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Key Topics
Requirement
Financial accounting and reporting
Solution
Introduction
We have taken Europe based BERENDSEN PLC for carrying out the performance analysis of the organisation. Company is operating in the Textile industry and Industrial premises , Hospitals and Healthcares are the major targeted customer of the company . We have selected AGGRECO PLC for comparison purpose. The analysis of the same has been made for last 4 years in tabular form.
Financial Analysis of the company
For carrying out financial analysis of the BERENDSEN PLC, we have used ratio analysis as a tool . The ratio of the BERENDSEN PLC is compared with the AGGREKO PLC . Following are the category of ratios which will form as base for our analysis .
Ratio of the company can be divided in following types:
Profit Ratio
Liquidity Ratio
Activity Ratio
Leverage Ratio
Shareholder Return Ratio
Due Pont Analysis
As far as Return on equity based in Due point analysis is concern the BERENDSEN PLC has lower ROE than the AGGREKO PLC. Yes if we compare the BERENDSEN PLC ratio with its past year it shows increasing trend and AGGREKO show decreasing trend but if we compare overall ratio AGGEKO has higher ROE for last four years .
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Findings and Analysis of the company based on Ratio analysis
Profit Ratio
It includes various types of profitability ratios to measure the company’s profitability. The Profitability Ratios of the company are as under:
1.Gross Profit Ratio: (Revenue-Cost of Goods Sold) / Revenue * 100
Gross Profit Margin shows part of the company’s profitability available to cover the companies administrative cost, sales & distribution cost and other operating cost. As the Gross profit ratio of both the company shows that it is consistent with the change of period. However in the year, 2014, Gross Profit Margin is lower for the company AGGREKO as compare to last years that shows the manufacturing cost is increased in the year as compare to less increase in sale price. Similarly in case of BERENDSEN, the GP ratio is decreased as compare to last year. The GP ratio of AGGREKO Company is much higher as compare to AGGEREKO Company.
2.Operating Margin Ratio: Operating Margin / Sales * 100
Operating Margin is able to assist in identify the profit of the company which relates to the main objective of the company. While comparing the data of both the company, the Operating margin ratio of the AGGREKO is better and acceptable.
3.Net Profit Ratio: Net Profit / Sales Revenue * 100
Net profit ratio of the company shows overall profitability of the company which available for stakeholders. The total return of the company on its operation is net profit of the company. In case of BERNDSEN, manufacturing cost is increased but other administrative cost is decreased accordingly overall cost of the company is decreased and profitability is also increased. However, in case of AGGREKO, Both the manufacturing as well as administrative cost is similar. Hence the overall profitability has decreased.
4.Return on Equity: Net profit available for equity share holders / Equity
Return on equity tells us to the investor that what the company has earned on his investment. Investors are seeking for more returns; hence management is required to maximise the return on equity. The company’s goal of maximization of wealth of the company is fulfilled only if the return on equity is increased. The BERENDSEN Company’s trend shows that the return on equity having so much of variableness and in the last year i.e. 2015 it is increased to 17.03% as compared to 12.43% in 2011. However in case of AGGREKO the ratio is decreased continuously in last 2 years it may result into decrease in market cap of the company also the investor will attract in the company which having more and more return.
Liquidity Ratio
1.Current Ratio (In times): Current Assets / Current Liabilities
Current Ratio is helpful to find out the company’s Liquidity position. As the standard for the current ratio are of two times. The company’s ratio is below standard; however the AGGREKO Company’s ratio is better as compare to BERENDSEN. The company has less liquid assets. Both the company’s shall require to increase the liquid assets to maintain the industries standard. Quick Ratio of the companiesis as under:
Activity Ratio
It includes the ratio which is useful to measure efficiency of the day to day activity of the company. Following ratio are included in activity ratio:
1.Inventory Turnover (In times): Cost of Goods Sold / Inventory
Inventory Turnover Ratio shows the number of times for which inventory turns over. It is useful to compute whether the organisation is carrying more stock as compare to required quantity in inventory. The BERENDSEN has more effective inventory management as compare to AGGREKO.
2.Average Collection Period: Debtors / (Total Sales / 365)
It measures the time for which company has to wait to receive the consideration for sale. We can evaluate the company’s efficiency of collection procedure. On an average company’s debtors are outstanding more in case of AGGREKO.
3.Asset Turnover Ratio: Asset / Sales
It is useful to identify the number of times of asset is converted into sales. The ratio is similar in both the company.
Leverage Ratio
1.Debt to Asset Ratio: Debt / Total Asset
It is useful to identify that how much fund are financed from debt. It is known to that the debt shall be less in the companies finance portfolio. The company AGGEREKO has less debt in its funding portfolio. As far as concern both the company is continuously maintain the same debt equity ratio.
2.Debt to Equity Ratio: Debt / Equity
Debt Equity Ratio shows that in the companies funds how much the debt and rest of the equity. As per Industry Standard data it should be 1:2. Now in 2015, the AGGREKO is maintaining standard of the industry. However the company BERENDSEN having double of the standard industry ratio.
3.Interest Coverage Ratio: Profit Before Interest & Tax / Total Interest Charges
As per the industry average interest coverage ratio should be around 10%. In the company AGGREKO the ratio is more as compare to the standard. It is reflected that the company’s profitability is better as compare to industry. The company has lower risk and more margins. However in case of BERENDSEN, the ratio is lower as compare to industry standard.
It is to be noted that for BERENDSEN PLC, if compare its performance with last year in the contest of ratio analysis. The company has shown much improvement , however if Conclusionwe compare the financial performance of BERENDSEN PLC with AGGREKO PLC then , we can say from above comparison that AGGEREKO PLC has report sound result than BERENDSEN PLC. IN all area profitability, Liquidity and Leverage ratios of Competitor Company shows strong results. It is to be noted that the BERENDSEN PLC can go for implementation of the cost reduction engineering mechanism which can help to increase the profitability ratio.
Berendsen plc – Application of Accounting standards and its effect.
IAS 2
It is to be noted that IAS 2 talks about the determination of cost of inventory and its valuation. The inventory needs to be stated at net realization value. However as per the Auditors report for 2014, the company has included the value of inventory which were lying with third party. It is to be noted that when the inventory are not in the direct control of the organisation, physical inventory calculation has to be fixed as a proof. The report itself contains the disclaimer for existence of risk in the valuation of inventory . We can say that the value of the inventory has significant impact on the financial statement of the company and hence to ensure the correctness of the value of inventory as per IAS 2 , proper mechanism has be implemented , which ensure the correctness of the valuation of inventory
IAS 36
The IAS 36 stipulate the provision for impairment of the assets. It is to be noted that company has vet huge amount of goodwill on its balance sheet in year 2014 of around 390 M Pound. The impairment is not done in 2014 because company expects more than 100% recovery from such CGU stating company is growing. However, if we look at the year 2014 sales growth it shows decreasing trend. Also free cash flow for 2014 has also decrease. Proper evaluation of such valuation of goodwill has to be made. As in such time of global uncertainty expecting more than 100% recovery seems quite unreasonable.
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ANON, nd, Financials of AGGREKO PLC, Available at http://www.gurufocus.com/term/Gross%20Profit/ARGKF/Gross%2BProfit/Aggreko%2BPLC [Accessed on 01/12/2015]
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ANON, nd, Financials of BERENDSEN PLC, Available at http://www.gurufocus.com/term/Gross%20Profit/ARGKF/Gross%2BProfit/Aggreko%2BPLC [Accessed on 01/12/2015]
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D K Singhal, 2014, Financial Management, Available at [Offline] [Accessed on 01/12/2015]
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ANON, nd, Berendsen PLC ADR, Available at http://financials.morningstar.com/ratios/r.html?t=BSNXY [Accessed on 01/12/2015]
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ANON, nd, AGGREKO, Available at http://www.redmayne.co.uk/research/securitydetails/financials.htm?tkr=AGK [Accessed on 01-12-2015]
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