Acquisition Planning

Acquisition Planning
Acquisition Planning

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Acquisition Planning

In this case study acquisition would be an appropriate option because the supply and demand calculations to determine the company equilibrium both in short-run as well as long-run shown that acquisition is a favorable option, and it is essential for the effective measures or interventions to be implemented. This is due to the fact that, this approach is highly imperative to ensure that the company maintains its competitiveness in the market (Andreyeva, Long & Brownell, 2014). 

As a result, increased capital investment in R&D in order to come up with high quality methods and procedures in the Bio Sensor Virus Detector (BSVD) program is highly encouraged. This calls for the need for the company to embark on a continuous and an aggressive process of making sure that there is a consistent improvement of the quality of its products and methods (Saito, 2013). This is a vital consideration with regards to the federal government directive in 2010, in which GAO was given the mandate to conduct an examination of how civilian agencies were undertaking their acquisition planning for services contracts (Saito, 2013).

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In particular, there was a concern on the extent of spending by these agencies in terms of acquisition planning with respect to professional, management and administration to support these services (Saito, 2013). As a result, there was a recommendation for these challenges to be resolved through an elaborate acquisition planning procedure including: cost estimation, written acquisition plans, as well as incorporation of requirements development (Andreyeva, Long & Brownell, 2014). 

Thus, it is clearly evident that these elements are critical for planning, and acquisition planning ought to be closely aligned with elements stipulated in the FAR. Finally, the case study reveals the need to adopt several practices in attempts towards curbing the identified limitations including hiring personnel who have procurement specialization, especially with regards to business issues and cost and price analysis as a key strategy towards providing a guideline in helping to prepare key documents concerned with acquisition planning. 

References

Andreyeva, T., Long, M. W., & Brownell, K. D. (2014). The Impact of Food Prices on Consumption: A Systematic Review of Research on the Price Elasticity of Demand for Food. American Journal of Public Health, 100(2), 216-222. doi:10.2105/AJPH.2008.151415.  

Saito, Y. (2013). Managerial Decisions to Discontinue Operations and Future Firm Performance. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1906125

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The Impact of Brexit on the UK and the EU’s financial regulation

Brexit
Brexit

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The Impact of Brexit on the UK and the EU’s financial regulation

  1. Introduction

The 1999 EU regulatory initiatives were meant to ensure that there were maximum financial markets activities among member countries. The regulations were also meant to contribute to the removal of existing legal barriers in the financial sector among EU members. The cross-border financial market initiative benefitted the UK and contributed to an increase in trade in the sector. However, Brexit’s move on 23rd June 2016 might have resulted in an end to the many of the financial conveniences that the UK enjoyed (Grant Thorton, 2016).

According to Wellink (2009: 13), and World Bank (2013: 15), regulatory arbitrage is one of the greatest disadvantages that can emerge from an exit of a country from a Union with existing guidelines and policies. According to Wen (2016), there is a possibility of businesses undercutting each other if the current financial market is deregulated. Brexit might contribute to deregulation of the UK’s financial sector, therefore contributing to undercutting of some firms through unscrupulous dealers. Some of the firms that have their headquarters in the region might initiate planning on moving to other regions that they consider favourable; especially those within the European Union coverage.

Institutions in the global financial market will be affected to great lengths as a result of Brexit. Institutions that are directly related to the UK or the European Union might have to “revise” the location of their headquarters or location of their subsidiaries. The adjustments are necessary for the firms to survive in the market. Brexit has a major impact on financial firms because the sector is strictly regulated, and might contribute to challenges especially for UK firms.

  • Impact and challenge of Brexit on the UK’s financial sector regulation

According to Claessens and Kodres (2014: 78), regulation of the financial sector contributes to securing of firms so that the shareholders’ wealth is maximized.   The UK financial institutions will have to meet the requirements of strict regulations which emanate from Brussels. Before Brexit, the UK might have had an upper hand in negotiating for strict financial regulations such as their refusal on the imposition of tax bonuses. However, the EU might want to use them (UK) as an example of the disadvantages that countries are bound to face when they exist the EU.

The regulatory arbitrage for the UK might have complex consequences since some of the financial sector regulations for the UK and EU are different. The UK might have more strict rules in comparison to those that are issued by the EU. The EU might have less stringent rules based on the need to accommodate many different members who have different backgrounds.

The UK has been part of the EU for over forty years, and most of its financial sector laws are based on policies in the EU regulations. Therefore, Brexit could contribute to instability of the UK banking system since most of the financial regulations that have been in use, have not been enshrined in the UK law for the forty years that the country has been a member of the EU. The effects from pass porting will determine the future of the financial sector for the UK.  It is not all gloom for the UK’s financial sector after Brexit since the country will attain independence to make its own decisions in the sector.

Any loopholes that might be used by firms for arbitrage purposes should be identified and sealed so as to minimize any chances of illegal activities. Banker bonus cap has been raised as one of the areas that the bank of England and the European Parliament discussed as possibly contributing to financial regulation arbitrage.


There will be immediate need of business continuous amidst the new and old regulations, or lack of clarity in the regulations that should be applied. Existing international financial firms that are located in the UK will have to make decisions on the viability of their current location. If the firms decide on a new location within the EU, they will have to make assessments on the suitability of a location that will contribute to a high level of business.

The short duration of confusion might lead to loss of business for some international firms. Financial firms in the UK will also have to ensure that they follow the MIFD II rules that will be established in 2018. The UK’s economy will be negatively impacted by a move of the financial firms that will want to relocate especially from London. Most of the international firms owned by EU member countries might want to relocate to other capital cities within the EU in order to make maximum gains.

The UK owned financial firms that have been conducting business in the EU will face higher costs and double rules if they will continue trading within the EU (Ashurst, 2016: 4). The low costs and EU financial regulation rules will no longer be accessible to those firms. Companies in the UK will also face stringent measures as required by the European Commission and the UK in the acquisition of partners from the EU.

The regulatory authorities in the UK are likely to increase the sector’s interest rates so as to make up on the deficit from being charged high rates through trade involving the EU. Clients will consider financial firms in the UK as being less stable as compared to those in the EU. Therefore, the clients might ask for higher returns on their investment based on the higher level of risk.

Financial firms will in turn have to invest in projects that have a high return, but take a long duration to give the expected profit on the investment made. The regulation of the financial sector institutions and supervision is largely national, even if the country is a member of a larger body (Omarova, 2010: 665: International Monetary Fund, 2009).

  • Evaluation of UK and EU’s financial regulation

The EU is quite strict on “bailing out” of companies since it results in the depression of the economy. Funds that could have been injected into projects contributing to the development of the economy, or boosting the economy are put into several companies that might not have a major positive impact on the economy (Heath, 2013: 32). Bailing out of companies by the government might contribute to lowering of ethical standards in companies.  

The companies would know that the government would bail them out in the event that they collapsed. UK based financial companies are bound to face strict regulation especially since clients are likely to demand higher returns based on the higher level of risk. The EU is viewed as contributing to stability among its member states, and therefore making transactions that they engage in safer and more likely to give the planned return.

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The consequence arbitrage that has resulted from Brexit is highly influenced by non-financial effects of the initiative. The UK is no longer being considered as a major stakeholder in the making of foreign policies that might be required in times of conflict. Therefore, the UK has less bargaining power if it requires making deals with other countries. It is critical for a country to have a high bargaining power so as to negotiate trade and profitable financial agreements for its institutions (Weil, Fung, Graham, and Fagotta, 2006: 68).

The consequence arbitrage is the exit of major international financial institutions from London to other European Union capital centres. International financial organizations such as banks have already operated in the European Union and in the EU for decades. The move will contribute to the undoing of many years work, since the UK government has made numerous deals to bring the firms into the country (Ashurst, 2016: 4). Governments usually have to spend reasonable resources and adjust their regulations so as to be attractive to investors from foreign organizations.

Many other countries usually compete for the foreign firms. Therefore, countries have to ensure that their package offers are as friendly as possible. Furthermore, a financial Maginot line is necessary to deal with any eventualities that might arise such as collapsing of hedge funds. A hedge fund with a large volume of deposits could collapse and contribute to the collapse of banks in the region. The collapse or discovery of missing funds in a hedge fund could be triggered by sudden national financial moves such as the one triggered by Brexit.

Clearing houses might also contribute to negative consequences in the financial sector. According to Wen (2016: 9), clearing houses deals defaulting by a few traders can contribute to the system’s collapse. The collapse would result from the system’s insolvency. The central banks in different nations oversee the financial systems of those countries. However, there is no institution to oversee the central banks of different countries.

In the event of a collapse of the central banks of the countries involved in Brexit, there would be a collapse of all other financial institutions in involved nations. Financial regulatory organizations are focused on maintaining the regulations in place, especially because of the hefty fines that have been put in place. Therefore, in the event that the central bank was collapsing, it might take time for signs to be recognized by the financial firms that are the major focus of regulation.

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4.0 Conclusion

If it would not make the UK appear inconsistent, I would recommend a return to the European Union. However, since the decision and necessary steps have already been taken, the UK has to make do with its current situation. The UK has to establish clear guidelines in its financial sector since it has mostly used those in the European Union for about forty years. The opportunity should be utilized in coming up with financial sector regulations that will promote growth and have a competitive edge over countries in the European Union.

The regulatory authorities in the UK are likely to increase the sector’s interest rates so as to make up on the deficit from being charged high rates through trade involving the EU. However, the UK will have to come up with clear financial policies so as to mitigate the occurrence of a crisis. In the past, there has been severe and a high level of frequency of financial crisis that have occurred across the globe. The regulation and supervising of firms in the financial sector of a country is largely a national responsibility.

Both regulation and consequence arbitrage results are likely to be experienced by countries in the UK due to its exit from the European Union. There are international banks that have been situated in the UK for a long duration. These firms might have to relocate to other geographical locations in the EU so that they can continue enjoying the same regulations that they are used, especially if their parent firms are located in Europe (Ashurst, 2016: 6).

The geographical move would result in loss of revenue and employment for many UK nationals. Financial firms in the UK would be motivated to move because they would be expected to comply with a double regulation of the financial sector in EU, and that of the UK. Clearing houses could also contribute to a major collapse of the financial sector as a consequence of a failure of payment by a few dealers especially if they trade in high volumes. The solution to the possible loopholes that might occur is strict regulation of the financial sector for both the UK and EU.

Bibliography

Ashurst, 2016, Brexit: potential impact on the UK’s banking industry. Ashurst.

Claessens, S. and Kodres, L. 2014, The Regulatory Responses to the Global Financial Crisis: Some Uncomfortable Questions, IMF Working paper.

Grant Thorton, 2016, The impact of ‘Brexit’ on the financial services sector, http://www.grantthornton.co.uk/globalassets/1.-member-firms/united-kingdom/pdf/Brexit-impact-financial-services.pdf

Hopkin P, 2013, Risk management. London: Kogan Page.

Heath, R., 2013, “Why Are the G-20 Data Gaps Initiative and the SDDS Plus Relevant for Financial Stability Analysis?” IMF Working Paper 13/6 (Washington: International Monetary Fund).

International Monetary Fund, 2009, “Restarting Securitization Markets: Policy Proposals and Pitfalls,” Chapter 2 in the Global Financial Stability Report (Washington: International Monetary Fund).

Omarova, Saule T., 2010, “Rethinking the Future of Self-Regulation in the Financial Industry,” Brooklyn Journal of International Law, 35, (3): 665.

Weil, D., Fung, A., Graham, M., and Fagotta, E. 2006, “The Effectiveness of Regulatory Disclosure Policies,” Journal of Policy Analysis and Management, Vol. 25, No. 1, pp. 155-81.

Wellink, A.H.E.M, 2009, “The Future of Supervision,” Speech given at a FSI High Level Seminar, Cape Town, South Africa, January 29, at http://www.dnb.nl/en/news/newsand-archive/speeches-2009/dnb212415.jsp

Wen, J. 2016, some gaps in the financial Regulatory system. Class Notes.

World Bank, 2013, Global Financial Development Report, Rethinking the Role of the State in Finance, (Washington: World Bank).

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Return on Equity: Financial Statement Interpretation

Return on Equity
Return on Equity

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Return on Equity: Financial Statement Interpretation

Volkswagen

The German automobile company was created in 1937 under the Volkswagen group of companies and is recognized as one of the top-selling automakers in the entire world. In fact, it is considered to be the second largest automobile manufacturing company in the automotive industry. As such, three of its products are in the top ten of bestselling cars. Better still, the company recorded $244.985 billion in revenues as of 2014. With a workforce of 588,902 employees and $424.982 billion in total assets, the company generated $13.393 billion profits (Morrow, 2016).

The company has focused its primary goal to double its market share in the United States. Through this, the firm would be focusing on its vision of becoming the world’s largest manufacturer of automobiles by the year 2018. In keeping faithful to this vision, they are expanding to bigger markets with the major ones being Germany and China (Morrow, 2016).

Return on Equity

Return on equity checks the return on the shareholders’ equity. In simpler terms, it measures the firm’s efficiency in earning profits from every unit of the shareholder’s equity. This means that a company needs to invest funds in an appropriate manner for them to get growth in their earnings. It is essential to note that measuring consistent margins in earnings per share does not sufficiently explain the performance. Therefore, Return on equity serves to be the best profitability ratio in measuring efficiency in performance. In this case, Volkswagen’s Return on equity ROE using the Du Point analysis for the last two years would be;

ROE using the DuPont method = (net income/revenue) * (income/assets) * (assets/equity)

Or

ROE = (RNOA) + Return on debt

2015 = -1.67

2016; (10271.714922/227011) * (227011/429031.72385) * (429031.72385/97714.633) = 10.51

High return on equity mean that firms are not capital intensive. However, even if there are high returns with leverage in 2016, there is still a solid balance sheet. This means that the firm has utilized little of its capital this year on income-generating investing as opposed to 2015. All in all, it is critical to invest in firms with high Return on equity as they fluctuate due to company earnings or cycles when looking at long-term investments. For that reason, investors should look at investing in this year’s company ventures for them to get high returns.

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Microsoft

Microsoft is an American technology company that deals with the manufacture and distribution of computer software, electronics, as well as services. It is also recognized as the world’s largest software company and the most valuable. Founded in 1975, the company had its headquarters in Washington and recorded a revenue of $93.58 billion by 2015. It is also noted that the company has produced billionaires and millionaires from its 118,584 employees. More so, the firm is known to register high profits with a net income of $12.19 in 2015. As such, the company continues to grow to be a major player in the computer and electronics industry.

Return on Equity

ROE using the DuPont method = (net income/revenue) * (revenues/assets) * (assets/equity)

(Net profit margin) * (Asset turnover) * (Leverage)

2014; (25.42%) * (0.50) * (1.92) = 24.59%

2015; (13.03%) * (0.53%) * (2.20) = 15.23%

As stated earlier, firms that have registered high ROE often generate more cash rather than investing it. Even though, higher Return on equity show that the company is making good use of their equity in making more income, they are not exhausting their full potential in investments. In this case, Microsoft’s 2015’s Return on equity is lower than in 2014 by 9.36%. This means that they have been investing more rather than making profits. As a result, their balance sheet is not rigid since cash is always flowing in and out of investments. Better still, the higher rates of ROE show that the company is making good use of efficiency in utilizing their capital or shareholders’ equity in generating more income.

Walmart

In the same sense as Microsoft, Walmart is an American company but classified under the retail industry where it manages hypermarkets, departmental stores, and groceries. The firm has grown to establish 11,543 stores in 28 countries with its main operations being in the United States and Canada. The company has a registered revenue of $482.13 billion by 2016 thereby being recognized as the world’s largest firm by revenue. The family-owned business is also the most valuable enterprise through its attractive market value.

Being the biggest grocery retailer in the United States, its net income adds up to $14.694 billion even though it has employed 2.2 million people in all its global branches. However, it struggles to get a bigger market share by venturing into the growing and emerging Chinese and another Asian market. Also, they set low prices for their products in order to get a large customer base. Additionally, since the business is the biggest private employer in the United States, its turnover rate significantly affects the unemployment rates. In the same regard, they have faced numerous charges ranging from lawsuits to labor strikes.

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Return on Equity

ROE using the DuPont method = (net income/revenue) * (income/assets) * (assets/equity)

(Net profit margin) * (Asset turnover) * (Leverage)

2016; (3.07%) * (2.40%) * (2.48%) = 18.24%

2015; (3.39%) * (2.37%) * (2.50%) = 20.10%

Businesses that have higher returns on equity are focused on protecting their net income in facing the competition. This is so since they generate more income with little need of reinvesting it yet they have the ability to increase their business value. Still, higher Return on equity means having good business value since the stock prices will appreciate in a bid to trade with the firm’s growing value.

But, is having more shares worthwhile than investing the gained income? In the above recordings, it is clear that Walmart is making god use of their shareholders’ equity in generating more income for the business. However, the generated income is to place the company at the top of their rivals and in the stock market. Fortunately, the Return on equity decreased from 20.10% in 2015 to 18.24% in 2016 due to further reinvestment of their gained earnings.

From the above statistics, it is clear that both Microsoft and Walmart understand the importance of reinvesting their income in profitable ventures rather than having a solid balance sheet. On the other hand, Volkswagen is increasing their Return on equity perhaps to recapture their market position. The firm might also have decided not to reinvest their earnings probably to increase their value and better trading stocks in the stock market.

Company Analysis

Current Ratio

The current ratio measures a organization’s ability to offset its short-term debts or meeting its obligations. It gives the efficiency of a company’s operations to turn the product into cash. This is understood through the fact that businesses that are unable to pay their short-term debts often have liquidity problems.

 It is given as; Total current liabilities/total current liabilities

For the first quarter in 2016;

Volkswagen – 179895.323/177672.61 = 1.01

Walmart – 59097/70282 = 0.84

Microsoft – 128421/44354 = 2.90

(Financials are given in millions)

The higher the ratio is, the more likely a company is able to pay its short-term debt. Therefore, a current ratio that is under 1 means that the establishment is having difficulties in paying off its obligations. Even though this is an indication the firm is not in good financial vigor, it does not inevitably mean that they will go broke (Christensen, Baker & Cottrell, 2014).

This means that Walmart’s first quarter performance is not good since they are having difficulties paying off their short-term debt. However, if the company has satisfying long-term projections, it may be able to borrow and pay off its obligations. In the same sense, Microsoft proves to be most efficient in paying off its short-term liabilities compared to the rest.

Quick Ratio

Though almost similar to current ratios, quick ratios show the practice’s ability to meet its short-term debt through its most liquid assets such as cash. As a result, inventories are excluded since they are less liquid.

For that reason, it is given through;

(Total current assets – portfolio)/ total current liabilities

For the first quarter in 2016;

Volkswagen – (179895.322 – 39936.526)/ 177672.606 = 0.79

Walmart – (59097 – 44513)/ 70282 = 0.21

Microsoft – (128421 – 2450)/ 44354 = 2.84

(Financials are given in millions)

Generally, a low quick ratio is an indication that a company is over-leveraged or is finding it hard to increase its sales, pay bills or is collecting their income slowly. From the other perspective, a higher quick ratio shows that a business is able to meet its financial obligations (Christensen, Baker & Cottrell, 2014). As such, they often have a faster inventory with fast conversion cash cycles. In this regard, Both Volkswagen and Walmart and struggling to meet their financial obligations. They cannot fully pay their current debt. Conversely, Microsoft shows good financial strength in its short term.

Net Profit Margin

Net margin is often used in assessing a company’s profitability and value estimation but is not entirely reliable. This is so because they can be easily manipulated by changing the methods of depreciation or altering the standard accounting practices. They are given through;

Net profit margin – net income/revenue

For the first quarter in 2016;

Volkswagen – 2630.290/56752.784 = 4.63

Walmart – 3079/115904 = 2.66

Microsoft – 3756/20531 = 18.29

(Financials are given in millions)

In this case, Microsoft company is the most profitable firm in the sense has it has the highest net profit margin with Walmart having the least profit margin.  Microsoft is, therefore, ranked as having a net margin higher than 79% of the companies in the global software and infrastructure industry. In the same regard, Walmart was 68% higher in the retail industry while Volkswagen was 83% higher in net margins in the automotive industry.

Asset Utilization

Asset utilization involves the calculation of returns on Assets which measures the efficiency in which a firm uses their assets to generate income (Christensen, Baker & Cottrell, 2014). In short, it shows how well a company uses what it has to generate income. Therefore, it is given by;

Asset utilization – (net income/revenue) * (revenue/average total assets)

For the first quarter in 2016;

Volkswagen – (10521.1581/227011.136) * (227011.136/429031.724)= 2.45

Walmart – (12316/463616) * (463616/199143) = 6.18

Microsoft – (15024/82124) * (82124/180983) = 8.30

Similar to the return on equity, asset utilization can be affected by dynamic business cycles. Due to this, the ratio becomes crucial when looked at in the long-term perspective. Due the many factors such as stock buyback, may make the ROA not reflect the specific earning authority of the assets. ROA and ROE should not be used in the comparison of firms that are in different industries (Christensen, Baker & Cottrell, 2014). Microsoft’s ROA is higher than the rest of the companies even though they are in different industries.

Financial leverage

Financial leverage is recognized as the ability of an enterprise to use its debt in acquiring assets. It is also commonly known as trading on equity. It is given through;

Financial leverage – average of the total assets/average of the total equity

For the first quarter in 2016;

Volkswagen – 429031.724 / 97714.633 = 4.391

Walmart – 199143/77864.5 = 2.558

Microsoft – 180983.5/75793 = 2.388

When the value of assets falls, the financial leverage may fail to be beneficial. They do not guarantee the success of any business (Christensen, Baker & Cottrell, 2014). Volkswagen is, therefore, risking due to its high financial leverage in the event of having a decline in sales. From the above recordings, Microsoft is taking less risky investments of using debt to acquire assets as opposed to Walmart and Volkswagen.

Conclusion

Comparing companies in different industries is not always easy due to the variety of factors that involve the various operations that are undertaken. As stated above, ROE and ROA will not be useful when comparing the companies since they are from various industries (Christensen, Baker & Cottrell, 2014). In the same regard, manufacturing companies will have different accounting methods.

The allocation of resources and elements will be different. The service industry often has little overhead costs that lead to higher revenues that are converted to profit. On the other hand, manufacturing companies have higher revenues due to the variety of products and the costs. It is also to note that the difference in accounting is due to the standards applied. Inventory costs in IFRS are not allowed as opposed to GAAP standards.

Similarly, write-downs are reversed under the IFRS while it is not allowed in under GAAP. The IFRS are based on principles while the U.S. GAAP focus on rules. Therefore, IFRS better present economic transactions. However, all companies have shown efficiency in using their working capital even though they are done in different degrees (Christensen, Baker & Cottrell, 2014). All in all, Microsoft proves to be most efficient and having more financial strength.  

References

Christensen, T. E., Baker, R. E., & Cottrell, D. M. (2014). Advanced Financial Accounting. The McGraw-Hill Companies, Inc.

http://www.gurufocus.com/term/ROE/MSFT/Return-on-Equity/Microsoft-Corp

http://www.gurufocus.com/term/ROE/VLKAY/Return-on-Equity/Volkswagen-AG

http://www.gurufocus.com/term/ROE/WMT/Return-on-Equity/Wal-Mart-Stores-Inc

Hurd, J., Lawman, M., Salkowski, Z., Sampson, H., & Stellato, A. (2014). Wal-Mart Case Study.

Morrow, R. (2016). Corporate Social Responsibility and Corporate Financial Performance: An Empirical Analysis. Available at SSRN.

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Financial Analysis: Sprint and Verizon

Financial Analysis
Financial Analysis
Financial Analysis of Sprint Corporation and Its comparison with Verizon Communications Inc

Sprint Corporation is US based telecommunication company which provides wireless and internet services. It was founded in 1899. HTC is considering shifting to this company’s communication system so this report synthesizes the financial analysis of the company so as determine its future prospects and financial viability. The tools of trend analysis, ratio analysis and stock price trend have been applied.

This financial analysis will become the base for taking the decision whether to shift to this company’s communication system or not. Sprint Corporation changed its financial year from Jan-Dec to April-March in 2014. So the financial period ending on March 2015 is of 15 months. The comparative study of financial performance of Sprint Corporation and Verizon Communications has also been done to study the prospects of Verizon Communications.

I. Trend analysis of financial performance in financial analysis of Sprint Corporation and Verizon Communications

The financial technique of trend analysis has been applied to evaluate the financial performance of Sprint Corporation for last three years along with its comparison with Verizon Communication Inc. for the last year i.e.2016.

Table 1: Trend analysis

 Sprint CorporationVerizon Communication Inc
 Dec-12Dec-13Mar-15Mar-16Dec-15Dec-16
Revenue  ($ in Millions)35345168913453232180131,620125,980
Increase/decrease in Revenue (%) -52%-2%-9% -4%
Net income ($ in Millions)-4326-1860-3345-199517,87913,127
Increase/decrease in Net Income (%) -57%-23%-54% -27%
Working Capital  ($ in Millions)4,8852,389-1,163-5,130-12,772-3,945
Increase/decrease in working capital (%) -51%-124%-205% 69%
Return on assets (%)-8.57-2.7-4.03-2.467.495.37
Return on equity (%)-46.73-11.39-15.41-9.62124.4867.4

(Morningstar, 2017)

The above table depicts the trend value of revenue, net income, working capital, return on assets and return on equity.

  • Revenue: There is decline in revenue of Sprint Corporation over the last three years. The reduction was huge in 2013 as it reduced by more than half. In 2014, the company was able to revive its revenue and able to gain revenue near to base year i.e. 2012. This financial period is of 15 months. It can be one of the reasons for recovery in revenue. In 2016, again the revenue reduced by 9%.
  • Net income: There is declining trend in net income of Sprint Corporation. The value of net income is negative in all the years. The decrease in net income of financial period 2016 is greater than the decrease in revenue. It means the company has not been able to control its expenses.
  • Working Capital: There is decreasing trend in working capital of the company, which represents the excess of current assets over current liabilities. The working capital was positive in 2013 but it became negative in 2015 and 2016. The decrease in working capital depicts the deterioration in the capability of the company to repay its short term liabilities in time.
  • Return on assets: The return on assets of Sprint Corporation is negative in all years.
  • Return on equity: Similarly return on equity of Sprint Corporation is also negative in all years.

If we compare the performance of Sprint Corporation for the financial year 2016 with the performance of Verizon Communication Inc, we find that the decline in net income of Verizon Communications Inc was also greater than the decline of its revenue. It also has deteriorated working capital position but it has been able to generate positive return on equity and assets.

References

CNN Money. (2017, March). S&P500 index. Retrieved from http://money.cnn.com: http://money.cnn.com/data/markets/sandp/

Google. (2017). Verizon Communications Inc. Retrieved from Google.com: https://www.google.com/finance?cid=664887

Yahoo Finance. (2017). Sprint Corporation. Retrieved from https://in.finance.yahoo.com: https://in.finance.yahoo.com/quote/S?ltr=1

Yahoo Finance. (2017, March). US Treasury Bond Rates. Retrieved from https://finance.yahoo.com: https://finance.yahoo.com/bonds

Yahoo finance. (2017). Verizon Communication Inc. Retrieved from https://in.finance.yahoo.com: https://in.finance.yahoo.com/quote/VZ?p=VZ

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PERFORMANCE ANALYSIS OF INDITEX GROUP

PERFORMANCE ANALYSIS OF INDITEX GROUP
PERFORMANCE ANALYSIS OF INDITEX GROUP

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PERFORMANCE ANALYSIS OF INDITEX GROUP

EXECUTIVE SUMMARY

The analytical and critical review of a company’s performance is a very important managerial responsibility. Most of the decisions are based on the figures generated by the finance and accounting departments and this calls for strict observance of the financial reporting standards in the preparation of the financial statements. They must capture all the relevant information so that the inferences drawn from them can be realistic and effective. These figures must reflect the true and fair view of the company.

INTRODUCTION

Inditex Group is a Spanish company and one of the major players in the textile industry. It is composed of more than 100 companies all engaged in the manufacturing, designing and distribution of textiles all over the world.

Question 1.ANALYSIS OF FINANCIAL PERFORMANCE

Comparison of latest year with previous year reports.

The financial year for the Group ends at 31st January of the proceeding year.

The following are extracts from the Group’s financial statements;

 Year ending 31stJan.2011Year ending 31st Jan. 2012
Sales12,52713,793
Operating Income2,9663,258
Operating Profit2,2902,522
Pre-tax Profit2,3222,559
Net Income1,7321,932
Earnings per share (Euros)2.783.10
   

.

There was growth in each of the above variables, an indication of the company’s good performance.

Question 2

Ratio analysis of both latest and previous years:    
 (A) LIQUIDITY
 Current ratioThis ratio indicates the company’s ability to meet its current liabilities obligations using current assets; 

Therefore for the year ended 31st January 2012 the current ratio for the company 

The current ratio for the year ended 31st January 2011 was  

Quick ratio

The second liquidity ratio is the Quick ratio. This ratio shows the ability of a company to satisfy its current liabilities using its most liquid assets ( Deverrel, 1999).

                                 Current liabilities

Therefore the quick ratio for the year ended 31st January 2012= 5437- 1277  = 1.54

                                                                                                                                     2702

For the year ended 31st January 2011 the quick ratio was =5203- 121

                                                                                                                      2675

Networking capital to sales ratio

This ratio indicates the liquid assets of a company based on its need for that liquidity (as indicated by sales) after the company meets its short term obligations.

Therefore for Inditex Group, the networking capital to sales ratio for the year ended 31st Jan 2012 was = 5437- 2702  =0.19

                           13793

The ratio for the previous year was = 5203- 2675 = 0.2

                                                                              12527

The larger these liquidity ratios are, the greater is the company’s ability to meet and finance its short term obligations. If for instance one considers the current ratio, huge amounts of current assets and less amount of current liabilities will imply that the company can successfully meet its short term obligations. 

The Inditex group is performing very well because the liquidity ratios analyzed increase in the present year as compared to the previous. This shows that chances of the company lacking liquid capital for its immediate requirements are minimal (Keegan, 2005).

(B)SOLVENCY RATIOS

These ratios show the ability of a company to service its long term debts and also any interest earnings that will accrue on those debts. The larger these ratios are the more solvent a company is and hence its ability to service any of its long term debt commitments (Caroline, 1997). These ratios include:

Solvency ratio.

This is expressed as a ratio of the total assets to liabilities. Therefore;

For Inditex company the solvency ratio for the year ending 31st January 2012 is =10959 =3.09

                                                                                                                                    3544

For the year ending 31st January 2011=9826 =2.85

                                                              3440

For the year ending 31st January 2010= 8335 =3.62

                                                                2304

Debt ratio

This ratio shows the degree of reliance on debt by a company to finance its assets. The lower the debt ratio the stronger is the company.

Debt ratio= Total debt

                   Total assets

The debt ratio for the company for the year ending 31st January 2012= 1.54   = 0.00014

                                                                                                                 10959

The debt ratio for the year ended 31ST January 2011= 4.17  = 0.00042

                                                                                      9826

These figures are very low and this indicates that the company is very strong and can fully service its debts which are very low.

Indebtedness ratio

This ratio is used as an indicator of what makes up the debt liability of a company. This is because a company’s total debt can be in other areas like payables, salaries and not only in form of bank loans.

Indebtedness ratio= Total debts

                                Total liabilities

For Inditex  Company, the indebtedness ratio for the year ending 31st Jan 2012=1.54 =0.0004

                                                                                                                                3544

For the year ending 31st January 2011 = 4.17 =0.001

                                                               3440

(C)WORKING CAPITAL MANAGEMENT RATIOS

The working capital enables a company take advantage of opportunities as they arise. The working capital is normally the difference between current assets and current liabilities.

Working capital ratio = current assets

                                         Current liabilities

This ratio indicates the ability of the company to finance its long term obligations. It is the same as the current ratio.

Collection ratio

This ratio gives the average number of days it takes a company to transform receivables into cash.

Collection ratio= accounts receivable 

                             Average daily sales

The collection ratio for this company for the year ending 31st Jan 2012=548.28   =14.5

                                                                                                                 13793/365

For the year ending 31st Jan 2011 = 498   =14.5

                                                   12527/365

Inventory turn over ratio

This ratio indicates how efficient a business is in the selling and management of its inventory.

Inventory turn over ratio= Net sales

                                           Inventory

The inventory turn over ratio for Inditex group for the year ended 31st Jan.2012=13793 =10.8

                                                                                                                                    1277

For the year ended 31st Jan.2011= 12527/1214=10.3

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(D) PROFITABILITY RATIOS

These ratios are an indicator of how well a firm is performing. The net profit margin ratio shows how much profit a company is making for every unit currency of sales (Fred, 2000).

Net profit margin ratio = Net profit after tax

                                                   Sales

The net profit margin ratio for the company as at 31st January 2012 was 14.2% and for the previous year was 12.1%

Return on assets ratio (ROA)

This shows the level of profitability as a comparison to investment in new capital.

Return on assets = Net income

                              Total assets

The return on investments for the company as at 31St January 2012 was 18.4% and for the previous year it was 14.9%.

This ratio tells how efficient the management is in using the company’s assets to generate earnings.

Return on equity

This rate indicates how mush the shareholders earned for their investment in a company.

Return on equity= Net income

                            Total shareholders equity

The rate for the Inditex group was 24.8% for the year ended 31st January 2012 and 21.7% for the previous year.

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(E) ASSET EFFICIENCY RATIOS

Inventory turn over ratio

This ratio indicates the number of times inventory is sold and stocked every year. If it is high the company could be in danger of having stock outs and if it is very low the company could be having some obsolete inventory that does not sell in the market. 

Inventory turn over ratio= Net sales

                                           Inventory 

Inditex Group had an inventory turn over ratio of 13793/1277=10.8 for the year ended 31st January 2012 and the ratio for the previous year was 12527/1214=10.3

 Days’ sales in inventory 

This ratio measures the performance of the company for the management and the owners of the company.

Days’ sales in inventory = 365 days / inventory turn over

For this company the ratio will be 365/10.8=33.8 for the year ended 31st January 2012 and 365/10.3=35.4 for the previous year.

Fixed assets turn over ratio

This ratio gives a picture of how the fixed assets like plant and equipment are being used to generate sales.

Fixed assets turn over ratio= sales/ net fixed assets.

For the company, the ratio is 13793/4082= 3.4 times for the year ended 31st January 2012 and 12527/3414=3.7 times for the previous year. This means the fixed assets were used more to generate sales in the year ended 31st January 2011 than the proceeding year.

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 Question 3

Most of the industry operators experienced moderate sales. On average majority had net profit margin ratios of between 4 to 9 %. This was mainly due to the effects of the global financial crisis of 2008 and the majority have not fully recovered.

Question 4               Key performance indicators (KPIs)

Current ratio2.01
Solvency ratio3.09
Collection ratio14.5
Net profit margin ratio14.2%
Inventory turn over ratio10.8

Question 5

Key performance indicators denote the level of success of an activity and the achievement of a company’s goals and objectives. KPI’s are used in various departments of the organization and therefore those choosing the indicators to be used in a particular section must have a good understanding of the organization. There should also be good management frameworks in companies to enable better understanding of the procedures and hence the selection of the correct KPI for use.

Question 6

The level of liquidity and solvency for Inditex is healthy. The liquidity levels have also been rising meaning that the ability of the company to meet its current liabilities obligations using current assets has been improving. The company has also been able to continuously give dividends to its shareholders due to the impressive performances in the management of its assets and equity.

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Question 7

Advantages of using KPI’s

  • Provides vital information necessary for making business decisions
  • Alerts managers on the direction the business is taking and need for precautionary and intervention measures.
  • Provide information that enables the optimal allocation of resources and achievement of set goals and objectives.

Disadvantages 

  • Requires a lot of resources in form of qualified personnel for monitoring and managing the processes involved.
  • Any biases in the data collection, computation and analysis can have negative implications to the business. 

The compilation of this data helps in making key decisions concerning the business. Decisions to acquire other businesses, increasing the product range, marketing strategies to be adopted usually rely on this data (John, 2010). 

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References

Caroline, H (1997). Financial Analysis Techniques. London. Prentice Hall, P.28

Deverrel, W (1999). Performance Indicators. Sydney. Lakers Publishers, P.4

Fred, D (2000) “The need for Financial Analysis” (Online) Available from http://www.fin.edu.au/ (Accessed on 19th May 2012) 

John, V (2010). Basic Business Decisions. Dublin. Ace Books, P.19

Keegan, B (2005). Analysing Business Environments. Freiburgh. Hewmann Books, P.81

Appendix 1

 Annual  Interim
20122011201020092008
Period End Date01/31/201201/31/201101/31/201001/31/200901/31/2008
Stmt SourceARSARSARSARSARS
Stmt Source Date04/02/201203/30/201103/30/201004/01/200906/11/2008
Stmt Update TypeUpdatedUpdatedUpdatedUpdatedUpdated
      
Assets     
Cash ahttp://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gifnd Short Term Investments3,517.443,433.532,420.111,466.291,465.84
http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gifTotal Receivables, Net548.28498.8437.44600.65465.44
Total Inventory1,277.011,214.62992.571,054.841,007.21
Prepaid Expenses0.00.00.00.00.0
Other Current Assets, Total94.5655.5593.67142.2643.11
Total Current Assets5,437.295,202.513,943.83,264.042,981.6
      
Property/Plant/Equipment, Total – Net4,082.873,414.443,306.813,450.783,191.59
Goodwill, Net218.09131.69131.69131.69125.58
Intangibles, Net614.11555.75533.28547.94517.95
Long Term Investments9.58.9215.3914.4236.17
Note Receivable – Long Term0.00.00.00.00.0
Other Long Term Assets, Total597.31512.78404.48367.78252.72
Other Assets, Total0.00.00.00.00.0
Total Assets10,959.189,826.088,335.447,776.657,105.6
      
  Liabilities and Shareholders’ Equity     
Accounts Payable1,838.091,886.671,557.751,540.771,577.94
Payable/Accrued0.00.00.00.00.0
Accrued Expenses178.46145.57133.920.00.0
Notes Payable/Short Term Debt0.00.00.0220.47333.49
Current Port. of LT Debt/Capital Leases0.692.6835.0613.5737.78
Other Current Liabilities, Total685.54639.98578.23616.05508.86
Total Current Liabilities2,702.772,674.912,304.962,390.852,458.07
      
http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gifTotal Long Term Debt1.544.175.013.2442.36
Deferred Income Tax182.53172.65172.89213.85110.96
Minority Interest40.7736.9841.3826.8923.92
Other Liabilities, Total616.75551.19482.04410.11277.17
Total Liabilities3,544.373,439.93,006.273,054.932,912.47
      
Redeemable Preferred Stock0.00.00.00.00.0
Preferred Stock – Non Redeemable, Net0.00.00.00.00.0
Common Stock93.593.593.593.593.5
Additional Paid-In Capital20.3820.3820.3820.3820.38
Retained Earnings (Accumulated Deficit)7,312.646,359.815,343.424,722.564,181.55
Treasury Stock – Common0.0-0.62-0.62-0.62-6.93
ESOP Debt Guarantee0.00.00.00.00.0
Unrealized Gain (Loss)0.00.00.00.00.0
Other Equity, Total-11.72-86.89-127.51-114.11-95.37
Total Equity7,414.816,386.185,329.174,721.714,193.13
      
Total Liabilities & Shareholders’ Equity10,959.189,826.088,335.447,776.657,105.61
      
Total Common Shares Outstanding623.33623.11623.11623.11620.96
Total Preferred Shares Outstanding0.00.00.00.00.0

Financial data in EUR 

Appendix 2

Annual Income Statement Data
Actuals in M €Estimates in M €Fiscal Period January2010,2011, 2012201320142015
Sales11 08412 52713 79315 63617 14618 858
Operating income (EBITDA)2 3742 9663 2583 7334 1414 556
Operating profit (EBIT)1 7292 2902 5222 8913 2263 553Pre-Tax Profit (EBT)1 7322 3222 5592 9183 2433 618
Net income1 3141 7321 9322 2192 4572 689EPS ( €)2,112,783,103,553,954,32
Dividend per Share ( €)1,201,601,802,112,402,67
Yield1,79%2,38%2,68%3,14%3,58%3,98%
Annoucement Date 03/17/2010
06:18am03/23/2011
06:02am03/21/2012
06:40am—

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