Organization depends upon the functions of many departments in line and every department is important from the standpoint of an entity (Zameer, 2012). The entire productivity of an organization depends upon the working of its department as every department shows its eagerness as far as increasing the long run productivity of the company.
According to most of the analysts and management professionals, organization is basically a place wherein people belong to different demographic work together work together. However the distribution of people in different departments is a natural phenomenon (Zameer, 2012).
Finance is a field which is important in almost every walk of life and currently the utilization of the same has now moved almost in every corner of life. There are certain things that come under the ambit of finance (Cinnamon & Larsen, 2006). Actually Finance is the mixture of economics and accounting and both of these things in collective manner would define the same. The field of finance has been surrounded with many things in total and forecasting of the financial result is one of them which has its own recognition both in short and long term time period. The main perspective of this assignment is to analyze t he financial statement of a particular company which has a name of Kingfisher. The next section will detail down the corporate history of the company as a whole followed by the analytical measures, which has been distributed into six different lines and sections.
Kingfisher: An Overview
Kingfisher Plc is basically a British based multinational retailing company with its headquartering located in London, UK. It is the largest home improvement retailer in Europe. Kingfisher Plc is basically a global merchandiser & retailers with its operational headquarter in Cheshunt, United Kingdom.
In terms of revenue and size, Kingfisher Plc is the 4th largest retail stores of the world. The company has more than 14 big stores across Europe, Asia and North America. Kingfisher Plc is a regular constitute of Financial Times Stock Exchange (FTSE-100) and its shares are actively trading in London Stock Exchange (LSE). In terms of competition, Sainsbury Plc is the biggest competitor of Kingfisher Plc herein the UK. The company is in a good financial and strategic position and continuously increasing the shareholders equity. It is obvious that the path of economic fragility will be very high for the entry. The overall contribution of Kingfisher Plc in the Gross Domestic Product (GDP) of UK is about 30% followed by Sainsbury of 22% and WM Morrison 11.8%. The company earned net revenue of Great Britain Pounds (GBP) 10.8 billion in the year 2012 with net income of GBP 639 million in the same year. The company has around 80,000 employees spread in around 1000 stores around the globe.
Reorganize the financial statements and Analyze Historical Performance
Financial statements are the end products of an organization on which the investors, policy makers, creditors and other relevant people emphasize a lot.
In order to execute the future financial strategy for the company, it is important to first analyze the current financial strategy of the company. Three different ratios have been analyzed here to analyze the current as well as the future financial strategy of the company. Net Profit Margin, Current Ratio and Cash flow to net income ratios would be used in this section (Erich & Helfert 2001).
Net Profit Margin:
Profit is the bottom line of an organization and every organization always tries to increase its bottom line (Erich & Helfert 2001). High NPM is a clear indication that the company is doing a good job. Three years NPM and graph of Kingfisher Plc is mentioned below.
From the analysis, it can be said that Kingfisher Plc is doing a wonderful job in increasing the economic belonging of the company. The sales of the company showed an year on year (YOY) increment of 5.58% and 7.06% FY 2010 and 2011 respectively while the net income of the company increased by 9.26% and then increased by 14.34% for two consecutive years. Average NPM of the company is 4.15% which means that the company is able to generate 4.15 GBP of net income from 100 GBP of sales (Cinnamon, R & Larsen, 2006).
By considering the current financial strategy, the predicted sales revenue and net income of the company for three years will be 64,781, 68,876 and 73,229 Million GBP and 2986, 3338 and 3732 Million GBP respectively.
Current means anything which has a life of 1 or less than 1 year in finance. This particular thing has a real dominance in the literature of economics and finance. This ratio let the investors regarding the stance of a company in meeting with short term financial promises (Erich & Helfert 2001). The chart and table of CR is mentioned below,
The current ratio of the company is in good position but not on the standard level indeed. The CR of the company was 2.82 in the year 2009 which increased bit in the year 2010. The CR of the company throughout the analytical period remains higher the psychological level of 1which cannot be a bit concern for the company but with ad hoc financial strategy, the company will breach the psychological level of 1 in the upcoming fiscal years.
Cash Flow to Net Income
Net income of a company is not a guarantee of cash inflow (Erich & Helfert 2001). Hence there is a ratio called cash flow to net income which used to evaluate the net inflow of cash in terms of the net income.
Forecast Financials and Cash Flows From the above mentioned analysis, it can be found that the cash flow of the operation of Kingfisher Plc increased in the fiscal year 2010 by 19% as compared to the same period of last year but it decreased in the year 2011 by 15%. Considering the current financial strategy of the company, the C/NPM of the company will increased by 200 basis points in the year 2012.
Revenues are the one for which the organizations strive hard (Cinnamon, R & Larsen, 2006). The amount of revenue is the most important figure in a company’s income statement because it appraises the actual worth of the organization. The Net Revenue of KINGFISHER comprises on three things which are products, services and financial income. It means that the total revenue of KINGFISHER is comprises on these three things (Cinnamon, R & Larsen, 2006). Last’s years financial statements manifesting that the products proportion in the overall portfolio of revenue is in a congestion band from 60-80%, along with the growth percentage of around 17%. After applied this growth rate, the product revenue is increasing with somewhat same proportion for the next five years, however a little difference among the proportions have been envisaged in the upcoming years. On the services, I have applied the growth rate of 1.72% on upcoming years likewise the previous years. The next item in the portfolio of revenue is financing income which has around 0.31%-0.33% proportion in the entire revenue figures. The growth rate which applied on the financing income is 10.88%, similar to last year’s growth. By adding all of these things, I have reached on net revenue figures for the next five years of KINGFISHER which are GBP 141,026, GBP 158,430, GBP 178,648, GBP 202,149, GBP 229,483 for years (FYS) 2011, 2012, 2013, 2014 and 2015 respectively.
Earnings From Operations
After recognized the Net Revenue (NR) as well as Total Expense (TE) of KINGFISHER for the next years, I have reached on the computation of earnings from operation, also called the operational income. Operational income is basically an income generated through the core operations of an organization. The bulk of accumulation accomplished from a business's operations afterwards demography out operating costs - such as amount of appurtenances awash (COGS) or accomplishment - and depreciation. Operating assets takes the gross assets (revenue bare COGS) and subtracts added operating costs and again removes depreciation. These operating costs are costs which are incurred from operating activities and accommodate things such as appointment food and calefaction and power. Earnings from operations also called Earnings before Interest and Taxes (EBIT). After deducting the total expenses from the net revenue, I have reached on the EBIT figures of KINGFISHER which predominantly are GBP 12,540, 13,681, 15,523, 18,256 and GBP 22,110 each year for the next 5 years. According to the common size statement analysis, the operating income or EBIT of KINGFISHER was around 8.85 to 9.12%. The figures computed by me for the next five years manifesting the same proportion like common size analysis for prior years. The rate of growth of operational income is 9.1%, 13.46%, 17.60 and 21.11% for the years 2011, 2012, 2013, 2014 and 2015 respectively as compared to the same period of last year. Let’s now compute the interest figures of KINGFISHER for the projected years.
Balance Sheet and Cash Flow Analysis
In accounting and finance, disinterestedness is the balance affirmation or absorption of the best inferior chic of investors in assets, afterwards all liabilities are paid. If valuations placed on assets do not beat liabilities, abrogating disinterestedness exists. In an accounting context, Shareholders' disinterestedness (or stockholders' equity, shareholders' funds, shareholders' basic or agnate terms) represents the actual absorption in assets of a company (Cinnamon, R & Larsen, 2006).
The first component comes under the umbrella of equity in KINGFISHER’S financial position is additional paid up capital which was under the bandwidth of 10-12.29%. In this component, I have applied different growth rates for the coming years merely to manage the proportion rate same as the previous years. For year 2011 and 2012 growth rate of 32% has been applied while in 2013 the growth rate of additional capital will decreased to the level of 21.25%. For the next two consecutive years, the growth rate decreased to the levels of 18.2% and 15.51% for the fiscal years 2014 and 2015 respectively.
Retained earning is the second component of equity which is again very important as far as an organization is concerned. Average growth rate has been applied on this particular component to arrive at the figures of 2011 to 2015. The average growth rate is 8% for the next five years of retained earning.
Comprehensive loss is another component of the equity, and KINGFISHER has been recorded comprehensive losses from last few years. The average comprehensive loss for the company according to the press release is 5% and the same has been applied for the analysis of upcoming five years.
Non controlling interest in the last component comes under the umbrella of Equity which proportionally was in the congestion band from 0.22% to 0.27%. To accomplish the same proportional rate, I have applied a growth rate of 5.44% for the next five years to reach on the final figures of total shareholders equity of the company. The total equity projected equity figures of KINGFISHER are GBP 46,902, 53,517, 60,587, 68,050 and 75,793 for the upcoming years of 2011 to 2015 respectively. By accumulating the total equity and total liabilities figures, we have reconciled the balance sheet of KINGFISHER because the total assets are equal to the total liabilities and equities of the company. Maintaining almost the same common size proportion throughout the analysis appraises use that the company will get the revenue target quite easily and will create substantial benefits for its shareholders in the future.
Estimate a Continuing Value
According to the analysis, the company is going with a reasonable pace, which can also be depicting from its net income, revenues and other sort of incomes. From the entire operations, it is found that the ROIC of the company would also be remain positive in the near future as well and it would be lie from 2% to 5%.
Compute the Cost of Capital
The annual report of the company has mentioned that the cost of capital of the company (computed) in the year 2011 was 9.8%.
Convert Enterprise Value to Equity Value
The company has not issued any preferred and right issues for its external shareholders and investors, hence the equity value would be the same as the ordinary shares value.
Corporations mean anything in which employees work together (Erich & Helfert 2001). Organizations have to engage itself in different things merely to increase the bottom line of the company. Inevitably, there are numerous things that collectively contribute in strengthen the financial structure of an organization (Erich & Helfert 2001).
Kinds of different strategies may include, financial, human resources, supply chain and value chain. All of the strategies have one focus which is to increase the shareholders equity. Financial strategy is one of the most important strategies come under the ambit of organizational strategies. For this piece of work, a company should be selected and then analyze its financial strategy from three different angles. The company which has been chosen for his assignment is Kingfisher Plc. From the analysis, it is found that the financial strategies of the company are wonderful and the company has to prolong it for the prosper future of the company.
Mentioned below are some strategies to strengthen the financial strategy of the company.
a) Current Ratio should exceed from the psychological level of 1
b) The company has to reduce the operational cost in order to increase the bottom line of the company
Debt to equity ratio should be maintain on the current level