Financial Analysis


financial analysis
By: andreas ioannides
E-mail:
TABLE OF CONTENTS. INTRODUCTION. PROCEDURE. FINDINGS.

1.0 INVESTMENT RATIOS – MEASURES OF EFFICIENCY. 1.1 Earnings
per Share. 1.2 P/E Ratio or Price / Earnings Ratio 1.3 Dividend Yield. 1.4
Dividend Cover. 2.0 PRIMARY OPERATING RATIOS – MEASURES OF
EFFICIENCY. 2.1 Return on Capital Employed 2.2 Debtors Turnover Ratio
2.3 Creditors Turnover Ratio 2.4 Return on Shareholders’ Fund 3.0
PRIMARY FINANCIAL RATIOS – GEARING AND LIQUITY. 3.1
Gearing Ratio 3.2 Liquidity Ratio 3.2.1 Current Ratio 3.2.2 Quick or Acid Ratio
4.0 CASH FLOW CONCLUSION RECOMMENDATIONS APPENDICES
BIBLIOGRAPHY – REFERENCES INTRODUCTION It can be suggested
that accounting consists of identifying, measuring and communicating business
information to facilitate judgements and decision making for the further future.

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This specific report is pointed at investigate National Grid Group Plc’s report
and accounts in order to decide whether someone should invest or not in this
company. Someone, who is able to analyse this company, must have its Annual
Report for at least two years, which will help the person, because it contains
basic components like the Profit and Loss Account, the Balance Sheet, the
Cash Flow Statement and the Director’s Report. PROCEDURE In order to
guide you to understand about this specific company, I have used the Annual
Review by following some steps: 1) To summarise the size, the structure and
the profit of the company I have first check the balance sheet and the profit
and loss accounts. 2) I have read very carefully the chairman’s statement and
the director’s report, which helped me to understand better things about the
company. 3) I have also calculated the trends and ratios. The performance
data, P;L A/C, Balance Sheet, Ratios and Trends were obtain from the
following sources: – Annual Review of National Grid Group of 1997-98. –
Articles from Financial Times newspaper. – Books related to the subject.

FINDINGS. 1.0 INVESTMENT RATIOS – MEASURES OF EFFICIENCY.

Investment ratios are the ratios used by the investors when deciding whether a
share should be bought, sold or held. 1.1 Earnings per Share. Earnings per
share (EPS) indicate the amount of profit after tax, interest and preference
shares earned for each ordinary share. It is also more reliable for comparing
the performance of any company because it can not be affected by the policy
of the directors. Profit after tax + interest EPS = No. Of Ordinary shares The
earnings per share of National Grid Group, excluding the exceptional profit
relating to Energis, were 19.8 pence, compared with 24.3 pence in 1996/97.

This reduction resulted from lower transmission profits following the
implementation of the new price control. 1.2 Price Earnings Ratio. The Price
Earnings Ratio (PE ratio) is a measure of market confidence in the shares of a
company. Also the PER play a significant role not only in the company itself,
but on the industry in which it operates and, of course, on the level of the stock
market, which tends to rise more than reported profits when the business cycle
swings up and to fall more than profits in a downturn. Arithmetically, the ratio
measures the number of years it would take to repay the share’s current value
in earnings. It can be define like this: Market price per share Price Earnings
Ratio = Earnings per share At 31 March 1998, NGG’s share price was 353
pence compared with 209 pence at the start of the year, an increase of 68 per
cent. The shares traded during the year within the range 206 pence to 353
pence. The market capitalisation of the Company at year-end was $5.2 billion.

(The National Grid Group plc Annual Review 1997-98) 1.3 Dividend Yield.

Dividend Yield expenses dividends as a proportion of the market value of total
shares. They are also based on gross dividends per share, that is, on the
dividends actually paid plus the associated tax credit. It can be defined like this:
Dividend per share Dividend Yield = x 100 Market value per share On the 25th
of November 1997, NGG announced that it was taking steps to improve the
financial efficiency of the Group by returning excess capital to shareholders by
way of a special dividend of 44.7 pence net per ordinary share. The special
dividend, which represented approximately 15 per cent of the Group’s market
capitalisation at the close of business on the 24th of November 1997, amounted
to 786.6 million and was paid on the 17th of February of1998. On 5th of
February 1998, the shareholders approved a share consolidation to reflect this
return of value. As a consequence, 1,718 billion new ordinary shares of 11
pence each, a reduction of 15 per cent in the total number of ordinary shares in
issue. 1.4 Dividend Cover. Dividend Cover compares net profit with dividends
to show how many times over the dividends could be paid and how safe this
annual yield is. With other words, the dividend cover shows how many times a
dividend covered by earnings after tax profit. Earnings per share Dividend
Cover = Net dividend per share The recommenced final divided of 7.24 pence
net per ordinary share, with the interim dividend of 4,83 pence net paid on 17th
of February 1998, brings the total ordinary dividend for the year to 12.07 pence
net per ordinary share. This represents an increase of 8.4 per cent over
1996/97. Dividend cover, excluding the exceptional profit relating to Energis
was 1.6 times. 2.0 PRIMARY OPERATING RATIOS – MEASURES OF
EFFICIENCY. 2.1 Return on Capital Employed (ROCE). The ROCE is a
fundamental measure of the profitability of a company. The ratio is a popular
indicator of management efficiency because it contrasts the net profit d by the
company with the total value of fixed and current assets, which are presumed
to be under management control. Therefore, the ROCE demonstrates how well
the management has utilised total assets. It can be argued that ROCE is the
most important measure of the profitability of any specific company.

Mathematically can be measured by this: Net Operating Profit before tax,
interest and dividends ROCE = Capital Employed Operating profit from
continuing operations (Group undertakings) fell from $716.1 million to 570.6
million as a result of the significantly reduced contribution from transmission
following the implementation of the new price control. The operating profit
contribution from the associate and joint ventures amounted to 1.3 million
(1996/97- nil). 2.2 Debtors Turnover Ratio. The DTR measures the length of
time it takes the debtors to pay the company for purchases. It can be either
expressed in days, months or as a percentage. (The Annual Review 1997/98 of
the National Grid Group Plc doesn’t show exactly how much is the amount of
the debtors) 2.3 Creditors Turnover Ratio. The CTR gives some indication of
the amount of credit a company is allowed by its suppliers, and quite a good
indication, provided stock levels and profit margins and reasonably steady and
the business is not highly seasonal. This can be measured like this: Average
Creditors Creditors Turnover Ratio = x 365 (days) Purchases 937.7(million)
The ratio for 1997 was: = 1.499 x 365 = 547.17 625.5(million) 1105300 The
ratio for 1998 is: = 1.578 x 365 = 576.06 700350 2.4 Return on Shareholders’
Fund. The Return on Shareholders’ Fund represents the net profit of a
company as a percentage. It can be expressed by the following ratio: Profit
after tax and dividends Return On Shareholders Fund = Shareholders’ Funds
224,5(million) The ratio for 1997 was: = 16.16% 1388.9 (million) For the
year 1998 because the company has given more dividends that the Profit of
Ordinary activities after Taxation, thus it has Retained Loss instead of Retained
Profit. 3.0 PRIMARY FINANCIAL RATIOS – GEARING AND LIQUITY.

3.1 Gearing Ratio. Whatever method is used to compute gearing, a company
with ‘low gearing’ is one financed predominantly by equity, whereas a ‘highly
geared’ company is one which relies on borrowings for a significant proportion
of its capital. It can be defined like this: Long – Term Debt Gearing Ratio =
Shareholder Fund 804(million) The Gearing Ratio for 1997 was: = 57.8%
1388.9(million) 1320.5(million) The Gearing Ratio for 1998 is: = 148.6%
888.6(million) The National Grid Group Plc Company may it has loss in 1998
because they have given more total dividend to their shareholders than 1997,
and that’s why they have retained loss in 1998 (516.3 million), instead the
Company used to have Profit on Ordinary activities after taxation (441.3
million) so the shareholders funds had been reduced from 1388.9 million in
1997 to 888.6 million in 1998. But from the other side of view Creditors
(amounts following due after more than one year) have been increased in 1998
to $1320.5 million from 804 million in 1997. Because of this all the above exist
this high Gearing Ratios to that Company so the managers must take in to
consideration this phenomenon. 3.2 Liquidity Ratio. Liquidity ratios are ratios
that show the relationship of a firm’s cash and other current assets to its
current liabilities. It is also concerned with the amount of assets held as cash or
cash equivalents. 3.2.1 Current Ratio. The Current Ratio is calculated by
dividing current assets by current liabilities: Current Assets Current Ratio =
Current liabilities Current assets normally include cash, marketable securities,
accounts receivable, and inventories. Current liabilities consist of accounts
payable, short-term notes payable, current maturities of long-term debt,
accrued income taxes, and other accrued expenses (principally wages). If a
company is getting into financial difficulty, it begins paying its bills (account
payable) more slowly, borrowing more from its bank, and so on. If current
liabilities are rising faster than current assets, the current ratio will fall, and this
could spell trouble. Because the current ratio provides the best single indicator
of the extent to which the claims of short-term creditors are covered by assets
that are expected to be converted to cash fairly quickly, it is most commonly
used measure of short-term solvency. Care must be taken when examining the
current ratio, just as it should be when examining any ratio individually. For
example, just because a firm has a low current ratio, even one bellow 1.0, this
does not mean the current obligations cannot be met. 368.2 (million) The
Current Ratio for 1997 was: = 0.378:1 973.7 (million) 384 (million) The
Current Ratio for 1998 is: = 0.347:1 1105.3 (million) 3.2.2 Quick or Acid
Ratio. The Quick or Acid Ratio is calculated by deducting inventories from
current assets and then dividing the remainder by current liabilities: Current
Assets – Stock Quick or Acid Ratio = Current Liabilities Stock (Inventories)
typically are the least liquid of a firm’s current assets, hence they are the
assets on which losses are most likely to occur in the event of liquidation.

Therefore, a measure of the firm’s ability to pay off short-term obligations
without relying on the sale of inventories is important. 368 – 100 (million)
The Ratio of 1997 was: = 0.257:1 973.7 (million) 384 – 84 (million) The
ratio for 1998 is: = 0.271:1 1105.3(million) 4.0 CASH FLOW The statement
of Cash Flow is designed to show how the firm’s operations have affected its
cash position by examining the investment (uses of cash) and financing
decisions (sources of cash) of the firm. The information contained in the
statement of cash flows can help answer such questions as: Is the firm
generating the cash needed to purchase additional fixed assets for growth? Is
growth so rapid that external financing is required both to maintain operations
and for investment in new fixed assets? Does the firm have excess cash flows
that can be used to repay debt or to invest in new products? This information is
useful both for financial managers and investors, so the statement of cash
flows is an important part of the annual report. For National Grid Group Plc,
net cash inflow from continuing operations fell from 877.3 million in 1996/97
to 615.2 million, primarily as a result of lower operating profits. Cash inflow
benefited by 203.1 million as a consequence of the global offer and listing of
Energies shares. Payments to the providers of finance, in the form of dividends
and interest, totalled 997.6 million, compared with 269.8 million in 1996/97: of
this, 768.6 million related to the special dividend. Net purchases of tangible
fixed assets absorbed cash of 286.4 million, compared to 279.1 million in
1996/97. 29.9 million was invested in increasing the Group’s interest in Citelec
from 15 per cent to 41.25 per cent and15.4 million in acquiring a 38.9 per cent
interest in the Copperbeit Energy Corporation, Zambia. The most significant
financing initiative of the year was the issue of 460 million of 4.25 per cent
exchangeable bonds due 2008, the net proceeds of which were 448.0 million.

The exchangeable bonds represent competitive medium-term financing for the
Group and the structure of the bonds affords the Group significant flexibility in
deterring its longer-term capital structure based on its future requirements.

CONCLUSION. I can now believe that I have guided you about the National
Grid Group Plc Company with the Annual Review. So if someone wants to
invest in this Company must first read this assignment in order to understand
something about this and after that to decide what to do.

RECOMENTATIONS. As far as I am concerned, I truly believe that the
National Grid Group Plc Company must take into consideration some factors
that may help them in order to improve their company as a hall or to increase
their profit and minimise their expenses. First of all they must find ways in
order to increase the Return on Shareholder funds. For example minimise the
cost by integrating and enforcing a Computerise new Company. In other words
to have a consistently high rate of return on shareholders’ equity. Second they
must have an above-average record of earning per share. In 1997 for the
Company it was 24.3 pence and 1998 has increased to 26.1 pence. Next
they must have a strong level of retained earnings. So the company must
reduced the dividends to the minimum in order to have more retained earnings
and no losses, and then they will increase their shareholders funds and to
reduced the current and long turn liabilities. The Profit Margin of the Company
in 1998 is: (PBIT / SALES = 40%). So this is a nice thing for the Company, but
because they own a lot of money in Debts (Long Turn), they pay a lot of
interest so it minimises at the end of the day the Retained Profit. That’s why
they have to increase the at least the Profit Margin. About the Cash flow,
because of the decreasing rate of profits of the year 1998, the Net Cash Inflow
has been decreased (increases the Cash Outflow) because of the interest of
the increased and Dividend paid. As well as, they have to decrease the Current
Liabilities and to increase the Current Assets. Also to decrease the Gearing
Ratio, (decrease the Long Turn Liabilities).

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