Financial Analysis of the Marstons Group - Essay Example

?Financial Analysis of the Marston’s Group Marston Group is a privately owned specialist firm operating in United Kingdom aiming to provide its services in the field of civil and high court enforcement. It’s an agency that provides an ethical and professional approach to clients seeking recovery solutions; from amicable recovery to enforcement. Being a service-oriented organization, the business highly depends on the intellectual assets (human resource) for delivering best results. We will present an analysis of how Marston Group has performed over the period of CY08 to CY09. Trend Analysis Revenues of Marston Group have declined by 3.2% from the period CY08 to CY09. The recessionary woes prevalent in the country have adversely affected the business of company. As the recession has taken a strong hit on the manufacturing organizations, so has service sector been affected by it. Although revenue has declined by a meager percentage, the profitability of the company has been slashed down by 73.5% during the same year. The operating expenses have themselves decreased by 2.6% on account of declining revenues and a better allocation of resources by management during the period. Exceptional items occurrence in the operating expenses section have trimmed the profitability. They have increased from a tiny ?4.7 Million in 2008 to ?37.4 Million in 2009 which represents an increase of 687% over the period. Finance costs have also painted a dim picture of profitability increasing by 10.28% during the period from CY08 to CY09. The financial burden was magnified because of an increase in exceptional items occurring in the financial charges table which increase from ?4.2 Million to ?11.9 Million. Income taxes paid during the year decreased by 65.3% with the credit going to the inverse effect of exception items on the taxable income. In a nutshell, if we exclude the effects of exceptional items, the profitability has only shrunk by 20%. Exceptional items are rare in occurrence and are not persistent in nature. Their affect is only confined to a single year or a small period of time. Profitability Analysis: Gross Margins of the company dropped off from 68% in CY08 to 66.5% in CY09. The reason can be traced back to increasing cost of services which increased by 0.3% during the year without making an effect on revenues. High gross margins of the company depict that the company is operating in service industry. Operating margins have decreased from a hefty 23.6% in CY08 to 17.6% in CY09. Increase in operating expenses has caused the company to bear the brunt of falling profitability. Operating expenses have increased by 8.38% during the calendar year. Incorporating the effect of exceptional items show that operating margins have only declined from 24.3% in CY08 to 22.8% in CY09. The explanation can be attributed to the ground that the company has incurred ?37 million additional in exceptional items under the operating expenses table. Hence, we expect that the future of the company will remain upbeat as these exceptional items will have a limited affect on future operations. Net Profit Margin of Marston group has squeezed from 9.3% in CY08 to 2.5% in CY09. Again, exceptional items are the main culprit to such a large decline in margins. Financial costs have jumped up by 10.3% during the period on account of increasing exceptional items incurred within the financial charges category. Efficiency Analysis Asset turnover ratio decreased from 0.27 in CY08 to 0.265 in CY09. This implies that the company is generating ?0.265 in revenues for every ?1 in its assets. This decline is a result of squeezing out of revenues in FY09, although the impact has also been mitigated by a slight decrease in assets from ?2465.9 to ?2431.3 in CY09. Trade receivables day outstanding has increased from 41 days in CY08 to 45 days in CY09 which implies that receivables are being collected in a higher number of days in the previous year, thus marking a negative sign on efficiency of the company. As the organization is not a manufacturing concern, therefore, analysis of inventory turnover is not meaningful in this case. Liquidity Analysis The liquidity situation of the group has improved as it is witnessed by its increasing current and quick ratio. Current ratio has increased from 0.90 in CY08 to 1.21 in CY09. Quick ratio has also shown an upward trend as the impact of inventory was minimal in both the years, increasing from 0.80 in CY08 to 1.11 in CY09. Liquidity situation should not be deemed as a key indicator of the financial performance of the company. It should be gauged with profitability to understand the financial dynamics happening within the period. Gearing Analysis Solvency based ratios depict that the company can easily continue its operations for the foreseeable future. Debt/Equity ratio declined from 1.88 in CY08 to 1.53 in CY09. The improved debt/equity ratio is a result of additional injection of equity in to the company’s operations and improved stakes in other businesses. However, interest coverage ratio declined from 1.94 in CY08 to 1.24 in CY09 which is not a highly alarming sign for the company as many of the costs incurred within the business operations during the year were exceptional. Answer 2) a) Marginal Income Statements Month 10 eR1 eR2 eR3 Total Sales 850,000 2,400,000 2,400,000 5,650,000 Less: Production Cost Direct Machinery 200,000 600,000 480,000 1,280,000 Direct Labor 50,000 200,000 240,000 490,000 Direct Materials 200,000 600,000 720,000 1,520,000 Variable Overhead 200,000 400,000 240,000 840,000 Total Variable Cost 650,000 1,800,000 1,680,000 4,130,000 Contribution Margin 200,000 600,000 720,000 1,520,000 Less: Fixed Costs 400,000 400,000 400,000 1,200,000 Net Profit/(Loss) (200,000) 200,000 320,000 320,000 Overhead has been separated into fixed and variable components. Each product has been apportioned a fixed overhead of ?400,000 and the remaining amount has been substituted to variable overhead. Variable Overhead = Total Overhead – Fixed Overhead Month 11 eR1 eR2 eR3 Total Sales 1,020,000 2,880,000 3,200,000 7,100,000 Less: Production Cost Direct Machinery 240,000 720,000 640,000 1,600,000 Direct Labor 60,000 240,000 320,000 620,000 Direct Materials 240,000 720,000 960,000 1,920,000 Variable Overhead 240,000 480,000 320,000 1,040,000 Total Variable Cost 780,000 2,160,000 2,240,000 5,180,000 Contribution Margin 240,000 720,000 960,000 1,920,000 Fixed Costs 400,000 400,000 400,000 1,200,000 Net Profit/(Loss) (160,000) 320,000 560,000 720,000 b) The table presented below shows the impact of exclusion of eR1 from product portfolio on profit and loss account. eR2 eR3 Total Sales 2,880,000 3,200,000 6,080,000 Less: Production Cost Direct Machinery 720,000 640,000 1,360,000 Direct Labor 240,000 320,000 560,000 Direct Materials 720,000 960,000 1,680,000 Variable Overhead 480,000 320,000 800,000 Total Variable Cost 2,160,000 2,240,000 4,400,000 Contribution Margin 720,000 960,000 1,680,000 Fixed Costs 600,000 600,000 1,200,000 Net Profit/(Loss) 120,000 360,000 480,000 Fixed Costs = Total Fixed Cost/Number of Products = 1,200,000/2 = 600,000 Total fixed cost has been apportioned equally to the two products amounting to ?600,000. Excluding eR1 from product portfolio results in lower Net profit as it has decreased from ?720,000 to ?480,000. Therefore, based on the above analysis, it is concluded that eR1 should not be excluded from the product portfolio since it has a positive contribution margin and increases the total income of the company. c) Optimum Production Plan   Sales Units CM per Unit Machine hours per unit eR1 11800 20 1 eR2 25600 30 3 eR3 18300 60 5 Product CM per unit per Machine Hour Ranking eR1 20 1 eR2 10 3 eR3 12 2 CM per unit per Machine Hour = CM per Unit / Machine hours per unit Based on the above ranking, eR1 should be produced maximally followed by eR3 and eR2. Product Total Machine Hours Machine Hours per Unit Sales Units eR1 11800 1 11,800 eR2 56700 3 18,900 eR3 91500 5 18,300 160,000 Machine Hours (eR2) = (11,800 x 1) + (18,300 x 5) + (18,900 x Machine hours) = 160,000 Machine Hours (eR2) = 56,700 Forecasted Marginal Income Statement   eR1 eR2 eR3 Sales Unit 11,800 18,900 18,300 Price per Unit 85 120 200 Direct Machinery per Unit 20 30 40 Direct Labor per unit 5 10 20 Direct Material per Unit 20 30 60 Variable Overhead per unit 20 20 20 eR1 eR2 eR3 Total Sales 1,003,000 2,268,000 3,660,000 6,931,000 Less: Production Cost Direct Machinery 236,000 567,000 732,000 1,535,000 Direct Labor 59,000 189,000 366,000 614,000 Direct Materials 236,000 567,000 1,098,000 1,901,000 Variable Overhead 236,000 378,000 366,000 980,000 Total Variable Cost 767,000 1,701,000 2,562,000 5,030,000 Contribution Margin 236,000 567,000 1,098,000 1,901,000 Fixed Costs 400,000 400,000 400,000 1,200,000 Net Profit/(Loss) (164,000) 167,000 698,000 701,000 Sales = Sales Unit x Price per Unit Production Cost for Direct Machinery = Direct Machinery per Unit x Sales Unit Production Cost for Direct Labor = Direct Labor per Unit x Sales Unit Production Cost for Direct Materials = Direct Materials per Unit x Sales Unit Production Cost for Variable Overhead = Variable Overhead per Unit x Sales Unit Answer 3) (a) Employee behavior is highly linked with the attainability of budget goals. Easily attainable goals will not trigger enough efforts from employees as they will be confident in meeting the targets. Whereas, too much demanding targets will resort the employees to use unscrupulous means for achieving their goals. Hence, budgets should be reasonably attainable but not too much easy to meet. (b)  Participation of managers in budget process entails that they will be responsible for attaining the goals. Budgets become the basis of managerial performance appraisal ensuring that managers are accountable for their actions. (c) A better budget relies on realistic assumptions and does not deviate from the reality. It incorporates all the matters which are imminent and possibly could happen in the near term. It includes all those matters which are under control of the company, such as which products to produce, and where to allocate the resources. (d) A budget quantifies the forecasted performance for a company therefore it only includes monetary measures as they help in quantifying the information. Appendix (Related to Question 1) Income Statement 2008 (Before Exceptional Items) 2008 (Exceptional Items) 2008 (After Exceptional Items) 2009 (Before Exceptional Items) 2009 (Exceptional Items) 2009 (After Exceptional Items) Revenues 666.1 666.1 645.1 645.1 Cost of Sales (213.3) (213.3) (214.0) (214.0) Gross Profit 452.8 452.8 431.1 431.1 Operating Expenses (291.2) (4.7) (295.9) (283.7) (37.0) (320.7) Operating Profit 161.6 (4.7) 156.9 147.4 (37.0) 110.4 Finance Costs (76.5) (4.2) (80.7) (77.1) (11.9) (89.0) Profit before Tax 85.1 (8.9) 76.2 70.3 (48.9) 21.4 Income Tax Expense (15.6) 1.2 (14.4) (14.7) 9.7 (5.0) Profit for the Year 69.5 (7.7) 61.8 55.6 (39.2) 16.4   2008 (Before Exceptional Items) 2009 (Before Exceptional Items) YoY Increase 2008 (After Exceptional Items) 2009 (After Exceptional Items) YoY Increase 2008 (Exceptional Items) 2009 (Exceptional Items) YoY Increase Revenues 666.1 645.1 -3.2% 666.1 645.1 -3.2%       Cost of Sales (213.3) (214.0) 0.3% (213.3) (214.0) 0.3%       Gross Profit 452.8 431.1 -4.8% 452.8 431.1 -4.8%       Operating Expenses (291.2) (283.7) -2.6% (295.9) (320.7) 8.4% (4.7) (37.0) 687.2% Operating Profit 161.6 147.4 -8.8% 156.9 110.4 -29.6% (4.7) (37.0) 687.2% Finance Costs (76.5) (77.1) 0.8% (80.7) (89.0) 10.3% (4.2) (11.9) 183.3% Profit before Tax 85.1 70.3 -17.4% 76.2 21.4 -71.9% (8.9) (48.9) 449.4% Income Tax Expense (15.6) (14.7) -5.8% (14.4) (5.0) -65.3% 1.2 9.7 708.3% Profit for the Year 69.5 55.6 -20.0% 61.8 16.4 -73.5% (7.7) (39.2) 409.1% Balance Sheet   2008 2009 Property Plant & Equipment 1975.9 1894.4 Goodwill 223.9 224.2 Other Tangible Assets 23.7 23.9 Deferred Tax Assets 47.7 59.4 Other Non-Current Assets 24.7 21.9 Derivative Financial Assets   0.1 Total Non Current Assets 2295.9 2223.9 Inventories 19 17.3 Assets Held for Sale 15.9 19.5 Trade Receivables 75 79.3 Cash & Cash Equivalents 60.1 91.3 Total Current Assets 170 207.4 Total Assets 2465.9 2431.3 Share Capital 22.3 44.3 Retained Earnings 172.7 148.2 Other Components of Equity 511.9 590.7 Total Equity 706.9 783.2 Long Term Borrowings 1299 1173.5 Derivative Financial Instruments 37.6 77 Pension Commitments 37.9 35.3 Deferred Tax Liabilities 189.5 173.3 Other non current Liabilities 0.6 0.7 Long Term Provisions 6 17.2 Total Non Current Liabilities 1570.6 1477 Current Borrowings 29.2 21.4 Derivative Financial Instruments 4.2 16.1 Trade Payables 133.5 109.6 Current Tax Payable 21.5 24 Total Current Liabilities 188.4 171.1 Total Liabilities 1759 1648.1 Total Equity & Liabilities 2465.9 2431.3 Financial Ratios Profitability 2008 2009 Gross Margin (Gross Profit before exceptional items) / Revenue 32.0% 33.2% Operating Margin (Operating Profit before exceptional items) / Revenue 23.6% 17.1% Net Profit Margin (Earnings before exceptional items) / Revenue 9.3% 2.5% ROE (Earnings before exceptional items) / Total Equity 9.8% 7.1% Liquidity 2008 2009 Current Ratio (Current assets/ Current Liabilities) 0.90 1.21 Quick Ratio (Current assets – Inventory)/ Current Liabilities) 0.80 1.11 Solvency 2008 2009 Debt/Equity ( Total Debt/ Total Equity) 1.88 1.53 Interest Coverage Ratio (Operating Profit / Finance Cost) 1.94 1.24 Efficiency 2008 2009 Asset Turnover (Revenue/Total Assets) 0.270 0.265 Trade Receivable Days Outstanding ( 365 / (Sales / Trade Receivables ) 41 45 Bibliography Hill, R. A. 2008, Strategic Financial Management, Ventus Publishing: UK Welch, H. 2009, Corporate Finance: An Introduction: Prentice Hall: New York Read More