English
中文2) The financial performance for the company is very good in terms of profitability and efficiency in the use of assets. However it has deteriorated with regards to the financial year 2000. The three main ratios that were calculated were the efficiency ratios, the profitability and the liquidity ratios, which show a worse picture for the company over the two year period.
Profitability
The company’s profitability position worsened from 2000 to 2001. Although the company witnessed a small increase in retained profits from £139 million to £143.1 million, calculated ratios show a slight fall in the profitability situation of the company. The gross profit margin has fallen from 9.64 % to 8.09 %. Although sales increased by 5.3 %, the gross profit fell from £ 380.9 million to £ 336.6 million. This can be explained by the higher increase of in cost of sales of 7.3 % over the financial year 2000. This has also been confirmed by the reduction in gross profit mark up. The operating profit margin follows the same trend, where by it fell from 7.81 % to 6.14 %. This fall can be attributed partly to the increase in cost of sales, but also due to the meager increase in operating expenses from £ 72.1 million to £ 81.2 million. However, we find that the profit before tax margin has fallen less proportionately than the other ratios due to the fact that other income exceeded other costs. The increase in the absolute figure of retained profits may be due to other factors like interest paid which has fallen by 16.4 %. This is backed by lower leverage levels of the company. In 2001, the company relied less on fixed cost capital, hence leading to the fall in interest paid. There is also a slight fall in the tax paid. Those two factors have equally contributed to the minor increase in the retained profits figure. The most significant ratios in terms of profitability remain the return on capital employed and the return on equity. We find that both these ratios worsened due to the falling profits. The return on capital employed fell from 5.55 % to 5.31 %. The small increase in profits for the financial period was offset by a resulting increase in capital employed from £ 2503.3 million to £ 2693 million. Return on equity fell due to increase in equity. This might have adverse effects on the share price behavior quoted on the stock exchange.
Liquidity
The liquidity position for both years is very dangerous. The company shows symptoms of a very weak and dangerous liquidity status. For both years we find that the working capital ratio is negative and has increased in terms of deficit. The acid test ratio is extremely weak at 0.02:1 for both years which is far from the conventional 1:1 situation. However, it may be explained through the fact that the leisure and tourism industry has very low stock levels, including in its own catering service. The current ratio has also decreased from 0.5:1 to 0.45: 1, which clearly shows a worse situation in 2001 than in 2000. Although we can allow for such weak ratios in this type of industry, a negative working capital is not acceptable and may prove very dangerous for the company in future years. The company may have troubles paying out its debts in the future years.
Efficiency Ratios
The efficiency ratios show a weak propensity to make productive use of assets. The efficiency ratios prove that the company made less good use of assets in 2001 than in 2001. The total assets and net assets turnover ratio, which measure the revenue generation propensity of one pound of assets, have dropped from 0.84: 1 to 0.82:1 and 1.58: 1 and 1.54:1 respectively. The fixed assets ratio has also decreased (from 0.93:1 to 0.91:1) where we see that the company has more fixed assets in the business. This practice in the leisure and tourism industry is mostly due to the volatility in demand. Investing in hotel rooms (acquisition of fixed assets) is a popular management policy where by it decreases the risks of running out of rooms in peak periods. This explains the increase in fixed assets. The company may have acquired hotels in 2001 which led to the increase in intangibles in the form of goodwill. The creditors’ turnover ratio also backs the thinking that the company does not have good liquidity position. The company pays its creditors approximately three months in arrears of the transaction, which is not a good sign in terms of its payment worthiness. The debtors’ repayment period has fallen by only three days which is not significant for the liquidity position.
Gearing
A noticeable feature of the company is that it has lowered its gearing ratio. Its fixed cost capital has remained roughly the same. However we witness an increase in the ordinary share capital. In turn this has led to a small increase in the interest cover, which implies that the company meets the costs of its fixed capital nearly 3.5 times.
In a nutshell, the financial position of the firm has worsened over the years. All the calculated ratios, namely profitability, liquidity and efficiency ratios have dropped between both years. However, when analyzing the gearing ratios, we also notice a shift in the structure of capital from fixed capital to ordinary share capital. The worsening situation of the company may also be an industry phenomenon. The September 11 attacks could have had such an effect on the whole tourism industry where the company has been directly affected.
3) The company may benefit and incur drawbacks as a result of being listed on the stock exchange. Legal compliance with stock exchange listings requires the company to publish its financial statements. Investors will use these financial statements along with the annual reports before deciding to invest in the business. As such many advantages and disadvantages emanate from this practice.
Amongst the various benefits of floatation of stocks, the company will find it easier to raise capital for business development, since investors have good knowledge of the company’s financial position. Moreover, since the company is listed on the stock exchange, it may have an enhanced business profile which will earn the credibility from suppliers and potential stakeholders. An inherent goodwill may be secured by the company. Moreover, by being listed on the stock exchange, it may benefit from tax advantages. Likewise, it can lead to better performance by motivating employees by issuing them with shares. This practice has been very common amongst companies listed on the stock exchange. A very important advantage of floatation will be that the company will have a greater potential for acquiring other business. This is because both shares and cash may be used as purchase consideration.
However, the company may not incur drawbacks as a result of being quoted on the stock exchange. Market fluctuations may make it become vulnerable. Shareholder’s interest and perception of the company will play a key role in the management and decision making procedures of the company. The present situation of the company may lead to its slump on the stock market, which will reduce the marketability of the shares. Moreover, the costs of floatation may be very high through the professional fees that will be incurred. The company will need to pay auditing fees as a result of being listed on the stock exchange. Moreover, it will need to amend its accounting systems in order to comply with the rules of stock market regulations. By being quoted on the stock exchange, the company runs the risk of being undervalued and runs the risk of being taken over by stronger firms.
The present situation of the company implies that it has a low marketability since its financial position has worsened. If the present situation is company specific and not industry specific, shareholders may want to sell their shares in this company to buy shares in other similar companies where they may earn higher in terms of capital gain and dividends. However, the present liquidity situation may be dealt with by raising capital through shareholders who may invest in the business because it still earns a positive return on equity.
Hence the company may actually do better than its present status through the floatation of its shares on the stock exchange. However the company runs the risks of predatory bids through its present financial status.
4) There are many sources of finance that are available to the company if it seeks to expand its business. It can raise its finance both through internal and external sources. It may raise its finance through capital markets (including the stock exchange), loan stocks, bank borrowing, government sources, leasing (operational and finance leases), Hire purchase, Venture Capital, Retained Earnings.
Since the company is quoted on the stock exchange, it may raise additional capital (along with those listed above) a new issue of ordinary shares, a rights issue of share and issue of preference shares. We shall explain these sources of finance.
A new issue of share may occur through an offer for sale basis. In turn new and existing potential shareholders will decide to accept or not to accept to buy the shares. Costs to this source of funding will include amount for advertising the new issue and also professional fees to lawyers, financial advisers, accountants and due diligence providers. The ordinary shareholders will be paid though ordinary dividends
A rights issue of share refers to an offer of ordinary shares to existing shareholders in proportion to their shareholdings which requires cash subscription. In other words, these shares are offered to ordinary shareholders with respect to their present shareholding in return for cash. For e.g. the company may make a rights issue of one for four basis at 150 p. a shareholder who owns 16 shares in the company may buy 4 shares ( one share for every four) at the price of 150 p each. If the shareholder purchases the shares, his ownership in the company will increase to 20 shares, enabling him to earn higher dividends. In turn the company receives cash. As compared to the above, a rights issue of shares is a less costly mode of raising finance. However, the company must be careful while setting its price. A too high price may actually lead to less capital raised where as a too low price may lead to dilution of earnings.
Raising funding though preference shares is the same as raising funding through ordinary shares. However the rights associated with preference shares are different. Preference shares do not have ownership rights and preference shareholders may not receive dividends when the financial position of the company is bad, unlike debenture holders. However cumulative preference shares are an exception to the rule. Moreover, raising funding through preference shares does not restrict the borrowing power of the business as it is not tied to the value of assets. The implication for the company of using this source of funding is that it lowers its gearing ratio (unless it is redeemable), and it enables the company to secure a relatively less risky form of capital.
