Operating efficiency
The operating efficiency of the company will be measured using efficiency ratios that are presented in the table above. The value of day’s sales outstanding rose in 2012, declined between 2013 and 2014, and rose again in 2015. When the value increases, it shows the company takes a long time to collect receivables. In such instances, the values of receivables turnover are low. On the other hand, if the value of the ratio is low, then it indicates that the company takes a shorter time to collect the receivables. The payables turnover increased during the period. Besides, the values were quite high. This indicates that the company takes a long time pay creditors. This indicates a low level of efficiency. However, it increases the working capital of the business because it increases the duration the company holds cash. Finally, there was a general growth in fixed asset and asset turnover. It shows an improved efficiency in use of assets (Collier 57). Thus, the operating efficiency of the company is erratic. It lacks trend. Therefore, it is difficult to predict future trends of the company (Fridson and Alvarez 56).
Profitability
The table presented below shows a summary of profitability ratios.
The profitability ratios will give information on the earning capacity of the company. Generally, it can be observed that the ratios improved between the years 2011 and 2013. Thereafter, the company experienced a decline. The gross profit margin was high during the entire period. This can be attributed to the fact that the company does not directly deal with the buying and selling of commodities. The operating margin was also high. The ratio indicates that the company is efficient in managing income and costs that relate to the key activities of the company (McLaney and Atrill 148). The net margin ratios, which give information on how the company is efficient in managing both operating and non-operating activities of the company, were high. This shows that the company is efficient in managing the business. The values of return on assets were low. It indicates that the amount of profit generated per unit of a fixed asset was low. This can be attributed to the fact that the profits are either low, or the fixed assets that are held by the company are no longer productive. Finally, the values of return on equity were high. The ratio gives information on the amount of net income that is generated per unit of shareholder’s equity. The high value of the ratio indicates that the management is efficient in using equity to generate earnings (Fridson and Alvarez 98).
Analysis of cash flow statement
There was a general increase in cash generated from the operating activities of the business. The value rose from £366 million in 2011 to £473 million in 2013. Thereafter, the value dropped to £455 million and further to £446 million in 2015. This section of the cash flow statement gives information on the amount of cash generated or cash used in the key operating activities of the business (Fridson and Alvarez 102). Since working capital is a component of cash generated from operating activities, it shows that the company is efficient in working capital management. However, it is worth mentioning that companies can influence cash flow from operating activities by increasing the duration they take to pay a debt, lowering the collection period, and failing to buy inventory (Deegan 102).
The cash flow statement also reveals that cash was used in investing activities. A significant amount of cash was generated from sales/maturity of investments. Further, the company used cash during the five year period for the purchase of investments. Further, a small percentage of the money was spent on the purchase of property, plant, and equipment. Finally, it can be observed that some cash was used in and generated from acquisitions and dispositions. These acquisitions and dispositions relate to divestitures, subsidiaries, and joint ventures (Fridson and Alvarez 85).
A further review of the cash flow statement shows that cash was used in financing activities throughout the entire period. A significant proportion of this amount was used in dividend payments. The amount of dividends paid by the company rose gradually from £105.5 million in 2011 to £265.8 million in 2015. In 2011, the company repaid debt worth £77.9 million. There was no debt repayment in the subsequent years. Further, it can be noted that some cash was used for repurchase of cash (Brigham and Ehrhardt 103). Therefore, it can be noted that a significant amount of cash was used in financing activities as compared to the amount generated. The amount of cash generated from operating activities exceeded the amount spent on investing and financing activities. This resulted in a positive net change in cash. This shows that the operating activities of the company can generate funds that can adequately finance other activities (Arnold 86).
Works Cited
Arnold, Glen. Corporate Financial Management, UK: Financial Times/Prentice Hall, 2007. Print.
Brigham, Eugene and Michael Ehrhardt. Financial Management Theory and Practice, USA: South-Western Cengage Learning, 2009. Print.
Collier, Peter. Accounting for Managers, London: John Wiley & Sons Ltd, 2009. Print.
Deegan, Craig. Financial Accounting Theory, London: McGraw-Hill, 2009. Print.
Fridson, Martin, and Fernando Alvarez. Financial Statement Analysis: A Practitioner’s Guide, USA: John Wiley & Sons, 2011. Print.
McLaney, Evans, and Peter Atrill. Financial Accounting for Decision Makers, London: Financial Times/Prentice Hall, 2008. Print.