Summarised Financial Accounts 2012 for Spin Plc

Finance

A.  Summarised Financial Accounts 2012 for Spin plc

Regarding the income statement:  The income statement indicates the company’s financial performance and shows its profit and loss.  The cost of sales is the total costs to produce goods or service.  It can often be related to the company’s profitability of purchasing and selling.  It can be calculated by subtracting revenue from gross profit, Gross Profit – Revenue = Cost of Sales.  The cost of sales for Spin is £68.5m and is less than its revenue, which means that the company product is profitable.  The net income is the total earnings of the company.  It is also often in the shareholders’ interests since it is attributed profit.  Net income considers the total costs, such as taxes, interest and other indirect expenses, and is minus by gross profit.  Gross profit – (overheads + net interest received + tax) = Net Income.  The net income is £9.5m.  Earning per share can be seen as one of the most important determinant of the company’s share value.  It can also be view as the company’s profitability per unit of share.  The EPS is calculated: Net Income/ Shared Issued.  The earnings per share for Spin in 2012 is £1.9m.

Regarding Balance Sheet: The Balance Sheet shows a company’s financial position, how much it owes and owns.  Debtors are view as one of the company’s current assets.  It indicates how much other company or individual owes the company.  Total current assets – (Cash+ Inventories) = debtors = £30m.  Net current asset, also known as working capital, represents how well the company is financing its business in the short term.  It is the total current assets minus the current liabilities.  The net current assets for Spin plc in 2012 are £10m.  Net assets, comparing to net current assets, can be view as the company’s value in the long term.  It shows the difference between what the company owns and owes, whether the business is in debt or not.  It is calculated: [Non-current assets (fixed assets) + Net current assets] – Non-current liabilities (long-term loans) = Net assets = £270.

B.

 i. Operating Profit: (Net profit for the year/ Sales for the year)*100 = (11.5/147.5)*100 = 7.80%

Operating profit considers the company’s overheads and indicates its profitability.  It is often compared with the previous years’ percentage and indicates how the company is performing.  By looking at the past figures, the business can know its profitability and whether it improves it performances or not.  In addition, it is in shareholders’ interests since it is where dividends come from.  Spin’s operating profit is reasonable, however, it may be lower than its stakeholders’ expectation, since the share price decrease,

˙Net profit can be refer to the Operating profit, which is the sum of gross profit minus overheads.

 ii. ROCE: (Net profit for the year/ Average Capital employed)*100 = (11.5/ 410)*100 = 2.80%

The ROCE implies the returns of investment and the higher the number is the better the company is performing.  It shows the percentage of how much investors can get in return of their capital investment.  The figure also indicates the business’s efficiency of generating profit with the use of capital.  In addition, ROCE implies the corporation’s long-term profitability since it usually considers the long-term finance, such as loans.  It is an important indicator for investors, because they are hoping to get a return which is bigger than bank’s interest rate.  The return of Spin is quite low and may be lower than the bank’s interest rate, thus, may imply that the company is not operating very efficiently.

iii. Acid Test: Current Assets – Stock: Current Liabilities = (70-37)/ 60 = 0.55:1

The ratio indicates the company’s liquidity regarding its short-term liabilities.  It may imply how quick the company can respond to its immediate credits with its liquid assets.  Although the ideal ratio is approximately 1:1, the ratio may vary from industry to industry.  For instance, clothes shop may have a smaller ratio compare to furniture wholesale.  However, the acid test is lower than the average and this may indicate that it has too much stock.

 iv. Debtor Collection Period: (Debtors/ Credit Sales for year)*365 = (30/ 147.5)*365 = 74.24

The ratio shows how long it takes for a business to collect its debt.  It indicates whether debtors are being allowed excessive credit.  If the figure is high, comparing to other companies in the business, it could possibly be assumed that the company is having problem of its financial position.  Moreover, the ratio may suggest the business’s efficiency regarding collecting its customer’s debts and could probably have an effect on its cash flow.  Whereas the ratio may be less the better, since it could reduce the risk of having bad debt, it could possibly depend on the type of business.  It is possible to assume that longer collection period may work as an incentive for the business and attract more customers.  Nevertheless, the figure of Spin is much higher than the average of 30 days and may indicate that there might be a problem with the company’s cash flow management.