Financial Analysis Report: Skanska PLC Performance and Recommendations

This report presents a financial analysis of Skanska PLC, a multinational construction and development company. It begins by defining the roles of the accounting and finance departments, emphasizing their importance in financial management, investment decisions, and tax functions. The rep...Read More

FINANCIAL ANALYSIS

EXECUTIVE SUMMARY
Financial analysis could be defined as process of evaluating the business, budgets, projects
and other financial transactions for determining the suitability and performance of organisation.
Financial analysis is also used for assessing the stability, solvency, liquidity or profitability of teh
organisation. Report has revealed about the accounting and the finance departments. They both
play a significant role in the success of organisation, it is difficult to run the operations without
adequate management. The ratio analysis has been performed to assess the financial performance
of Skanska plc. It has been evaluated from the analysis that company is having adequate
financial management but have weak profitability and liquidity which has to be improved using
effective strategies and policies.

TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................2
TABLE OF CONTENTS................................................................................................................3
TASK 1............................................................................................................................................1
Introduction of Skanska PLc.......................................................................................................1
Define Accounting and Finance Department..............................................................................1
Importance of Accounting and Finance Department...................................................................1
Role of Accounts department......................................................................................................2
Role of finance Department.........................................................................................................3
TASK 2............................................................................................................................................4
a) Calculation of Ratios...............................................................................................................4
b) Financial analysis of Skanska Plc using the ratio analysis between two years.......................5
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

TASK 1
Introduction of Skanska PLc
Skanska Plc is the multinational construction and development company situated in
Sweden. It is fifth largest construction company of the world. The company is established since
133 years and is having headquarters in Stockholm Sweden. The construction projects of
company include renovations of UN headquarters, world trade centre, Moynihan Station and
many others
Define Accounting and Finance Department
Accounting and financial department of all the organization is regarded as a centre of all
the organization. Accounting and financial department generally ensures that financial
management and financial control are effectively controlled in the organization (Olbe, 2016).
Financial and accounting department generally controls the flow of money in and out of
business. Also, they make sure about the Payroll of all the employee and also perform the
activity of preparing financial report in the organization i.e. Profit and Loss Statement, Balance
sheet and budget. In simple words it can be said that it is the department which looks at
preparing financial statement, maintaining ledger, paying bills, manage payroll and flow of
money in & out of the business. Both the department used to operate same type of function but
the different is that Accounting department used to focus on the past, at the same time Finance
department used to focus on the future functioning of organization.
Importance of Accounting and Finance Department
Accounting and Finance department of Shanska PLc helps the company in managing the
finance in the organization. They generally make it sure that company is having a good amount
of the finance to overcome the variety of the issue which may be faced by the company. Not only
that financial department of the company also help the company in improving the level of
investment decision in the organization. Accounting department also help the company in
presenting and making of a financial report for the company. Not only that this department of
company also help the company in managing the tax liability of the company by coordinating
with the legal department of the company (Mumford, 2017).
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Role of Accounts department
Financial Management: Accounting department generally used to play the role of financial
management in an organization. Accounting department of the organization looks at planning,
organizing, controlling and monitoring financial resources in a way that it help the company in
achieving the goal of the business. At the same time it has been critically analysed that
Accounting department of company individually are not capable of managing the finance in the
organization, they has to take the help of different department for performing the same activity.
For example, to plan budget of company they generally take help of different management
individual and departmental head.
Management Accounting: At the time of performing the activity related to the
management accounting in the organization, accounting department generally used to provide the
different financial report to the manager in the organization. On the basis of the same report in
the organization manager generally used to make different decision to find out the solution of the
issue which is faced by the company in current scenario (Balakrishnan, Prakash and Ramesh,
2018). At the same time it has been also seen that report which are provided by the accounting
department does not prove sufficient for the manager to make different decision. Hence, it can be
said that accounting department just play a part or small role in management accounting function
of an organization.
Tax Function: Accounting department in organization also used to play a critically role
in performing the tax function in the organization. Accounting department generally used to
consider nature of all the transaction which generally take place in the organization and on the
basis of the same make sure that tax liability of the company is fulfilled efficiently. Accounting
department also used to keep track of critical tax document. At the same time it has been also
seen that tax function is not only handled by the accounts department, Legal department of the
company also used to provide good hand of support to accounts department in carrying out the
different activity very efficiently in the organization.
Auditing Function: Under Auditing function of accounts department, department
generally looks to compile different policies and procedure with the current operation of the
business. Accounting department of the organization generally consider looking at the current
performance of business and evaluating the same. Accounting department of company assess the
compliance with the accounting standard of the company. In simple words accounting
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department used to play the role of supervisor of different operation in organization. It has been
also seen that in many organization accounting department do not play any kind of role in
Auditing function of organization. Auditing department is a separate department who generally
looks at the different operation of auditing in the organization. It is essential for the business to
have proper inspection of the accounting records prepared by the organisations. This function of
the accounts departments plays critical role as auditors certify whether the financial statements
are free from errors and mistakes. They ensure that the financial statements present true and fair
view of the financial position and performance of company.
Role of finance Department
Investment Function: Financial department of company generally looks at the present of
money in the organization and supports the senior management of the company at the time of
making any sort of decision in regards of new investment. Financial Department used to play the
supporting role at the time of making any sort of Investment decision in an organization. They
generally used to provider of the information about the amount of financial resources which is
possessed by them in general. At the same time it has been also analysed that some time
Financial department of the company has to change their opinion in the investment decision if
management of the company is more than keen to make a investment in the market. Management
has to make analysis of the proposed investments or the project that will be providing it adequate
return. The short term finances help the organisation in supporting their working capital
requirements.
Financing Function: Financing Function of finance department generally looks at
selecting the source through which finance can be recruited in the organization to carry out
different operation of the organization (O'Leary, 2020). Financial department generally looks at
understanding different sources through which organization can have a fund and on the basis of
same touch them whenever there is need of the same in the organization. At the same time it has
been critically understand that any wrong selection of sources of finance in the organization used
to create the variety of the issue for the organization to dealt with in future. They have to analyse
all the factors attached with the procurement of funds. Finance is considered as an important
accounting function as it provides funds for running the operations of business successfully.
Dividend Function: The dividend function of the finance department play a critical role
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in the business. Profit earnings or the positive return are common objectives of the organisations.
Key function of finance department is to assess whether the company should distribute profits in
form of dividends to shareholders or retaining profits or making partial distributions. It is the role
of financial department to frame optimum dividend policy that will be maximising market value
of the company. Common practices of firm includes payment of dividends in case of profits. But
deciding about the dividends in case of inadequate profits is a challenging task for the financial
managers. Dividend policies have direct impact over the cash flows of business. The wealth is
decreased by the amount of dividend paid by company. In case of inadequate profits company
could make dividend cuts for managing the cash flows. The dividend decisions of the finance
department are directly associated with the shareholders’ equity. Also the company has to ensure
that there are adequate cash funds available to be distributed in the form of dividends.
Working Capital Function: This function of the financial department of the
organisation play an effective role in the success of the organisations. Working capital
management helps to ensure that the tied up capital in the company that could be utilised
otherwise over productive uses are released by the organisation for generating returns. It is the
effective tool that guarantees long term success of the business. Working capital helps to get
cheaper sources of the finance that could be used for the expansion of the existing projects for
new investments for company. One of the methods used by financial department for increasing
the profitability of the business is by effective working capital management. Improper
management of the working capital could lead to negative consequences for the business like
increase in loans or borrowing raising the finance cost of the business. This function has
significant attention of the managers as it is essential for the company to arrange different
functions in manner that effective operating cash cycle is maintained for meeting working capital
requirements.
TASK 2
a) Calculation of Ratios
SKANSKA PLC
Particulars Formula 2018 2017
Profitability Ratios
Return on capital
employed
Net operating
profit/Employed Capital 11.59% 10.85%
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Employed Capital
Total assets – Current
liabilities 39639 37880
Net Income 4594 4111
Net profit margin
Operating Income/ Net
Sales 2.68% 2.60%
Net Income 4594 4111
Revenues 171730 157877
Liquidity Ratios
Current assets 95786 89700
Current liabilities 76657 71557
Inventory 1256 1058
Quick assets 94530 88642
Current ratio
Current assets / current
liabilities 1.25 1.25
Quick ratio
Current assets - (stock +
prepaid expenses) 1.23 1.24
Efficiency Ratios
Inventory 1256 1058
Trade Receivables 27243 27778
Trade Payables 38072 38224
Days 365 365
Sales 171730 157877
Debtor days Debtor/ Sales*365 57.90 64.22
Creditor days Creditor / Sales*365 80.92 88.37
b) Financial analysis of Skanska Plc using the ratio analysis between two years
Ratio Analysis
Ratio analysis refers to the tool used for comparison of the line items in financial
statements of the business. Ratio analysis is used by the management and investors to assess the
financial health and performance of the business. The straight figures reported in the annual
statements do not reflect the true nature of the business or company. To identify the working and
management of organisation ratio analysis tools proves to be most useful.
Ratios about company performance
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It is very essential for the managers and investors to analyse the performance and position
of company before making investments in any of the company. Management identify whether
the strategies and policies implemented for the business have drawn the desired results or not. It
enables the management to frame more efficient strategies or to make improvements in the
existing framework (Bayrakdaroglu, Mirgen and Kuyu, 2017). Investors using ratio analysis
identify the profitability, liquidity position, efficiency and the solvency of an organisation. In the
present report ratio analysis of Skanska plc has been carried out for assessing the financial health
and performance of business.
Return on Capital employed
It is a ratio that is used by the investors to evaluate the efficiency of management and
profitability of the organisation. The ratio identifies the strength and capability of the
management in generating returns over capital employed in organisation. Business is started with
the motive of earning greater returns. Company is required to have adequate level of returns over
capital employed for building confidence in the investors. It could be analysed from the above
table that ROCE of Skanska Plc was 10.85% in 2017 and it has increased to 11.59% which
shows that the company has showed upward movement in the ROCE. It shows that the ROCE of
company is adequate however it has to be increased further for reflecting strong management
efficiency. It could also be seen that upward movement is seen in the ratio due to higher returns
generated by the company in comparison with last year (Almumani, 2018).
Increase in revenues have raised the return over capital employed. It could also be
evaluated that the management strategies for making effective utilisation of the existing
resources are becoming successful. The effectiveness of the strategies will also enable to build
strong confidence in the managers and will enable the organisation to frame more effective
policies. It could further increase the ratio by evaluating the assets that are unproductive and not
adding value to business. This will reduce the assets that are consuming unnecessary cost of
organisation. Skanska plc is having strong management that is enabling it to generate adequate
returns over the capital employed by the business.
Net Profit margin
This is one of the ratios used to assess profitability of the organisation. It is used mainly
for evaluating the net returns generated from carrying out the business throughout the year. Net
profit is the amount left with organisation after meeting all the costs and expenditures of the
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organisation. It reflects the operating effectiveness of organisation and ability of management in
meeting the costs and expenditures of organisation adequately. In the above table it could be
evaluated that net profit margin is 2.68% in 2018 where in year 2017 the ratio was 2.60%. The
net profit margin of company is very low. There has been very low movement in the ratio from
last year. It could be evaluated from the ratio that net profit margin of company has to be
strengthened as it could face negative consequences with lower profit margin. The profit margin
of Skanska is low as costs are very high (Laitinen and Laitinen, 2018). Cost of sales of company
are very high as against the revenues. It could also be evaluated that company has controlled the
costs in comparison to last year as against the sales but growth is not seen as income from joint
ventures was low. It had made divestment from many joint ventures causing decrease in income.
Also the tax expense for the year is double in current year that has declined the profit to further
lower level. It has to adopt new policies and strategies for meeting the costs effectively and
increasing the profits (Erin and Oduwole, 2018). Profits are most attractive source for investors
through which companies could expand the business.
Current Ratio
The current ratio is used for analysing the liquidity of company. The current ratio reflects
the ability of company to make payment for short term obligations. Funds are required for
running the operations of business smoothly. They have to manage the operations of business by
effectively managing the cash flows (Ardekani, Distinguin and Tarazi, 2020). Current ratio of
Skanska plc in the year 2018 is 1.25 and it was same in the year 2017 at 1.25. The current ratio
of the company is adequate which shows that the business is making effective utilisation of the
financial resources. There is no movement in the ratios over the two years that shows that the
management has effectively maintained the liquidity position. Company has increased the
current assets and liabilities in the same proportion. The standard current ratio is 2:1 where ratio
of company is below the standard.
The reason behind no change in the movement of current ratio could be said that the
company has adopted adequate level of strategies for maintaining the cash flows. Current assets
have increased from last year and so is the liabilities that enabled it to maintain the ratio. It has to
ensure that the ratio does not goes beyond this level as maintaining current ratio is essential.
Many stakeholders of the organisation are concerned with the liquidity position of the business
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as they have interest in the financial liquidity and position of the enterprise. Suppliers do not
make further transactions with company have weak liquidity position.
It is essential for the organisation to enhance its liquidity position by effective working capital
management. It has to ensure that the operating cash cycle of the company is running effectively.
The revenues have to be increased and for meeting the working capital requirements it could
reduce the short term borrowings and make long term borrowing for decreasing the current
liabilities. The cash flows have to be managed over effective places only.
Debtor’s collection Period
Debtor collection period refers to the time taken by the company to collect all the trade
debts. Smaller amount of time firm takes to collect the debts, more efficient company seems to
be. Longer time indicates that firm have problems or issues in collecting the payments or have
less efficiency. The management ensures that the company has adequate debtor collection days
where it could manage the cash cycle.
Debtor collection period of Skanska was 64 days in the year 2017 and has reduced to 58
days. There is downward movement in the collection days which is a good sign. This reflects that
the management is able to collect dues timely as compared with last year (Stana and Brazis,
2019). The lower collection period has happened due to increasing the interest rate over late
payments and reducing trade with customers having bad trade records that are not able to make
timely payments.
Creditor’s payable period
It refers to the time that indicates time taken by company to make payments to the
suppliers. The creditor payment period are suggested to be greater as they enable the company to
utilise funds elsewhere over more productive uses. The creditor payment period has reduced to
80 days from the 88 days in last year. The management of the company is efficient as it reduced
the creditor period along with debtor period for maintaining the effective cash cycle.
CONCLUSION
It could be summarised from the above report that the financial management plays an
effective role in the success of organisation. They have to manage the operations of business in
manner for generating adequate returns. From the ratio analysis it could be concluded that the
financial management of company is adequate and also the company is profitable with adequate
liquidity position. Funds will help the organisation to enhance the marketing efforts and business
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operations. Ratio analysis is an effective tool used by the management and investors to evaluate
the performance of organisation.
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REFERENCES
Books and Journals
Mumford, J., THE ROLE OF ACCOUNTING AND FINANCE PROFESSORS IN US
GOVERNMENT SPENDING EDUCATION.
Balakrishnan, K. P., Prakash, L. and Ramesh, L., IMPACT OF AI TECHNOLGY IN
ACCOUNTING AND FINANCE.
O'Leary, D. E., 2020. Enterprise Architecture for Accounting and Finance Transformation:
Using Strategy Maps to Develop High-Performance FinanceStrategy Maps and Enterprise
Architecture. Journal of Emerging Technologies in Accounting.
Olbe, A.W., Department Accounting and Finance Hawassa University POB 65 Hawassa,
Ethiopia.
Bayrakdaroglu, A., Mirgen, C. and Kuyu, E., 2017. Relationship between profitability ratios and
stock prices: an empirical analysis on BIST-100. PressAcademia Procedia. 6(1). pp.1-10.
Almumani, M.A.Y., 2018. An empirical study on effect of profitability ratios & market value
ratios on market capitalization of commercial banks in Jordan. International Journal of
Business and Social Science. 9(4). pp.39-45.
Laitinen, E.K. and Laitinen, T., 2018. Financial reporting: profitability ratios in the different
stages of life cycle. Archives of Business Research. 6(11).
Erin, O.A. and Oduwole, F., 2018. An investigative analysis into the impact of International
Financial Reporting Standards (IFRS) on the profitability ratios of Nigerian
banks. EuroEconomica. 38(1).
Ardekani, A.M., Distinguin, I. and Tarazi, A., 2020. Do banks change their liquidity ratios based
on network characteristics?. European Journal of Operational Research.
Stana, G. and Brazis, V., 2019, May. Analyses of Trolleybus Recuperation Energy Utilisation
Losses Considering Different Efficiency Ratios of Traction Inverter and DC/DC
Converter. In 2019 20th International Scientific Conference on Electric Power
Engineering (EPE) (pp. 1-6). IEEE.
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