How the WPP PLC Uses its Assets to Generate Sales and Profit - Essay Example

WPP PLC INTRODUCTION WPP is one of the world's largest communications services groups, made up of leading companies in advertising; media investment management; information, insight & consultancy; public relations & public affairs; branding & identity, healthcare and specialist communications. Through its companies and associates, WPP offers a comprehensive and, when appropriate, integrated range of communications services to national, multinational and global clients. 2- PROFITABILITY Profitability is all about analyzing whether the business making money and earning a satisfactory return on its investment or not. The following ratios would help us better understand the profitability of the WPP PLC. Profitability is the one area where, without exception, the higher the ratios the better. Return on investment (ROI) Profit before interest and tax (PBIT)_______ x 100 = 5.79% Investment (Total Assets- Current Liabilities) Return On Equity (ROE) Profit After interest and tax (PAIT) x 100 Ordinary Shareholder's Funds = 7.37% Gross Profit Ratio Gross Profit x 100 Sales (Turnover) = 95.12% Net Profit Ratio Profit before interest and tax (PBIT) x 100 = 10.58% Sales The above ratios reveal that the company had 5.79% return on capital employed in 2004. The gross profit and net profit ratios show that the company had 95.12% gross profit on sales while 10.58% net profit on sales. This gap makes clear that the company is paying heavy operating costs, which is having a decreasing impact on its profitability. 3- EFFICIENCY The assessment of how the WPP PLC uses its assets (fixed and current) to generate sales and profit is very important because that's the only reason a company invests in assets. Total Asset Turnover Sales Total Assets (Fixed + Current) = 1.7 times Fixed Asset Turnover Sales _____ Fixed Assets = 3.00 times Stock Turnover Ratio Cost of Sales__ Average Stock* *(Average stock=(opening stock + closing stock)/2.) = 62.4 times Cash Turnover Ratio Sales For Period_____ Average Cash Balance* *(Opening cash balance + closing cash balance)/2 = 15.9 times The above ratios show that WPP PLC generates value and sales for its business 1.7 times of total assets, 3 times of fixed assets 62.4 times of stock (shows efficiency of stock) and 15.9 times of cash. The comparison of these ratios shows that current asset has not been utilized well as compared to fixed assets. The stock turnover ratio indicates that WPP PLC has replaced its stock almost 62.4 times during the year. In other words, it can be said that the company generated $62.4 worth of sales for every $1 invested in stock. Debtor Day's Collection Period Debtors__ x 365 Cash Sales = 50 days Creditor Day's Payment Period Creditors x 365 Purchases = 125 days Difference between creditor and debtor days for 2004 is positive: Creditor days - Debtor days= 125 days - 50 days = 75 The firm takes considerably longer (75 days longer, on average) to pay its creditors than it does to obtain payment from its debtors, having a good sign for the business. 4- LIQUIDITY The ability of WPP PLC to 'pay its way' or to satisfy financial obligations without difficulty as and when they become due can be analyzed with the help of following ratios: Current Ratio Current Assets___ Current Liabilities = 0.87: 1 Acid Test (Or Quick) Ratio Current Assets- Stock Current Liabilities = 0.82: 1 Thus, the above ratios don't show a good position of the company in terms of its current assets and liabilities. It reveals that the company doesn't have enough liquid assets to pay off its short-term liabilities when they become due. 5- SOLVENCY To obtain an indication of the company's longer-term solvency and its degree of financial risk, following ratios would be used: Gearing (Or Leverage) Ratio Total Debt Capital x 100 Total Equity Capital = 33.28% Debt Ratio Total Debt Capital_________ x 100 Total Assets (Fixed + Current) = 11.66% It shows that total debt capital of the company is 33.28% of total equity capital and 11.66% of total assets is financed by borrowed money. Both reveal a longer-term solvency for the business. Interest Cover Profit Before Interest and Tax (PBIT) Total Interest Payable = 7 times Dividend Cover Profit After Interest and Tax (PAIT) Dividends Payable = 5 times This indicates that the level of 2004 profits, after interest and tax were sufficient to cover the dividend payment almost 5 times and interest payments almost 7 times over. 6- STOCK MARKET The following ratios would help us understand the attractiveness of the company's share as an investment in the Stock Market from the investor's perspective: Earnings Per Share (EPS) Net Profits or Loss For the Period _______ Weighted Average Number of Ordinary Shares = $2.39 Price Earnings (P/E) Ratio Market Price Per Share__ Earnings Per Share (EPS) = 20.54 Dividend Yield Dividend Per Share x 100 Market Price Per Share = 1.09% The above ratios indicate the future share valuation of WPP PLC in terms of its current market price and Earnings Per Share (EPS). The number of dollars earned for each ordinary share issued is $2.39 and dividend yield I-e; the return (dividend) received by the investor (ordinary shareholder) per share is 1.09%. 7- SOLUTION The company should increase its investment in Current Assets so as to maintain its short-term solvency as well as credibility. 8- CONCLUSION Thus, the company's financial statements for 2004 show that company is having a sound position other than its investment in current assets, which should be improved. REUTERS INTRODUCTION Reuters is a global information company providing indispensable information tailored for professionals in the financial services, media and corporate markets. Its information is trusted and drives decision making across the globe. It has a reputation for speed, accuracy and freedom from bias. It provides financial institutions with specially designed tools to help them reduce risk and distribute and manage the ever-increasing volumes of market data. Reuters supply news - text, graphics, video and pictures - to media organizations across the globe. It also provides news to businesses outside financial services as well as direct to consumers. 2- PROFITABILITY The profitability of Reuters' business in terms of profit before and after interest and taxation can be analyzed using the following ratios: Return on investment (ROI) Profit before interest and tax (PBIT)_______ x 100 = 15.48% Investment (Total Assets- Current Liabilities) Return On Equity (ROE) Profit After interest and tax (PAIT) x 100 Ordinary Shareholder's Funds = 32.61% Gross Profit Ratio Gross Profit___ x 100 = 6.75% Sales (Turnover) Net Profit Ratio Profit before interest and tax (PBIT) x 100 = 10.77% Sales The above ratios reveal that the company has 15.48% return on capital employed in 2004. The gross profit and net profit ratios show that the company has 6.75% gross profit on sales while 10.77% net profit on sales. This gap makes clear that the company is mostly relying on income other than sales. 3- EFFICIENCY The analysis of how efficiently Reuters manages its assets both fixed and current to generate sales and profit can be analyzed with the help of following ratios: Total Asset Turnover Sales Total Assets (Fixed + Current) = 0.5 times Fixed Asset Turnover Sales _____ Fixed Assets = 2 times Debtor Day's Collection Period Debtors__ x 365 Cash Sales = 168 days The above ratios show that Reuters generates value and sales for its business 0.5 times of total assets and 2 times of fixed assets. The comparison of these ratios shows the company has not efficiently utilized that current asset as compared to fixed assets. Moreover, collection from debtors' period is also quite longer. 4- LIQUIDITY Liquidity measures short-term solvency of the business. Following ratios would determine the level of Reuters' liquidity in terms of current and quick assets: Current Ratio Current Assets___ = 0.87: 1 Current Liabilities Acid Test (Or Quick) Ratio Current Assets- Stock Current Liabilities = 0.87: 1 The above ratios indicate that Reuters doesn't have a sound position in terms of short-term liquidity. It doesn't own sufficient liquid assets to pay off the short-term liabilities. 5- SOLVENCY Reuters' longer term solvency and in terms of debt and equity finance can be assessed as: Gearing (Or Leverage) Ratio Total Debt Capital x 100 Total Equity Capital = 83.3 % Debt Ratio Total Debt Capital_________ x 100 Total Assets (Fixed + Current) = 22.12% It shows that total debt capital of the company is 83.3% of total equity capital and 22.12% of total assets is financed by borrowed money. It shows that the company is highly geared. Interest Cover Profit Before Interest and Tax (PBIT) Total Interest Payable = 50 times Dividend Cover Profit After Interest and Tax (PBIT) Dividends Payable = 2.5 times This indicates that the level of 2004 profits, after interest and tax were sufficient to cover the dividend payment almost 2.5 times and interest payment almost 50 times over. 6- STOCK MARKET The investment prospects for Reuters from the investor's point of view can be analyzed by: Earnings Per Share (EPS) Net Profits or Loss For the Period _______ Weighted Average Number of Ordinary Shares = $1.43 Price Earnings (P/E) Ratio Market Price Per Share__ Earnings Per Share (EPS) = 28.41 Dividend Yield Dividend Per Share x 100 Market Price Per Share = 2.03% The Reuters Earnings Per Share (EPS) show that the number of dollars earned for each ordinary share issued is $1.43 and dividend yield I-e; the return (dividend) received by the investor (ordinary shareholder) per share is 2.03%. 7- SOLUTION Reuters should invest more in liquid assets as the current position of the company indicates that it doesn't have much capability to pay off its short-term liabilities out of the quick assets. 8- CONCLUSION Thus, Reuters has a sound position but the company's current financial condition shows weak short-term liquidity and inefficient management of current assets, which needs to be improved to generate more sales. INCISIVE MEDIA PLC Introduction Incisive Media is a fast growing specialist business information provider operating in eight core markets, financial risk management, retail investment, insurance, mortgage, capital markets/financial IT, marketing, photographic and Private Equity. The Group delivers key information to defined target audiences across a variety of platforms including magazines, conferences and exhibitions, websites, newsletters, contract publishing and databases. Incisive Media is one of the fastest growing publishers in the UK and is extremely well positioned to benefit from a recovery in the advertising market. 2- PROFITABILITY The following ratios analyze the capability of Incisive Media Plc to pay off its short-term liabilities out of its quick assets whenever the need arises: Return on investment (ROI) Profit before interest and tax (PBIT)_______ x 100 = 9.10% Investment (Total Assets- Current Liabilities) Return On Equity (ROE) Profit After interest and tax (PAIT) x 100 Ordinary Shareholder's Funds = 14.22% Gross Profit Ratio Gross Profit x 100 Sales (Turnover) = 41.75% Net Profit Ratio Profit before interest and tax (PBIT) x 100 = 14.43 % Sales The above ratios reveal that the company has 9.10% return on capital employed in 2004. The gross profit and net profit ratios show that the company has 41.75% gross profit on sales while 14.43% net profit on sales. The difference between these two ratios shows that the company is incurring heavy operating costs. 3- EFFICIENCY To assess the efficiency of Incisive Media Plc in utilizing its assets towards increased sales and profits, the following ratios would be helpful: Total Asset Turnover Sales Total Assets (Fixed + Current) = 0.44 times Fixed Asset Turnover Sales _____ Fixed Assets = 0.5 times Stock Turnover Ratio Cost of Sales__ Average Stock* *(Average stock=(opening stock + closing stock)/2.) = 72 times The above ratios show that Incisive Media Plc generates value and sales for its business 0.44 times of total assets and 0.5 times of fixed assets 72 times of stock (shows efficiency of stock). The stock turnover ratio indicates that Incisive Media Plc has replaced its stock almost 72 times during the year. Debtor Day's Collection Period Debtors__ x 365 Sales = 80 days Creditor Day's Payment Period Creditors x 365 Purchases = 365 days Difference between creditor and debtor days for 2004 is positive: Creditor days - Debtor days= 365 days - 80 days = 285 days The firm takes considerably longer (285 days longer, on average) to pay its creditors than it does to obtain payment from its debtors and that is a good sign for business. 4- LIQUIDITY The liquidity analysis of Incisive Media Plc can be done as: Current Ratio Current Assets___ = 0.62: 1 Current Liabilities Acid Test (Or Quick) Ratio Current Assets- Stock Current Liabilities = 0.60: 1 These ratios indicate a highly risk to the short-term liquidity of the business due to insufficient investment in current assets by the company as it would not be able to pay off its short term dues quickly against current assets. 5- SOLVENCY The money borrowed by the business from external sources and the money provided by the shareholders of the company determines the long-term solvency of a company as: Gearing (Or Leverage) Ratio Total Debt Capital x 100 Total Equity Capital = 61% Debt Ratio Total Debt Capital_________ x 100 Total Assets (Fixed + Current) = 10.3% It shows that total debt capital of the company is 61% of total equity capital and only10.3% of total assets is financed by borrowed money, which means that the business doesn't over depend on the external debts and a margin of protection to creditors against shrinkage of assets is high. Interest Cover Profit Before Interest and Tax (PBIT) Total Interest Payable = 3 times Dividend Cover Profit After Interest and Tax (PAIT) Dividends Payable = 1.3 times This indicates that the level of 2004 profits, after interest and tax, were sufficient to cover the interest payment 3 times and dividend payment almost 1.3 times over. 6- STOCK MARKET The investors, whether present or potential, make their investment decisions on the basis of profitably of the company in using the investors' money. This can be analyzed for Incisive Media Plc with the help of following ratios: Earnings Per Share (EPS) Net Profits or Loss For the Period _______ Weighted Average Number of Ordinary Shares = 0.07 Price Earnings (P/E) Ratio Market Price Per Share__ Earnings Per Share (EPS) = 20.37 Dividend Yield Dividend Per Share x 100 Market Price Per Share = 1.32% The above analysis shows that the company is earning as low as 0.07 for every share invested by the shareholders with a price/earning ratio of 20.37 and the dividend yield on 1.32% of market price per share. 7- SOLUTION Incisive Media Plc should increase its investment in current assets, as its current ratio is 0.62: 1, which is a high risk to the short-term solvency of the business. It should also look toward more efficient utilization of its assets. 8- CONCLUSION Thus, Inclusive Media Plc's financial statements analysis reveals that although it has quite sound long-term solvency ratios but it doesn't have enough working capital to handle short-term business expenditures. Therefore, it is needed for the company to increase its investment in current assets. Reference: About Incisive Media Plc, retrieved October 18, 2005 from the World Wide Web: http://db.riskwaters.com/public/showPage.htmlpage=11338 Annual Reports & SEC filings, retrieved October 18, 2005 from the World Wide Web: http://www.wppinvestors.com/annual_reports/pdf/2004_ar_financials.pdf Company Overview, retrieved October 18, 2005 from the World Wide Web: http://about.reuters.com/aboutus/overview/ Commentary and Profile, Fact Sheet, Investor Factsheet, retrieved October 18, 2005 from the World Wide Web: http://www.wpp.com/ Financial Data, Report & Accounts - 2004, retrieved October 18, 2005 from the World Wide Web: http://about.reuters.com/investors/data/companyreports/index.asp Investors, Annual & Interim Reports, retrieved October 18, 2005 from the World Wide Web: http://db.riskwaters.com/public/showPage.htmlpage=incisive_investor_reports Meigs & Meigs (9th edition) "ACCOUNTING: The Basis for Business Decisions", New York: McGraw-Hill Inc Financial Management Read More