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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.

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.

 

Reference list

Akgul, B.K., Ozorhon, B., Dikmen, I. and Birgonul, M.T., 2017. Social network analysis of construction companies operating in international markets: case of Turkish contractors. Journal of Civil Engineering and Management23(3), pp.327-337.

Alwan, Z., Jones, P. and Holgate, P., 2017. Strategic sustainable development in the UK construction industry, through the framework for strategic sustainable development, using Building Information Modelling. Journal of cleaner production140, pp.349-358.

Ft.com. 2018. Carillion PLC. [online] Available at: https://www.ft.com/topics/organisations/Carillion_PLC [Accessed 7 Mar. 2018].

Lins, K.V., Servaes, H. and Tamayo, A., 2017. Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. The Journal of Finance72(4), pp.1785-1824.

Loosemore, M. and Lim, B.T.H., 2017. Linking corporate social responsibility and organizational performance in the construction industry. Construction management and economics35(3), pp.90-105.

Vuong, N.B., Vu, T.T.Q. and Mitra, P., 2017. Impact of Capital Structure on Firm’s Financial Performance: Evidence from United Kingdom. Journal of Finance and Economics Research2(1), pp.16-29.

Wang, Z. and Sarkis, J., 2017. Corporate social responsibility governance, outcomes, and financial performance. Journal of Cleaner Production162, pp.1607-1616.

Wolfson, M.A., Tannenbaum, S.I., Mathieu, J.E. and Maynard, M.T., 2018. A cross-level investigation of informal field-based learning and performance improvements. Journal of Applied Psychology103(1), p.14.



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