Question:

1.0           Introduction

1.1            Define SFA and the importance of financial analysis

Strategic Financial Analysis (SFA) is a combination of approaches, methods and tools to analyze, evaluate and communicate financial information about whether an institution is achieving its mission from a financial perspective (Peat, Marwick, Mitchell & Co, 2005). SFA enables institutions to make financial decisions needed to achieve their mission, such as aligning operating and capital budgets with mission and strategic plan goals • Determining resource allocation, sufficiency, flexibility and management • Achieving balance between financial and physical assets • Integrating capital and operating budgets and facilities planning • Investing funds for current versus future students, faculty and other constituents • Evaluating return on assets deployed • Identifying and communicating sources and uses of funds • Integrating financial policies, such as investment, cash management and debt policies

Strategic financial analysis uses different types and sources of financial information, including operating budgets, capital budgets and annual financial reports.

An institution’s annual financial report is a summary of the institution’s significant financial events, consolidation of similar financial transactions and a representation of the institution’s financial condition at a point in time

1.2      Assignment objectives

1.3      Brief intro of the 2 companies

1.4      Brief intro of methods of analysis

2.0      Ratio analysis –5 year-on-year/trend and benchmarking

 Higher ratio not good for company

Identify the moment

2.1      Profitability

2.2      Liquidity

2.3      Efficiency

2.4      Leverage

2.5      Investors

3.0      Common-size analyses

3.1      Vertical – SOPL, SOFP and SOCF

Vertical Income Statement

Income Statement, Cost of Sales, Gross Profit, Operating Profit, Profit before tax, Profit for the period

Vertical – Balance Sheet

Non-current assets, current assets, Total Assets, Total Equity , Total Liability

Vertical Cash Flows Statement

Net Cash flow from investing activities

Net cash flows from financing activities

Changes in cash and cash equivalent

Cash and equivalent – closing

3.2      Horizontal – SOPL, SOFP and SOCF

                Revenue

Net cash flows from operating activities

3.3      Du Pont analysis

3.4      Segmental analysis

4.0      Merits and Demerits

 (advantage and disadvantage of each) /literature review with citation

4.1      Ratio analysis

4.2      Common-size

4.3      Du Pont

4.4      Segmental analysis

5.0      Conclusions and recommendations

5.1      Conclusions

5.2      Recommendations

6.0      Contemporary methods of analysis

6.1      CAPM (200 words)

Brief description, 2 paragraph

6.2      EMH

6.3      EVA

7.0      List of references

8.0      Appendices

Answers:

1.0              Introduction

1.1              Define SFA and the importance of financial analysis

Strategic Financial Analysis (SFA) is a mixture of methodologies, approaches and instruments for analyzing, evaluating and communicating themonetary information regardingif an organizationachieves its mission from a monetary viewpoint (Peat, Marwick, Mitchell & Co, 2005). SFA makes the organizations enablein making fiscal decisions that are required for attainingthe firm’s mission.

1.2       Assignment objectives

In the particular report, various approaches of financial analysis have been determined, implemented and examined for understanding the importance of these methodologies. The aim of this assignment is to analyze the monetary performance of the organization named WolseleyPlcand for better understanding of its financial position (Weil, Schipper and Francis 2013).

1.3       Company Background

(Refer to Appendix 1)

1.4       Methods Analysis

The fiscal statements of both the mentioned firms have been studied in detail for calculating and comparing various ratios of the firm including profitability ratios, liquidity ratios, efficiency ratios, leverage ratios and investors. In addition to this, common-size analysis including Vertical analysis, Horizontal analysis, Du Pont analysis and Segmental analysis have also been performed for better and detailed analysis of the company performance.The particular report on the determination and analysis of the financial performance of WolseleyPlc has been done by comparing its value with Booker Group Plc by the help of strategic financial analysis method. The standard procedure of SFA is composed of some specific steps starting from organizational goal determination to implementation of decision (Narayanaswamy2014). The detailed process is as follows:

Figure 1: Procedure of SFA

(Source: Created by Author)

 

2.0       Ratio analysis –5 year-on-year/trend and benchmarking

Profitability Ratio

Gross Profit Margin

Definition of Gross Profit Margin– Gross Profit ratio help in understanding the profitability position of both the company (Wolseley and Booker) and information is gathered from the annual report from the year 2012 to 2016 (5 year trend). This company undergoes expansion into supplying caterers as well as selling more fresh food.

Movement with ratios on 5-year basis– It can be interpreted from the above table and graph (Appendix 4) that Wolseley has higher Gross Profit Margin in comparison with Booker as accounted for the given years (2012 to 2016). There was further bold on acquisitions implemented by Wolseley in terms of annualized revenues. Depreciated gross profit margin noticed from the 2012 to 2016 was due to tobacco sales slipped hit by numerous factors such as display ban as well as rise of electronic cigarettes. (Refer to Appendix 4)

Reasons for changes- This increase in trading profit for ongoing operations was due to foreign exchange movements prevailing the year 2012 to 2016. Appendix 4 reflects that there is constant increase in gross profit margin for Wolseley Plc from the year 2012 to 2016.

Implications- Company with high gross margin (Wolseley in this case) mean that the company will have more money in paying its operating expenses such as salaries, utilities and rent Booker, on the hand, has comparatively less gross profit maintained within the years 2012 to 2016. In the first half of the financial year, Booker engages and is benefited from Makro acquisition.

Operating Profit Margin

Definition of Operating Profit Margin– There is constant increase in operating profit margin for the company named as Wolseley Plc because of variety of factors.

Movement with ratios on 5-year basis– Wolseley ability in maintaining attractive profit margins because of increased level of demand as well as competition markets

Reason for changes– On the other hand, Booker has relatively less operating profit margin on comparing it with Wolseley Plc.

Implications-Booker Plc sets out Budgens for the first time with the chain as expected for reduced operating profit for the year 2016 (Refer to Appendix 4)

Net Profit Margin

Definition of Net Profit Margin-Net Profit help in predicting the clear picture of company profitability as it is calculated by adjusting the non-operating expenses incurred by a particular company (Hendersonet al. 2015).

Movement with ratios on 5-year basis-Wolseley has higher Net Profit Margin in comparison with Booker as accounted for the given years (2012 to 2016).

Reason for changes– The above ratio(Refer Appendix 4) help in understanding the profitability position of both the company (Wolseley and Booker) and information is gathered from the annual report from the year 2012 to 2016 (5 year trend).

Implications– On the contrary, it can be noticed that Wolseley has higher and consistent improved net profit margin over Booker.

 

Liquidity Ratio

Current Ratio

Definition of Current Ratio– Wolseley has higher Current ratio in comparison with Booker as accounted for the given years (2012 to 2016).

Movement with ratios on 5-year basis– The above ratio help in understanding the liquidity position of both the company (Wolseley and Booker) and information is gathered from the annual report from the year 2012 to 2016 (5 year trend).

Reason for changes– This ratio indicate the ability of firm whether they can pay the short-term obligations of the firm.

Implications– Ideal current ratio is 2:1 and Wolseley has maintained adequate current ratio for meeting the working capital requirements in an effective way (Graff 2015). Booker, on the other hand, has lower current ratio that makes the company struggle in meeting the short-term obligations in required form.

Debt to Equity Ratio

Definition of Debt to Equity Ratio– On making the comparison between Wolseley and Booker, it can be seen that Booker has no debt for the years stating 2012 to 2016.

Implications- Depreciated debt to equity ratio is preferrable in comparsion with higher ones. This means Booker has better solvency position in comparison with Wolseley (Christensen, Baker and Cottrell 2014).

Dividend Payout Ratio

Reason for change– It can be interpreted from the above table and graph that Wolseley has higher dividend payout ratio in comparison with Booker as accounted for the given years (2012 to 2016).

Implications– The above ratio help in understanding the investor position of both the company (Wolseley and Booker) and information is gathered from the annual report from the year 2012 to 2016 (5 year trend. Decrease in dividend payout refers to increase in investment that in turn can generate future earnings for the company.

Price Earnings Ratio

Definition of Price Earnings ratio– Price Earnings ratio is one of the market prospect ratios that reveal market value of stock aligning with Earnings per share (Refer Appendix 4).

Implications– Price earnings ratio of Wolseley is higher in comparison to Booker. In the year 2012, WolseleyPlc has highest price earnings ratio that means the company has unfavorable financial condition.

Debt to Assets Ratio

Definition of Debt to Assets Ratio-Debt to Assets ratio implies the amount earned by firm on its average total assets. Booker has no debt, so has better solvency position in comparison with Wolseley (Carmichael, Graham and Whittington 2012).

Resaon for change– By comparing both the above-mentioned companies, identification of degree of efficiency of management (Refer Appendix 4)

 

Dividend Yield Ratio

Definition of Dividend Yield Ratio– Dividend yield ratio helps in measuring the amount of cash dividends as disbursed in and among the common shareholders aligning with market value per share (Refer Appendix 4).

Reason for change and Implications– From the above graph, it can be interpreted that investors of Wolseley are paid large dividends in comparison with Booker

Earnings per share

Definition and reason for change– Wolseley has higher Earnings per share in comparison with Booker as accounted for the given years (2012 to 2016).

Implications- The above ratio help in understanding the investor position of both the company (Wolseley and Booker) and information is gathered from the annual report from the year 2012 to 2016 (5 year trend)(Refer Appendix 4).

3.0       Common-size analyses

3.1       Vertical Analysis

Vertical Income Statement

            Vertical Income Statement is conducted for the companies (WolseleyPlc and Booker Plc) for the years (2012 to 2016). Sales is taken as 100% (as a whole) and other attributes are calculated based on the total sales incurred by both the above-mentioned company.

• Cost of Sales– For the company Booker Plc, it has been noticed that cost of sales has negative percentage starting from 2012 to 2016. Cost of sales considered as direct costs for attributing production of goods sold by a particular company. This amount involves cost of materials as used for purpose of creating the good aligning with direct labor costs used for producing the good. In case of WolseleyPlc, cost of sales has negative percentage starting from 2012 to 2016.
• Gross Profit– As far as gross profit for both the companies (WolseleyPlc and Booker Plc), WolseleyPlc has higher gross profit percentage in comparison with Booker Plc. On comparing the current 2016, Gross profit for Booker Plc is 5.08% and 28.27% for the company named as Wolseley Plc.
• Operating Profit– WolseleyPlc has higher operating profit percentage in comparison with Booker Plc as viewed for the year 2012 to 2016.
• Profit before tax– WolseleyPlc has higher profit before tax in comparison with Booker Plc as viewed for the year 2012 to 2016
• Profit for the period- WolseleyPlc has higher profit percentage in comparison with Booker Plc as viewed for the year 2012 to 2016.

Vertical – Balance Sheet

Out of the total assets of Booker Plc. higher portion is consisted by non-current assets. However, over the period of five years, the proportion of current assets has increased quite significantly. The main two components of the non-current assets are intangible assets and property, plant and equipment. In the beginning of the period, the company had invested at the rate 46.67% in the intangible assets, higher than PP&E, but it has increased to invest more in the PP&E in the following years, which is at the rate 33.68%. Amongst the current assets, the company uses to maintain higher amount of inventories at the rate 28.67%, in comparison to the trade receivables and cash balances at the rate 5.35% and 6.78% respectively. However, the proportions of trade receivables and cash balances have improved over the period, whereas, the proportion of inventories has reduced constantly. The table indicates that the company used to depend more on liabilities than the equity funds for maintaining its capital fund. Over the period, it has also improved the equity fund position to 42.59% and decreased the proportion of liabilities to 57.41% accordingly.

The vertical analysis of Wolseley Plc. exhibits that unlike the Booker Plc. the total assets of the company are consisted more with the current assets at the rate 60% in average. Over the period, the company has reduced its investment in the non-current assets also. In the non-current assets, it has invested majorly in intangible assets and Plant, Property and Equipment at the rate 12% and 16% in average respectively. However, over the periods, the investment in the PP&E has increased and that of intangible assets has reduced subsequently. In the initial period, the company used to fund its capital from debt capital and equity capital at more or less equal proportion. However, in the following years, the debt capital has increased to 64.41%, which resulted in the reduction in the proportion of equity to 35.59%. Though the assets structure of the company does not match with the Booker Plc. the liability structures of both the companies are almost identical.

The vertical analysis of the both companies indicates that the Booker Plc. has improved its financial position through proper asset allocation and improvisation in the capital structure. Wolseley Plc. has also increased the proportion of the current assets, but the investment in the non-current assets has fallen down significantly. It should be noted that the current assets are source of working capital, whereas, the non-current asset are considered as the symbol of the financial strength. Therefore, if the proportion of the non-current assets decreased rapidly, it may indicate that the company is suffering from any financial crisis. Moreover, Booker Plc. has increased its equity capital proposition, but Wolseley has failed to maintain the equity proportions at same level over the period. It also denotes that the Booker has strengthen its financial position over the period, but Wolseley Plc. fails achieve the same.

(Refer to Appendix 3)

Vertical Cash Flows Statement

• Net Cash flow from investing activities– In case of Booker Plc, net cash outflow from investing activities showed in negative percentage. In case of WolseleyPlc, Net cash outflow from investing activities has 22% for the year 2012. Booker Plc requires more acquisition of fixed assets as well as purchase of fixed assets at the same time.
• Net cash flows from financing activities– Wolseley and Booker Plc has negative net cash flow from financing activities starting from 2012 to 2016. Both the companies need to issue equity shares and make the dividend on timely manner (com. 2016).
• Changes in cash and cash equivalent– In case of WolseleyPlc, changes in cash and cash equivalents arrive at 33% for the year 2016. On the contrary, Booker Plc has 83.95 changes in cash and cash equivalents.
• Cash and equivalent – closing– In case of Booker Plc, cash equivalents at the end will be 72.76% for the year 2016 and 32% for the company (WolseleyPlc).

3.2       Horizontal Analysis

• Revenue– In horizontal analysis, base year (2012) is taken as 100%. For Booker Plc, 101.51% for 2013, 119.04% for 2014, 120.85% for 2015 and 126.92% for 2016On the contrary, WolseleyPlc revenue percentage arrives at 107.52% for the year 2016. This means Booker Plc has higher revenue generated from the year 2012 to 2016.
• Net cash flows from operating activities– Net cash flow from operating activities is higher for the company Booker Plc in comparison with Wolseley Plc.
• Net cash flows from investing activities– Booker Plc has positive cash generated from investing activities and has the ability in acquiring fixed assets. On the contrary, WolseleyPlc has negative percentage of net cash flow from investing activities (com. 2016).
• Net cash flows from financing activities– Booker Plc has 291.55% as net cash flow from financing activities for the year 2016. WolseleyPlc has 209% as net cash flow from financing activities for the year 2016 (com. 2016).
• Changes in cash and cash equivalent– Booker Plc have decrease in cash and cash equivalent (113.29)% for the year 2016. WolseleyPlc have decrease in cash and cash equivalents (2)% for the year 2016
• Cash and Cash equivalent – opening– Booker Plc has 318.18% as opening cash and cash equivalents for the year 2016. WolseleyPlc has 77% as opening cash and cash equivalents for the year 2016
• Cash and cash equivalent– closing– Booker Plc has 200.63% as closing cash and cash equivalents for the year 2016. WolseleyPlc has 32% as closing cash and cash equivalents for the year 2016

3.3       Du Pont analysis

            Du Pont analysis has three factors named as Profitability, Asset use efficiency as well as financial advantage. For the year 2016, return on equity for WolseleyPlc arrives at 23.60% and 21.51 for the company Booker arrives at 25.97% for the year 2016.

Return on Equity

= Profit Margin*Asset Turnover*Equity Multiplier

= Net Profit or Sales*Sales to Assets

= Net Profit to Equity

The three factors in Du Pont analysis involves:

Profitability measured as per profit margin

Asset use efficiency as measured by asset turnover

Financial advantage as measured by equity multiplier

3.4       Segmental analysis (Wolseley Only as Booker does not have segments)

• Revenue–From detailed study, it can be said that the revenue of the firm WolseleyPlcconstantly increased in the market of U.S. It was £ 6168 in the year 2012, then it increased to £ 6785 in the year 2013 and then constantly increased to £ 7070 and £ 8343 in the year 2014 and 2015 respectively (com. 2016). Finally in the year 2016, the revenue of the particular firm increased to £ 9456 indicating a positive trend of the business in the U.S. market. However, in the market of U.K. the revenue of WolseleyPlc decreased from £ 1898 in the year 2012 to £ 1769 in the year 2013, but then it increased constantly to £ 1853, £ 1987 and £ 1996 in the years 2014, 2015 and 2016. This indicates a slight growth rate of the business in U.K (Wolseley.com. 2016). On the other hand, the revenue generationfrom the markets of Nordic and Canada/ Central Europe decreased constantly from £ 2125 in 2012 to £ 1881 in 2016 and from £ 3230 in 2012 to £ 1097 in 2016 respectively.

Revenue	2012	2013	2014	2015	2016
US	6168	6785	7070	8343	9456
UK	1898	1769	1853	1987	1996
Nordic	2125	1916	1935	1984	1881
Canada/Central Europe	3230	2684	2272	1138	1097
Total	13421	13154	13130	13452	14430

Table: Segment analysis (Revenue from 2012 to 2016)

(Source: Created by Author)

• Operating Profit/Loss–The detailed study indicates that the particular firm WolseleyPlc runs under loss in the year 2016, in case of two markets that are U.K. and Central as it has been noted as -41 and -42 respectively. However, from the markets of U.K., Nordic and Canada/ Central Europe, the firm WolseleyPlc earns operating profit of an amount of £ 743, £ 56 and £ 51 respectively in the year 2016.

4.0       Merits and Demerits

4.1      Ratio analysis

Advantages:

• The ratio analysis helps in forecasting the financial condition of an organization on the basis of the trends in profits, sales and costs as well as guides in planning based on the trend analysis.
• Ratios help to measure the operating efficiency as it indicates the efficiency degree.

Disadvantages:

• Limitations in the fiscal declarations act as disadvantages for the ratio analysis.
• The historical information does not help the ratio analyst to determine the current conditions of the firm.

4.2       Common-size

Advantages:

• The common-size analysis is very easy to understand, thus it helps the fiscal declaration users to make clear concepts, ratios and percentages regarding everyitem of total assets and liabilities of an organization.
• It is also helpful for analysis of time series.

Disadvantages:

• It does not help in taking any decision as there is no standard value for ratio.
• This analysis does not help in recognizing any change in the level of price.
• .

4.3       Du Pont

Advantages:

• The company’s entire situation regarding monetary performance and health can be better understood through implementation of Du Pont analysis.
• This analysis is comparatively better than equity valuation tools.

Disadvantages:

• It relies more on accounting data from the fiscal declarations of the firm.
• Moreover, some of the accounting data of a firm can be manipulated, so the analysis on the basis of this data becomes useless.

4.4       Segmental analysis

Advantages:

• The segmental analysis helps to separate the profitable zone, segment, or region of the market from the other comparatively less profitable area(com. 2016).
• This analysis helps in improving the context.

Disadvantages:

• The main disadvantage of segmental analysis is that it mainly puts emphasis on the current situation or it can also be said that this mainly highlights on the short-term numbers.
• Moreover, manipulation of the accounting data and information is considered as the disadvantage of performing segmental analysis.

5.0       Conclusions and recommendations

5.1       Conclusions

WolseleyPlc is the word largest distributor of plumbing as well as heating products especially to professional contractors. On analysis, it has been found that investing in Wolseley is profitable because scale brings substantial operating synergies. This company has stable financial position and has attractive growth opportunities in fragmented markets. Low volatility is other aspects that needs consideration while investing in Wolseley Plc. Their business models are highly cash generative by use of economic cycle. This company has strong execution culture majorly focusing on customer services as well as execution and efficiency. Booker Plc defines supermarket gloom with rise in profits in upcoming financial year. The cash and carry wholesaler shrugs off with turmoil especially in the grocery sector reported with 10% increase in the interim pretax profit.

5.2       Recommendations

It is recommended that WolseleyPlc have better profitability position than Booker Plc. This company requires finding ways in generating more revenue for attainment of future goals as well as objectives in an effective way. In case of liquidity ratio, WolseleyPlc has better liquidity position in comparison with Booker. Both the companies have the capacity in meeting the short-term obligations within the stipulated time. Vertical and horizontal analysis has been conducted whereby income statement and balance sheet figures are taken into consideration for estimating the figures starting from 2012 to 2016.

6.0       Contemporary methods of analysis

6.1       CAPM

Capital Asset Pricing Model is one of the models that describe positive relationship between systematic risk as well as expected return for assets especially in case of stock. This asset-pricing model is used for finance in case of pricing of risky securities for generating expected return for assets for specified risk. It is widely used by financial analyst for analyzing the company cost of equity capital.

6.2       EMH

            Efficient Market Hypothesis considers as one of the investment theory stating stock market efficiency. This help financial company for understanding the existing share prices and revealing the information in an accurate form

            In case of WolseleyPlc, the company as strong market efficiency and presence producing building materials. This company has high stock prices as well as other securities reflecting and revealing potential information. Booker, on the hand, places as semi strong market efficiency and presence in the retail sector. This implies the company gets all public information as well as calculated into stock current share prices. This company neither uses fundamental nor technical analysis for achieving superior gains.

6.3       EVA

WolseleyPlc has better profitability position from the year 2012 to 2016 that can be predicted by forecasting the completion date and final cost building materials used for the particular company. It can be compared with planned amount of work after determining the cost and scheduling the planned activities for smooth functioning of business organization. Booker, on the other hand, has better efficiency position and this can be evaluated by acquisition management system. Booker Plc deals in retail sector and should use performance-based acquisition for measuring the achievement of cost as well as schedule and performance goals at the same time

 

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