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financial analysis

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1.0 INVESTMENT RATIOS – MEASURES OF EFFICIENCY.

1.2 P/E Ratio or Price / Earnings Ratio

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2.0 PRIMARY OPERATING RATIOS – MEASURES OF EFFICIENCY.

3.0 PRIMARY FINANCIAL RATIOS – GEARING AND LIQUITY.

It can be suggested that accounting consists of identifying, measuring and communicating business information to facilitate judgements and decision making for the further future. This specific report is pointed at investigate National Grid Group Plc’s report and accounts in order to decide whether someone should invest or not in this company. Someone, who is able to analyse this company, must have its Annual Report for at least two years, which will help the person, because it contains basic components like the Profit and Loss Account, the Balance Sheet, the Cash Flow Statement and the Director’s Report.

In order to guide you to understand about this specific company, I have used the Annual Review by following some steps:

1) To summarise the size, the structure and the profit of the company I have first check the balance sheet and the profit and loss accounts.

2) I have read very carefully the chairman’s statement and the director’s report, which helped me to understand better things about the company.

3) I have also calculated the trends and ratios.

The performance data, P&L A/C, Balance Sheet, Ratios and Trends were obtain from the following sources:

– Annual Review of National Grid Group of 1997-98.

– Articles from Financial Times newspaper.

1.0 INVESTMENT RATIOS – MEASURES OF EFFICIENCY.

Investment ratios are the ratios used by the investors when deciding whether a share should be bought, sold or held.

Earnings per share (EPS) indicate the amount of profit after tax, interest and preference shares earned for each ordinary share. It is also more reliable for comparing the performance of any company because it can not be affected by the policy of the directors.

Profit after tax + interest

No. Of Ordinary shares

The earnings per share of National Grid Group, excluding the exceptional profit relating to Energis, were 19.8 pence, compared with 24.3 pence in 1996/97. This reduction resulted from lower transmission profits following the implementation of the new price control.

The Price Earnings Ratio (PE ratio) is a measure of market confidence in the shares of a company. Also the PER play a significant role not only in the company itself, but on the industry in which it operates and, of course, on the level of the stock market, which tends to rise more than reported profits when the business cycle swings up and to fall more than profits in a downturn.

Arithmetically, the ratio measures the number of years it would take to repay the share’s current value in earnings. It can be define like this:

Market price per share

Earnings per share

At 31 March 1998, NGG’s share price was 353 pence compared with 209 pence at the start of the year, an increase of 68 per cent. The shares traded during the year within the range 206 pence to 353 pence. The market capitalisation of the Company at year-end was $5.2 billion.

(The National Grid Group plc Annual Review 1997-98)

Dividend Yield expenses dividends as a proportion of the market value of total shares. They are also based on gross dividends per share, that is, on the dividends actually paid plus the associated tax credit. It can be defined like this:

Dividend per share

Dividend Yield = x 100

Market value per share

On the 25th of November 1997, NGG announced that it was taking steps to improve the financial efficiency of the Group by returning excess capital to shareholders by way of a special dividend of 44.7 pence net per ordinary share. The special dividend, which represented approximately 15 per cent of the Group’s market capitalisation at the close of business on the 24th of November 1997, amounted to £786.6 million and was paid on the 17th of February of1998.

On 5th of February 1998, the shareholders approved a share consolidation to reflect this return of value. As a consequence, 1,718 billion new ordinary shares of 11 pence each, a reduction of 15 per cent in the total number of ordinary shares in issue.

Dividend Cover compares net profit with dividends to show how many times over the dividends could be paid and how safe this annual yield is. With other words, the dividend cover shows how many times a dividend covered by earnings after tax profit.

Earnings per share

Net dividend per share

The recommenced final divided of 7.24 pence net per ordinary share, with the interim dividend of 4,83 pence net paid on 17th of February 1998, brings the total ordinary dividend for the year to 12.07 pence net per ordinary share. This represents an increase of 8.4 per cent over 1996/97. Dividend cover, excluding the exceptional profit relating to Energis was 1.6 times.

2.0 PRIMARY OPERATING RATIOS – MEASURES OF EFFICIENCY.

2.1 Return on Capital Employed (ROCE).

The ROCE is a fundamental measure of the profitability of a company. The ratio is a popular indicator of management efficiency because it contrasts the net profit d by the company with the total value of fixed and current assets, which are presumed to be under management control. Therefore, the ROCE demonstrates how well the management has utilised total assets.

It can be argued that ROCE is the most important measure of the profitability of any specific company. Mathematically can be measured by this:

Net Operating Profit before tax, interest and dividends

Capital Employed

Operating profit from continuing operations (Group undertakings) fell from $716.1 million to £570.6 million as a result of the significantly reduced contribution from transmission following the implementation of the new price control. The operating profit contribution from the associate and joint ventures amounted to £1.3 million (1996/97-£ nil).

The DTR measures the length of time it takes the debtors to pay the company

for purchases. It can be either expressed in days, months or as a percentage.

(The Annual Review 1997/98 of the National Grid Group Plc doesn’t show exactly how much is the amount of the debtors)

The CTR gives some indication of the amount of credit a company is allowed by its suppliers, and quite a good indication, provided stock levels and profit margins and reasonably steady and the business is not highly seasonal. This can be measured like this:

Average Creditors

Creditors Turnover Ratio = x 365 (days)

Purchases

£ 937.7(million)

The ratio for 1997 was: = 1.499 x 365 = 547.17

£625.5(million)

£1105300

The ratio for 1998 is: = 1.578 x 365 = 576.06

£700350

The Return on Shareholders’ Fund represents the net profit of a company as a percentage. It can be expressed by the following ratio:

Profit after tax and dividends

Shareholders’ Funds

£224,5(million)

The ratio for 1997 was: = 16.16%

£1388.9 (million)

For the year 1998 because the company has given more dividends that the Profit of Ordinary activities after Taxation, thus it has Retained Loss instead of Retained Profit.

3.0 PRIMARY FINANCIAL RATIOS – GEARING AND LIQUITY.

Whatever method is used to compute gearing, a company with ‘low gearing’ is one financed predominantly by equity, whereas a ‘highly geared’ company is one which relies on borrowings for a significant proportion of its capital. It can be defined like this:

Long – Term Debt

Shareholder Fund

£804(million)

The Gearing Ratio for 1997 was: = 57.8%

£1388.9(million)

£1320.5(million)

The Gearing Ratio for 1998 is: = 148.6%

£888.6(million)

The National Grid Group Plc Company may it has loss in 1998 because they have given more total dividend to their shareholders than 1997, and that’s why they have retained loss in 1998 (£516.3 million), instead the Company used to have Profit on Ordinary activities after taxation (£441.3 million) so the shareholders funds had been reduced from £1388.9 million in 1997 to £888.6 million in 1998. But from the other side of view Creditors (amounts following due after more than one year) have been increased in 1998 to $1320.5 million from £804 million in 1997. Because of this all the above exist this high Gearing Ratios to that Company so the managers must take in to consideration this phenomenon.

Liquidity ratios are ratios that show the relationship of a firm’s cash and other current assets to its current liabilities. It is also concerned with the amount of assets held as cash or cash equivalents.

The Current Ratio is calculated by dividing current assets by current liabilities:

Current Assets

Current liabilities

Current assets normally include cash, marketable securities, accounts receivable, and inventories. Current liabilities consist of accounts payable, short-term notes payable, current maturities of long-term debt, accrued income taxes, and other accrued expenses (principally wages).

If a company is getting into financial difficulty, it begins paying its bills (account payable) more slowly, borrowing more from its bank, and so on. If current liabilities are rising faster than current assets, the current ratio will fall, and this could spell trouble. Because the current ratio provides the best single indicator of the extent to which the claims of short-term creditors are covered by assets that are expected to be converted to cash fairly quickly, it is most commonly used measure of short-term solvency. Care must be taken when examining the current ratio, just as it should be when examining any ratio individually. For example, just because a firm has a low current ratio, even one bellow 1.0, this does not mean the current obligations cannot be met.

£368.2 (million)

The Current Ratio for 1997 was: = 0.378:1

£973.7 (million)

£384 (million)

The Current Ratio for 1998 is: = 0.347:1

£1105.3 (million)

The Quick or Acid Ratio is calculated by deducting inventories from current assets and then dividing the remainder by current liabilities:

Current Assets – Stock

Current Liabilities

Stock (Inventories) typically are the least liquid of a firm’s current assets, hence they are the assets on which losses are most likely to occur in the event of liquidation. Therefore, a measure of the firm’s ability to pay off short-term obligations without relying on the sale of inventories is important.

£368 – £100 (million)

The Ratio of 1997 was: = 0.257:1

£973.7 (million)

£384 – £84 (million)

The ratio for 1998 is: = 0.271:1

£1105.3(million)

The statement of Cash Flow is designed to show how the firm’s operations have affected its cash position by examining the investment (uses of cash) and financing decisions (sources of cash) of the firm. The information contained in the statement of cash flows can help answer such questions as: Is the firm generating the cash needed to purchase additional fixed assets for growth? Is growth so rapid that external financing is required both to maintain operations and for investment in new fixed assets? Does the firm have excess cash flows that can be used to repay debt or to invest in new products? This information is useful both for financial managers and investors, so the statement of cash flows is an important part of the annual report.

For National Grid Group Plc, net cash inflow from continuing operations fell from £877.3 million in 1996/97 to £615.2 million, primarily as a result of lower operating profits. Cash inflow benefited by £203.1 million as a consequence of the global offer and listing of Energies shares.

Payments to the providers of finance, in the form of dividends and interest, totalled £997.6 million, compared with £269.8 million in 1996/97: of this, £768.6 million related to the special dividend. Net purchases of tangible fixed assets absorbed cash of £286.4 million, compared to £279.1 million in 1996/97. £29.9 million was invested in increasing the Group’s interest in Citelec from 15 per cent to 41.25 per cent and£15.4 million in acquiring a 38.9 per cent interest in the Copperbeit Energy Corporation, Zambia.

The most significant financing initiative of the year was the issue of £460 million of 4.25 per cent exchangeable bonds due 2008, the net proceeds of which were £448.0 million. The exchangeable bonds represent competitive medium-term financing for the Group and the structure of the bonds affords the Group significant flexibility in deterring its longer-term capital structure based on its future requirements.

I can now believe that I have guided you about the National Grid Group Plc Company with the Annual Review. So if someone wants to invest in this Company must first read this assignment in order to understand something about this and after that to decide what to do.

As far as I am concerned, I truly believe that the National Grid Group Plc Company must take into consideration some factors that may help them in order to improve their company as a hall or to increase their profit and minimise their expenses. First of all they must find ways in order to increase the Return on Shareholder funds. For example minimise the cost by integrating and enforcing a Computerise new Company. In other words to have a consistently high rate of return on shareholders’ equity.

Second they must have an above-average record of earning per share. In 1997 for the Company it was £24.3 pence and 1998 has increased to £26.1 pence.

Next they must have a strong level of retained earnings. So the company must reduced the dividends to the minimum in order to have more retained earnings and no losses, and then they will increase their shareholders funds and to reduced the current and long turn liabilities.

The Profit Margin of the Company in 1998 is: (PBIT / SALES = 40%). So this is a nice thing for the Company, but because they own a lot of money in Debts (Long Turn), they pay a lot of interest so it minimises at the end of the day the Retained Profit. That’s why they have to increase the at least the Profit Margin.

About the Cash flow, because of the decreasing rate of profits of the year 1998, the Net Cash Inflow has been decreased (increases the Cash Outflow) because of the interest of the increased and Dividend paid.

As well as, they have to decrease the Current Liabilities and to increase the Current Assets. Also to decrease the Gearing Ratio, (decrease the Long Turn Liabilities).

1. Geoffrey H., Alan S. (1993) Interpreting Company Reports and Accounts.
Woodhead-Faulkner Limited.

2. Barry E., Jamie E. 1996 Financial Accounting & Reporting. Prentice Hall.

3. Allan P. (1994) Accounting and Finance. UK: Redwood Books.

4. Weston B. B. (1996) Essentials of Managerial Finance. Dryden Press.

Cite this financial analysis

financial analysis. (2018, Jun 18). Retrieved from https://graduateway.com/financial-analysis/

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