Essay: Report to the Board of Directors of Outdoors PLC (financial management)

Contents
Report to the Board of Directors of Outdoors PLC………………………..……………………………2
Highlights………………………………………………………………………………………………………..3
Profitability………………………………………………………………………………………………………………………….5/6
Liquidity……………………………………………………………………………………………………………………………….6
Investment…………………………………………………………………………………………………………………………..7/8
Efficiency……………………………………………….……………………………………….……..8/9
Investment Options……………………………………………………………………………………..9
NPV………………………………………………………………………………………………9/10/11
Internal Rate of Return………………………………………………………………………………12/13
Discounted Payback Period…………………………………………………………………………………………………..12
Non-discounting method of Investment Appraisal……………………………………………………14
Investment Approval……………………………………………………………………………….15/16
Optimal Policy Investment…………………………………………………………………………16/17
Conclusion…………………………………………………………………………………………17/18
Biblography………………………………………………………………………………………………………………………..19
Report to Board of Directors
Dear Board of Directors
Today Outdoors PLC a major competitor in producing high end garden furniture and related items reporting their full year financial results for 2016. This is an independent financial assessment of Outdoors Plc it was conducted to establish the specific and current finance position and culture that exists in one of the largest outdoor furniture producing organisations in the market. The full scope of the report will investigate the five-year period from 2012 to 2016, between the major areas of profitability, liquidity, investment, efficiency and gearing.
This report will also review three potential investment options for Outdoors PLC 1: Expand blossoming retail outlets to include all stock, 2: Full deployment to internet sales and 3: Produce Greenhouses and Conservatories.
The information found in this report can be evaluated and used towards the investment programme in the 3 fields open consider investment also the report can be used for the future strategic direction of the company.
All figures in the below report are stated in Great British Pound (£).
Highlights
Outdoor PLC has had a profitable 2016 with five-year highs in: A financial ratio is a relationship between two quantities on a company’s financial statements, which is derived by dividing one quantity by another. The purpose of using ratios is to reduce the amount of data to a workable form and to make it more meaningful. (Niall Lothian & Prof. John Small, 1991)
• Trading Profit Margin @ 7.8% (+0.3% YOY)=Trading Profit/Sales
• Earnings Per Share @ £15.65 (+ £2.05 YOY)=Total Earnings/Outstanding Shares
• Dividends Per Share @ £5.90 (+ £0.5 YOY)=Dividends/Number of Shares
• Net Assets Per Share @ £102.1 (+ £12.88 YOY)=Net Asset/No of Shares Outstanding
• Working Capital Turnover @ 8.6 (+ 0.6 YOY)=Current Assets/Current Liabilities
Profitability
Trading profit is equivalent to earnings from operations. Thus, it does not include any financing-related income or expenses, nor does it include any gains or losses on the sale of assets. This is a good indicator of the ability of the core operations of a business to generate a profit. (Steven, 2018) The method is of limited use when projects have differing cash flow patterns. These patterns may be important to the company since they will affect the timing and availability of funds. With multi-period capitol rationing, it is possible that the project with the highest Profitability Index is the slowest in generating returns (Paul, Lydon)
The Profitability Index ignores the absolute size of individual projects. A project with a high index might be very small and therefore only generate a small NPV. (Paul, Lydon)
The trading profit margin has been raised from 7.3 % in 2012 to 7.8 % in 2016. Which is the highest it has been in the 5 years we are reviewing. The lowest point was 2014 when it was based at 7%.
Profitability 2016 2015 2014 2013 2012
Margin Trading Profit % 7.8 7.5 7 7.2 7.3
Sales
Return on assets Trading Profit % 16.3 17.6 16.2 18.2 18.3
Net operating assets
Return on investment or Return on assets for 2016 was based at a percentage rate of 16.3% down to nearly its lowest percentage rate in the 5- year period close to 2014 amount of 16.2%. The highest % rate for the 5-year period was 2012 which was based at 18.3%.
Liquidity
These are designed to measure a company’s ability to meet its maturing short-term obligations. (Niall Lothian & Prof. John Small, 1991) barring supplies, which may take time to convert to profit the quick ratio for Outdoors PLC shows as 0.74 to 1 for 2016 which hasn’t moved much over the previous years. This ratio of current assets less stock to current liabilities is commonly set as 1:1 to 0.7:1 depending on industry and is reported as 0.83 for furniture and related product manufacturing (Niall Lothian & Prof. John Small, 1991).
Liquidity Ratios 2016 2015 2014 2013 2012
Quick ratio Current assets less stock % 0.74:1 0.73:1 0.78:1 1.13:1 0.93:1
Current liabilities
Current ratio Current assets % 1.34:1 1.30:1 1.42:1 1.79:1 1.75:1
Current liabilities
Current ratio of 1.34 to 1 for current assets to current liabilities. The organisation can meet all their bills when they fall due at any time. 1.34 shows that funds being used correctly.
Earnings per share (EPS) for 2016 is at £15.65 the highest position for this 5- year period. EPS measures amount of net income earned per share of stock outstanding, in other words, this is the amount of money each share of stock would receive if all the profits were distributed to the outstanding shares at the end of the year (Niall Lothian & Prof. John Small, 1991). Investors would then weigh up if Outdoors PLC represents a ‘safe bet’, this information must be weighed against the market averages. (Niall Lothian & Prof. John Small, 1991)
Per share 2016 2015 2014 2013 2012
Earnings per share P 15.65 13.6 10.98 11.32 12.18
Dividends per share P 5.9 5.4 4.9 4.6 4.1
Net assets per share P 102.1 89.22 85.95 85.79 78.11
Net assets per share in this five-year period, set at a high of 102.1% in 2016 there appears to be a very surge in net assets. This is showing a huge increase in goods sustained by Outdoors PLC. Dividend per share is the sum of declared dividends issued by a company for every ordinary share outstanding. The figure is calculated by dividing the total dividends paid out by a business, including interim dividends, over a period by the number of outstanding ordinary shares issued. (https://www.investopedia.com/terms/d/dividend-per-share.asp) For the year 2016 shows a DPS hare amount of 5.9 % shows a fast growth in the share price since the 2012 low of 4.1%
Efficiency
This ratio measures how efficiently a company uses its assets to generate revenues and its ability to manage those assets. With any financial ratio, it’s best to compare a company’s ratio to its competitors in the same industry. (Sometimes it is also referred to as activity or turnover ratios) which is used to assist managers in judging how effectively a company manages its assets. In the below table it compares the sales and the investment in various assets.(https://www.investopedia.com/ask/answers/040715/what-do-efficiency-ratios-measure.asp)
Asset ratios 2016 2015 2014 2013 2012
Operating asset turnover Sales Times 2.1 2.4 2.3 2.5 2.5
Net operating assets
Working capital turnover Sales Times 8.6 8 7 7.4 6.2
Working capital
The working capital turnover ratio is set at 8.6% highest over the five-year period was set at the lowest in 2012 at 2.5%. A high turnover and a growth in the turnover percentage shows that Outdoors PLC are being very efficient showed in the 2.5 % growth in the five years.
(https://www.investopedia.com/terms/w/workingcapitalturnover.asp)
Interest and Dividend cover 2016 2015 2014 2013 2012
Interest cover Trading Profit Times 2.9 4.8 5.1 6.5 3.6
Net finance charges
Dividend cover Earnings per Ordinary share Times 2.7 2.6 2.1 2.5 3.1
Dividend per Ordinary share
Debt to equity Ratio
Net borrowings % 65.9 61.3 48.3 10.8 36.5
Shareholders funds
A gearing ratio is a general classification describing a financial ratio that compares some form of owner’s equity (or capital) to funds borrowed by the company. Gearing is a measurement of the entity’s financial leverage, which demonstrates the degree to which a firm’s activities are funded by owner’s funds versus creditor’s funds. (https://www.investopedia.com/terms/g/gearingratio.asp) The interest cover for 2016 is set at 2.9%
Net Present Values:
The net present value approach takes all the cash flows associated with the company discounts them to the present value by using an appropriate interest rate.
The management have singled out three potential investment opportunities to grow Outdoors PLC to compete with their rivals who have already invested in such realms as for example, internet sales. To review start with the net present value (NPV) movement to fully gauge the present predicted value of each potential investment options and considering the time value of money. The three options are:
A. Expand its flourishing retail outlet to include all products.
B. Develop into internet sales.
C. Produce greenhouses and conservatories.
These options would require initial expenditure of (A) £750,000 (B) £1,200,000 or (C) £2,000,000. The most recent estimates on year-end cash flows is as follows:
Initial expenditure Year 1 Year 2 Year 3 Year 4 NET
(A) -£ 750,000 £ 400,000 £ 500,000 £ 500,000 £ 500,000 £ 1,150,000
(B) -£ 1,200000 £ 500,000 £ 600,000 £ 800,000 £ 1,000,000 £ 1,700,000
(C) -£ 2,000,000 £ 500,000 £ 1,000,000 £ 1,500,000 £ 1,500,000 £ 2,500,000
The cost of capital at be 8% (this being the discount rate we apply to future value to account for inflation interest foregone and risk premium) so that we can compare future value with present value, we apply the following discount factor from present value tables:
DF 8% Year 0 Year 1 Year 2 Year 3 Year 4
(A) 1.00 0.9875 0.8765 0.7012 0. 5609
(B) 1.00 0.9875 0.8765 0.7012 0. 5609
(C) 1.00 0.9875 0.8765 0.7012 0.5609
This gives us the discounted cash flow and NPV of the three options as follows:
Year 0 Year 1 Year 2 Year 3 Year 4 Disc 8% NPV
(A) -£ 750,000 £ 368,000 £ 410,300 £ 370,550 £ 340,150 £ 743,600
(B) -£ 1,200,000 £ 450,450 £ 490,560 £ 600,080 £ 680,300 £ 1,033,900
(C) -£ 2,000,000 £ 450,450 £ 820,600 £ 112,650 £ 102,450 £ 1,431,500
NPV technique with a cost of capital of 8%, – producing greenhouses and conservatories – would be the suggested project to proceed with as it has the largest NPV during the 4 year scale at £1.4 million. In addition to the net present value calculations, other factors such as strategic considerations and competitor’s actions may need to be considered. A good track record for previous capital investment will also carry weight when it comes to the final decision. The approach can be only being used if projects are divisible, if the projects are not divisible a decision has to be made by examining the absolute NPV’s of all possible combinations for complete projects that can be undertaken within the constraints of the capital available. The combination of projects which remains at or under the limit of available capital without any of them being divided, and which maximises the total NPV, should be chosen. (Paul, Lydon)
Net Present Value (NPV) is the value of all future cash flows (positive and negative) over the entire life of an investment discounted to the present. NPV analysis is a form of intrinsic valuation and is used extensively across finance and accounting for determining the value of a business, investment security, capital project, new venture, cost reduction program, and anything that involves cash flow. (https://corporatefinanceinstitute.com/resources/knowledge/valuation/net-present-value-npv/)
The cash flows in net present value analysis are discounted for two main reasons, (1) to adjust for the risk of an investment opportunity, and (2) to account for the time value of money (TVM).The first point (to adjust for risk) is necessary because not all businesses, projects, or investment opportunities have the same level of risk.
(https://corporatefinanceinstitute.com/resources/knowledge/valuation/net-present-value-npv/)
NPV is perceived as conclusive evidence and superior to the other methods of analysis.
The NPV is shown as a definitive measure method with some favoured benefits. The method unambiguously ranks mutually exclusive projects, and can differentiate between projects of different scale and time horizon. The downsides with NPV it’s not a concept that enters everyday business conversation, it can be challenging to explain to management the full value of the NPV it also relies heavily on discount rate values and cash flow that are approximated.
Discounted Payback Period:
There are two steps involved in calculating the discounted payback period. Firstly, we must discount (i.e., bring to the present value) the net cash flows that will occur during each year of the project.
Secondly, we must subtract the discounted cash flows from the initial cost figure in order to obtain the discounted payback period. Once we’ve calculated the discounted cash flows for each period of the project, we can subtract them from the initial cost figure until we arrive at zero.
(https://corporatefinanceinstitute.com/resources/knowledge/finance/discounted-payback-period/)
Year 0 Year 1 Year 2 Year 3 Year 4 Years Months
(A) -£ 750,000 -£ 380,640 £ 200,660 £ 400,210 £ 740,360 1 11
(B) -£ 1,200,000 -£ 740,550 -£ 240,990 £ 350,090 £ 1,033,900 2 5
(C) -£ 2,000,000 -£ 1,545,500 -£ 710,950 £ 400,700 £ 1,431,500 2 8
 
 
 
Non-discounting method of Investment Appraisal:
Non-discount method of capital budgeting does not explicitly consider the time value of money. In other words, each pound earned in the future is assumed to have the same value as each pound that was invested many years earlier. The payback method is one of the techniques used in capital budgeting that does not consider the time value of money.(Prentice, Hall 1987)“ The Payback period is the most popular technique and is used through-out business it’s often calculated before tax, and always after accounting depreciation. The advantages to the payback period its easy to compute and apply. It fails to consider the time value of money. Cash inflows, in the payback calculation, are simply added without suitable discounting. This violates the most basic principle of financial analysis which stipulates that cash flows occurring at different points of time can be added or subtracted only after suitable compounding / discounting. (http://www.openlearningworld.com/books/Investment%20Appraisal/Investment%20Appraisal%20-%20Methods%20And%20Considerations/Non-discounting%20Methods.html)
Investment Approval:
Different elements to be considered on the undertaking determination incorporates hazard as money related and non-monetary variables. As talked about in NPV segment, we have accepted an expense of capital of 8% on all activities. This has not represented the diverse dimensions of hazard from each. For instance, more obligation would mean a change to cost of capital. The capital structure of the organization is changing in 2016 with all the more equipping or obligation to value. It ought to be affirmed if the 8% cost of capital is representing this change.
On the monetary examination, assessments could conceivably not be right and that ought to be considered. A potential region for further examination is consider an affectability investigation on all ventures proposed. This could be, for instance, an or more/less 10% or for best case/more terrible case on the income contributions of each venture to see the subsequent yield (NPV and so on) and if the modified yield would change the choice on task choice or show requirement for a relief plan.
Non-money related components to consider incorporate the kinds of tasks being proposed. Undertaking (C) would appear to conceivably have more hazard regions from creating items not recently delivered by Outdoors PLC, absence of information, unexpected costs, for example, contracting new staff or preparing existing staff and the capacity for Outdoors PLC to finish in this new market. Undertaking (An) and (B) would seem to have less hazard factors from expanding on an officially steady retail outlet and moving into web deals on effectively settled items. Different contemplations would incorporate worker effects, for example, a decrease in retail staff with a move to web deals or an expansion in occupations from an extended retail outlet and extra creation employments on new items. Data on this ought to be added to the undertaking recommendations for the sheets’ thought.
The board may likewise consider if the undertaking recommendations are in-accordance with the organization’s vital destinations and how this will be seen by the client base. Each of the three of the proposed activities ought to have an inspirational viewpoint from the client point of view indicates activity and vital arranging. Likewise, thought ought to be given to think about any options that could accomplish similar advantages, upgraded benefits without the disadvantage of a huge spend.
Optimal Policy Investment:
With capital apportioning on the assets accessible for venture of £2.5 million, Outdoors PLC should decide whether the three tasks proposed are distinct for example it is conceivable to execute a bit of an aggregate venture. On the off chance that it is discovered this is the situation, we can ascertain the gainfulness file (PI) of each venture and select undertakings arranged by PI up to point where accessible assets are depleted. PI considers return per pound spent as opposed to the aggregate return per venture. Underneath you will discover for every one of the three activities, the present esteem net money streams and beginning use (cost) from table 1, the PI which is the PV net money streams isolated by expense and the NPV from table 3 with limited income of 8%.
Project PV Net Cash Flows Outlay PI Ranking NPV % Implement Resulting NPV
(A) £ 115,000 £ 750,000 1.53 1 £ 740,360 100% £ 740,360
(B) £ 170,000 £ 1,200000 1.42 2 £ 1,033,900 100% £1,033,900
(C) £ 250,000 £ 2,000000 1.25 3 £ 1,431,500 27.5% £ 390,366
Total: NPV if divisible £2,164,626
In light of the PI the positioning of undertakings is (A) (B) (C) in a specific order. On the off chance that we returned to the IRR count for ventures (An) extending retail outlet to incorporate all items and (B) form into web deals, we see that this backings this positioning with IRR of 49.3% and 44.5% continuously, being over that of undertaking (C) at 36.4%. All things considered to boost restore the prescribed ideal venture approach for Outdoors PLC is actualize 100% of undertaking (An) and (B) and up to 27.5% of task (C) in view of aggregate cost of £2.5 million. The subsequent aggregate NPV if ventures were separable would be £2.16 million toward the finish of four years
Conclusion:
Outdoors PLC intends to implement significant changes to their core business model over the coming years. To bring the proposed investment programme to fruition, the main sources of finance available here. “When considering the various sources of finance available, it is useful to distinguish between external and internal sources of finance (atrill,2014).
Traditionally, the major sources of finance for a limited company were internal sources. (Lydon, Paul) Internally the fastest way, if funds were available, to finance the investment programme would be to use cash reserves from working capital and profits. The retained profit would then be available to use within the business to help with buying new equipment. (Lydon,Paul) Advantages of this would be not taking on any extra debt with interest payments plus means no further dilution of company ownership by taking in outside investors. It can be a powerful business strategy in funding your own growth and using liquid assets that generate poor or no return (Becker n.d). Possibly the disadvantages could affect the short-term capital of the business, working capital is used to pay for the everyday trading activities carried out by the business – staff salaries, rent, ad- hoc bills, if working capital decrease could be detrimental to the day to day running of the business. Shareholders will want to see growth from Outdoors Plc and a return of dividend in the short to medium term.
We would also recommend Outdoors PLC to set out a detailed business plan to fully research the finance options available for raising capital for the possible expansion into the Greenhouse and Conservatory area. If the board, consider going this route and prove that there is a real demand from the customer and a growth market for these new products. There should be a real focus on the size of this potential market and competitors with more knowledge in this area before fully investing in this sphere. Additional risk controls, stress tests and provisions for reserves in respect of future investment will need to be adopted if the investment recommendation comes to fruition and a strategic plan regarding the long-term sustainability of the potential new area and the business as a whole, may need to be addressed.
 
 
 
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