Analyzing Financial Issues in Cable&Wireless Communications Plc - Essay Example

Introduction It is important for people to learn how to invest their money in order to save for the future. The use of financial analysis can help aperson decipher whether a common stock is a good investment or not. It is not a wise move to invest money in the stock market without doing proper research of the investment target. In order to learn more how to properly assess the viability of investing in a specific stock this paper will analyze the performance of Cable & Wireless Communication Plc utilizing various analytic tools including ratio analysis. The sections that are going to be included in the paper are: the stock market, company background, financial performance and investor values, gearing impact on investment, and the final summary section. The financial performance of the company will be evaluated over the last five years. The Stock Market The stock market is the most popular form of investment in the world. The largest and most liquid stock market in the United Kingdom is the London Stock Exchange (LSE). Once a firm is listed in the London Stock Exchange it becomes a public company. Investors can achieve investments in public companies by buying their common stock. Purchasing a common stock implies that the investor gain ownership in the company. To purchase common stocks a person must buy the stocks from a stockbroker. Due to advances in technology people today can purchase stocks using the services of online brokerage firms such as Scottrade. Scottrade charges its customers $7 per trade (Scottrade, 2014). The values of stocks sold in the stock market vary each minute while the market is open. Investing in the stock market can help a person gain wealth, but people must be aware that investing in common stocks is a high risk proposition. In order to lower the risk of investing in the stock market an investor must utilize a diversification strategy. Diversification can be defined as spreading a portfolio over many investments to avoid excessive exposure to any one source of risk (Bodie, Kane, Marcus, 2002). The safest investment in common stocks that an investor can make is buying blue chip stocks. Blue chip stocks can be defined as a stock of a large, well-established and financially sound company that has operate for many years and whose market capitalization is in the billions of pounds (Investopedia, 2014). From the perspective of corporations the stock market serves the purpose of being a mechanism to raise money. Companies that become public enter the market through an initial public offering (IPO). Companies that already established are able to obtain money through secondary offerings. Company Background Cable & Wireless Communication is a full service telecoms operator providing mobile, broadband, fixed line, TV, and enterprise services (Cwc, 2014). The company was founded in the 1860s by Sir John Pender. The companys headquarters is located in London. The Chairman of the company is Sir Richard Lapthorne and its chief executive officer is Phil Bentley. The common stocks of the company are listed in the London Stock Exchange. The global operations of the company has regional operations located in the Caribbean, Panama, Monaco, and Seychelles. The organization has 3.7 million mobile customer, 1.1 million fixed line customers, and 388,000 broadband customers (Cwc, 2014). Cable & Wireless Communication has 3,977 employees. The common stocks of the company are currently valued at 45.25p (Cwc, 2014). Financial Performance and Investor Values The company generated revenues in fiscal year 2014 of $1.87 billion which represents a decrease of 4% in comparison with the previous year. When comparing the companys revenues with its results in fiscal year 2010 the organizations revenues reduced by $0.57 billion. The net income of the firm in fiscal year 2014 was $951 million. The net income results of the company was outstanding considering the fact that the company only had a net income of $170 million in fiscal year 2013. In comparison with five years ago Cable & Wireless Communications net income grew by a factor of 2.76x. Achieving increased profitability is a desirable outcome. A financial metric that measures the broad profitability of a company is the gross margin. Another financial formula that measures the absolute profitability of a firm is the net margin. Net margin can be calculated dividing net income by total sales. The table below shows the gross and net margin of the company between fiscal years 2014 through 2010. Year Gross Margin Net Margin 2014 73.19% 50.77% 2013 71.42% 8.75% 2012 72.24% 9.17% 2011 74.21% 1.28% 2010 65.00% 14.10% The table above clearly shows that the organization achieved a tremendous spike in absolute profitability during 2014. The reason that Cable & Wireless Communication had such a high net income in 2014 was due to a gain on disposal of discontinued operations of $1.011 billion. The return on capital employed ratio measures the returns that a company is realizing from its capital (Investorwords, 2014). The formula to calculate ROCE is EBIT / (Total assets – current liabilities). A high ROCE result is a desirable outcome. Cable & Wireless Communication had a ROCE in fiscal year 2014 of 4.92%. The ROCE results of the company for fiscal years 2013 through 2010 were 8.2%,8.12%,-0.4%, and 22.23% respectively. The ROCE of the firm in 2014 is about half of what it was in 2013 and 2012. In relation to five years ago the ROCE of the company is 17.31% lower than in fiscal year 2010. Earnings per share (EPS) is a financial metric that tends to have an effect on the market price per share as reflected in the price earning ratio (Garrison & Noreen, 2003). In fiscal year 2014 the firm had an earnings per share of $34.30. The EPS result of the company is much higher than its 2013 result of $0.40. The EPS of the company during fiscal years 2012, 2011, 2010 were $0.8, -$3.1, and $7.6. The highest EPS that the company achieved in the last five years was the 2014 result. Gearing Impact on Investment Year Current ratio Quick ratio Working capital Debt ratio Debt to equity 2014 0.61 0.58 -$484 million 0.73 2.76 2013 1.16 1.13 $190 million 0.93 13.56 2012 0.57 0.52 -$772 million 0.89 8.03 2011 0.88 0.81 -$154 million 0.78 3.5 2010 1.03 0.99 $33 million 0.77 3.27 The current ratio shows the ability of a company to pay off its short term debt (Investopedia, 2014). The formula to calculate current ratio is current assets divided by current liabilities. Cable & Wireless Communication had a current ratio in fiscal year 2014 of 0.61. The 2014 results are poor due to the fact that the company is below the 1.0 threshold and because the metric is much lower than its 2013 result of 1.16. In fiscal year 2010 the companys current ratio was 1.03 and in the subsequent two years the metric lowered to 0.88 and 0.57. The quick ratio is another short term solvency ratio that is more stringent than the current ratio because it eliminates inventory from the numerator of the formula. The organization had a quick ratio in fiscal year 2014 of 0.58. The quick ratio of the company in 2014 was much lower than its 2013 result of 1.13. Working capital shows that ability of the company to pay off its short term debt using solely current assets. The desirable outcome is for the firm to have a positive working capital result. Cable & Wireless Communication had a working capital in 2014 of -$484 million. During the last five years only in 2012 the company had a worse working capital result. Last year the working capital of the company was $190 million. The debt ratio is a solvency ratio that measures the portion of the assets of a business which are financed through debt (Accountingexplained, 2014). The debt ratio result in 2014 of 0.73 shows that the company total debt position has decreased by 27% in comparison with the previous year. The debt ratio of the company in 2014 is the lowest it has been during the last five years. The debt to equity ratio of Cable & Wireless Communication in 2014 was 2.76. The debt to equity ratio measures the amount of assets being provided by creditors for each dollar of assets being provided by stockholders (Garrison, et. al., 2003). Final Summary The financial analysis performed on Cable & Wireless Communication Plc showed some good signs and some negative outcomes. The company has shown that it can generate profits year after year. During the last five years the company has achieved positive net income results. The net margin of the firm in fiscal year 2014 was 50.77%. The company has also done a good job at generating profits for its shareholders evidenced by its EPS result in 2014 of $34.30. A negative result in the analysis of the company is its short term solvency position. The current ratio of the firm in 2014 was only 0.61. To fix this problem the company could either sell some assets or issue new common stocks in order to increase its cash balance. The debt ratio results showed that the company is not too highly leveraged. Overall my recommendation is to buy Cable & Wireless Communication common stocks. References Accountingexplained.com (2014). Debt Ratio. [Accessed 22 October 2014] Annual Report (2014). Cable & Wireless Communication 2014 Annual Report. [Accessed 22 October 2014] Bodie, Z., Kane, A., Marcus, A. (2002). Investments. Boston: McGraw-Hill Irwin. Cwc.com (2014). About us. [Accessed 22 October 2014] Cwc.com (2014). Quick facts. [Accessed 22 October 2014] Cwc.com (2014). Share price. [Accessed 22 October 2014] Garrison, R., Noreen, E. (2003). Managerial Accounting (10th ed.). Boston: McGraw-Hill Irwin. Investopedia.com (2014). Blue-Chip Stocks. [Accessed 22 October 2014] Investopedia.com (2014). Current Ratio. [Accessed 22 October 2014] Investorwords.com (2014). ROCE. [Accessed 22 October 2014] Scottrade.com (2014). Home. [Accessed 22 October 2014] Appendix A: Cable & Wireless Communication 2014 Income Statement (Annual Report, 2014). Appendix B: Cable & Wireless Communication 2014 Statement of Retained Earnings (Annual Report, 2014). Appendix C: Cable & Wireless Communication 2014 Balance Sheet (Annual Report, 2014). Appendix D: Cable & Wireless Communication 2014 Statement of Cash Flow (Annual Report, 2014). Read More