Financial Analysis of Outdoor PLC

Forecasting is significant for any business. This is because it assists the company plan for the future events. An analysis of current ledgers helps a company to determine the direction to take the business. Most companies, therefore, engage experts in business analysis periodically in ascertaining the efficacy of the company. The success of a business is an important evaluation of the management. In the US and many other countries, policies such as SOX ensure that the management takes up responsibility for any losses incurred by the investors, employees and any stakeholders as a result of mistakes resulting in losses. In this cases, an accounting analysis could help prevent legal offenses by establishing loopholes early enough to seal them. (Dransfield 1)The analysis of the Outdoor PLC presents a compelling case. While the profit and earnings of the stocks indicate a functional unit, other factors signify looming trouble. There is an apparent deterioration in performance especially with regards to paying its current assets. A close analysis of the company’s performance will identify specific areas that the firm is demonstrating weakness and thus need re-evaluation.
Below is the balance sheet whose analysis will help determine the financial prospects for the company.
2015 2014 2013 2012 2011
FINANCIAL RATIOS Profitability Margin Trading Profit
Sales % 7.8 7.5 7.0 7.2 7.3
Return on assets Trading Profit
Net operating assets % 16.3 17.6 16.2 18.2 18.3
Interest and Dividend cover Interest cover Trading Profit
Net finance charges times 2.

9 4.8 5.1 6.5 3.6
Dividend cover Earnings per Ordinary share
Dividend per Ordinary share times 2.7 2.6 2.1 2.5 3.1
Debt to equity Ratio Net borrowings
Shareholders’ funds % 65.9 61.3 48.3 10.8 36.5
Liquidity Ratios Quick ratio Current assets less stock
Current liabilities % 0.74:1 0.73:1 0.78:1 1.13:1 0.93:
Current ratio Current assets
Current liabilities % 1.34:1 1.30:1 1.42:1 1.79:1 1.75:1
Asset ratios Operating asset turnover Sales
Net operating assets times 2.1 2.4 2.3 2.5 2.5
Working capital turnover Sales
Working capital times 8.6 8 7 7.4 6.2
Per share Earnings per share p 15.65 13.6 10.98 11.32 12.18
Dividends per share p 5.90 5.40 4.90 4.60 4.10
Net assets per share p 102.10 89.22 85.95 85.79 78.11
N.B Net assets include tangible fixed assets, stock, debtors, and creditors. They exclude borrowings, taxation, and dividends.
A profit margin expresses the absolute performance of a company over the years since t is the ratio between the profits and sales. This relationship generates figures of 7.3 in 2011, 7.2 in 2012, 7.0 in 2013, 7.5 in 2014 and 7.8 in 2015. Outdoor PLC has thus had an inconsistent level of performance over the years. The first three years demonstrated a declining rate of productivity. This trend, however, changes in the fourth year with a value of 0.5% rise in the profit margin. On the next year, the margin increased but minimally. It is important to note that the margin is measured as a percentage and hence 7% is still a minimal value. It is important for the management to find the underlying the course of the dismal performance. This profit margin will determine the potential of the company to grow and cover its expenses and is thus vital.
The return on assets further demonstrates a peculiar trend. Even while the profit margin was increasing, the return on assets decreases. With the exception of the returns between 2013 and 2014, the other years witnesses plunging results. The return on assets is a measure of how well the management is utilizing the available assets. The data available therefore indicates that the efficiency in using the available assets was decreasing. This is true for example if the company received newer technology but continued to perform below the value of the new technologies which would mean that even though the margin went up, the efficiency decreased. Diminishing return on assets is a bad signal for the company that indicates either poor management strategies, problems with staffing or any other array of challenges that influence of performance. The company must determine why there is a decreasing trend and endeavor to change the direction.
Between the initial two years, there was a sharp rise in the interest cover. After this, there was a continuous decline. This value indicates the capability of a company to service the interests generated from debts and other liabilities. Productive companies should maintain an average of interest coverage higher than two. This means that outdoor PLC was earning enough resources to cover its interests sufficiently. However, a very great value in this figure could also indicate a form of inefficiency in acquiring cheaper sources of loans. For this reason, the high values in the first four years are a probable indicator of unhealthy borrowing trends. (ANG and LIU 2745) This is especially to for 2012 where there was a surge in the interest coverage. To understand these trends carefully, the management should evaluate the borrowing trends and analysis the probable cause of the shift. However, the trend is encouraging. The figure has reduced over the last four years demonstrating improved efficiency in managing the costs. The current value of2.9 is a desirable rate that should be sustained. Going below the value of two means that the company will be at risk of failing to pay the interest accumulated from loans. For this reason, based on the previous continuous decrease in the figure, the management has the task of ensuring that the figure does not continue to drop to unsustainable levels. An explanation of this could be the evidence drawing on increased borrowing through the debt-equity ratio and the decreases return on assets. The two show incoherence between the borrowing and the returns per increased borrowing posing the risk of unsustainable interests on loans.
The coverage on dividends, on the other hand, is the measure of the company’s capability to generate income for the investor. Dividend coverage above two is taken to be a desirable number that will assist in ensuring that the company can sustain the pre-defined level of dividend payout. The dividend coverage for outdoor PLC has been fluctuating over time but has retained a value above two. This is a positive sign that indicates that the company is able to pay out dividends to investors. Some values went as high as 3.1 in the first year. Typically, higher dividend coverage indicates that a company is reserving more of its income to finance current or future investments. It means a possibility for the company to be able to pay even higher dividends in the future and is thus a welcome development. Strategic planning for the future will determine the potential dividends to be distributed and those that should be retained to finance projects for the benefit of lucrative payments in the future. (Wix et al. 1)
Debt equity ratio is a value that gives an insight on the amount portion of the enterprise that is funded through debts. Capital intensive companies are often characterized by higher debt-equity ratios while minimally capital-intensive companies such as those in the IT industry will have minimal debt equity ratios. Importantly, this ratio indicates the amount of risk taken to operate in debts. Outdoor PLC is certainly a capital intensive industry since all the raw materials for making the furniture must be solicited. Additionally, the factories for the preparation of the furniture must be furnished with expensive machinery. It is thus expected that the ratio will be high as can be seen in the presented figures. There has been fluctuation in the value over the period of five years. However, the general trend is an increase in the ratio which is at 65%. This means that 65% of the company’s productivity is financed through debt. This is a significant risk for the enterprise. An evaluation of the effect of this trend can only be identified through the investigation of income. Higher borrowing, which undoubtedly increases the ratio, can lead to an increase in the income. When the revenue generated is more than the cost of the debts, the shareholders will receive more income in dividends. However, there is the second scenario where the company may experience an overwhelming from the debts leading to loss of income. (Wix et al. 1) Too many debts and inefficiency in management can even lead to bankruptcy. This is a segment that should, therefore, be put under investigation to ensure that the benefits of the debts outweigh the costs.
The reason for an insistence on this is the fact that it has been previously established that the return on assets has been decreasing. Relating these two shreds of evidence could indicate primarily that the company is borrowing to increase assets either in the quality of newer technologies. However, the return on assets is decreasing which means that the added utilities are not bearing as much income as would be expected from their implementation costs. A continuation of this trend will mean that the value added by acquisitions gotten through debt is not sufficient to meet the interest and other costs of servicing the loans which will deplete the profitability of the company. The company should thus consider minimizing borrowing and maximizing the utilization of the already available assets.
Among the best measures of how a company is faring financially is through the use of liquidity ratios. There are two important methods of calculating the ratios. The first one is the quick ratio while the other is the current ration. The difference between the two closely related values is the fact that quick ratio considers assets that are more easily changed into cash than the current quota. For the two, a figure of above one is desirable. This is because it means a company can cater for its current liabilities using its existing assets. In the data available, the quick liquidity ratio does not present a very desirable figure. On average, the figure is about 0.7. That number is below the initial years where 2011 recorded a value of 0.93 and 2012 recorded 1.13. In translation, this means that in 2012, for every 1.13 asset fast convertible to cash, the company had one current liability. The company was, therefore, capable of meeting all its financial obligations with its current assets. In 2015 however, the company had 0.74 assets for everyone current liability. This is a precarious position because it means that the firm is not able to pay off its debts with the most liquid sources of income. If the most liquid resources are no sufficient to cover the debts, the company can convert it’s almost liquid resources into cash. The value of these resources is included when calculating the current liquidity ratio. Using this value, the outdoor PLC is fairing on. However, it is noted that the company’s ability to meet its financial obligations have been declining with time. In 2011, the company had a current liquidity ratio of 1.75:1. This means that it had 1.75 current assets to cater for every single current liability units. However, by 2015, this ratio had decreased to 1.34:1. Once again, the liquidity ratios indicate the company is declining with time.
The operating assets ratios are used to determine how many of the assets are being converted into revenue. It is thus important to analyze this fact because it can be used to determine the number of assets that should be eliminated from the balance sheet. The assets are converted into cash and can be used to set off some liabilities or boost operations. A figure of one will allude to the fact that every asset is producing one unit or revenue. In the case of Outdoor PLC, results show that there are multiple units of sales from a unit of assets. (Sinha 415) This would indicate that the assets are all being used o produced some revenue. It could also indicate that there is further potential for growth in the utilization of the assets. On the other hand, the working capital turnover is indicative of management’s ability to utilize its working capital. The lower the figure, the better the position of the company in repaying its debts at the end of the accounting period. Outdoor PLC recorded a rising working capital turnover. This means that its inability to pay its debt at the end of the accounting period is increasing. This information concurs with the rest of the previous information that indicates the company’s strength is reducing with time.
The earning per share, dividends per share and asset value per share are jointly used to determine the profitability of the company. These figures are frequently used to determine how much wealth a company can generate for its investors. The earning per share is the amount of its profit that is distributed to each of its stocks. (Jury 2) According to the available data, outdoor PLC is still profitable and generates considerable wealth per share. This wealth has been rising steadily for the last five years.
This analysis can reaffirm the fact that the company is undergoing financial challenges. This is especially with regards to its ability to finance its current debts. However, it is also evident that the company is making substantial wealth and therefore is not completely incapacitates. To ensure proper progress to the company, the company needs to analyze the reason for segments that are not doing so well. For example, the company should analyze the reason why the working capital turnover is increasing. (Jury 2) Also, figures such as the return on assets are decreasing which means that the assets that are there are not entirely generating income proportional to their value. Besides, the database establishes that every asset available is contributing to sales with the sales being about two times more than the assets. Obviously, this value is not enough to meet the value of the operating assets. There are numerous reforms that should be taken. (“Global Body For Professional Accountants | Accountancy | ACCA | ACCA Global” 1)
Among the reforms would be the culture of borrowing. It is evident that the company is having a difficult meeting its financial obligations from its current assets. This could mean that the company is acquiring credit from very expensive sources. The result of this is that the output of the investments from these loans cannot generate sufficient revenue to meet the cost of these loans. It is important for the company to establish these loopholes and seal them before bankruptcy.
Having determined that the business is not performing maximally, the idea of diversifying is an important one. A high working capital is an indication that clients are no longer buying one’s product as much as they used. For this reason, it would be important to introduce newer products that can generate better revenue. The Outdoor PLC has three important options to consider for this diversification. NPV can be used to evaluate the most beneficial investment from the values indicated. NPV is the measure of an investment’s present value in the future productions. It helps determine the current value for a projected income when a particular value is invested into a business. The outlook for the expected improvement after the improvements is as follows.
Year 1 Year 2 Year 3 Year 4
£’000 £’000 £’000 £’000
(A) 40 50 50 50
(B) 50 60 80 100
(C) 50 100 150 150
Option A
If the company choose to take the first option an expands its retail market to suit all its products, then the expected cash flows will be as follows:
NPV= ∑ {Net Period Cash Flow/ (1+R)^T} – Initial Investment
R =rate of returnT = periods.
Initial investment for this venture is 75000
The following is a table of the present value for the five years starting with year 0 for option A imported from excel.
year present value
0 -75000
1 36363.63636
2 41322.31405
3 37565.74005
4 34150.67277
74402.36323
Option B
If the company chooses to take the second option which includes diversification into internet marketing, then the expected cash flows will be as follows:
NPV= ∑ {Net Period Cash Flow/ (1+R)^T} – Initial Investment
R =rate of returnT = periods.
Initial investment for this venture is 120000
The following is a table of the present value for the five years starting with year 0 for option B imported from excel.
year present value
0 -120000
1 45454.54545
2 49586.77686
3 60105.18407
4 68301.34554
103447.8519
Option C
If the company chooses to take the third option which includes the diversification to create greenhouses and conservatories, then the expected cash flows will be as follows:
NPV= ∑ {Net Period Cash Flow/ (1+R)^T} – Initial Investment
R =rate of returnT = periods.
Initial investment for this venture is 200000
The following is a table of the present value for the five years starting with year 0 for option C imported from excel.
year present value
0 -200000
1 45454.54545
2 82644.6281
3 112697.2201
4 102452.0183
143248.412
Comparing the NPV values, the most logical investment is C. the company should start producing greenhouses and conservatories. Although the initial investment for this is larger, the eventual benefits outweigh the present investments. The higher the NPV, the more desirable the investment and hence the choice of A is better.
A further Analysis of the investments through NPV gives the following results
IRR = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n
Column1 year 0 year 1 year 2 year 3 year 4 IRR
A -75000 40000 50000 50000 50000 49%
B -120000 50000 60000 80000 100000 41%
C -200000 50000 100000 150000 150000 34%
According to IRR, project A would have better reruns than the rest of the projects. The internal rate of A is 49% compared to 34% in the project C expected to be more favorable when NPV is used. Despite the contradicting results, the enterprise should stick on investment C. this conclusion is based on the fact that NPV is usually a superior model of projecting the value of an NPV that IRR.
There is numerous reason why NPV is preferred to IRR while determining the value of an investment. The primary benefit is the fact that NPV can capture the average for a longer period without bias. On the contrary, when IRR is used, it gives varying results for programs with shorter periods of time. The resulting consequence of this, when evaluating shorter programs, they will seem more profitable than programs running for longer. This is despite the fact that a program may run for a long time and ultimately produce better results for an organization than a short project. The same happens when investigating projects with lesser capital requirements. IRR will always generate a favorable result for the project that is least capital intensive. This is evident for the example of Outdoor PLC as indicated above. Option A has a capital requirement of 75000 has a significantly higher IRR compared to investment C with a capital requirement of 200000. Using IRR can lead to a wrongful choice of investments with lesser capital requirements while those with larger requirements have better returns in the long run.
Another reason why NPV is desirable is the fact that it considers the value of money. A shilling today is not the same as the shilling tomorrow. For this reason, it is beneficial to use methods of financial calculation that take care of inflation. NPV considers the present value of a future investment considering a particular value of capital return. In addition to this, the calculation of NPV involves the consideration of both lending and borrowing rates. (Sharma 39) When money is borrowed from an institution, it accrues an additional cost in interests. The investment must, therefore, generate income higher that the installments for the loan and the interests for the company to break even. Other methods of financial forecasting assume a similar rate in borrowing and lending which may cripple the business if the loan rates turn out to be higher than the lending rates.
Since NPV gives a direct view of the present value of an investment, it is easy to interpret and understand. It is also easy to compare numerous investments. It is, therefore, beneficial in helping to preventing misconceiving the benefits of a project in the interpretation. There are only three possible case scenarios for NPV. (Martin 58)When a value is negative, it means that the eventual result of implementing a particular project is a loss. These projects should never be implemented. The second option can be a result of zero. This means that the implemented investment will have no effect on the company’s income. Again, this kind of business should not be undertaken. The primary aim of investing resources is to multiply revenue. If their sum effect is nil; there is no reason to spend time in it. On the other hand, a positive result indicates there will be some positive output from the business. In particular, the value given indicates the exact value of the projects. It is thus also possible to compare two projects with a positive return by only picking the one with a higher return. The analysis of NPV is thus straightforward.
NPV is also easily customizable to reflect the reality of the company and its environment. A majority of the other formula propose a standard measure for all the companies in all industries. However, some industries may have higher risks depending on the markets and also the location. For example, in the banking industry, the risks in issuing a loan in developing countries is much higher that issuing one in the developed countries. The discount rate, however, can be adjusted to cater for the value of risk. It can also cater for other variables such as the opportunity cost, long-term debt, and 64)
There is a big difference when using discounted and non-discounting methods in financial evaluation. Discounted methods are more accurate in determining the attractiveness of a financial investment. This is because they determine the value of money for the time to come and the value of the opportunity cost. For example, it the investments impeded the development of a plan that would have yielded 5% of the total investment annually, and then it is possible to access how much an individual is losing through the use that investment. On the other hand, non-discounted methods give a direct figure that is simply an evaluation of the returns without the considerations of the involved interests. For example, if an investment will bring in 100 dollars for the next ten years, non-discounted methods will determine its output as 1000 dollars. However, this is not true because there are many variables influencing the value of those 1000 dollars for the ten year period. (Sharma 37)
However, there are still numerous financial analysts that would prefer to use non-discounted methods. There are numerous reasons for this. First of all is the ease of calculating these values. Non-discounting methods are straight forward and easily understood by people who do not have an in-depth understanding of economics. (Rao, Rao and Sivaramakrishna 2) For this reason, when the analyst is preparing a report to present so someone who does not have an in-depth understanding of other financial methods, they may choose this method which is easier to illustrate. Besides, it is assumed that when comparing between two investments, a discounted and non-discounted method will produce the same result.
Another reason that may draw an analyst towards the non-discounted methods is the uncertainty regarding trends in the future. The present external environment is difficult to perceive. The political arenas change very rapidly, and the economic policies shift frequently. Globalization has changed the trading arena vastly. It is possible for an investor to move millions in resources from Europe to Asia or from America to Africa in a matter of seconds though the click of a button. (Plewa and Friedlob 1) Financial analysts are therefore at a loss of possible essential discounting figures that they could use. This leads to the decision to apply non-discounted methods circumvent the burden of analyzing the immense number of risks and scenarios. Besides, this method alienates an individual from the responsibility of misleading investments.
Non-discounted methods can also be used to give an analysis where urgency is required. These methods are primarily easier and this faster. They are also somewhat accurate in projects running for a short while where the risk of inflation and other factors is not so prominent. Other individuals feel that cash dictates everything. For a reason, when evaluating only one business or investment, the general approach is that the investment for that single business is better than nothing. For this reason, since no comparison is required, direct calculations are used to determine the probable value and thus plan for the project.
Despite these factors, using non-discounted methods remain to be deceptive. The analyst must keep in mind that the reflected result is not the real value. Whenever income exceeds expenses, then the business is regarded as profitable. But the business must have enough surpluses to remain in operation as well as pay its debts. For this reason, proper financial planning must include the value of the interest that will accumulate over time and the real value of the expenses.
Other factors to consider
So far, this analysis has considered the financial aspect of starting the business of the cost of capital. However, capital is not the only challenge to consider while planning an investment. The environment where the company will be set is essential before a business van be established. One of the primary things to consider is the market for the good. Consideration for the market must engage the factor of the clientele available bust also the competitors. The clientele base can be investigated by simple questioners or review of market trends. The competitors in the same industry will share the market available and thus a company must analyze its strengths as compares to the strengths of the opponents.
Partly as part of marketing, social trend is a big factor to consider when deciding whether to implement a business. Social trends include what the people are drawing towards. It will determine the profitability of a venture in the run. The vitality of this topic stems from the fact that the people are the consumers of the good that industry is preparing. Successful enterprises must be able to establish an emerging a need before it fully blooms. There are two social aspects of that are vital to the analysis of business. A market can be either undershot or overshot. In an overshot market, the consumer is already satisfied with current modifications of a product. The consumer already does not need the majority of the specs and therefore is not willing to pay more for additional product. For such a market, it is wise to divulge into lower segment products. This will prevent loss of market to disruptive startups that are specifically aimed at snatching clients from large enterprises. On the other hand, an undershot market is that which feels a need for more upgrades. This population believes that there are more things that technology could solve and hence would pay more to for expensive technologies. For such a market, it is thus essential to develop further.
Finally, the economic outlook should be considered. The economic status in a particular period determines people capability to invest in a product. Is a company produces a good that is too expensive for the population segment it is targeted for, there will be lower demand and thus losses. The economic power of the people, therefore, affects pricing. A product must be reasonably priced for it to be able to cater for the expenses and the cost of borrowing. If a company projects the wrong value, it will be forced to dispose its goods at a lower price which will negatively influence the productivity of a venture.
If the available funds were 250000, the first step should be an implementation of the third project comprehensively. This is because this project has already demonstrated its capability to generate lucrative income for the capital investment. This investment costs 200000 and thus there will be 50000 more to invest in either of the two remaining projects. A better rationally would be to implement project A. this is because it is not as capitally intensive as B. Instead of 120000, A required 75000. This means that there will be fewer deficits that need to be sought extraneously. It also means that when the project is implemented, it will be more comprehensive that if B is instituted. There is a possibility for A to attain a functional level with 50000 after which it can be advanced with the income from the two segments. However, an attempt to institute B would leave it merely at the foundation without much potential to yield any fruits and thus it is likely to be an absolute waste of resources.
In the investigation of the company, it is already identified that the Outdoor PLC is having a challenge servicing its current liabilities. There is, therefore, a big challenge in previous methods used to finance the operations. The most likely problem is the fact that the company may have sourced funds from institutions with very high-interest rates. (Sinha 415) Borrowing is still a vital way of sourcing for development funds. Having analyzed potential risks and opportunities, the company should be very precise in soliciting loans. These loans should be acquired from sources whose interest is below the capability of the company to repay.
Another source of income could be in selling stocks. Dividing the shares and selling them can generate immense wealth for the organization. Apart from stocks, the company could embark on selling the unnecessary assets in the enterprise. The challenge is this is that unnecessary is a difficult concept to define. While something may be entirely unnecessary for one person, it could be potentially beneficially to another department. It is thus important to discuss and form a clear hypothesis of what will be eliminated in unison.
The stakeholders are an endless source of wealth for a company. In most small businesses, the actual stakeholders may have more wealth than the entire organization. These individuals can be very handy in financing developments of an enterprise. Additionally, the company can seek such opportunities as government subsidies. This will help reduce the investment cost and this increase the profitability of the company.

Works Cited
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