Multi-National Operation and Risk Management of Renishaw Plc - Essay Example

The Renishaw Plc Company Analysis Table of content Introduction and ……………………………………..3 Performance: FinancialTrend Analysis……………………………4 Profitability ratios Efficiency Ratios Liquidity Ratios Gearing or Solvency Ratios Investment ratios Globalization strategy……………………………………………….9 Managing risks……………………………………………………..10 Exchange rates risk management Country and Political Risk Recommendations………………………………………………….13 References…………………………………………………………..14 Introduction and Description This is a multinational with its focus based on the core skills of measurement, motion control, precision machining without forgetting spectroscopy. The company is founded upon the fundamental belief that the success of its operations will largely be based on its patented ad innovative products alongside its processes (Thomsett 2006). This is coupled with high quality manufacturing and above all, its ability to provide large customer support in virtually all its markets worldwide. Renishaw plc is a medical device manufacturer. The operations of the company include designing, manufacturing, and selling precision metrology and inspection equipment. It also deals in production of healthcare products. Among what it produces are medical devices, surgical robots, and planning software used for stereotactic neurosurgery for products. The company manufactures dental CAD/CAM and stereotactic neurological systems. The company sent its products to all markets in the world (Thomas 2012). This is a company with its base in the UK and has operations throughout the world. Renishaw Plc offers services in 35 key markets, including Australia, Europe, United States, and Japan among others. The UK and Germany are two of its largest markets (Grant 2007). Especially the Western Europe markets, which are the largest source of purchasing power accounting for 28% of the worldwide total in 2012. In addition, the company has more than 60 offices in 32 countries with 94% of its sales realized outside the UK. The reputation as exhibited by the company has made it receive numerous awards among them the fifth Queen’s Awards (Grant 2007). This is a public company listed in the London Stock Exchange with an employee base of over 3,092; it is also a constituent of FTSE 250 Index. However, this number grows progressively at the rate of 11.8% yearly. This is partly because of the business in which the company is engaged in of manufacturing an assortment of test-probe and measurement system that are applied in industrial operations. Its latest sales as at June 2013 were recorded at $ 527.5 Million with a growth of 1.8% from the previous year’s sales figures. Its net income was recorded at $ 105.6 Million with an income growth of 2.8% annually. The firm as well gains its competitive strengths from its competitors, which include - Badger Meter, Inc; Euro Tech Holdings Company Limited; Controlotron Corporation among many others (Aguilar 2004). Performance: Financial Trend Analysis Financial Ratio Analysis is a technique that is employed when analyzing the financial performance of a given company. Because of the ratios, we are always able to make given major decisions affecting the company’s operations in terms of operations, growth, and expansion among many other issues (Plummer 2010). These ratios include; the profitability ratios, Efficiency Ratios, Liquidity Ratios, gearing rations and investments ratios as well. For Renishaw we are going to analyze a few ratios under each category and see how they affect the company. Profitability ratios These are ratios, which shows how successful the company is in terms of profitability and returns on the investments made on the business. Any liquid and efficient business has the likelihood of being profitable as well. Let us now see the profitability of Renishaw over the 5 years. RATIO FORMULA 30/06/2009 30/06/2010 30/06/2011 30/06/2012 30/06/2013 RETURN ON SALES (Net Profit/Net Sale)*100 (3.6/171.25)*100 =2.1% (21.31 /181.61)* 100 =11.7% (65.73 /288.75)*100 =22.8% (69.04 / 331.89)* 100 =20.8% (68.82/346.88)*100 =20% RETURN ON EQUITY (Net Profit/Owner’s Equity)*100 (3.6/143.76)*100 =2.5% (21.31/159.05)*100 =13.398% (65.73/202.21)*100 =32.51% (69.04/243.14)*100 =28.4% (68.82/278.05)*100 =24.75% As shown through the Return on Sales and the Returns on Equity, the profitability of Renishaw increases progressively from the year 2009 all the way to the year 2011. There is a slight drop in the year 2013. However, we can see for sure that Renishaw has been able to adequately cover its operating costs together with the indirect costs throughout the 5 years of operation. The ROE on the other hand is a good indicator that the investors in the publicly listed firm are increasingly getting a return that is worth taking a risk of their funds for (Plummer 2010). It is therefore advisable for the investors not to think of moving their funds to less risky investments like the bonds as the company shows prospects of a bright future in terms of profitability given the positive trend in growth of 2.5%, 13.398%, 32.51%, 28.4% and 24.75%from the year2009 to 2013. Efficiency Ratios These ratios are rooted from the balance sheet and the income statements and they show the efficiency of the company in turning their inventory, sales assets, debtors, or even creditors (Plummer 2010). The ratios are therefore used to measure the ability of the company to take care of its short-term obligations. An example for Renishaw is as follows:- RATIO FORMULA 30/06/2009 30/06/2010 30/06/2011 30/06/2012 30/06/2013 Inventory turnover ratio Net Sales/Inventory 171.5/29.16 =5.87 times 181.61/30.88 =5.88 times 288.75/49.81 =5.79 times 331.89/53.98 =6.15 times 346.88/65.27 =5.31times According to the inventory turnover ratios calculated below since the year 2009-2013, it is evident that Renishaw plc is able to convert inventory 5.87 times, 5.88 times, 5.79 times, 6.15 times, 5.31times respectively. This shows that the ability of the company to take care of its short-term obligations was never in doubt as indicated by an average of about 5 times turnover throughout the years. Liquidity Ratios These ratios are extracted from the balance sheet and used in measuring the liquidity of the company on the date when the statements are prepared (Plummer 2010). These ratios are used to find out whether the firm is able to take care of both its short term and long-term obligations. An example is the current ratio and it trends throughout the five years as follows; RATIO FORMULA 30/06/2009 30/06/2010 30/06/2011 30/06/2012 30/06/2013 CURRENT RATIO Current Assets/Current Liabilities 79.66/21.49 =3.6: 1 115.63/29.88 =3.9: 1 157.37/47.10 =3.3: 1 186.58/56.38 =3.3: 1 186.55/43.78 =4.3: 1 This ratio is calculated by dividing the current assets by the current liabilities and it tests the liquidity of a company. The ratio does this by expressing the relationship of the working capital to the available current assets. The standard of this ratio is normally at 2:1 with a company showing a higher value than this exhibiting a very strong ability to take care of its current obligations. Renishaw plc through its ratios 3.6: 1, 3.9: 1, 3.3: 1, 3.3: 1, 4.3: 1 for the years 2009, 2010, 2011, 2012 and 2013 have consistently indicated its ability to take care of its short term obligations. Gearing or Solvency Ratios These ratios are used in determining the capital structure of the company. Renishaw plc is therefore able to determine the amount of debt and equity capital in its structure and hence determine the level of risk that it’s undertaking (Elliott & Elliott 2002). An example is the debt to equity ratio. This is a long-term solvency ratio, which shows the soundness of the long-term financial policies of the company. RATIO FORMULA 30/06/2009 30/06/2010 30/06/2011 30/06/2012 30/06/2013 DEBT TO EQUITY RATIO Total Liabilities/ Stockholder’s Equity 62.42/143.78 =0.43 85.36/158.62 =0.54 116.96/201.72 =0.58 127.66/242.40 =0.53 117.56/276.72 =0.42 All the figures of debt to equity ratio for Renishaw fall below 1 which means that the portion of the assets provided by the stockholders is more than those provided by the creditors. Throughout the years from 2009 to 2013 the ratios are as follows; 0.43, 0.54, 0.58, 0.53, and 0.42. This is highly preferred by the creditors as it means that their money is not at risk as the assets of the shareholders adequately cover them. For this ratio a ratio 1:1 is always considered satisfactory for most industries. Investment ratios These ratios show the shareholders a return on their investments and help them make the decisions as to whether they should continue investing in the company or not depending on each investor’s preferences (Elliott & Elliott 2002). High net worth individuals with a high appetite to invest will not be fascinated by high EPS and vice versa. For Renishaw the trend has been on the rise since 2009 as shown below. RATIO FORMULA 30/06/2009 30/06/2010 30/06/2011 30/06/2012 30/06/2013 EPS(Adjusted) 9.30p 31.60p 88.50p 95.60p 91.40p Globalization strategy The existence of this company in the world markets is driven by the fact that it has customers that it has no option of letting down whatsoever. Alongside the customers who demand service, we also have the competitors as witnessed above, the moment they are not able to deliver as promised, and the customers are likely to shift to the readily available competitors (Rao 2001). Globalization of materials R & D time for a national strategy (2005) states that the company has therefore invested heavily on research and development with about 15-18% of its annual sales invested in R&D as well as engineering. This has since enabled the diversification of the company in terms of the products it provides to its clients worldwide (Go & Pine 2005). The globalization strategy as devised by Renishaw has gone a long way in ensuring that it takes care of its people both the employees and the clients alike (Etemad 2003). The company operations as well understand it processes so well band through R&D the company is able to control it technology and hence it is ever relevant in its market of operations (Baum & Lampel 2010). The technology that is employed by the company has greatly enhanced the support of all its stakeholders. The company’s processes were defined manually before involving technology and act that has ensured its improved operations in the global arena. The process adopted by the company is so simplified while at the same time it has the capability of delivering quality and efficiency that is required in the production technology (Baum & Lampel 2010). Through research and development, the company has always known what it intends to be involved in; it is also able to know what the technology it intends to use is capable of and therefore easily takes advantage of the same (Moore 2009). This strategy has ensured that the experience of all those who deal with the company are never barred by location, language, culture or business practices (Go & Pine 2005). Its products cut across the board in the global arena. Its subsidiaries are as follows: - Renishaw Inc. (United States); Renishaw GmbH (Germany); Renishaw KK (Japan); and Renishaw International BV (Netherlands). In addition, we have the Renishaw Metrology Systems Private Ltd (Bangalore); Renishaw SA (France); Renishaw Oceania Pty Ltd. (Australia); Renishaw SpA (Italy); Renishaw (Hong Kong) Ltd; Renishaw A.G (Switzerland); Renishaw Iberica S.A (Spain); Renishaw Latino Americana Ltd (Brazil); Renishaw (Ireland) Ltd. This is an indication that its global presence of Renishaw plc is quite extensive (Baum & Lampel 2010). Managing risks Given the existence of a variety of risks that exists in the business environment, running a business may be a very risky affair. This is because such risks have the possibility of crumbling the business operations or even scale down its activities. The costs may exist in form of financial as well as in terms of time taken to recover from them (Rieger 2006). Renishaw conducts its business across various countries and the most common type of risk is caused by the fact that the pricing of its commodities in those countries is conducted using the local currencies. After the breakdown of the Breton Woods system, the volatility of the exchange rates has been a common occurrence (Tarantino & Cernauskas, 2009). The first risk that Renishaw as a multinational is faced with is the exchange rate risk given such types of risks are not accompanied by offsetting changes in the prices of the commodities it deals with in the countries that its subsidiaries are based most so its markets in the far east. Exchange rates risk management Renishaw has devised several ways of dealing with the exchange rates risks. First, it uses the operational hedging strategy and it has done this by first identifying its revenue centers in form of regions considering all the area it makes the sale of its products. It then has grouped the regions in terms of the sales realized from each of the regions. It then locates production in regions where it has realized massive sales in the past and therefore has the possibility of getting even more revenues in the local currency of which in the perspective of the firm is considered to be foreign to the operations of the firm (Currie 2011). This strategy is also adopted in cases where the local corporations who deal in the same business have a strong production capacity and hence posing a stiff competition to Renishaw plc. Therefore, apart from merely managing exchange risk, the company is as well able to manage local competition and remain relevant in its areas of operation (Chapman 2011). Using this strategy, the likely impacts of the unexpected changes in exchange rates and foreign demand conditions on the domestic currency value of the sales revenues realized will be covered or hedged by the similar changes in the value of the domestic currency of the production costs in the locally instituted firms (Doherty 2000). This strategy has worked to motivate Renishaw to undertake Direct Foreign investment in the foreign regions that it has establishments. Another strategy used by Renishaw to manage its Exchange risk is through financial hedging policies. This strategy works most of the time for the firm given its wide coverage with massive subsidiaries; and given that, it is much simpler and less costly to undertake such a strategy. While it implements the operational strategy in areas that the firm rakes in massive revenue, the firm employs the financial hedge policies in the other sales regions (007 2004). Under this strategy, the firm uses forwards contacts to hedge when the quantity of foreign currency it expects to receive or generate from its sales is certain (McNeil, Frey, & Embrechts 2005). For instance during a given financial year, the exchange rate for the euro against the sterling pound ranged from its lowest of 0.776 to its highest of 0.849 where the exchange rate changed by 13%. In other countries such as the U.S. nations, the currency in use is the dollar. The sterling pound is stronger on exchange than the dollar creating a difference of about 6.7%. This helps the firm eliminate all its transaction exposure (Doherty 2000). On the other hand, the firm there is instances when the quantity of foreign currency expected is not certain or is fluctuating. This situation may be caused by frequent shift in demand conditions of the products supplied by Renishaw plc. In such a case, no financial hedge can satisfactorily give an assurance of effectively managing the exchange risk (Hillson 2009). The option we resort to in this case is the operational hedge as a sure measure. This is despite the fact that such operational measures may have a direct impact on the profits of Renishaw. Country and Political Risk The company given its operations in multiple markets also faces many political risks. This is the likely that the business of the firm may be affected by the political game shift of its area of operation (Bickelhaupt & Niv 2003). The policies that the political decisions of any of its countries of operations are likely to make have the impact of affecting the profits of Renishaw and as well derail it from its goals in most of the instances (Thomas 2012). In many instances, most corporations have faced a complete destruction because of detrimental political actions and at other times, some political decisions have hindered the movement of capital across the borders. Political risks are therefore categorized as either macro risks or micro risks. Renishaw has invested in research through consultants in countries that it invests in as well as the prospective markets. Such researchers provide the company with detailed information on the risks and risk situations in the countries of their operations as and when there need be (Deventer & Imai 2005). Through the company’s risk division, it is as well able to conduct its own research on risk and risk situations to enable them make major investment decisions. In the operations of any venture it must always be realized that the higher the risk the higher the returns in most of the cases. It is therefore worth taking calculated risks at times in such instances Renishaw plc normally employs the strategy of negotiating terms of compensation with the host country so that there is a legal basis of recourse in the event that calamity strikes (Hopkin 2013). For countries the company considers lucrative for its business while such countries poses a high risk, the company normally purchase political risk insurance policy. These vary from country to country and in most of the circumstances, the profits of Renishaw plc are affected due to hefty premiums (Jordão 2010). Recommendations Both exchange risk and country or political risks will in most of the instances have massive negative effects in terms of finances or time, which are so costly to the company. The company should therefore: - define its path and ensure that it makes investments only in businesses that are in line with their objectives. Before any engagements are arrived at, the company should as well ensure that the conditions of doing business are never exaggerated. Any agreement that Renishaw is involved in must always be clear in terms of the policies both financial and managerial to help avoid conflicts that may drag the business operations. In cases where the company has decided to purchase political risk insurance policy, it must realize that claims take a lengthy procedure and always devise a back up strategy to help mitigate against delays in operations (Merna & Thani 2008). References 007, RM, 2004, Risk management (3rd ed.), Standards Australia International, Ltd: Sydney, NSW. Aguilar, FJ, 2004, Managing corporate ethics: learning from Americas ethical companies how to supercharge business performance, Oxford University Press: New York. Baum, J.A, & Lampel, 2010, The globalization of strategy research, Emerald: Bingley, UK. 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