This report gives an analysis of financial statement of Invensys plc over the past two years. The main aim of this report is to analyse company’s performance and to compare it with other companies working in the similar sector. The purpose of this report is to present the results of analysis to its potential stakeholders. The three form of analysis will be done on financial statements of this company (i. e. vertical analysis, horizontal analysis and ratio analysis), which will help us to examine the liquidity, profitability and efficiency of the business and to identify the investment opportunities that might be available to the company.
Invensys is a global technology group providing software, solutions, products and services to control, optimise and automate equipment and processes in a broad range of industries and environments. “Invensys PLC grew out of the merger in 1999 of Britain’s Siebe PLC and the British manufacturing conglomerate BTR PLC. Already the worldwide leader in the design, manufacture, distribution, and installation of controls and control systems as Siebe, the company has positioned itself to become a diversified manufacturing giant after merging with BTR and changing the company name to Invensys.
While analysts have questioned the wisdom of Invensys’ move from a relatively “pure play” controls and controls systems group to a diversified engineering and manufacturing empire, there is little doubt that the emerging company will become one of the world’s leading manufacturing concerns with industry dominance in the high value-added controls and automation industries. The merger, at a price of approximately 6 billion, represents only the latest in a long span of acquisitions that had enabled Invensys to grow from a company producing revenues of just 70 million in the mid-1980s to a giant with annual sales of nearly 7 billion in 2002. ” (Invency plc, 2003)
An examination of financial statements Financial statements are the formal record of a business’s activities and its entity. There are three main types of financial statements:
- Income statement – that gives information on company’s revenue, expenses and profit or loss over a specific period of time (usually 1 year).
- Statement of Financial position – that gives information on business’s assets, liabilities and ownership equity at a specified time.
- Statement of Cash flow – gives information on company’s cash flow activities, such as, operating, investing and financing activities.
In this report, the ‘income statement’ and ‘statement of financial position’ of Invensys plc will be analysed. In order to do that, it is vital to calculate the horizontal and vertical analysis for the company’s financial statements that will give clear information on company’s performance over the last two years.
Looking at the vertical analysis of income statements, it shows that the operating expenses before exceptional items has increased in 2009 where as the profit before exceptional items have decreased as compared to 2008. The analysis shows that this increase in the cost of sales has affected the operating profit for the company in 2009. With regards to that, the revenue has also increased in 2009. The operating profit with regards to sales and cost of sales, was 15% in year 2008 which went down to 7. 8% in 2009. Again the increase in cost of sales may be the reason of fall in operating profit as it is covering a big part of revenue.
At the end, the profit for the year went down to 5. 8% in 2009 whereas it was 15. 9% in 2008. Looking at the analysis, it indicates that the fall of operating profit in 2009 and an increase of operating expenses in the same year have resulted in a decrease in the profit figure. Overall, the analysis indicates that the company has faced a decrease in the profit because of an increase in the percentage of its cost of sales and expenses.
Looking at the Vertical analysis of Invensys’s Balance sheet, it shows us that the company has decreased its total assets from 479. % in 2008 to 318. 4% in 2009. The non-current assets have fallen to 123. 1% in 2009. This is because the company disposed assets at a net book value of 33m and 16 million of impairment charges were also recorded in the statements that lead to a fall in the non-current assets held at the end of year 2009. On the other hand, the analysis shows a fall in the liabilities of the company in 2009 as compared to 2008. This is mainly because the company has paid out its borrowings and has only got 0. 2% of the loan in the business.
The analysis also shows an increase in the provision and payable account, which means that company is finding it difficult to pay off to its creditors. Overall, the analysis shows that the company has improved in paying of its long-term liabilities which lead to the decrease in its assets as the money held has gone down.
The Horizontal analysis for the income statement helps understand the situation of the business in more effective way as it shows the percentages difference between two years figures. Looking at the Horizontal analysis column, it shows an increase of 8. % in the sales figure, which means the company has increased the level of selling goods. This could mean that in the same year the company must have purchased more. As result of this the cost of goods sold has decreased by 10% in the year. At the end the analysis shows that 60. 4% profit was decreased in year 2009. This is because the company has increased it expenses which are clear from the analysis.
This is because the company was able to recover 55. 35 from its customers. The liabilities were decreased by 3. 1%, which is because a big amount of loans was cleared in 2009, which was 99. 4% as compared to 2008. This means the company almost has cleared all its loans in 2009. At the end, analysis show that the treasury shares and reserves were decreased in 2009 whereas an increase of 77. 8% in the figure of equity holders of the parent was also noted.
Key Ratios Analysis Liquidity
At the end of 2008, Invensys had ? 234m which increased to 96m in 2009. This was an increase of 26%. The current assets ratio shows that there was a decrease in the liquidity in 2009 as compared to 2008 as the ratio dropped from 1. 43 to 1. 42. When we exclude the inventories from the equation, the acid test ratio has also shown a decrease in the assets. Although there was a slight decrease in the assets ratio, the analysis still shows that it is a healthy position of the company as it is still holding enough assets to meet its liabilities (i. e. it has got 1. 43 to pay off its 1. 00 of liability).
The overall verdict is that the company does not appear to have any immediate liquidity problems. Profitability (Appendix 3) Looking at the liquidity position of the company, it is confirmed that in the immediate future the company will not have any cash problems and that its future as a going concern is not in trouble. Now examining the profitability of the company, all the figures have decreased in large amounts. The mark up percentage shows that the company has decreased the mark-up gross profit from the cost of sales as compared to 2008.
The percentage has gone down from 17. 63% in 2008 to 6. 8% in 2009. The Gross profit percentage figure with regards to the sales of the company has also dropped down to 7. 80% in 2009 from 15% in 2008. This means before taking off the expenditure, the business has already lost a big amount of it operating profit in the year 2009. The ROCE percentage fall indicates that the company is not getting enough amount of profit from its investment. The overall verdict is the company appears to be lacking in the profitability area of the business. The management needs to take actions to improve the profitability of business.
The Inventory turnover ratio appears to have gone down from 30 days to 23 days from 2008 to 2009. This means that the company has not improved the number of stock turnover over a year. On a net basis, the fixed assets turnover has also decreased from 3. 30 to 2. 90 times a year. This may be because the company has disposed some of the assets at net book value in 2009 that reduces the ratio. The trade receivables collection period has also decreased which shows an improvement to the business as the ratio indicates that its taking lesser time for the trade receivables to pay to the business.
The trade payables payment period has also decreased. In other words it paid its creditors faster in 2009 than it did in 2008. A company with a less strong liquidity position than Invensys could find that a combination of increase in the trade receivables collection period and a decrease in the trade payables [payment period causes it to have a liquidity problem. The overall verdict shows that we have sufficient information to be confident that Invensys is operating at average efficiency.
From a combined liquidity, profitability and efficiency point of view an existing shareholder should be reasonably happy with the performance of the company, although most shareholders are primarily interested in the profit they are going to earn on the investments in the company. The capital gearing ratio has gone to 0% in 2009 from 42. 37% in 2008. This means the company has no long-term loans left to pay which is a very good indication for the investors, as the company has less to pay for its liability and hence is more likely to pay a higher percentage of dividends to its shareholders.
Looking at the graphs produced for FTSE 100 Index share prices and Invensys share prices. The information shows that the company is not doing good as compared to others listed in the FTSE 100 index. Although both the graphs indicate the the share prices are constantly going down but there is a big fall in Invensys share prices as compare to FTSE 100 index.
Based on two years’ data and with the analysis undertaken, Invensys appears to be in a favourable liquid position, earning an average profit and operating reasonably efficiently. It retains a low proportion of its profits and is cautious about paying out high percentage of dividend for its investment that, perhaps is more difficult economic climate, it may not be able to sustain. Nevertheless, judged by its gearing ratio, the company appears to be highly favourable. The company has clearly performed very well in the last two years during a relatively prosperous economic period.