In Addition there is an exceptional charge of £57m, this is for stock absolence, that is stock is moving too slow and lying too long therefore it had to be written-off.
If the exceptional values were removed from the figures in the ratio, and a true figure was deduced it would show a much lower difference than that of 2002.
Has the company improved?
This is clearly not an improvement for the company as there has been an overall reduction in ROSF by **%
Return On Capital Employed (R.O.C.E.)
R.O.C.E. = net profit before interest and tax x100
Share capital + reserves + long term loans
What does this ratio show us?
This ratio shows the how much return the suppliers of the company will get before deductions such as interest or dividends have been paid. It shows us how well the company uses its funds i.e. how effective investments have been.
What would we expect to see?
This is a large company with most of its money tied up in assets and also has a high capital value therefore we would expect to see a rise in profit from the ROCE ratio.
What does the ratio say?
This ratio tells a similar story to that of ROSF, mainly that the company is not performing well and that the return on the assets is less than what the business has to repay for most of its loans and borrowed funds, therefore heading towards needing even more financial assistance.
Why is the ratio so?
This ratio expresses the relationship between the net profit, generated by the business and the long-term capital invested, that is it compares the value of the capital invested with profit.
The company made a provision of £5909m for bad and doubtful inter-company debtors this amount is integrated into the consolidation figure. This is perhaps why the company did not have any distributable reserves in 2003. Again the exceptional charges are the main influence over this ration but the provision could be the reason the figure is so drastic.
Has the company improved?
As this ratio shows a similar outlook to that of the R.O.S.F. the same conclusion can be made, that the company is not performing well, and will soon need additional government assistance.
Net Profit Margin
N.P.M. = net profit before interest and tax x100
Sales
What does this ratio show us?
This ratio relates the net profit to the sales during a set period. Factors influencing this include, competition, economic climate and industry characteristics.
What would we expect to see?
We would expect to see a low margin as this company is generating power constantly and it is being used quickly therefore there is no need to allocate a high value on price of electricity.
What does this ratio say?
A week but improved performance compared to that of previous year this again explains the poor ROSF and ROCE figures. Again two years it too small a time span to base a solid assumption that the company is improving overall.
Why is the ratio so?
The outcome of this ratio is due to high expenses and increased running costs. Sales are not an issue with this company as everyone wants and needs power so the problem lies with decreased consumer price. The market price of electricity dropped suddenly last September therefore giving inadequate profits to cover the running costs of the stations. The director stated that he did not foresee the prices dropping so much and so suddenly, subsequently they did not have time to prepare, as a company for this crisis..
Has the company improved
From this ratio we can see that the company has slightly improved in this area however this is mainly due to government intervention and reduced competition.
Gross Profit Margin
G.P.M. = Gross Profit x100
Sales
What does this ratio show us?
It shows how much profit is earned on the products without consideration of selling and administration costs. In addition it informs us of the company’s ability to control its production costs, and manage the margins it makes.
What does this ratio say?
Gross profit was lower relative to sales, therefore the cost of sales was higher than the actual sales themselves this reflects the outcome of the net profit margin. We would expect these two results to reflect each other.
Why is the ratio so?
Much the same answer as the net profit margin and also the same reasons, the huge reduction in capital employed has been the result of the poor return.
Has the company improved?
The company has not improved it has in fact declined, but as said before this is due to the sudden market crash last September.
Summary of the profit and loss account
Turnover has decreased by 40% form 2002 to 2003. Gross profit is 88% of turnover. Company loss is due to exceptional items and the fact that the costs are not fixed.
Overall the company is declining with respect to financial profitability however this does not mean the performance of the company is deteriorating in coincidence with profitability.
The Balance Sheet
The Balance Sheet is a statement which shows the financial position of the company at a specific moment of time. It also shows how much wealth there is in the business and how much resources is in each form, therefore showing how efficient the company is with its investments and returns.
Efficiency ratios for the Balance sheet
Average stock turnover period
Average stock turnover period = average stock held x365
Cost of sales
There was no stock held in 2002.
What does the ratio show us?
This ratio shows how long stocks are being held.
What would we expect to see?
Stock within this company accounts for a large portion of the total assets held, we would expect to see a low figure.
What does the ratio say?
The ratio shows us that stock is only held for 23 days. This shows signs of good stock control and reasonable efficiency.
Why is the ratio so?
The stock turnover for British Energy is low as the group value for stock held in stores was £162m in 2002 however is only £75m in 2003 this is a drop of £87m which means the company has almost halved the stock it holds this is perhaps a movement towards increased stock rotation. Again it would be interesting to review previous year accounts to see if this is an improving trend
Has the company improved?
The company itself did not show a figure for stock held in 2002 therefore it is unclear if the company has improved in the past year
Average settlement period for debtors (Debtor Days)
Average settlement period for debtors = trade debtors x365
Credit sales
What does the ratio show us?
This ratio shows us how long it takes the company to get back the money it is owed from its debtors.
What would we expect to see?
As this company financial state is poor we would expect to see a low figure meaning the company was improving credit control. The aim of this company is to shorten debtor days and lengthen creditor days.
What does the ratio say?
The ratio tells us British Energy is taking 43.3 days to receive payment from its debtors. This is an decrease of 9.1 days from 2002, credit control has improved
Why is the ratio so?
In 2002 British energy as a company had 5 means of debtors and received a total of £732m from its debtors however the company itself received £2,517m. In 2003 the company has only 3 forms of debtors giving only £387m (53% less from last year) to the group and just £85m of that to the company. The reason for these figures is the subsidiary undertakings which accounts for £81m. There is also a provision for bad debts of £6209 owed from UK companies.
Has the company improved?
We can see there has been an improvement since 2002 but again an analysis of previous years accounts would give a fairer statement.
British energy need to allow credit to achieve satisfactory sales (or increased market value of power) however this results in an interest cost of funds tied up in debtors and the possibility of bad debt.
Average settlement period for creditors (Creditor Days)
Average settlement period for creditors = trade creditors x 365
Credit purchases
What does the ratio show us?
This ratio shows us how long (average) it take British Energy to pay its creditors
What would we expect to see?
We would expect to see a slightly bigger figure than that of the debtor days this is to give the company a temporary boost for increasing efficiency
What does the ratio say?
It can be seen that British Energy has decreased its creditor days, again this is evidence that the company is gaining power over credit control and backs up evidence that debtor days are decreasing steadily.
Why is the ratio so?
In 2002 British Energy paid £1,858m to its creditors and in 2003 paid £1909m. British Energy terminated contracts with two companies through the year which gave rise for amounts of money which became payable to creditiors.
Has the company improved?
This is an improvement and is evidence that the company does indeed have some sort of strategy for retaining profit.
Sales to Capital Employed (asset turnover ratio)
Sales to capital employed = sales
Long-term capital employed
What does the ratio show us?
This ratio shows us how effectively British Energy assets are generating sales revenue . As this is a nuclear power company the assets of the company should be very efficient.
What would we expect to see?
We would expect to see a high figure, this would mean assets were being used more productively in relation to generating profit.
What does the ratio say?
The ratio shows a high ratio which would suggest that British Energy is using its assets productively.
Why is the ratio so?
The outcome of the ratio suggests the company has invested in its capital and holds less stock and had adopted a J.I.T. (Just In Time) method of stock rotation this would mean improved condition and ‘younger’ assets.
Has the company improved?
The company has improved since 2002 this could be due to the control over stock.
Sales per employee
Sales per employee = Sales
Number of employees
What does the ratio show us?
This ratio aims to give a value of the productivity of the workforce.
What would we expect to see?
We would expect to see a high figure this would mean staff are working effectively and optomising efficiency.
What does the ratio say?
The ratio shows the employees are not working effectively however it can be seen that there is an improvement form 2002 to 2003 of 1 pence
Why is the ratio so?
The number of employees has increased by 249 over the past year this would explain why the sales per employee has increased however the figure has not increased as much as could have been predicted. Further analysis would be required to show why this has not increased to a satisfactory value.
Has the company improved?
The company has improved slightly however the figure is still not acceptable in relation to the size of the company.
Review of the Balance Sheet
Overall the balance sheet shows the financial position and efficiency of the company. It can be clearly seen that the company is in a poor state and is declining at a steady rate. Many issues need to be addressed and investigated, however as stated in the Profit and Loss section there are other influences on the figures which means calculations are not always like with like.
Factors contributing to the stated financial position are:
Fixed Assets
The market value of shares held by employees was £2m compared to a book value of £104m, as the long term prospects of the company have deteriorated h the directors consider it appropriate to recognize a permanent diminuation in the value of the shares held in employee trust. This has resulted in an exceptional charge of £102m
Long-term resources of the business resources with a lifespan more than one year are called fixed assets. In the balance sheet fixed assets are divided into tangible, intangible or financial assets. In 2002 the balance sheet value for fixed assets was £4,714m in 2003 there has been a severe drop in the value, fixed assets are now worth £686m.
The charge for depreciation of fixed assets is based on the straight-line method, this wirtes-off the cost of assets, after taking into account provisions for the depreciation in value, over their estimated useful lives. The asset lives adopted are subject to regular review
Current Assets
Decommissioning fund
The group makes contributions into an interdependently administered fund to cover all the costs of decommissioning its UK nuclear power stations.
The decommissioning fund is in the balance sheet under current assets, in 2002 the fund was £411m and decreased to £344m in 2003.
The market value of the UK Decommissioning Fund was £344m on the last review date which was 31st March 2003. this figure was in fact £124m lower than the cost of the investment, which resulted in an exceptional charge of £124m. this exceptional charge has been recognized, £111m has been represented as revalorisation credit and has been treated as an exceptional financing charge with the remaining £13m being categorised as an exceptional operating cost. These write-offs mean the company can restate the Decommissioning Fund receivable to market value.
Nuclear decommissioning fund
A large part of power-generated capacity in Britain is nuclear and the decommissioning cost of nuclear power plants is a large part of the depreciation of fixed assets.
The estimated cost for decommissioning the groups nuclear power stations are capitalised as part of the cost of construction and are depreciated over the same lives as the stations. These estimated costs are discounted having regarded to the time scale whereby work will take place over many years after station closure. The estimated costs include the demolition and site clearance of the stations, radioactive facilities and the movement of waste.
What is the depreciation policy
The value of an asset falls over time, a machine bought in one year will be worth less the next therefore allowances must be made for depreciation when showing the value of assets. An estimate is predicted by the amount which the asset will depreciate each year, this way the cost of the asset can be filtered through the balance sheet and profit and loss and over a number of years instead of in one lump sum which would have a detrimental effect on any company especially one such as British Energy.
Sources of long-term finance
External long-term finance can be in the form of share capital or loan capital. Share capital involves the sale of shares to raise money and is often the most important source of funds for a limited company.
As British Energy is in such a weak state external finance is required regularly, the company has used its loan capital i.e. debentures, loans and government assistance in other words money that has been borrowed for a lengthy period of time.
Intangible assets are not mentioned in the balance sheet, however the company’s goodwill is, goodwill is the difference between the value of a company they have bought over versus the value of the net assets within the company. Goodwill is capitalised as an intangible asset and amortised (depreciated) on a straight-line basis over its estimated useful life. British Energy has managed to generate income in the past from goodwill- with the purchase of Bruce power and Amergen.
Brand names are often included as an intangible asset as they generate income for a lengthy period. If British Energy was still in the financial position to buy over another company it would be wise to acquire one with a brand name.
Patents, copyrights and trademarks prevent others from copying more efficient machinery, ideas, products and methods adopted through acquisition of other companies (Bruce power, Amergen).
Research and development can be included as capital expenditure and can sometimes yield success in the future.
The Cash Flow Statement
The Cash flow statement shows the sources and uses of cash for a period
Liquidity Ratios for the Cash Flow Statement
Current Ratio
Current Ratio = Current Assets
Current Liabilities
What does this ratio show us?
This ratio compares the ‘liquid’ assets of the company (i.e. cash and assets most easily turn into cash) with the short term liabilities.
What would we expect to see?
The ideal ratio is 2 times or 2:1 times.
What does this ratio say?
The current ratio is reasonable however there is a decline from 2002 to 2003.
Why is the ratio so?
This is mainly due to the type of company it is, as seen earlier the company is now holding stock for a shorter period of time which would explain the decrease. The company holds stocks of finished goods, raw materials and work in progress. As the ratio is low the company can be seen as having low liquidity however most of this companies funds are tied up in assets this related back to, and explains poor efficiency
Has the company improved?
The company has not improved with respect to liquidity, the company should aim to have the ideal ratio of 2:1 as liquidity is vital to a company’s success. Referral to previous years accounts would be more insightful however the acid test ratio will provide a more in depth perspective.
Acid test ratio
Acid Test Ratio = Current Assets
Current Liabilities
What does this ratio show us?
This ratio is simply a more rigorous test of liquidity.
What would we expect to see?
Results similar to that of the current ratio.
What does this ratio say?
This ratio shows a decline from 2002 to 2003
Why is the ratio so?
As the ratio is below 1.0 this is cause for concern however it is not a surprise, the previous calculations have shown British Energy is declining as a company.
Gearing
Gearing = long term liabilities
Share capital + reserves + long term liabilities
What does this ratio show us?
The gearing ratio shows the extent to which the company is financed form sourced that require a fixed return.
What would we expect to see?
As this company is not doing very well we would expect to see a high gearing ratio as it is highly financed from external sources.
What does this ratio say?
This ratio shows British Energy is highly geared.
Why is the ratio so?
This is because the company borrows heavily in order to survive, the result of this is the company is committed to paying interest charges and making capital repayments.
Has the company improved?
This is not a good thing for British Energy to do in its current financial state as it is just another financial burden. The effect of this gearing is reflected in the R.O.S.F ratio as less funds are available.
Summary of the Cash Flow Statement
Even though the company makes losses the cash flow statement is still positive, this is because depreciation is not included. The negative figures are a result of the company having more finance to service than they have investments generating returns. As seen in 2001 the companies taxation section is negative this could be due to the company sustaining losses after a taxation of profits period, the positive figures in the past two years could be mainly due to tax refunds
As the cash flow is a summary of the profit and loss and the balance sheets it would therefore reflect the negative position and performance discovered earlier.
Although there are obvious financial problems within British Energy, there have been crucial advancements since the restructuring program was announced on 28 November 2002. For example, investments in Bruce Power and Huron Wind have been wiped out, and standstill agreements are now in place with their most significant creditors and BNFL, in addition they and are controlling their cash and collateral requirements within the limits of the credit facility provided by the UK Government.
Cash flow can be improved by shortening stock turnover, shorter period of credit for debtors and by lengthening credit taken from creditors.
Accounting Policies of British Energy
The financial statements are prepared under the historical cost convention and in accordance with applicable accounting standards.
The basis of consolidation
The financial statements are a consolidation of all the groups withi British Energy and all its subsidiary undertakings however inter-company transaction and balances are not shown on consolidation.
British energy depreciation policy
The charge for depreciation of fixed assets is based on the straight-line method, this writes-off the cost of assets, after taking into account provisions for the depreciation in value, over their estimated useful lives. The asset lives adopted are subject to regular review.
Conclusion
To conclude, British Energy has a bleak outlook for the future and very little positive prospects. The declining future of the company is evident from this report, as a company it has exhausted most of its profit making resources and government buy-out seems inevitable.
Evaluation
Unfortunately, we do not feel that this has been our best effort and feel disappointed that we could not produce a higher standard of work which was due to a number of factors. Although this is supposed to have been a group report it has resulted in certain members of the group not contributing equally and adding more onto the other members workloads which, has also contributed to the poor result of this report.
On the basis of contracts and agreements in place at 31st March 2003 [pg 34 Annual Report and Accounts]
Amergen is an American company which owns three nuclear stations, however British Energy require government assistance so they must dispose of Amergen which has resulted in yet another exceptional value.
Written-down value is the value of the asset at a point in time according to the depreciation method.
This provision could be seen as an investment.
They could have prepared by starting something like an ‘eventuality’ fund.
Coal power stations have now been closed reducing competition.
This was denominated in foreign currency and exchanged at the end of the year.
It does not appear that the company holds cash at bank, however it may be held in a group account.
Revalorisation is a charge which results from restating liabilities to take into account inflation for the year.
This means stock is moving faster.
Results in assets being recorded at their outlay cost rather than their current value
