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Financial Ratios Examples

Company Introduction:

Liberty International PLC (Liberty International) is a real estate investment trust (REIT). It is one of the largest property companies in the United Kingdom (U.K.). The Company makes selected investments in long-term prospective in the property sector. Its activities are focused on its two operating businesses: Capital Shopping Centers (CSC), which specializes in the ownership, management and development of regional shopping centers, and Capital & Counties, which engages in commercial and retail property investment, management and development in the U.K, the United States and other parts of the world. Its subsidiaries include Capital Shopping Centers PLC, Capital & Counties Limited, Capital & Counties Debenture PLC, Capital & Counties CG Limited and Liberty International Asset Management Limited, among others. On August 19, 2008, the Company acquired a 50% interest in the Empress State Limited Partnership. During the year ended December 31, 2008, it disposed of its 70% interest in Capital Enterprise Centers (Jersey) Limited. The Capital Shopping Centers (CSC) is quite large with a square footage totaling 12.9 million and property portfolio of approximately £4.4 billion. Capital and Counties (CAPCO), in the group’s non-shopping international business, encompasses investment properties of £1.7 billion. One of these prime retail assets is Covent Garden Estate in Central London. Construction and Development is the company’s latest undertaking. It combines the existing skills set of Capital Shopping Centers and Capital and Counties business.

Liberty International is quite a large company with many shareholders and people are looking for lucrative investments every day. There is certain information that the keen investor will take into consideration before investing in any business. Certainly the capital structure of the business, its profitability, management efficiency, dividend paid and the external auditor’s report are but a few but extremely important analysis that are and will be taken into consideration when deciding to invest in a company such as Liberty International.

Annual report 2008, Liberty International PLC, June 2008, PP: 40-47

 

 

Financial performance Analysis:

 

LIQUIDITY ANALYSIS

 

In examining the accounts of Liberty International it is evident that the company does not have a strong liquidity position. The ideal current ratio for any organization is 2:1; Liberty International is not within this ratio. It has slipped from 1.30:1 in 2006 to 0.18:1 in 2008. Liquidity is the lifeblood of any business and at the moment Liberty International’s figures are extremely poor.  A business must have a healthy Liquidity position in order to stay solvent in the short-run thus allowing for the possibility of meeting short term debts as they fall due and also the possibility of short term investments. This Liquidity position is due to group’s policy to manage near term foreign exchange risk by entering into cross-currency interest rate swaps and forward foreign exchange rates contracts due to the high fluctuations now a days. Investments in overseas subsidiaries are hedged by borrowings in the functional currency to hedge the foreign exchange risk and borrowings foreign currencies in foreign operation.

Other liquidity ratio is quick ratio which doesn’t include inventory in the current ratio but in real estate sector, there is almost no existence of inventory in the company current assets. Inventory is more related to the manufacturing industry.

 

 Comparing to its major competitor The British Land Company (BLC) it is more liquid in 2006 & 2007 but it remained less liquid after the serious setback of property recession in 2008. Whereas, BLC became more liquid in 2008 to 0.67 form 0.53 in 2006. Figures for BLC are better than Liberty International but also not good itself.

Financial Statement Analyses, 2009 by Pearson Publications, PP: 575-615.

 

EFFICIENCY ANALYSIS

In examining the receivable collection period, it is apparent that the group is taking less time to collect money owed by customers. In 2006, it took on average 53 days to collect and increased a bit to 56 days in year 2008. As Shown in the below graph that company have consistently collected better than its competitive company.

 

Trade Receivable Turnover in days

Name

 

Annual report 2007, Liberty International PLC, June 2007, PP: 22- 35

 

The company has also performed better in the payable sections. As sown in the below given graph, Liberty International had 207 of payable in 2006 comparing to 264 of BLC and it weakened in 2008 to 215 comparing to 220 of competitor. With these figures suppliers of company should feel better of their money blocked in the company.

 

 

Creditor Payable Turnover in days

Name

 

 

Total Asset Turnover

Name

 

 

 

Real Estate sector Total Asset Turnover ratio is almost always low because of high amount of investments are needed which is all in the assets (real estate assets). The above graph misrepresents us a little. We can see that form 2006 to 2008 the ratio is increasing continuously and Liberty International’s ratio is increasing more than the BLC. It is not because of increasing revenues but this is because of deceasing value of company assets. As, in real estate companies, assets figures are state in the market value in the books of account. Recession deteriorate the assets value the most in 2008. This is because the ratio is highest in that year and Liberty International’s ratio is even higher in 2008. This is because; its assets’ value was deteriorated more than its competitor.

 

 

PROFITABILITY ANALYSIS

Net Profit Margin

Name

 

We can see in the above given graph that in 2006 both of the companies were enjoying high profit margins. Liberty was gaining higher profits than BLC. As shown in the table Liberty International has 2.78 of net profit margin by comparing 1.57 of BLC. But as real estate was hit by the recession in 2007 BLC started incurring losses but surprisingly BLC improved its profit. In 2008, when recession high in high command, Liberty suffered from huge losses comparing small losses by BLC.

 

Return on capital employed

Name

 

This ratio lets us know about the return on investment made by the company stake holders. In 2006 Liberty International had been gaining high amount of returns on its capital and BLC even higher.

In 2007 company profits deteriorated and shrieked to 0.62 forms 14.4 in the last years but BLC was still acquiring high profits. In 2008 company’s profits turned into huge losses but BLC suffered less seriously than the Liberty International.

 

ANNUAL REPORT & ACCOUNTS 2007, British Land Company PLC, 19 May 2008, PP: 82-110

 

 

Earnings per Share

Name

 

Like all the profitability ratios EPS also started well in 2006 with higher profits but they turned in losses in 2008 which higher than BLC.

SOLVENCY ANALYSES:

In solvency analyses we estimate that whether the company would be able to stay alive in the future. We also compare the solvency to invest in the better company by reducing the risk of default. The table below tells us the position of two companies in three years.

 

Debt to Total Capital Ratio

Name

 

We can see sky blue bars of Liberty international are continuously high by almost the same difference. All the bars of Liberty International are having about 100% values. It means that company is having a high amount of debt in its total capital employed. It is always desirable to keep lowest possible debt in your capital structure in the time of recession. Keeping it true, BLc has reduced its debt from 48% to 42% whereas, Liberty International has incased its debt from 99.52% in 2006 to 100.5% in 2007.

Investing in Liberty International is much, while, it is safer to keep your money in BLC stock.  

 

Liberty International is significantly less solvent than its competitor. It is one reason of having lesser current ratio and profitability ratios because of higher current proportion of debt and higher interest expenses respectively.

 

INTREST COVERAGE ANALYSES:

 

Name

 

 

Interest coverage tells us that whether are able to cover our interest expenses form our operating profits. Like most of the ratios graph notifies us that it is highly probable in 2006, less probable in 2007 for Liberty & good for BLC. But after the recession setback, it is unlikely to meet your interest expenses form your operating income. Liberty has even lower negative interest coverage ratio than competitor in 2008. This is because of higher amount debt in capital structure of Liberty International.

Annual Report 2008, British Land Company PLC, 19 May 2008, PP: 80-99

 

 

 

                                                                                               

 

INVESTOR ANALYSES

There are many ratios which help us to choose the better company to invest in. Following are described few of them.

 

Dividend Cover

Name

 

 

Dividend Cover presents the ability of a firm to meet its dividend payments from its net profit.      Like almost every other ratio Liberty starts of well in 2006. In this ratio company has better coverage chances in 2006. But it finished in 2007 when it suffered from of minute losses. Whereas, BLC has the ability to meet it interest payments. In 2008 both are paying dividends but this is not form income of the company so meaningless.

 

Price earnings ratio (P/E):

Price earnings ratio is the most important of the investor analysis. It lets us know that how highly the market rates comparing earning on the stocks. The table, in the next page, represents the P/E ratios of both companies in three years. In 2006 Liberty International has the higher P/E but in 2007 company P/E goes negative but BLC’s P/E is still positive. Till this time it is advisable to invest in BLC and withdraw if you keep any investment in Liberty International. After this both the companies has negative P/E which is meaningless for analyses.

 

Accessed on 14th December 2009

 

Name

 

Financial Statement Analyses, 2009 by Pearson Publications, PP: 575-615.

 

Auditor’s Opinion:

Investors will undoubtedly take into account whether the company’s account has been audited by independent or external auditors and what the outcome of the audit was. It is the responsibility of the company to ensure that its business operation is conducted in a fair manner and that the financial reports provided corroborates this. The directors are responsible for preparing the Annual Report, the Directors’ remuneration report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union which sets out the statement of Directors’ responsibilities.

 

The auditor’s PricewaterhouseCoopers LLP, as noted in the auditor’s report reviews whether the financial statement reflects the company’s compliance with the nine provisions of the 2003 FRC Combined Code specified for review by the Listing Rules of the Financial Services Authority, and report if it does not. They are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures. They read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements.

 

The other information comprises only the Directors’ report, the unaudited part of the Directors’ remuneration report, the Chairman’s statement, the Operating and Financial Review, the corporate governance statement and the other items included in the contents section. They consider the implications for their report if they become aware of any apparent misstatements or material inconsistencies with the financial statements. Their responsibilities do not extend to any other information.

 

For the three years in question the auditors conducted their assessment of the company based on the international standards on auditing and the opinion given in 2006 read:

In our opinion:

• the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the group’s affairs as at 31 December 2006 and of its profit and cash flows for the year then ended;

• the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as at 31 December 2006 and cash flows for the year then ended;

• the financial statements and the part of the Directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the group financial statements, Article 4 of the IAS Regulation; and

• The information given in the Directors’ report is consistent with the financial statements.

 

Similar reports were given in 2007 and 2008. The external or independent auditors report is extremely important because an auditor’s report provides essential information for investors. The opinion report can be termed Qualified, when the auditors encounter a few problems indicating that the company has not totally adhered to some accounting guidelines, Adverse, when there are material misstatements and nonconformance to the accounting principles; a Disclaimer, when the auditors is unable to form an opinion. There is the unqualified report   which is the one given by Liberty International auditors, PricewaterhouseCoopers LLP. The investors often looks at this as a clean bill of health and are thus more willing to invest in companies that have had unqualified reports.

 

The company’s property is divided into leasehold and freehold properties. Property figures include Additions, Disposals, and Transfers from trading property, Foreign exchange fluctuations, and Surplus on valuation. Additions are the new property acquired by the company this includes both freehold and leasehold property. Disposals, which are property no longer with the company, are deducted from the total. They off course would have likely been sold or otherwise disposed of. Trading property is property bought for resale. This is in effect the company’s in trading asset. Foreign exchange fluctuations are not in effect real assets but represents the changes in value accorded to an appreciation / loss in relation to the exchange associated with the loss or gain in the value of the asset. Surplus on valuation represents the amount in excess of the value which was to the assets had. Included within investment and development properties are figures which represents interest that has been capitalized. Included in the 2007 figure was as much as £13.8 million (31 December 2006 – £3.3 million) of interest capitalized on developments and redevelopments in progress.

 

Investors will also take in to consideration the company’s performance in relation to the industry averages. Liberty International in some instances has fallen short of industry averages and has been strong in some instances.

 

 

Appendix

    Ratio Analysis

 

 

 

 

 

Competitive company

 

Liberty International

 

The British Land Company PLC

 

2008

2007

2006

 

2008

2007

2006

Current assets

231

387

481

 

377

406

287

Current liabilities

1,281

598

370

 

561

800

546

 

 

 

 

 

 

 

 

Current Ratio

0.18

0.65

1.30

 

0.67

0.51

0.53

Quick Ratio (Acid Test Ratio)

Same because no inventory

 

Same because no inventory

 Stock Turnover in days

Ratio related to manufacturing industry

Ratio related to manufacturing industry

Days

365

365

365

 

365

365

365

Revenues

618

575

563

 

715

826

754

Receivables

95.6

83.5

81.4

 

133

198

133

Receivable Turnover

6.466527

6.881437

6.914005

 

5.37594

4.171717

5.669173

Trade Receivable Turnover in days

56.44

53.04

52.79

 

67.90

87.49

64.38

Days

365

365

365

 

365

365

365

Revenues

618

575

563

 

715

826

754

Payables

364.9

341.7

319.5

 

450

746

546

Payable Turnover

1.694163

1.681592

1.761502

 

1.588889

1.107239

1.380952

Creditors Payable Turnover in days

215.45

217.06

207.21

 

229.72

329.65

264.31

Gross Profit Margin

Either related to Manufacturing or Services industry Ratio

 

Either related to Manufacturing or Services industry Ratio

profit After Interest

 

 

 

 

-1,609

1,440

1498

Interest cost

 

 

 

 

-290

-618

-491

Income Before interest

 

 

 

 

-1319

2058

1989

Net Profit before tax, interest and dividends (EBIT) /

-1,776.20

52

927.7

 

-1319

2058

1989

Total equity attributable to shareholders of the Company

1,985.80

4,708.90

4,732.40

 

6,790

8,747

6,016

Total Debt (Debentures and loans)

4,195.50

3,704.00

3,341.30

 

5151

6,617

5,575

Total Capital Employed

6,181

8,413

8,074

 

11,941

15,364

11,591

Return on capital employed

-28.74%

0.62%

11.49%

 

-11.05%

13.39%

17.16%

 

 

 

 

 

 

 

 

Revenues

618

575

563

 

715

826

754

Total Assets

7,531

9,173

8,750

 

12,648

16,380

13,512

Total Asset Turnover

8.21%

6.26%

6.43%

 

5.65%

5.04%

5.58%

 

 

 

 

 

 

 

 

Earnings per share (EPS)

-678.10

-29.00

462.10

 

-305.00

472.00

228.00

Share Price

518

1011

1366

 

1652

906.5

585.5

Price earnings ratio (P/E)

-0.76

-34.86

2.96

 

-5.42

1.92

2.57

Dividend

123

122.1

97.4

 

166

91

84

Share Price

1366

1011

518

 

585.5

906.5

1652

Dividend Yield

 

 

 

 

28.35%

10.04%

5.08%

Net income

-2,576.50

-105

1,564.10

 

-1,563

2,453

1,184

Dividend

123

122.1

97.4

 

166

91

84

Dividend Cover

-20.95

-0.86

16.06

 

-9.42

26.96

14.10

Total Debt (Debentures and loans)

4,195.50

3,704.00

3,341.30

 

5151

6617

5575

Total Capital Employed

4,175

3,703

3,357

 

11941

15364

11591

Gearing or Debt to Total Capital

100.50%

100.02%

99.52%

 

43.14%

43.07%

48.10%

Net Profit before tax, interest and dividends (EBIT)

-1,776.20

52

927.7

 

-1319

2058

1989

Interest cost

241.6

222

198.6

 

290

618

491

Interest Cover Ratio

-7.35

0.23

4.67

 

-4.55

3.33

4.05

Net income

-2,576.50

-105

1,564.10

 

-1,563

2,453

1,184

Revenues

618

575

563

 

715

826

754

Net Profit Margin

-4.17

-0.18

2.78

 

-2.19

2.97

1.57

 
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