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Financial Ratio Analysis

Financial Ratio Analysis

Scott Wilson Group plc is an international consultancy offering integrated professional services to meet the planning, engineering, management and environmental needs of clients. The Company provides integrated solutions to four industry market sectors: transportation, property, environment and natural resources. The trading activities of the Company are managed through five geographical Divisions: UK Central, UK South, Scotland and Ireland, UK Railways, and International.

 

During the fiscal year ended April 29, 2007 (fiscal 2007), the Company had contracts with the East London Line, Airdrie Bathgate Rail Link, London Crossrail, Three Counties Alliance, Combe Down Mine Stabilisation and Ionian Motorway in Greece. In fiscal 2007, it acquired the minority interest in Scott Wilson Pavement Engineering Ltd; Roscoe Postle Associates Inc.; Ferguson McIlveen LLP; Cameron Taylor Group Limited; DGP International Limited; DCL Consulting Engineers Ltd, and McLay Collier LLP.

 

 

Current Year Analysis:

 

Vertical Analysis

 

2005

 

2006

 

Currency

 £ million

%

£ million

%

Turnover 

8323.6

100

7903

100

Cost of Sales

-7650.4

-91.912

-7141.2

-90.361

Gross profit

673.2

8.08785

761.8

9.63938

Operating expenses

-162.4

-1.9511

-144.2

-1.8246

Operating Profit

510.8

6.13677

617.6

7.81475

Other costs/income

47.6

0.57187

-35.6

-0.4505

Profit before interest and taxation

558.4

6.70864

582

7.36429

Net interest receivable (payable)

-158

-1.8982

-189.6

-2.3991

Profit on ordinary activities before taxation

400.4

-1.8982

392.8

-2.3991

Tax on profit on ordinary activities

-113.6

-1.3648

-114.4

-1.4476

Profit on ordinary activities after taxation

286.8

3.44562

278.4

3.52271

Equity minority interests 

-0.6

-0.0072

-0.4

-0.0051

Profit for the financial period

286.2

3.43842

278

3.51765

Dividends

-281.2

-3.3783

-155.8

-1.9714

Retained profit

5

0.06007

122.2

1.54625

Horizontal analysis

Consolidated Profit and Loss Account for the year ended 2005 2006

Currency

 £ million

£ million

%

Turnover 

8323.6

7903

94.9469

Cost of Sales

-7650.4

-7141.2

93.34414

Gross profit

673.2

761.8

113.161

Operating expenses

-162.4

-144.2

88.7931

Operating Profit

510.8

617.6

120.9084

Other costs/income

47.6

-35.6

-74.7899

Profit before interest and taxation

558.4

582

104.2264

Net interest receivable (payable)

-158

-189.6

120

Profit on ordinary activities before taxation

400.4

392.8

98.1019

Tax on profit on ordinary activities

-113.6

-114.4

100.7042

Profit on ordinary activities after taxation

286.8

278.4

97.07113

Equity minority interests 

-0.6

-0.4

66.66667

Profit for the financial period

286.2

278

97.13487

Dividends

-281.2

-155.8

55.40541

Retained profit

5

122.2

2444

 

Adding the above Horizontal & Vertical Analysis following are given all the major types of Ratio analysis to compare the Performance, Profitability, Liquidity and solvency positions of both companies. These Financial Ratio Analysis also depicts the efficiency and investor related comparison analysis of both companies. 

 

Profitability Ratios:

 

Gross Profit Ratio: 2005 Gross Profit/Turn Over:

 

Year 2005: 8.08785                Year 2006: 9.63938

 

This is a ratio which is telling that what amount of profit the company is having while there is no deduction from the sales of in term of operating expenses. What we can analyze from the above figures of the gross profit ratio is that company is having a fair amount of gross profit in the current year which is also increasing as compare to the previous year figure of Gross Profit Ratio; this means that company is able to decrease its cost of sales as compare to last year.

 

 

Net Profit Ratio: Net Profit/Turn Over:

 

Year 2005: 2.862                    Year 2006: 2.78

 

The company is having net profit in the year of 2006. From this it is quite safe to say that the company is being in a fine enough position that it is having 2.78% profits after deduction of all the expenses from the current year sales.

 

If the ratio is compared with GP Ratio, it is analyzed that gross profit was increased as compared to last year but net profit is decreased that means that operating expenses of company is increased which is not a very good sign. But this is happening to a great extent.

 

Operating income margin: Operating income/Net sales

 

2006    :7.81%

617.6

7903

0.07814754

Operating Income

Net sales

OIM

 

 

 

 

 

2005:   6.14%

Operating Income Margin

Net sales

Operating Income

OIM

 
 

2005

510.8

8323.6

6.14%

 

 

 The company is prospering in term of comparison of ratio to the last year performance. Operating income which is in 2006 is 7.81% which is increased up to 1.67 percent. This is a positive sign that the operating income is increasing, Operating income 7.81% is a healthy ratio.

 

Efficiency Ratios:

 

Total Assets Turnover: Net sales/ Average Total Assets

 

Average Total Assets: Total Assets 2005 + Total Assets 2006

                                                                       2

 

                                     : 10126.65                  +          9772.026 in £ million                                                                                                 2

 

2006 ATA:        7903___

Net Sales   :       9417.4

 

Year 2006: 0.85 times

Year 2005: 0.78 times

 

The ratio means that how many times the sale is going to achieving the total assets ratio in a year. The above analyses tell that in the year 2006 the ratio is increased the sale is increased as compare to the total asset of the company. It is a healthy radio to be 0.85 times a year.

 

Return on equity:

 

The ratio describes that what amount of profit the shareholders are earning on their income. The return on common equity is also increased comparative to the year 2005. This is also a positive sign for the shareholders of the company.

 

Return on common equity ratio is also the same because there is not any preferred stock in the company’s capital structure. All the income earned by the shareholders is given on the common equity.

 

Also return on Total Equity

Net Income

Average Total Equity

Return on equity2005

286.2

 5,386.07

5.31%

Return on equity2006

278

4999.6

5.56%

 

Return on total asset Variation:

 

Return on Total Assets variation2005

286.2

9158.8

3.12%

Return on Total Assets variation2006

278

8492.4

3.27%

 

This ratio includes the return to all suppliers of funds, both long and short term, by both creditors and investors.  The return show in the above calculations is a good sign for the investors and creditors that the ratio is being increased comparing to the last year’s statistics.

 

Liquidity Ratios

Current Ratio:

 

This ratio describes the liquidity of the company. This means that whether the current assets of company are going to full fill the current liability of the company. If this is not so then these are full filled by the long term debt which is not really a good strategy or healthy sign for the company.

 

 

Current Assets

Current Liability

Current Ratio2005

                      967.85

1155.2

83.78%

Current Ratio2006

                      925.00

1810.8

51.08%

 

In the analyses below short run position for the company is not good enough. The current ratio is above 1 in the current year 2006 the percentage is even deceased to 50 present. It means that it is not able to meet the current obligations from its current assets. 

 

 

Acid Test Ratio:

 

Some conservative investors use this ratio for the evaluation of the current position of the company. We exclude the company’s inventory from the current asset because this is not a very liquid asset for the many investors.

 

Acid Test Ratio2005

1,892.85

2466.4

76.75%

Acid Test Ratio2006

881

3122

28.22%

 

Acid test ratio for the year 2006 is 28.22% which is very bad for the investor analysis which means that company can only fulfill the obligations of 28% from its current assets.

 

Leverage Ratios:

Debt Ratio:

 

This ratio measures the firm long term debt paying ability. It is computed for Scott Wilson Group plc is as follow:

 

 

Total Assets

Total Liabilities

Debt Ratio 2005

                   10,126.7

4685.2

216.14%

Debt Ratio 2006

                   10,126.7

4364.4

232.03%

 

This debt ratio describes the percentage of assets financed by the creditors is 232.03% this is fine enough percentage which tells that the creditors of the company are well protected by the assets of the company in case of solvency, creditors are in a good position. The ratio is increased comparing to the year 2005. This is a better sign for the creditors of the company. They are more secure as compare to before.

 

Debt Equity Ratio:

 

Debt equity ratio is another is another computation that determines the entity’s long- term debt paying ability. This computation compares the total debt with the total share holder’s equity.

 

 

 Debt

Equity

 

Debt/Equity Ratio2005

                   10,126.7

 5,386.07

188.02%

Debt/Equity Ratio2006

10,126.7

4999.6

202.55%

 

There are no loans and advances given in the balance sheet. So,, we have taken the long term creditors as the Debt of the company .The above analyses describes that company is able to meet its long term ability to pay debt on its equity. Equity share holders should feel secure fro the equity they have invested n the company.

 

Investor’s Ratios:

 

Earning per share:

 

The company is earning not a very high amount of profit. The profit described below is 0.09 per share but this is very consistent from couple of years. Being consistent in term of profits is not a sufficient attribute to attract the shareholders and the business opportunity. The company is not having a good earning for the shareholders.

 

 

Earning

# of shares

EPS2005

286000000.2

3155044898

0.09

EPS2006

278000000

3009077760

0.09

Company must make some strategy to increase the earring per share. It should must be having some sound plans to improve to EPS ratio which is mandatory for the future of the company’s success.  

 

Dividend per Share:

 

In the year 2005 company is giving almost all of its profits in term of dividend to keep the shareholders happy but even then the dividend paid is too short as compare to the market value of the share price.

 

Dividend per share2005

281000000.2

3155044898

0.09

Dividend per share2006

155000000.8

3009077760

0.05

 

In the current year of the given data company is paying 0.05 as dividend from 0.09 earning per share. This time the company has kept some profits for the further investments in the business. The small amount must be inserted in the business sort run operation to meet the current obligations of the company.

 

Price Earning Ratio:

 

The ratio explains that how many times the company is earring to its market value of the share.   

 

Profit

Earning

 

P/E Ratio2005

2.2

0.090648472

24.27

P/E Ratio2006

1.85

0.092387111

20.024438

 

In the calculations above company having its market price of the share 20 times as compare to the earning of the Scott Wilson Group plc. This is not a good sign for the investors in the company and outside market of the shares.

 

Future Management Strategies:

 

First of all the must focus on the marketing strategies to improve the sales of the company. It must have to make a right IMC plan for the stipulation demand of the sales of company. For this company must have to give a handsome budget fro the marketing department.

 

 It also will have to concentrate to decease the cost of the company’s cost. It is a service oriented company and it is having a very high cost of its sale. This is not a good element for the future prospective and the success of the company. Calculations for the company’s cost are given as under:

 

2005

2006

7650.4

7141.2

8323.6

7903

91.9121534

90.36062255

 

 

Its cost must be decease instantly to the 20% more percent. It also will have to investigate the reason behind the high cost.

 

Scott Wilson Group plc is not showing any Long term Bank loans in the balance sheet. It must have to include some Long term loans in its capital structure.  This loan now must be invested to expand the business in the new areas and also in a little new way of doing business.

 

The company is making all f its sale on credit. This is not a good sign for the company’s future. It also must have to make most of the purchases on cast to increase the funds of the company. Scott Wilson Group plc is service oriented company and in most of the Service oriented are not making more than 20% of their sales on credit. So, this is not good for the company make its all of the sales on credit.

 

Although company don’t have any long term debt but it has got a large amount of creditors involved in the capital structure. The percentage of creditors is of Scott Wilson Group plc is so large that it is even more than 200% of the equity capital. The company must concentrate to reduce the creditors. The credit ratio for the year is even increased as compare to the last year. Company will have to make some strategies to decrease the debt of the company and also increase the amount of equity capital by issuing more shares and make a settlement of debt by issuing share against the long term credits it has taken from outsiders.

 

Scott Wilson Group plc is not in a good position to fulfill the short run obligations from its current assets. To solve this problem, it is necessary for the company to increase the current assets and decrease the current liabilities for the smooth running of the company’s business and financial operation. Company must have a working capital in the positive figures.

 

Scott Wilson Group plc investment for the short run is getting increased but still this is not sufficient. It must have to invest more funds in the new opportunities. SWG must have to find the new business opportunities in the new and emerging markets of the world. It will have to make new market plans and invest in the best of the areas where it can see a high growth in the business.   

 

Dividends of the company have been decreased as compare to the previous year. The company will have to make an effective dividend policy which is having a consistency in it. The dividend policy must be made to increase the shareholders wealth. The company is not paying a high level of dividends but the percentage from the profits of the company is very high. SWG must have to make strategies to increase the profit of the company and pay a high level of dividends to the shareholders to keep the company’s share market value high.

 

Share value of the company is also very low in the market. To increase the share value it will have to make the strategies which will affect the company’s share in a positive manner. It may merge the share like merging the company’s two shares in one share. Some other strategies like paying a very few dividends and investing the fund in few of the attractive opportunities may also increase the share price in the market.  

 

Fixed assets

 6,107.00

Total assets

     9,417

 %

64.85

 

Percentage for the fixed asset is very high being a service oriented company. There is another option of that company may sale its few of the fixed excess assets and invest the amount in the new business opportunities. This will not only decrease the ratio of fixed asset to total assets but it will also increase the current assets  and possibly increase a high level of profits of the company.

 

The company is involved in different activities of consultancy services. It must now have to make a separate department of every type of business consultation. It will have to hire specialist for each and every sort of consultancies. The company must have to study the concepts, practical implications, environment and economic conditions of the area where it is giving the consultancy services.   

 

In short company have to restructure polices and procedures and review the present financial conditions. The above Financial Ratio Analysis is based on the following data of Income Statement and Balance Sheet.   

 

Appendix

Consolidated Balance Sheet 2005 2006

 

2005

2006

Currency

 £ million

£ million

 Fixed Assets Intangible Assets

3305

2214.6

Tangible Assets

5650

6107

Investments

203.8

170.8

Total Fixed Assets

9158.8

8492.4

Current Assets Stock

 50.4 51

 

Debtors due within one year

801.6

708.6

Short term investment

0

0

Cash at hand and in bank

115.8

172.4

Total current assets

967.8

932

Creditors: Amounts falling due within one year

-2123

-1810.8

Net Current Assets (liabilities)

-1155.2

-878.8

Total assets less current liabilities

8003.6

7613.6

Creditors: Amounts falling due after more than one year

-2562.2

-2553.6

 Provisions for liabilities and charges

-55.4

-53.4

Net asset 

5386

5006

Capital and reserves Called-up share capital 

315.6

301

Share premium

3427.8

3413.4

 Other reserves

901.8

458.8

Profit and Loss account

732

826.4

Equity Shareholders' funds

5377.2

4999.6

 Minority interests 

8.8 7

 

Total Capital employed

5386

5006.6

Weighted average number of shares in issue in the period

3155044898

3009077760

 

 

 

 

 

Consolidated Profit and Loss Account for the year ended 2005 2006

ratio analysis

Currency

 £ million

£ million

Turnover 

8323.6

7903

Cost of Sales

-7650.4

-7141.2

Gross profit

673.2

761.8

Operating expenses

-162.4

-144.2

Operating Profit

510.8

617.6

Other costs/income

47.6

-35.6

Profit before interest and taxation

558.4

582

Net interest receivable (payable)

-158

-189.6

Profit on ordinary activities before taxation

400.4

392.8

Tax on profit on ordinary activities

-113.6

-114.4

Profit on ordinary activities after taxation

286.8

278.4

Equity minority interests 

-0.6

-0.4

Profit for the financial period

286.2

278

Dividends

-281.2

-155.8

Retained profit

286.2

278

 

Notes:

 

1. There are no figures given for 2004.

2. The market value of a share in 2004 was £2.20 and in 2006 was £1.85.

3. All purchases are made on credit.

4. All sales are made on credit.

5. Depreciation is not included in these calculations.

6. There is no separate item for purchases.

7. There are no preference shareholders.

 

 

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