A Sample Report on Financial analysis
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TABLE OF CONTENTS INTRODUCTION ...........................................................................................................................3 TASK 1 ............................................................................................................................................3 Acquisition strategy and Potential acquisition targets ................................................................ 3 Internal management memo of Metro AG .................................................................................. 3 Internal management memo of Booker Group PLC 150 ............................................................ 5 Task 2 ...............................................................................................................................................6 Comparison of financial performance of Metro AG and Booker Group PLC ........................... 6 Preferred acquisition target ......................................................................................................... 9 Task 3 .............................................................................................................................................10 Capital investment decision making ....................................................................................... 10 Net Present Value (NPV) .......................................................................................................... 10 Pay Back Period (PBP) ............................................................................................................. 11 Accounting Rate of Return (ARR) ........................................................................................... 12 Internal Rate of Return (IRR) ................................................................................................... 12 Conclusion ....................................................................................................................................13 References ......................................................................................................................................14 Appendix ........................................................................................................................................16
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INDEX OF TABLES Table 1: Statement showing profitability ratios of Metro AG and Booker Group PLC ................7 Table 2: Statement showing liquidity ratios of Metro AG and Booker Group PLC ......................8 Table 3: Statement showing efficiency ratios of Metro AG and Booker Group PLC ...................9 Table 4: Statement showing Gearing ratios of Metro AG and Booker Group PLC ....................10
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INTRODUCTION Financial decisions are crucial part of business activities because it has direct impact on the liquidity and solvency of its operations. In order to make viable financial decisions, management of firm is required to conduct appropriate analysis on the available information. For this aspect, they make use of various financial tools and techniques based on the decision of entity (Graff, 2013). Present study focuses on the evaluation of financial analysis of Carrefour SA in order to assist them in taking decisions for acquisition of proposed entities i.e. Metro AG and Booker Group PLC. In order to understand commercial activities of proposed entities, internal management memo will be prepared. This memo will be supported by description of impact of recent economic conditions on them. Further, financial performance of both the companies will be evaluated by computation of financial ratios. In order to assure financial feasibility and viability of project, provisions of capital investment decision making will be discussed.
TASK 1 Acquisition strategy and Potential acquisition targets In accordance with the given case scenario, management of Carrefour SA is planning for the expansion of their business through acquisition of the large UK or European based wholesale retailing group. Company had targeted two potential acquisition entities i.e. Metro AG and Booker Group PLC. Metro Group is one of the biggest retail organizations operating with more than 230,000 employees. Their independent sales brand provides range of product and services to the private and commercial customers. Further, Booker Group Plc is the UK's leading food wholesaler. Company is offering private label and branded goods to more than 400,000 customers comprises of grocers, pubs, independent convenience stores and restaurants. Internal management memo of Metro AG TO: Senior Management Team of Carrefour SA FROM: Financial analyst Get our top-notch finance assignment writing services with 100% plagiarism free content from expert writers.
RE: Operations of Metro AG DATE: 09-3-2016 Metro AG is German global diversified retail and wholesale organization. In terms of revenue, cited company is considered in category of top ten in the world. Metro Group is established in 1964 by Wilhelm Schmidt-Ruthenbeck and Ernst Schmidt. Management of organization is committed towards their values and objectives (Chan and et.al. 2011). Their powerful sales brand are providing variety of products and services to the customers. For financial effectiveness, company had formed diversified portfolio through segments such food retail, wholesale and non-food specialty stores. The business entity operates in various sales divisions including Metro and Makro Cash and Carry which is famous among its range of operations. The Makro stores are situated in United Kingdom and elsewhere in Europe. The mentioned sales division of company accounts for nearly half of group sales (the information is of 2004). However, the respective decision is the most internationalized division, for which the company has its stores in almost every country. The another sales division is “real� in which the business entity operates in hypermarket, while having 265 stores in Germany (Annual report of Metro AG, 2014). In addition to that Media Markt and Saturn are other sales divisions that operas in consumer electronics stores in Germany as well as in various European countries. Galeria Kaufhof also comes under the sales division of the mentioned company which is a department store chain situated in Germany and Belgium, recently in 2015, this sales division s sold to Hudson's Bay Company for $3.2 billion U.S. Dollars. According to the information available in annual reports, the Metro Group operated stores in more than 25 European countries including five Asian countries, and one in Africa. Impact of recent economic conditions on them Being a global diversified retailer, Metro AG operates in various markets, hence, the economic condition of each and every market affects the operations of company. As per the impact of economic conditions, the company's share earnings have been reduced dramatical. The currency of each and every nation affects the operational and financial performance of Group Get our top-notch finance assignment writing services with 100% plagiarism free content from expert writers.
(Galloway and Deakins, 2012). Instead of economic downfall, German market has started following disposal of activities in Eastern Europe and Turkey which has played a crucial role in attaining success and increasing sales of Metro AG group. The cited company is focused towards expansion in worldwide countries therefore, it has to keep eye of economic condition of both the countries. The recent downturn in world's food wholesale market has lead company to make diversification in its offering to generate higher sales. Internal management memo of Booker Group PLC 150 TO: Senior Management Team of Carrefour SA FROM: Financial analyst RE: Operations of Booker Group PLC DATE: 09-3-2016 Booker Group plc is the leading food wholesale of United Kingdom's which is also recognised as the largest operator for offering branded and private-label goods. The mentioned entity serves 400,000 customers via its three divisions such as independent convenience stores, grocers, pubs and restaurants. This entity was founded in was founded by George and Richard Booker in 1835, further, the business was diversified into the distribution of goods. In 1978, business has focused towards a new business including food wholesale distribution (Annual report of Booker Group Plc, 2014). The cited business entity supplies around 1.5 million businesses across the UK. The business mainly operates in cash and-carry branches in all around the United Kingdom and has few operations in India. In addition to that business operates in national delivery service within the UK and employees more than 13,000 individuals. There are various operational decisions of Booker Group plc and each of them are specialized in different areas of the wholesale market. The famous operations are Booker Wholesale which is a cash and carry and delivery businesses that focuses on independent retailers, grocers, pubs and restaurants. Other sector is, Makro Self Service Wholesalers that mainly focuses on caterers and small professional businesses (Drake and Fabozzi, 2012). Booker Direct is also a sales division through which the cited company delivers wholesale business and serves cinemas. Further, the next division of company supplies drinks to pubs and bars which is Get our top-notch finance assignment writing services with 100% plagiarism free content from expert writers.
named as “Classic Drinks�. Ritter Courivaud is also a sales division of mentioned wholesale business that is specialized in delivering fine foods to the UK's top restaurants. Premier stores are also the part of Booker Group plc which is a symbol group of independent convenience stores of the mentioned company. Booker India is a leading subsidiary of the mentioned company which deals in India Market Impact of recent economic conditions on them The recent trend in UK economy affects the Booker Group plc is the leading. The demand of organic food is increased in the country as well as in the global market that have positively affected the new product development of the mentioned company. Due to changing taxation policies and import and export duties have affected the business of mentioned company. In addition to that operations of Booker Group plc are affected by unemployment and government economic policy (Sisaye and Birnberg, 2010). The availability of resources in the global economy has also affected the business of cited company in a manner as iots financial performance has affected. Due to favourable economic condition in India, the company now have six branches over there and has planned to opened two branches in the year.
TASK 2 Comparison of financial performance of Metro AG and Booker Group PLC Profitability ratios Profitability ratios are computed to measure the profit earning capacity of the business. By making intra comparison of these ratios, stakeholders can determine which organization is providing better performance and making optimum utilization of available resources. Higher profitability ratio shows that organization is operating effectively and vice versa in decreasing trend (Financial ratio and Analysis, 2013). For this aspect, computation of gross profit ratio, operating profit ratio, net profit ratio and return on capital employed is done. Gross margin ratio shows trading efficiency of business by considering profitability of goods and services. Further, operating and net margin considers expenses and incomes which are not directly related to the product and services (Peters, 2011). Return on capital employed shows capacity of business in earning return on the investment made in business. Get our top-notch finance assignment writing services with 100% plagiarism free content from expert writers.
Table 1: Statement showing profitability ratios of Metro AG and Booker Group PLC
Ratios Gross Profit Ratio Operating Profit Ratio Net Profit Ratio (After tax) Net Profit Ratio (Before tax)
Formula (Gross Profit/ Net Sales) *100 (Operating Profit/ Net Sales) *100 (Net Profit/ Net Sales) *100 (Net Profit/ Net Sales) *100 (Net Operating profit/(Total assetsReturn on Capital employed Current Lia.))*100
Metro AG (in â‚Ź) 20.97 2.02 0.29 1.12
Booker group plc (in ÂŁ) 4.40 2.64 2.25 2.61
10.68
18.95
Gross profit ratio of Metro AG is higher than Booker group Plc because of excessive production capacity. However, operating management of Metro AG is better as they are able to enhance their net profits by making improvement in business strategies. By making comparison of profitability ratios of Metro AG and Booker Group PLC, it can be noticed that Booker group PLC is performing better (Financial Statement Analysis, 2015). It is because; there net profit margin is higher in comparison to Metro AG. Further, sales and expenses of Metro AG is showing decreasing trend while financial figures of Booker Plc are increasing. On the basis of this aspect, it can be stated that Booker Plc has better opportunities of growth. Liquidity ratios Computation of liquidity ratio is done to determine efficiency of business in paying current obligation through their liquid and quick assets. For this aspect, current and quick ratio is computed. Current ratio shows proportion of assets and liabilities that will be disposed in one year. In accordance with the financial standards, ideal quick ratio is 2:1. Further, quick ratio computes proportion of liquid assets with the current liabilities (Lampe and Hofmann, 2013). Liquid assets are those possessions which are instantly convertible into cash. Thus, liquid asset does not include stock and prepaid expenses. Standard quick ration is 1:1. Liquidity ratios must be near to the standard because higher ratio shows excessive consumption of funds while lower ratio shows inefficiency of business in payment of debt. Table 2: Statement showing liquidity ratios of Metro AG and Booker Group PLC Ratios
Formula
Metro AG
Booker group plc
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Current Ratio Quick Ratio
Current Assets / current Liabilities (Cu. Assets - Cl. Stock)/Cu. Liabilities
(in €) 0.77 0.40
(in £) 0.98 0.44
Current ratio of Metro AG and Booker group PLC is .77 and .98 respectively. Further, liquidity of Booker group PLC is .40 and .44. This aspect depicts that both the organizations are having lower liquidity in comparison to standard requirements. It is because of the nature of the industry as retail entities had made investment in the capital assets for the enhancement of productivity and efficiency (Annual report of Booker Group Plc, 2014). In addition to this, there is less requirement of working capital. By comparing liquidity ratios of both the organizations it can be noticed that Booker group Plc has better management of their current assets and liabilities. Efficiency ratios Efficiency ratios are computed to determine capabilities of organization in utilizing their assets for the generation of revenue. These ratios can be determined by computation of the repayment of liabilities, the quantity and usage of equity, turnover of receivables and the general use of machinery and inventory (Financial ratio and Analysis, 2013). Higher efficiency shows increasing performance of business and optimum utilization of available assets. Table 3: Statement showing efficiency ratios of Metro AG and Booker Group PLC
Ratios Total Assets Turnover Ratio Receivables collection period Payable payment period Inventory Turnover ratio
Formula Net Sales/ Total Assets (365*Avverage receivables)/ Annual net credit sales (Account Paybles/Cost of sales)*365 COGS/Inventory
Metro AG (in €)
Booker group plc (in £)
27.62 times
2.05 times
63.63 days
48.8 days
28.83 days 30 days 8.38 times 13.66 times
Efficiency ratio of both the companies shows that Metro AG is having better asset turnover ratio while Booker Group Plc is efficient in managing revenue activities (Lussier, Corman and Kimball, 2010). Due to effect of economies of scale, Metro AG is making Get our top-notch finance assignment writing services with 100% plagiarism free content from expert writers.
effective utilization of capital assets in order to generate revenue for business. However, their operating cycle is less efficient because of ineffective management of non-operating activities (Financial Statement Analysis, 2015). By considering these ratios it can be said that management of Metro AG is making effective utilization of capital assets while management of Booker Group Plc is making effective use of revenue assets. Gearing ratios These ratios are also known as solvency ratios. On the basis of these ratios, effectiveness of capital structure of corporate entity can be determined. For this aspect, computation of time interest ratio and debt equity ratio is done (Brooks and et. al. 2012). Favorable solvency ratios are necessary for business entities because inappropriate management of debt and equity can enhance the issue of insolvency. Table 4: Statement showing Gearing ratios of Metro AG and Booker Group PLC
Ratios Times Interest Ratio Debt equity ratio
Formula Net Income before interest and tax/ Interest expense Debt/Equity
Metro AG (in â‚Ź) 2.77 1.38
Booker group plc (in ÂŁ) 72.82 0.09
Solvency ratio of Metro AG shows that management had maintained balance between equity and debt by considering their operational activities. Further, portion of equity has been reduced because of the reducing profitability. In contrast to this, balance of debt and equity in Booker Group Plc is not appropriate (Wahlen and et.al. 2011). It is because; higher amount has been obtained from equity in comparison to the debt. Due to this aspect, they have to distribute their entire earnings to the shareholders and there is restriction of formation of retained earnings. Preferred acquisition target By considering financial values of both the companies, management of Carrefour SA is recommended to acquire Booker Group Plc instead of Metro AG. It is because; management of Booker Group Plc is operating in an effective manner and they have better growth opportunities (Beginners' Guide to Financial Statements, 2007). With the minimum assets, they are Get our top-notch finance assignment writing services with 100% plagiarism free content from expert writers.
able to earn good profitability ratios. With their strategies, Carrefour SA can avail better growth opportunities in the future in order to achieve aims and objectives of business (Financial
Statement Analysis, 2015). Further, comparison of profitability ratios of Metro AG and Booker Group PLC shows that profit margin of preferred company is higher in comparison to Metro AG. Further, sales and expenses of Metro AG is showing decreasing trend while financial figures of Booker Plc are increasing (Keller, 2013). In addition to this, evaluation of liquidity assets depicts that Booker group Plc has better management of their current assets and liabilities. On the basis of cited financial factors, there will be less risk in acquisition of Booker Group Plc as management of Carrefour SA will have good capital as well as revenue returns.
TASK 3 Capital investment decision making Capital investment can be defined as funding of financial resources in an enterprise or firm in order to achieve business objectives in an effective manner. It can also be considered as firm's acquisition of fixed or capital assets in order to enhance their productivity and profitability. These investments require huge amount of financial resources due to which these decisions are very important for business (Davies and Crawford, 2011). Capital investment decisions are taken by comparing risk and return of different projects in order to select the most profitable project for the business. Objective of these decisions is to enhance growth opportunities along with minimizing risks for business. These decisions are supported by following techniques: Net Present Value (NPV) In this capital investing technique, present value of inflow and outflow is computed by considering time value of money (Coleman, 2010). Net present value of the investment project shows the difference between present value of cash inflow and outflow. Computation of NPV is done by considering following formula:
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In this formula; Ct=Net cash inflow during the period t Co = Total cost of initial investment r = Discounting rate or cost of capital t= Duration of investment Management of Carrefour SA is recommended to make investment in acquisition project if it provides positive net value. However, in situation where both the acquisition projects are providing positive NPV then, project with the higher NPV should be selected for investment. Advantages NPV is the most suitable technique for making capital investment decision because; it considers all vital factors of project such as inflow, outflow, time value of money and duration of investment (Beenhakker, 2006). In addition to this, NPV provides high priority to the profitability and risk of potential investment options. By making use of this method, management of Carrefour SA can maximize their value of business. Disadvantages In comparison to the other investment appraisal techniques, NPV is difficult to apply in investment projects (Ahrendsen and Katchova, 2012). In addition to this, approach of NPV is not able to derive appropriate conclusion in situation where amount and duration of mutually exclusive projects are not equal. Computation of discounting rate for calculating net present value is not easy because it requires detail analysis. Pay Back Period (PBP) Payback period can be defined as length of time needed by investment project for the recovery of initial invested amount. It is a financial metric used for the cash flow analysis of project (Brooks and et. al. 2012). Computation of payback period can be done by using following formula: Get our top-notch finance assignment writing services with 100% plagiarism free content from expert writers.
Payback period = A + (B/C) In this formula; A: represent the last period of negative cash flow B: it shows the absolute value of cumulative cash flow after completion of period A C: shows the amount of total cash flow after the period A Business entities are recommended to make investment in the proposed option only of amount initial investment is recovered through projected inflow prior to the completion of investment duration. Advantages Payback period is universally used and easy to understand. This method is focused on effectiveness of liquidity in the investment project for making decision (Lussier, Corman and Kimball, 2010). By considering this method, risk of projects can be compared by entity as option with less PBP has lower risk in comparison to the option having higher PBP. Disadvantages Major drawback of this method is that it ignores time value of money due to which accurate liquidity cannot be determined. In addition to this, this approach is emphasized of liquidity due to which profitability factors of project is ignored (Wahlen and et.al., 2011). In this method, cash flow till the payback is only considered instead of total inflow. Accounting Rate of Return (ARR) It is also known as average rate of return of investment project. In this method of investment appraisal, rate of return is computed by dividing net inflow and initial capital investment (Drake and Fabozzi, 2012). This rate of return is compared by desired return of business and further decisions are taken by managerial parties. Advantages This approach of investment appraisal provides a percentage return to the business which can be compared with the target return in order to make decision (Lampe and Hofmann, 2013). Main focus of this method is on assessing the effectiveness of profits generated by the
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investment option. Accounting rate of return satisfies query of shareholders because they are mainly concerned with profitability. Disadvantages Accounting rate of return is only concerned with the profits instead of cash flow. Further, profits are not adjusted with the time value of money due to which accuracy of outcome is reduced (The Investment Decision Making Process, 2011). As a consequence, it provides equal importance to the profits of all the years in investment project. Internal Rate of Return (IRR) Internal rate of return is a metric used in capital investment decision making for the measure of profitability. It can be defined as discounting rate at which NPV of all cash inflow and outflow is equal to zero. Computation of IRR is similar to the computation of NPV. Advantages Similar to NPV approach, internal rate of return also considers time value of money in financial analysis. Internal rate of return is easy to compute and assist managerial persons in visualizing the potential outcome of mutually exclusive projects (Sisaye and Birnberg, 2010). For the computation of IRR, hurdle rate is not required which reduces the risk of wrong estimation. In addition to this, IRR considers entire cash flow for the assessment in order to derive accurate outcome.
Disadvantages Main disadvantage of this method is that it ignores economies of scale. Furthermore, in various situations, it is impractical to make assumption of reinvestment rate. This method is not beneficial in situation where comparison is made between two mutually exclusive projects. By considering above described investment appraisal techniques, management of Carrefour SA is recommended to make use of net present value for the evaluation of proposed investment projects (The Investment Decision Making Process, 2011).
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It is because; this approach considers all the vital factors for the assessment of project and will assist in making better decision for the business. Practical implication of NPV is as follows:
Year 1 2 3 4 5 6
Project A 35000 80000 90000 75000 20000 25000
Project B 218000 10000 10000 4000 3000 5000
Initial investment of both the projects will be ÂŁ200000. In order to select most viable method of net present value will be applied by Carrefour SA. Table 5: Statement showing computation of NPV of both the projects Net Present Value
Year
Project A
Project B
1 35000 218000 2 80000 10000 3 90000 10000 4 75000 4000 5 20000 3000 6 25000 5000 Total Present value of cash inflow
Discounted Factor @10%
0.909 0.826 0.751 0.683 0.62 0.564
PV of Cash inflow of Project A @10%
PV of Cash inflow of Project B @ 10%
31815 66080 67590 51225 12400 14100
198162 8260 7510 2732 1860 2820
243210
221344
-200000
-200000
Less: initial investment
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Net Present Value 43210
21344
Management of Carrefour SA will make investment in project A as it is providing higher positive NPV.
CONCLUSION In accordance with the present study conclusion can be drawn that Booker Group Plc is better acquisition target for management of Carrefour SA. It is because; they have good market reputation and increasing operating efficiency. By acquiring this organization, management of Carrefour SA will be able to enhance their resources and can make improvement in their operational strategies. These investment decisions must be supported by the techniques of investment appraisals. By implementing investment approaches in capital decision making, organization can compare risk and return in managerial parties can make better decisions for the enhancement of profitability along with the minimization of risk.
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REFERENCES Books and journals ⚫
Ahrendsen, L. B., and Katchova, L. A. 2012. Financial ratio analysis using ARMS data. Agricultural Finance Review. 72(2). pp.262 – 272.
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Beenhakker, 2006. Invesment decision making in the private and public sector. Cengage learning
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Brooks, A. and et. al. 2012. Accounting : business reporting for decision making. John wiley & sons.
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Chan, S. T. F., and et.al., 2011. Investment appraisal techniques for advanced manufacturing technology (AMT): a literature review. Integrated Manufacturing Systems. 12(1). pp.35 – 47.
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Coleman, M., 2010. Managing finance. SAGE.
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Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
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Drake, P. P. and Fabozzi, J. F., 2012. Analysis of Financial Statements. 3rd ed. John Wiley & Sons.
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