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AC4410 Accounting And Finance 2

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  • Course Code: AC4410
  • University: University Of Central Lancashire
  • Country: United Kingdom

Question:

You are required to prepare an individual written financial analysis of the most recent full financial statements of your chosen company. You may use whatever (legal!) techniques and methods you think appropriate and any extra information.

 

Answer:

Introduction:

Sky plc is a European media and telecommunication company which is situated in London, UK. The key products of the company are direct broadcast satellite, broadband, telephony services, broadcasting, pay television etc. the total revenue of the company was € 12.916 billion in 2017. Currently, 21 million subscribers are entertained by the company and 30,000 people are employed by the company (Home, 2018). The company operates its business through its segments and subsidiary companies which are sky UK, the cloud, Sky Italia, Sky Ireland etc. Currently, company is planning to expand the market through grabbing the international market more. The annual report of the company briefs that the financial position and performance of the company is quite better and chief financial officer describes about some new projects of the company (annual Report, 2017)

Ratio analysis:

Ratio analysis is a process which is conducted by the financial analyst and the financial managers of the company to evaluate the profitability, liquidity, solvency, capital structure etc position of the company. It aids the company to compare the performance from last year as well as with competitors. Though, ratio analysis process has some limitations as well. The benefits and limitations of the ratio analysis are as follows:

Limitations and benefit:

Brigham and Ehrhardt, (2013) has briefed that ratio analysis is one of the most used tool of financial analysis to evaluate and measure the financial performance of the company. Ratio analysis aids the financial manager of the company to predict the future and evaluate the current performance of the company. Ratio analysis also assists the manager of the company to evaluate that whether the target has been achieved or not.

On the other hand, it has some limitations as well. The ratio analysis calculations totally based upon the financial statement of the company. If the financial statements are not reliable than the ratio analysis measurement is also not good and reliable (Borio, 2014). Ratio analysis is based on many assumptions and the level of an organization could not be compared with other organization in terms of liquidity, capital structure etc.

Ratios to calculate:

For the analysis, sky plc’s financial statement of last 4 years (2017, 2016, 2015 and 2014) has been used. The calculations and the analysis of ratios of the company are as follows:

Profitability ratio:

Profitability ratios brief about the capability of an organization to generate profit on various bases such as sales revenue, total assets, equity etc. In the report, return on capital employed, gross profit margin and operating profit margin has been evaluated.

Return on capital employed:

Return on capital employed measures that how the long term finances are used by the company to enhances and generate the operating profits.

Return on Capital employed

 

 

 

 

 

Operating profit /

 

11,54,000

9,77,000

9,72,000

11,61,000

Capital employed (total assets - current liabilities)

 

            1,28,88,000

            1,30,84,000

          1,11,54,000

            39,30,000

Answer:

%

8.95%

7.47%

8.71%

29.54%

Analysis:

The calculations of return on capital employed briefs that the return on capital employed of the company is quite better. Currently, company is offering 8.97% return to the long term financers of the company.

Gross profit margin:

Gross profit margin measures the profit generation capability of the company in context with the total sales revenue of the company.

Gross Profit Margin

 

 

 

 

 

Gross profit /

 

              71,03,800

              65,80,750

            49,77,000

            41,97,600

Sales Revenue (note used operating revenue)

 

            1,29,16,000

            1,19,65,000

            99,89,000

            76,32,000

Answer:

 

                      0.55

                      0.55

                    0.50

                    0.55

Analysis:

The calculations of gross profit margin brief that the gross profitability position level of the company is quite competitive. The company has maintained a good limit of gross profit margin in last 4 years.

Operating profit margin:

Operating profit margin measures the profit generation capability of the company in context with the total sales revenue of the company.

Operating profit margin

 

 

 

 

 

Operating profit /

 

11,54,000

9,77,000

9,72,000

11,61,000

Sales Revenue

%

1,29,16,000

1,19,65,000

99,89,000

76,32,000

Answer:

 

8.93%

8.17%

9.73%

15.21%


Analysis:

The calculations of operating profit margin brief that the operating profitability position level of the company has been lowered from 2014 and 2015 but still the company is managing a competitive position.

 

Activity / efficiency ratio:

Asset efficiency ratios brief about the capability of an organization to manage the assets and the working capital management for the daily operations of the company. In the report, inventory turnover, debtors turnover and trade payable payment days has been evaluated (Gitman and Zutter, 2012).

Inventory turnover days:

Inventory turnover days brief that how long would it take for an organization to turnover the inventories.

Inventory Turnover (days)

 

 

 

 

 

Average Inventory /

 

11,13,000

9,90,000

8,47,000

5,46,000

Cost of Sales

# days

58,12,200

53,84,250

50,12,000

34,34,400

Answer:  (note the above needs to be x 365)

 

69.90

67.11

61.68

58.03

 

Analysis:

The calculations brief that the inventory turnover days of the company has been enhanced from last year which explains about high working capital.

Debtors’ turnover days:

Debtors’ turnover days brief that how long it takes to the credit customers of the company to pay the amount.

Receivables Turnover (days)

 

 

 

 

 

Average trade debtors /

 

                4,13,000

                3,45,000

              2,67,000

              1,40,000

Sales revenue  (note used operating revenue)

# days

            1,29,16,000

            1,19,65,000

            99,89,000

            76,32,000

Answer:  (note the above needs to be x 365)

 

11.67

10.52

9.76

6.70

 

Analysis:

The calculations brief that the debtors’ turnover days of the company has also been enhanced from last year which explains about high working capital requirement.

Creditors’ turnover days:

Creditors’ turnover days brief that how long it takes to the company to pay the amount to its creditors (Borio, 2014).

Trade payable payment period ratio

 

 

 

 

 

Accounts payable/

 

16,12,000

14,21,000

13,61,000

8,02,000

Cost of sales

 

58,12,200

53,84,250

50,12,000

34,34,400

Answer: (note the above needs to be x 365)

 

101.2319

96.3300

99.1151

85.2347

 

Analysis:

The calculations brief that the creditors’ turnover days of the company has been increased from last year which explains about less working capital requirement

Liquidity ratios:

Liquidity ratios brief about the capability of an organization to manage and pay the short term debt of the company. In the report, current liquidity ratio and acid test ratio have been evaluated.

Current liquidity ratio:

Current liquidity ratio brief about the ability of the company pay off all the current liabilities of the company on the basis of current assets of the company.

Current Ratio

 

 

 

 

 

Current Assets /

 

53,34,000.00

47,02,000.00

45,59,000.00

25,73,000.00

Current liabilities

 

55,50,000.00

43,26,000.00

42,04,000.00

25,19,000.00

Answer:

 

0.96

1.09

1.08

1.02

 

Analysis:

The calculations of current ratio brief that the level of liquidity position has been lowered from last year. The company is required to maintain a competitive level.   

Acid test ratio:

Acid test ratio brief about the ability of the company pay off all the current liabilities of the company on the basis of quick assets of the company.

Acid test ratio

 

 

 

 

 

Current Assets - Inventory /

 

42,21,000

37,12,000

37,12,000

20,27,000

Current Liabilities

 

55,50,000

43,26,000

42,04,000

25,19,000

Answer:

 

0.76

0.86

0.88

0.80

 

Analysis:

The calculations of current ratio brief that the level of liquidity position has been lowered from last year. The company is required to reduce the level of current liabilities to maintain a competitive level.  

Capital structure ratios:

Capital structure ratio briefs about the capability of an organization to manage its capital structure such as debts and equity (Kaplan and Atkinson, 2015). In the report, gearing ratios and interest coverage ratio have been evaluated.

<table width="100%" border="1",cellspacing="0">

Gearing ratio briefs the position of capital structure of a company. It evaluates the long term liabilities and long term funds of the company.

Gearing ratio

 

 

 

 

 

Long term liabilities /

 

90,41,000

96,43,000

79,30,000

28,58,000

Capital employed

 

1,28,88,000

1,30,84,000

1,11,54,000

39,30,000

Answer:

%

                     0.702

                     0.737

                   0.711

                   0.727

 

Analysis:

The calculations of gearing ratio brief that the level of long term liabilities have been reduced from last year’s which briefs about less cost position of the company.  

Interest coverage ratios:

Interest coverage ratio briefs the position of capital structure of a company. It evaluates the total cost of the company.

Interest Coverage Ratio

 

 

 

 

 

EBIT /

 

11,54,000.00

9,77,000.00

9,72,000.00

11,61,000.00

Net Finance Costs (used net interest expense)

 

2,45,000

2,32,000

2,21,000

1,35,000

Answer:

times p.a

                     4.710

                     4.211

                   4.398

                   8.600

 

Analysis:

The calculations of interest coverage ratio brief that the level of cost of the company has been enhanced in context of the last year.

Investors’ ratios:

Investors’ ratios brief about the investment position of an organization. It evaluates the shareholders position in the company (Grinblatt and Titman, 2016). In the report, earnings per share and dividend coverage ratio have been evaluated.

Earnings per share:

Earnings per share ratio brief the total net income of the company in context with the outstanding share of the company.

Earnings per share

 

 

 

 

 

Net income

 

6,95,000

6,66,000

19,57,000

8,65,000

Weighted average shares outstanding

 

17,10,000

17,07,000

16,90,000

15,62,000

Answer:

 

                     0.406

                     0.390

                   1.158

                   0.554

 

Analysis:

The calculation of earnings per share ratio briefs the level of EPS has been enhanced from last year but in context of last 4 years, the position of the company has been lowered. It briefs the alterations among the profitability position of the company.

Dividend coverage ratio:

Dividend coverage ratio brief the total net income of the company in context with the dividend paid of the company.

Dividend coverage ratio

 

 

 

 

 

Net income /

 

6,95,000.00

6,66,000.00

19,57,000.00

8,65,000.00

Dividend paid to shareholders

 

3,58,000

5,64,000

5,49,000

4,85,000

Answer:

 

                     1.941

                     1.181

                   3.565

                   1.784

(Morningstar, 2018)

Analysis:

The calculations of dividend coverage ratio briefs the level of dividends have been lowered and it explains about lower dividend payout ratio of the company. If the investors are looking forward for continuous return then the company is not a good opportunity.

Recommendation and conclusion:

The report briefs that few changes are required to be done by the chief financial officer of the company to maintain the better financial position and performance of the company. Liquidity position and the asset efficiency position should be enhanced and managed by the company for better performance.

To conclude, the overall financial position of the company is quite better and company is a good opportunity for the purpose of investment.

 

References:

Annual Report. 2017. Sky plc. [Online]. Available at: https://www.skygroup.sky/corporate/articles/annual-report-2017 [Retrieved on 14th April 2018].  

Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt?. Journal of Banking & Finance, 45, pp.182-198.

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Gitman, L.J. and Zutter, C.J., 2012. Principles of managerial finance. Prentice Hall.

Grinblatt, M. and Titman, S., 2016. Financial markets & corporate strategy. Prentice Hall.

Home. 2018. Sky plc. [Online]. Available at: https://www.skygroup.sky/corporate/about-sky [Retrieved on 14th April 2018].  

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Morningstar. 2018. Sky plc. [Online]. Available at: https://financials.morningstar.com/cash-flow/cf.html?t=SKY&region=gbr&culture=en-US&platform=sal [Retrieved on 14th April 2018].  

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