TABLE OF CONTENTS. INTRODUCTION. PROCEDURE. FINDINGS. 1.

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INVESTMENT RATIOS – MEASURES OF EFFICIENCY. 1.1 Earnings per Share. 1.2
P/E Ratio or Price / Earnings Ratio 1.3 Dividend Yield. 1.4 Dividend Cover. 2.0
PRIMARY OPERATING RATIOS – MEASURES OF EFFICIENCY. 2.1 Return on
Capital Employed 2.2 Debtors Turnover Ratio 2.3 Creditors Turnover Ratio 2.4 Return
on Shareholders’ Fund 3.0 PRIMARY FINANCIAL RATIOS – GEARING AND
LIQUITY. 3.1 Gearing Ratio 3.2 Liquidity Ratio 3.2.1 Current Ratio 3.2.2 Quick or Acid
Ratio 4.0 CASH FLOW CONCLUSION RECOMMENDATIONS APPENDICES
BIBLIOGRAPHY – REFERENCES INTRODUCTION It can be suggested that
accounting consists of identifying, measuring and communicating business information to
facilitate judgements and decision making for the further future. This specific report is
pointed at investigate National Grid Group Plc’s report and accounts in order to decide
whether someone should invest or not in this company. Someone, who is able to analyse
this company, must have its Annual Report for at least two years, which will help the
person, because it contains basic components like the Profit and Loss Account, the
Balance Sheet, the Cash Flow Statement and the Director’s Report. PROCEDURE In
order to guide you to understand about this specific company, I have used the Annual
Review by following some steps: 1) To summarise the size, the structure and the profit of
the company I have first check the balance sheet and the profit and loss accounts. 2) I
have read very carefully the chairman’s statement and the director’s report, which helped
me to understand better things about the company. 3) I have also calculated the trends
and ratios. The performance data, P&L A/C, Balance Sheet, Ratios and Trends were
obtain from the following sources: - Annual Review of National Grid Group of 1997-98.
- Articles from Financial Times newspaper. - Books related to the subject. FINDINGS.
1.0 INVESTMENT RATIOS – MEASURES OF EFFICIENCY. Investment ratios are the
ratios used by the investors when deciding whether a share should be bought, sold or
held. 1.1 Earnings per Share. Earnings per share (EPS) indicate the amount of profit after
tax, interest and preference shares earned for each ordinary share. It is also more reliable
for comparing the performance of any company because it can not be affected by the
policy of the directors. Profit after tax + interest EPS = No. Of Ordinary shares The
earnings per share of National Grid Group, excluding the exceptional profit relating to
Energis, were 19.8 pence, compared with 24.3 pence in 1996/97. This reduction resulted
from lower transmission profits following the implementation of the new price control.
1.2 Price Earnings Ratio. The Price Earnings Ratio (PE ratio) is a measure of market
confidence in the shares of a company. Also the PER play a significant role not only in
the company itself, but on the industry in which it operates and, of course, on the level of
the stock market, which tends to rise more than reported profits when the business cycle
swings up and to fall more than profits in a downturn. Arithmetically, the ratio measures
the number of years it would take to repay the share’s current value in earnings. It can be
define like this: Market price per share Price Earnings Ratio = Earnings per share At 31
March 1998, NGG’s share price was 353 pence compared with 209 pence at the start of
the year, an increase of 68 per cent. The shares traded during the year within the range
206 pence to 353 pence. The market capitalisation of the Company at year-end was $5.2
billion. (The National Grid Group plc Annual Review 1997-98) 1.3 Dividend Yield.
Dividend Yield expenses dividends as a proportion of the market value of total shares.
They are also based on gross dividends per share, that is, on the dividends actually paid
plus the associated tax credit. It can be defined like this: Dividend per share Dividend
Yield = x 100 Market value per share On the 25th of November 1997, NGG announced
that it was taking steps to improve the financial efficiency of the Group by returning
excess capital to shareholders by way of a special dividend of 44.7 pence net per ordinary
share. The special dividend, which represented approximately 15 per cent of the Group’s
market capitalisation at the close of business on the 24th of November 1997, amounted to
£786.6 million and was paid on the 17th of February of1998. On 5th of February 1998,
the shareholders approved a share consolidation to reflect this return of value. As a
consequence, 1,718 billion new ordinary shares of 11 pence each, a reduction of 15 per
cent in the total number of ordinary shares in issue. 1.4 Dividend Cover. Dividend Cover
compares net profit with dividends to show how many times over the dividends could be
paid and how safe this annual yield is. With other words, the dividend cover shows how
many times a dividend covered by earnings after tax profit. Earnings per share Dividend
Cover = Net dividend per share The recommenced final divided of 7.24 pence net per
ordinary share, with the interim dividend of 4,83 pence net paid on 17th of February
1998, brings the total ordinary dividend for the year to 12.07 pence net per ordinary
share. This represents an increase of 8.4 per cent over 1996/97. Dividend cover,
excluding the exceptional profit relating to Energis was 1.6 times. 2.0 PRIMARY
OPERATING RATIOS – MEASURES OF EFFICIENCY. 2.1 Return on Capital
Employed (ROCE). The ROCE is a fundamental measure of the profitability of a
company. The ratio is a popular indicator of management efficiency because it contrasts
the net profit d by the company with the total value of fixed and current assets, which are
presumed to be under management control. Therefore, the ROCE demonstrates how well
the management has utilised total assets. It can be argued that ROCE is the most
important measure of the profitability of any specific company. Mathematically can be
measured by this: Net Operating Profit before tax, interest and dividends ROCE = Capital
Employed Operating profit from continuing operations (Group undertakings) fell from
$716.1 million to £570.6 million as a result of the significantly reduced contribution from
transmission following the implementation of the new price control. The operating profit
contribution from the associate and joint ventures amounted to £1.3 million (1996/97-£
nil). 2.2 Debtors Turnover Ratio. The DTR measures the length of time it takes the
debtors to pay the company for purchases. It can be either expressed in days, months or
as a percentage. (The Annual Review 1997/98 of the National Grid Group Plc doesn’t
show exactly how much is the amount of the debtors) 2.3 Creditors Turnover Ratio. The
CTR gives some indication of the amount of credit a company is allowed by its suppliers,
and quite a good indication, provided stock levels and profit margins and reasonably
steady and the business is not highly seasonal. This can be measured like this: Average
Creditors Creditors Turnover Ratio = x 365 (days) Purchases £ 937.7(million) The ratio
for 1997 was: = 1.499 x 365 = 547.17 £625.5(million) £1105300 The ratio for 1998 is: =
1.578 x 365 = 576.06 £700350 2.4 Return on Shareholders’ Fund. The Return on
Shareholders’ Fund represents the net profit of a company as a percentage. It can be
expressed by the following ratio: Profit after tax and dividends Return On Shareholders
Fund = Shareholders’ Funds £224,5(million) The ratio for 1997 was: = 16.16% £1388.9
(million) For the year 1998 because the company has given more dividends that the Profit
of Ordinary activities after Taxation, thus it has Retained Loss instead of Retained Profit.
3.0 PRIMARY FINANCIAL RATIOS – GEARING AND LIQUITY. 3.1 Gearing Ratio.