Travis Perkins Plc: A Corporate Performance Analysis


As requested have carefully carried out and completed the financial appraisal of Travis Perkins Plc's performance for the period 2007 to 2008 fiscal years. The report consists of three distinct parts: Firstly, there is the narrative part; secondly is a trend analysis and thirdly is a financial ratio analysis accompanied by the financial statements in the appendices.

Trend Analysis

The trend analysis comprises of both a vertical and horizontal analysis intended to highlight significant changes in the company's financial structure and performance during the 2007-2008 financial periods under review.

Comprehensive Statement of Position -Vertical Trend Analysis

It is clear that the company's balance sheet is dominated by Goodwill (non-current assets) and accounts receivables as current assets. Asset balances have been stable over the period. In general non-current assets have marginally increased by 3.09%, the increase can be attributed to increase in Derivative financial instruments. Current assets have also remained relatively stable although the negative hedging reserve has marginally distorted this proportion at the end of 2008. Non-current liabilities have declined to 22.7% due to a decrease in the financial liabilities, which is due to the re-classification of debt to current liability.

Comprehensive Statement of Position -Horizontal Trend Analysis

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The horizontal trend analysis shows a steady non-current asset figure with a major growth in Derivative financial instruments. Consulting the notes reveals that, the Group utilizes derivative financial instruments for hedging purposes regarding its exposure to interest rate risks arising from financing operations. Therefore, cash flow hedges of interest rate risk are recognized directly in equity, an increase in material portion is recognized in the consolidated statement of income. Current asset levels have also remained stable, however increase in Inventories and accounts receivables remain immaterial.

Looking at shareholders equity, the figure has remained relatively stable implying that no significant capital financing has taken place. This can be attributed the losses recognized in the hedging reserve, though not financially significant. These losses come as a result of revaluations of financial instrument that were impaired due to the 2007/2008 financial recession. Generally, non-current liabilities have declined especially financial liabilities which, have fallen over the periods although there has been a rise in derivative balances a type of financial instrument but these are insignificant in financial terms.

Current liabilities on the other hand have decreased; an area of improvement is in short-term financial liabilities. However, further investigation is required from the notes to the accounts to provide more explanation. The other decrease in the payables balances, but this is also reflected in decreasing receivables and cash balances indicating that the company is becoming more efficient in managing its credit. Therefore, the company's a comprehensive analysis of the statement of position reveals no significant structural changes in its financial position.

Vertical and Horizontal Trend Analysis Commentary: Statement of Comprehensive Income

It is clear that, the company's revenues are increasing demonstrating that the market is expanding. This is also can be supported by decreasing cost of sales. In as much as operating expenses have slightly decreased in 2008 this can be attributed, operating profits has been remedied by management and remains to be relatively stable.

With regard to exceptional items, the Group holds a number of vacant and partly sub-let leasehold properties. As deemed necessary, provisions have been made for residual lease commitments. This is done after considering existing and expected sub-tenant arrangements. In 2008, existing and expected sub-tenant arrangements attributed to a significant increase in the provision which takes a considerable portion of the exceptional items. Thus for 2008, exceptional figures of £18.3m were attributed to Builders Merchants, while £37.9m were attributable to Retail leases. Form the financial statements, total exceptional figures are added back for the calculation of adjusted profit, simply operating profit before exceptional items. Therefore, it is important to note that profits for 2009 and 2008 are significantly affected by exceptional charges. However, the general underlying trend indicates recovering profitability especially after a recessionary period witnessed in 2008 as a result of the global financial crisis. Financial Ratio Analysis -Profitability

2.1.1. Profitability

The company's ROCE has significantly reduced as the company seems not to be utilising its capital more efficiently. The decrease in profitability can be pointed to impairment charges but the general trend remains that ROCE is improving. The return on assets stands at 9.39% in 2008 as compared to 11.47 %. This indicates that the company is not using its asset base effectively to generate profits.

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The company's gross margin remains stable even as revenues and purchases seem to be increasing in opposite directions, an indication that the costs of sales are successfully being passed to its consumers. In 2008, the net profit margin has decreased marginally. The company is still recovering from the unfavourable economic conditions of 2008 but this trend indicates that it will actually recover and will most likely surpass that of 2007.

Financial Ratio Analysis - Efficiency

Trade receivables have decreased and are substantially lower than the payables which have also decreased slightly indicating an unfavourable negative cash flow, i.e. funds are received about 44 days before being paid out. However, it is important to avoid taking too long to pay suppliers, suppliers should be paid on time within the company's scope without interfering with the cash flow cycle. In retrospect, this will help in avoiding problems with the credit control department which may cost the company more money in terms of further investigation. On the other side, inventory turnover has significantly improved over the last two periods. This is a good indication of increased demand for the company's products.

2.1.3. Financial Ratio Analysis -Liquidity

Both the current ratio and quick ratios prima facie indicate short-term solvency as compared to standard benchmarks. These ratios have improved considerably during the last financial period. However, it must be recognised that the company generates most of its revenues from credit sales and relatively low cash sales; hence it is not generating significantly positive cash streams in daily sales activities all year around thus permitting it to operate above traditional solvency levels.

2.1.4. Gearing

The company significantly relies on both long-term and short-term debt financing and on equity and reserves. As a result, the gearing ratio, a measure of financial risk of the company is highly geared demonstrating a potentially high level of financial risk attributable to the global economic downturn. Nevertheless, this level of gearing exacerbated in 2008 thus posing immediate threats. In addition, current finance charges related to the borrowings are not well covered as compared to 2007 indicating the presence of a major financial risk of the company being unable to meet its debt interest obligation from the existing operating profits.

Question 3

Traditional approaches to the measurements and reporting financial activities have been regarded as flawed, and unable to take into consideration of various non financial factors with the contemporary business environment such as intellectual. Johnson and Kaplan (1987) posited that: "Corporate management accounting systems are inadequate for today's environment". They further argued that, "Business has changed dramatically since 1930.  Accounting has not changed at all since that time!" This implies that, management accountants need to move away from conventional accounting approaches, notably cost Accounting.  Conventional management accounting systems tend to rely heavily on the measure cost side of operations rather than other business aspects. Contemporary management accounting has evolved out of cost and accounting approaches that were preoccupied with the cost of raw materials and the changing of those items into productive products. In order for a firm to remain healthy, financially speaking, there are several other aspects that are important and need to be well thought-out including the investment in intellectual property, research and development, and the investment in employees and customers. Investment in the later items do not profit from traditional management accounting systems.

A number of experimental approaches have been utilized to address the weaknesses of these approaches including the Balanced Scorecard developed by Kaplan and Norton (1996) and the extension of management accounting systems to include the measurement of intellectual capital by Edvinsson (1997). Nevertheless, it has not been easy to develop accounting approaches that can be utilized for consistent inter-industry or firm comparison. On the other hand; Bontis et al., (1999) in their review of four accounting approaches; balanced scorecard, human resource accounting, economic value added, and intellectual capital, concluded that these approaches had their shortcomings which have led to the hardnosed retention of the conventional financial based approach, regardless of its own severe weaknesses. Conceivably, the most hopeful way to change management accounting systems lies at the national-levels. For instance, the SEC filing requirements outlines a clear framework that private-public must adhere to when reporting on intellectual capital.

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In conclusion, present management accounting systems are in urgent need of updating. Novel explanatory frameworks and metrics are necessary to allow management accountants to comprehend the workings of the contemporary business environment; in particular these approaches should take into consideration of intangible goods and other sectors that are usually unknown from public outlook. Starting from the firm level, a new series of measurement and analytical techniques are needed to allow company management boards, stockholders and investors to review management performance and distinguish what is good, bad and aberrant corporate stewardship.