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Financial analysis of Halfords limited

Discuss About The Measuring Managing The Value Of Companies.

The report has been prepared to evaluate about the Halfords limited. Being a chief financial officer of a company, it is required to evaluate and analyze the financial position and performance of the company. All the financial decisions of the company are required to be done by the chief financial officer in such a way that the funds could be raised by the company in minimum price and invested in the project from where maximum return could be earned. In the report, financial statement of the Halfords limited has been evaluated firstly to recognize the profitability and the short term debt obligation position of the company. Further, the reports lead to the investment project evaluation of the company and lastly, it has been identified that whether the company should acquire another company for the diversification or not. 

Halfords group plc is retailing company which operates its business in UK market and Ireland market. The company retails the car accessories, car audio, bicycles, ripspeed, tools, child seats etc. further, various services are also provided  by the company such as Bicycle repair, Audio installation, vehicle part, fitting etc. the company has been founded in 1892 and currently the revenue of the company is £ 1095 million (Home, 2018). The financial and non financial position of the company is quite competitive. Being a chief financial officer of the company, financial statement of the company has been evaluated firstly to identify that whether the company would be able to make profit or not. The ratio analysis study of the company is as follows:

Profitability ratios express about the profit making capability of an organization. It express that whether the company is able to make enough profits for the equity holder and whether the resources of the company are enough (Kaplan and Atkinson, 2015). The profitability ratio of Halfords group explains that the profitability level of the company has been lowered in year 2017. The return on equity ratio evaluates about the total profit in context of the total equity of the company. On the basis of Return on equity calculations, it has been found that the return on equity in current year has been lowered due to changes in the industry. Though, the financial performance of the company is according to the ideal ratio (more than 15%) (Fridson and Alvarez, 2011).

Profitability ratios

Gross profit margin explains about the profit of the company which is generated after deducting the cost of revenue from total revenue of the company. The gross profit margin level of the company explains that the performance of the company is quite better. The material price of the products has impacted on the position of the company.

Liquidity ratios express about the short term debt payment capability of an organization. It expresses that whether the company is able to pay the short term debt obligation of the company or not (Brooks, 2015). The liquidity ratio of Halfords group explains that the liquidity level of the company is quite competitive. The current ratio evaluates about the total current assets in context of the current liabilities of the company. On the basis of current ratio calculations, it has been found that the current ratio of the company is quite better and competitive.  The financial performance of the company is according to the ideal ratio and the industry (Morningstar, 2018).

Acid test ratio explains about the short term debt capability of the company which eliminates the items that could not be liquidated instantly (Hogarth and Makridakis, 2011). The acid test ratio level of the company explains that the performance of the company is quite better. The company is enough able to pay the payment at the time of liquidation.

Investment appraisal techniques are the process to recognize the investment and project options of an organization. It is an evaluation process which includes various tools to identify that whether the project should be accepted by the company or not. It examines the cash inflow and outflow of the project and on the basis of that a decision is made about the acceptance or rejection of a project (Brown, 2015). This process is used by every organization to make better decision about the projects and investment opportunities.

In the given case, Halfords limited is planning to invest into a new project in which the car parts would be manufactured by the company. The investment opportunity explains that the company would have to invest £ 3,00,00,000 in the plant and the plant would run for 10 years with no salvage value (Besley and Brigham, 2008). Further, the cash inflow of the company has been evaluated on the basis of industry position and the production process of the company and it has been found that the capacity of the plant would be 4,00,000 units to 5,00,000 units and the selling price of the parts would be £ 60. Thus the cash inflow of the project would be £  55,00,000 to £  70,00,000. 

Liquidity ratios

The investment appraisal technique of the company examines the net present value and the internal rate of return of the project further. Net present value is the process which recognize the net cash flow of the project, if the cash flow is positive than the project should be accepted otherwise company should reject the proposal (Titman and Martin, 2014). The net present value of the project is £ 51,31,380 in case of 5,00,000 units and - £ 23,96,773. It explains that if the capacity and the sale of the products would be 5,00,000 units than only the project should be accepted by the company otherwise the project would lead to the company towards loss (Higgins, 2012).

Further, internal rate of return is the total return  percentage of the project where the net present value of the project is zero (madhura, 2011). The internal rate of return of the project is compared with the cost of capital of the company. If the cost of capital of the company is lower than the internal rate of return, project should be accepted by the company otherwise vice-versa.

The internal rate of return of the project is -2.83% in case of 5,00,000 units and 3.62% in case of 4,00,000 units. It explains that in both the cases, the cost of capital of the company (15%) would be higher than the internal rate of return of the project and thus the proposal should not be accepted (Gibson, 2011).

The study of new project on the company explains that the net present value of the project is better but the internal rate of return of the company is lower than the cost of capital. So, the company should not invest into the project. Rather than investing into the new project, company should focus on the existing project so that more revenue could be generated from that.

A company always looks for various ways to diversify its market so that the more revenue could be generated by the company as well as the market share of the company could also be enhanced. Acquisition is one of the ways through which the company could diversify its market and meet the goals of the company. In acquisition, a company is targeted by the potential acquirer to evaluate that the whether the company should be acquired or not. There are various ways to evaluate that the acquisition process would be beneficial for the company or not (Koller, Goedhart and Wessels, 2010).

Investment appraisal techniques

In Halfords plc, if the company wants to diversify its market, than acquisition is a good option for the company. The main target of the company should be ScS group plc. ScS group plc has been chosen for the acquisition because of its market share and the better financial position of the company. The company is operating in the same business and thus, it would help the company to meet the objectives of more market share and greater revenue.

The financial performance and the annual report of the company of last few year has been analyzed to identify that whether the acquisition would be beneficial for the company or not. The project has explained that the financial performance of the company is quite better. The company is performing well in terms of financial position as well as non financial position. If the company would acquire the ScS group plc than the market share of the company would definitely be greater.

The financial position of the company explains about the continuous growth in the company. Future performance and position of the company has been evaluated further on the basis of discounted cash flow technique and it has been found that the cash flow of the company would be increased by 17.07% in next 5 years on the other hand; the inflation rate of the company would be enhanced by 3.33% (Brigham and Ehrhardt, 2013). It explains that the company’s growth is quite higher than the inflation rate.

The estimated cash flow of the company of next 5 years has been calculated and it has been found that the terminal cash flow of the company after 5 years would be £ 56,544.99 (Morningstar, 2018). It explains about better incremental position of the company. Further, the present value of the terminal cash flows of the company has been evaluated and it has been recognized that the total worth of the company is £ 5,52,897.85 which includes £ 1,16,5000 worth of debt and rest amount is related to the equity of the company (Brigham and Houston, 2012).

The calculations further explains that the total equity of ScS is £ 4,33,398 and the number of issued share of the company is 2000 which explains that the per share value of the company is £ 216.7. Though, the market value of the company is £ 210. It explains that the intrinsic value of the company is higher and thus the acquisition process would help the company to generate more profits and meet the goals and mission of the company (appendix).

Acquisition for market diversification

The Halfords group plc would be required to pay £ 210 to each shareholder of the company whereas the total worth of per share of the company is £ 216.7. It would lead the company to great profits and the financial position of the project is also better which would assist the company to meet its objectives (Vogel, 2014).

On the basis of financial performance, investment appraisal techniques and the acquisition plan of the company, it has been found that the company should invest into the acquisition rather than investing into the new plan as it would assist the company to generate more profits and meet the goals and mission of the company.

Conclusion:

To conclude, the financial position of the company is quite better. The profitability ratio of the company explains about better position of the company from last 5 years. Though, the current performance of the company has been lowered due to high material price. Further, the liquidity position of the company is quite competitive and explains about lower risk position of the company in the industry. In addition, the study of new project on the company explains that the net present value of the project is better but the internal rate of return of the company is lower than the cost of capital. So, the company should not invest into the project. Rather than investing into the new project, company should focus on the existing project so that more revenue could be generated from that.

Lastly, in case of acquisition, the acquisition of ScS group plc would lead the company to great profits and the financial position of the project is also better which would assist the company to meet its objectives. On the basis of financial performance, investment appraisal techniques and the acquisition plan of the company, it has been found that the company should invest into the acquisition rather than investing into the new plan as it would assist the company to generate more profits and meet the goals and mission of the company.

References:

Besley, S. and Brigham, E.F., 2008. Essentials of managerial finance. Thomson South-Western.

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

Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning.

Brooks, R., 2015. Financial management: core concepts. Pearson.

Brown, R., 2012. Analysis of investments & management of portfolios. Pearson Higher Ed.

Fridson, M.S. and Alvarez, F., 2011. Financial statement analysis: a practitioner's guide (Vol. 597). John Wiley & Sons.

Gibson, C.H., 2011. Financial reporting and analysis. South-Western Cengage Learning.

Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.

Hogarth, R.M. and Makridakis, S., 2011. Forecasting and planning: An evaluation. Management science, 27(2), pp.115-138.

Home. 2018. Halfords group plc. [Online]. Available at: https://www.halfordscompany.com/ [Accessed as on 25th April 2018].

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

Koller, T., Goedhart, M. and Wessels, D., 2010. Valuation: measuring and managing the value of companies (Vol. 499). john Wiley and sons.

Madura, J., 2011. International financial management. Cengage Learning.

Morningstar. 2018. Halfords group plc. [Online]. Available at: https://financials.morningstar.com/cash-flow/cf.html?t=XFRA:HDK&region=deu&culture=en-US [Accessed as on 25th April 2018].

Morningstar. 2018. ScS group plc. [Online]. Available at: https://financials.morningstar.com/income-statement/is.html?t=SCS&region=gbr [Accessed as on 25th April 2018].

Titman, S. and Martin, J.D., 2014. Valuation. Pearson Higher Ed.

Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press

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