Economics and Financial Management Report: Northern Rock Bank Analysis

This report provides a comprehensive analysis of Northern Rock Bank's financial performance, focusing on the impact of economic factors and accounting ratios. It begins with an executive summary highlighting key findings and recommendations. The introduction provides background information on Northern Rock's history and the reasons for its failure. The report then delves into the analysis of macroeconomic and microeconomic factors, examining their influence on the bank's operations. It includes the calculation and interpretation of key accounting ratios such as return on capital employed, net profit margin, and current ratio for the years 2017-2019. The importance of these ratios in assessing a company's financial health is also discussed. The report concludes with recommendations for the bank to improve its financial performance and overall business strategy. The analysis includes the impact of customers, suppliers, distribution channels, public, and competitors as macroeconomic factors, while demand, supply, and elasticity are considered as microeconomic factors. The report also highlights the significance of accounting ratios in evaluating profitability, efficiency, solvency, and risk.

Running head: REPORT 0
ECONOMICS AND FINANCIAL MANAGEMENT
FEBRUARY 16, 2020
STUDENT DETAILS:

REPORT 1
Executive summary
The accounting ratios are effective method to measure liquidity, solvency, and efficiency along
with profitability of the company. This is a reason that the accounting ratios are relevant and
important to increase the efficiency of administration. With the help of this, the company can
make strategy to decrease expenditure as well as increase the profit margin. It can see that
Northern Rock Bank is failing to repay loan as well as generating profit. The customers have no
faith in this bank. Northern Rock Bank is required to make focus on the microeconomic factors
as well as macroeconomic factors for the development of business. By following these factors,
the company can create its image. The microeconomics analyses decision of individual as well
as business. On the other hand, the macroeconomics assesses decision made by government and
country. These macroeconomic factors are related to broad economy. The microeconomic factors
put impact on the demand along with supply. It is helpful in determining the price level. In this
report, macroeconomic factors like customer, supplier, and distribution channel, public as well as
competitor, and microeconomic factors (demand, supply and elasticity) is discussed. The below
mentioned parts also discuss definition and impact of accounting ratios. This report puts focus on
the efficiency ratio, return on capital employed, current ratio, as well as net profit margin ratio.
These below discussed parts also recommend some strategies to the bank to develop business
and get more profits.

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Contents
Executive summary.........................................................................................................................1
Introduction –...................................................................................................................................3
A. Analysis of economic factors and their impacts on business –................................................3
B. Calculation of ratios for each of the three years –....................................................................6
C. Accounting ratios and their importance on business –.............................................................6
D. Recommendations..................................................................................................................11
E. Conclusion..............................................................................................................................12

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Introduction –
Northern Rock was founded in 1850. It was operated as building society in initial period. It
provided banking along with financial services like mortgage services. It became joint stock
Company in year 1997. It was regulated by London stock Exchange. It was regulated as publicly
traded company. It can see that the bank was performed efficiently. But, it went through the
global banking crisis of 2007. It lowered the profit margin of bank. The bank became incapable
to make money from the loans and repay the loan amount, which has been borrowed by bank for
banking functions. The main objective of this paper is to render company analysis of the
company that has failed because of several economic factors. In the following parts, the macro-
economic factors as well as micro-economic factors, and their impacts are discussed and
examined. This report also discusses the accounting ratios and their impact on the business. The
below mentioned parts also make recommendation and conclusion.
A. Analysis of economic factors and their impacts on business –
Macro-economic factors- the macroeconomic principle is helpful to understand the decisions
made by government along with nation. The macroeconomic factors are competitor, customer,
distribution channel, public, as well as supplier. It can say that these macroeconomic factors play
significant role in the business (Gandhi and Perumal, 2016). These key uncontrollable or
outer factors put impact on the powers of taking decision of the entity. The entity can make
better strategies to perform well. It can see that the customer is most significant factor in
microenvironment. The reason is that the business is centred on the customers. Additionally, the

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employees also affect the performance of business as macroeconomic factor. They are the
primary driver of organizational performance as well as effectiveness (Noss and Toffano, 2018).
Further, it is also required to make focus on the supply chain as well as distribution network. It is
necessary for the success of business. Besides, the investors along with shareholders are most
significant internal stakeholders for the business. The business also exists to create shareholder’s
value. It can say that there is competition in every industry. A level of competition affects the
profit of any business. When the competitors increase, then the market share will also decrease.
Moreover, the public as well as media create responsible social image.
(Morries, 2018)
Micro-economic factors – The microeconomic principle puts focus on the demand as well as
supply. It also makes focus that how to determine the level of price. It makes it bottom-up
approach (Bahaj and Malherbe, 2016). These micro-economic factors include demand, supply, as
well as elasticity. It can evident that the decision of supply may appear to be regulated by the
business. However, when the consumer agrees to pay more for the products as well as services,

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then the demand will also increase. The higher price means the business would enhance
production. In this way, it will supply more products as well as services. The microeconomic
doctrine states that all things are same. It can say that when price of services, the supply of the
products or services will be increased.
(Yanikkaya, Gumus and Pabuccu, 2018)
Comment on performance of company - it can be concluded that major cause of failure was
the securitization system and provision of funding through wholesale capital markets. Even
though, the bank has sufficient assets (Burgress, et. al, 2016). The main issue of Northern Rock
bank is loss in the trust of consumers. The banking sector was heavily shaped by the laws as well
as macroeconomic factors such as international financial crisis (Afonso, Baxa and Slavík, 2018).
Northern Rock bank was famous British. However, it is not operating from some last years. It is
analyzed that the bank is not able to completely commit to repayment of money of the investors.
It is required by the bank to put focus on the macroeconomic as well as microeconomic factors to
make a place in the market.

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B. Calculation of ratios for each of the three years –
Calculation of ratio Formula
31-12-
2017
31-12-
2018
31-12-
2019
Return on capital employed
Operating profit/capital
employed*100 3.33 3.54 3.50
Net profit margin Net profit/sales revenue*100 74.15 68.46 84.10
Current ratio Current assets/current liabilities 6.74 3.26 3.02
Average receivable
days/Debtors collection period
Trade receivables/Credit
sales*365 NA NA NA
Average payable days/
creditors collection period
Trade payables/Credit
purchases*365 NA NA NA
Efficiency ratio
Non-interest expenses/
(operating income- loss loan
provision)*100 30.73 28.11 41.96
C. Accounting ratios and their importance on business –
The accounting ratios are also considered as financial ratios. The ratios state the relationship
between figure of the income statement, cash flow statement as well as the Balance Sheet of the
company (Ntuli, 2016). It can say that the accounting ratios are effective methods of evaluation

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utilised by the administration, shareholder, and creditor along with different stakeholders of
organisation. It is evident that the accounting ratios are considered as significant sub-set
of financial ratios. They are regarded as group of metrics that can be utilised to assess, solvency,
profitability as well as efficiency of the organisation based on the financial report. These ratios
render the manner of expressing the relationships between one accounting data point to other
point. In this way, they are base of ratio analysis (Blundell-Wignall, Atkinson and Roulet, 2018).
Further, the accounting ratios are significant to assess the financial performance of company.
They are helpful to evaluate profitability, efficiency, solvency, as well as risk. They are helpful
to make comparison between the trends of 2 or more than 2 companies over the period. In this
way, the accounting ratios can be utilised to measure the fundamentals of company.
Additionally, these ratios render data about the performance of an organisation over previous
quarter or financial year.
I. Return on capital employed – the Return on capital employed is a profitability ratio.
It can say that it is accounting ratio that can be used at the time of valuation. It has
important place in accounting. The Return on capital employed is helpful to compare
the relative profitability of the organisations after considering the amount of capital
utilised. In this way, the Return on capital employed is known as financial ratio. It is a
good measure for assessing the profitability as well as efficiency of the company. In
different terms, this ratio assesses how well the entity is making profit from the
capital. Therefore, this ratio is used as a ratio to measure the performance of company
(Rashwan and Ehab, 2017).

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From the above calculation, it can say that the return on capital employed ratio of
Northern Rock Bank was 3.33 in year 2017. Further, this ratio was increased to 3.54
in 2018. In 2019, it was slightly decreased to 3.50. As it can see that bank has return
of 3.50 in 2018. In different terms, every dollar invested in employed capital, the
bank gets $3.50. In this way, the return may be high because it keeps lower level of
assets. This ratio states how much profits every dollar of employed capital makes. It
can see that the higher ratio will be favourable for the company for the reason that
more dollar of profit is made by each dollar of the capital employed. It is clear that
the company having small amount of asset as well as large amount of profit would
have the high return. From the above discussion, it is found that the company has
high return on capital employed but it needs to improve the return on capital
employed by reducing cost and increasing sales.
II. Net profit margin – the net profit margin is considered as percentage of revenue
excluding expenditures have been reduces from sale. The assessment states the
amount of profit that can be extracted from the total sale. The net profit margin ratio
is useful to define the capability of company to generate profits and to take different
matters in consideration, like increase in expenditures that is deemed unsuccessful. It
is very helpful in the financial model as well as valuation of company. It can say that
the net profit margin is solid display of the whole success of company. This ratio is
normally described as the percentage. However, the main thing to consider is that the
single number in the report of company is rarely adequate to consider the
performance of company. The increase in revenue may be converted into the loss if

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followed by the increase in expenditure. Alternatively, the reduction in revenue,
followed by best regulation over expenditures, may put entity further in profits
(Ariesta, Marlina and Hidayati, 2019).
From the above calculation, it can say that the net profit margin of Northern Rock
Bank was 74.15% in year 2017. Further, this margin was decreased to 68.46% in
2018. In 2019, it was increased to 84.10%. It means that the company is doing well.
However, the company needs to increase net margin by enhancing revenue. It is
required by the bank to sell more goods as well as services. It should also increase
the price. In this way, it can say that the bank can increase the net profit margin by
decreasing the costs. The company needs to find inexpensive sources for the raw
materials. The bank should also reduce the utilities to increase net profit margin. In
addition, the bank should find new customers to develop the business. However, it
may be the most expensive approach to generate more revenue. The products or
services with the highest gross profit margin are the most important to your business.
The bank should make strategy to attract more customers by focusing productive
services. After identifying the profitable services, the banks should focus on them. It
is required for the bank to determine whether the unprofitable services should be
removed in whole. The bank should review the area of improvement to make place in
the market.
III. Current ratio – The current ratio is also known as acid-test ratio or quick ratio. This
ratio is considered as liquidity ratio. It is helpful in measuring the capability of
company to make payment of short-term obligation (obligations due within 1 year). It

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is helpful for the investor along with analyst to know how the entity can increase
the current assets on the balance sheet for satisfying the current debt as well as other
payable (Osborne, Fuertes and Milne, 2017).
From the above calculation, it can say that the current of Northern Rock Bank was
6.74 in year 2017. Further, this margin was decreased to 3.26 in 2018. In 2019, it was
again decreased to 3.02. It can say that the company is not doing well. As it can see
that, the current ratio is 3.02 in 2019. The current ratio of 3.02:1 means that the
business has $ 3.02 of current assets for every $ 1 of current liabilities. The ideal
current ratio is 2:1. It is required by the company to improve current ratio. For
reducing the current ratio, it is required by the bank to increase short-term loans. The
bank needs to spend more cash in optimal way. The company should focus on the
amortization of prepaid expenses. In addition, the company should also focus on the
leaner working capital cycle (Tüysüz and Yıldız, 2019).
IV. Average receivable days/Debtors collection period – the average collection period
is average account receivable divided by average credit sales (Nyssa, 2019).
The average collection period is helpful in informing the business owners about the
the liquidity of accounts receivable of a company. It can see that this ratio renders
data about the credit policy of company. In this way, the business owners can assess
how well the credit policy of company is working by assessing average collection
period. It can see that this ratio is not applicable in case of bank (Chowdhury, 2019).

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V. Average payable days/ creditors collection period – this ratio states that Creditor
Days are enhancing beyond the general trading terms of suppliers. It shows that the
company is not making payment to dealers as efficiently as it is required. The
downward trends in the Creditor Days ratio mean that the enhancing amount of the
cash (possibly from overdrafts) is required to funding business. In this, this can be the
issue for developing the business. This ratio is not applicable in case of bank
(Degryse, Matthews and Zhao, 2018).
VI. Efficiency ratio - The efficiency ratio indicates the expenditures as the percentage of
revenues, with some variations. This is significantly how much the entity or person
spends to generate dollar; the companies are supposed to attempt reducing efficiency
ratios.
From the above calculation, it can say that the current of Northern Rock Bank was
30.73 in year 2017. Further, this margin was decreased to 28.11 in 2018. In 2019, it
was again increased to 41.96. The efficiency ratio of 50% or below 50% is optimal
ratio. When this ratio increases, then it can say that the expenditures are enhancing or
the revenues are reducing. In this way, it can say that the company is doing well.
However, the bank should decrease efficiency ratio to the great extent because lower
efficiency ratio is better (Tvaronavičienė, Masood and Javaria, 2018).
D. Recommendations
As it can see that, the Northern Rock Bank has low profit margin. The bank also lost faith of the
customers. In this situation, it is suggested that the bank should try to get support of the
commercial buyers and government. The bank should follow different approaches to make its

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image among the customers. It can see that the generating new lead is very significant for the
development of the business. The bank should know that what percentage of the leads finally
converts to the sales? It is suggested that enhancing sales conversion in the business is quick way
to develop the business. The bank should adopt the lowest cost method to get more profits. In
addition, the right costing of the services as well as products of bank is very
significant. Therefore, the bank should evaluate the costing of the services or products regularly.
The bank should make adjustments in the prices consequently. In last, it is also advised that the
company should take advantages of the overstock discount or seasonal clearances. Moreover, the
bank should also reduce the direct cost. The best way to reduce cost is negotiating the better
price.
E. Conclusion
As per the above analysis, it can be concluded that there are mixed results. From the point of
view of efficiency ratio, Northern Rock Bank is not in very good position. The company needs to
decrease efficiency ratio to increase the revenue and decrease the cost. The return on capital
employed is also good. On the other hand, it can say that the bank is not using cash optimally
because the current ratio of bank is 3.02:1 in 2019. It is not ideal current ratio or quick ratio.
Further, the bank is performing well from the point of view of net profit margin. However, the
company can increase net profit margin by making concentration on macroeconomic factors such
as customers.

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Appendix
Income statement 2016-2017
Balance sheet 2016-2017

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Income statement 2018-2019

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Balance sheet 2018-2019

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