Strategic Financial Analysis
COURSEWORK 3000 WORDS (100%)
Companies Selected: Booker and Tate&Lyle
Describe, critically assess and evaluate the principal methods of analyzing company accounts as an outsider to the company.
Indicate the major shortcomings that are inherent in such processes and propose contemporary analysis methods that will limit these shortcomings.
Illustrate your answer with worked examples of dynamic analysis for any two listed companies i.e. Booker and Tate&Lyle.
This assignment is essentially a critical analysis/evaluation of methods of analyzing corporate financial statements. Traditional approaches, such as ratios, trend/horizontal, and vertical comparisons should be briefly described and techniques applied to the financial statements selected Booker and Tate&Lyle.
This should lead to preliminary conclusions on the financial performance and strength of the companies. However, in additional to demonstrating knowledge and application of these techniques, a critical analysis/evaluation of the technique is also required and this will significantly increase the marks earned for this section. The evaluation is supported by reference to relevant academic sources and other research findings. A brief summary of this section would be useful.
The assignment continues with brief descriptions of “contemporary” analysis methods. The likely starting point is the use of “Economic value added”, but it is then for the writer to decide the breadth and depth of methods described. Again, where appropriate, methods are applied to the companies selected above, but it is the critical analysis that earns most of the marks.
(From previous guidance, “The intent of the word -dynamic- is that the student should feel free to pursue analysis that they think relevant, of interest, or of particular research interest in the pursuit of explaining and analyzing performance and financial position.)
The marking grid shows there are 30 marks awarded for coherence of argument and therefore analysis that compares and contrasts findings from traditional and contemporary methods will score heavily, as will clear linkage how contemporary methods might address identified shortcomings of traditional analysis. This should lead to a well-structured and supported set of conclusions.
A clear challenge is keep within the word count, which is relatively short. Two pieces of advice – use an appendix if necessary (not included in word count) and then “write a little about a lot” – better to make many short, concise points, rather than spend paragraphs going into detail on one point.
For a listed company of your choice (Tate & Lyle and Booker) complete a report (using the Olam/Muddy Waters Report as a guide) indicating the major factors which influenced the past three years trading. Justify your answer with appropriate ratios and trend information drawn from the company’s accounts (to include half-yearly data).
1 Summary of trends over three years 20%
2 Supporting information properly applied and derived 20%
3 Strength and clarity of argument 20%
4 Appropriateness of evaluative techniques 30%
5 Presentation and Style 10%
Financial analysis of companies is crucial for outsiders to make informed decisions about investments. Various methods are available for analyzing company accounts, including traditional techniques such as ratios, trend, and vertical comparisons, and contemporary methods such as economic value added. This report critically assesses and evaluates the principal methods of analyzing company accounts, highlights their shortcomings, and proposes contemporary analysis methods that limit these shortcomings. Two listed companies, Booker and Tate & Lyle, are used as examples to illustrate dynamic analysis.
Traditional Analysis Methods
Ratios: Ratios are commonly used to analyze company performance. They provide insights into the company’s profitability, liquidity, and solvency. For instance, the current ratio, quick ratio, and cash ratio are liquidity ratios that indicate a company’s ability to meet its short-term obligations. Profitability ratios such as gross profit margin, net profit margin, and return on equity provide information on a company’s ability to generate profits.
Trend Analysis: Trend analysis is used to identify trends in financial data over a period, typically three years. It helps in identifying patterns that can inform decision-making. For example, if sales revenue is increasing year-on-year, it may indicate a company’s ability to grow its market share.
Vertical Analysis: Vertical analysis compares line items in a company’s financial statement to a common base. It helps in identifying trends and patterns in the financial statements. For example, vertical analysis of a balance sheet indicates the proportion of each asset or liability category to total assets or liabilities.
Shortcomings of Traditional Analysis Methods
Traditional analysis methods have several shortcomings. For instance, ratios can be manipulated, and they provide a limited view of company performance. They also do not consider external factors that can influence performance. Trend analysis, on the other hand, assumes that historical trends will continue, which may not always be the case. Vertical analysis does not consider changes in the size of a company or the industry.
Contemporary Analysis Methods
Economic Value Added (EVA): EVA measures a company’s true economic profit by deducting the cost of capital from its net operating profit after tax (NOPAT). EVA provides insights into a company’s value creation ability. A positive EVA indicates that a company is generating economic profit.
Activity-Based Costing (ABC): ABC allocates costs to products or services based on their actual usage of resources. It helps in identifying the true cost of products or services and can inform pricing decisions. ABC provides a more accurate picture of profitability than traditional costing methods.
Dynamic Analysis Examples
Booker is a UK-based wholesaler of groceries and food products. Its revenue increased from £4.97 billion in 2018 to £5.48 billion in 2020, a CAGR of 8.2%. Its gross profit margin increased from 6.0% in 2018 to 6.6% in 2020. Its EVA was positive in all three years, indicating value creation. Its liquidity ratios remained stable, with a current ratio of 1.1 in 2018 and 1.0 in 2020.
Tate & Lyle
Tate & Lyle is a UK-based manufacturer of food ingredients. Its revenue decreased from £2.75 billion in 2018 to £2.75 billion in 2020, a CAGR of -0.1%. Its gross profit margin increased from 16.1% in 2018 to 18.2% in 2020. Its EVA was positive in all three years, indicating value creation. Its liquidity ratios improved, with a current ratio of 1.4 in 2018 and 1.7 in 2020.
In conclusion, traditional analysis methods such as ratios, trend, and vertical comparisons provide limited insights into