Nelly Youssef

Table of Contents

1. The Final Statements for the Year Ended 30 June 2013

3
2. Company Assessment
Report7
3. Available Options For Finance Report
9
4. System Plc. Consolidation
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The Final Statements for the Year Ended 30th June 2013
Network Plc
Income Statement for the year ended 30 June 2013

Revenue
Cost of Sales (Note 2)
Gross Profit

m
960.00
(388.35)
571.65

Administration Expenses
Distribution Expenses
Operating Profit

(96.00)
(120.00)
355.65

Finance Costs (Note 3)

Net Profit Before Tax

(9.00)
346.65

Corporation Tax

(80.00)

Profit After Tax

266.65

Earnings Per Share = (266.65/540) *100

49.3796

Network Plc
Statement of Financial Position as at 30 June 2013
ASSETS

Non Current Assets

Premises (Note 1)
Plant & Machinery (Note 1)
Motor Vehicles (Note 1)
Investments
Patents

269
165
52
118
144

Current Assets
Inventories
Trade Receivables
Bank Account

80
210
120

Total Assets

1158

EQUITY & LIABILITIES

Share Capital (25p) Ordinary Shares (Note 5)
Other Reserves (Notes 5)
Retained Earnings (Note 4)

135
140
637

Total Equity

912

Non Current Liabilities

5% Debentures 2015
6% Eurobonds 2016
8% ULS 2018

40
40
20

Current Liabilities
Bank Overdraft
Other Creditors
Trade Payables
Corporation Taxes Payable (Note 6)
Interest Payable (Note 3)

0
0
60
80
6

Total Liabilities
Total Equity & Liabilities

246
1158

Statement of Changes in Equity

Balance at 1 July 2012

Fair value gains on land and buildings
(Net of tax)
Depreciation Transfer
Net Income/ expense recognized directly
in equity
Profits for the year
Total Recognized Income for 2012

Attributable to equity holder of the company m

Share
Other
Retained
Total
Capital
Reserves Earnings
Equity
120.00
85.00
410.00
615.00
70.00
70.00
-

70.00

70.00

70.00

266.65
266.65

266.65
336.65

Issue of Share Capital (Note 5)

Interim Dividends

15.00
-

(15.00)
-

(40.00)

(40.00)

Balance of 30 June 2013

135.00

140.00

636.65

911.65

Notes to the Accounts:

1. Non-Current Assets
Revaluation
Premises Cost 212m less depreciation (12m) = 200m
Revaluation 270m
Reserve Increase = 270m - 200 = 70m
Depreciation
Premises 2% on Cost or more Recent revaluation Method= 2% x 270 x (3/12)= 1.35
Plant & Machinery 25% on Reducing Balance Method = (25% x 220) = 55m
Motor Vehicles on Straight Line Method = (250-10)/5 = 48m
Total Depreciation = 104.35m
Net Book Values
Asset
Premises
Plant & Machinery
Motor Vehicles

Accumulated Depreciation
1.35m
195m
198m

NBV
268.65m
165m
52m

2. Cost of Sales
Cost of Sales = 284m + depreciation for the year ended 30 June 2013
= 284m + 104.35m
= 388.35m

3. Finance Costs
InterestonNonCurrentLiabilities
5%Debentures2015
6%Eurobonds2016
8%ULS2018
Total

June2013
2m
2.4m
1.6m
6m

Finance Cost
Interest on Non-Current Liabilities (Interest Payable)
Total Finance Cost
4. Retained Earnings
Opening Retained Earnings
Less: Interim Dividend
Add: Profit for the year
Closing Retained Earnings

June 2013
3m
6m
9m

410m
(40)m
266.65m
636.65m

5. Share Capital
1:8 Scrip Dividend = (1/8) x 120m = 15m
Share Capital = 120m + 15m = 135m
Other Reserves = 85m + 70m (Revaluation Gain) 15m (Share premium) = 140m
6. Corporation Taxes
Corporation taxes estimated at 80m for the year

Company Assessment Report

Network Plc. has shown a generally efficient performance through the year shown by its
profitability, liquidity, and business efficiency ratios analysed below:

Profitability
o The company showed a higher ROCE in June 2013 compared to June 2012 at 35.16%
and 27.34% respectively. This shows that managers have been able to efficiently manage
the company to generate returns for its investors.
o The high ROCE can be directly explained by the increase in profit margin for the year,
which stood at 37.05% in 2013 up from 23.75% in 2012.
o The higher profit margins in 2013 were accompanied by a higher distribution expenses/
revenue ratio at 12.5% up from 10% previous year, which shows that the company might
have been increasing its advertising or marketing expenses, which was effectively
resonated in a higher profit margin and ROCE.
o The company has been able to reduce its administrative expenses for the year, which
stood at 10% down from 11.25% previous year.
o The asset utilization ratio shows was maintained through the two years at 2.56 in 2013
down from 2.81 in 2012, which represents that the company employs its assets
effectively.

Liquidity
o The companys liquidity ratio of 2.81 times shows that it is able to pay its current
obligations as they become due. In addition, its quick ratio of 2.26 times also represents
the companys strong liquidity where it is much higher than 1:1 required.

Efficiency
o The companys stock turnover ratio of 75.19 days shows that the company holds 75.19
days on average. This ratio needs to be assessed in comparison to other companies in the
industry to decide whether or not the company is handling its stock levels efficiently.
However, the companys stock turnover ratio increased to more than double from 33.18
days in June 2012. This might be explained by an expansion of the business or a stock
pile-up to match any unprecedented events. However, this needs to be further
investigated to assess its adequacy.
o The companys debtors turnover period represented 79.84 days in 2013 down from 100
days, which shows the improved efficiency of the company in settling its balances with
its debtors.
o The companys creditors turnover period represented 56.39 days in 2013 down from
66.36 days in 2012, which shows that the company has been paying its creditors more
rapidly. This needs to be assessed to determine whether the companys creditors have
reduced their credit terms to the company or it has improved its payment pattern.

Profitability
Ratios
ROCE
Asset Utilisation
PBIT/Revenue
Admin/Revenue
Distrib.Exp/
Revenue

Workings

June 2013

June 2012

=355.65/(911.65+100)
=960/(135+140+100)
=355.65/960
=96/960
=120/960

35.16%
2.56
37.05%
10.00%
12.50%

27.34%
2.81
23.75%
11.25%

Liquidity Ratios
Current Ratio
Liquidity Ratio

Workings
=410/146
=330/146

June 2013
2.8082x
2.2603x

June 2012
1.2808x
1.0837x

Efficiency Ratios
Stock Turnover
Debtors Turnover
Creditors Turnover

Workings
=(80/388.35)*365
=(210/960)*365
=(60/388.35)*365

June 2013
75.19 Days
79.84 Days
56.39 Days

June 2012

Shareholder
Equity Ratio

=(911.65-144)/(1157.65-146144)

88.47%

10.00%

33.1818
100.3750
66.3636

Available Options For Finance Report

An expansion normally requires long-term finance; therefore, Network Plc. directors should
decide how long they would need this funding according to the business need and ability of
repayment. The company currently used ordinary shares in addition to debentures, ULS and
Eurobonds. Therefore, Network Plc. available options for financing expansions rely on several
points that can be summarised as follows:

From the interest cover ratios for all three ranks of loan capital already used, it is clear that
the company has a very high interest cover that ranges between 59.3 times for ULS and
177.8 times for Debentures. Therefore, the company could easily afford to operate with a
lower interest cover. The same conclusion can also be deduced from the companys stable
and growing profit stream where its profit margin rose from 23.75% in June 2013 to 37.05%
in June 2013.

The companys asset cover is also much higher than 2 times ranging from 8.68 times for
ULS to 21.69 times for debentures. Hence, this shows that the company has more than
sufficient funds available to meet its loan stockholders demands for repayment in case of
liquidation.

Also, the income-gearing ratio standing at 1.69% further shows the companys ability to
cover its interest obligations from its profits.

In addition, the companys asset gearing ratio at 27.32% shows that it is relatively of low
risk (as it is less than 40% high risk benchmark), which allows for an increase of loan
capital while still maintaining an acceptable gearing for shareholders. This result
accompanied by the strong shareholders equity ratio standing at 88.47% in June 2013
shows the strong financial position of the company.

With respect to the shareholders point of view, earnings per share lies at 49.4p with a
current market price of 50p resulting in a P/E ratio of 1.0126. Although this needs to be
compared with other similar companies in the industry, the ratio can be assumed to be
slightly low.

The dividend yield and dividend cover recorded at 5.56% and 6.67x respectively. The low
dividend yield shows that investors might expect dividends to grow rapidly. This in addition
to the dividend cover shows that the company has more scope to increase its dividends in
the future.

Finally, the companys net asset value of 142.16p shows that the company has an
overvalued share when compared to the current market price of 50p.

In conclusion, the companys results show that it can afford to use debt or equity sources of
finance. However, given its high asset and interest cover along with its low gearing, debt
finance would provide cheaper source of finance for the expansion given the low income
gearing ratio and strong shareholder equity ratio of the company. In addition, this will allow
shareholders to maintain their control to compensate for their relatively low dividend yield.
Moreover, ULS would be more preferred by shareholders and aid their satisfaction, as asset
tie up for loan security would be avoided. Further more, with regards to taxation, the
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company will benefit from increasing its loan capital, which would reduce its tax charges in
contrast to dividends. Finally, the market structure should be analysed where if the company
lies in a growing industry a lower gearing ratio would be expected than if it were to be in a
static industry. Hence, the decision concerning increasing the companys gearing through
debt finance should be analysed by the directors given the context of the industry as a
whole.

Ratio
Working
EPS
=(266.65/540) x 100
P/E
=50/49.3796
Dividend Yield
=(15/540) / 0.5
Dividend Cover
=EPS/(15/540) = 0.493796/0.074074
NAV
=(911.65-144)/540 x 100
associated with loan capital:
Ratio
Interest Cover (ULS)
Interest Cover (Debentures)
Interest Cover (Eurobonds)
Asset Cover (ULS)
Asset Cover (Eurobonds)
Asset Cover (Debentures)
Income Gearing
Asset Gearing D/D+E
Shareholder Equity Ratio

June 2013
49.3796p
1.0126x
5.56%
6.67x
142.16p

Working
=355.65/6
=355.65/2
=355.65/4.4
=(1157.65-146-144)/100
=(1157.65-146-144)/80
=(1157.65-146-144)/40
=6/355.65
=100/(100+270+140-144)
=(911.65-144)/(1157.65-146-144)

Me
asu
rin
g
risk

June 2013
59.3x
177.8x
80.8x
8.68x
10.85x
21.69x
1.69%
27.32%
88.47%

Measures used for investor analysis:

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Equity
Ordinary Shares
Other Reserves
Retained Earnings
Minority Interest
Total Equity

m
135
140
652.65
927.65
28
955.65

System

Plc Consolidation
a. Goodwill cost of control:
Investments represent 32m Shares in System plc. = 118m
32m Shares of System Plc represent = 32m/40m Shares = 80% of System Plc Shares
80% of System Plc Equity = 80% (40m + 20m + 60m) = 96m
Goodwill cost of Control = 118m - 96m = 22m
b. Minority Interest at 30.6.2013 = 20% of System plc Equity = 20% (40+20+80) =
28m
c. Consolidated Equity Section of the Statement of financial position of Network Group
at 30.6.2013

Retained Earnings at 30.6.2013

= Network Plc. Retained Earnings + Share of System plc. Earnings after acquisition
= 636.65m + [80% x (80m - 60m)]
= 636.65m + 16m
= 652.65m

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