Custom «Analysis of Financial Statements» Essay Paper Sample

Analysis of Financial Statements

Return on Capital Employed (ROCE)

Basically, Return on capital employed (ROCE) ratio indicates efficiency and profitability of an organization's capital. This ratio is calculated by computing the value of earnings before interest and tax divided by total assets less current liabilities. Before analyzing this ratio for our company of interest, it is important that it is noted down that ROCE ratio should be higher than the cost at which a company borrows capital. Capital is made up of shareholders funds plus long term debt.

In 2006, ROCE for Tottenham Hotspur Plc. was -15.11% implying that this company's returns from employed capital were less than costs incurred. Company's top management could not effectively use available capital to produce returns that would cover all costs that were incurred during this period. In the following year, Tottenham Hotspur Plc. turned tables and effectively employed available capital to make positive returns. 2008 saw the company make positive returns from its capital but at a declining rate from the previous period. After 2008 the company made an improvement in capital usage and recorded an increase of ROCE at 19.69% from the previous year's figure which was 5.42%. In 2010, things went wrong again and the company recorded a negative figure.

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From the analysis, it is evident that there is inconsistency in annual values ROCE. Two factors may have contributed to this: the company is either ineffectively and inefficiently using capital to generate returns, or the company may be experiencing a debt burden. Debt affects return on capital employed and so this may be a possible explanation why this ratio's figure keep rising and falling.

Gross profit Margin

This ratio is directly related to pricing strategies of a company. It is calculated by simply computing the total revenue less incurred costs. This ratio, for a stable company, should not fluctuate a lot from one accounting period to another unless; the industry which a company is operating is undergoing drastic changes likely to affect prices.

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We now turn to our analysis. From the table, it is evident that gross profit margins for Tottenham Hotspur Plc., within the five accounting periods of our analysis, has fluctuated from as high as 32.55% to -1.29%. The stability of this company is thus in doubt. In 2006, the company had the lowest gross profit margin (at least in the 5 years of analysis) which stood at -12.7%. This means that the company had its mark up way below 100%. After 2006, the company showed an improvement in its pricing strategy but this lasted for only 3 years. In 2010, the company's mark up fell below 100%.

We can only guess the reasons for these fluctuations to be drastic changes in costs of goods and services or changes in pricing strategies.  

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Operating expenses

This ratio is related to the cost of operating a given property and the income generated from operating that property. A high operating expense ratio (OER) deters investors from investing in that particular company. The importance of this ratio is that it shows how the management is effectively using property. The lower the OER the more likely a company is to attract new investors.

From the table, it can be read that in 2006 Tottenham Hotspur Plc. spent 112.7% of its income generated from property to cater for maintenance and operating expenses. In the other four years, OER ratio remained quite high with the lowest ratio recorded in 2009. In 2009 and 2010, the company used more than was earned from property to cater for maintenance and operating expenses.

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If a verdict was to be reached from operating expenses ratio for our company of analysis, we would conclude that the company's management is ineffective in managing property. What can be realized from the figures is that Tottenham Hotspurs Plc. is spending more of its income generated from property to pay for expenses such as property management fees, wages, utilities, advertising, legal fees among other operating expenses.

Net profit margin

This ratio is also known as profit margin. It indicates the proportion of sales that is retained in earnings. It is calculated as net profits divided by total recorded sales. A positive profit margin ratio shows that a company is taking control of its costs.

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In 2006, net profit margin for Tottenham Hotspur Plc. was -12.7%. This means that the company incurred more costs than what had been earned in this particular year. In the following year (2007), profit margin improved from a negative figure to 28.73%. This means that for every dollar or pound earned in sales, 0.28 dollars or pounds were retained in earnings. 2008 saw only 0.06 dollars/pounds retained in earnings. In 2009 net profit margin was the highest in the five years of analysis at 32.55%. This means that 0.3 of each dollar earned was retained in earnings. In 2010, however, the company incurred more costs than what it earned from sales.  

On average, the company seems not to be performing poorly as far as net profit margin is concerned. For three out of the five years, Tottenham Hotspurs Plc. recorded positive net profit margins meaning that the company's managements has been in control of the costs incurred by the company.

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Fixed Asset ratio

Fixed assets ratio shows how a company is able to generate net sales from use of fixed asset investments. It is calculated by dividing net sales by total fixed assets (plant, equipment, fixtures and fittings). A high ratio means intensive utilization while a low ratio may be a pointer of fixed assets underutilization.

From the table, what can be read are ratios that are way below 5%. The highest fixed asset turnover ratio for our company was recorded in 2006 and this stood at 2.29 percent. The lowest figure was recorded in 2009 and this was almost zero. What can be concluded here is that the company, in the five years, failed to successfully employ fixed assets in generating net sales. The figures displayed can be compared with those of a company that is just breaking even. Overall, this ratio for is not at all pleasing.

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A Message to Interested Investors (Customers)

Five profitability ratios for Totenham Hotspur Plc. have been analyzed.  A brief description of what a ratio entails has been provided. This was to avoid jumping into conclusions. From the ratios, as a financial advisor, I would advise an interested investor to think otherwise about this company.

Return on capital employed (ROCE) are supposed to show how capital (shareholders funds and debt) is used in generating returns. From the table, is evident that this ratio is not at its best. Negative ratios have been recorded while high positive figure would be desirable. A look at gross profit margin show that the pricing strategies of Tottenham Hotspur are poor or the company is unable to control its costs. Negative figures in this case mean that the company's mark up is below 100%.

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Operating expenses ratio show that more of income generated from property goes into financing operating and maintenance expenses; a fact that does not go down well with serious investors. Net profit margin ratio for 2 out of the 5 years is negative meaning that the company may have struggled with losses in the 2 years. Finally, fixed asset turnover figures are positive but very low. This is an indicator that fixed assets may be underutilized. From the issues raised here, I would high recommend against buying shares from this company. A serious investor should look for an alternative.

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