Analysis of FSDMP Financial Statements
Introduction
Sports World is the largest sporting goods store in the UK with a turnover of close to 216 million
pounds. It operates over three hundred and ninety eight stores in forty five cities across the
world.
Accounting Standards
The financial statements have been prepared in accordance to the provisions of the Companies
Act as per Group financial statements and also in compliance to International Accounting
Standards (IAS article 4 of the standards regulations) and also in line with the International
Financial Reporting Standards (IFRS). (Drucker, 1999)
Based on the current financial ratios, what is Sport World’s performance record and what are
the future expectations?
The performance of Sports World’s is relatively average. The efficiency ratio of FSDMP which
is calculated by; Inventory Turnover = Cost of Goods Sold/Average inventory. Shows the rate at
which inventory is being turnover in order to generate revenue. A higher ratio indicates
Analysis of FSDMP Financial Statements
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efficiency in the management of the stocks by reducing and minimizing the cost of inventory as
investment. Inventory turnover for FSDM = 3.1 for 2012 and 2.2 for 2011. The inventory turned
3.1 times in the year 2012. Total assets turnover = sales / average total assets = 2.3 and 2 for
2012 and 2011 respectively. The firm in the year 2012 generated 2.3 dollars for every dollar
invested while in 2011 it generated 2 dollars for every dollar invested in the company. These
reflected an increase of about 15%. This shows some slight improvement in its performance and
may a good indication of better future prospects.
What is its record with regards to growth and stability of earnings and cash flow and
operations?
The growth of total assets increased by 25.5% to 95.298 million pounds from the previous
75.909 million pounds in the year 2012 and 2011 respectively, due to increased investment in
modern technology. Total liabilities increased by 29.8% while the current liabilities increased by
34.4%. The net assets or the total stockholders equity in the year 2012 amounted to 45.935
million while 2011 was 37.867 million pounds which reflected an increase of 21.3% in net assets
in the year 2012. Inventory increased by 28% while other receivables also increased by 7.3% for
the same period ending 2012.
How is the firm performing in terms of key indicators of debt, profitability, liquidity and
productivity?
FSDMP Net sales increased by 41% for the year ended 2012. Cost of goods sold and the Gross
profit margin for the same period also increased by the same margin. The Return on Capital
Employed (ROCE) in the year 2012 was 42% on pre-tax profits excluding assets that are
intangible. The year to year investments resulted in a much lower ROCE. The profit earned
before tax (EBIT) increased by 63% in the year 2012. The Earnings per Share (EPS) increased
Analysis of FSDMP Financial Statements
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by 52% that stood at 1.96 pounds from 1.29 pounds per share in 2011. (Ehrhardt and Brigham,
2008) Inventory turnover for FSDM = 3.1 for 2012 and 2.2 for 2011. The inventory turned 3.1
times in the year 2012. Total assets turnover = sales / average total assets = 2.3 and 2 for 2012
and 2011 respectively. The firm in the year 2012 generated 2.3 dollars for every dollar invested
while in 2011 it generated 2 dollars for every dollar invested in the company.
Trade creditors increased by 88.3% in the year 2012 from the year 2011 i.e. the creditors total
credit amounted to $14.294 million pounds in the year 2012 while the year 2011 had $7.591
million pounds. The total debt increased by 6.703 million pounds in the year 2011.
Ratio Analysis – Profitability
Gross profit of FSDMP for the year 2012 increased by 41% from the year 2011. The operating
expenses were managed effectively which resulted in favourable EBIT and NPAT (Profit After
Tax) The Return on Capital Employed (ROCE) in the year 2012 was 42% on pre-tax profits
excluding assets that are intangible. The year to year investments resulted in a much lower
ROCE. (Garrison, Noreen and Brewer, 2009)
Ratio Analysis – Efficiency
Inventory Turnover = Cost of Goods Sold/Average inventory. It shows the rate at which
inventory is being turnover in order to generate revenue. A higher ratio indicates efficiency in the
management of the stocks by reducing and minimizing the cost of inventory as investment.
Inventory turnover for FSDM = 3.1 for 2012 and 2.2 for 2011. The inventory turned 3.1 times in
the year 2012. Total assets turnover = sales / average total assets = 2.3 and 2 for 2012 and 2011
Analysis of FSDMP Financial Statements
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respectively. The firm in the year 2012 generated 2.3 dollars for every dollar invested while in
2011 it generated 2 dollars for every dollar invested in the company. ( Helfert , 2004)
Ratio Analysis – Liquidity
Liquid assets are those assets that can be easily converted into cash. The current ratio is one of
the short-term methods of analyzing the risk of defaulting in payments because of shortfall in
financial resources. Current ratio = Current assets/Current liabilities. The year 2012, $65.846/
$27.461, 2011, $56.264/$20.432, = 2.4 for 2012 and 2.8 for 2011. The liabilities are covered at
2.4 times for 2012 and 2.8 times for the year 2011. With a higher liquidity the company cannot
default or be unable to meet its short-term obligation. (Ross, Westerfield & Jaffe, 2002)
The quick ratio = Total current assets – inventories/ current liabilities = 0.7 for the year 2012 and
- These ratios are unfavorable as they do not meet the 1:1 threshold that’s required for
effective management of the company’s liquidity position. It basically means that FSDMP can
default in the payment of its debt. (Cheng and Junkus, 2007)
What is the firm’s capital structure?
A firm’s capital structure is basically the way the company’s assets are financed. The capital
structure of FSDMP is made up of 10.5% common stock made up of 10,000,000 shares, 2.1 %
additional capital and the rest is retained earnings.
How will the firm’s required rate of return change with the proposed purchase? How much risk
is inherent in the firm’s capital structure?
The firm’s rate of return will decrease as it will apply a large capital base than before. The
funding from the company’s equity gains no tax benefits unlike other loans borrowed which have
tax advantages. i.e. When a company borrows money to invest in the business, the government
Analysis of FSDMP Financial Statements
5
allows interest expenses to be deducted in order to arrive at the taxable income. Tax liability is
reduced. But when equity is utilized no deductions are allowed on the grounds in terms of
divided.
What are the expected returns, given the firm’s current condition and future outlook?
Balance Sheets for the ended xxx(£000s)
xxx
ASSETS
Current Assets
Cash £
4,061
Marketable securities (note A) £
5,272
Accounts receivable* £
8,960
Inventories £
47,041
Prepaid expenses £
512
Total current assets £
65,846
Fixed Assets (Notes A, C and E)
Land £
811
Buildings and leasehold improvements £
18,273
Equipment £
21,523
Total Land, Building and Equipment £
40,607
Less accumulated depreciation and
amortization
£
11,528
Net property, plant and equipment £
29,079
Other Assets (Note A) £
373
Total Assets £
95,298
LIABILITIES
Current Liabilities
Analysis of FSDMP Financial Statements
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Accounts payable £
14,294
Notes payable-banks (note B) £
5,614
Current maturieties of long-term debt (Note
C)
£
1,884
Accrued liabilities £
5,669
Total current liabilities £
27,461
Long-term liabilities
Deferred taxes (Notes A and D) £
843
Long-term Debt (Note C) £
21,059
Total long-term liabilities £
21,902
Total liabilities £
49,363
STOCKHOLDERS’ EQUITY
Common stock, par value £1, authorized
10,000,000 shares;
£
10,000
Additional paid-in capital £
957
Retained Earnings £
40,175
Total stockholders’ equity £
51,132
Total Liabilities and Stockholders’ Equity £
100,495
Source from Excel work sheet.
The company’s expected returns are positive. The firm’s current condition is still very strong
with total assets turnover of more 2.3 dollars per dollar invested. The total stockholders equity
will amount to 51.132 million pounds while the total liabilities and stock holders equity will
eventually amount to 100.495 million pounds.
What will be the impact of the proposed expansion plan?
The impact means that the current management of FSDMP will lose control of the company and
new management will come in. When a company borrows money to invest in the business, the
Analysis of FSDMP Financial Statements
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government allows interest expenses to be deducted in order to arrive at the taxable income. Tax
liability is reduced. But when equity is utilized no deductions are allowed on the grounds in
terms of divided. When everything else remains constant, the higher the increase in marginal tax
value or rate of a particular firm, the more its capital structure will be indebted. When companies
borrow more debts the probability of bankruptcy increases.(Moyer, Kretlow and McGuigan,
2011).
What will the financial statements look like in five years time?
In the next five years the company will be heavily gear.
Will the firm be able to make a profit?
Discussion of alternatives: you should present your assessment of risk to your bank (what could
go wrong), any alternatives in terms of the transactions being offered (mix of loan, debentures,
etc) Risky companies should borrow less other things remaining constant. The risk is normally
defined as the average variance rate of the current market total value of the company’s assets. A
high variance rate presents a higher probability of failing to repay the loan or debt. Most
companies prefer internal financing as they adapt most of their dividend payment ratios to
investments. When companies feel their need for external financing then they mostly issue the
best and safest security first i.e. debt, convertible bonds and probably equity as the final option.
There is no clear and well defined mix of debt-equity because there are only two types of equity
i.e. internal and external.
Do you think your bank should underwrite the issue of bonds and provide the loan?
Yes. The banks will ensure that all the bonds are taken up as the bank will compensate the
shortfall in case the corporate bonds cannot attract investors at the minimum price agreed upon.
Analysis of FSDMP Financial Statements
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The banks usually bank on the market risk rather the normal credit risk. Besides banks often use
the bond market as a supplement for deposits. Bonds are classified as tier 2 source of capital.
Reference
Drucker, F. (1999) Management Challenges of the 21st Century. New York: Harper Business.
Ehrhardt, M., Brigham, E. (2008) Corporate Finance: A Focused Approach (3rd Ed.). p.131.
Garrison, R., Noreen, W., Brewer, P. (2009). Managerial Accounting . McGraw-Hill Irwin.
Kieso E., Weygandt, J. J., & Warfield, T. D (2007). Intermediate Accounting (12th
Ed.).(Hoboken, NJ: John Wiley & Sons, p. 1320.
Khan, M. (1953) Theory & Problems in Financial Management. Boston: McGraw Hill
Higher Education.
Vance, D. (2003) Financial analysis and decision making: tools and techniques to solve
financial problems and make effective business decisions. New York: McGraw-Hill.
www.Yahoo.business finance.com
Cheng, L., Junkus, J. (2007) Financial analysis and planning: an overview , Journal of
Economics and Business, 35(3–4), pp.259-283
Helfert , E. (2004) Techniques of Financial Analysis: A Modern Approach, New York: McGraw-
Hill Education
Analysis of FSDMP Financial Statements
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Ross, A., Westerfield, R. & Jaffe, F. (2002) Corporate Finance, 6th ed. McGraw-Hill/Irwin,
New York.
Moyer, C., Kretlow, W., McGuigan, J. (2011). Contemporary Financial Management (12 Ed.).
Winsted: South-Western Publishing Co.
