Financial Management and Control – Kingspan
Contents
- Introduction
- Profitability Ratios
- Gross Profit Ratio
- Net Profit Ratio
- Return on Capital Employed (ROCE)
- Liquidity Ratios
- Current Ratio
- Quick Ratio/Acid Test Ratio
- Efficiency Ratios
- Debtors Days
- Creditors Days
- Inventory Turnover Days
- Gearing Ratios
- Gearing Ratio
- Debt to Equity Ratio
- Interest Cover
- Investment Ratios
- Earnings per Share
- Price Earnings Ratio
- Dividend Cover
- Sources of Finance
- Debt capital
- Lease and Hire Purchase
- Share Capital
- Creditor & Debtors
- Reducing stock levels
- Conclusion
Introduction
Below are the ratio findings based on Kingp PLC’s annual report year ended 31st December 2010. The ratios are calculated for both 2010 and 2009. There is a slightly higher Gross Profit in 2010. Kingp is now holding onto. 51% more of each euro of sales then they were in 2009. This is due to the increase in sales. There is a slight increase of 08% in 2010 compared to 2009. If going by the gross profit ratio this should have been higher; this indicates that they need to manage their expenses more efficiently thus increasing their net profit. Kingp has been less efficient in using their capital in 2010; they are down by . 2% from 2009. Although there was an increase in sales in 2010 the decrease in ROCE is due to the higher borrowings in 2010. If in the following years they continue this trend investors could start to worry and sell shares.
Liquidity Ratios
The current ratio in 2010 shows that Kingp are managing their short term debt more efficiently than in 2009; this is due to increasing their current assets and managing to keep their currents liabilities relativity steady. They need to manage their debtors and stock better to further increase the ratio which will entice potential investors.
Quick Ratio/Acid Test Ratio
Kingp may have had difficulty in paying their short term creditors but they have managed to increase it in 2010. Given the ideal ratio of 1:1, they could look at investing the surplus assets for a return.
Efficiency Ratios
Kingp was managing their debtors better in 2009. There is an increase of 8 days in 2010; this could potentially lead to bad debt. Collecting their debt earlier will increase the liquidity of the business. They could offer discounts on early payment or offer a cash price.
Creditors Days
Kingps’ creditors days have decreased by 2 days meaning they are paying off their debts 2 days earlier than in 2009. This shows that Kingp is managing its debt more efficiently and may interest potential investors.
Inventory Turnover Days
Kingp has managed their stock more efficiently in 2010; by doing so they have increased their cash flow and reduced their holding costs.
Gearing Ratios
By decreasing the level of gearing they have decreased the level of financial risk, although they have increased their borrowing the increase in capital is greater meaning that they are using less debt to make their profit.
Debt to Equity Ratio
Debt to equity has decreased by almost 2% in 2010 showing that there are more shareholders funds to borrowings. This shows that Kingp can manage to pay their debts which is important for future borrowings and investors.
Interest Cover
Loan Interest12,59412,750 There are higher interest rates associated with short term borrowings than there are with long term borrowings. By reducing their short term and increasing their long term borrowings Kingp has reduced its finance costs in 2010. They have also increased their sales giving a better interest cover. It shows that in 2010 Kingp would be able to pay their interest 5. 35 times compared to 4. 91 times in 2009. Bank and investors would look at this ratio to see how they cover their loans.
Investment Ratios
Earnings per share in 2010 have remained almost the same as in 2009. It is displayed here rounded but 2010 has a slight increase. It shows the profitability of Kingp and the consistency of the EPS shows security. Shareholders are receiving a slightly higher return in 2010.
Price Earnings Ratio
It is more expensive to buy Kingp shares in 2010 than compared to 2009; this shows confidence in future earning power. Earnings per Share6,661 Kingp can pay their shareholders times from their available profits. They did not pay any dividends in 2009; this could have been a strategic move to increase cash flow.
Sources of Finance
Kingp operates a number of different finance sources.
Debt capital: Kingp have both long and short term borrowings. With short term borrowings such as overdrafts and hire purchase Kingp will pay a high-interest rate on their 2009 borrowings of €31,863mn but they have managed to reduce that by over half to €14,259mn. This will reduce the financial costs. The interest rate for long term borrowings is generally a lot lower than that of short term loans; although Kingp increased there long term borrowings in 2010 by €12,529mn they will be paying a lower interest rate, again saving on finance costs. By reducing their short term borrowings and increasing their long term borrowings in 2010, Kingp has managed to reduce its overall finance cost to €156mn in 2010. The long term borrowings of €213,671mn have been scheduled for staggered repayments over 5 years, this ill allow Kingp to meet their liabilities when due. Interest rates for loans over €300,000 can be discussed with individual financial institutions. Kingp’s interest rate for both long and short term loans will depend on their credit rating. They will have to be able to produce cash flow forecasts or provide security for the loan. 6. 2Lease and Hire Purchase This form of finance allows Kingp to obtain the use of an asset without a large initial cost. It is beneficial as the risk remains with the owner and as technology changes, they can upgrade the equipment with minimal cost. Kingp has increased its lease/hire purchase costs by €7 mn in 2010.
Share Capital
The core funding in Kingp is provided by shareholders; this increased by €81,410mn in 2010. Although there is risk involved and there may be a high return expected by using this form of financing there is no requirement to pay dividends even if profits exist. As Kingp does not have preferred shareholders they did not pay out dividends in 2009 and allowed them to retain their profit and improve sales.
Creditor & Debtors
Kingp’s creditors’ days decreased by 2 days in 2010; depending on the agreement they may have been able to receive a discount for early payment. However, agreeing longer credit terms with their suppliers would allow them more flexibility with cash flow. In 2009 Kingp was also managing their debtors days more efficiently than that of 2010. This may be due to the downturn in the economy and to make sales they could have offered longer repayment options. If needed Kingp could renegotiate the terms or offer discounts for early payment.
Reducing stock levels
By reducing the number of days stock is held will save on holding costs such as security, light, heat, warehousing, and staff it will also reduce the risk of spoiling or obsolete goods. Kingp has managed to reduce their stock turnover days to 51 days compared to 60 days the previous year.
Conclusion
Overall Kingp is performing better in 2010 than compared to 2009. The sources of finance are working well for the company, they have a low gearing ratio and have moved funds between long and short term borrowing taking advantage of a lower interest rate. They are managing their creditor, debtor, and stock turnover days more efficiently than in 2009. They are leasing or using hire purchase to obtain assets this giving Kingp the use of equipment without a large initial cost. Given the industry and the economic climate in 2010. Kingp shows to be a liquid company and shows confidence in future earnings.
