Report on the financial performance of Robinson PLC 1998 - 2001.

University Degree Business and Administrative studies

2. REPORT ON THE FINANCIAL PERFORMANCE OF ROBINSON PLC 1998 - 2001

In analyzing the performance of Robinson plc, the first striking observation is that while sales increased by ₤3000 between 1999 and 2000 the cost of sales has not increased significantly, the operating expenses ratio has been declining. The increase in gross profit can be attributed to price increases justified by increasing demand as evidenced by the growth in sales. This shows that management has become increasingly efficient in utilizing available resources, or that the firm has been operating under capacity.

However, the very large difference between gross and net profit margin is too high suggesting that they ought to cut operating expenses drastically as a proportion of total costs to remain viable in the industry.

The next interesting trend is that for fixed assets to increase over the period, this is attributable partially to the increase in share capital between 2000 and 2002 and the increase in log term debt of ₤5000 between 1998 and 2000 as evidenced by the gearing ratio which peaks at 29.92% in 2000.

Management boosts investor confidence when they successfully convert debt into cheaper equity, slashing the gearing ratio to 22.5% in just one year. This is a measure of sound management because dividends are payable at the discretion of management, who have exercised the option of financing operations through retained income, instead of allowing cash to flow out of the firm through costly and legally enforceable debt.

However, though debt has been liquidated through the period, management have been extending their o/d gradually, probably as a means to finance short term costs associated with the increasing production levels between 2000 and 20002.

Profitability of the company has increased since 1999 because while sales have been increasing on average, operating expenses have remained constant for the duration of the period under scrutiny. This is in spite of the fact that they are being spread over an increasing level of output.

Another positive indicator of management performance is the fact that while turnover increased by 3000 management managed to cut the interest bill by almost 50 %, a formidable achievement!

Perhaps, primarily due to its marketing efforts, the company is establishing itself in the market as evidenced by the increase in turnover. The Net profit margin has been relatively stable at an average of about 5%. It is possible therefore to deduce that the Robinson PLC is pursuing a strategy of growth and that the firm is in and expansion phase as supported by the large proportion of income retained for reflexive investment.

Furthermore their expansion of debtors as shown by the increase in debtor days is possibly an attempt to lure more customers by offering more favourable credit terms. Or alternatively it may evidence of slack credit policy on the part of Robinson plc.

However it is my belief that if as the trend indicates Robinson plc management are on an expansion path the best way for them to add value to their firm is through leverage, If they borrow to expand their capital base the returns will be very great though the risk will increase because at present 2002 ...

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3. ANALYZE THE FINANCIAL STATEMNTS FROM THE SHAREHOLDER PERSPECTIVE

The increase in share capital indicates investor confidence. The firm and industry is growing positively as investors are increasingly willing to pay a higher premium as the company issues more shares.

Earning potential

The main ratios for consideration here are the return on shareholders funds, a figure which has been fluctuating over the period, average being 2.42%. This is much lower than that of competitor, Balfour Beatty. The earnings per share have been declining over the period, possibly due to the increased number of shares from 2001 onwards.

Investors feel the benefits of the potential returns from buying shares in Robinson PLC outweigh the associated risk. With the net profit margin of 5% higher than the risk free bank rate 3 and27/32% (Financial Times 10 December 2002) the opportunity cost of not investing in Robinson is too high for the smart investor. For the prudent investor the dividend cover of 3.46 times in 2001, is more than adequate, hence with the company’s illustrious performance, one would expect share holders to have little objection to directors retaining such a high proportion of more than 70% of the profit.

Income potential

Dividend cover has been increasing, meaning Robinson is well able to pay investors from its profits. However the dividend yield has been decreasing probably, as mentioned before, due to the increased number of shares. Robinson’s reduction in net asset turnover can be ascribed to under utilization of new plant acquired in possible anticipation of expansion in a growing market. Balfour Beatty is also growing in terms of turnover, however, for the two years their profitability is declining as shown by the reductions in their ROCE and net profit margin. However, in spite of this, EPS is rising probably as a result of market belief that the firm’s performance will improve because it is in a robust industry, where the level of systematic risk is low. Balfour Beatty has a much smaller difference between gross and net profit than Robinson plc perhaps because of innovations or new techniques they have realized the importance of capital acquisition hence they made acquisitions with ₤60m in 2001 compared to nil in 2000. This is a trend which Robinson plc is also trying to follow.

Investors analyze the trend of a company’s earnings per share over a number of years and make estimates from the trend as to the share’s likely earnings in the future. Robinson plc does have sound dividend cover of 3.46 in 2002, furthermore, this high ratio suggests that the company can maintain its present dividend to investors with cover and at the same time provide a supporting cushion from which dividends might be more comfortably maintained in the future. Over the last two years Robinson plc have paid out only about a third of their available earnings in dividends, implying they were not concerned to maximize immediate return to share holders but preferred to retain a substantial proportion of profits within the business to finance future expansion.

This is to the advantage of shareholders, who may sacrifice income in the present but who then have the prospect of greater income in the future which is enhanced by the growth of the business.

The fact that the total amount declared as dividends is falling over the years means that a lesser amount is being shared by a larger amount of shareholders each year, hence I would not pay much attention to the fact that earnings per share and dividend yield are declining because over the same period current share price is rising, meaning that while at face value the shares appear to be earning less, in real terms they are worth more each year as determined by the market mechanism. Chances are that if Robinson PLC floated additional shares, they would be oversubscribed.

Risk

The risk attached to a business comes from two sources; business risk applies to all businesses which like Robinson plc are in the construction industry. Financial risk arises from management’s financial policy. One indicator is interest cover which in this case is very high , making Robinson plc very attractive, not only to buyers of shares but also to lenders such as banks and preference shareholders and debentures recipients.

Also with its extremely high interest cover, Robinson plc is a low risk investment and for this reason would be attractive to institutional investors for inclusion into an investment portfolio.

The reduction in asset turnover can be ascribed to underutilization of new plant acquired in anticipation of expansion in a growing market an act which in itself is likely to spark interest within investors.

Value

Another method of measuring equity investors’ potential is provided by the amount of earnings per share. Robinson plc does have value for share holders because their 2001 EPS of 3.8p indicated a P/E ratio of 8. When share price moved up from 2.11 to 2.97 it sold for 11 times earnings.

5. THE COMPANY’S MAJOR COMPETITOR IS BALFOUR BEATTY. YOU ARE ASKED TO COMPARE THE MANAGEMENT PERFORMANCE OF THIS COMPETITOR WITH THAT OF ROBINSON PLC. YOU NEEED TO CALCULATE THEIR RATIOS ALSO.

In comparing the financial statements of Balfour Beatty and Robinson plc I have assumed that the two companies use similar accounting policies and that the balance sheets are representative of the companies’ normal levels of trading.

The performance of Balfour Beatty is better than that of Robinson in terms of profitability to sales and profitability to assets employed. This is due to Balfour Beatty’s much higher sales per fixed assets employed and ROCE.

Robinson plc is a comparatively costly concern to run because whilst their gross profit margin at 50% is much higher than Balfour Beatty, much of their gross profit, half of it goes to pay expenses. Their operating expense ratio is 35% compared to Balfour Beatty’s mere 7%. Robinson plc clearly needs to cut down their operating expenses.

This can be done by using more capital intensive and technologically advanced methods in their construction and engineering techniques. Balfour Beatty are doing this aggressively, they increased their fixed assts by a whooping ₤785 between 2000 and 20001, evidently they also bought up and invested in other companies as shown by the dramatic increase in goodwill of 67% from 168m to 250m.

Liquidity ratios

Current ratio: this did not fluctuate much over the five years; the management of Robinson is maintaining it well. Current liabilities are well covered by current assets. However the same cannot be said for Balfour Beatty who will face short term liquidity problems should creditors call up their funds. The same can be said for the acid test. However Robinson’s prolonged debtor days and stock turnover ratios indicate a lack of credit control when compared to Balfour Beatty, whose debtor days are lower and creditor days more generous. Balfour Beatty has more advantageous contracts with its suppliers who are responsible for much of the financing of working capital and enforces debt collection more strictly.

Return On Capital Employed

Return on capital employed is also referred to as the return on investment. This ratio is very import because it shows how much profit has been made in relation to the capital invested. This enables us to make a judgment as to whether management have been performing optimally, also if we compare the ROCE with the risk free rate which according to the Financial Times of 10 December 2002, was approximately 3 37/32% ( TB rate ) . With figures of 33.5 % and 40% for 2001 and 2000 respectively, Balfour Beatty is clearly providing an excellent return for its investors. However, the figures for Robinson at 2.5% are much lower, this is possibly due to Robinson operating with excess capacity, therefore with full usage of its equipment and the adoption and implementation of forward looking management strategies for the expansion the ROCE for Robinson can be expected to rise.

Another important aspect to consider is the age of the fixed assets because ROCE is distortedly increased as they get older, making comparison of companies more difficult.

For 2001 Balfour Beatty earned a lower return on sales 9.33% but compensated for this by generating a higher level of sales compared with the capital employed 5.47 times. Robinson plc in the same year achieved a much lower level of sales compared with the investment 0.56 but the profitability of sales was high 40%

Price earnings ratio

The general rule is that the lower the P/E ratio is the better the investment. In 2001 Balfour Beatty had a lower P/E of 9.44 up from 7.08 in 2000, making it a better investment than Robinson with P/E’s of 8 and 11 respectively.

What the P/E ratio means is that if the 2001 rate of earnings per share is maintained it will take Balfour Beatty 9 1/3 years to repay the cost of investing while it would take Robinson 11 years.

However on analysis of the gearing ratios in 2001 Balfour Beatty has a gearing of 30.33% whereas Robinson has 20.84%. Therefore, while from an ROCE and P/E perspective, Balfour Beatty looks sounder. Robinson plc’s dividend yield of 2.63 is higher than Balfour Beatty’s 2.59

CONCLUSION

It is important to note that while ROCE can influence investment decisions and to judge if capital in a company has been invested successfully. It should not be used as a decision tool in making the capital investment decision facing Robinson plc with its recent injections of fresh capital. What is appropriate in this regard is an appraisal method which looks at the whole life of the proposed capital expenditure projects such as accounting rate of return , Internal rate of return , payback , discounted payback and net present value.