A&F dissertation section 3
2500 words, it is a part of dissertation
Section 3 Strategy Analysis of Barratt and Competitors
The comparison of strategy consists several perspectives:
1. Targeted land buying and effective planning
2. Outstanding and innovative designs
3. Excellent and efficient construction
4. Newly approach of sales and marketing, combined with social media
5. Customized experience with customers
6. Delivering better financial results to shareholders
An 8,000 word (maximum) report analysing a listed UK company.
The report should provide an analysis of the company’s strategic, financial and stock market performance over the last five years. It should be addressed to a potential investor in the company’s shares and should include your recommendation to that investor as to the desirability of investing (or not) in the short, medium or long-term.
You will be allocated a particular company and the module will provide the tools to enable you to access its published accounts, other financial and strategic data and stock market data. The allocation of assessment companies is carried out randomly. Please note you will NOT be able to select a company of your own choice. In order to satisfactorily complete the assignment, you will need to conduct in depth research into your allocated company, the industry in which it operates and its competitors. You will be given detailed information as to how to conduct this research in lectures and from suggested reading.
The main body of your report should be structured into the following sections:
1. Introduction
This section should provide a brief company history, an outline of the industry and of the company’s position within it.
2. Strategic Analysis
The strategic analysis should contain reference to the broad environment, industry and competitors, and, most importantly, to the company itself. It should include:
a. A PEST(LE) analysis
b. An analysis of the industry including a Porter’s Five Forces analysis
c. An analysis of the company’s strategy with comparisons to its competitors. The analysis could include for example pricing policies, product range, market position, etc., with that of its competitor(s).
3. Financial Statement Analysis
This section should offer an analysis of the company’s financial performance over the last five years. Crucially it should make use of your knowledge of the company’s strategic direction, its industry position and the broad environment. This section should include:
a. A detailed analysis of the financial statements, making comparisons with competitor(s).
b. Identification of any new accounting policies/treatments, which may impact significantly on future profitability.
c. Identification of problems of comparison caused by particular accounting policies/treatments.
4. Stock Market Analysis
This section should offer an analysis of the company’s share price performance over the last five years. You will need to use your strategic and financial knowledge of the company as a basis for your analysis.
a. Analysis of share price performance relative to the industry and the stock market as a whole.
b. An evaluation of stock market indices (price-earnings ratios, dividend yield, etc.) in comparison with competitor(s), sector and market averages.
5. Conclusion and Recommendations
The conclusion section should draw together your findings in order to make a recommendation to a potential investor in the company’s shares.
The report should be based on information up to and including Friday 28th February 2020.
All sources of information should be identified in the report. A full bibliography containing all references (books, newspaper reports with dates, company reports, internet information etc.) must be included with the report. These references will also not count towards the word limit.
Financial Statement Analysis – Accounting for Profit.ppt
Leeds University Business School
Financial Statement Analysis:
Accounting for Profit
LUBS 3670
Financial Analysis
Lecture 9/10
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Revised IAS 1 (from periods after 1 Jan 2009)
It replaced the income statement previously required with a statement of comprehensive income.
The statement of comprehensive income includes all recognised gains and losses in the period including those that were previously recognised in equity.
It is acceptable under IAS 1 to present the comprehensive income statement as one statement or alternatively, as two statements which separate the income statement from the comprehensive income.
Notice that only a minimal amount of information is required on the face of the income statement.
Detail of income and expenses must be presented either on the face of the income statement or in the notes to the accounts.
Certain items (known as unusual or ‘exceptional’ items) must be disclosed separately either in the income instatement or in the notes, if material.
(See Maynard, p 163-174)
Analysis of expenses
IAS1 permits companies to analyse expenses by:
Function – e.g., cost of sales, distribution costs, administrative expenses, other expenses.
Or
Nature – e.g., raw materials, staffing costs, depreciation.
The great majority of companies analyse by function (Format 1).
Unusual or ‘exceptional’ items
(see Maynard p 277 – 281)
IAS 1 defines unusual items as
items within the ordinary activities of the enterprise which are of such size, nature or incidence that their separate disclosure is required in the financial statements in order for the financial statements to show a true and fair view
Unusual or ‘exceptional’ items
Examples include:
write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs
restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring
disposals of items of property, plant and equipment
disposals of investments
discontinuing operations
litigation settlements
other reversals of provisions
No items may be presented in the income statement, or in the notes as ‘extraordinary items’.
Discontinued operations
(see Maynard pp 281 – 292)
Profits or losses on disposals of assets and liabilities of a discontinued operation must be shown on the face of the income statement.
If a company acquires or discontinues operations this is going to affect its profit flows in future years.
Therefore if the financial statements are to be useful to investors in their decision making they need to know the amount of profits or losses which relate to operations that have been closed or sold during the year.
IFRS 5, Definition of Discontinued Items
A discontinued operation is one that
either has been disposed of, OR
is classified as held for sale
represents a separate major line of business or geographical area of operations as reported in accordance with IFRS 8
is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale.
Definition of held for sale
IFRS 5 defines assets as held for sale
if the carrying amount will be recovered principally through a sale transaction rather than through continuing use; and
it must be available for immediate sale in its present condition and its sale must be highly probable.
Highly probable – criteria
management must be committed to a plan to sell
an active programme started to locate a buyer
actively marketed for sale at a price that is reasonable in relation to current fair value
sale should be expected to be completed within a year
it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Disclosure for discontinued operations in the year of disposal
Total on the face of the income statement of:
the post-tax profit or loss and
the post-tax gain or loss recognised on the measurement to fair value less cost to sell
an analysis of the total profit/loss into:
revenue, expenses, pre-tax profit/loss and tax
the net cash flows attributable to the operating, investing and financing activities
What about Acquisitions?
In order to make valid comparisons with the previous year it is helpful to know the amount of profits or losses that relate to newly acquired operations.
Unfortunately, IFRS 5 does not require any disclosures relating to acquired activities.
They will be narrative
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Earnings per share (EPS)
(see Maynard, chapter 8)
Widely used by investors as a measure of a company’s performance.
It is of particular importance in
Comparing the results of a company over a period of time and estimating future growth;
Comparing the growth in earnings between companies
Calculating the price/earnings (PE) ratio which is widely used in making judgements about the share value.
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Earnings per share (EPS)
Profit or loss attributable to ordinary shareholders
weighted averaged number of ordinary shares
The profit or loss attributable to ordinary shareholders is the profit or loss after tax, minority earnings and dividends on non-equity shares
Basic EPS – based on ordinary shares currently in issue.
Diluted稀释EPS based on ordinary shares currently in issue plus potential ordinary shares.
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EPS based on overall profit or loss
Prevents creative calculations of EPS but does cause potential problems to the analyst.
EPS is used to calculate the price earnings (PE) ratio .
P/E ratio(share price/EPS) assumes that past earnings are a reasonable guide to a company’s future earning power.
The analyst wants to identify the maintainable post-tax earnings that arise in the ordinary course of the business
Important to exclude genuinely unusual one-off items if a true earnings record is to be charted and the company’s performance assessed and different companies are to be compared.
Companies and the stock market do not like fluctuating EPS’s.
Limitations of EPS as performance measure
Based on historical earnings
No account of inflation
Real growth differing from apparent growth
Inter-company comparison adversely affected
Management choice over accounting policies
Changes in capital structure.
Do NOT compare absolute EPS between two or more companies.
The rate of growth of EPS can be compared between different companies.
IAS 33, Earnings per Share
Requires all companies are who have publicly traded shares to disclose basic and diluted EPS on the face of the income statement.
They may also show alternative calculations and indeed many companies do so.
There must be a reconciliation between the basic EPS and the alternative figure.
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IIMR ‘headline’ earnings per share
Includes:
all the trading profits and losses for the year.
Excludes:
profits or losses from the sale or termination of discontinued operations
profits or losses from the sale of fixed assets or businesses
profits or losses arising on the revaluation of assets
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Beware
Companies use different definitions of ‘headline’ earnings
Some focus on EBITDA – Earnings before interest, tax, depreciation and amortisation.
Some focus on ‘underlying’ profit.
Dividends
(see Maynard pp 558 – 559)
Proposed and declared dividends after the year end do not meet the definition of a liability;
Not included on BS or IS
Obligation to pay dividends only arises when it has been declared;
Declared or proposed dividends should be shown in a note to the accounts (non-adjusting event IAS 10)
Treatment of borrowing costs for self constructed assets
Before periods beginning January 2009
IAS 23 Benchmark treatment
Recognise in income statement as an expense in the period in which they were incurred.
IAS 23 alternative treatment
Capitalisation of borrowing costs directly attributable to the acquisition, construction or production of assets that take a substantial time to get ready for their intended use.
Funds borrowed specifically – use actual rate
Funds borrowed generally – use weighted average
Capitalisation ceases when asset substantially prepared for its intended use or sale
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Treatment of borrowing costs for self constructed assets
After January 2009
Borrowing costs that are directly attributable to the acquisition, construction or production of a ‘qualifying asset’ should be included as a directly attributable cost of construction.
A ‘qualifying asset’ is one that necessarily takes a substantial period of time to get ready for its intended use or sale.
Capitalisation v Income – Why does it matter?
Capitalisation means that instead of being taken to the income statement as incurred interest charges are added to the cost of the relevant asset in the balance sheet and written off as the asset is depreciated.
Hence, the hit to the income statement is later and over a number of years.
Choice is a problem for those who would look for greater consistency in financial reporting and capitalisation of interest charges may have a significant impact upon reported figures.
Segmental Analysis
(see Maynard pp 293 – 303)
Companies are required to report segmental information for:
Business – a single product or service of the group or group of related products & services with different risks & returns; and
Geographic segments- provision of products & services within particular economic environment with different risks & returns
Found in the notes to the accounts.
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Segmental Analysis
The chairman’s/chief executives officer’s report and/or operating review
often contain comment on the reasons for the changes in profitability of the business segments /geographical areas and may indicate trends.
Analyses over a number of years to reveal trends in profitability and changes in the structure of the businesses of the company
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Financial Statement Analysis – Accounting for the Balance Sheet.ppt
Leeds University Business School
Financial Statement Analysis:
Accounting for the Balance Sheet
LUBS 3670
Financial Analysis
Lecture 11
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Leeds University Business School
Format of the Balance Sheet
(Statement of Financial Position)
Assets
Non-current Assets
Current Assets
=
Liabilities
Non-current Liabilities
Current Liabilities
+ Equity
Ordinary share capital
Reserves
(See Maynard, Part 4)
Uk terminology instead of international standards
Fixed assets, not non-current assets
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Warnings about presentation
Some companies use the pre-IFRS format (UK GAAP)
Assets – Liabilities = Equity
There is flexibility in IAS 1 so this is permitted
Some companies use UK terminology not international
Fixed assets not non-current assets
Stock not inventories
Debtors not receivables
Creditors not payables
Again, this is permitted
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Non-Current Assets
Property, plant and equipment
Goodwill and other intangible assets
Investments
Receivables
Deferred tax, etc.
Working capital
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Relevant IFRS standards
Accounting for Tangible Assets
IAS 16 Property, plant and equipment (PPE)
IFRS 5 Non-current assets held for sale
Accounting for Intangible Assets
IAS 38 Intangible assets
IFRS 3 Business combinations
Both
IAS 23 Borrowing costs
IAS 36 Impairment of assets
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Chapter 10 textbook
Impairment
Leeds University Business School
Property, plant and equipment
(IAS 16)
Valuation issues:
Historic Cost or
Fair Value or
Deemed Cost
Some rules with revalue option:
Have to value everything in an asset class
If start this must continue
Keep up to date
Formal valuation every 5 years
Interim valuation by directors every 3 years
Must continue to depreciate over remaining useful economic life
Cannot revert back to HC
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Goodwill and intangible assets
The main requirements of IFRS 3 Business Combinations and IAS 38 Intangible Assets are:
purchased goodwill and intangible assets should be capitalised as assets
internally generated goodwill should not be capitalised; and
internally developed intangible assets should be capitalised only where it is probable that future economic benefits attributable to the asset will flow to the enterprise and the cost of the asset can be measured reliably
capitalised assets are subject to amortisation and/or impairment review.
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Impairment of Assets (IAS 36)
Where there is evidence of impairment of assets a review should be carried out.
Impairment: an asset is impaired when its carrying amount exceeds its recoverable amount
Carrying amount: the amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses (i.e. the NBV)
Recoverable amount: the higher of an asset’s fair value less costs to sell (sometimes called net selling price) and its value in use
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IAS 36 – Impairment of Assets
Fair value: the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties
Value in use: the discounted present value of the future cash flows expected to arise from:
the continuing use of an asset, and from
its disposal at the end of its useful life
If the review indicates a fall in value below carrying value in the balance sheet then the asset needs to be written down to the recoverable amount
The recoverable amount is the higher of net realisable value and value in use
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Leasing
Some assets being utilised in a business may not appear on the Balance Sheet.
‘Lease’ describes two types of lease (IAS 17)
Finance lease – on BS
Operating lease – not on BS
Prior to periods beginning 1 January 2019 – IAS 17
After periods beginning 1 January 2019 – IFRS 16
June 2020, first year to leasing standard to apply IFRS16
No restate
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Definitions (IAS 17)
“A LEASE is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.”
“A FINANCE LEASE is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred.”
“An OPERATING LEASE is a lease other than a finance lease.”
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Accounting Treatment
– Operating Lease (IAS 17)
Treat as an annual expense (rent) in the profit and loss account
Disclose the amount included in the profit and loss account in respect of operating lease rentals
Disclose commitment to make payments in future years, analysed between the commitment in the next year, in the second to the fifth year inclusive, and over five years.
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Accounting Treatment
– Finance Leases (IAS 17)
The leased asset is capitalised in NCA / fixed assets account at the lower of present value of the lease payments and its fair value (arm’s length price)
Annual depreciation charged on this value over the shorter of the estimated useful life or the lease period
The annual depreciation charge reduces the net book value of the leased asset.
Leeds University Business School
The finance lease obligation is a liability, recorded in the borrowings element of trade payables/creditors.
The finance charge for the lease is calculated as the difference between the total minimum payments and the fair value of the asset (or the present value of the total minimum payments if lower).
The finance charge is allocated to the accounting periods over the term of the lease and recorded in the profit and loss account.
Each accounting period the finance lease obligation should be reduced by the capital element of the repayment made (i.e., difference between the lease payment and the finance charge).
Prefer operating leases
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IFRS 16: Leases
Effective for periods beginning on or after 1 January 2019
Nearly all leased assets will now be recorded on BS with corresponding liability
BS: Big impact for some industries:
Airlines, shipping, property companies most affected
IS: Minimal overall impact:
Operating rental expense replaced with:
Depreciation on asset, and interest expense on debt
HOWEVER, could have significant effect on some measure (eg: EBITDA)
Raise in debts
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Current Assets
Inventories
Trade and other receivables
Short-term investments
Cash and cash equivalents
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Non-current Liabilities
Trade and other payables
Financial Liabilities (look here for borrowings)
Provisions
Post-employment/retirement benefit obligations (pensions)
Deferred tax liabilities
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Current Liabilities
Trade and other payables
Financial liabilities (look here for borrowings)
Provisions
Current tax liabilities
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Debt structure analysis
Look at gearing ratios
Borrowings as a percentage of capital employed
Consider debt/sales
Look at how the amount of debt changes over time
Look at how the nature of debt changes (short versus long-term)
Net debt = cash+financial assets-financial liabilities (may be defined differently by different companies) – will be notes giving more detail about this
Small equity part
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Financial Statement Analysis – The cash flow statement.pptx
Financial Statement Analysis – The Cash Flow Statement
LUBS 3670
Financial Analysis
Lecture 12
Leeds University Business School
Leeds University Business School
1
Smaller than income statement and balance sheet
Standard layout of the cash flow statement
equals
plus or minus
Net increase (or decrease) in cash and cash equivalents over the period
Cash flow
from operating activities
Cash flow
from investing activities
Cash flow
from financing activities
plus or minus
The definition of cash and cash equivalents
Cash is defined as notes and coins in hand, deposits in banks or similar institutions that are accessible on demand and bank overdrafts.
Cash equivalents are short-term, highly liquid assets that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Short-term is considered to be a period of three months or less.
Cash flows from operating activities
This is the net inflow or outflow from trading operations, after tax and financing costs (i.e. interest and dividends).
There are two methods
the direct method
the indirect method.
Indirect method
Cash flows from investing activities
This section of the cash flow statement includes cash payments made to acquire additional non-current asset and cash receipts from the disposal of non-current assets.
It also includes receipts from investments (loans and equity investments) in the form of interest on loans made by the business and dividends from shares in other business that are owned by the business.
Cash flows from financing activities
This section of the cash flow statement include cash flows relating to the long-term financing activities of the business.
Cash flows include the increase and repayment of borrowings and the receipts from share issues and payments made to purchase the business’ own shares.
Dividend payments made by the firm can also be included under this heading, as an alternative to including them as part of ‘Cash flows from operating activities’.
Analysing the cash flow statement
The cash flow statement allows consideration of:
Whether the company is a cash generator or a cash sink
Whether cash is being produced/absorbed from operating or non-operating activities
How the company is financing any cash shortfall or using surplus cash
The ‘quality’ of the company’s profits
Cash generator or cash sink
Generator Cash > Needs
Sink Cash < Needs
Neutral Cash = Needs
Need to view the situation over a number of years.
Cash produced/absorbed from operating or non-operating activities
Cash generated by operating activities is of vital importance
Cash position of operating activities may be improved or made worse by non-operating activities.
Financing a Cash Shortfall or Absorbing a Cash Surplus
Cash generator – How is the case spent.
Borrowing repaid
Shares repurchased
Cash reserves increased
Cash Sink – How is the cash found?
Additional funds borrowed
New shares issued
Cash reserves ran down.
Quality of Company’s Profits
Healthy Profits + Net Cash Inflow
Tends to indicate a favourable state of affairs
Healthy Profit + Net Cash Outflow
May suggest ‘Creative Accounting’
Operating activities:
Is the company generating a net cash inflow from its operating activities?
Is the company managing to increase the net cash inflow from its operating activities?
Seek explanations for any change - is it result of changes in operating profit, depreciation or change in control of company’s working capital requirements?
Look for significant increases/decreases in inventories, receivables and payables and seek explanations for such increases/decreases. Working capital tends, in an inflationary period and/or when the business expands, to rise roughly in line with turnover.
Returns on investment and servicing of finance:
How much cash is being used to service borrowings? Particular attention should be paid to the difference between interest paid in cash and interest shown in the income statement.
Capital expenditure and financial investment:
Is the company maintaining/expanding its non-current asset base?
How important has the disposal of non-current assets and/or businesses been in terms of generating funds?
Acquisitions and disposals:
Is the company making acquisitions and what effect have acquisitions had on the cash flow position?
What is the nature of any businesses purchased and how will they fit in with the organisations existing activities?
Will any newly acquired businesses generate or use cash for the foreseeable future?
Is the company disposing of businesses and what effect have such disposals had on the cash flow position?
Equity dividends paid:
Is the company able to fund comfortably its level of dividend payment?
Market prefers stable growth in dividends, does not like reductions, therefore companies are under pressure to maintain dividends - may lead to companies paying dividends from reserves.
Financing:
How is the company financing a cash deficit or absorbing a cash surplus?
- effect on borrowing levels?
- effect of cash position ?
Net profit, after interest, before taxation
+ depreciation/amortisation
+ interest expense
-/+ profit or loss on the disposal of non -current assets
+/- decrease/increase in inventories
+/- decrease/increase in trade receivables and prepayments
+/- increase/decrease in trade payables and accruals
= Cash generated from operations
- interest paid
- taxation paid
- dividend paid (* note, can be shown as part of financing)
= net cash from operating ac tivities
Net profit, after interest, before taxation
+ depreciation/amortisation
+ interest expense
-/+ profit or loss on the disposal of non-current assets
+/- decrease/increase in inventories
+/- decrease/increase in trade receivables and prepayments
+/- increase/decrease in trade payables and accruals
= Cash generated from operations
- interest paid
- taxation paid
- dividend paid (* note, can be shown as part of financing)
= net cash from operating activities
Financial Statement Analysis Part 1.pptx
Techniques of Financial Statement Analysis - Part 1
LUBS 3670
Financial Analysis
Lecture 8
Leeds University Business School
Leeds University Business School
Strategic Analysis
Broad environment
PEST or PESTEL analysis (table in Appendix, summary in main text)
Industry
Background to the industry – regulatory background, size, structure, major companies, etc.
Porter’s Five (or Six) Forces (table in Appendix, summary in main text)
Company
Analyse company strategy and compare with at least one competitor
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2
Financial Statement Analysis
Suggested structure of this section:
Income Statement
Revenue
Cost of Sales
Exceptional Items
Profits and Profitability
Balance Sheet
Non-Current Assets
Working Capital
Debt Structure
Equity
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Financial Statement Analysis
Suggested structure of this section:
Cash Flow Statement
Cash from Operating Activities
Cash from Investing Activities
Cash from Financing Activities
Change in Cash over the year
Cash Balance
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Financial Statement Analysis
The structure of the analysis is up to you, but try to structure the analysis by theme (e.g. revenue, costs, profits, NCA, debt structure, etc. as suggested in the last two slides) rather than by technique (trend, common size, ratios, etc.)
Illustrate your analysis with tables and graphs placed in the main text.
You need to analyse the key financial statements (income statement, balance sheet and cash flow statement) and to show evidence of this.
5 years of financial statement data is required.
Try to relate financial performance with the strategies discussed in the Strategic Analysis section.
Leeds University Business School
5
General overview
Two broad techniques of analysis:
Horizontal and vertical analysis
Horizontal Analysis:
Trends examined over a number of accounting periods
Useful where comparisons are for periods greater than two years
Vertical Analysis:
Equating total to 100 and producing ‘common size’ statements
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Horizontal (trend) analysis
calculation of percentage changes in the main components of the accounts from one year to another
measurement of growth in key items (such as growth in revenue, profits, assets etc)
comparison with competitors
reasons for large changes - examination of inconsistencies (read notes thoroughly)
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Example: horizontal analysis between two periods
2018 2017 Amount of change % of change
Net sales 28,500 25,000 3,500 14%
Costs and expenses
Cost of Sales 14,700 12,000 2,700 23%
Selling, general, and administrative expenses 10,500 10,200 400 4%
Interest expense 745 570 175 31%
Interest income 50 90 -40 -44%
Income before tax 2,605 2,420 185 8%
Income tax expense 1,042 847 195 23%
Net income 1,563 1,573 -10 -1%
A B A-B (A-B)/B
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Interest numbers are small
8
Indices
a useful technique for analysing trends is to convert certain key items (such as sales and profits) into index numbers to ease comparison of the trends over time.
calculated by taking the earliest year’s figures as a base of 100 and scaling缩放subsequent years accordingly
use of indices allows you to rebase key items and compare their growth directly
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9
Indices example
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1187/1187*100%=1
1444.2/1187*100%
2036.1/1187*100%
Divide Very first year
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Indices example
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Effects of inflation
In order to assess the true underlying performance of a company the reported figures should be converted to real or constant £ figures to eliminate the effects of inflation.
One way of adjusting for inflation is to deflate the reported figures by an inflation index which reflects changes in the prices of the goods and services for the industry to which the firm belongs.
Alternatively, as a (very) rough measure, the retail price index (RPI) or consumer price index (CPI) can be used,
Note that for certain industries and products, the RPI fails to provide a realistic measure of specific inflation.
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Inflation example
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Getting an inflation rate
13
Trend analysis - complications
Effect of inflation
Effect of structural change
changes in market/competition (new products, new firms)
developments in technology that substantially change cost-volume-profit relationships
acquisitions and disposals
Effect of accounting method changes
Effect of earnings smoothing via the use of provisions
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Changes in year end
Accounts are normally constructed for periods of 12 months.
However, when a company changes its accounting year end, an accounting period of more or less than 12 months will result.
Cannot directly compare, for example, sales for 12 months with sales for 15 months – need to adjust.
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Company X changes its accounting year end from 31 December 2005 to 31 March in 2007
YEAR ENDING 31/12/04
12 months YEAR ENDING
31/12/05
12 months PERIOD ENDING 31/3/07
15 months YEAR ENDING 31/3/08
12 months
Example -
Changes in year end
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16
Changes in year end
Does not affect balance sheet – do not adjust
Affects cash flow statement – but be very careful
Affects all of income statement – adjust
Need to adjust ratios involving both IS and balance sheet data, e.g. ROCE
Be very careful using ratios from databases – they often don’t adjust for changes in year end.
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Vertical Analysis
(Common Size Statements)
Concentrate on one year’s financial statements
Express all items in each financial statement as a percentage of a selected figure
For example:
sales in the income statement
total assets or total net assets in balance sheet
Allow comparisons between companies of different sizes
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Common size income statement
In millions of UK£ 2017
Net sales 38,125
Cost of products sold 21,206
Marketing, research, and administrative expenses 10,666
Operating income 6,253
Interest expense 650
Other income, net 235
Earnings before income taxes 5,838
Income taxes 2,075
Net earnings 3,763
In percentage of sales 2017
Net sales 100.0%
Cost of products sold 55.6%
Marketing, research, and administrative expenses 28.0%
Operating income 16.4%
Interest expense 1.7%
Other income, net 0.6%
Earnings before income taxes 15.3%
Income taxes 5.4%
Net earnings 9.9%
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Combine horizontal with common size statements
In millions of UK£ 2017 2016 2015 2014 2013
Net sales 38,125 37,154 35,764 35,284 33,482
Cost of products sold 21,206 21,064 20,316 20,762 19,561
Marketing, research, and administrative expenses 10,666 10,035 9,960 9,707 9,677
Operating income 6,253 6,055 6,488 4,815 4,244
Interest expense 650 548 457 484 488
Other income, net 235 201 218 338 244
Earnings before income taxes 5,838 5,708 5,249 4,669 4,000
Income taxes 2,075 1,928 1,834 1,623 1,355
Net earnings 3,763 3,780 3,415 3,046 2,645
In percentage of sales 2017 2016 2015 2014 2013
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold 55.6% 56.7% 56.8% 58.8% 58.4%
Marketing, research, and administrative expenses 28.0% 27.0% 27.8% 27.5% 28.9%
Operating income 16.4% 16.3% 15.3% 13.6% 12.7%
Interest expense 1.7% 1.5% 1.3% 1.4% 1.5%
Other income, net 0.6% 0.5% 0.6% 1.0% 0.7%
Earnings before income taxes 15.3% 15.4% 14.7% 13.2% 11.9%
Income taxes 5.4% 5.2% 5.1% 4.6% 4.0%
Net earnings 9.9% 10.2% 9.5% 8.6% 7.9%
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Compare with competitors
20
Common size Balance Sheet
Assets 2017 2016 2015 2014 2017 2016 2015 2014
Current Assets
Cash and cash equivalents 2,294 1,549 2,350 2,074 7.1% 5.0% 8,5% 7,5%
Investment securities 506 857 760 446 1.6% 2.8% 2,8% 1,6%
Accounts receivable 2,940 2,781 2,738 2,841 9.2% 9.0% 9,9% 10,2%
Inventories 3,338 3,284 3,087 3,130 10.4% 10.6% 11,2% 11,3%
Deferred income taxes 621 595 661 598 1.9% 1.9% 2,4% 2,2%
Prepaid expenses and other currents assets 1,659 1,511 1,190 1,718 5.2% 4.9% 4,3% 6,2%
Total currents assets 11,358 10,577 10,786 10,807 35.4% 34.2% 39.2% 39,0%
Property, plant, and equipment (net) 12,626 12,180 11,376 11,118 39.3% 39.3% 41.3% 40,1%
Goodwill and other intangible assets (net) 6,822 7,011 3,949 4,281 21.2% 22.6% 14.3% 15.4%
Other non-current assets 1,307 1,198 1,433 1,524 4.1% 3.9% 5.2% 5.5%
Total assets 32,113 30,966 27,544 27,730 100.0% 100.0% 100.0% 100.0%
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Common size Balance Sheet
Liabilities and shareholders’ equity 2017 2016 2015 2014 2017 2016 2015 2014
Current Liabilities
Accounts payable 2,300 2,051 2,203 2,236 7,2% 6,6% 8.0% 8.1%
Accrued and other liabilities 4,083 3,942 3,802 3,981 12.7% 12.7% 13.8% 14.4%
Taxes payable 1,228 976 944 492 3.8% 3.2% 3.4% 1,8%
Debt due within one year 3,150 2,281 849 1,116 9.8% 7.4% 3.1% 4,0%
Total current liabilities 10,761 9,250 7.798 7,825 33.5% 29.9% 28.3% 28,2%
Long-term debt 6,231 5,765 4,143 4,670 19.4% 18.6% 15.0% 16,8%
Deferred income taxes 362 428 559 638 1.1% 1.4% 2.0% 2,3%
Other non-current liabilities 2,701 3,287 2,998 2,875 8.4% 10.6% 10.9% 10.4%
Total liabilities 20,055 18,730 15,498 16,008 62,5% 60,5% 56.3% 57,7%
Shareholders’ equity 12,058 12,236 12,046 11,722 37,5% 39.5% 43,7% 42,3%
Total liabilities and shareholders’ equity 32,113 30,966 27,544 27,730 100.0% 100.0% 100.0% 100.0%
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Mar-31 Mar-31 Mar-31 Mar-31 Mar-31
xxx1 xxx2 xxx3 xxx4 xxx5
£ m £ m £ m £ m £ m
TURNOVER 1,187.0 1,444.2 2,026.1 2,048.6 1,971.3
Index 100 121.67 170.69 172.59 166.07
TRADING PROFIT 111.6 137.5 179.7 177.8 135.4
Index 100 123.21 161.02 159.32 121.33
Mar-31
Mar-31
Mar-31
Mar-31
Mar-31
xxx1
xxx2
xxx3
xxx4
xxx5
£ m
£ m
£ m
£ m
£ m
TURNOVER
1,187.0
1,444.2
2,026.1
2,048.6
1,971.3
Index
100
121.67
170.69
172.59
166.07
TRADING PROFIT
111.6
137.5
179.7
177.8
135.4
Index
100
123.21
161.02
159.32
121.33
Turnover v Profit
0
20
40
60
80
100
120
140
160
180
'xxx1
'xxx2
'xxx3
'xxx4
'xxx5
Turnove
r
Profit
Turnover v Profit
0
20
40
60
80
100
120
140
160
180
'xxx1
'xxx2
'xxx3
'xxx4
'xxx5
Turnover
Profit
Mar-31 Mar-31 Mar-31 Mar-31 Mar-31
xxx1 xxx2 xxx3 xxx4 xxx5
£ m £ m £ m £ m £ m
TURNOVER 1,187.0 1,444.2 2,026.1 2,048.6 1,971.3
RPI (xxx1 = 100) 100 104.0 106.0 108.4 112.2
RPI adjusted turnover 1187.0 1388.7 1911.4 1889.9 1757.0
% change 17.0 37.6 -1.1 -7.0
Mar-31
Mar-31
Mar-31
Mar-31
Mar-31
xxx1
xxx2
xxx3
xxx4
xxx5
£ m
£ m
£ m
£ m
£ m
TURNOVER
1,187.0
1,444.2
2,026.1
2,048.6
1,971.3
RPI (xxx1 = 100)
100
104.0
106.0
108.4
112.2
RPI adjusted turnover
1187.0
1388.7
1911.4
1889.9
1757.0
% change
17.0
37.6
-1.1
-7.0
3670 Financial Statement Analysis Part 2.pptx
Techniques of Financial Statement Analysis – Part 2
LUBS 3670
Financial Analysis
Lecture 13
Leeds University Business School
Leeds University Business School
Ratio Analysis
Describe the relationship between different accounting numbers in the financial statements
Ratios need to be compared with:
Same ratios in the preceding period
Budgeted ratios for the same period
Ratios for other companies in the same sector
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Ratio Analysis
In order to interpret the meaning of a ratio it is necessary to have some basis of comparison
Comparisons should be made using either times-series analysis, or by using cross-sectional analysis
The use of a single ratio on its own is virtually meaningless
Often numerous ways of calculating a particular ratio.
The key to ratio analysis is consistency
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Ratio definitions
The accounting ratios most often used can be grouped as follows:
Liquidity
Gearing
Activity
Profitability
Shareholder (or Investment Ratios)
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Liquidity ratios
Current/
working capital ratio Indicates the extent to which a firm can meet its short term liabilities from its current assets without having to raise finance by borrowing, issuing more shares or selling fixed assets.
Acid test/
quick /
liquidity ratio Measures the firm’s ability to meet its short term liabilities from its current assets without having to rely on the sale of its stock.
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Gearing ratios
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Capital employed – Issues
How do you measure capital employed?
Total assets – current liabilities
Shareholders’ funds + non- current liabilities
But
How to deal with borrowings which appear in current liabilities
Bank overdraft
Long term borrowings that are in their last year before repayment
Short term loans
Alternative (preferred) measurement
Shareholders’ funds + non- current liabilities + short-term borrowings
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Activity ratios
Inventories (stock) turnover period Inventories x 365 Indicates how many days it
Cost of sales would take to sell the inventory
Collection period for Receivables Trade receivables x 365 Average collection period for
(Debtor Days) Sales Revenue receivables expressed in days
Payment period for payables Trade payables x 365 Average payment period to
(Creditor Days) Credit Purchases or Cost of Sales payables expressed in days
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Profitability
Return on capital employed Measures the performance of the firm regardless of the method of financing.
Return on shareholders’ funds Measures the profitability of the shareholders’ investment in the firm.
Net profit margin Shows how much £1 of sales earns as net profit.
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Profitability
Asset turnover Turnover
Capital employed Measures how efficient the firm is at generating sales from its capital
Gross profit margin Gross profit x 100%
Sales Shows how much £1 of sales earns as gross profit.
ROCE = Net profit margin X Asset turnover
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Financial Statement Analysis
Suggested structure of this section:
Income Statement
Revenue
Cost of Sales
Exceptional Items
Profits and Profitability
Leeds University Business School
Financial Statement Analysis
Suggested structure of this section:
Balance Sheet
Non-Current Assets
Working Capital
Debt Structure
Equity
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Financial Statement Analysis
Suggested structure of this section:
Cash Flow Statement
Cash from Operating Activities
Cash from Investing Activities
Cash from Financing Activities
Change in Cash over the year
Cash Balance
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Current assets
Current liabilities
Current assets
–
stocks
Current liabilities
Debt /Capital Gearing
Total borrowings Shows the extent of borrowings
ratio
Capital employed in relation to capital employed
x 100%
Debt / Equity Ratio
Total borrowings Shows the extent of borrowings
Shareholders’ funds in relation to shareholders funds
x 100%
How many times profit covers
Interest cover
Profit before interest and tax interest payments – a measure
Interest payable of ability to service debt
Debt /Capital Gearing
Total borrowings
Shows the extent of borrowings
ratio
Capital employed
in relation to capital employed
x 100%
Debt / Equity Ratio
Total borrowings
Shows the extent of borrowings
Shareholders’ funds
in relation to shareholders funds
x 100%
How many times profit covers
Interest cover
Profit before interest and tax
interest payments – a measure
Interest payable
of ability to service debt
Profit before Interest and Tax
Capital employed
x
100%
Profit after tax
Shareholders
‘
funds
x
100%
Profit before interest and tax
Sales
x
100%
Financial Analysis Assessment Overview – 2020(1).pptx
Financial Analysis:
Assessment Overview
LUBS 3670
Financial Analysis
Leeds University Business School
Leeds University Business School
1
Assessment
Report format – this is not an essay
The following structure outline is for guidance only – it is not a ‘required’ structure.
8000 word maximum limit on the main body of the report.
Rules on what can be included in appendices – see later.
Deadline 26th March 2020
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Structure
Title page
Contents page
Introduction
Strategic Analysis
Financial Statement Analysis
Stock Market Analysis
Summary and Conclusion
Bibliography
Appendices
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Title and contents page
Title page
Module name and number
Name of company (can use company logo)
Student number
Do not put your name anywhere on the report
Contents page
Should list sections and subsections with page numbers
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Introduction
Name and status of company
What sector/market is it in?
Industry sector
Segmental analysis – both sector and geographical
Strategic business units (SBUs, Divisions)
Company history
When did it start-up?
What has it done since start-up?
What major acquisitions/mergers/spin-offs have occurred?
Is it under a major strategic change? If so, why?
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Strategic Analysis
Broad environment
PEST or PESTEL analysis
Industry
Background to the industry – regulatory background, size, structure, major companies, etc.
Porter’s Five Forces
Company
Analyse company strategy and compare with at least one competitor.
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Financial Statement Analysis
You need to analyse the key financial statements (income statement, balance sheet and cash flow statement) and to show evidence of this.
The structure of the analysis is up to you, but try to analyse by theme (e.g. revenue, costs, profits, NCA, debt structure, etc.) rather than by technique (trend, common size, ratios, etc.)
Use graphs, charts and extracts of data to illustrate your analysis. Include these in the main text section of the report.
5 years of financial statement data is required.
Try to relate financial performance with the strategies discussed in the Strategic Analysis section.
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Financial Statement Analysis
Suggested structure of this section:
Income Statement
Revenue
Cost of Sales
Exceptional Items
Profits and Profitability
Balance Sheet
Non-Current Assets
Working Capital
Debt Structure
Equity
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Financial Statement Analysis
Suggested structure of this section:
Cash Flow Statement
Cash from Operating Activities
Cash from Investing Activities
Cash from Financing Activities
Change in Cash over the year
Cash Balance
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Stock Market Analysis
Share price performance
Compare with stock market, industry and competitors (not necessarily in that order)
Graphs are essential and make sure I can read them
I mark your handed-in copy, so a black and white version of comparisons is usually unreadable.
Stock market indicators
Discussion of EPS and P/E
Discussion of dividend policy and D/Y
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Conclusion
Short summary of your findings overall
Can include a SWOT analysis
How do you think the company is performing and what are its future prospects?
Would you recommend an investor to invest in this company?
There is no right or wrong answer in this section, unless you completely go against your own analysis without justification!!
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Bibliography and referencing
Different referencing styles are allowed – the important thing is to reference.
You need to reference within the main text and/or table.
If you take something directly from the company report, website, etc., make it clear that you have done so.
Do NOT plagiarise from market research reports, the web , etc.
Do NOT copy from each other – you will not be graduating this year once you are caught.
Do NOT give your report to anyone else regardless of however nicely they ask and how friendly you are with them. If they copy parts of your report, you are considered just as guilty of plagiarism as they are.
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Appendices
Allowable contents
Company history table
PEST or PESTEL table
Porter’s 5 (or 6) Forces table
Company strategy tables.
Directors/shareholder tables
Income statement, balance sheet and cash flow statements plus associated analysis.
Ratios, with definitions
SWOT analysis in a table format
Paragraphs of text are not allowed.
I only mark the appendices if you direct me to them via a reference in the main text.
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Word limit
The word limit does not include:
Title page
Contents page
Bibliography
Appendices
Graphs, charts and extracts of data tables (e.g. revenue trend, ratios, etc.) in the main body/text.
Tables in the main text
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Balance Sheet
Balance Sheet
June
9
s
100 100
805.9
792.2 792.2
–
– –
in subsidiary undertakings
– – – – –
1
– –
– – – – –
3.1 2.3 1.6
–
3.1 3.5
.7
0.8
–
-200
91.1
13.5
29.9
– – – –
6.3
– –
-6
5.4
– – – –
– – – –
1109 1109 1109 1109
1.4 6.9 7.5
8.9
4840.3 4869 4597.7 4322.2 4010.2
Income Statement
| 2019 | 2016 | |||||||||||||||||||||||||
| Continuing operations | £m | |||||||||||||||||||||||||
| Revenue | 3419.2 | 4763.1 | 4874.8 | 4650.2 | 4235.2 | |||||||||||||||||||||
| Cost of sales | – | 2804.9 | – | 3678.9 | -38 | 65.9 | – | 3718.2 | – | 3434.8 | ||||||||||||||||
| Gross profit | 614.3 | 1084.2 | 1008.9 | 932 | 800.4 | |||||||||||||||||||||
| Administrative expenses | -124.5 | -183.1 | -146.3 | -132 | ||||||||||||||||||||||
| Profit from operations | 493.4 | 901.1 | 862.6 | 799.2 | 668.4 | |||||||||||||||||||||
| Finance income | 5.1 | 7.1 | ||||||||||||||||||||||||
| Finance costs | -35 | -35.9 | -48.6 | -62.6 | -64.1 | |||||||||||||||||||||
| Net finance costs | -29.9 | -28.8 | -45.1 | -59.7 | -58.2 | |||||||||||||||||||||
| Loss on disposal of joint ventures | -1.7 | |||||||||||||||||||||||||
| Share of post-tax profit from joint ventures | 28.3 | 39.2 | 18.6 | 25.4 | 71.9 | |||||||||||||||||||||
| Share of post-tax profit from associates | -0.6 | |||||||||||||||||||||||||
| Profit before tax | 491.8 | 909.8 | 835.5 | 765.1 | 682.3 | |||||||||||||||||||||
| Tax | -89.1 | -170.4 | -164 | -149.1 | ||||||||||||||||||||||
| Profit for the | year | 402.7 | 739.4 | 671.5 | 616 | 5 | 50.3 | |||||||||||||||||||
| Profit for the year | 399.7 | 740 | 671.2 | 615.8 | 550.3 | |||||||||||||||||||||
| Profit for the year attributable to non-controlling interests | -0.2 | |||||||||||||||||||||||||
| Earnings per share from continuing operations | ||||||||||||||||||||||||||
| Basic | 39.4p | 73.2p | 66.5p | 61.3p | 55.1p | |||||||||||||||||||||
| Diluted | 38.9p | 72.3p | 65.9p | 60.7p | 54.3p |
Cash Flow Statement
2020 2019 2018 2017 2016
-7.5
-7.5 -4
subsidiaries
–
– – –
–
– – –
11.7
received from
investment
s accounted for using the equity method
– 18.6 – – –
– – – – –
3.5 5.1 2.9 2.5 2.6
65.9
– – –
– -1.4 – –
-1
6 – 0.1 0.1 0.2
7.1 8.4 2.4
-60 – 200 0.3 3
– -5.9 – –
784.4 758
619.8 958.3 982.4 784.4 758
Investment account
| Investment In Unconsolidated Subsidiaries | |||||
| BARRATT DEVELOPMENTS | 152.1 | 213.1 | |||
| THE BERKELEY GROUP HOLDINGS | 261.8 | 374.7 | 315 | 135 | 150 |
| TAYLOR WIMPEY | 55.3 | 48.3 | 50.9 | 27.1 | |
| PERSIMMON | |||||
| thomas |
Investment In Unconsolidated Subsidiaries from 2016 to 2020
BARRATT DEVELOPMENTS
2020 2019 2018 2017 2016 152.1 189 234.1 213.1 255.9 THE BERKELEY GROUP HOLDINGS
2020 2019 2018 2017 2016 261.8 374.7 315 135 150 TAYLOR WIMPEY
2020 2019 2018 2017 2016 55.3 48.3 50.9 50.3 PERSIMMON
2020 2019 2018 2017 2016 2.1 3 3 3
Year
s
GP
1008.9
%
8.25%
3419.2 4763.1 4874.8 4650.2 4235.2
Revenue of Barratt Developments Plc (£m)
Revenue £m
2020 2019 2018 2017 2016 3419.2 476
00000000004 4874.8 4650.2 4235.2
Year
Revenue £m
non-current assets
| Non-Current Asset | |||||||
| Property, Plant and Equipment | Goodwill and other intangible assets | Receivables | |||||
| 907 | 1.30 | ||||||
| -1.2 | -36.9 | -0.20 | |||||
| 9.20% | -0.1 | -19.52% | -13.33% | ||||
| 908.2 | 1.50 | ||||||
| – | 1.60 | ||||||
| 5 | 0.00% | 1.79% | -19.27% | -51.61% | |||
| 11.6 | 892.2 | ||||||
| 0.80 | |||||||
| 22.11% | 9.85% | 34.78% | |||||
| 2.30 | |||||||
| -42.8 | |||||||
| -1.04% | -16.73% | 43.75% | |||||
2020 2019 2018 2017 2016 0 2020 2019 2018 2017 2016 2020 2019 2018 2017 2016 0 0 0 0 0 2020 2019 2018 2017 2016 0 19 17.399999999999999 11.6 9.5 9.6 2020 2019 2018 2017 2016 0 907 908.2 892.2 892.2 892.2 2020 2019 2018 2017 2016 0 152.1 189 234.1 213.1 255.9 2020 2019 2018 2017 2016 0 1.3 1.5 3.1 2.2999999999999998 1.6
ratios-efficiency
2020 2019 2018 2017 2016
0 0 0 0 0
-130
3419.2 4763.1 4874.8 4650.2 4235.2
5027.9 4824.3
4475.4 4326.6
1.3 1.5 3.1 2.3 1.6
-1587.9 -1462.4 -1534.2 -1513.5
Non current assets turnover of Barratt Developments Plc
Non current assets turnover
2020 2019 2018 2017 2016 3.0242349195117639 4.0361833742903146 4.0528766212171599 4.0999823664256745 3.5800507185122568
Year
Non current assets turnover
ratios-liquidity
| Liquidity | ||||
| Current ratio | 3.91 | 3.56 | 3.25 | 3.30 |
| Acid test ratio | 0.48 | 0.78 | 0.57 | |
| current liability | 1588.4 | |||
| inventory |
profitability
| Profitability | |||||||||||
| ROCE | 8.95% | 16.40% | 16.05% | 16.01% | 13.85% | ||||||
| Gross margin | 20.70% | ||||||||||
| Net profit margin | 14.43% | 18.92% | 17.70% | 17.19% | 15.78% | ||||||
| Asset turnover | 62% | 87% | 91% | 93% | 88% | ||||||
| Return on shareholders’ funds | 8.32% | 15.21% | 14.63% | 14.28% | 13.75% | ||||||
| PBIT | |||||||||||
| capital employed | 5514.8 | 5493.2 | 5373.3 | 4991.9 | 4826.7 | ||||||
| gross profit | |||||||||||
| Shareholders’ funds + non- current liabilities + short-term borrowings | |||||||||||
| nc liability | 606.3 | ||||||||||
| 72.5 | |||||||||||
ratios-gearing
| Financial Gearing |
| Capital gearing |
| Debt / Equity ratio |
| Interest cover |
investment
| Financial Ratio’s: Investment |
| Dividend cover |
| Dividend payout |
| Earnings per share (eps) |
| Price / Earnings (P/E ratio) |
dividend
| Amounts recognised as distributions to equity shareholders in the year: | 103.1 |
| Special dividend for the year ended 30 June 2015 of 10.0p (2014: nil) per share | |
| Interim dividend for the year ended 30 June 2016 of 6.0p (2015: 4.8p) per share | 60.1 |
| Total dividends distributed to equity shareholders in the year | |
| Proposed final dividend for the year ended 30 June 2016 of 12.3p (2015: 10.3p) per share | 123.3 |
| Proposed special dividend for the year of 12.4p (2015: 10.0p) per share | 125 |
| The proposed final dividend and the special dividend are subject to approval by shareholders at the Annual General Meeting. The cost has been calculated based on the issued share capital at 30 June 2016 and has not been included as a liability at 30 June 2016. |
3.
Financial Statement Analysis
This section should offer an analysis of the company’s financial performance over the last five years. Crucially it should make use of your knowledge of the company’s strategic direction, its industry position and the broad environment. This section should include:
a) A detailed analysis of the financial statements, making comparisons with competitor(s).
You have done very well for part a.
b) Identification of any new accounting policies/treatments, which may impact significantly on future profitability.
c) Identification of problems of comparison caused by particular accounting policies/treatments.
IFRS 15 Revenue from Contracts with Customers, effective on or after 1 January 2018 and applicable to Barratt Developments Plc from 1 July 2018. Barratt has applied IFRS 15 using the cumulative effect method, in respect of the adoption of IFRS 15, revenue is adjusted and reduced by £12.7m.
This is an example what I did for part b and c, only for revenue. I did write down the new accounting policy, but I don’t know how to analyse the impact of future profitability and what the problems are related to new accounting policies or treatments. So, I think you can help me to finish them.
Reference:
https://www.investegate.co.uk/barratt-developments/rns/final-results/201909040700051051L/
But most of them (not only the revenue) need to analyse new accounting policies/treatments (if they have).
So you need to write a short paragraph for every account of them