factors responsible for changes in ROCE and currently, it is
higher in Wolseley representing that it is earning greater return on their total capital employed in the
business (Verschoor, 2015).
Interpretation: Wolseley’s ROA got increased from 0.76% to 7.31% in 2014, then dropped
down to 2.99% and again got enhanced to 8.43% in 2015. On the other hand, T&L’s ROA inclined
from 10.24% to 10.27%. However, it shows a sudden decline in 2015 to 1.21% due to heavy decrease
in net yield to £30m. After this, 2016 shows a positive change and improved ROA to 8.43% because of
higher net earnings to £163m. Comparatively Wolseley generated greater return on their total corporate
assets which is considered good and indicates solid performance (Majors and Johnson, 2015).

Interpretation: Wolseley’s ROSF got inclined from to 7.77% to 23.95%. This happened
because firm earn good amount of profit in its business but its equity remain stable. However, T&L’s
ratio shows a continuous decreasing trend from 31.16% to 3.02% in 2015, but in 2015, it imrpoved to
16.61%. This happened because firm make fresh issue of shares in the market. Although improved
ratio is a good sign indicating that in 2016, both the company are offering greater return to their
shareholders, but still, greater ROA in Wolseley demonstrating that its investors are generating more
yield.
Liquidity
This ratio helps to measure that whether companies have enough amount of nearby
resources/current assets or not to make their deferral payments to current liabilities, more importantly,
creditors.
Interpretation: CR indicates relationship between two variables of balance sheet that are
current assets and current liabilities. Both the company’s CR got decreased in 2016, as in Wolseley, it
came down from 1.69:1 to 1.46:1, however, in T&L, it dropped down from 1.91:1 to 1.63:1. The main
reason behind decline in current ratio is that firms are mertting their working capital needs by taking
more and more amount of short term loan from banks and suppliers. Comparatively, it is still higher in
T&L shows that it is highly able to repay their short-term liabiliies like payables within extended credit

duration (Ball and et.al., 2015). But still, both the company’s ratio are still far away from the ideal ratio
of 2:1 depicting that managers need to maximize their CA and decline CL to reach standard ratio.
Interpretation: This ratio helps to examine creditworthiness without taking into account
closing inventory and prepaid expenses under the head current assets. In T&L, QR shows a decreasing
trend as it dropped down from 1.24:1 to 1.03:1. However, Wolseley’s ratio got decreased from 1.06:1 to
0.89:1. 1.0:1 ratio reflects that company achieved the ideal ratio of 1:1. Ratios of both firms declined
because amount of cash in the business and investnmen in security is reducing consistnetly year by
year. Contrary to this, Wolseley’s QR came down from 1.01 to 0.84 and also it is lower than standard
ratio demonstrating that T&L is able to meet their short-term obligations on right time.
Efficiency/activity

Interpretation: It indicates the time period to receive money from the debtors, in T&L, its
receivable days got increased to 31.2 days to 37.66 days whilst Wolseley’s receivable days shows a
little bit increased from 43.98 days to 44.77 days. But still, lower days in T&L is considered good
because it demonstrating that company is getting their receipts promptly from the accounts receivables
for the strong cash management (Tamir, Griffel and Bertoni, 2013). Poor performance is observed in
case of Wollesley because its cash management strategy is not strong. Hence, it must review its cash
management strategy and must make modifications in same.
Interpretation: In 2013, T&L inventory days shows a sudden incline to 814.88 days and after
the period shows a sudden fall to 86.36 days. However, at the end of the period, stock days shows nill
balance indicating that T&L did not supplied any credit to the debtors and make sales only on the cash
and prompt basis. However, Wolseley’s ratio is 65.32 days reflecting that its warehoused stock item

take 65 days to convert the item into sales. Contary to this, T&L goods moves into actual sales very
frequently. Woleselly is making purchase of goods in large quantity and same are not sold in the market
at fast pace. Due to this reason its inventory turnover days are high. Hence, firm must purchase goods
in small quantity from the suppliers.
Interpretation: Similar to stock days, T&L’s payable days also shows a sudden increase to
441.40 days in 2013 and thereafter came down to 69.48 in next year. On the contrary, Wolseley’s
creditors days moved upward from 62.27 days to 69.64 days. Zero days in T&L depicts that managers
decided to make transactions only on cash basis and pay suppliers at the point of original purchase
(Bodie, Kane and Marcus, 2014). Creditors days increase in case of Wolleseley and this means that
firm is taking more time to make payment to creditors. This happened because firm cash management
strategy is not so strong. Firm must try to recover debt as fast as possible from debtors and relevant
amount must be used to make payment to suppliers.

Interpretation: This ratio is used to measure the time period that how long company will take
to retain cash prior to the sale of inventory (Thomson, 2014). T&L’s CCC is comparatively less to
37.66 days whereas T&L’s CCC is higher to 40.45 days. It demonstrates that T&L’s cash is retained for
shorter period as compare to that of Wolseley.
Interpretation: ATR in Wolseley’s got reduced from 1.88 times to 1.77 times reflects that
managers and executives are not utilizing their total assets effectively to generate improved turnover.
This happeneed because firm operations are very complex and due to this reason managers are not able
to utlize entire asset in proper manner. But still, it is comparatively more than Wolseley as its ratio is
0.92 times shows that maximum utilization of business assets, which is good.

Leverage
Interpretation: D/E ratio of Wolseley gone upward from 0.22:1 to 0.40, whilst T&L’s ratio
came down from 0.78 to 0.53. The ratio in case of Wollsely increase because it increase its business
operations at rapid rate. Hence, in order to fund operations it take huge amount of debt from banks.
Decreased ratio of T&L indicates les financial risk due to repayment of long-term debt and higher use
of equity funds (Uechi and et.al., 2015). Moreover, it is near to ideal ratio of 0.5:1 shows that T&L’s
managers managed their capital structure to meet their long-term obligations on time as per repayment
schedule.

Investors
Interpretation: EPS of Wolseley’s shows rapid increase from 0.2 to 2.58 which is a sign of
better return to the investors. However, T&L’s EPS came down from 0.64 to 0.34 in 2016. This
happened because firm issue shares in the market and return increase at slow pace. Hence, EPS of the
firm declined. High net yield available for equity shareholders in Wolseley enable managers to pay
solid financial return to their investors to satisfy their return expectations.

Interpretation: Wolseley’s DPS shows continous rising trend as it got increased from 0.36 to
0.94, however, T&L’s ratio shows little bit fluctuations and in 2016, it rose from 0.27 to 0.28. This
flcutuatioon is observed in case of T&l because it is not following a stable dividend policy in its
business. Graph clearly depicts Wolseley’s shareholders generate good dividend on their money
invested in the establishments (Edelman and et.al., 2016).
Implications of ratios
Both firms are financially sound as their profit is increasing consistently and liquidity position is
good. Apart from this debt and equity proportion is better. However, there are some issues in the
efficiency ratios. But this does not mean that specific is facing credit crunch in its business.
COMMON-SIZE
It implies for the financial statement which presents all the amount in the form of percentage by
taking into account the common base. On the basis of this aspect of income statements are evaluated on
the basis of sales figure. In this way, it facilitates analysis between the companies to the large extent. In
this way, by presenting the elements in the form of percentage fair view of the financial statement can
be presented. Along with this, in balance sheet all the elements are also displayed in the form of
percentage. On the basis of this aspect, by evaluating the amount of assets and liabilities in against to
the related total amount fair view can be presented of the balance sheet to the large extent.
Vertical analysis
From vertical analysis it has been assessed that COGS of T&L decreased from 69.79% to 0% at
the end of accounting year 2016. Operating expenditure of the firm also inclined from 17.13% to
94.61%. On the other side, income of the company moved from 13.08% to 5.39%. Hence, it can be said

that business organization needs to make modification in the existing strategic and policy framework.
Attached in Appendix
Horizontal analysis
Attached in Appendix
Du-Pont analysis
Interpretation: As per the above table, it can be seen that in 2012, ROE of T&L is higher to
29.53% whereas Wolseley’s ROE is comparatively lower to 1.82%. However, in 2016, changes in ROE
bring Wolseley to greater level as it’s ROE reached to 22.70% whereas T&L’s ratio dropped down to
15.86%. It indicates that Wolseley’s investors are more satisfied as they are generating comparatively
better yield on their total invested money.
Segmental analysis

Interpretation: As per the graph, it can be seen that in 2016, T&L’s revenue from specialist
food ingredients got improved from £865m to £897m whereas revenue from bulk ingredients got
decreased from £1476m to £1458m. In total, sales from continued operations got improved from
£2341m to £2355m whilst from discontinued operations, it droppped down by £2m from £15m to
£13m. Rising trend in revenue is considered good to maximize business performance.
ADVANATAGE AND DISADVANTAGE
Ratio analysis
Although ratio analysis helps to compare each and every elements of financial statements and
provide assistance to the managers for both the internal and external analysis, but still, it provides
information regarding past or historical performance only without any assistance to anticipate or
predict future performance. Moreover, it is not useful especially in cross-industry comparison.
Moreover, it does not take into account external market volatility and fluctuations such as changing
legislation, government policies, inflation rate, environmental conditions, technological advancement,
level of competition and others which limit the objective of analysis (Donovan, 2016). In addition to
this, comparison does not consider accounting policies, convention, rules and regulations to record
monetary transactions in the financial statement that directly impacts the usefulness of ratio analysis for
performance evaluation.
Advantage:
 This technique is easy to understand and enable business analyst to compute the ratio of each
and every item of SOCI, SOFP and SOCF to total revenues, assets and liabilities.
 It helps to predict movement in each item over the period via examining trend. =
Disadvantage:
 One of the most important limitation is it does not consider change in inflation rate which have
a huge impact on the reported figures in the annual accounts (Subho, 2013).
 Inconsistency in the accounting policies, procedures and concepts limits the significance of
vertical analysis.
 It does not provide any assistance to address qualitative factors and fail to convey information
in the period of seasonable fluctuations.
Du-pont
Merit:
The best benefit of Du-pont analysis is it enable analytical to evaluate overall corporate
performance and financial status as well by measuring profitability margin, assets utilizing efficiency

and financial leverage as well.
Demerit:
Inaccurately reporting of data in the income statement and balance sheet directly influences the
result of Du-pont analysis and may lead to take harmful and misleading decisions. Moreover, seasonal
variability which is directly associated with the industry and distinguish accounting policies also may
lead to distort ratios and lead to misleading interpretation (Gelman and et.al., 2014).
Segmental analysis
Advantage:
It helps to segregate total turnover into various sub-parts and helps to analyze performance
more effectively. This in turn, managers can make better decisions and formulate strategies to enhance
performance.
Disadvantage:
Manipulation in financial reporting and non-compliance with the accounting policies and rules
may lead to take misleading decisions.
CONCLUSION AND RECOMMENDATION
Conclusion
Report concluded that T&L is performing well, have good creditworthiness, maintained
solvency position. But still, it is not delivering better yield to their investors as monetary reward for
their money invested in the business. However, Wolseley’s managers are utilizing their total business
assets more effectively and efficiently and rendering better return to their investors to meet their
expectations.
Recommendation
 In order to deliver solid return to the investors, it is considered advisable to T&L’s executives
and directors to optimally utilize their corporate assets. With the help of this, company will be
able to achieve target turnover and render high reward to their investors to accomplish their
return expectations (Gelman and et.al., 2014).
 Controlling over operational expenditures via implementing regular monitoring and close
supervisions is also considered good suggestions to expand net yield, which in turn, results in
higher return on shareholder’s fund.
 Effective pricing policy mechanism, expansion strategies in new markets, adoption of new and
advanced technologies for manufacturing and operations also give assistance to the firm to

maximize revenues and render better return to the shareholders (Ambrosin and et.al., 2015).
CONTEMPORARY METHODS
Capital-assets-pricing-model
CAPM model assists in describing relationship between the systematic risk and expected return.
It is usually undertaken by the investors for pricing the risky securities. Besides this, it presents the
compensation which investor will enjoy in against to the additional risk taken by them.
Efficient market hypothesis (EMH)
EMH is an investment theory which states that it is not possible for the investors to beat the
market. The rationale behind this existing market share reflects all the possible information through the
means of prices which are prevailed in the market (Guerrien, 2011). EMH also implies that stocks are
always traded at fair prices. On the basis of this aspect, neither one can purchase the stock at lower
prices nor seller at the higher cost (Stanley and et.al., 2013). However, usually investors earn higher
return by investing money in the riskier securities. EMH can be distinguished into three types such as
weak, semi-strong and strong. Hence, by making evaluation of all such aspects investors would become
able to take suitable decision (Ang, 2011).
Economic value added
This measure helps in making analysis of the company's financial performance on the basis of
residual value. Hence, it assists in estimating the firm's economic profit in comparison to the required
rate of return assumed by the shareholders. By employing such measure investor can assess the
performance of internal management through the means of the comparison of net operating profit in
against to total cost of capital (Baker and Riddick, 2013).

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APPENDIX
Financial ratio analysis of Wolseley Plc (amount stated in GBP million)
Financial ratio analysis of T&L (amount stated in GBP million)
23

Common-size/vertical analysis of Wolseley’s SOCI
Common-size/vertical analysis of Wolseley’s SOFP
24

Common-size/vertical analysis of Wolseley’s SOCF
25

Common-size/vertical analysis of T&L’s SOCI
26

Common-size/vertical analysis of T&L’s SOFP
27

Common-size/vertical analysis of Wolseley’s SOCF
Horizontal analysis of Wolseley’s SOCI
Horizontal analysis of Wolseley’s SOFP
28

Horizontal analysis of Wolseley’s SOCF
29

Horizontal analysis of T&L’s SOCI
30

Horizontal analysis of T&L’s SOFP
Horizontal analysis of T&L’s SOCF
31

32