Managerial Accounting - Managing Financial Resources

Seminar Paper 2003 23 Pages

Business economics - Banking, Stock Exchanges, Insurance, Accounting



1.0 Question
a. Abstract
b. Introduction- Business Statistics of Company
1.i Advanced Medical Solutions Group (AMS) plc - Corporate Analysis
1.i.a Corporate Performance over Past two Years
1.i.b Control of Working Capital/Liquidity
1.i.c Funding/Capital Structure of AMS
1.i.d Implications of Ratio’s - Comments to Investor
1.ii Judging the Profitability of a Company - ROCE Ratio and It ’ s Limitations Alternative or other Performance Measurements - Comments on EVA & MVA

2.0 References

3.0 Appendix
3.a Copy of Annual Report 2002
3.b Financial Charts
3.c Financial Accounts
3.c.i Profit & Loss (Income Statement)
3.c.ii Balance Sheet
3.c.iii Cash Flow Statement
3.d Benchmark SIC codes

1.0 Question

a. Abstract

This paper summarises in a short and concise manner the potential benefit of financial analysis to a prospective investor. The company ADVANCED MEDICAL SOLUTIONS GROUP PLC (AMS) was chosen at random - figures used are from the group as a whole.

In section (i.), I will measure the companies past performances related to Financial Statements (F/S) and identify its strengths and weaknesses associated with this information.

In section (ii.), I will comment on the limitation and usefulness of ROCE vs. EVA & MVA.

b. Introduction- Business Statistics of Company

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1.i Advanced Medical Solutions Group (AMS) plc - Corporate Analysis

1.i.a Corporate Performance over Past two Years

Corporate performance can be analysed with profitability ratios [see table 1 (measuring a company’s return on investment1 )], for a user of financial ratio’s it’s an indicator of a company’s ability to generate revenues in excess of expenses2. As available, some of the ratios will be compared against RMA standards3. There is no space to consider the direct competitors (AorTech, NMT or Surgical Innovation) of AMS, which is certainly a good way to compare AMS performances and foothold in the market.

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Table 1: Profitability Formulas, Brealey et. al., 2001

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Table 2: Key Performance Figures & Profitability ratios4

Gross Profit Margin - Increased Turnover of plus 91% in 2002 vs. 2001 reflects the contributions from the recent acquisition of MedLogic Global Holdings, as well as strong sales growth (MedLogic contributed £0.9m to the turnover bottom-line). Net loss reflects improved gross margins and a substantial decrease in distribution expenses in addition to 242K exceptional income. COGS totalled £5.887m, or 70.3% of sales, on the £8.37m in sales reported by AMS in 2002. This gross profit margin improved, when COGS totalled 82.4% of sales. In 2002, the turnover was the highest vs. the previous five years5.

Operating Margin- Operating losses decreased to -£1.4m and variance at -26.4% vs. the previous year. Total Turnover was higher by £1.0m which difference was offset by increased SG&A expenses, which included costs for R&D, sales & marketing. R&D expenses also rose from £748m to £969m to 11.6% of turnover in 2002.

Net Profit Margin - In 2002, Net Profit Margin based on EAT for AMS with -£1.40m, or -19.8% in turnover. This profit margin is a slight increase over the level achieved in 2001, when the profit margin was -15.3% of turnover. The interest was added back since AMS is partly finance by debt; otherwise the more common calculation net income/turnover might be used. Profit Margin shows much of each £ turnover is left after all costs, of any kind, are subtracted. These other costs include such items as interest on corporate debt and income taxes.

Return on Equity (ROE) - ROE is the most comprehensive indicator of profitability, since this ratio is influenced operating-, financing-, investing- and tax related decision. ROE can be increased by debt financing since the interest rates are lower than the ROE, which is also true for AMS, which is partially financed through debt.

The company's return on equity in 2002 was -10.7%. This was an improvement in performance from the -11.6% return that the company achieved in 2001.

Return on Assets (ROA) - ROA measures the return on assets and it’s a reflection on how well AMS management uses its assets to generate profits. It is a better measure for operating efficiency than ROE, which only measures how much profit is generated on the shareholders equity but ignores debt funding. Since taxes are different from country to country generally ratios in the financial industry are compared on an EBIT basis. There has been a minor increase in the average total assets from 2002 vs. 2001, which included the exceptional loss of £0.2 incurred on disposable fixed assets.

1.i.b Control of Working Capital/Liquidity

Financial strength looks at the business risk and liquidity, which is about shot-term viability of a company. A concern for investors and analysts are a company’s ability to meet its maturing and on- going obligations6. Working capital has an effect on incremental cash flows especially if net working capital changes from previous levels (factors are especially, stock movement, trade debtors and trade creditors).

The following ratios in table 3 will give us a good inside of AMS of its control of working capital and it’s liquidity position:

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Table 3: Liquidity and Financial Strength Formulas

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Table 4: Key liquidity figures and Financial Strengths ratios

Net Working Capital/Total Assets Ratio - This ratio is positive and grew to 10.5% in 2002 vs. the preceding year. Working capital and its ratios are especially influence by stock movement, trade debtors and creditors that has an effect on to the bottom-line of the business. In 2002, stock and creditors remained comparable levels despite the acquisition and continuous improvement vs. 2001. Working capital grew by £0.57m in 2002. This positive ratio is also a reflection of the increase in debtors to £2.44m due to development grants & R&D tax credits (see also appendix table 3b1)

Current Ratio reflects ability of AMS to repay the current debt by using current assets. Its current ratio of 1.94 and 1.65 in 2002 vs. 2001 is near the mean of the SIC code, indicates that it won’t have any problem to repay its debt. Most commonly the current ratio is calculated with the cash yielding a higher ratio of 4.96 for 2002, which is out of the average range of 1.1-3.37 for SIC code 3841.

Quick Asset (Acid Test) Ratio - This ratio compares the instant assets, excluding stocks available to cover the current liabilities. According to this ratio, of 1.44 and 1.15, AMS shows the healthy ability to repay its current debts (calculated w/out cash).

Stock Turnover Ratio: For the last years, cost of sale was £3.912m with a stock of £918K,which is equivalent to a ratio of 4.26, slightly higher than industry standard (SIC 3841). In other words, AMS turns it’s stock a good 4.3/year.


1 Brealey et.al. pp 505

2 Ciancanelli et. al., ch 2, 19

3 RMA (Risk Management Association), Url: http://www.rmahq.org/, SIC Code (3841 - Manufacturing; Surgical & Medical Instruments Supplies)

4 Annual Report & Accounts 2002, publ. March 2003, (P&L Account & Balance Sheet), pp22 & 24

5 Annual Report & Accounts 2002, publ. March 2003, pp42

6 Cinacanelli et. al., chapter 2, 20.

7 This SIC code range is the RMA financial average of 102 surgical & medical manufacturing companies between Jan-Dec, 2002


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managerial accounting managing financial resources



Title: Managerial Accounting - Managing Financial Resources