MFO - Assignment

8/2/2019 MFO - Assignment

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Answer No. 1.

From Financial Analyst

To Fuller Smith and Turner Plc Group Board of Directors

Subject Company Performance Analysis 2009-2010

Date 20 April 2012

Introduction:

With reference to the data available, I have undertaken the financial Performance analysis of

the companys financial statements for the year 2009-10. The report starts with the trend

analysis and then concludes on the ratio analysis.(Appendix 1 - 5).

Profitability

The horizontal trend analysis shows that the revenue growth has been achieved by the

company up to 8.43%. There is an increase in gross profit of the company also which 7.17 %

is more than the previous year. It is seen that the operating profit before the exceptional

items, the reason is that the exceptional items were the reason this year which gave this spike

in the operating profit. It is see that the exceptional items were also responsible to cut down

the finance cost this year. All operating profits were high after considering the exceptional

items.

It is also observed that the company has reduced the long term borrowings but in contrast

increased the short term borrowings. The asset turnover however remains constant, the return

on assets is constant as well when exceptional items are not considered, but when theexceptional items are considered there is a increase by 2% as compared to the previous year.

Liquidity

This should be the major area of concern for Fuller Smith and Turner Plc Group as the

liquidity ratio is well below the set benchmarks thus keeping the company at high risk of

liquidity that is 0.19:1. This ratio falls below the previous years figures as there is an

increase in the days for inventory turnover by 5 days as compared to previous year.

The reason for this can be found out by trend analysis which shows that the company had

more short term borrowings as compared to previous year. Though the company has been

able to operate below the benchmarks of liquidity this year it seems that there is a high riskbecause as compared to the year 2009 the total assets have just increase by 8.66% .

Efficiency

The trend analysis shows that there is a decrease in trade receivables but increase in the

inventory, thus increasing the cost of sales by 7.17% this year. There is also an increase in the

inventory turnover period by 8 days thus reducing the efficiency.


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There have been a reduction in the debtors period and increase in the creditors period when

the figures are compared to the year 2009. This is beneficial for the company and has

increased the cash flow for the company.

Gearing

Though the company has managed to maintain the gearing ratio constant as that of the

previous year, which is around 34%, the benchmark for this is above and thus keeps the

company at average risk.

This is possible because when the long terms borrowings were reduced the short term

borrowings were increased thus balancing the change for the year 2010 and 2009.

Conclusion

Though Fuller Smith and Turner Plc Group have high revenues for the year 2010, the

company is at a high risk of liquidity. But the company can continue the operations as the

profit made is good. The company should make some provisions to decrease the short term

borrowings and thus reducing the liquidity risk.


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The following are the figures of the financial performances for the year 2009 and 2010 for

Fuller, Smith and Turner Plc.

(Ref: Fuller, Smith and Turner Plc group Statement of Comprehensive Income)

Appendix 1: Vertical Trend Analysis.

Fuller Smith and Turner Plc Group Comprehensive Statement of Position as at 27th March

2010

Fuller Smith and Turner Plc Group

Comprehensive Statement of Position 2010 2010 2009 2009

as at 27th

March 2010m % m %

Non Current Assets

Property Plant and equipment 348.20 84.35% 318.70 83.89%

Goodwill 23.90 5.79% 24.10 6.34%

Deferred tax assets 6.10 1.48% 5.00 1.32%

Other non-current assets 9.70 2.35% 9.10 2.40%

Total non-current assets 387.90 93.97% 356.90 93.95%

Current Assets

Inventories 7.60 1.84% 6.10 1.61%

Assets held for resale 0.60 0.15% 0.00 0.00%

Trade Receivables 15.60 3.78% 16.00 4.21%

Cash and cash equivalents 1.10 0.27% 0.90 0.24%

Total current assets 24.90 6.03% 23.00 6.05%

TOTAL ASSETS 412.80 100.00% 379.90 100.00%

Equity and Liabilities

Share capital 22.80 5.52% 22.80 6.00%Share Premium 4.80 1.16% 4.80 1.26%

Retained earnings 180.90 43.82% 173.30 45.62%

Other components of equity -1.30 -0.31% -3.90 -1.03%

Total equity 207.20 50.19% 197.00 51.86%

Non-Current Liabilities

Long-term borrowings 27.40 6.64% 86.30 22.72%

Derivative financial instruments 0.00 0.00% 1.50 0.39%

Pension commitments 12.70 3.08% 8.40 2.21%


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Deferred tax liabilities 37.50 9.08% 37.60 9.90%

Other non-current liabilities

Long term provisions 2.10 0.51% 2.40

Total non-current liabilities 79.7 19.31% 136.20 35.85%

Current Liabilities

Current borrowings 81.40 19.72% 8.80 2.32%

Derivative financial instruments 0.60 0.15% 0.00 0.00%

Trade payables 39.70 9.62% 33.60 8.84%

Current tax payable 3.80 0.92% 3.90 1.03%

Provisions 0.40 0.10% 0.40 0.11%

Total - current liabilities 125.90 30.50% 46.70 12.29%

Total Liabilities 205.60 49.81% 182.90 48.14%

TOTAL EQUITY AND LIABILITIES 412.80 100.00% 379.90 100.00%

Appendix 2: Vertical Trend Analysis.

Fuller Smith and Turner Plc Group Statement of Comprehensive Income.

2010 2009

Revenue 100 100

Cost of Sales 32.14% 32.52%

Gross Profit 67.85% 67.47%

other Income before exceptional items 0% 0.01%

other Income after exceptional items 0.48% 0%

Operating Expenses before exceptional items 53.79% 53.66%

Operating Expenses after exceptional items 54.19% 57.66%Finance Costs 2.37% 3.04%

Profit before tax before exceptional items 11.68% 10.85%

Profit before tax after exceptional items 11.76% 6.95%

Income tax expense before exceptional items 3.29% 3.14%

Income tax expense after exceptional items 3.33% 2.61%

Profit after tax before exceptional items 8.39% 7.71%

Profit after tax after exceptional items 8.47% 4.34%

Operating Profit before exceptional items 8.38% 7.71%

Operating Profit after exceptional items 8.43% 4.20%


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APPENDIX 3 horizontal Trend Analysis of Comprehensive Statement of Position

2010 2009

ASSETSm m % change

Non Current AssetsProperty Plant and equipment 348.20 318.70 9.26%

Goodwill 23.90 24.10 -0.83%

Deferred tax assets 6.10 5.00 22.00%

Other non-current assets 9.70 9.10 6.59%

Total non-current assets 387.90 356.90 8.69%

Current Assets

Inventories 7.60 6.10 24.59%

Assets held for resale 0.60 0.00

Trade Receivables 15.60 16.00 -2.50%Cash and cash equivalents 1.10 0.90 22.22%

Total current assets 24.90 23.00 8.26%

TOTAL ASSETS 412.80 379.90 8.66%

Equity and Liabilities

Share capital 22.80 22.80 0.00%

Share Premium 4.80 4.80 0.00%

Retained earnings 180.90 173.30 4.39%

Other components of equity -1.30 -3.90 -66.67%

Total equity 207.20 197.00 5.18%

Non-Current Liabilities

Long-term borrowings 27.40 86.30 -68.25%

Derivative financial instruments 0.00 1.50 -100.00%

Pension commitments 12.70 8.40 51.19%

Deferred tax liabilities 37.50 37.60 -0.27%

Other non-current liabilities

Long term provisions 2.10 2.40 -12.50%

Total non-current liabilities 79.7 136.2 -41.48%

Current Liabilities

Current borrowings 81.40 8.80 825.00%

Derivative financial instruments 0.60 0.00

Trade payables 39.70 33.60 18.15%

Current tax payable 3.80 3.90 -2.56%


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Provisions 0.40 0.40 0.00%

Total - current liabilities 125.90 46.70 169.59%

Total Liabilities 205.60 182.90 12.41%

TOTAL EQUITY AND LIABILITIES 412.80 379.90 8.66%

APPENDIX 4: Horizontal Trend Analysis of Comprehensive Income

2010 2009 % change

m m

Revenue227.7 210 8.43%

Cost of Sales 73.2 68.3 7.17%

Gross Profit 154.5 141.7 9.03%

other Income before exceptional items 0 0.2 -100.00%

other Income after exceptional items 1.1 0 0.00%

Operating Expenses before exceptional items 122.5 112.7 8.70%

Operating Expenses after exceptional items 123.4 121.1 1.90%

Finance Costs 5.4 6.4 -15.63%

Profit before tax before exceptional items 26.6 22.8 16.67%Profit before tax after exceptional items 26.8 14.6 83.56%

Income tax expense before exceptional items 7.5 6.6 13.64%

Income tax expense after exceptional items 7.6 5.5 38.18%

Profit after tax before exceptional items 19.1 16.2 17.90%

Profit after tax after exceptional items 19.2 9.1 110.99%

Operating Profit before exceptional items 19.1 16.2 17.90%

Operating Profit after exceptional items 19.2 8.9 115.73%


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Appendix 5: Financial Ratios of Fuller Smith and Turner Plc Group

2010 2009

Profitability:

Metri

c

Pre

Excepti

onal

Items

Post

Exceptional

Items

Pre

Exception

al Items

Post

Exception

al Items

Benchmar

k

Return

on

Capital

Employ

ed

(ROCE

)

Return on

capital

employed =

(Net profit

before tax and

interest/capital

employed) X

100 % 8.40% 8.40% 7.8 ~ 8% 8%

Average

Return

Return

on

Assets

(ROA)

Return on

Assets = Profit

before tax and

interest/tax

assets) X 100 %

6.44 ~

6% 6.49 ~ 6% 6% 3.84 ~ 4%

Net

Profit(NP)

Net Profit = (

Net profit

before interest

and tax /

Revenue) X100 % 11.68 ~12% 11.76 ~ 12% 10.08 ~10% 6.95 ~ 7%

2010 2009

Asset

Turnov

er

(ATO)

Asset turnover

= (Revenue /

assets) times 0.55 0.55

Gross

Profit(GP)

gross Profit =

(Gross Profit/

Revenue) X100 % 67.85 ~ 68% 67.47 ~ 67%


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Efficiency 2010 2009

Debtors

(receiva

bles)

collection

period

(DCP)

Debtors

(Receivables)

collection

period = (

Tradereceivables/rev

enue of sales)

X 365 days 25 days 28 days

Credito

rs/Paya

bles

period

(CPP)

Creditors/Paya

bles period =

(Trade

Payables / Cost

of sales or

purchase) X

365 days 198 days 180 days

Invento

ries

Turnov

er

(ITO)

Inventory

Turnover =

(Average of

closing

Inventory /

Cost of sales or

revenues) X

365 days 38 days 33 days

Liquidity 2010 2009current

or

workin

g

capital

Current

Assets/Current

Liabilities x:1 0.19 : 1 0.49 : 1 High Risk

quick

or acid

test

ratio

(Current Assets

-

inventories)/Cu

rrent Liabilities x:1 0.137 : 1 0.361 : 1 High Risk

Gearing 2010 2009

Gearing

(Fixed Interest

Capital /

Capital

Employed) X

100 % 34.43 ~ 34% 32.55 ~ 33%

Average

to Low

risk


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Formulae Used:

Profitability:

Return on capital employed = (Net profit before

tax and interest/capital employed) X 100 ROCE (%)

Return on Assets = Profit before tax and

interest/tax assets) X 100 ROA (%)

Asset turnover = (Revenue / assets) ATO

gross Profit = (Gross Profit/ Revenue) X 100 GP (%)

Net Profit = ( Net profit before interest and tax /

Revenue) X 100 NP (%)

Efficiency

Debtors (Receivables) collection period = (Trade receivables/revenue of sales) X 365 DCP (Days)

Creditors/Payables period = (Trade Payables /

Cost of sales or purchase) X 365 CPP (Days)

Inventory Turnover = (Average of closing

Inventory / Cost of sales or revenues) X 365 ITO (Days)

Liquidity

Ratio Formulae

Current Working Capital (Current Assets / Current Liabilities) = X:1

Quick or Acid Test ratio((Current Assets - Inventory)/ CurrentLiabilities) = X:1

Gearing

Ratio Formulae

Gearing

(Fixed Interest Capital / Capital Employed) X

100


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Answer No. 2:

a) Investment Appraisal evaluation:

1)

Net Present Value

(NPV)

Tax Wizard

Year Net Cash flow ( k) DCF PV (k)

0 -60 1 -60

1 25 0.91 22.75

2 30 0.83 24.9

3 32 0.75 24

NPV (

k) 11.65

Tax Easy


0 -120 1 -120

1 50 0.91 45.5

2 70 0.83 58.1

3 40 0.75 30

NPV (

k) 13.6

Tax Angel


0 -180 1 -180

1 95 0.91 86.45

2 80 0.83 66.4

3 58 0.75 43.5

NPV (

k) 16.35

Profit Index calculations

Tax Wizard

Profit Index 19.41

Tax Easy

Profit Index 11.33

Tax Angel

Profit Index 9.08


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2) Internal Rate of Return (IRR)

Tax Wizard At DCF 10%

Year Net Cash flow ( k) DCF PV (k)0 -60 1 -60

1 25 0.909 22.72

2 30 0.826 24.78

3 32 0.751 24.03

NPV ( k) 11.53

Tax Wizard At DCF 20%


0 -60 1 -60

1 25 0.833 20.83

2 30 0.694 20.82

3 32 0.579 18.53

NPV ( k) 0.16 ~ 0

Tax Wizard IRR 20 %

Tax Easy At DCF 10%Year Net Cash flow ( k) DCF PV (k)

0 -120 1 -120

1 50 0.909 45.45

2 70 0.826 57.82

3 40 0.751 30.04

NPV ( k) 13.31

Tax Easy At DCF 20%


0 -120 1 -120

1 50 0.833 41.65

2 70 0.694 48.58

3 40 0.579 23.16

NPV ( k) -6.61

Tax Easy IRR 16.68%


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==================================================================

3) Payback

Tax Wizard

2 years 1.87 months

Tax Easy

2 years

Tax Angel

2 years 1.10 months

Tax Angel At DCF 10%


0 -180 1 -180

1 95 0.909 86.36

2 80 0.826 66.08

3 58 0.751 43.56

NPV ( k) 16

Tax Angel At DCF 20%


0 -180 1 -180

1 95 0.833 79.14

2 80 0.694 55.52

3 58 0.579 33.58

NPV ( k) -11.76

Tax Angel IRR 15.76%


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b) Selection of Product:

Whenever projects are considered by companies to invest it the factors like NPV, the payback

period and the IRR are considered. For the 3 software given in the problem statement the

summary is given as below:

Tax

Wizard Tax Easy Tax Angel

Net Present Value (NPV k) @

10% 11.53 13.31 16

Net Present Value (NPV k) @

20% 0 -6.61 -11.76

Payback period

2 years

1.87

months 2 years

2 years 3.10

months

IRR 19.86% 16.68% 15.76%

From the figures seen above it is clear that the Tax Wizard is the most suitable for investing.

Tax Wizard looks suitable because as compared to other 2 namely Tax Easy and Tax Angle,

as if the current scenario is considered when the cost of capital of company is 10 % the value

of NPV for Tax wizard is lowest that is 11.53, but when the forecast of financial director is

considered that the cost of capital could rise to 20%, Tax easy and Tax Angel would actually

give a negative NPV and the company might face a loss. However, the NPV of Tax wizard

would be almost zero thus giving the company no profit or loss.

The payback for Tax wizard is fair in comparison with the other 2 softwares.

The IRR for Tax Wizard is highest, up to 20% and that is the maximum as compared to other

two softwares.

The profit index for tax wizard is 19.41 which is the highest as compared to the other 2

software.

When the projects are considered as mutually exclusive Tax Wizard shows the high value for

PI and IRR but the NPV is 0 when DCF is 20%.

The advise to the board of directors would be not to invest in any software unless necessary

on the base of NPV calculation. But if there is a need to invest then TAX WIZARD would be

a better choice on the basis of IRR calculations.


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Answer 3:

Budgeting is the most important task for a organization as it helps to set targets, know the

potential and find means to increase the profit. There are many factors to be considered when

budget planning is to be done. One of the factors necessary for the success of the budget is

human behaviour. When budget planning is done the approach adopted for deciding the

budget plays an important role. The approaches are the top-down approach, the bottom-up

approach, the rolling budget approach and the feed forward approach. Adopting an approach

depends on the company and the motivation level of the employees of that company.

The top-down approach for budgeting.

This type of budgeting approach is usually followed by a company with senior and experienced

management officials. The top management officers give the budget to the managers with targets that

can be achievable on the basis of data analysed by them. However, it is sometimes seen that the

management expects too much form the employees to achieve thus reducing their motivation andresulting into low productivity. This type of budget can lead the lower-level managers to find

themselves in a position of doubt to complete the unrealistic targets for their team. There is also a

positive side to this type of budgeting approach where the organization can actually be managed well

in terms of efficiency and capital invested. This kind of budget is the best type of communication

from the top management to the employees to perform accordingly (Walther,L and Skousen,C (2010)

Budgeting : Planning for success ).

Source: Walther,L and Skousen,C (2010) Budgeting : Planning for success

For example if sales budget is was 200 items in the previous year and according the new budget this

year it is expected as 400 items the morale of the employee is affected as the target seems to be un

achievable to them, however if this years budget expects a sale of 250 items, the morale of the

employee is of doubt but they can actually take it as a acceptable target to achieve and will give it a

try (Perks. R, and Leiwy, D. (2010), Accounting: understanding and practice, McGraw Hill, 3rd edition,

pg.328.). Thus they can prove themselves worth for the challenge and improving their motivation to

do their work.


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Bottom-Up approach:

Source: Walther,L and Skousen,C (2010) Budgeting : Planning for success

The bottom-up approach for budgeting is used mostly by well established organizations. This type of

budget is the most acceptable budget when it comes to the employees involved. This budgeting

approach is also called participative budgeting technique as all the departments are involved in

planning the budget. The planning of this budget works with all the departments involved presenting

their individual budget to plan the main budget of the organization. This budget has proved to

improve and enhance the motivation level of the employees as the target given to them is more

realistic. Even when the budget planning takes considerable amount of time there are more chances

of this kind of budget to achieve the objective defined.

For example, if the sale department gives an estimated sale they can do in that financial year, the

manufacturing department should be capable to produce that much of the product for the sales

department to sell. However all the facts and figures are checked and compiled by the management

and an achievable target is given to all the departments.

Rolling Budget.

This type of approach employs budgeting for shorter intervals like a quarter. In this approach the

targets are continuously monitored for a quarter and updated simultaneously. This type of budgets

are more suitable for the organizations with limited amount of working capital where taking is a loss

can cause them going out of business. The employees are often seen with limited productivity as the

motivation level to work is less for a reason that they can be forced more and more to achieve

targets as compared to the previous quarter.


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Budgetary slack.

Most of the time this problem is faced by the accounting managers while making the budget. The

figures provided by the different departments are hyped to achieve bonus or incentives, but later

after the actual practice of the budged the departments lag behind, this is called the budgetary

slack. This has to be kept in concern while planning the budget whether the concerned department

who are interdependent can cope up with the individual figures provided.

The human behaviour is thus the crucial factor while planning the budget, as people are involved in

all the operations from manufacturing or from sales or from service as well. When people are

involved in budgetary planning process it is seen most of the time that problem solving is quite

effective and employees from departments negotiate with the other departments and come up on

achievable targets as people are to work out the budgets Hopwood, A (1974).


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References

Perks. R, and Leiwy, D. (2010), Accounting: understanding and practice. 3rd Ed. New York: McGraw

Hill.

Raiborn et al (2000), Managerial Accounting. USA: West Publication Company.

Hopwood, A (1974), Accounting and Human Behaviour. London: Haymarket Publishing

Walther,L and Skousen,C (2010) Budgeting : Planning for success

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