Financial Statement Analysis of Bodycote Plc (BKM 102)

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Assessment 2-BKM 102
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Table of Contents
LIST OF FIGURES.........................................................................................................................3
PART A...........................................................................................................................................4
PURPOSE AND USEFULNESS OF THE BALANCE SHEET, INCOME STATEMENT
AND CASH FLOW STATEMENT TO A BUSINESS..............................................................4
BALANCE SHEET.....................................................................................................................5
INCOME STATEMENT.............................................................................................................5
CASH FLOW STATEMENT......................................................................................................6
PART B...........................................................................................................................................7
PROFITABILITY RATIOS........................................................................................................7
LIQUIDITY RATIOS.................................................................................................................9
GEARING RATIOS..................................................................................................................10
REFERENCES..............................................................................................................................11
APPENDIX....................................................................................................................................13
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LIST OF FIGURES
Figure 1: Financial Statements for Business...................................................................................4
Figure 2: Bodycote Plc Logo...........................................................................................................7
3

PART A
PURPOSE AND USEFULNESS OF THE BALANCE SHEET, INCOME STATEMENT
AND CASH FLOW STATEMENT TO A BUSINESS
In this competitive world, it becomes vital for the businesses to understand the financial
statements so as to develop an understanding of the important reporting and aspects. For every
business, it is necessary to gain constant information on a variety of aspects such as market
share, competitiveness, price, demand, cost of production and statutory levies (Collier, 2015).
Every business spends time on managing customers and employees so as to achieve its long term
objective of profit making (Weygandt et al., 2015). Similarly, the financial statements such as
Balance sheet, Income statement and the Cash flow statements help to gauge the performance of
the firm. Based on these important financial statements the owners and managers reach to
conclusions about the financial feasibility and health of the company and thus engages them to
ensure the success of the business (Wahlen et al., 2014).
Finance and financial management thus play a vital role for a business as it helps in funding the
operations of the business and ensures capital management (Wahlen et al., 2014). Through this,
the owner gains information about cash management and also plans effectively for the profits by
reviewing the financial statements (Noreen et al., 2014). The financial statements also help
business in risk management and thus maximising the benefits for the business (Collier, 2015).
Figure 1: Financial Statements for Business
4
Income
Statement
Financial
perfromance
Earning at
specific period
of time
Balance Sheet
Financial health
What a business
owns and owes
CashFlow
Statement
Cash
Management
Cash inflows and
outflows

(Source: Webster, 2016)
BALANCE SHEET
Balance Sheet can be defined as a financial statement that depicts the financial position of a
business that shows clearly the assets, owners’ equity and liabilities for a period of time and also
shows the net worth of the business (Ward, 2018).
Purpose of Balance Sheet
Balance Sheet is a financial statement of a business which provides a snapshot of the company’s
assets and liabilities for a specific period. It has its assets side and liabilities side which are used
by managers to analyse the financial position of the business (Noreen et al., 2014). Balance Sheet
reveals the financial status of a business concerned and shows how much an entity owes and
owns and thus provides valuable insights (Wahlen et al., 2014).
Usefulness of Balance Sheet
In business, Balance Sheet plays a vital role and it has its usefulness which makes it important
for every manager (Salas and Campos, 2016). It helps in determining the working capital
availability and ensures sustainability of operations. It provides an idea to the investors regarding
the issuance of the dividends (Yanuaria, 2018). The Balance Sheet shows the retained earnings
which help in ensuring the predictability of the dividends. It also helps in gaining insights about
the ability of the firm to bear risk and provide the year ending values or inventories (Woodruff,
2018). Various information is present in a Balance sheet that provides an understanding of the
short-term financial status of the business through which one can also estimate the fund's
requirements in short term to pay off its obligations (Yanuaria, 2018).
INCOME STATEMENT
Income Statement can be defined as the financial statement that depicts the profit or loss for a
time period of business. It involves the revenues and expenses which displays the income and
expenses of the business in a coherent manner (Kokemuller, 2017).
Purpose of Income Statement
Income Statement is also popularly known as the profit and loss statement which depicts total
expenses and the total revenues for a period. The Income Statement may be prepared by the
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businesses on quarterly, monthly and annual basis depending on the need of the business
(Woodruff, 2018). This statement is divided into time periods and shows the costs, gross profits,
revenues, selling expenses, other expenses and administrative expenses in a logical manner
(Woodruff, 2018).
Usefulness of Income Statement
An Income statement has its several uses such as it helps to track the revenues and expenses of a
business and helps in determining the operating performance of the business (Salas and Campos,
2016). This statement also helps in rendering insights to the owners regarding the business areas
which are under budget and over budget and thus helps in tracking these items which in future
may cause unexpected expenditures (Noreen et al., 2014). It is also useful for investors as well as
creditors that play a significant role in making investing decisions (Wahlen et al., 2014).
CASH FLOW STATEMENT
A Cash Flow Statement is termed to be a statement that is usually prepared by acquiring cash
and also involves the application of the cash by a business for the payments (Jeswani, 2017).
This is a statement that is prepared for analysing the cash transactions and converts the financial
transactions from an accrual basis to cash basis (O’Connor, 2017).
Purpose of Cash Flow Statement
The Cash Flow Statement is prepared with the sole aim to present the cash inflows and outflows
occurring in business within a specific period of time (O’Connor, 2017). It makes a record of the
profits as well as sales that helps in rendering information if enough cash is being generated to
cover expenses (Jeswani, 2017).
Usefulness of Cash Flow Statement
The Cash Flow Statement is vital as it records both internal as well as external sources of cash
flows that help investors and the owners to separate and observe the differences in the cash
outflows and inflows (Jeswani, 2017). Cash Flow statement can be used by a business in
ensuring timely investments for the investment opportunities available. Also, it helps in ensuring
a regular business income that too without relying on the outside investment and the external
borrowings. Thus it forms an integral part of reporting statements that shall always be considered
important by the users of financial statements (Noreen et al., 2014).
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7

PART B
For this part of an assignment, the business of a company named Bodycote has been considered
to analyse the liquidity, profitability and gearing ratios. Bodycote Plc is a leading provider of
specialist thermal processing services and the heat treatment services across the world. It
positions itself in the market through global networks and offers high quality and cost-effective
services to its customers irrespective of their size or market sector.
Figure 2: Bodycote Plc Logo
PROFITABILITY RATIOS
Calculation
Ratios Formula Calculatio
n for 2015
Calculation
for 2016
Calculatio
n for 2017
2015 2016 2017
Return
on
assets
(Net
Profit /
Total
Assets)*1
00
56.2/805.5*
100
67/924.40*10
0
97.3/959.7*
100
6.97% 7.24% 10.13%
Operati
ng profit
margin
Operating
Profit
/Sales *
100
77.9/567.2*
100
95.1/600.6*10
0
119.4/690.2
*100
13.73% 15.83% 17.29%
Net
profit
margin
Net Profit
/ Sales
*100
56.2/567.2*
100
67/600.6*100 97.3/690.2*
100
9.90% 11.15% 14.09%
Return
on
equity
(Profit
after
Tax /Net
worth) *
100
56.2/549.6
*100
67/628.3*100 97.3/697.5*
100
10.22% 10.68% 13.94%
Return
on
capital
employe
Operating
Profit /
Capital
Employe
77.9/ 805.5-
164.8*100
99.6/ 924.4-
97.6*100
123.9/
959.7-
177.7*100
12.15% 12.9% 15.26%
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d d * 100
Analysis and Interpretation
At Bodycote the return on capital employed has increased that is notwithstanding with enhanced
rate of the capital investment and in 2017 there has been witnessed a strong growth in the profit
which in 2016 was less (Bodycote Plc, 2017). In terms of the return on assets, the company is
experiencing a rise in the returns available from the assets which depict the better position of
profitability for a firm. In the area of the capital expenditure, the Bodycote has experienced to
exert strong financial discipline. Net profit margin after deducting all expenses emerges to be
rising from 9.90% in 2015 to 14.09% in 2017 which shows better profitability for the company
(Bodycote Plc, 2016).
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LIQUIDITY RATIOS
Calculation
Ratios Formula Calculatio
n for 2015
Calculation
for 2016
Calculation
for 2017
2015 2016 2017
Curre
nt
ratio
Current
Assets / Cur
rent
Liabilities
168.9/164.8 175.8/197.6 212.7/177.7 1.02:
1
0.93:
1
1.19:1
Quick
ratio
(Current
Assets-
Inventory)/
Current
Liabilities
168.9-
19.5/164.8
175.8-
16.6/197.6
212.7-
16.4/177.7
0.90:
1
0.84:
1
1.1:1
Inven
tory
turno
ver
ratio
Cost of
sales/averag
e inventories
469.3/20.2 505.5/18.05 570.8/ 16.5 23.23
times
28.01
times
34.59
times
Analysis and Interpretation
In terms of the current ratio Bodycote has never been in position of an ideal firm with an ideal
ratio of 2:1 rather in 2015 it has a current ratio of 1.02:1 which is good position for firm which in
2017 became 1.19:1 depicting fair capability of the firm to pay off the current liabilities through
the current assets (Bodycote Plc, 2017). In terms of the quick ratio, a company is experiencing a
low ratio which shows that it is less capable to pay off its current liabilities from cash or quick
assets in case of contingencies (Jan 2015).
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GEARING RATIOS
Calculation
Ratios Formula Calculation
for 2015
Calculation
for 2016
Calculatio
n for 2017
2015 2016 2017
Debt-
to-
equity
ratio
Debt/
Equity
164.80/549.6 187.60/628.30 262.2/697.5 0.29 0.32 0.37
Debt
to
capita
l ratio
Debt/
Debt+Eq
uity
164.80/164.8
0+549.6
187.60/187.60
+628.30
262.2/262.2
+ 697.5
0.23 0.7 0.27
Analysis and Interpretation
On analysing the gearing ratio of Bodycote from 2015 till 2017 it can be depicted that there is an
increasing trend with the debt to equity ratio of Bodycote. The increasing ratio depicts that it is
turning riskier to creditors and the investors as compared to the previous year (Bodycote Plc,
2016).
In terms of the debt to capital ratio Bodycote has experienced a high ratio in the year 2016 i.e.
0.7 as compared to 2015 which was only 0.23 which depicts that the company is using
extensively its debt to finance the operations of the business (Bodycote Plc, 2015). It again fell in
2017 from 0.7 to 0.27 which shows that it raises its funds now from current revenues.
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REFERENCES
Bodycote Plc, 2015. Annual Report 2015. Online available at (https://www.bodycote.com/wp-
content/uploads/2017/11/bodycote-annual-report-2015.pdf) last accessed January 2019.
Bodycote Plc, 2016. Annual reports 2016. Online available at (https://www.bodycote.com/wp-
content/uploads/2017/11/bodycote-annual-report-2016.pdf) last accessed January 2019.
Bodycote Plc, 2017. Annual reports 2017. Online available at
(https://www.bodycote.com/investors/reports-and-results/) last accessed January 2019.
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Jan, I., 2015. Inventory turnover ratio. Online available at
(https://accountingexplained.com/financial/ratios/inventory-turnover) last accessed January
2019.
Jeswani, H., 2017. Cash Flow Statement: Meaning, Importance and Preparation. Online available
at (http://www.accountingnotes.net/financial-statement/cash-flow-statement/cash-flow-
statement-meaning-importance-and-preparation/7333) last accessed January 2019.
Kokemuller, N., 2017. Describing an Income Statement & Its Uses. Online available at
(https://smallbusiness.chron.com/describing-income-statement-its-uses-76687.html) last
accessed January 2019.
Noreen, E.W., Brewer, P.C. and Garrison, R.H., 2014. Managerial accounting for managers.
New York: McGraw-Hill/Irwin.
O’Connor, B., 2017. The Importance of the Cash Flow Statement. Online available at
(https://tgg-accounting.com/the-importance-of-the-cash-flow-statement/) last accessed January
2019.
Salas, O.A. and Campos, M.J.S., 2016. Finance and Accounting for Managers (Vol. 28). Profit
Editorial.
Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement
analysis and valuation. Nelson Education.
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Ward, S., 2018. Balance Sheet Definition and Examples. Online available at
(https://www.thebalancesmb.com/balance-sheet-definition-2946947) last accessed January 2019.
Webster, W.H., 2016. Accounting for managers.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John
Wiley & Sons.
Woodruff, J., 2018. The Purpose of a Balance Sheet & Income Statement. Online available at
(https://smallbusiness.chron.com/purpose-balance-sheet-income-statement-61847.html) last
accessed January 2019.
Yanuaria, M.L., 2018. What is the Use of the Balance Sheet?. Online available at
(https://mpm.ph/use-balance-sheet/) last accessed January 2019.
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APPENDIX
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