Financial and Management Accounting
Total Word count: 3000
The aim of the assignment
The aim of the assignment is to enable you to be familiar with the financial reports that are published by companies to provide information to the interested parties. It is intended that you should interpret the information from both the financial statements and the other reports that are included in the Annual Report and also in the other announcements that companies make from time to time.
Introduction
As the projects manager of a UK - based company that is quoted on the London Stock Exchange (LSE), you report to the finance director. The company is considering making a takeover bid for another LSE listed company in the same line of business and the finance director has asked you to prepare the initial evaluation of the target company for consideration by the Board of Directors. At present you have no access to the target company beyond information available in the public domain and so the starting point will be the annual report of the company that is available on its website.
SELECTION OF A TARGET COMPANY and at least one other company in the same industry as a BENCHMARK
You have to select your own target company. Choose a UK LSE (Main Market, not AIM) listed company (other than the one you work in) in any sector except banking and other financial institutions. It must not be a subsidiary of another company or an overseas company with a UK listing. Avoid companies that have been involved in a major takeover or disposal during the period that you are investigating. It is likely that there will be some changes that will have occurred in most companies but do not choose one if the change is substantial. In addition, do not select a company that has made a loss during the period.
Send the name of your company to your local counsellor for approval. The counsellor will check that your company has already been chosen by another student and that it is a suitable company for you to analyse. Before submitting your company for approval. make sure that the other companies in the same industry so that they can be used as benchmarks to enable you to assess the performance and financial position of your company. It is unlikely that you will find companies that are exact matches but the local counsellor will provide guidance.
SOURCES OF INFORMATION
Your main source of information is the annual report which will be available on the company's website. The company website may have more information in the section for 'investor relations'. You may wish to use other reference sources that are available on the university library website. Give clear reference to all sources used and numbered footnote references should be included in the text of your report.
Outline of report
Your report is expected to be at least 3000 words (excluding tables and references). You must give a word count on the title page of your report. As a guideline, it is suggested that the report should contain the following sections:-
1. Introduction (300 words)
The nature of the business of the company and relevant information of the industry.
This information should be available from the five-year summary in the annual report and the additional information should be available online. The trends in growth of sales and profits, profitability and any other key indicators for this company should be included on this part of the report..
2. Strategy and forward planning (300 words)
What information can be found about the target company's strategy and forward planning? There will be information in the annual report and details may be available on related websites.
3. Ratio analysis (table plus 1500 words)
Prepare a table of ratios for the current year and previous year, SHOWING FULL DETAIL OF WORKING CALCULATIONS for each ratio. Use attached ratio formulae, which will also be attached to the final examination paper. .
- Interpret the ratios and form YOUR OWN conclusions on the financial strengths and weaknesses of the target company.
- Compare your calculations with the other companies that you have selected..
- Find the market price, p/e multiple and dividend information from the Financial Times daily share listing.
Table of Ratios
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Current year
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Working calculations
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Previous year
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Working calculations
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Profitability ratios:-
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Return on Capital Employed
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Return on Shareholders Funds
(also called Return on Equity)
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Net Profit Percentage (based on profit after interest and tax)
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Gross Profit Percentage
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Operating Profit Percentage
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Liquidity Ratios:-
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Current Ratio
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Quick Ratio (Acid Test)
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Efficiency Ratios:-
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Stock Holding Period (days)
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Debtors Payment Period (days)
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Creditors Payment Period (days)
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Cash Conversion Cycle (days)
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Financial Structure:-
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Gearing
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Interest Cover
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Price/Earnings ratio (year end)
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Dividend yield (year end)
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4. Cash flow (150 words)
From the cash flow statement, what are the main aspects of the cash flow position of the company? How does this fit in with the picture that you obtained from the section that looked at the strategy and forward planning and also the ratio analysis.
5. Non-financial performance indicators (300 words)
Does the company provide any form of non-financial performance indicator? Quantitative or qualitative? Comment on the usefulness and transparency of the information. If the company does not provide any non-financial performance indicators, suggest three suitable indicators that could be monitored, giving reasons.
6. Conclusion and Recommendations (450 words)
(i) Is the company growing?
(ii) What are the main strengths and weaknesses that the company has faced during the period under review
(iii) What steps should be taken to improve the performance and financial position of the company.
(iv) Is the company managing its assets effectively and able to meet its financial obligations?
(v) Is the company viewed favourably by financial markets?
2. What kind of takeover target is this company? Give reasons based on the evidence presented in your report.
(i) Strong performance, acquire and use to achieve faster growth and market share
(ii) Weak performance, could be improved with the right kind of management
(iii) Weak performance, buy up to close down and eliminate a competitor.
(iv) Potential e.g. strong resources in balance sheet, good location of activities, good reputation, could retain managers for further expansion.
Sources
State full references to all sources used. Give a brief reference at the point where the source information is used, and a full reference in a 'References' list at the end. The standard expected is such that another person, reading your references, could find the relevant source material.
IN YOUR REPORT
Make clear which sources you have used and what information you have found. Show which sources led to each item of information or opinion taken from elsewhere. It is a good thing to use other sources and refer to them. It is a bad thing to use other sources and pretend these are your own ideas. Referencing other work also protects you in the event that there is an error in the source material.
ADDITIONAL GUIDANCE ON SOURCES
In preparing your report you should make use of the electronic sources available in the Business Information Service of the SBS.
If you choose Databases by subject you will see a section for Company Information.Under this heading you will find links to:
- Company ProFile
- FAME
- Factiva.com
- Global Business Browser
As a starting point choose Global Business Browser. Enter your company's name in the 'Quick search' box and press 'Go'. The information page on the company should now appear. There are also links to analysts' reports, which may help you.
Use FAME to find a Peer comparison - where does your company sit amongst its competitors