financial analysis By: andreas ioannides E-mail: TABLE OF CONTENTS. INTRODUCTION. PROCEDURE. FINDINGS.1.0 INVESTMENT RATIOS – MEASURES OF EFFICIENCY.
1.1 Earningsper Share. 1.
2 P/E Ratio or Price / Earnings Ratio 1.3 Dividend Yield. 1.4Dividend Cover. 2.
0 PRIMARY OPERATING RATIOS – MEASURES OFEFFICIENCY. 2.1 Return on Capital Employed 2.2 Debtors Turnover Ratio2.3 Creditors Turnover Ratio 2.4 Return on Shareholders’ Fund 3.0PRIMARY FINANCIAL RATIOS – GEARING AND LIQUITY.
3.1Gearing Ratio 3.2 Liquidity Ratio 3.
2.1 Current Ratio 3.2.2 Quick or Acid Ratio4.
0 CASH FLOW CONCLUSION RECOMMENDATIONS APPENDICESBIBLIOGRAPHY – REFERENCES INTRODUCTION It can be suggestedthat accounting consists of identifying, measuring and communicating businessinformation to facilitate judgements and decision making for the further future.This specific report is pointed at investigate National Grid Group Plc’s reportand accounts in order to decide whether someone should invest or not in thiscompany. Someone, who is able to analyse this company, must have its AnnualReport for at least two years, which will help the person, because it containsbasic components like the Profit and Loss Account, the Balance Sheet, theCash Flow Statement and the Director’s Report. PROCEDURE In order toguide you to understand about this specific company, I have used the AnnualReview by following some steps: 1) To summarise the size, the structure andthe profit of the company I have first check the balance sheet and the profitand loss accounts. 2) I have read very carefully the chairman’s statement andthe director’s report, which helped me to understand better things about thecompany. 3) I have also calculated the trends and ratios. The performancedata, P;L A/C, Balance Sheet, Ratios and Trends were obtain from thefollowing 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 ashare should be bought, sold or held.
1.1 Earnings per Share. Earnings pershare (EPS) indicate the amount of profit after tax, interest and preferenceshares earned for each ordinary share. It is also more reliable for comparingthe performance of any company because it can not be affected by the policyof the directors. Profit after tax + interest EPS = No. Of Ordinary shares Theearnings per share of National Grid Group, excluding the exceptional profitrelating to Energis, were 19.8 pence, compared with 24.3 pence in 1996/97.
This reduction resulted from lower transmission profits following theimplementation of the new price control. 1.2 Price Earnings Ratio. The PriceEarnings Ratio (PE ratio) is a measure of market confidence in the shares of acompany. 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 stockmarket, which tends to rise more than reported profits when the business cycleswings up and to fall more than profits in a downturn. Arithmetically, the ratiomeasures the number of years it would take to repay the share’s current valuein earnings. It can be define like this: Market price per share Price EarningsRatio = Earnings per share At 31 March 1998, NGG’s share price was 353pence compared with 209 pence at the start of the year, an increase of 68 percent. The shares traded during the year within the range 206 pence to 353pence.
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 totalshares. They are also based on gross dividends per share, that is, on thedividends 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 25thof November 1997, NGG announced that it was taking steps to improve thefinancial efficiency of the Group by returning excess capital to shareholders byway of a special dividend of 44.
7 pence net per ordinary share. The specialdividend, which represented approximately 15 per cent of the Group’s marketcapitalisation at the close of business on the 24th of November 1997, amountedto 786.6 million and was paid on the 17th of February of1998.
On 5th ofFebruary 1998, the shareholders approved a share consolidation to reflect thisreturn of value. As a consequence, 1,718 billion new ordinary shares of 11pence each, a reduction of 15 per cent in the total number of ordinary shares inissue. 1.4 Dividend Cover.
Dividend Cover compares net profit with dividendsto show how many times over the dividends could be paid and how safe thisannual yield is. With other words, the dividend cover shows how many times adividend covered by earnings after tax profit. Earnings per share DividendCover = Net dividend per share The recommenced final divided of 7.24 pencenet per ordinary share, with the interim dividend of 4,83 pence net paid on 17thof February 1998, brings the total ordinary dividend for the year to 12.07 pencenet per ordinary share. This represents an increase of 8.
4 per cent over1996/97. Dividend cover, excluding the exceptional profit relating to Energiswas 1.6 times. 2.0 PRIMARY OPERATING RATIOS – MEASURES OFEFFICIENCY. 2.1 Return on Capital Employed (ROCE).
The ROCE is afundamental measure of the profitability of a company. The ratio is a popularindicator of management efficiency because it contrasts the net profit d by thecompany with the total value of fixed and current assets, which are presumedto be under management control. Therefore, the ROCE demonstrates how wellthe management has utilised total assets. It can be argued that ROCE is themost 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 fromcontinuing operations (Group undertakings) fell from $716.1 million to 570.6million as a result of the significantly reduced contribution from transmissionfollowing the implementation of the new price control. The operating profitcontribution from the associate and joint ventures amounted to 1.3 million(1996/97- nil). 2.
2 Debtors Turnover Ratio. The DTR measures the length oftime it takes the debtors to pay the company for purchases. It can be eitherexpressed in days, months or as a percentage. (The Annual Review 1997/98 ofthe National Grid Group Plc doesn’t show exactly how much is the amount ofthe debtors) 2.3 Creditors Turnover Ratio. The CTR gives some indication ofthe amount of credit a company is allowed by its suppliers, and quite a goodindication, provided stock levels and profit margins and reasonably steady andthe business is not highly seasonal.
This can be measured like this: AverageCreditors 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 Theratio 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 acompany as a percentage. It can be expressed by the following ratio: Profitafter tax and dividends Return On Shareholders Fund = Shareholders’ Funds224,5(million) The ratio for 1997 was: = 16.16% 1388.9 (million) For theyear 1998 because the company has given more dividends that the Profit ofOrdinary activities after Taxation, thus it has Retained Loss instead of RetainedProfit.
3.0 PRIMARY FINANCIAL RATIOS – GEARING AND LIQUITY.3.
1 Gearing Ratio. Whatever method is used to compute gearing, a companywith ‘low gearing’ is one financed predominantly by equity, whereas a ‘highlygeared’ company is one which relies on borrowings for a significant proportionof 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 1998because 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 theCompany used to have Profit on Ordinary activities after taxation (441.3million) so the shareholders funds had been reduced from 1388.9 million in1997 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 1998to $1320.5 million from 804 million in 1997.
Because of this all the above existthis high Gearing Ratios to that Company so the managers must take in toconsideration this phenomenon. 3.2 Liquidity Ratio. Liquidity ratios are ratiosthat show the relationship of a firm’s cash and other current assets to itscurrent liabilities. It is also concerned with the amount of assets held as cash orcash equivalents. 3.
2.1 Current Ratio. The Current Ratio is calculated bydividing 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 accountspayable, short-term notes payable, current maturities of long-term debt,accrued income taxes, and other accrued expenses (principally wages). If acompany is getting into financial difficulty, it begins paying its bills (accountpayable) more slowly, borrowing more from its bank, and so on. If currentliabilities are rising faster than current assets, the current ratio will fall, and thiscould spell trouble. Because the current ratio provides the best single indicatorof the extent to which the claims of short-term creditors are covered by assetsthat are expected to be converted to cash fairly quickly, it is most commonlyused measure of short-term solvency.
Care must be taken when examining thecurrent ratio, just as it should be when examining any ratio individually. Forexample, just because a firm has a low current ratio, even one bellow 1.0, thisdoes not mean the current obligations cannot be met. 368.2 (million) TheCurrent Ratio for 1997 was: = 0.
378:1 973.7 (million) 384 (million) TheCurrent Ratio for 1998 is: = 0.347:1 1105.3 (million) 3.
2.2 Quick or AcidRatio. The Quick or Acid Ratio is calculated by deducting inventories fromcurrent assets and then dividing the remainder by current liabilities: CurrentAssets – Stock Quick or Acid Ratio = Current Liabilities Stock (Inventories)typically are the least liquid of a firm’s current assets, hence they are theassets 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 obligationswithout 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) Theratio for 1998 is: = 0.271:1 1105.3(million) 4.0 CASH FLOW The statementof Cash Flow is designed to show how the firm’s operations have affected itscash position by examining the investment (uses of cash) and financingdecisions (sources of cash) of the firm. The information contained in thestatement of cash flows can help answer such questions as: Is the firmgenerating the cash needed to purchase additional fixed assets for growth? Isgrowth so rapid that external financing is required both to maintain operationsand for investment in new fixed assets? Does the firm have excess cash flowsthat can be used to repay debt or to invest in new products? This information isuseful both for financial managers and investors, so the statement of cashflows 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 1996/97to 615.2 million, primarily as a result of lower operating profits. Cash inflowbenefited by 203.1 million as a consequence of the global offer and listing ofEnergies shares. Payments to the providers of finance, in the form of dividendsand interest, totalled 997.6 million, compared with 269.8 million in 1996/97: ofthis, 768.
6 million related to the special dividend. Net purchases of tangiblefixed assets absorbed cash of 286.4 million, compared to 279.1 million in1996/97. 29.
9 million was invested in increasing the Group’s interest in Citelecfrom 15 per cent to 41.25 per cent and15.4 million in acquiring a 38.
9 per centinterest in the Copperbeit Energy Corporation, Zambia. The most significantfinancing initiative of the year was the issue of 460 million of 4.25 per centexchangeable bonds due 2008, the net proceeds of which were 448.0 million.The exchangeable bonds represent competitive medium-term financing for theGroup and the structure of the bonds affords the Group significant flexibility indeterring its longer-term capital structure based on its future requirements.CONCLUSION. I can now believe that I have guided you about the NationalGrid Group Plc Company with the Annual Review.
So if someone wants toinvest in this Company must first read this assignment in order to understandsomething about this and after that to decide what to do.RECOMENTATIONS. As far as I am concerned, I truly believe that theNational Grid Group Plc Company must take into consideration some factorsthat may help them in order to improve their company as a hall or to increasetheir profit and minimise their expenses. First of all they must find ways inorder to increase the Return on Shareholder funds. For example minimise thecost by integrating and enforcing a Computerise new Company. In other wordsto have a consistently high rate of return on shareholders’ equity.
Second theymust have an above-average record of earning per share. In 1997 for theCompany it was 24.3 pence and 1998 has increased to 26.1 pence. Nextthey must have a strong level of retained earnings. So the company mustreduced the dividends to the minimum in order to have more retained earningsand no losses, and then they will increase their shareholders funds and toreduced the current and long turn liabilities.
The Profit Margin of the Companyin 1998 is: (PBIT / SALES = 40%). So this is a nice thing for the Company, butbecause they own a lot of money in Debts (Long Turn), they pay a lot ofinterest so it minimises at the end of the day the Retained Profit. That’s whythey 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 Inflowhas been decreased (increases the Cash Outflow) because of the interest ofthe increased and Dividend paid. As well as, they have to decrease the CurrentLiabilities and to increase the Current Assets. Also to decrease the GearingRatio, (decrease the Long Turn Liabilities).