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ANALYSIS OF FINANCIAL STATEMENTS

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ANALYSIS OF FINANCIAL STATEMENTS

ANALYSIS OF FINANCIAL STATEMENTS

Introduction

Financial performance analysis is the most important but time consuming activity that the management of any company needs to perform to understand the sustainability of the business in the short and long run. Financial analysis indicates the market position of a company from different perspectives like, profitability, liquidity, efficiency, capital structure and investment attracting capacity. In this study, the financial performance analysis will be conducted considering the financial results of Carillion Plc for last three years that are from 2014 to 2016. The financial analysis will be conducted or perform following the technique of ratio analysis. At the same time, the study will provide some recommendations for further improvements of the financial performance of the company. Before concluding the overall study, a suggestion regarding the investment in Carillion Plc will be provided to one competitor of Carillion Plc.

 

1. Discussion and analysis of the financial performance and position of Carillion Plc

The financial performance of a company can be easily analyzed using the financial ratios. The financial ratios use the past data of the company to understand its financial performance trend. Here, for analyzing the financial performance of Carillion Plc, mainly five different types of financial ratios have been used. These financial ratios are – profitability ratios, liquidity ratios, and efficiency ratios, gearing ratio and investment ratios.

Considering the profitability ratios of Carillion Plc in the above table, it can be stated that during the period of 2014 to 2016, the profitability position of the company has declined. The gross profit ratio, operating profit ratio and net profit ratio are showing continuous decrease in the profitability level of the business. For example, in the financial year 2014, the gross profit ratio of Carillion Plc was 9.37, which decreased to 8.62 in 2015 and 7.97 in the financial year 2016. The situation was almost same in the case of operating ratios and net profit ratios of the business.

The decreasing trend of the profitability of Carillion Plc is indicating that the cost level of the business has increased during these years because the revenue of the company increased gradually at this time. However, if the analysis is made in more critical manner, it can be identified that the percentage increased in the revenue of the company was very low and the difference between the revenue and cost of sales of the business was also very less. This has reduced the profitability of the business. This situation is indicating that the management of the company is unable to control the cost level and the marketing activities were not effective enough for increasing the level of sales of the business (Lins et al. 2017). This is not a satisfactory situation for the stakeholders like, shareholders, investors, management and employees because the income levels of these stakeholders are directly linked with the profitability of the company. Hence, the management of Carillion Plc needs to be more careful regarding the control of cost.

Considering the liquidity ratios of Carillion Plc it can be stated that the company had strong liquidity position during 2014 to 2016. At the same time, it can also be stated that the liquidity of the company was almost in the static level during these period. For example, in the year 2014, the current ratio was 1.0246; in 2015, the current ratio was 1.0235 and in 2016, the current ratio was 1.0236. These financial figures are indicating that the liquidity of the business was almost same in every year from 2014 to 2016. The situation was kind of similar in the context of quick ratios. However, it is also true that from 2014 to 2016, the quick ratio of the business decreased by a little percentage.

Analyzing the liquidity ratios of the business critically, it can be stated that the company had enough short-term assets to mitigate the short-term or current liabilities. This is indicating that the company was financially stable, which is good for the current position of the business (Loosemore and Lim 2017). Moreover, if the liquidity position of the business remains strong, the company can easily satisfy the short-term creditors. Due to this, the company can easily gather the short-term debt from the external market (Akgul et al. 2017). Therefore, the management of the company needs to maintain the liquidity position properly in the future to make the business easier.

The efficiency ratios of the business are indicating that the level of efficiency of Carillion Plc has declined during 2014 to 2016. As per the above table, in the year 2014, the inventory turnover ratio of the business was 63.201, which declined to 56.139 in the financial year 2015 and 21.3223 in the financial year 2016. This continuous decrease in the inventory turnover ratio is indicating that the company or its management failed to handle the inventory efficiently. At the same time, it is also indicating that due to the inefficiency of the management as well as employees, the company could not enhance the sales level by high amount. Moreover, the table is indicating that the inventory turnover ratio was in continuous decreasing trend, which indicates weak financial performance of the company.

This type of situation indicates danger for the business. However, in this context, it must be noted that the assets turnover ratio of the company was in bit fluctuating trend. In 2014, the assets turnover ratio was 0.89, which increased to 1.02 in the financial year 2015 and again in 2016 the ratio decreased to 0.99. This fluctuation indicates instability in the organizational performance. However, in the current competitive scenario, it is very important for the companies to maintain stability in their financial performances. Higher level of efficiency helps to maintain stability in the financial performance (Zhao et al. 2017). If the financial position of the company remains stable it becomes easier for the company to attract new investors and satisfy the existing shareholders.

The gearing ratio of Carillion Plc for the years 2014 to 2016 is indicating that the company is highly dependent on the debt capital. High dependency on the debt capital indicates that the risk level of the business is high. In this context, it is important to be mentioned that the debt to equity ratio of the business of Carillion Plc has gradually enhanced from 2014 to 2016, which means the management continuously increased the proportion of debt capital in the capital structure of the company. This affects the long-term stability of the business. At the same time, it can also be stated that the current capital structure of the business is not able to attract the investors those are not willing to take high risk in investment (Loosemore and Lim 2017).

Therefore, in this situation, it is important to reduce the proportion of debt capital in the capital structure of the business. If the company reduces the debt capital and enhance the proportion of equity capital, the overall risk of the business will be reduced. At the same time, the management will be able to enhance the amount of new investment.

The investment ratios of the business of Carillion Plc are indicating that the company is failure to satisfy its existing investors or shareholders. In the last three years that are from 2014 to 2016, the EPS to the shareholders was very low that is between the range of 28p to 30.9p, which was much low. On the other hand, the P/E ratios of the business are also indicating that the share value of the company in the market is low. However, it is also important to be mentioned that the value of share has increased by little proportion, which is indicating increasing trend of financial performance.

Therefore, from the overall analysis of the financial performance of the business, it can be stated that the management of the business is not efficient enough for improving the financial position of the business. The low profitability of the business is indicating that the company is losing its competency level in the national as well as international market (Lins et al. 2017). Decrease in the profitability level signifies that the management needs to take much care of the sustainability position of the business. As the liquidity position of the business is already strong, the management needs to take special care, so that the liquidity can be maintained in a better way in the long-run.Therefore, the higher authority of Carillion Plc needs to take immediate activities or develop the needful strategies for better survival of the organization. At the same time, the management also needs to reframe the capital structure to reduce the level of risk in the capital structure.

 

2. Recommendations for the improvement of financial ratios of the company

The above analysis of the financial results of Carillion Plc is indicating that the management needs to improve the financial performance as soon as possible. In order to improve the financial performance of the company, the management of Carillion Plc may adopt the following strategies:

  • Performing detail analysis of employees’ performance standards – The financial analysis has indicated that the performance standards of the employees at Carillion Plc are not up to the market. Therefore, in order to improve the financial performance standards, the higher authority of the company needs to take special care of the performance analysis of employees. This will help the management identifying in which area the employees are lacking behind (Vuong et al. 2017).
  • Arranging employees’ training session – After analyzing the employees’ performance standards and identifying the areas of improvements, the management of Carillion Plc needs to arrange for training sessions, which will be arranged especially for improving the lacking areas of the employees. This will also help the employees in developing their performance level in the coming financial year (Wang and Sarkis 2017).
  • Improved inventory management system – The management of Carillion Plc also needs to take care of the inventory management of the business. In the financial ratios analysis, it has been determined that the inventory turnover is low, which indicates poor inventory management of the business. In this context, the management of Carillion Plc may consider the FIFO or LIFO or AVCO method for better inventory management.


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