Financial Performance and Risk management of Domino Printing - Essay Example

Financial Performance and Risk Management of Domino printing plc INTRODUCTION Domino printing plc is United Kingdom based multinational company dealing in total coding and printing technologies. The company was established in 1978 and while went public in 1985 as a result of consistent expansion (Domino, a). In 2014, the sales of the company increased by 4% to £350.2 million (Domino, 2014a). Moreover, the pre-tax profits were £57.6 million and net cash inflow from operating activities before tax was £56.5 million (Domino, 2014a). In 2013 Domino printing plc was listed in the FTSE 250 share index on the London Stock Exchange (Domino, b). With 2200 employees, Domino printing plc is operating its business operations in more than 120 countries worldwide (Domino, b). The share of global sales of the company in different regions is illustrated below: (Domino, 2014b) In this report, the competition circumstances and international business operation will be discussed with the help of analyzing the Domino printing plc financial performance. Furthermore, the risks management related to exchange rate risk and country and political risk will be evaluated. BUSINESS AND KEY MARKETS STUDY At this time, Domino printing plc has expanded its business worldwide in which the primary segmentation is being done geographically which include three prime regions such as Europe, America, and Asia with the rest of the world. The sales revenue from these prime regions is presented below: (Domino, 2014b) (Domino, 2014b) (Domino, 2014b) In the region of Europe, Domino printing plc do direct sales in the several countries, rest of the distribution is done by the distributors. Europe was a good market for the company in the year 2014. Company managed to generate 12% higher sales in 2014 as compared to 2013 as a result of growth in Germany (Domino, 2014b). However, in the region of America the growth was not satisfactory especially in Central and South America due to the 7% decline in local currency and the weak and unstable economic performance in Brazil and Argentina (Domino, 2014b). Asia and the other remaining regions has becomes the growing areas for Domino printing plc. In this region the demand of marking and coding has been increases in 2013 because of the increased number in the middle class. China and India were the strong market for the company in 2014 because the sale was high in these countries (Domino, 2014b). CORPORATE AND FINANCIAL ACTIONS In the year 2014, company’s i-Tech product were launched including A520i continuous ink jet printer and V230i thermal transfer over printer which received a positive response from the customers, moreover, company also remains the member of FTSE4Good index (Domino, 2014b). However the N610i was also launched which increase the rapids sales in North America. In 2014, a new factory for house printer and fluids production was opened in India. The company is also planning to open a factory in China as well in 2015 because of the increased growth in China (Domino, 2014b). FINANCIAL TRENDS The financial trends of Domino printing plc have been analyzed in this section including profitability, financial gearing, investment and liquidity performance. The key financial figures and trends of the company are presented below:  In £ millions 2014 2013 2012 2011 2010 Total revenue 350.2 335.7 312.1 314.1 300 Cost of sales 181.8 174.2 156.9 156.6 151 Gross profit 168.4 161.5 155.2 157.5 149 Total operating expense 294.1 318.3 261 256.5 247.6 Operating profit 56.1 17.4 51.1 57.6 52.4 Net income 44.6 5.8 40.7 40.7 37.1 Total assets 302 315.8 323.3 281.4 261.8 Total liabilities 89.8 117.5 110.8 88.6 91 Total equity 212.2 198.3 212.5 192.8 170.8 (Adapted from: Domino, 2014b; 2013; 2012; 2011; 2010) (Adapted from: Domino, 2014b; 2013; 2012; 2011; 2010) The total revenue of the company has been improved every year, however, in the year 2011 and 2012 the revenue did not increase due to the fact that in these years the sale was constant which resulted in the stable net income. Although from the year 2013 the revenue and the sales increased rapidly but the net income suddenly decreased because the operating expenses get high, the reason behind that might be the unstable economic conditions in Europe which slow down the growth of operating profit. But again in the year 2014, the company speedily increased its profit and net income. (Adapted from: Domino, 2014b; 2013; 2012; 2011; 2010) The total assets, liability and capital of the company increased with the normal percentage; nevertheless, in 2012 the company improved its assets by launching the new i-Tech product in market. Profitability Ratios: Gross profit and Net profit margin In the year 2010, the gross profit was increasing smoothly and in 2014 it is constant but from the year 2012 to 2013 it declined (Domino, 2014b; 2013; 2012; 2011; 2010). This is due to the fact that the economic conditions start fluctuated which constant the revenue of the company. Moreover, in these years company launches some new products, which increased the purchases of raw materials and it shows impact on the cost of the good sold. Apart from that, in the year 2012 company did heavy investment in the R&D department which increased the operating expenses (Domino, 2012) but in 2013 the net profit increased because of the growth sale in America and Asia (Domino, 2013). Efficiency Ratios Inventory Turnover and Receivables turnover From the year 2011, the inventory turnover ratio starts declining. The reason behind it is that the new product ranges was introduced which replaced the existing products that result in the copying of the raw materials in some areas, although the new products were also manufacturing at the same time. On the contrary, the increased in the receivable from the year 2011 resulted in the constant downfall of the receivable turnover (Domino, 2011). Financial Strength Ratios Current ratio In the year 2011, the current assets abruptly declined (Domino, 2011). The major downfall was found in the cash and bank loan start rising which turn down the current ratio. But from 2013, the current assets suddenly raised and the non-current liabilities of the company fall down ((Domino, 2013). Although still the company was in good condition to pay off all his debt and can reinvest in its business. Total debt/Total Capital From the year 2010, the liability increased along with the retained earnings. But in 2013 the retained earning starts falling down because company launched new i-Tech products. Moreover, company’s potential growth was in Europe is the major reason in the increased profit. Investment Ratios Earnings per share EPS was constant till 2012 but in the year 2013 there was a big decline in EPS. The reason behind is that due to excess of operating expenses decrease the net income and its effect is shown in the EPS. Payout ratio From the year 2010 to 2011 the company was following the trend of 20% increase in dividend. However, from the year 2012 the trend got break and the dividend differ every year. In the year 2012 the company starts paying more dividends to its shareholders because from this year company invested a lot in making new products. RISK MANAGEMENT: Businesses operate in an environment which carries risks for them in addition to the opportunities (Power, 2004). Multinational Corporation which is operating in other countries than the host country is subject to additional risks from the environments of the host country (Shrader, Oviatt, & McDougall, 2000; Borghesi & Gaudenzi, 2012). Effective risk management system is, therefore, important to be implemented in order to ensure that business is prepared to deal with the risk that can hamper their performance, market, operation as well as reputation (Miller & Waller, 2003). Domino Printing having existing in multiple countries is also subject to such risk and therefore, has taken comprehensive risk management system implemented as presented in the image below: (Domino, 2014b) This section of the report details the exchange as well as the political risks that Domino Printing is exposed to and its respective measures in dealing with it. Exchange Rate risk In this era when company get globalized, it faces many challenges because of the competitors and economic conditions (Allayannis & Ofek, 2001). The major threat which companies deal with is the fluctuating exchange rates because when the companies expand its business in different countries, the currency exchange rates affect the business operations and profits (Papaioannou, 2006). Domino printing PLS has a risk management committee which is operated by the CFO of the company and the company takes given different measures to deal with the foreign currency translation risks (Domino, 2014b). In order to prepare the consolidate report of the business financials, organizations are required to translate the business performance in host countries to local or the functional currency (Andersen et al., 2000). This conversion brings exchange rate risk. Simply stating exchange rate risk implies the change in the value of the asset or liability due to the change in the value of operating currency. The reporting currency of the Domino Plc is pound sterling (Domino, 2014b). Company prepares the individual report of the group in the currency of the country in which it is operating. Later, for the consolidate reporting, the financials are translated into pound sterling. The exchange rate adopted for the purpose is the one prevailing on the date of reporting. The resulting net gain or loss from the exchange rate translation is then reported in the profit or loss for the respective year (Domino, 2014b). Exchange rate risk is dealt by using various tools and derivate. Forward is one of the widely used tools for the purpose (Andersen et al., 2001). Being multinational, Domino Plc has developed Group’s treasury policy to determine the scope and the level of foreign currency risk that business shall exposed the company also uses forward foreign exchange contracts in dealing for hedging the risk contained in the foreign currency risk (Domino, 2014b). These exchange contract enable business in hedging risk that is implied in the future transactions of the business in other currencies. Moreover, forward foreign exchange contracts are also developed to deal with the exchange rate risk posed to cash inflow or outflows in the foreign currencies (Domino, 2014b). Domino Plc had forward foreign exchange contracts of amounting to £ 25,627,000 in 2014 as compared to  £’22,281000 in 2013 (Domino, 2014b). It is important to mention that such measures support business in mitigating risk and does not eliminate the risk in totality. For instance, Domino Plc reported a net loss of £559,000 in the year 2014 as a result of the change in the value of the derivative instruments that company acquired for hedging (Domino, 2014b). For the recently reported years, company incurred net loss of £559,000 as compared to net gain of £7,000 that Domino printing realized in the year 2013 (Domino, 2014b). Political risk Political risks are the external environmental uncertainties created by the political factors (Desbordes, 2010). When organizations avoid political risk they do a great mistake (Baek & Qian, 2011). Regarding to the political uncertainties the company faced following risks: Firm Based: Every organization faces the political risk which affects the productivity and growth of the organization (Perotti & Van Oijen, 2001). Domino printing science plc also face the risks related to firms. For instance, in the year 2013, the region of Central and South America’s political situation restricted the trade in many countries which resulted in reduced customer purchasing for the product (Domino, 2013). At the time of hedging or doing acquisition, when company do material adverse change, the political situations of the countries influence the business operations (Hansen, 2004). However, being multinational company, Domino takes proactive measures to deal with the risk that are specific to the firm. For instance, risk management system of the Domino constantly monitors the changing trends. Change in the market intelligence and changing economic environment that are subject to have an impact on the operational performance of the firm are assessed and respective measures are taken to deal with (Domino, 2011). Corporate governance of the firm has to play an effective and critical role in dealing with the firm based political risk. For the purpose, the company has developed a corporate governance system that is in full compliance with the code of the conduct issued by Financial Reporting Council in the year 2010 entitled as the “The UK Corporate Governance Code” (Domino, 2011). The board of directors as well as the entire operations of the business is accounted for the operations. Domino Printing has laid a complete set of procedures to be followed in order to ensure the compliance of the business with the regulation and in the best interest of the stakeholders. In addition to this, the risk management committee is also set-up who is responsible for the proactive anticipation of risk, measures to mitigate risk and control measures. Moreover, the managers are also required to submit the report in the risks posed to the business on quarter and annual basis (Domino, 2011). Having business in multiple companies, Domino Plc not only abides by the local regulation but also given due consideration to the all regulations related to competition as well as trade related laws. Finally, the corporate social responsibility ensures the alignment of the company with the ethical aspects of business in addition to the regulatory measures (Domino, d). Country Based: As the Domino printing plc is a multinational corporation and it is expanding its business globally so company faces some risks which differ from country to country. For example, in the year 2014, the region of Europe and Asia was less encouraging for the company (Domino, 2014b). The Ukraine crises and the failing political circumstances of the Middle East badly impact the customer investment in the firm. This impact on the local economy resulted in the impacting the demand and market of Domino printing. However, company takes some major actions in order to deal with these risks. According to UK Bribery Act, Domino Printing firmly adopted the anti-bribery policy in order to reduce the compliance risks (Domino, 2012b). Moreover, the risk of Human resources is also being faced when company get globalized. Retaining the employees by making the environment of organization according to the country is very essential (Quer, Claver, & Rienda, 2007). Domino Printing retained the employee of every country by following their culture and revising their remuneration policies (Domino, d). Furthermore, the company also tries to maintain healthy relationship not with its customers only but also with its suppliers by following all the ethical norms (Domino, 2012c). Global Based: In this time the global risk is the major factor which occurs unexpectedly and affects the business operations (Shapiro, 2008). Domino printing science plc follows foreign rules while operating the business globally so that it can deal with uncertain situations. The globalization of the organization forces the companies to take ethical steps in dealing with risks. Domino printing plc take care of the environmental sustainability by efficiently using the natural resources and safely disposed and recycled the waste material without threatens the natural environment (Domino, c). The company publishes some metrics in their annual reports related to environmental measures. Moreover, company also give environmental training to its employees and also make the workplace environment friendly so that the accident rates can be controlled in the organization (Domino, c). CONCLUSION AND RECOMMENDATION: Domino printing science is a multinational company which operates its business globally and its three main regions are America, Europe and Asia with rest of the world. The company’s total revenue is increasing smoothly but in the year 2013 the company’s net income suddenly falls the major reason is that the poor economic condition in the Europe. Although the company launched i-Tech in 2012 but the income still remain same, however, in 2014 i-Tech increased the sales growth. Furthermore, in 2012 the company breaks the 25 years trend of 20% increased dividend and in 2014 the pay off all his debts. As the economic conditions in different countries are fluctuating so the company should do not do heavy investments and till the economic condition did not get stable the company should update their current products. List of References Allayannis, G., & Ofek, E. (2001). Exchange rate exposure, hedging, and the use of foreign currency derivatives. Journal of international money and finance, vol. 20, no. 2, pp. 273-296 Andersen, T. G., Bollerslev, T., Diebold, F. X., & Labys, P. (2000). Exchange rate returns standardized by realized volatility are (nearly) Gaussian (No. w7488). National bureau of economic research Andersen, T. G., Bollerslev, T., Diebold, F. X., & Labys, P. (2001). The distribution of realized exchange rate volatility. Journal of the American statistical association, vol. 96, no. 453, pp. 42-55 Baek, K., & Qian, X. (2011). An analysis on political risks and the flow of foreign direct investment in developing and industrialized economies. Economics, management, and financial markets, vol. 6, no. 4, pp. 60-91 Borghesi, A., & Gaudenzi, B. (2012). Risk management: How To Assess, Transfer And Communicate Critical Risks (Vol. 5). Springer Science & Business Media Desbordes, R. (2010). Global and diplomatic political risks and foreign direct investment. Economics & Politics, vol. 22, no. 1, pp. 92-125 Domino. (2010). Annual reports and financial statements 2010. Available from http://www.domino-printing.com/Corporate/Download-Area/Result-Centre/Annual-Report-and-Accounts/2010AnnualReportandAccounts.pdf [Accessed 12 February 2015] Domino. (2011). Annual reports and financial statements 2011. Available from http://www.domino-printing.com/Corporate/Download-Area/Result-Centre/Annual-Report-and-Accounts/2011-Annual-Report-and-Accounts.pdf [Accessed 12 February 2015] Domino. (2012). Annual reports and financial statements 2012. Available from http://www.domino-printing.com/Corporate/Download-Area/Result-Centre/Annual-Report-and-Accounts/2012-Annual-Report-and-Accounts.pdf [Accessed 12 February 2015] Domino. (2012b). Anti bribery policy. Available from http://www.domino-printing.com/Corporate/Download-Area/CSR/Anti-Bribery%20Policy.pdf [Accessed 12 February 2015] Domino. (2012c). Ethics policy. Available from http://www.domino-printing.com/Corporate/Download-Area/CSR/Ethics-Policy.pdf [Accessed 12 February 2015] Domino. (2013). Annual reports and accounts 2013. Available from http://www.domino-printing.com/Corporate/Download-Area/Result-Centre/Current-Year/2013-Annual-Report-and-Accounts.pdf [Accessed 12 February 2015] Domino. (2014a). 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Available from http://www.domino-printing.com/Corporate/Responsibility/Policy-and-Approach/Policy-and-Approach.aspx#readMore [Accessed 12 February 2015] Hansen, K. W. (2004). Managing political risks in emerging market investment.Transnatl Law., vol. 18, pp. 77 Miller, K. D., & Waller, H. G. (2003). Scenarios, real options and integrated risk management. Long range planning, vol. 36, no. 1, pp. 93-107. Papaioannou, M. (2006). Exchange Rate Risk Measurement and Management: Issues and Approaches for Firms. IMF Working paper. Available from https://www.imf.org/external/pubs/ft/wp/2006/wp06255.pdf [Accessed 12 February 2015] Perotti, E. C., & Van Oijen, P. (2001). Privatization, political risk and stock market development in emerging economies. Journal of International Money and Finance, vol. 20, no. 1, pp. 43-69 Power, M. (2004). The risk management of everything. The Journal of Risk Finance, vol. 5, no. 3, pp. 58-65 Quer, D., Claver, E., & Rienda, L. (2007). The impact of country risk and cultural distance on entry mode choice: An integrated approach. Cross Cultural Management: An International Journal, vol. 14, no. 1, pp. 74-87 Shapiro, A. C. (2008). Multinational financial management. John Wiley & Sons. Shrader, R. C., Oviatt, B. M., & McDougall, P. P. (2000). How new ventures exploit trade-offs among international risk factors: Lessons for the accelerated internationization of the 21st century. Academy of Management journal, vol. 43, no. 6, pp. 1227-1247 Read More