The Growth in the UK Retail Market for the Financial Year - Research Paper Example

?(a) In order to analyze the market potential of Curtis Plc operating a gift business in UK, it is of prime importance that the retail market of UK is evaluated. The growth in the UK retail market for the financial year 2012 saw an escalation as compared to the previous financial years. During every quarter of the financial year, the retail industry in UK experienced a growth of 1%. The analysts are of the view that this particular growth in the industry is a definite positive sign if it is compared to the last two financial years. The retailing conditions in the past two years remained quite adverse for the companies but now the situation appears fruitful and lucrative for the companies. A Comparison of financial year 2012 with the financial year of 2011 presents that fact that the volume of sales in the retail industry in UK increased by 2.7 percent. Changes in reported retail sales between August 2011 and August 2012 standard reporting periods (by size of business)     Pre-dominantly food Non-specialized pre-dominantly non-food Textile, clothing and footwear House-hold goods Other non-food Non-store retailing Pre-dominantly automotive fuel Total All Retailing including automotive fuel                     increase 107 32 138 72 375 64 23 811 All decrease 97 33 104 77 306 46 50 713   total 204 65 242 149 681 110 73 1524                     Large increase 66 32 110 42 158 30 n.a. 438 decrease 56 33 73 47 107 19 n.a. 335   total 122 65 183 89 265 49 n.a. 773 Small increase 41 n.a. 28 30 217 34 23 373 and decrease 41 n.a. 31 30 199 27 50 378 medium total 82 n.a. 59 60 416 61 73 751 [Ons.gov.uk (1999) Retail Sales: August, 2012] With respect to the food merchandise business, there were certain hardships that were faced by the retailer. During the year 2012, costs of both food items and fuel increased, particularly of fuel which resulted in an escalation in the manufacturing cost of the merchandise. Tate & Lyle Plc has in place an import team which constantly monitors the fluctuation in prices of cotton. For the purpose of reducing the cost of fuel, the retailers are now acquiring the help from the appropriate technology to manage the distribution in the most cost effective manner. In addition to that, retailers are now opting annual fixed price contracts. It is considered that the food industry is comparatively remaining consistent. However, it the prevailing market condition especially the low demand of food ingredient in EU countries significantly influence the market and brought the fluctuation the food market. The deterioration in macroeconomic environment as the result of existing financial crisis also negatively affects this sector. Additionally, the market is passing through from the bad time because the consumer and government are more focusing on the healthy lifestyle. A lot of advertisement is doing on the published media, social media to create awareness among consumers to adopt the healthy life style. The second main reason of downward trend of the food market is increase in the sugar prices and other various raw materials. The increase in the input material results in the high price of the end food products. The consumers are price conscious. The purchasing power of the consumer has been tightening due to low income. (b) As the companies being evaluated are situated in Hong Kong, the primary risk that the acquisition of any of these companies entails is that of the currency risk. Curtis Plc needs to have an adequate understanding of what these risks here and how they can be mitigated. The global operations of any multinational require it to actively participate in international trade which causes it to be exposed to a great deal of foreign exchange risks. These companies engages in international trade through foreign exchange forward contracts and options and cross currency swaps to hedge various currency exposures. These exposures primarily include assets, liabilities and bonds denominated in foreign currency. Effective financial management requires identification of risks and taking effective measures in order to curb them. This requires evaluating the exposure of the multinational company and the corresponding risk. International exposure of the multinational companies can be defined as the value of its assets and liabilities, presented in its functional (primary) currency, exposed to the change in the foreign interest rates, exchange rates and inflation rates. Concept of Currency Exposure Risk, Translation Exposure, and Economic Exposure The foreign risk exposure can be classified into two broad categories. Transaction Exposure; and Translation Exposure Transaction exposure can be defined as the risk arising due to the unanticipated change in the exchange rate which affects the cash inflow or outflow at the time of the settlement of an asset or liability. An important factor to consider in these types of risks is that the foreign currency value in such circumstances is fixed and thus these types of risks are also termed as contractual exposure. On the other hand, translation exposure arises due to the operation of the accounting and legislative standards which requires the foreign currency balances of assets and liabilities appearing in the balance sheet, to be revalued at the closing spot rate. These assets are of the time which is not going to be liquated in the near future. Translation risk, which is also termed as the accounting risk, is basically the related measure of variability. [Grant, K. & Marshall, A. P., 1997] Exchange rate can be defined as the relative price of one currency in terms of other. The exchange rate plays a very significant role in determining the capital flows and investments between international boundaries. In order to exercise prudent financial management, it is of prime importance for the multinationals to forecast the future exchange rates so that they do not suffered exchange losses and incur additional liability. Multinational companies, in order to curb the foreign exchange risk exposure enter into hedging transaction which means reducing or controlling risk. In hedging transaction, the firm take place a position in the future market which is opposite to the one being taken in the spot market. The underlying objective of the hedging is to reduce or limit the risk associated with the change in the exchange rate. For example, if an American company has an obligation to pay ?100 in month time and currently the exchange rate parity between USA and UK is ?1 is equal to $1.5, currently in its principal currency, $, the American company has the obligation of paying $150. Now if the financial managers of the American company forecast that the exchange rate parity between USA and UK will be ?1 to $2, then the company will be liable to pay $200 and thus will have to pay $50 more due to the fluctuation in exchange rate. In order to cater this situation, the company can enter into a hedging transaction whereby it enters into a transaction where it has to receive ?100 in one month, so that the loss on payable is offset by the gain on receivables. There are several types of foreign currency risk hedging. The most common types of foreign currency hedges that can be observed are the foreign currency forward contracts and foreign currency options. In forward contracts, the settlement of the transaction is contracted at a rate which is decided beforehand at a rate which is termed as the forward rate. On the other hand, in foreign currency options, the owner has the right to buy or sell a particular amount of the currency at a rate which is predetermined on the purchase date. There is no obligation in the case of foreign currency options, whereas the forward foreign currency contracts are binding. Other forms of hedges are money market hedge and foreign currency swaps. (c) Financial Ratio Analysis   Adam Bass   Profitability Ratios Gross profit margin 36.00% 31.00% Net profit margin 25.14% 16.25% Return on assets 21.86% 12.88% Interest coverage (times) 11.94 7.24 ROCE 40.94% 34.44% Adam Bass Liquidity Current ratio 2.1 1.31 Adam Bass Gearing Ratios Debt to asset ratio 0.34 0.44 Debt : equity ratio 0.52 0.78 Gross profit margin is an analyzing tool which assists in identifying how effectively and efficiently the company is utilizing its raw materials [1], variable cost related to labor and fixed costs such as rent and depreciation of property plant and equipment. The ratio shows that the company Adam is performing better than bass. The primary reason that can be behind better profitability outlook of Adam in comparison with Bass is that the company has been able to curtail it cost of sales in terms of prices of raw material and labor. The company might also be able to negotiate discount and lower prices from the supplier. The net profit margin follows the similar pattern. Net profit margin, on the other hand analyzes the profitability of the company before deducting the taxation and finance charges from the earnings [2]. The ratio is calculated by dividing the profit after interest and tax with the sales revenue of the current financial period. The ratio highlights how well the company is managing its selling and administrative expenses it also highlights the other income generated by the company during the course of its operation. Other ratios such as ROCE and ROA also proves the fact that the company Adam is performing quite well, The liquidity ratio measures the company’s ability to pay its short term liabilities. The ratio illustrates that how quickly a company can convert its assets into cash and cash equivalent in order to pay off its short term liabilities [Investopedia.com (2012)]. The most commonly used liquidity ratio, the current ratio, which is calculated by comparing the current assets and current liabilities. The strengthened the current ratio the more ability the company has to pay its debts and short term obligations over the next 12 months. The current ratio of Adam of 2.1 is quite better than that of Bass which is 1.31. The gearing ratios and indicate the level of risk taken by a company as a result of its capital structure [Peavler, R. (2012)]. These ratios are a great source of determining the level of financial risk to which the company is exposed and thus helps in reducing it to the optimum. The equity ratio indicates how much of the entity’s assets are financed through the finances generated through the revenue generated from the operations of the entity and raising financing through equity issue rather than acquiring debts or other financial institution. The analysis shows that in the capital structure of Adam, debt is lesser as compared to Bass. This will have benefit for the company in the long run as lower debt in the capital structure means that the company will have lesser interest expense, correspondingly increased distributable income. (e) International Accounting Standard 28, investment in associate, describes the associate as an entity in which the investor has significant influence and is able to participate in the financial and operating policy decision making. Usually a holding of 20% or more in the equity shares of any company makes it an associate of the investor. In most of the cases, if the holding in the equity shares of any company is less than 20%, the stature does not allow or grant privilege to the investor to actively participate in the policy making and taking strategic decision. IAS 28 further defines significant influence as follows: representation on the board of directors or equivalent governing body of the investee participation in the policy-making process material transactions between the investor and the investee interchange of managerial personnel provision of essential technical information As per the accounting treatment, equity method of accounting is used in order to account for the profit in the associate’s operation. Initially the consolidated financial statement of the parent, the investment is recorded at cost, at then subsequently it is increased every year by the share of profit of the associate. Reverences 1 Investopedia.com (2012) Profitability Indicator Ratios: Profit Margin Analysis | Investopedia. [online] Available at: http://www.investopedia.com/university/ratios/profitability-indicator/ratio1.asp [Accessed: 24 Oct 2013]. 2 Investopedia.com (2012) Understanding Financial Liquidity. [online] Available at: http://www.investopedia.com/articles/basics/07/liquidity.asp [Accessed: 24 Oct 2013]. 3 Investopedia.com (2012) Equity Financing Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/e/equityfinancing.asp [Accessed: 24 Oct 2013]. 4 Peavler, R. (2001) Profitability Ratio Analysis. [online] Available at: http://bizfinance.about.com/od/financialratios/a/Profitability_Ratios.htm [Accessed: 24 Oct 2013]. 5 Peavler, R. (2013) Debt and Equity Financing. [online] Available at: http://bizfinance.about.com/od/generalinformatio1/a/debtequityfin.htm [Accessed: 24 Oct 2013]. 6 Qfinance.com (2010) Gearing Ratios - Definition of Gearing Ratios - QFINANCE. [online] Available at: http://www.qfinance.com/dictionary/gearing-ratios [Accessed: 24 Oct 2013]. Read More