FINANCIAL REPORTING AND ANALYSIS

Financial Reporting and Analysis

Abstract

The purpose of this report is to analyze the Busybank plc Company's performance and financial position. The company's performance is evaluated by profitability and efficiency ratios and some conclusion are drawn. By relying on liquidity and gearing ratios, the financial position of the company is discussed. Finally, the importance of cash management is described and the cash situation of the company is analyzed. The two competitors in the same industry, which were the Sun Ltd and Show Ltd, were chosen for assessing the ratios. The outcomes of calculating same ratios for these companies were compared with a set of four-year trend in Busybank plc Company's ratios. In order to evaluate the ratios, all of them are benchmark against Time, Industry competitors and Expectations (TIE method).

Financial Reporting and Analysis

Part (a)

Return on Capital Employed (ROCE)

ROCE is one of the most important ratios for measuring performance of companies. The ratio expresses the relationship between the company's profit and total capital which is invested in the company. Therefore, the more ROCE shows that more profit has been generated by certain amount of investment. (Aldwinckle, 1987, 19-20)

This ratio for Busybank plc keeps on increasing and it has increased more than 5% since 31st March 2005. Despite of a high increase in profit margin (£ 11.6m to £ 63.3m), the ROCE has not increased so much. This fact is because of the more capital which has been invested in forms of shares, reserves and long term liabilities. Referring to other competitors in this industry, Busybank plc's performance in terms of ROCE is not satisfactory. (Aldwinckle, 1987, 19-20) On the other hand, comparing this ratio with the bank interest, it can be concluded that if the money had been invested at bank the company could have made same money which means that the profit has not covered the risk of investment. All above facts together, if the ROCE continue on increasing, it can become satisfactory in the next years.

Return on Sales (ROS) and Asset turnover

For evaluating performance more precisely, The ROCE can be broken down into two ratios: ROS and Asset Turnover (ROCE=ROS*Assets Turnover). The ROS reflects the margin generated by each pound of sales and, Assets Turnover shows how much sales is generated per each pound of capital employed. (Brindle, 1987, 49-62) To enhance the profitability and efficiency, the company has to consider both figures and attempt to promote each of them. Referring to calculations (appendix) and below charts, it can be concluded that the reason of low ROCE is low ROS, not Asset Turnover. Busybank plc is almost twice more efficient in use of its assets in comparison to its other competitors, but it is not generating high profit out of its sales. Although the ROS has been increasing every year but still has a considerable difference with the competitors. (Brindle, 1987, 49-62)

Cash flow

Gross Profit Margin (GPM)

Up to this stage, it has been found out that the low ROCE is because of the low ...