Strategic Financial Analysis - Assignment

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Strategic Financial analysis
Table of ContentsINTRODUCTION................................................................................................................................3SFA and its significance....................................................................................................................3Objectives.........................................................................................................................................3Company overview...........................................................................................................................3Analysis methods..............................................................................................................................3RATIO ANALYSIS..............................................................................................................................4Profitability.......................................................................................................................................4Liquidity...........................................................................................................................................8Efficiency/activity.............................................................................................................................9Leverage.........................................................................................................................................12Investors..........................................................................................................................................13COMMON-SIZE................................................................................................................................15Vertical analysis..............................................................................................................................15Horizontal analysis.........................................................................................................................15Du-Pont analysis.............................................................................................................................15Segmental analysis..........................................................................................................................15ADVANATAGE AND DISADVANTAGE........................................................................................17Ratio analysis..................................................................................................................................17Common-size..................................................................................................................................17Du-pont...........................................................................................................................................17Segmental analysis..........................................................................................................................18CONCLUSION AND RECOMMENDATION..................................................................................18Conclusion......................................................................................................................................18Recommendation............................................................................................................................18CONTEMPORARY METHODS.......................................................................................................19Capital-assets-pricing-model..........................................................................................................19Efficient market hypothesis (EMH)................................................................................................19Economic value added....................................................................................................................19REFERENCES...................................................................................................................................20APPENDIX........................................................................................................................................22
INTRODUCTIONSFA and its significanceIn the modern corporate world, companies are require to examine and interpret theirperformance as well as financial health so as to frame better strategies and make solid decisions for thesuccess. SFA make use of both the internal as well as external resources for the performance evaluationand enable managers to manage their cost of capital, creditworthiness/liquidity, financial risk andoptimal utilization of business assets (Vogiatzi, 2015). This process involves identifying, measuring,monitoring and evaluating financial risk by adopting various techniques like horizontal, vertical andratio analysis method. It is very important for the directors and decision-making authority to assess andanalyze their financial performance and make better decisions to achieve set goals.ObjectivesThe aim of the present assignment is toillustrate the answers with worked examples of dynamicanalysis of 2 companies. In this regardemphasizes is given on financial performance evaluation of twocompanies, named Tate & Lyle Plc and its competitor, Wolseley Plc. In order to make both the internaland external analysis, ratio analysis and horizontal and vertical analysis of SOPI, SOFP and SOCF havebeen done. In addition to this, importance of contemporary methods like CAPM, EMH and EVA willbe discussed to measure corporate performance. Moreover, the report also highlight the majorshortcomings associated with associated contemporary analysis techniques like ratio analysis,horizontal analysis ofSOPI, SOFP and SOCF, Du-pont and segmental analysis ofTate & Lyle Plc andWolseley Plc. In addition to this, importance of contemporary methods like CAPM, EMH and EVA willbe discussed to measure corporate performance.Company overviewTate & Lyle (T&L) is a UK-based public limited company founded in the year 1921, listed onLSE and headquartered in London, England, UK. It is a global agriculture business which manufacturevariety of products like corn, tapico, oats and others using different ingredients henceforth, operates infood processing industry. Another company that has been chosen for comparative analysis is Wolseleyplc that is a multinational material distribution company for construction of building. It is one of theleading distributors of heating and plumbing products in the world. Moreover, its product portfolioconsists of pipe, air conditioning, heating, ventilating, plumbing, waterworks and refrigeration andcarrying out operations in UK, US, Canada, Denmark and other geographical region.
Analysis methodsKey performance indicators (KPIs) common-size statement, ratio analysis and Du-pont analysistechnique have been used for the performance evaluation. Moreover, trend analysis will be done byapplying horizontal analysis method, in which, performance will be evaluated by comparing currentperformance with the base year to determine that whether it has been increased or decreased.RATIO ANALYSISThis is considered as an effective way to measure corporate performance by computing differentratios. Moreover, it also helps to examine performance over the years via comparing ratios of currentyear 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’sperformance has been increased or decreased (Masubuchi, 2013). In addition to this, comparativeevaluation assists decision-maker to identify such company that is performing excellent in the market.ProfitabilityThe surplus of revenues remains after subtracting incurred expenditures is a measure of profit orloss, presented below:
Interpretation: In all the years, T&L’s GM is comparatively higher than Wolseley and alsoincreasing rapidly over the period of 5 years ranging from 30.21%to 37.54%.It indicates that T&L isearning more profitability due to maximumrevenue and effective control over direct cost.Strong brandposition in China, Innovative and Commercial development (ICD), globalized operations, M&A, highcustomer demand are the reasons for higher gross margin.Interpretation:T&L’s NM is got decreasedfrom 10.01% to 6.92%due to higher operatingexpenseswhereas 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 themarket (Catita and et.al., 2014). Firm Tough market competition, external market forces and volatilityin 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 OMshows rising trend as it got enhanced from1.58% to 5.39%. Control over operating expenditures andrising operational income are the most important reasons for better and increased return in Wolseley. Atthe end of the year 2016, both the company’s OM shows a very little bit differences of 0.07% only butstill, declined trend in T&L cannot be considered good. Supply issue, ineffective monitoring of themanagers, 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 decreasedfrom 18.26%
to 1.90%whereas in the next year, it got enhanced to7.01% which is good.However, on the contraryto 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 ishigher in Wolseley representing that it is earning greater return on their total capital employed in thebusiness (Verschoor, 2015).Interpretation: Wolseley’s ROA got increased from 0.76% to 7.31% in 2014, then droppeddown to 2.99% and again got enhanced to 8.43% in 2015. On the other hand, T&L’s ROA inclinedfrom 10.24% to 10.27%. However, it shows a sudden decline in 2015 to 1.21% due to heavy decreasein net yield to £30m. After this, 2016 shows a positive change and improved ROA to 8.43% because ofhigher net earnings to £163m. Comparatively Wolseley generated greater return on their total corporateassets which is considered good and indicates solid performance (Majors and Johnson, 2015).
Interpretation:Wolseley’s ROSF gotinclinedfrom to7.77% to 23.95%. This happenedbecause firm earn good amount of profit in its business but its equity remain stable.However, T&L’sratio shows a continuous decreasing trend from31.16% to3.02% in 2015, but in 2015,it imrpoved to16.61%. This happened because firm make fresh issue of shares in the market. Although improvedratio is a good sign indicating that in 2016, both the company are offering greater return to theirshareholders, but still, greater ROA in Wolseley demonstrating that its investors are generating moreyield.LiquidityThis ratio helps to measure that whether companies have enough amount of nearbyresources/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 arecurrent assets and current liabilities. Both the company’s CR got decreased in 2016, as in Wolseley, itcame down from1.69:1 to 1.46:1, however, in T&L, it dropped down from1.91:1 to 1.63:1.The mainreason behind decline in current ratio is that firms are mertting their working capital needs by takingmore and more amount of short term loan from banks and suppliers.Comparatively, it is still higher inT&L shows that it is highly able to repay their short-term liabiliies like payables within extended credit
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