INTERPRETING FINANCIAL STATEMENTS

Lecture Example

Alexandra plc Results for y/e 31/01/08

Selected Ratios 12 months ended: 31/01/2008 31/01/2007 '000 '000 Current Ratio Current Assets Current Liabilities Current Ratio Liquidity Current Assets less; Inventories Current Liabilities Liquidity Ratio Gearing Long-term borrowings Total Shareholders Equity Gearing (%) Trading (Gross) Profit Group revenue Gross profit Gross Profit Margin (%) Operating Profit Group revenue Profit from operations Operating Profit Margin (%) Return on Shareholders Funds Total Shareholders Equity Profit for the year Return on Shareholders Funds (%) Return on Capital Employed Total assets Profit from operations Return on Capital Employed (%) Asset Turnover Group revenue 78,025 81,478 78,025 6,946 8.90% 28,240 3,370 81,478 4,771 5.86% 24,463 2,118 27,852 28,240 99% 78,025 29,382 37.66% 16,214 24,463 66% 81,478 31,627 38.82% 70,278 36,837 33,441 27,385 1.22 64,417 36,896 27,521 34,245 0.80 70,278 27,385 2.57 64,417 34,245 1.88

11.93% 94,412 6,946 7.36%

8.66% 85,885 4,771 5.56%

Total assets Asset Turnover

94,412 0.83

85,885 0.95

Activity 10 page 43. 1. b) ROSF measures the efficiency of the business in generating profits from the resources contributed by shareholders. A rise in ROSF implies either that profitability has increased or shareholders equity has fallen (or some combination of the two). In this case operating profits have increased proportionately more than the increase in shareholders capital. 2. b) Revenues have fallen while the asset base of the company has increased. 3. b) long term borrowings have increased although, as explained in the lecture, overall net borrowing has not changed. Activity 11 Unassessed Peer Review - page 44 There is no set solution as it is clear students may interpret the performance of the Group in different ways. However examiners should expect students to focus on issues relevant to a potential investor considering whether or not to buy shares in the Group. Some examples of the types of points examiners should be looking for and a marking scheme are indicated below. Part a) The groups background, strengths, weaknesses, opportunities and threats from the perspective of a potential investor Strengths y Although sales and gross margins have declined the business is a market leader and remains profitable and net margins have increased y Workplace clothing is obligatory for many of the companies customers which may mean that it is more able to weather the recession Weaknesses y Small executive team lack of management talent? y Lower gross margins as a long term issue as clients get larger? Opportunities y Fragmented market especially in Europe scope for growth and consolidation y Sale of property in Scotland opportunity to reduce debt Threats y Economic downturn following the credit crisis y Exposure to political uncertainty eg manufacturing operations in Morocco. 1 or 2 marks per pertinent point made. Give credit for extra

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research not taken directly from the Accounts narrative sections. Part b) Relevant ratio analysis focusing on the Groups financial performance in relation to the key issues identified in part a). Possible points could include: y Slightly lower sales and gross margins provide evidence of the more challenging market conditions. However net operating profitability has been maintained and enhanced through cost cutting and efficiency measures. y Receivable balances and debtor collection days have both increased. Although there is a wide spread of debtor balances the increase in provision indicates credit control is becoming an important priority for the business. y Although gearing has increased this is mainly as a result of a restructuring of short term debt. The absolute level of total borrowing has remained stable. The relatively high gearing may be of concern in the mid term as the recession affects the business. However it is intended that some of this borrowing will be repaid by the sale of certain property and new facilities have been agreed. y Poor recent share price performance. 2 or 3 marks per pertinent ratio and comment. Credit should be given for answers that show an ability to relate the ratios to underlying business performance and use details from the notes to illustrate or elaborate points made. Answers must be relevant to a potential investor. Credit should be given for innovative ratios. Part c) Conclusions as to whether or not the Group represents a good investment based on the analysis in part b). Points could include: y Well managed recession proof business with strong profitability, cash flow and a good dividend record y Some evidence of more difficult trading conditions may raise some concerns in the short to mid term but likely to be a long term prospect y Small management team lack of depth of management skills could mean additional risk y Opportunities for development in the long term in a fragmented European market. Could mean capital growth and promotion opportunities. y Buy the shares

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2 or 3 marks per pertinent point made.

Part d) Brief notes giving the limitations of the advice. Possible points could include: y Current market trading conditions (accounts over a year old) y Limited information on comparative performance. 1 or 2 marks per pertinent point made. Total

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