Finance论文模板 – Financial Management

Introduction

The report contains a financial ratio and trend analysis to identify key areas of performance. The period covered is from the year 2008 to 2012. Suggestions have been made on areas deemed to be unsatisfactory.

Profitability

Hibu’s profitability has been on the decline over the five year period covered by this report. The graph below illustrates the movement of sales and net income after tax over the five year period.

Figure 1: Sales and profit performance

Cumulatively, the company has shed off about 32% of its sales since they peaked in the year 2009. The company has only recorded marginal after tax profits in 2011, 2010, and 2008 while making substantial losses in 2012 and 2009. The performance raises questions over the company’s ability to survive in the market as loses can only be borne for a limited period and not when the firm is making marginal profits while incurring substantial loses (Pusnik & Tajnikar, 2008, p. 45).  Table 1 acutely represents Hibu’s profitability position.

ROCE 20122011201020092008
EBIT/capital employed%-57%9%8%-14%10%
Gross profit margin      
(Gross profit / sales) x 100%42.7955.3755.0056.2056.88
Operating profit margin      
operating profit/sales*100%-97.6117.5719.28-30.7025.94
Net profit margin      
(Net profit before interest and tax / sales) x 100%-97.6117.5719.28-30.7025.94

 Table 1: Profitability analysis

In the years the company made profits, the ROCE was an average of 9%. However, this was completely wiped out by loses made in 2009 and 2012 where the ROCE over the two years was an average of negative 35.5%. The result was that the average ROCE over the five year period was a negative of 1.7%. A consolation was that the gross profit margin was positive and high throughout the five years, indicating that Hibu has the ability to control its cost of production. However, its ability to control operating costs is questionable as Hibu recorded negative margins in 2012 and 2009. To stabilize its profitability in the future, operating costs should be a key area of concern (Atrill & McLaney, 2006). The company should look into the processes involved in its operations and seek to streamline them as these high costs are usually the result of duplication of efforts (Francesco & Gordini, 2009, p. 145).  

Efficiency performance

Table 2 illustrates how well Hibu utilized its assets in generating income.  

Asset efficiency ratios2012 2011201020092008
Total Asset turnover     
sales/average total assets-0.460.070.07-0.120.09
Accounts Payable Turnover Ratio     
cost of goods sold/average payables4.6453.5392.7396.98110.71
Return on total assets     
(NPBIT / Average total assets)-45.617.226.98-11.738.64
Inventory Turnover     
(Average inventory held / Cost of sales) x 365137.6015.288.758.597.65
Fixed assets turnover ratio     
sales/fixed assets0.600.420.450.480.41
Average collection period     
(Average trade debtors / Credit sales) x 365128.98127.68141.84155.10175.92
Accounts receivable turnover ratio     
credit sales/accounts receivable2.832.862.572.352.07

Table 2: Asset efficiency ratio

Hibu’s ability to collect its receivables has increased over the five year period. For instance, while it took an average of 175 days to collect debts in 2008, it took 129 days to do the same in 2012. However, this is not the same period taken in paying off creditors. The analysis shows that Hibu paid its creditors every four to five days in the year 2012, while it paid off creditors in 111 days in 2008. The mismatch indicates that Hibu’s creditors are asking for their money sooner in 2012 than they did in 2008 and the company should consider doing the same with its receivables (Ahrendsen & Katchova, 2012, p. 267). While the reduction in days taken is commendable, more action is to be taken to ease the company’s financial position. With regards to Hibu’s ability to use its assets in generating revenues, the company was affected by loses made in 2012 and 2009. Total asset turnover of negative 46% put off all the positives recorded in the three years the company some form of profits (Yap, et al., 2012, p. 334). Other asset to revenue ratios indicated a similar trend where Hibu was not able to generate adequate revenues.      

Liquidity position

Table 3 illustrates the liquidity position of Hibu over the five year period.

Liquidity ratios2012 2011201020092008
Current ratio     
Current assets / current liabilities1.071.631.711.311.31
Quick ratio     
(Current assets-inventory)/current liabilities1.051.471.391.071.02
Cash ratio     
Cash and cash equivalents/current liabilities0.190.270.210.040.06

Table 3: Liquidity ratios

While Hibu’s profitability and asset utilization ratios show a bleak picture, liquidity ratios show a better aspect of the business. Hibu’s current ratio was 1.31 in 2008 but it was highest in 2011 and lowest in 2012 at 1.07. The implication is that the most recent year shows a decline in liquidity though a ratio of above one is still commendable as it shows that Hibu can pay off its most urgent debts with ease (Poston, et al., 2011, p. 49). This is emphasized in the quick ratio where the company had adequate liquid assets to pay off current liabilities. Hibu’s cash position has also improved over the five year period rising from a low of 0.06 in 2008 to 0.19 in 2012 (William, 1966, p. 86). Hibu should seek to reduce its stock of inventory and increase debt collection activities so as to improve it cash and liquidity position (Huang, et al., 2008, p. 1037).

Gearing position

Table 4 illustrates Hibu’s gearing position.

Gearing/Financial measurements     
Gearing     
Long term liabilities / (share capital + reserves + retained profits + LTL)248.9378.5965.9499.4465.26
debt to total assets ratio     
total liabilities/total assets91%92%79%93%77%
Interest cover     
EBIT / interest expense-9.851.241.20-2.462.16

Table 4: Gearing ratios

Hibu’s long-term liquidity position is worrying. An overall gearing ratio of 248.93% in 2012 indicates that the company is highly geared to a position its capital is not even adequate to cover its long-term liabilities. This is emphasized by the high proportion of debt in Hibu’s assets that goes to a high of 93% and a low of 77% (Perdreau & Le Nadant, 2006, p. 378). Moreover, its ability to cover for interest obligations is increasingly under pressure when the ratio is of interest cover is not negative, it is marginally positive indicating that Hibu is not generating adequate profits to cover its interest obligations (Blundell-Wignall & Atkinson, 2010, p. 18).      

Financial market performance

With respect to Hibu’s declining financial performance, the market price has responded by reducing its value. The company’s share price has reduced significantly from a high of 144 pence in 2008 to just six pence in 2012, a 95% decline in share price (Keay, 2011, p. 16).  This is despite the overall market indicating gains over the five year period as illustrated in the rising FTSE 100 index growth from 5702.1 points in 2008 to 6387.6 points in 2012. Hibu is lagging behind the market in performance (Willem & Langbroek, 2009, p. 15).    

Year as at 31March20122011201020092008
Hibu Plc Share Price in pence6p12p58p65.6p144p
FTSE 1006387.65948.35672.33962.15702.1

Table 5: Market performance

Conclusion

The analysis exposes that Hibu as three main areas to address and redeem itself from eminent failure. These areas are:

  • Declining profitability
  • Declining long-term financial position
  • Inadequate asset utilization

Hibu should address these areas as they have a direct impact on its financial market performance as indicated in the share price decline over the five years.

Task two

Comments on results obtained

Borsetshire expects to increase production to a maximum of 16,000 units. This is a commendable prediction as it would increase profits to £418,360 compared to the £302,650 made by producing just 12,500 units of dairy feeds. The results are based on an increasing economy of scale where the company utilizes its assets in producing more units as opposed to less. The table below illustrates these figures.

Animal feed sales in tonnes 10,000.00 15,000.00   12,500.00   14,700.00   16,000.00
£000’s£000’s£000’s£000’s£000’s
Revenues8001,200100011761280
Direct labour-60-907588.296
Direct raw materials-315-472.5393.75463.05504
Production overheads-90-135112.5132.3144
Non production overheads-115-140116.1117.068117.64
-580-837.5697.35800.618861.64
Profit220362.5302.65375.382418.36
  1. Proposal evaluation

  The milling company has a cost structure as shown in the table below.

£Items
80Revenues
 
6Direct labour
31.5Direct raw materials
9Production overheads
11.5Non production overheads

 With a selling price of £60, Borsetshire stands to make at least £2 per unit factoring in the non-production overheads. When production costs are considered on their own, the milling firm has the opportunity to make £28.3 for every ton sold. Therefore, the company should take the proposal despite it being a reduction in the unit profits at the current selling price of £80.

Task three

According to Friedman (1962), the only reason a company exists is to satisfy the economic goals of the shareholders. Any obligation to other parties could be met by the shareholders in their private capacity once their financial goals have been achieved by the company (Friedman, 1962, p. 133). However, this theory was countered by Freeman (1984) who wrote that a company owes some obligations to third parties who include employee, suppliers, and government agencies among other parties. This point was proven repeatedly by numerous corporate failures from Enron to the most recent collapse of the Lehman Brothers (Smith, 2003).

In their seminal paper, Donaldson and Preston (1995) conceived the idea that a company could have its stakeholders in three groups according to normative, descriptive, and normative views from the management. Stakeholders could also be classified as internal and external stakeholders. Internal stakeholders include the management itself and employees involved who pay a vital role in the success of the company (Arora, 2010, p. 34). External interests include the community in which the company is located, suppliers, government agencies, customers, employee trade unions, among other numerous parties. These parties’ claim on the company includes a share of its profits and better treatment if the company is to gain acceptance in the environment (Porter & Kramer, 2011; Cuganesan, et al., 2007).   

In their model, Donaldson and Preston (1995) argued that a descriptive approach in defining stakeholders could be used to define how the company and its board of directors model the firm’s functions to meet expectations. For instance, it has become a mandatory requirement that mining companies comply with minimum safety requirements to guard its employees from harm and fatality. This is not only a government expectation as a stakeholder but it is expected by employees themselves that the company will deploy necessary safety measures at the workplace. Moreover, safety expectations emanate from employee unions in those nations and companies where such unions have a powerful voice in management. To meet these expectations, the board of directors might have a board committee that investigates any injuries and fatalities at the company’s operations, reporting the results to respective stakeholders.

The instrumental approach is used when data is applied to showcase the achievement of stakeholder expectations (Donaldson & Preston, 1995, p. 73). For example, customers expect that the company will produce products that meet the highest quality possible. However, some industries are increasingly facing pressure from customers to be ethical in sourcing for the raw materials used in making these products (Guthrie, 2012). This is particular to such industries as the chocolate and confectionary industry where child labor has become a persistent factor in the study of ethical supply chains. Moreover, ethical supply chains are geared towards ensuring that the supplier is fairly paid for his produce. The instrumental approach is used when the chocolate factory uses figures of how many child labor hours were used in sourcing for the product. It is also used when the company discloses how it contributed to the well-being of the suppliers and the communities that they live in. ethical behavior is an excitation of customers as well as regulators. The instrumental approach is also used when the company presents its results to the shareholders. As owners of capital and stakeholder of the company, shareholders expect that the company’s management will use the resources at its disposal to generate excellent financial results and high income for capital owners.

Lastly, a firm can be driven a moral and philosophical rules in defining its stakeholders (Donaldson & Preston, 1995, p. 83). In this view, it is argued that the company does not need to meet set laws and regulations, but espouses meeting its stakeholders’ goals on its own volition. A rising number of companies are employing more and more women to higher executive positions even when there are very few laws regulating employment along gender lines. Therefore, many of those companies are not employing more women because there is a law stating equal employment but because their management is of the view that creating a gender balanced workplace will have a positive impact on performance.  The philosophical approach to determining company objectives is also the basis of the stewardship theory that puts forth the argument that a manager is willing to give his best in ensuring that the company meets the needs of its shareholders and other stakeholders (Donaldson & Davis, 1991, p. 54).       

References

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Arora, R., 2010. Structure and Reform of Corporate Governance in the United Kingdom in Relation to the Shareholder Versus the Stakeholder Theory. Social Science Electronic Publishing, Inc., pp. 1-74.

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Freeman, R. E., 1984. Strategic management: A stakeholder approach.. 1st ed. Boston: Pitman Publishers.

Friedman, M., 1962. Capitalism and Freedom. 1st ed. Chicago: Chicago University Press.

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Keay, A. R., 2011. The Global Financial Crisis: Risk, Shareholder Pressure, and Short-Termism in Financial Institutions – Does Enlightened Shareholder Value Offer a Panacea?. Social Science Electronic Publishing, Inc, pp. 1-31.

Perdreau, F. & Le Nadant, A., 2006. Financial profile of leveraged buy‐out targets: some French evidence. Review of Accounting and Finance, 5(4), pp. 370-392.

Porter, M. & Kramer, M., 2011. Creating Shared Value. Harvard Business Review, 1 January, p. Online.

Poston, K., Harmon, K. & Gramlich, J., 2011. “A test of financial ratios as predictors of turnaround versus failure among financially distressed firms. Journal of Applied Business Research , 10(1), pp. 41-56.

Pusnik, K. & Tajnikar, M., 2008. Technical and Cost Efficiencies as Determinants of Business Failures of Small Firms: The Case of Slovenia. Eastern European Economics, pp. 43-62.

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Yap, B., Munuswamy, S. & Mohamed, Z., 2012. Evaluating Company Failure in Malaysia Using Financial Ratios and Logistic Regression. Asian Journal of Finance & Accounting, pp. 330-344.

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