AF4S31 - Strategic Financial Management - University of South Wales
Learning outcome
The ability of students to critically assess, apply and evaluate the issues and techniques of strategic financial management.
Assignment
You have recently attended a workshop aimed at improving your understanding of company Annual Reports using Tesco's report as an example.
During the workshop you looked at the following sections of Tesco's annual report:
• The Strategic Report including the Environmental and Social Review,
• The Corporate Governance Report and,
• The Group Statements of: ‘Income' (also sometimes referred to as the Statement of Profit and Loss) ‘Balance Sheet' and ‘Cash-Flows'.
You learned about how different ‘stakeholders' may use the information contained in these reports and financial statements. You also learned about financial ratios and how these can be used to interpret and assess the performance of a business in terms of its profitability, liquidity, efficiency and return to investors.
The timing of the workshop was very fortuitous. You are the Purchasing Manager for the business you work for. You are in the process of letting a contract for the supply of an important component used in your business's production. You have been provided with the financial statements of Benedict Co. who are one of a few companies tendering for the contract. The income statement and statement of financial position have been reproduced below.
As well as reviewing the financial statements of Benedict Co. from a potential customer perspective, you are interested in how the company may be viewed by potential investors, lenders and suppliers.
You have also collected the following information about other companies operating in the same sector as Benedict Co.:
Current ratio 1.6 Quick ratio 1.0
Trade receivable days 55 days Inventory days 60 days
Trade payable days 90 days
Statement of income for Benedict Co. for the year to 31 January
|
|
20X1
|
20X0
|
|
|
$'000
|
$'000
|
|
Sales
|
30,800
|
24,900
|
|
Cost of sales
|
16,000
|
14,500
|
|
Gross profit
|
14,800
|
10,400
|
|
Admin expenses
|
1,700
|
400
|
|
Distribution costs
|
3,500
|
800
|
|
Finance costs
|
1,300
|
500
|
|
Profit before taxation
|
8,300
|
8,700
|
|
TAXATION
|
1,700
|
1,700
|
|
Profit after taxation
|
6,600
|
7,000
|
Statement of financial position for Benedict Co. as at 31 January 20X1
20X1 20X0
$'000 $'000 $'000 $'000
Non-current assets 38,000 32,600
Current assets
Inventory 5,200 2,600
Trade receivables 7,600 3,800
12,800 6,400
Total assets 50,800 39,000
Capital and reserves
Share capital 18,000 18,000
Reserves 10,000 7,900
28,000 25,900
Non-current liabilities
6% bonds 12,000 8,000
Current liabilities
Trade payables 6,800 4,300
Overdraft 4,000 800
10,800 5,100
50,800 39,000
Dividends of $4.5 million were paid in 20X1 and $3.6 million in 20X0. Shares in Benedict Co. had a market value of $5.60 at 31 January 20X1 compared to $3.60 in 20X0. Benedict Co. has issued 18 million $1 shares.
Required:
Prepare a report for your manager which:
1) Using the Annual Report of Tesco
a) Explains the term ‘stakeholder' and identifies three types of stakeholder of Tesco.
b) Analyses how the Environmental and Social Review and the Corporate Governance Report help Tesco demonstrate its performance in terms of its corporate and social responsibilities to two of the stakeholders identified in a) above.
2) Analyses and evaluates the financial position of Benedict Co. using a range of financial ratios to meet the requirements of potential customers, investors, lenders and suppliers. Your analysis should:
a) Explain the purpose and relevance of the chosen ratios.
b) Include the results for each chosen ratio and reasons for the movement between the two years.
c) Highlight any aspects of the performance of Benedict Co. which would give cause for concern.
d) Critically evaluate the application of financial ratios in interpreting and measuring the performance of a company.