International Financial Accounting Group Coursework BAAF2 2011
Critical Analysis of Annual Financial Report of Pursuit Dynamics Plc
Student Name:Sarah Winner
Tutor Name: Libby Scott
Course name: International Financial Accounting Group Coursework BAAF2 2011
Names and student IDs of the group:
Group number: 56
Group members: Sarah Winner
Michelle Thompson
Justin Edem
Swan
Actual Word count: 2500 words
A page of contents:
Numbered pages:
Critical Analysis of Annual Financial Report of Pursuit Dynamics Plc in period of year 2009/2010
The Basic Information of Pursuit Dynamics Plc:
Company Information | |||
Address: | Shackleton House Kingfisher Way Hinchingbrooke Business Park Huntingdon Cambridgeshire PE29 6HB | Index: | FTSE Aim All-Share FTSE Aim 100 FTSE Aim UK 50 |
Tel: | +44 (0)1480 422050 | Sector: | Engineering & Machinery |
Fax: | +44 (0)1480 422059 | ||
E-Mail: | Epic: | PDX | |
Secretary: | Dawn Sugden | ||
Registrar: | Computershare Investor Services PLC | Updated: | 23/06/2010 |
RNS number: 4028F
Executive Summary of Pursuit Dynamics Plc:
The Board of PDX, the developer of the PDX platform technology, has approved and is pleased to announce a proposed placing (the "Placing") of 3,200,000 new ordinary shares of 1p each in the share capital of the Company ("Placing Shares") at £2.50 per share; this will raise £8 million before expenses.
PDX has entered into a placing agreement pursuant to which the Placing Shares have been conditionally placed with institutional investors on behalf of the Company.
Mirabaud Securities LLP, as brokers to the Company, arranged the Placing.
The Placing will provide PDX with capital to accelerate the development of the Bio Fuels (ethanol) business well above the previously planned targets for FY2012, also as a result of the progress made to date with the current three installations. In addition, with the Kaercher agreements signed recently, additional development of products with Kaercher Futuretech GMBH can be funded. Finally, as a result of increased licensing partner interests in PDX technologies, the Company will be able to provide significant resource investments to exploit these fast developing industrial licence activities better.
Capital Structure Analysis of PDX Company:The company's marginal tax rate were 40%, the company's after-tax cost of debt would be only 3% (5% x (1-40%)).
Cost of Equity: =(Dividend per share for the next year)/(Current market value of stock)+Growth rate of dividend=(699931/40000) / 97729)+[(10000000-9960000)/9960000]*100%=2.6%
Debt/equity ratio=Total liabilities/shareholder's equity=1988258/9940549*100%=20%
Retained earnings(RE)=Beginning RE+net income-dividends=-7090295-8675895
（1）Capital Structure Analysis Report
Working Capital Management Section
1)Identify the liquidity and efficiency ratios were under-performing relative to industry standard over the three-year trend.
2)Recommend specific changes in working capital strategies for each of the following (when applicable):
a)Cash and marketable securities :(9972844-5666496)/5666496*100%=76%
b)Credit policy:could be time for another run with this small cap tech darling,and there are few smaller companies creating quite the stir in the City that PDX is this summer of 2011.
1)Identify the liquidity and efficiency ratios were under-performing relative to industry standard over the three-year trend.
2)Recommend specific changes in working capital strategies for each of the following (when applicable):
a)Cash and marketable securities :(9972844-5666496)/5666496*100%=76%
b)Credit policy:could be time for another run with this small cap tech darling,and there are few smaller companies creating quite the stir in the City that PDX is this summer of 2011.
c)Inventory:changeable ratio=(97729-71787)/71787*100%=36.14%
d)Sources and uses of short-term financing:1. DAY TO DAY NEEDS= 2. PAYMENT TO CURRENT CREITORS =(1988258-780572)*100%=154.72%.3. SHORT TERM INVESTMENTS =(-5000000-45526)/45526*100%=-106.26:1,short term investment=5000000
3)A detailed plan of our working capital strategy. Provide quantitative support for our recommendations. Discuss consequences of our recommendations on the firm's sales, profitability, customer service, quality, risks, and so forth.
d)Sources and uses of short-term financing:1. DAY TO DAY NEEDS= 2. PAYMENT TO CURRENT CREITORS =(1988258-780572)*100%=154.72%.3. SHORT TERM INVESTMENTS =(-5000000-45526)/45526*100%=-106.26:1,short term investment=5000000
3)A detailed plan of our working capital strategy. Provide quantitative support for our recommendations. Discuss consequences of our recommendations on the firm's sales, profitability, customer service, quality, risks, and so forth.
There is widespread belief that firms should pursue superiority in both customer satisfaction and productivity. However, there is reason to believe these two goals are not always compatible. If a firm improves productivity by “downsizing,” it may achieve an increase in productivity in the short-term, but future profitability may be threatened if customer satisfaction is highly dependent on the efforts of personnel. If so, there are potential tradeoffs between customer satisfaction and productivity for industries as diverse as airlines, banking, education, hotels, and restaurants. Managers in these types of service industries, as well as goods industries in which the service component is increasing, need to understand whether or not this is the case. For example, if efforts to improve productivity can actually harm customer satisfaction—and vice-versa—the downsizing of U.S. and European companies should be viewed with concern. It follows that developing a better understanding of how customer satisfaction and productivity relate to one another is of substantial and growing importance, especially in light of expected continued growth in services throughout the world economy.
（2）Valuation and Investment Section 1)Prepare a three-year trend analysis table for the following financial market ratios for the company:
a)Price earnings ratio =Market value per share/Earnings per share=36364/49350*100%=73.69%
b)Earnings per share =(Net income-dividends on preferred stock)/average outstanding shares=(8675895-304017)/5000000/10000000/40000=104.65
c)Dividend yield=Annual dividend per share/price per share=5000000/4000000*100%=125%
d)Common stock share price =292
a)Price earnings ratio =Market value per share/Earnings per share=36364/49350*100%=73.69%
b)Earnings per share =(Net income-dividends on preferred stock)/average outstanding shares=(8675895-304017)/5000000/10000000/40000=104.65
c)Dividend yield=Annual dividend per share/price per share=5000000/4000000*100%=125%
d)Common stock share price =292
2)Recommend a "buy," "hold," or "sell" (reflecting expected performance over the next 12 months) for the company, based upon our prior financial research.
3)Provide five supporting reasons for this recommendation (including financial, market, and industry risks).
（3）Cost of Capital Section
（3）Cost of Capital Section
1)Calculate the cost of capital (show calculations) for the company using the following:
a)Weighted average cost of capital. Strengths + Opportunities = 129,Threats + Weaknesses = 111.WACC=E/V*Re+D/V*Rd*(1-Tc)=9940549/(9940549+1988258)*(60754+40379888)+[1988258/(9940549+1988258)*(1-28%)=14.6. Where: Re = cost of equity ,Rd = cost of debt ,E = market value of the firm's equity ,D = market value of the firm's debt ,V = E + D ,E/V = percentage of financing that is equity ,D/V = percentage of financing that is debt ,Tc = corporate tax rate.
b)Capital-asset pricing model (beta). =Risk free rate+beta of the security*(expected market return-risk free rate)→E(
) = .02 +.8[.12 – .02] = 0.10,
→CAPM=2.68
a)Weighted average cost of capital. Strengths + Opportunities = 129,Threats + Weaknesses = 111.WACC=E/V*Re+D/V*Rd*(1-Tc)=9940549/(9940549+1988258)*(60754+40379888)+[1988258/(9940549+1988258)*(1-28%)=14.6. Where: Re = cost of equity ,Rd = cost of debt ,E = market value of the firm's equity ,D = market value of the firm's debt ,V = E + D ,E/V = percentage of financing that is equity ,D/V = percentage of financing that is debt ,Tc = corporate tax rate.
b)Capital-asset pricing model (beta). =Risk free rate+beta of the security*(expected market return-risk free rate)→E(
) = .02 +.8[.12 – .02] = 0.10, →CAPM=2.682)Discuss the relative strengths and weaknesses of the methods above as to the appropriate discount rate for the firm. One of the biggest disadvantage of experiments is their artificiality. There is always a question whether the things we learn in a controlled, laboratory will hold true in the real world. (This is one reason why we have so many different research methods.) Also, while experiments are strong in terms of explanation, they are weak in terms of description. They are seldom a good source of descriptive data about any meaningful populations.
3)Describe why these two methodologies may produce different results. PDX's capital structure is as follows: Debt 35% ，Preferred stock 15 ，Common equity 50 ，The after-tax cost of debt is 6.5 percent; the cost of preferred stock is 10 percent; and the cost of common equity (in the form of retained earnings) is 13.5 percent.
3)Describe why these two methodologies may produce different results. PDX's capital structure is as follows: Debt 35% ，Preferred stock 15 ，Common equity 50 ，The after-tax cost of debt is 6.5 percent; the cost of preferred stock is 10 percent; and the cost of common equity (in the form of retained earnings) is 13.5 percent.
（4）Financial highlights:Fundraising in April 2010 raised £10 million (before expenses) at £2.50 per share, a premium to the prevailing market price.Net funds of £10 million at financial year end.Operating loss before non-cash expenses rose by £1.4m to £7.2m (2009: £5.8m) following further investment in resources to ensure delivery of numerous opportunities.
New current trading highlights:Agreements signed with two of the top four global brewers to install the PDX brewing system.Agreement signed with one of German's largest brewers to install the PDX brewing system.Two new products announced for Brewing, the PDX Disinfection system and the PDX Pasteurisation system. These are being developed in cooperation with Oettinger Brauerei GmbH ("Oettinger"), one of Germany's leading brewers, and the other leading German brewer announced today.Four new bioethanol plants have agreed to install the Ethanol Reactor System ("ERS"), including three from Pacific Ethanol , Inc ("Pacific Ethanol").
Pacific Ethanol has now agreed to install PDX's ERS in all of its plants.Initial early performance measures, including ethanol concentration, residual sugars, glycerol, and lactic acid, from the first Pacific Ethanol plants are consistent with ICM uplift results and have demonstrated a considerable reduction in cycle times.Collaboration agreed with the Singapore Civil Defense Force to develop a first responder system for the Asian market as part of the Kaercher Futuretech GmbH ("Kaercher") joint venture.The 60/40 joint venture with the National Nuclear Laboratory ("NNL") is progressing well with licensing revenues of up to £5m forecasted over the next 18 months, which is faster than expected.New Water LOB created, initially focussed on waste water management solutions.
（5）Operational highlights:New leadership appointed to the Biofuels, Brewing, Food and Beverages and New Ventures LOBs（ Lines of Business ）.
Contracts to install the ERS signed with the Madrid, Nebraska plant of Mid America Bio Energy & Commodit, LLC, ICM's Marquis Energy, LLV plant and Pacific Ethanol Boardman plant.Agreement signed with Oettinger to install a new PDX brewing system at its Braunschweig brewery.Agreement signed with Kaercher, the world's leading manufacturer of high-pressure cleaning equipment, to establish a 50/50 joint venture to jointly develop, produce and market civilian and military decontamination
and disinfection products for the global market.Agreement signed with the UK's NNL to establish a 60/40 joint venture to develop, produce and market products for the global nuclear market.
（6）Comparison of Peer Company:
The Financial Ratios Analysis of Thetford IT Compactors Ltd in period of year 2009/2010
1, The main profitability ratios are:
A, Return on capital employed
=profit before long-term interest and tax / share capitals and reserves plus non-current liabilities
=280177 / ( 200000+200000+1640985+600-405995 )*100%
=17.13%
B, ROE Return on equity
=profit after interest,tax and preference dividend / ordinary share capital and reserves
=( 227127-150000) / 200000*100%
=38.56%
C. Gross profit margin
=gross profit / sales
=2281744 / 4375938*100%
=52.14%
D. Net profit margin
=profit / sales
=294754 / 4375938*100%
=6.74%
2, liquidity ratios:
A, the current ratio
=current assets / current liabilities
=2655838 / 1558094
=1.705:1
B. The quick assets ratio
=current assets less inventories / current liabilities
=( 2655838-77774 ) / 1558094
=1.655:1
3, Efficiency ratios:
A, asset turnover
=sales / net assets
=4375938 / ( 1149236+1097744+2246980+1097744+2246980 ）*100%
=55.82%
B. Inventory holding period
=average inventory / cost of sales*365
=77774/2094194*365
=13.56
C. Trade receivables collections period
=average trade receivables/cost of sales*365
=764387/2094194*365
=133.23
4, inventory ratios:
A, earnings per share
=profit after tax and preference dividend / number of ordinary shares in issue*100P
=77127/200000*100P
=38.56P
B. Price earnings ratio
=market price per ordinary share / earnings per share
=100P/38.56P*100%
=2.59:1
C. Dividend cover
=profit after tax and preference dividends / ordinary dividends
=77127/150000*100%
=51.42%
D. Capital gearing ratio
=preference share capital plus non-current liabilities / ( total share capital and reserves plus non-current liabilities) *100%
=（200000+405995 ) / ( 200000+200000+405995 )*100%
=75.19%
E. Dividend yield
=dividend per ordinary share/market price per ordinary share
=150000/200000/1
=75.00%
F. Interest cover
=profit before interest and tax / interest payable
=280117/14637
=19.14:1
（7）Current issues in international accounting. A brief explanation of how reporting using IFRS has changed / is changing the way companies prepare and present their financial statements.
The Pursuit Dynamics Plc will have a high gross profit margin but much of the gross profit will be absorbed by overhead expenses so that the net profit margin might be disappointed low. The inventory holding period and the trade receivables collection period will both be comparatively long. The company will often have to pay for supplies of clothing well before the clothing is sold to customers and this may cause some liquidity problems. As a consequence, the company may have needed to obtain a source of long-term finance. This would be reflected in the capital gearing ratio and might be depress the return obtain on equity.
ROCE=12.6%,=13.3%(Year 2010). ROE=8.6%,=9.2%.(Year 2009). Gross profit margin=17.0%(Year 2010),=22.0%(Year 2009). Net profit margin=13.0%(Year 2010),=19.5%(Year 2009).
These ratios all show a deterioration in the year 2010. The reduction in the gross profit margin was deliberate and was presumably responsible(in part)for the 43% increase in sales,but overall the company was substantially less profitable in the year 2010 than in the year 2009. In absolute terms,the company's profit actually fell in the year 2010. It appears that the company's attempts to stimulate sales have been successful but the objective of in creasing profits has not been achieved.
Current ratio=2.12 (Year 2010),=2.05(Year 2009), Quick assets ratio=1.04(Year 2010),=1.18(Year 2009).
These ratios has improved slightly in 2010 but this is entirely due to large (and deliberate) increase in the company had virtually no cash left at the end of 2010,despite raising an extra ￡850000 during the year from long-term loans Given that the company is now offering longer credit to its customers, the liquidity position looks poor.
Inventory holding period=110 days(Year 2010),=92 days(Year 2009). Recycling collection period=88 days(Year 2010),=58 days(Year 2009).
These increases in these ratios are expected,given the company's policy of holding larger inventories and offering longer credit to customers.
Capital gearing ratio=15.4%(Year 2010),=2.7%(Year 2009).
The PDX Company has moved from being a very low-geared company in 2009 to being a moderately low-geared company in 2010. The interest cover is still adequate but the ordinary dividend is barely covered by the profit after tax. If the company is forced by its liquidity position to increase borrowing still further and become more high-geared,it may be that the dividend paid to the ordinary shareholders will have to be reduced.
（8）The bibliography (Harvard style of referencing)
The student web regarding submission of coursework,coursework deadlines and extenuating circumstances. Available from:http://www.lse.ac.uk/current.student/coursework.shtml#deadline
(Accesses March 3rd 2011)
Online help-sheets by using the following link: Available from:http://www.lse.ac.uk/library/html/guidesandworkshops.shtml(Accesses March 12th 2011)
HS30 how to do your Referencing using the Harvard System: Available from:Http://www.lse.ac.uk/library/html/documents/hs30/pdf(Accesses March 25th2011)
All academic matters from the ' Academic Assistant ': Available from:http://www.blc.lse.ac.uk/aa/aa/(Accesses April 11th 2011)
Company websites for company information and annual reports accounts:
Northcote date for annual reports: Available from:http://www.northcote.co.uk/(Accesses April 14th 2011)
Various e-resources/books/newspapers available through the LSBU library website. Home Page: Available from:http://www.lse.ac.uk/libary(Accesses April 19th 2011)
FAME date(Financial Analysis Made Easy). FAME helpsheet: Available from:http://www.library.lse.ac.uk/helpsheets/db39.pdf(Accesses May 1st 2011)
（9）Appendix,as appropriate:
Accounting Ratios for Financial Statement Analysis：
http://www.investopedia.com/
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