An Analysis Of The Financial Annual Report Of Victrex Plc Accounting Essay

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1.0 INTRODUCTION

This paper comprises of two sections. The first section involves an analysis of the financial annual report of Victrex Plc in 2010, and assessment of the performance of the business in 2010 in comparison to the previous year 2009. The analysis will be carried out by reviewing the financial information provided in the company's annual report allocated for this paper. The type of information included in said annual report are the Chairman's statement, the Chief Executive Officer's review, Financial Director's report, the Director's report & the financial statements such as income statement, balance sheet and cash flow statement. An overview of the business performance over the last five years will also be discussed. The relevant ratios will be computed in order to examine the performance of the business and proffer conclusions and deductions where appropriate. Other relevant information such as corporate governance and accounting policies will be considered and discussed.

The second section of this paper will examine the relevance of working capital management in a business and discussing how the writer playing the role of treasurer impacted on working capital.Furthermore, techniques such as marginal costing and budgeting and their benefits in the decision-making process will be compared to the real world situation.

1.1 COMPANY OVERVIEW

Victrex Plc is a leading global manufacturer of high performance thermoplastics polymers which began using the VICTREX®PEEK in Western Europe and United States to address the needs in the automotive and transportation sector. As business became global, Victrex expanded into high growing markets such as Japan, China, India, Russia, and Brazil. The company has over 30years experience in the production of polyketone. Within this time of operation, Victrex Plc has a production, technology, customer service and distribution team that spans over 30 countries worldwide. Victrex Plc shares are listed in the London Stock Exchange.

Victrex Plc comprises of two divisions namely the Victrex Polymer Solution and the Invibio Biomaterial Solutions. Victrex Polymer Solution focuses on the transport, industrial and the electronic markets. This division specialises in the development and manufacture of high performance polyaryletherketones such as VICTREX®PEEK™ polymer, VICOTE® coatings and APTIV™ films. On the other hand, Invibio Biomaterial Solutions focuses on providing specialist solutions for medical device manufacturers. This division provides access to highly specialised biocompatible PEEK- based materials and services for medical device manufacturers. Their brands are PEEK-OPTIMA, MOTIS, PEEK-CLASSIX and ENDOLIGN.

VICTREX®PEEK Polymer is behind most of today's innovation in markets ranging from automotive, energy, electronics, aerospace, semi conductors, medical, food processing and textiles.

1.2 FIVE YEAR FINANCIAL SUMMARY REVIEW

The annual report 2010 of Victrex Plc has some information over the last five years of the performance of the Organisation. Information in the annual report highlights results on revenue, profit before tax, balance sheets, cash flow ratios and sale volume.

However, this report shows that the revenue of the company for the past five years increased by 6.9% between 2006 (£ 122.5m) and 2007 (£ 131.0m). This growth was due to an increase in sales of their industrial market which went up 16% above the previous year due to increase in demand for oil and gas and chemical processing customers. The transport market also increased by 6% as a result of increased commercial aerospace sales. Regionally, United States was up 9% due to growth in the automotive, commercial aerospace and oil and gas segments, but was partially offset by a reduction in semiconductor sales. Asia Pacific sales were up 13% as a growth in increase sales of transport and electronics (Victrex, 2010).

In the years 2007 and 2008, the company experienced an increase of 7.7% from £131.0m in 2007 to £141.1m in 2008. This growth was as a result of increase in sales in Japan and the United States. Also increase in the commercial aerospace sales in United States and Europe led to the growth in revenue (Victrex, 2010).

In Year 2008 and Year 2009, Based on the impact of customers destocking, there was a decrease of (26.4) % in revenue from £141.1m in 2008 to £103.8 in 2009. This reduction was as a result of reduction of sales volume based on the economic downturn. Transport sales decreased by 41% in 2009 due to significant decline in automotive sales across all regions. Industrial sale volume also decreased by 35% in 2009 as a result of reduced oil and gas demand, this also became resilient based on the economic downturn (Victrex, 2010).

Finally, the report shows that the greatest increase in revenue within the five year period was between 2009 and 2010 as revenue increase was 82.6% from £103.8 in 2009 to £189.5 in 2010. This was as a result of increase in sales volume from 1547 tonnes to 2535 tonnes. The benefit of improved underlying exchange rates as the sterling weakened against their currencies during the year also had a positive impact. Increased sales in electronics were up by 96% over 2009 which reflected strong sales into the customer electronics and semi conductor manufacturing sector. High demand of products resulted in an increase of sales in the geographical and industrial market which allowed for high inventory levels and manufacturing rates. The increase in sales was as a result of restocking trends. Other markets such as transport sales volume increased by 59% over 2009, Industrial sales increased by 53% over 2009. Aerospace showed strong growth due to a combination of higher production levels and new aircrafts orders driven by positive trends and forecast for both business and tourism travel, and new application development for the products to help meet demands (Victrex, 2010).

From the annual report given for the operating profit (Profit before interest and tax), it can be seen that in year 2006 it was £46.1m and increased in year 2007 to £52.0m, amounting to an increase of £5.9m. Also in years 2007 and year 2008, there was an increase of £3.0m with operating profit in 2007 as £52.0m and in 2008 as £55.0m. However, there was a decrease of (£29.9m) in year 2008 and 2009, with operating profit of in 2008 as £55.0m and in 2009 as £25.1m. In year 2010, the company made the greatest increase of £49.8m in operating profit between year 2009 as £25.1m and year 2010 as £74.9m (Victrex, 2010). These figures are illustrated in the diagram below

Figure 1: Victrex Plc's Five Year Revenue and Profit before Interest and Tax

From the chart, it can be deduced that the company had an increase in revenue and profit before interest and tax from Year 2006- 2008, a reduction in Year 2009 and a significant increase in Year 2010.

2.0 VICTREX ANNUAL REPORT ANALYSIS

In assessing the financial situation of Victrex Plc, it is required to look at its Consolidated Income Statement, Consolidated Balance sheet and Cash Flow Statement. The Ratio Analysis is deduced using four broad areas such as Profitability Ratios, Efficiency Ratios, Liquidity Ratios and Investment Ratios (White et al., 2003). For the purpose of this paper, the figures used are from the 2010 Annual Report and are calculated in £million (m).

2.1 INTERPRETATION OF ACCOUNTS

Ratios are indicators to an insight on areas that need to be examined in more details by comparing the previous year (2009) to the following year (2010) of Victrex Plc (Perry, 2011). Hence, the ratios are interconnected and used to draw conclusions from the analysis by evaluating a company's performance. To this end, Victrex Plc will be analysed using the four broad areas of ratio analysis.

2.1.1 REVENUE

The company's income statement shows that revenue was up by 82% to £189.5m in 2010 from £103.8m in 2009. This increase was as a result of increase in sales volume by 64% due to a strong rebound in demand across all markets in Europe, Middle East and Africa ('EMEA'), America, Asia Pacific and United Kingdom. Also there was depreciation in sterling as this resulted in the increase of revenue of other markets, which enabled the company benefit from the exchange rate differential. The annual report shows that the constant exchange rate of the revenue was up 47% compared to 2009 (Victrex, 2010).

2.1.2 PROFITABILITY RATIO

Profitability ratios are used to determine how profitably the business is operating. Thus Profit is a measure of a business success; therefore these ratios are watched by both internal users and external users such as management and shareholders (Jones, 2006). Profitability ratios comprises of Return on Capital Employed, Return on Total Assets, Return on Shareholders Fund, Gross profit Ratio, Operating Profit Ratio and Mark-up Ratio (Perry, 2011).

2.1.2.1 RETURN ON CAPITAL EMPLOYED

This ratio considers how effectively a company uses its capital employed (Jones, 2006).According to Perry (2011), Return on Capital Employed is defined as:

ROCE= Profit before Interest & Tax (Operating Profit) x 100

Total Assets- Current Liabilities (Capital Employed)

In 2010, it was 74.9m X 100 = 74.9m Ã-100 = 31.67%

279.0m - 42.5m 236.5m

In 2009, it was 25.1m X 100 = 25.1m Ã- 100 = 12.89%

221.0m - 26.3m 194.7m

From the calculation above, it shows that there was an increase of 18.78% in 2010 compared to 2009. This was due to the operating profit, total assets and current liabilities. In terms of the operating profit, the increase was up 198% to £74.9m in 2010 from £25.1m in 2009 and this was as a result of an increase in gross profit which was impacted by the increase in revenue and cost of sales. The gross profit increased 87% with the gross margin at 63.6% of the revenue in 2010.The gross margin was 62.1% in 2009 and was up 63.6% in 2010. The 1.5% difference was due to positive impact of currency partially offset by an increase in 'cost per tonne' as sales were largely out of inventory produced in 2009. There was a decrease in production volumes in 2009 as a result in increased fixed production costs per tonne. Sales, marketing and administrative expenses increased by 16% to £45.7m in 2010 from £39.4m in 2009 as a result of elements of staff remuneration being linked to the financial performance. There were also investments in resources to drive new application development across both divisions. The annual report also shows the constant exchange rate was up 53% compared to 2009. The Total Assets also increased by 26.2% to £279m in 2010 from £221m in 2009, this was as a result of an increase in cash with £77.2m in 2010 from £18.6m in 2009 which reflects the strong rebound in sales generated from operations which was shown on the cash flow statement . The current liabilities were up due to an increase in trade and other payables that were affected by accruals of £18.7m in 2010 from £8.8m in 2009 which implies the company still has cash to pay to their creditors (Victrex, 2010).

2.1.2.2 RETURN ON TOTAL ASSETS

This ratio shows how well a business is profitable in relation to its invested assets and what it has taken to fund it (Dyson, 2007). According to Perry (2011), Return on Total Assets can be defined as:

ROTA = Profit before Interest and Tax Ã- 100

Total Assets

In 2010, it was 74.9m Ã- 100 = 26.85%

279m

In 2009, it was 25.1m Ã- 100 = 11.36%

221m

The calculation above shows that there is an increase of 15.49% in 2009 to 2010. But this increase was due to an increased operating profit as well as an increase in total assets. As discussed in ROCE, the operating profit increased due to increase in gross profit of 87% within 2009 and 2010, cost of sales of 75.3% in 2009 and 2010 and revenue of 82% in 2009 and 2010. Also in terms of the total assets, there was an increase in cash and cash equivalents of 315% between 2009 and 2010, increase in trade and other receivables which implies increase in money owed to the company by debtors of 21.6% between 2009 and 2010 and an increase in deferred Tax assets of 36.6% between 2009 and 2010 (Victrex, 2010).

2.1.2.3 RETURN ON SHAREHOLDERS FUNDS

This ratio measures how well the management turned the return on capital employed to a return on the funds invested by the shareholders (Millichamp, 1997). According to Perry (2011), Return on Shareholders Funds can be defined as:

ROSF = Profit after Tax (Earnings) Ã- 100

Shareholders Funds

In 2010, it was 54m Ã- 100 = 25.60%

211m

In 2009, it was 17.8m Ã- 100 = 10.60%

168m

From the calculation above, there was a 15% increase between 2009 and 2010 in the return of shareholder's funds. This increase is due to an increase of revenue which was as a major catalyst in boosting sales and also depreciation in the sterling which increased the revenue from other markets. Also there was an increase in the shareholders funds of £43m between 2009 and 2010, due to the fact that the directors recommended the payment of a final dividend of 18.6p per ordinary share and a special dividend of 50.0p per ordinary share, as a result of this, there was an increase in the share premium. Based on the ROSF, it is likely the shareholders will appreciate the results, as this shows an increase from the previous year and the company is making profit in 2010 (Victrex, 2010).

2.1.2.4 GROSS PROFIT MARGIN

This ratio calculates the profit earned through trading, it is useful in a business where stock is purchased, marked up and then resold (Jones, 2006). According to Perry (2011), Gross Profit Margin can be defined as:

Gross Profit Margin = Gross Profit Ã- 100

Sales

In 2010, it was 120.6m Ã- 100 = 63.64%

189.5m

In 2009, it was 64.5m Ã-100 = 62.14%

103.8m

As can be seen above, the Gross profit margin difference between 2009 and 2010 is 1.50%. This increase was based on increased Cost of sales as well as in increase in revenue. The gross profit increased 87% with the gross margin at 63.6% of the revenue in 2010. The gross margin grew to 63.6% in 2010 from 62.1% in 2009.The 1.5% difference was due to positive impact of currency partially offset by an increase in 'cost per tonne' as sales were largely out of inventory produced in 2009. There was a decrease in production volumes in 2009 as a result of increased fixed production costs per tonne. Also, there was an increase in sales which led to the increase in revenue to 82% to £189.5m in 2010 from £103.8m in 2009. Also depreciation in sterling also helped the company's growth as the revenue of the other markets increased (Victrex, 2010).

2.1.2.5 OPERATING PROFIT MARGIN

This is an important financial indicator; it is calculated after expense in the profit and loss account. It is mostly used for internal comparison due to the fact that differing accounting policies applied by different businesses make external comparison complicated (Perry, 2011). Operating Profit Margin can be defined as:

Operating Profit Margin = Profit before Interest and Tax Ã- 100 (Perry, 2011)

Sales

In 2010, it was 74.9m Ã- 100 = 39.53%

189.5m

In 2009, it was 25.1m Ã- 100 = 24.18%

103.8m

The operating profit margin difference between 2009 and 2010 is 15.35% as this was as a result of the increase in the operating profit which was up 198% to £74.9m in 2010 from £25.1m in 2009. This was as a result of increase in the sales, marketing and administrative expenses and gross profit, as well as increased sales. Sales, marketing and administrative expenses increased by 16% to £45.7m in 2010 from £39.4m in 2009 as a result of elements of staff remuneration being linked to the financial performance. There were also investments in resources to drive new application development across both divisions. The annual report also shows the constant exchange rate was up 53% compared to 2009. As discussed above, the increase in revenue to 82% to £189.5m in 2010 from £103.8m in 2009 was as a result of increase in sales. Also depreciation in sterling also helped the company's growth as the revenue of the other markets increased (Victrex, 2010).

2.1.2.6 MARK UP RATIO

The Mark up Ratio is another way of measuring the profitability of a business. It also measures the amount of profit added to the cost of sales, in addition it can be the cost of goods sold equals to the sales revenue (Perry, 2011). Mark up Ratio can be defined by Dyson (2007) as:

Mark up Ratio = Gross Profit Ã- 100

Cost of Sales

In 2010, it was 120.6m Ã- 100 = 175.04%

(68.9) m

In 2009, it was 64.5m Ã- 100 = 164.12%

(39.3) m

The Mark up ratio difference between 2009 and 2010 is 10.92%. This implies that the gross profit increased 87% with the gross margin at 63.6% of the revenue in 2010. The gross margin grew to 63.6% in 2010 from 62.1% in 2009. The 1.5% difference was due to positive impact of currency partially offset by an increase in cost per tonnes as sales were largely out of inventory produced in 2009. There was a decrease in production volumes in 2009 as a result of increased fixed production costs per tonne. Also, there was an increase in sales which led to an 82% increase in revenue to £189.5m in 2010 from £103.8m in 2009. Also depreciation in Sterling also helped the company's growth as the revenue from other markets increased. Although, Cost of Goods increased by 75.3% between 2009 and 2010 and this was as a result of increase in demand of Victrex Peek Polymers across all markets, the company still made an increase in revenue (Victrex, 2010).

2.1.3 EFFICIENCY RATIO

This ratio is also known as the activity ratio. The efficiency ratio is used to measure how effectively a business enterprise is operating. It is concerned about the primarily use of assets (Jones, 2006). This ratio is used to determine how a business uses its assets to maintain its activities and sales (White et al., 2003). Four of the efficiency ratios will be used to analyse Victrex Plc.

2.1.3.1 SALES PER £1 CAPITAL EMPLOYED (NET ASSET TURNOVER)

This ratio is also known as Asset Turnover Ratio. It indicates how effectively the shareholders funds are generating money (Perry, 2011). According to Perry (2011), It can be defined as:

Sales per £1 Capital Employed = Sales = Sales

Capital Employed Total Assets - Current Liabilities

In 2010, it is 189.5m = 189.5m = 0.80 times

278.9m -42.5m 236.5m

In 2009, it is 103.8m = 103.8m = 0.53 times

221.0m - 26.3m 194.7m

The results above show that the shareholders funds generated more money in 2010 than in the previous year. There was an increase in revenue due to an increase in sales and a depreciation of Sterling also helped the company's growth as the revenue from other markets increased. Capital employed increased by £41.8m between 2009 and 2010. This was as a result of increase in cash and cash equivalents, trade and other receivables, deferred tax rates & trade and other payables. Giving a proper explanation, the total assets also increased by 26.2% to £279m in 2010 from £221m in 2009, this was as a result of an increase in cash with £77.2m in 2010 from £18.6m in 2009 which reflects the strong rebound in sales generated from operations which was shown on the cash flow statement. The current liabilities were up due to an increase in trade and other payables that were affected by accruals of £18.7m in 2010 and £8.8m in 2009 which implies the company still has cash to pay to their creditors (Victrex, 2010).

2.1.3.2 NON- CURRENT (FIXED) ASSET TURNOVER

This ratio provides an analysis of how efficiently the fixed assets are at generating sales. It is effective as an internal indicator when comparing one period with another (Perry, 2011).According to Perry (2011), it can be defined as:

Non- Current (Fixed) Asset Turnover = Sales

Non-Current (Fixed) Assets

In 2010, it was 189.5m = 1.31

145.1m

In 2009, it was 103.8m = 0.71

146.8m

Looking at the results above, Victrex Plc used its fixed assets more effectively in 2010 compared to 2009 thus the business is less at risk in 2010 than in 2009. This can be explained saying "for every GBP (£) tied up in non-current assets, the amount generated from sales was higher". This can be further explained due to the increase in revenue which was due to a boost in sales and depreciation of the Sterling as earlier discussed in the previous section. There was a decrease in fixed assets and this can be explained looking at the decrease in property, plant and equipment which was £125.3m in 2010 from £129.5m in 2009, this decrease was as a result of depreciation over the useful economic life of the assets. Also Intangible assets also decreased in 2010 to £10.1m from £10.3m in 2009 due to the goodwill of the acquisition of Victrex Polymer Solution being tested for impairment, thus reducing the goodwill of the acquisition. Also the impact of the know-how of the acquisition associated with the raw material BDF was fully amortised by 2010 resulting to no effect on the intangible assets (Victrex, 2010).

2.1.3.3 INVENTORY TURNOVER RATIO

This ratio is also known as stock turnover ratio. This ratio effectively measures the speed with which stock moves through the business. This varies from business to business and product to product (Jones, 2006). According to Perry (2011), it can be defined as:

Inventory Turnover Ratio = Cost of Goods Sold

Inventory

In 2010, it was 68.9m = 2.00 times

34.5m

In 2009, it was 39.3m = 1.06 times

37.2m

The calculation above shows that the inventory turnover increased 2.00 times in 2010, this implies that for every sale of two, there was one inventory held while in 2009, for every sale of one, there was one inventory held. Thus Victrex Plc was more effective in 2010 at purchasing and selling of goods, further explaining that there was more sale compared to the level of inventory held and the company was able to turn over its inventory better compared to the previous year (2009).This result is affected by the increase in cost of goods sold which was £68.9m in 2010 from £39.3m in 2009 as there was a higher demand of products in 2010 and the improvement over the period reflects the favourable effective exchange rates together with a lower underlying cost of sales per tonne in the second half resulting from lower fixed costs per tonne as production volume increased. Inventory decreased to £34.5m in 2010 from £37.2m in 2009, although raw materials increased due to the company stocking raw materials to enable them maintain supplies during any short term disruption but finished goods decreased in 2010 compared to 2009 because there was a short term surge in the demand for goods (Victrex, 2010).

2.1.3.4 RECEIVABLES COLLECTION PERIOD

This ratio seeks to measure how long customers take to pay their debts. Therefore, the quicker the business collects and banks the money, the better it is for the company. This ratio can be used monthly, weekly or daily basis (Jones, 2006). According to Perry (2011), it can be defined as:

Receivables Collection Period = Receivables Ã- 365

Sales

In 2010, it was 19.1m Ã- 365 = 36.79 days

189.5m

In 2009, it was 15.7m Ã- 365 = 55.21 days

103.8m

Looking at the calculations above, this implies that the business was more efficient at recovering its debts from customers as the results were lower in 2010 with 36.79days compared to 55.21days in 2009. This was as a result of increase in sales of goods produced in 2010 compared to 2009. This also indicates that in 2010 there was better cash flow as it took a shorter time to receive money owed by customers compared to 2009 (Victrex, 2010).

2.1.4 LIQUIDITY RATIO

These ratios are derived from the balance sheets and seek to test how easily a company can pay its debts. These ratios are important to loan creditors such as bankers who have loaned to the business (Jones, 2006). There are two types of ratios namely the 'current ratio' and the 'acid test ratio' (Perry, 2011). These ratios will be used to analyse Victrex Plc's liquidity.

2.1.4.1 CURRENT RATIO

This ratio tests whether the short term assets cover the short term liabilities. If this is not the case, then there will be insufficient liquid funds immediately to pay to the creditors (Jones, 2006). According to Perry (2011), Current ratio can be defined as:

Current Ratio = Inventory + Receivables + Cash and Cash Equivalents

Payables + Short Term Borrowings

In 2010, it was 34.52m + 0.74m + 19.11m + 2.24m +77.27m = 133.88m = 3.15: 1

(25.15)m + (15.11)m + (2.27) m (42.53)m

In 2009, it was 37.17m + 1.02 m+15.66 m+ 1.70m +18.56m = 74.11m = 2.82: 1

(6.30)m + (5.42)m + (14.58)m (26.3)m

From the calculation above, current ratio increased from 2.82 in 2009 to 3.15 in 2010. Therefore in 2010, for every £1 in current liabilities, there is £3.15 in current assets compared to 2009 during which for every £1 in current liabilities, there is £2.82 in current liabilities. This implies that the business has enough cash to cover its liabilities. If the current assets exceed the current liabilities, this could indicate sufficient cash in the business (Dyson, 2007). However, the major impact on the increase in current ratio was as a result of increase in cash of £58.7m between 2009 and 2010, which reflects the strong rebound in sales and the Group has a committed bank facility of £40m, all of which was undrawn at the year end and this expires in September 2012. Also looking at the cash flow statement, the company generated cash from operations. There was an increase in receivables of £3.4m between 2009 and 2010. The current liabilities were up due to an increase in trade and other payables that were affected by accruals of £18.7m in 2010 from £8.8m in 2009 which implies the company still has cash to pay to their creditors and also an increase in current income tax liabilities of £9.7m between 2009 and 2010 (Victrex, 2010).

2.1.4.2 ACID TEST RATIO

This is also known as the Quick Ratio. It is a measure of extreme short -term liquidity, thus the acid test ratio excludes inventories, which is the least liquid of the current assets to arrive at an immediate test of the company's liquidity (Jones, 2006). The importance of this ratio is that it has a clearer picture of the situation as a firm may not be able to dispose of its inventories immediately (Dyson, 2007).According to Perry (2011), Acid Test Ratio can be defined as:

Acid Test Ratio = Receivables + Cash and Cash Equivalents

Payables + Short Term Borrowings

In 2010, it was 0.74m + 19.11m + 2.24m +77.27m = 99.36m = 2.34 : 1

(25.15)m + (15.11)m + (2.27)m (42.53)m

In 2009, it was 1.02m +15.66m + 1.70m +18.56m = 36.94m = 1.40 : 1

(6.30)m + (5.42)m + (14.58)m (26.30)m

Looking at the calculation above, there is an increase in Acid test ratio of 2.34 in 2010 from 1.40 in 2009, even after the inventories were removed. This means that the business has enough cash to cover its liabilities. This implies that the inventories did not have an impact in the ratio as the major contribution to this change were the increase in cash as well as the increase in trade and other receivables ,increase in payables and current income tax liabilities , as these were explained above in the current ratio (Victrex, 2010). Therefore an acid test ratio above one (1) implies the company can still convert cash at ease.

2.1.5 FINANCIAL GEARING RATIOS

These ratios measure the ability of the business to meet its longer-term obligations and they indicate the amount of risk to which shareholders are exposed through the amount of debt present in the business capital structure (Jones, 2006). Gearing ratio and Interest Cover will be used to analyse Victrex Plc.

2.1.5.1 GEARING RATIO

This ratio measures the relationship between equity and debt capital of a company. The gearing of a business demonstrates how reliant the business is on borrowed money, rather than share capital. (Perry, 2011). According to Perry (2011), gearing ratio can be defined as:

Gearing Ratio = Net Borrowings (Debts) Ã- 100

Shareholders Funds (Equity)

According to Annual Report, the gearing ratio could not be calculated as there were no net borrowings in 2009 and 2010. Based on the fact that the Group had a committed bank facility of £40m, all of which was undrawn at the year end and this expires in September 2012 (Victrex, 2010).

2.1.5.2 INTEREST COVER

This ratio is of particular interest to those who have loaned money to the company (Jones, 2006). According to Perry (2011), it can be defined by showing the relationship during the trading period between operating profits and the interest charges resulting from the level of debt during the period. The formula is:

Interest Cover = Operating Profit = Operating Profit

Net Interest/ Finance charges Finance Cost - Finance Income

In 2010, it was 74.9m = 74.9m = 1.63

(93)m -139m (46)m

In 2009, it was 25.1m = 25.1m = 0.81

(60)m - 91m (31)m

Deducing from the calculation above, the interest cover has increased in 2010 to 1.63 from 0.81 in 2009. This increase implies that the company is generating enough revenue to pay its debts. This increase in 2010 is due to the fact that the operating profit increased which is as a result of increase in revenue as there was more demand of the products leading to an increase in sales compared to the previous year (2009). Thus in 2009, the business could have been in a financial risk as there might not have been sufficient cash to ride out sudden downturn as a result of the decrease in revenue. The finance income increased in 2010 to £139m from £91m in 2009. The Finance Cost increased by £33m between 2009 and 2010. This ratio is important to shareholders (Victrex, 2010).

3.0 CONCLUSION

Ratio Analysis is a very important way of evaluating the overall performance of an Organisation. Many organisations use this technique to compare the company's performance over time or compare it with the financial performance of other companies.

However, having analysed Victrex's Plc's, it can be said that Victrex Plc is a going concern as it has sufficient cash and resources to control its operational existence. Looking at the five year financial summary, it can be said that that year 2010 has proven to be the best financial year over the period. These analysis show that the company had an increase in cash and cash equivalents, increase in sales volume, high gross margin and also an increase in the operating profit.

Therefore, in terms of its profitability, the company had an increase in the gross margin showing an improvement which was based on increase in revenue with the the major catalyst to this being the favourable exchange rates and increase in sales. The operating margin also increased as a result of the increase of sales, marketing and administration expenses which emanated from elements of staff remuneration being linked to the financial performance. There was also an increase in the return of capital employed, return on total assets and also return on shareholders funds. This increase in 2010 indicates that the company has done better overall compared to the previous years in terms of a measure in the business success making the company attractive as an investment.

Looking at the efficiency ratio, the inventory turnover increased as a result of high demand of products across different markets. The non-current assets ratio increased although Property, plant and equipment decreased as a result of depreciation of the assets, Also the receivables collection period reduced indicating that the company is better at retrieving its debts from its debtors, and finally Net asset turnover also increased as a result of increase in cash and cash equivalent as its impact reflected on the capital employed. Thus, this increase in 2010 indicates that the company is better at using its assets effectively in generating sales compared to the previous years.

Considering the liquidity of the company, a conclusion can be drawn based on the current asset ratio and the acid test ratio which indicate an increase due to cash and cash equivalents and also the increase in the trade and other receivables, thus indicating that the company will be able to pay off any debt if a situation occurs in year 2010.

In terms of the financial gearing ratios, this helps to indicate how stable the company is, looking at Victrex Plc, there was no gearing ratio calculated as the firm had no net borrowings but there was an increase in interest cover this was as a result of the increase in operating profit and also based on the increase in share premium, thus this increase in 2010 will allow shareholders to appreciate the growth of the business compared to the previous year.

Conclusively, Victrex Plc appears to be a well positioned company for continued growth in its segment of the market in year 2010 compared to the previous year. The management of Victrex Plc have a good understanding of the markets they operate in by proactively anticipating the expected demands of their customers and continuing to take advantage of opportunities within the market place and expand its horizons as a market leader in the production of high performance thermoplastics polymers.

WORD COUNT: 5579

SECTION 2

4.0 THE ROLE OF WORKING CAPITAL MANAGEMENT IN MANAGING A BUSINESS

Working Capital can be defined as the current assets less current liabilities. The major components of the current assets are inventories, trade and other receivables and cash and cash equivalents while current liabilities components are trade and other payables, bank overdraft and short term borrowings (Mclaney & Atrill, 2008).

Working Capital Management can be defined as the management and control of the current assets and current liabilities which are the main constituents of the working capital (Mathur, 2002).

The importance of working capital management is an essential part of a business short-term planning process. Management should make decisions on how much of each component should be held (Mclaney & Atrill, 2008).According to Vijayakumar (2001), the significance of working capital management comprises of two reasons namely 1) A substantial portion of a total investment is invested in the current assets and 2) level of the current assets and current liabilities will change as a result in variation in sales.

Working capital management is important to the financial health of the business from all industries. The working capital needs of a particular business are likely to change over time as a result of changes in the business environment, giving room for decisions to be made constantly (Mclaney & Atrill, 2008).

Thus Working Capital has acquired a great significance and sound position for two twin objects of profitability and liquidity. The importance of working capital management and its satisfactory provision can lead not only to material savings in the economical use of capital but also assist in furthering the ultimate aim of the business by maximising the financial returns on the minimum amount of capital that needs to be employed (Vijayakumar, 2001).

If working capital is mismanaged, it can lead to loss of profits in the short-run but will results to a downfall of the firm in the long-run. Thus the adequacy of working capital together with efficient handling determines the survival or demise of the firm.

In the real world scenario, a firm can exist and survive without making profit but it cannot survive without working capital funds, thus this could lead to bankruptcy and closure over a period of time. Therefore in terms of the working capital management, one should consider the short-term liquidity position of the firm. The investment decision in the current assets deals with a few problems with working capital management as profitability and liquidity are dependent on the current assets management. Therefore an appropriate level of current assets and current liabilities in the business determines the level of working capital that affects the firm's liquidity (Vijayakumar, 2001).

The winning game was a simulation during the financial analysis and control module, the writer's role in this game was a treasurer. The treasurer's responsibility in the game was to advise the team on cash planning, to handle, control and record cash movements and prepare the cash flow statement. After preparation of the cash flow statement, the treasurer reconciled the cash records to the actual cash position throughout the year. The treasurer worked closely with the financial manager to jointly control all cash movements whether receivables or payables.

The treasurer also advised the team to win sales from the home market as receivable period was one quarter and the sale to the foreign markets was two quarters. Selling to the home market helped increase the cash flow situation as cash was gotten faster for goods sold. The sources of funds were through loans, discounting and existing shareholder's equity. The team only indulged in the discounting option once as seen in year one in the income statement as it was seen as less profitable. However, high amounts of loans were borrowed in year two to support the engineering and quality in order to be able to win bids as this can be shown in the balance sheet for year one and two.

Overall, looking at the management of the working capital of the game, one can deduce that as a result of poor team decision making which led to high inventory level based on purchase of raw materials which were not planned properly, the purchase of new equipments increased the work in progress, we did not benefit in sales as we had insufficient contract to meet capacity and also large unfilled contracts led to increase in the level of inventory. Receivables were also delayed due to the type of contract we bided for and also dependent on the foreign market which took a long time to receive cash.

Therefore in the real world situation, the treasurer should devote considerable time in effective control and the supervision of working capital components as this generates growth and profit of the business.

WORD COUNT: 778

5.0 MARGINAL COSTING

Marginal costing can be defined as a technique which divides costs in two categories namely fixed cost and variable cost when producing an extra unit of a product. A fixed cost can be defined in the short run as it does not vary in total when output fluctuates, for example; rent for a factory, while variable costs are those that total cost varies pro rata with the volume of output, for example, Direct Material and Direct Labour (Mott, 2008) .

According to Perry (2011), a circumstance whereby a product is already being produced and an additional product is demanded by a customer, the cost of producing the additional product is referred to as Marginal Costing.

In the winning margin game, the marginal costing enabled the team to make decisions based on what type of products to be manufactured and what is required in the production. In Year 3 of the game, the team explored opportunities in order to increase profitability by investing in product support to ensure all products are sold. It also helped in optimising contribution by evaluating the difference between the best and worst scenarios of the terrier and the tiger's sale values, variable cost and unit contribution. Thus, the benefit of the marginal costing in the game helped the team aim at winning orders closer to the best end of the contribution where it was profitable.

In the real world situation, Marginal Costing is used by management to help make decisions to the best cost of action in the short term (Millichamp, 1997). Decisions made by management by the assistance of marginal costing can be classified according to Mott (2008) as:

Make or Buy Decisions

One -off pricing Decisions

The consequences of a change in Product Mix

The Volume requires to break even or make a specified profit

A choice between Alternative Cost Structures

WORD COUNT: 312

6.0 BUDGETING

Budgeting can be defined as an important tool for managing and controlling a business (Mclaney & Atrill, 2008). According to Perry (2010), a budget objective identifies where the business needs to be at the end of a financial year. A budget should be prepared as a resource plan to enable that both financial and market objectives are achieved.

Therefore According to Drury (2004) and Millichamp (1997), the purpose of budgeting are classified into several characteristics; some of these characteristics would be used by the writer to discuss the budgeting technique used in the winning margin game. These Characteristics are as follows:

Planning: Budgets are used for future planning of activities in a company. It is used to benchmark to ensure companies meet their goals. In the winning margin, the team made plans based on what product should be produced, what market to invest in and plans based on financial issues such as loans to enable planning on cash inflow and outflow.

Profitability: Budgets can be used for assessing future profitability of management plans. This is used in comparing the budget plan to the actual results as this was done in the winning margin in year two in calculating the production budget and sales budget which was compared to the actual plan.

Coordination: The benefit of a budget is to enable various departments to cooperate and compromise when there is limited resources. In the winning game, the team cooperated in regards to the production capacity as to what contract to go for, what market to invest in and what stock to purchase and this helps detect any coordination problems and improve efficiency.

Communication: Budgeting enabled different departments in the winning margin game exchange information and ideas as the treasurer recorded cash movements, financial manager handled the financial policies, the purchasing manager was in charge of inventory, the commercial manager was aware of what market to invest in and the production manager was aware of what equipment to purchase.

Resource Allocation: Budget help in facilitating resource allocation in a company. In the winning margin, resources were distributed across the various departments as cash outflow was as a result of engineering and quality, product support and equipments.

In the real world, Budgeting can be used to promote forward thinking and it is a short term means of working towards a business objectives.

WORD COUNT: 394

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