Financial report

Mlle MORETTO Aurélia

Business Finance BU2005C

FINANCIAL FORECASTING -CARILLION PLC-

Tutor: S.Chakera

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Contents

Part 1 : Predicted income statement 2007

p.3

Predicted balance sheet 2007

p.4

Notes

p.5

Appendix 1

p.7

Part 2 : Report

p.11

Appendix 2

p.15

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Part 1 Predicted income statement For the year ended 31 December 2006 Notes Total revenue Less: Share of jointly controlled entities revenue Revenue Cost of sales Gross profit Administrative expenses Group operating profit before restructuring costs Restructuring costs Group operating profit Jointly controlled entities Operating profit Net financing expense Non-operating items Income tax Share of results of jointly controlled entities Profit from operations Non-operating items Financial income Financial expenses Net financial income Profit before tax Income tax Profit for the year Dividend paid Retained earnings

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1

2 3

4 5 6 7 8

2007 2006 £m £m 4,173.7 3,593.4 (613.9) (528.5) 3,559.8 3,064.9 (3,324.4) (2,862.2) 235.4 202.7 (198.4) (170.8) 37.0 31.9 (22.6) (22.6) 14.4 9.3 55.4 (8.0) _ (9.4) 38.0 52.4 25.3 87.1 (86.8) 0.3 78.0 (8.5) 69.5 (25.3) 44.2

47.7 (8.0) _ (8.1) 31.6 40.9 25.3 87.1 (85.7) 1.4 67.6 (7.2) 60.4 17.2 43.2

Predicted balance sheet As at 31 December 2007 Notes

2007 £m

ASSETS Non-current assets Property, plant and equipment Intangible assets Retirement benefit assets Investments in jointly controlled entities Other investments Dffered tax assets Total non-current assets Current assets Inventories Income tax receivable Trade and other receivables Cash and cash equivalents Derrivated financial instruments Total current assets TOTAL ASSETS LIABILITIES Current liabilities Borrowings Derivated financial instruments Trade and other payables Provisions Income tax payable Total current liabilities Non-current liabilities Borrowings Retirement benefit liabilities Deffered taw liabilities Provisions Total non-current liabilities TOTAL LIABILITIES Net assets EQUITY Issued share capital Share premium Reserves Retained earnings TOTAL EQUITY

11

2006 £m

170.3 692.4 12.7

146.6 596.1 10.9

178.8 15.0 64.3 1,133.5

178.8 15.0 55.4 1,002.8

44.7 0.2 1016.7 167.8 0.8 1230.2 2363.7

38.5 0.2 875.3 144.5 0.8 1,059.3 2,062.1

(48.5) _ (1,388.9) (2.4) (15.1) (1,454.9)

(12.6) _ (1,195.8) (2.4) (13.0) (1,223.8)

(239.9) (143.8) (43.4) (3.5) (430.6) (1885.5) 478.2

(239.9) (123.8) (37.4) (3.5) (404.6) (1,628.4) 433.7

140.6 199.9 (3.9) 141.6 478.2

140.6 199.9 (3.9) 96.1 433.7

12

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Notes 1. Restructuring cost: It was supposed that the company will not increase its restructuring costs, as the restructuration has already been made during the year 2006. De ipso facto the figure will remain the same for the year 2007.

2. Net financing (expenses)/income: For the 2007 income statement forecast, the Net financing income will stay the same, because it is a figure from the jointly controlled entities, that we are anable to forecast.

3. Net operating items: As they were inexistent the previous year, it is suggested that they won’t be any in 2007.

4. Non operating items: The 2006 figure will be used for the 2007 forecast because it is considered that the figure won’t increase.

5.Finance income: The 2007 finance income, remain the same as the data for forecasting are missing.

6. Finance expenses: The 2007 finance expenses has increased, as the additional fund needed of 2007 - at the rate of the short term borrowing – was added to the previous one. Refer to: Calculation of the 2007 final forecast finance expenses in appendix.

7. Income tax: The figure of the 2007 income tax is the result of the PBIT at the forecast tax rate, according to the 2006 tax rate. Refer to: 2007 tax rate calculation in appendix.

8. Dividend paid: Refer to the 2007 dividend paid in appendix.

9. Profit from operation before interests and tax – PBIT- : PBIT 2007 = 2007 group operating profit + 2007 share of results of jointly controlled entities.

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10. Profit before tax: Profit before tax = PBIT + non operating items + financial income 11. Borrowings: The figure of the 2007 short term borrowings will increase, due to the decision to invest the additional fund needed in the short term borrowings. Refer to additional fund needed in annexe.

12. Retained earnings: 2007 retained earnings = 2006 retained earnings + 2007 retained earnings from the draft income statement.

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Appendix 1. Growth rate calculation Formula: g= ¹‾ⁿ√(2006/2002)-1 ⁿ= 1-5= 4 g= 4√(3953.4/1974.4)-1 g= 0.1615 g= 16.15% 2. Draft income statement 2007 Draft income statement 2007

Total revenue Less: Share of jointly controlled entities revenue Revenue Cost of sales Gross profit Administrative expenses Group operating profit before restructuring costs Restructuring costs Group operating profit Jointly controlled entities Operating profit Net financing expense Non-operating items Income tax Share of results of jointly controlled entities Profit from operations Non-operating items Financial income Financial expenses Net financial income Profit before tax Income tax Profit for the year Dividend paid Retained earnings

2007 £m 4,173.7 (613.9) 3,559.8 (3,324.4) 235.4 (198.4)

2006 £m 3,593.4 (528.5) 3,064.9 (2,862.2) 202.7 (170.8)

37.0 (22.6) 14.4

31.9 (22.6) 9.3

55.4 (8.0) _ (9.4) 38.0 52.4 25.3 87.1 (85.7) 1.4 79.1 (8.5) 70.8 (25.3) 45.5

47.7 (8.0) _ (8.1) 31.6 40.9 25.3 87.1 (85.7) 1.4 67.6 (7.2) 60.4 17.2 43.2

NB: All the highlighted figures for 2007 were increased by the growth rate.

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3. Draft balance sheet 2007 Draft balance sheet 2007 2007 £m ASSETS Non-current assets Property, plant and equipment Intangible assets Retirement benefit assets Investments in jointly controlled entities Other investments Dffered tax assets Total non-current assets Current assets Inventories Income tax receivable Trade and other receivables Cash and cash equivalents Derrivated financial instruments Total current assets TOTAL ASSETS LIABILITIES Current liabilities Borrowings Derivated financial instruments Trade and other payables Provisions Income tax payable Total current liabilities Non-current liabilities Borrowings Retirement benefit liabilities Deffered taw liabilities Provisions Total non-current liabilities TOTAL LIABILITIES Net assets EQUITY Issued share capital Share premium Reserves Retained earnings TOTAL EQUITY

2006 £m

170.3 692.4 12.7

146.6 596.1 10.9

178.8 15.0 64.3 1,133.5

178.8 15.0 55.4 1,002.8

44.7 0.2 1016.7 167.8 0.8 1230.2 2363.7

38.5 0.2 875.3 144.5 0.8 1,059.3 2,062.1

(12.6) _ (1,388.9) (2.4) (15.1) (1,454.9)

(12.6) _ (1,195.8) (2.4) (13.0) (1,223.8)

(239.9) (143.8) (43.4) (3.5) (430.6) (1849.6) 514.1

(239.9) (123.8) (37.4) (3.5) (404.6) (1,628.4) 433.7

140.6 199.9 (3.9) 96.1 432.7

140.6 199.9 (3.9) 96.1 432.7

NB: All the highlighted figures were increase by the growth rate.

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4. Calculation of the additional fund needed:  Formula: Additional fund needed (AFN) = Total assets – (total equity + total liabilities) AFN 2007 = 2,363.7 – (478.21 + 1849.62) AFN 2007 = 35.9  How to finance the additional fund needed?

The additional fund needed will finance the borrowings. According to the low rate of interest for a short term borrowing, it is better if the company decide to finance its short term borrowings with. Thus in the final balance sheet the short term borrowing will increase – see notes 11 -.

5. Calculation of the final 2007 financial expenses:  Formula: Financial expenses 2007 = financial expenses 2006 + (afn 2007 x short term borrowing rate) Financial expenses 2006 = 85.7 AFN 2007 = 35.9 Short term borrowing rate = 3.13% Financial expenses 2007 = 85.7 + 1.12 Financial expenses 2007 = 86.8 6. Calculation of the 2007 tax rate: In order to calculate the Income tax for both final and draft 2007 income statement, the rate needed to be deducted from the 2006 figures.  Calculation of rate: R = (Income tax 2006 x 100) / PBIT 2006 R = (7.2 x 100) / 67.6 R = 10.7%

1

Total equity from the final balance sheet.

2

Total liabilities from the draft balance sheet.

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7. Calculation of the 2007 dividend paid:  Formula: Dividend paid 2007 = (issued share capital 2006/y) x price of shares 2006.

Issued share capital 2006 = 140.6 y = 0.50 Price of shares 2006 = £0.09 Dividend paid 2007 = (140.6/0.50) x 0.09 Dividend paid 2007 = m£25.3

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Part 2 Specimen short formal report

CONFIDENTIAL For: Mr Roy Palmer, Financial director From: Miss Aurelia Moretto, Personal assistant of Mr Palmer REPORT ON THE ANALYSIS OF THE PUBLISHED FINANCIAL STATEMENTS 1.0

TERMS OF REFERENCE The financial manager instructed an analysis of the published financial statements,

after the release of the forecast income statement and the balance sheet for the year ended 31 December 2007.

2.0

PROCEDURE In order to obtain relevant information, the following procedures were adopted to

acquire the information in the report: 2.1

Profitability ratios were calculated to assess the management effectiveness in

utilizing resources under their control.

2.2

The company’s liquidity and the use of assets were evaluated.

2.3

The sensitivity of earnings and the dividend to changes in profitability were

analysed.

2.4 3.0

Dividends were examined.

FINDINGS 3.1

Management effectiveness in utilizing resources under their control: 3.1.1 According to the Return on capital employed calculation (see

appendix), the ROCE 2007 increased from 4.9% to 5.8%. This growth attests that the business is becoming more performant, thanks to a good financial management.

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3.1.2 In comparison with the 2006, the 2007 net profit margin has grown by 0.2%, which shows that the quality of the products have improved. See appendix for calculations 3.1.3 The company’s both 2006 and 2007 asset turnover are high, because the net profit margins for both years are low. The 2007 asset turnover has risen, as the net profit margin raised. This means that the company’s assets are worked intensively. See appendix for calculation.

3.1.4 The results of the gross profit margin calculation illustrates that there is no change in the company’s attitude of buying and selling goods. CarilionPlc does not make profit by selling goods, and it neither produces loss by buying goods. In comparison with 2006, the company has the same profitability. See appendix for calculation.

3.1.5 To generate sales revenue, the company has not changed its strategy in using its working capital between 2006 and 2007.The use of the working capital has not improved, which explains that the generated sales revenue has not increased. In 2008, if the company wants to boost its sales revenue, it will have to change its strategy by augmented its working capital. See appendix for calculation.

3.2

Company’s liquidity evaluation: 3.2.1 Between 2006 and 2007, the current ratio has dropped by 2%, which

illustrates that the liquidity of the business has decreased. This can have a bad effect on the business since the higher the ratio, the more liquid the business is considered to be. In order to get more liquidity in their business, the company has to boost its current assets. See appendix for calculation.

3.2.2 The 2007 quick ratio has decreased by 0.021 in comparison with 2006.

The weak decline means that the ratio remains close to the 1:1. For both 2006 and 2007, the current liabilities were covered by liquid assets. The company is able to meet its existing liabilities if it fall due at once. In order to stay competitive the following year, Carilion Plc has to either increase its current assets, either reduce its inventories. See appendix for calculation; 3.2.3 Concerning the inventory turnover, the figures remain the same between 2007 and 2006, with a stock which has been turned over 74 times over each year.

Those figures show us that the company has not changed its strategy in term of stock management as the greater the number of times, the better the business controls the stock efficiency. In conclusion, Carilion plc is doing well in stock management. See appendix for calculation.

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3.3

Sensitivity of earnings and dividends 3.3.1 Using the gearing ratio help to indicate the risk and the sensitivity of

earnings and dividends to changes in profitability and activity level. For the previous year the ratio was high-nearly 0.8-, which attests that the business had a great risk for insolvency.

Nevertheless, it appears that the company has changed its strategy since the 2007 ratio is about 0.25. In that case, the meaning is that the company can increase borrowings when potential profitable projects are available. See appendix for calculation.

3.4

Analisis of the dividends: 3.4.1 For the financial year 2007, the interest cover is at a high level-60.4%-,

which shows that the company is able to pay interest out of profits generated. What is more this high figure, indicates to shareholders that their dividend are not at risk and that the company does not have difficulty financing its debts if its profits fall. The company has improved its interest cover in comparison with the previous year-47.7%-, and so became a sure value for its shareholders. See appendix for calculation.

3.4.2

The ratio of the dividend cover for the year 2007 has dropped

compared to this from 2006. The ratio decreased by 0.8, but remains high. This indicates that the business is comfortable to meet the dividend out of a current profit. Moreover, this attests to shareholders that the dividend will be maintained as the higher the ratio, the more confident the shareholders can be. See appendix for calculation.

4.0

CONCLUSION Carilion Plc is a wealth growing company. It records an increase in its business

performance as the return on capital employed has risen this year, as well as the net profit margin, which testify of the financial management effectiveness. This performances have enhanced in comparison with the previous and an improvement on this area for the next year can lead to better results. What is more, the company controls the use of its assets, as the rise of the asset turnover has increased, which shows that there are working intensively. The business is doing well concerning its stock management, which prevents a surplus in expenses in stocks. Moreover, the both ratios- current ratio and quick ratio- attest that the company has not met cash flows problems, and insolvency for the last two years. Carilion Plc is able to renew its short-term liabilities. Nevertheless, as the 2007 ratios have decreased compare to those of 2006, the company has to increase the next ones in the following years, by either decreasing their current assets, either increasing their current liabilities. On a shareholders Page 13 sur - 18

point of view, the company is a sure investment since the interest cover attests that the company is able to pay interests out of the profits generated. An increase in its net profit margin will might amplify this effect. The ratio of dividend shows to the shareholders that the dividends will be maintained for the next year. This has an important impact on the company because it can rely on their shareholders and reduce its borrowings.

However, the gross profit margin needs to be improved. To achieve this aim the company has to make more profit in selling its goods. In addition to that, an increase in its working capital would allow it to boost its sales revenue, and thus to boost its profit margin. According to the liquidity ratios, the business liquidity has decreased for the last two years. To avoid this in the future, it is necessary to boost the current assets, to remain with a high liquidity.

On general point of view, the Carilion Plc financial statement is getting better and better, but to the company has to take in consideration few changes for the next years in order to improve its weakest points.

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Appendix Data PBIT Capital employed Sales revenue Gross profit Net current assets Current assets Current liabilities Inventories Cost of sales Debt (short term borrowing) Equity (Issued share

2006 40.9 838.3 3,593.4 202.7 1,059.3 1,059.3 1,223.8 38.5 2,862.2.

12.6 (140.6+3.9+12.6)

2007 52.4 908.8 4,173.7 235.4 1,230.2 1,230.2 1,454.9 44.7 3,324.4 48.5 (140.6+3.9+48.5)

= 147.1 85.7 60.4 17.2

= 194 86.8 69.5 25.3

capital+Reserves+Borrowings) Interest payables Net profit Dividend payables

1. Profitability:  Return on capital employed(ROCE): Formula: PBIT/Capital employed Capital employed = Total assets – current liabilities -2006: ROCE 2006 = 40.9/838.3 = 0.049 ROCE 2006 = 4.9% -2007: ROCE 2007 = 52.4/908.8 = 0.058 ROCE 2007 = 5.8%

 Net profit margin(NPM): Formula: PBIT/Sales revenue -2006: NPM 2006 = 40.9/3,593.4 = 0.011

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NPM 2006 = 1.1% -2007: NPM 2007 = 52.4/4,173.7 = 0.13 NPM 2007 = 13%  Asset turnover: Formula: Sales revenue/Capital employed -2006: Asset turnover = 3,593.4/838.3 Asset turnover = 4.3% -2007: Asset turnover = 4,173.7/908.8 Asset turnover = 4.6%  Gross margin: Formula: Gross profit/Sales revenue -2006: Gross margin = 202.7/3593.4 = 0.056 Gross margin = 5.6% -2007: Gross margin = 235.4/4,173.7 = 0.056 Gross margin = 5.6%  Working capital turnover: Formula: Sales revenue/Net current assests -2006: Wct = 3,593.4/1,059.3 Wct = 3.4% -2007: Wct = 4,173.7/1,230.2 Wct = 3.4% 2. Liquidity and use of assets  Current ratio:

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Formula: Current assets/Current liabilities -2006 : Cr = 1,059.3/1,223.8 Cr = 0.866 -2007 : Cr = 1,230.2/1,454.9 Cr = 0.846  Quick ratio : Formula : (Current assets-Inventories)/Current liabilities -2006 : Qr = 1,020.8/1,223.8 Qr = 0.834 -2007 : Qr = 1,185.5/1,4554.9 Qr = 0.815  Inventorie turnover : Formula : Cost of sales/Inventories -2006 : It = 2,862.2/38.5 It = 74 times -2007 : It = 3,324.4/44.7 It = 74 times

3. Gearing :  Gearing :

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Formula : (Debt/Equity) x 100 -2006 : G = 12.6/147.1 = 0.802 G = 80.2% -2007 : G = 48.5/194 = 0.251 G = 25.1%  Interest cover : Formula : PBIT/Interest payables -2006 : It = 40.9/85.7 = 0.477 It = 47.7% -2007 : It = 52.4/86.8 = 0.604 It = 60.4%  Dividend cover : Formula : Net profit/Dividend payables -2006 : Dc = 60.4/17.2 Dc = 3.5 -2007 Dc = 69.5/25.3 Dc = 2.7

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