Analysis of Financing Activities for Big Yellow Group Plc (Coursework)

This report provides a detailed financial analysis of Big Yellow Group Plc's financing activities, focusing on the cash flow statement for the years 2018 and 2019. It examines key aspects such as the issuance of share capital, payment of finance lease liabilities, equity dividends paid, and increases in borrowings. The analysis highlights the significant impact of share capital issuance in 2019, the company's debt repayment efficiency, and dividend payments to shareholders. The report also assesses the company's suitability for investment, considering its negative free cash flow and the implications for dividend distribution. The report concludes that despite the company's growth, the negative free cash flow suggests caution for potential investors due to low returns.

Financial Accounting
Group Coursework
(Big Yellow Group Plc)

Financing activities
The section of financing activities in a cash flow statement represents net
amount of funding which an organisation generates in a year (Baik and et.al.,
2016). The amount generated from these activities are used to finance the
business. Financing activities are the operations which an organisation
undertake to achieve their economic goals and objectives; such activities
include issue of share capital, sale of shares, dividend payment and many
more. In the present case of Big Yellow Group Plc., which is a self-storing
organisation is accompanying various financing activities for their business
operations. These activities include issue of share capital, equity dividend
payment etc. All these activities are analysed in this question.
Consolidated Company Cash Flow Statement
(Financing)
In the table above, we have a consolidated cash flow statement for two years
(2018 & 2019). As we can see from the above table that there is huge
difference in the cash inflows and outflows between 2018 and 2019. The
major reason behind this difference is the capital which has been raised by
this company by issuing share capital to the public. It is evident that growth
cannot be judged only on the basis of financing activities but this company
can be considered as an effectively growing enterprise as they are
generating more capital and paying high dividends.
ISSUE OF SHARE CAPITAL
In a situation, when a public company intends to increase its capital, they
consider issuance of their share of ownership to the public; that situation is
known as issue of share capital. If an enterprise is willing to acquire funding
for business activities, then it can share the ownership with external parties
for which shares are issued in the market. Big yellow Group Plc has issued
shares for the purpose of funding future operations.
From the financing cash flow table, it has been analysed that in 2019, total
amount of issued shares were £65962000. In order to raise the capital of the
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organisation, this entity has issued shares in 2019 against which they have
raised their issued capital by £65,962000. This amount is the biggest reason
of high cash flow from financing activities of this company. The reason
behind issuing such high value shares is the operational requirements. The
proceeds for the issued shares are utilised by the company to acquire new
development sites in attractive locations which can allow the business to
continue deliver a contribution to earnings from external growth along with
maintaining a strong capital structure. It reflects that Big Yellow company
has reliable capital to effective work in market so it is a viable time to invest
in this company.
From the above table, it has been observed that ordinary shares of 16667are
issued in 2019.
PAYMENT OF FINANCE LEASE LIABILITIES
For effective execution of all the operations different loans are taken by the
organisations which are paid later, these loans are referred as payment of
finance lease liabilities. The amount of this activity is recorded in financing
activities of the organisation and resulted in outflow of funds from the
company. Loans are provided by the external stakeholders such as banks
which are required to be paid off after a certain period of time therefore it is
paid by the enterprise in current year as its duration was over.
It has been ascertained that in year of 2018, this group paid £1109000
against the finance lease liabilities which increased to £1075000. This
increased amount reflects that this company is efficient when it comes to
pay its debts which represents it as a reliable company.
From the cash flow statement of this company, apart from the new loans
taken by the company, there are few old loans which are now paid in the
year of 2019. These loans are repaid against the loan taken in precious
years which are transacted as “Payment of finance lease liabilities” in
CFS of Big Yellow Group Plc. Total amount of these loans repaid is £1075000
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which has been resultant in lowering the amount of net cash flows from
financing activities.
Equity dividends paid
When external parties buy shares of an organisation then the enterprise is
required to provide them dividend on the basis of organisational profits. Main
purpose of shareholders behind their investment in the companies is
generating dividend for a long period in future.
It can be seen from above image that Big Yellow Plc has paid dividend to its
equity shareholders amounting to £46183000 in 2018 which increased to
£52058000 in 2019. This increase shows that there is an increase in issue of
equity shares due to which this company has to pay more dividend. This also
shows that this company takes the decisions in favour of its shareholders
and pay them reliable dividends. From the Chairman’s statement, it has
been observed that dividend per share has also been increased by 8%.
In the year of 2019, no interest against any security was paid but a high
amount is paid as a dividend against the old equity shares which were issued
by Big Yellow Group Plc. The equity dividend amount was transacted as
£52058000 which is the greatest burden on the net cash inflow for year
2019.
Payment to cancel interest rate derivative
When an organisation is allotting debentures in the market then the
enterprise is required to pay interest on it. If a company is not able to pay
higher interest to the investors or debenture holders, then it may result in
decreased interest of them in the business which may affect operational
efficiency due to lack of funding.
In year 2019, no interest was received or paid by the company due to which
the amount of cancel the interest rate derivative is nil.
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Increase in borrowings
Loans are taken for the purpose of financing the business activities so that
all the operations in future could be performed in systematic manner. There
are various sources from where loans could be acquired by the company.
The main source of it is bank and the withdrawer is required to pay a
predetermined rate of interest on the amount which is being withdrawn. As
analysed from the cash flow statement, due to these new loans the total
borrowings of the organisation are increased.
From the cash flow statement, it has been assessed that total increase in the
borrowings of this company is £7026000 which is raised against the loans
taken by the Big Yellow Group Plc.
In year 2019, Big Yellow PLC had an increase in their borrowing amounting
£7026000. This amount has been decreased from the previous year which
shows that this company is capable of quickly paying their borrowed amount
which is a positive sign for investors. Big Yellow Group Plc. is a large scale
company which is listed at London stock exchange. By reviewing the cash
flow statement from annual report 2019, it has been seen that few new loans
have been taken in 2019. These new loans are transacted as “increase in
borrowings”.
From the above note, it can be seen that borrowings are increased from
328935 to 335877.
After considering all the above information and director’s report, financial
review and chairman’s statement, it is analysed that financing costs of this
company are increasing continuously which can affect the profitability and of
the company but at the same time these increased costs are beneficial as by
this, shareholders will get high dividend (Kimmel and et.al., 2016). The
financing cash flows show that the phase of acquiring capital for this
company has been completed and now this organisation is engaged in
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repaying all their loans which implies that it is best time to invest in this
company.
Suitability for investment
Introduction – Investment decision is a process of decision making regarding
investing in a specific project or an organisation (Levy, 2015). This decision is
either taken by the investor itself or by the investment consultor. Big Yellow
Group Plc. is a progressive company which publically trade their shares.
Investment decision regarding investing in this company is taken in this
section.
Big Yellow Group Plc. is a large scale company which deals in self storing
industry. Operations of this company are unique and there are very less
number of organisation which are effectively engaged in this industry. Big
Yellow Group Plc. not only is operating in this sector but is a market leader of
this sector. Various UK based and international companies are clients of this
organisation. Being a market leader, this organisation even enjoys monopoly
and the industry of self storing is one of the most growing sectors of all the
time. This background information of the company makes it highly evident
for investors to invest in this company as it has high scope for growth and
development in future years.
The above analysis provides an evidence to prove that Big Yellow Group Plc.
is an appropriate choice for investments but only background and industry
information cannot effectively support the investment decision. For this,
finance analysis is also essential. From the above points of this report
relating to cash position and operating, investing & financing cash flows, a
relevant decision can be taken. A positive free cash flow can evidently prove
that Big Yellow Group Plc. is a company which can effectively return capital
invested by investors. Free cash flow is the difference between net operating
activities and capital expenditures (Benaroch, 2018).
Free Cash Flow = Net Cash from Operating Activities – Capital
Expenditures
= 71,806-83,038
= -11,232
The free cash flow for Big Yellow Group Plc. is negative which shows that
investors are gaining low dividend against their capital invested in
organisation. By having negative free cash flow means organisation is not
having appropriate cash in their hands to distribute it among shareholders as
a dividend. This company cannot even pay the dividend against borrowed
funds. Big Yellow Group Plc. does not have enough free cash flow to pay
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dividend to its shareholders so it is suggested to the audience to do not
invest in securities of this company as they will not get suitable returns.
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Bibliography:
Books and Journals
Baik, B. and et.al., 2016. Who classifies interest payments as financing
activities? An analysis of classification shifting in the statement of cash
flows at the adoption of IFRS. Journal of Accounting and Public Policy.
35(4). pp.331-351.
Kimmel, P. D. and et.al., 2016. Financial Accounting. Wiley Custom Learning
Solutions.
Benaroch, M., 2018. Real Options Models for Proactive Uncertainty-Reducing
Mitigations and Applications in Cybersecurity Investment Decision
Making. Information Systems Research. 29(2). pp.315-340.
Levy, H., 2015. Stochastic dominance: Investment decision making under
uncertainty. Springer.
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