Kier Group plc is a leading company involved in construction, development and services specialising in building and civil engineering, support services, public and private house building, property development and the private finance initiative (PFI). The Group's annual revenue is £2.4bn and 11000 employees are employed by it worldwide.
1: Be able to analyze financial data.
Financial ratios indicate the financial situation and performance of a company. Ratios are mostly calculated by the information which is provided by the financial statements. Financial ratios are used to compare the performance of the company with the industry and also to previous years' financial statements which helps focusing on the areas which require attention. It is also a very important tool for decision making. Ratios are of following type;
Profitability Ratios
Liquidity Ratios
Efficiency Ratios
Investment ratios
Profitability Ratios
These ratios examine the profits made by a firm and compare these figures with the size of the company, the assets employed by the company or its level of sales. These ratios can also be used to examine how well the company is operating or how well the current performance is compared to past performance.
Return on Capital Employed
Return on Capital Employed is the percentage return on the capital invested in the business. It is a ratio which shows how effectively a company uses its capital invested. It is often seen as a prime ratio as it provides a direct measure of the main task of a company i.e. to maximize the return on capital invested.
ROCE= (profit before interest and tax / ordinary share capital + reserves) x 100%
Gross Profit Margin
It shows the profitability of the company before deducting the expenses. It shows the gross profit as a % of sales revenue. It shows what % of turnover represented by gross profit or how many pence out of every pound of sales is gross profit.
Gross Profit Margin = ( sales revenue/gross profit ) x 100%
Net Profit Margin
This profit indicates the profitability after all costs have been deducted. It is net profit as a % of sales revenue.
Net Profit Margin = (sales/net profit) x 100%
Liquidity Ratios
Liquidity ratios show the ability of a company to pay its creditors. They enable us to examine the strength of the company in terms of its ability to pay off its short term debts.
Current Ratio
They compare all current assets with current liabilities and indicate the ease with which, given time, a business will be able to meet its debt. As a guide, most business will require ratio of 1.8:1. Too high a ratio would suggest too much money is tied up in current assets, whereas too low a ratio could be dangerous if the creditors press for a quick payment.
Current Ratio = Current Assets/ Current Liabilities
Acid Test Ratio
This takes a tougher view, as it excludes stock from the current assets. This is done because, in some businesses, it can take a long time to turn stock into cash. As it is rare for the creditors to all ask for payment once, time is allowed for the money to be obtained from debtors. A reasonable level of cover would be about 0.8:1.
Acid Test Ratio = (current Assets - Stock)/ Current Liabilities
Efficiency Ratios
These ratios look at the internal workings of the company, they measure the efficiency with which the company measures its resources (assets) and liabilities. . They are used to assess the extent to which the assets and liabilities are fully utilized. Efficiency improvements should help increase profitability and cashflows.
Account receivable collection period
This ratio assesses the speed with which a business collects amounts owing from customers. The lower the collection period the more efficient is the control of credit. Most companies operate on a normal credit period to customers of 30 days. An acceptable debtor collection period might therefore be something like 30-36 days. Very high collection periods would indicate that the credit control system needs to be improved and that either incentives should be given to customers or effective sanctions applied against slow payers.
Account receivable collection period = (Average Accounts receivable/ credit sales) x 365 days
Accounts Payable collection Period
It measures the average days taken by a business to be able to pay any money owed to its suppliers. It is important to know how long it is taking for the business to pay its creditors because delay in payments could result in credit facilities being lost or penalties being imposed.
Accounts Payable collection Period = (Average accounts payable/ Credit Purchases) x 365 days
Stock Turnover ratio
This measures the number of times the business sells and replenishes its stocks. It shoes how many times on average, bundle of stock was sold during the last accounting period.
Stock Turnover ratio = (Stock/Cost of sales) x 365 days
Gearing ratio
This is an assessment of the extent to which a business is financed by long term loans. It is a very important ratio for prospective lenders, as many like to see the owners/shareholders providing at least half of the overall capital of the business. They may not be prepared to lend as further lending would push the gearing ratio too high. If the gearing ratio becomes too high or if the interest risesIt consists of two ratios, the business could do the following to improve the situation.
Raise more shareholder's funds by issuing shares and perhaps using some of this cash to repay loans.
Sell fixed assets and use the proceeds to repay loans.
Equity Ratio = debt/equity
Leverage ratio = (Ordinary share capital+ reserves/total assets - current liabilities) x 100%
Investment ratios
These ratios concentrate on the long-term health of a business - particularly the effect of the capital/finance structure on the business.
Earning per share
Earnings per Share = Profit after tax and preference dividend/ no. of ordinary shares
Dividend Yield
This relates the income from shares, the dividend to the value of the investment in the business. Consequently the result can be compared with the interest rates with other type of investments. Another factor which would also be considered would be any increase in share price, as this represents a capital gain to the share holder.
Dividend Yield = Annual dividends per share / price per share
