AAF044-6 Accounting and Finance
AAF044-6 Accounting and Finance
1. Introduction
This reported file aims to convey the financial performance and stability measurement of the company named FirstGroup PLC. This organization was developed in the year 1995 through the merger of two companies named “Badgerline Group Plc. and GRT bus group Plc”. it belongs to the “British multinational transport group” based in “Aberdeen in the North-East side of Scotland”. This is a UK-based company that provided all transport-related services throughout the globe. It has been noticed that in this country the UK the price of fuel is increasing day by day. Thus, people use public transport more than private transport. It has been identified as a plus point for this organization FirstGroup PLC to increase the market remand and the business growth in the UK market and expand the business internally as well. The mission of this company is to provide the most convenient and easiest mobility by improving the quality of service to the customers (firstgroupplc.com,2023). It helps us link people with each other and increase the interaction between them by improving socialization.
This company of FirstGroup PLC has been identified as the top leading transport sector in the UK market. The total revenue in the most recent financial year has been measured at the value of $7.3B. Thus, from this huge amount of revenue of the firm, it can be said that the company has stability in the financial condition and the ability to meet all the risks and obligations of the business to increase the profitability rate. The total funding of this firm has been revealed at the value of $ 370.40M (owler.com,2023). The main strength of this company is the employability of the organization. It operates all the organizational operations by engaging around 124000 employees and provides its transport services to around 2.5 passengers per year. The technical growth of this nation UK is too high and that is one of the main reasons for the business growth of this company FirstGroup PLC.
Not only the technical growth of the nation, but also all the political, economic, and environmental grith and stability also in favor of this organization. For such purpose as to evaluate the financial performance and the business growth of the firm, it has been compared with its biggest competitor National Express Group PLC (globaldata.com,2023). In this respect, the use of ratio analysis has been made in this report to highlight the financial performance and compared the same with this company National Express Group PLC. For the purpose of measuring the financial performance of this firm the computation of profitability, efficiency, liquidity, and market position ratios has been analyzed and compared with its competitor. All such computation and analysis of ratios will help this file to find the outcome of this measurement and insists to get the result comparison. This reported file also consists of the discussion on the proposal of a joint venture incurred by this company FirstGroup PLC. this, all the decision related to financial performance measurement and the decision-making process related to this joint venture has been highlighted in this report.
2. Analyzing the financial performance of FirstGroup PLC
2.1 Profitability ratio
The need for this profitability ratio is to reflect the overview of the ability of the organization to incur revenue and increase the rate of profitability in a respected year. Through this profitability ratio calculation, the measurement of financial performance by comparing the profitability rate and growth with other competitors and analyzing past data also can be done. This profitability ratio consists of various financial matrices with the help of those matrices the financial performance measurement can be done (Husain and Sunardi, 2020, p.03). Those financial matrices are “Gross profit ratio, Net profit ratio, Operating profit ratio, ROCE, ROE” and so on. The main aim of calculating all such financial matrices is just to evaluate the ability of the firm to generate and increase the profitability rate over the value of revenue in each financial year.
In this reported file for the purpose of analyzing the financial performance and the growth of the organization in respect of profitability, the ratios of ROCE, ROE, and the Net profit margin (NPM) have been computed. These ratios of ROCE and ROE has computed to highlight the efficiency of the firm in incurring profitability and the utilization of the capital structure and the equity of the firm (Arsyad et al. 2021, p.05). For the purpose of calculating the ROCE and ROE the used formula is “(EBIT/Capital employed)” and “(Net profit/Shareholder’s equity)” respectively. In the same way, the NPM has been calculated for the effectiveness of the firm to generate net profit overthe value of revenue incurred in the respective year. The formula for calculating this NPM is “(Net profit /Revenue) *100”. All such calculations of ratios are lighted below.
From this computation of profitability ratios, the value of the ROCE of this firm FirstGroup PLC has stood at 38.77%, 14.17%, and 9.85% respectively for the year 2022 to 2020. In the same way, the valuation of ROE is reflected as -1.24%, 0.87%, -28.63% respectively. Whereas the value of NPM for such three respected years of this company has stood at -0.24%, 0.23%, and -7.26% respectively. All the calculations are reflecting the company has decreased its profitability growth as the values are getting lower than in past financial years.
2.2 Liquidity ratio
The liquidity ratio helps in the presentation of the ability of the firm to use its liquid assets in financial activities and increase the value of profitability in that respected financial year. Thus, it can be said that from this computation of the liquidity ratio the ability of the firm to convert its current assets and current liabilities or the liquid assets into cash or revenue of the firm (Susantiet al. 2020, p.04). This liquidity ratio consists of a few financial matrices such as “current ratio, quick ratio” and so on. The current ratio refers to the computation of that kind of ratio which reflects the ability of the firm to generate profit from the liquid assets and liability. The formula for calculating this ratio is “Current assets/current liabilities”. In the same way, the quick ratio also has been computed and analyzed (Husna, A. and Satria, I., 2019, p.11). The reason for the analysis of this quick ratio is to evaluate the ability of the organization to generate profit by using the most liquid assets and liabilities. The formula for this calculation is “(Current assets-inventory)/current liabilities”. The reflection of this calculation of the liquidity ratio has been disclosed below.
The above table is representing the valuation of current and quick ratios for the years of 2022 top 2020 respectively. The current ratio for such respect years is 0.76, 0.78, and 0.76 respectively. In the same way, the value of the quick ratio has stood at 0.74, 0.77, and 0.74 respectively for 2022 to 2020. This valuation of the liquidity ratio is reflected as stable in position for all these three financial years.
2.3 Efficiency ratio
The efficiency ratio reflects the efficiency of the firm to mitigate financial obligations and operated the business activities effectively. Thus, the evaluation of the organization’s efficiency in business activities can be measured by this computation of the efficiency ratio (Hariani and Febriyastuti, 2020, p.07). This ratio includes various financial matrices such as “Inventory turnover period, Trade Receivable, Trade payable, Cash operating cycle” and so on. Through this calculation of financial matrices, it will be able to know about the ability of the organization to pay off the payables and collect from the receives. The formula used to find out the trade receivable is “(Trade receivable /sales) *365” and for trade payable is “(Trade payable / cost of goods sold) *365”. The inventory turnover period has been calculated to find out the efficiency of converting the inventory into cash (Taysayevet al. 2020, p.09). Lastly, the cash cycle represents the cash flow in the firm from all such business activities. The for this calculation is “(Inventory turnover period + Trade Receivable)-Trade payable”. All such calculation has oppressed below in the table.
The inventory turnover period has been highlighted for the years 2022 to 2020 at 6, 7, and 10 days respectively. In the same way the value of trade receivable at 48.97, 51, and 86 days respectively. Whereas the trade payable period has been found as 53.35, 41.75, and 55.66 respectively. Lastly, the valuation of the cash cycle operated by all such activities has reflected as 2, 15.77, 40.43 respectively for 2022 top 2020.
2.4 Market position (EPS)
The market position of this firm FirstGroup PLC has been measured by computing the value of EPS. This EPS has been computed by using the formula of “Net Profit/ No of Ordinary shares”(Sausan et al. 2020, p.06). This calculation also has been reflected below. From this calculation, it has been identified that the value of EPS for the years 2022 to 2020 stood at -0.01, 0.01, and 0.28 respectively.
2.5 Valuation Method
Valuation method can also be used for the analysis of financial performance of a company. The company which has been selected for the study is First Group Plc. The valuation method includes the valuations of the different assets of the company. To analyze the financial performance of the company it is needed to valuate the assets of the company. The valuation method mostly used by the Morgan Stanley Dean Witter for valuating the financial performance of different companies. The below shown figure explains about the valuation method very well.
The above shown figure shows valuation of the assets in the organizational premises. The figure expresses that the growth valuation of the company is in between 0-5 %, the valuation of the plant of the company is also between 0-5 %, the FCF valuation is more than 5%, the sale valuation is approximately 6%, similarly the different values of the different assets of the company has been shown in the figure. The figure shows the residual income at the rate of 32-33% , the EBITDA is also approximately similar, and the valuation of PER has been shown more than 50%.
2.6 Recommendation
From all such calculations of profitability, liquidity, efficacy, and market position ratio it has been reflected that the company has poor financial performance and running kind of loss in certain financial years. The profitability ratio is reflected as lower than the last financial year. Though the profitability ratio is low the efficiency, liquidity ratio is in a stable manner, the valuation of the assets is also in increasing order. Thus, there is a scope for the organization to increase profitability by adopting a few needy approaches and strategies in the organization. The company indeed proceeds by focusing on the increment in the net profit to increase the profitability ratio and the market demand as well as increasing the brand value. It will help to accrue a huge market in the UK and the overall globe as well.
3. Evaluation of the financial performance of FirstGroup plc compared with competitor
3.1 Profitability ratio
The profitability ratio of the company FirstGroup PLC has been measured with its biggest competitor named National Express Group PLC. In this respect, the comparison of such profitability ratio has been analyzed and presented though using a graph below.
From this comparison it has been reelected the value of ROCE of the main company FirstGroup PLC has stood at 38.77%, 14.17%, and 9.85% respectively, and of National Express Group PLC at 15.69%, 9.38%, and 5.39% respectively. In the same way, the value of ROE of FirstGroup PLC has stood at -1.24%, 0.87%, -28.63%, and of National Express Group PLC at -17.47%, -6.88, and -22.63 respectively. Whereas the value of NPM of both of these organizations has stood at -0.24%, 0.23%, -7.26%, -8.65%, -4.70%, and -17.08% respectively. Thus all of these ratios of the company FirstGroup PLC are higher than its competitor National Express Group PLC.
3.2 Liquidity ratio
The comparison of the liquidity ratio of these two companies is represented with the graphical presentation provided below.
The current ratio of this firm FirstGroup PLC has been computed and reflected as at the value of 0.76, 0.78, and 0.76 and of National Express Group PLC at 0.58, 0.83, and 0.88 respectively for 2022 to 2020. In the same way, the quick ratio stood at 0.74, 0.77, and 0.74 and 0.56, 0.81, and 0.86 pf both these firms respectively. It is reflecting that the ability of liquidity ratio is higher than its competitor National Express Group PLC.
3.3 Efficiency ratio
According to the comparison of the inventory turnover period in the year 2022, the value of FirstGroup PLC is reflected as 6 days and of National Express Group PLC at 7 days. In the same way, the value of trade payable and receivable value of FirstGroup PLC stood at 53.35 and 48.97 and of National Express Group PLC at 62.95, and 57 days. The last one is the cash cycle and the value of this ratio of FirstGroup PLC in 2022 at 2 days and of National Express Group PLC at 1.02. All such ratios of FirstGroup PLC are higher than the value of National Express Group PLC incurred in the financial year of 2022.
3.4 Market position (EPS)
The above figure is highlighting the comparison of the EPS value of these two companies for the years 2022 to 2020. The value of EPS of FirstGroup PLC in these respective years has stood at -0.01, 0.01, and 0.28, and of National Express Group PLC at -0.18, -0.07, and -0.23 respectively. This value of EPS of the company FirstGroup PLC is higher than its competitor.
3.5 Recommendation
From analyzing values of profitability, liquidity, efficiency, and market position ratios compared with its biggest competitor National Express Group PLC has noticed that all of these ratios of FirstGroup PLC are higher than its competitor. As all of these of the main company is higher than its competitors thus it can be said that the company is running its business activities effectively and accruing the market strongly. Thus, to compete with this competitor the company needs to increase more profitability to be in a stable financial position for a long time.
4. Analyzing the decision regarding the new joint Venture
The joint venture is a process to make business activities more effective, generate funds, and resources, and increase the profitability rate by merging with other companies or organizations. Thus, in this respect report, the company named FirstGroup PLC has offered to have a joint venture with an organization that is listed in LSE. thus, it can be said that if the company gets able to merge with another organization, then the process of collecting funds and resources will be easier for the organization (Leonard et al. 2020, p.04). With the help of this joint venture various new and advanced strategies and approaches also can be adopted by the organization. Through such utilization of required resources and strategies, the company will be able to make effective decisions and increase profitability. In this respect the company FirstGroup PLC needs to consider the preference of the internal and external stakeholders and shareholders also as they have a right to the business operations.
External stakeholders
External stakeholders reflect those individuals who are connected with the organization externally or control all the external factors as well. Thus, the external stakeholders refer to the targeted stakeholders, present stakeholders, customers, general bodies, public authorities, regulators, and all the external individuals those effects the business activities (Nguyen et al. 2019, p.08). So, the company needs to focus on the presence of these external stakeholders as well.
Internal stakeholders
The internal stakeholders refer to the internal individuals who are connected with the organization internally. In this stakeholder are mainly the employees, managers, leaders, executives, and suppliers include (Derakhshanet al. 2019, p.07). These stakeholders have the most important effect on the business activities thus it is important to fulfill demand as well.
Thus, by considering all such factors it can be concluded that the company FirstGroup PLC should accept the offer of a joint venture to increase the profitability and effectiveness in the business activities along with business growth.
References
Hariani, E. and Febriyastuti, R., (2020). The effect of fiscal stress, original local government revenue and capital expenditures on efficiency ratio of government independence performance. Jurnal Ekonomi dan Studi Pembangunan, 12(1), pp.18-25.
Husain, T. and Sunardi, N., (2020). Firm’s Value Prediction Based on Profitability Ratios and Dividend Policy. Finance & Economics Review, 2(2), pp.13-26.
Husna, A. and Satria, I., (2019). Effects of return on asset, debt to asset ratio, current ratio, firm size, and dividend payout ratio on firm value. International Journal of Economics and Financial Issues, 9(5), pp.50-54.
Leonard, T., Pakpahan, E.F., Heriyati, L.K. and Handayani, I.G.A.K.R., (2020). Legal review of share ownership in a joint venture company. International Journal of Innovation, Creativity and Change, 11(8), pp.332-45.
Nguyen, T.H.D., Chileshe, N., Rameezdeen, R. and Wood, A., (2019). External stakeholder strategic actions in projects: A multi-case study. International Journal of Project Management, 37(1), pp.176-191.
Sausan, F.R., Korawijayanti, L. and Ciptaningtias, A.F., (2020). The effect of return on asset (ROA), debt to equity ratio (DER), earning per share (EPS), total asset turnover (TATO) and exchange rate on stock return of property and real estate companies at Indonesia stock exchange period 2012-2017. Ilomata International Journal of Tax and Accounting, 1(2), pp.103-114.
Susanti, N., Latifa, I. and Sunarsi, D., (2020). The effects of profitability, leverage, and liquidity on financial distress on retail companies listed on Indonesian Stock Exchange. Jurnal IlmiahIlmuAdministrasi Publik, 10(1), pp.45-52.
Taysayev, K., Terentyev, A., Evtukov, S. and Arifullin, I., (2020). Efficiency ratio assessment model for buses. Transportation Research Procedia, 50, pp.674-680.
Websites
firstgroupplc.com,2023, an overview of FirstGroup PLC available at:https://www.firstgroupplc.com/ [Accessed on 26-04-2023]
globaldata.com,2023, Overview of National Express Group PLC available at:https://www.globaldata.com/company-profile/firstgroup-plc/competitors/[Accessed on 26-04-2023]
owler.com,2023, revenue of FirstGroup PLC available at:https://www.owler.com/company/firstgroupplc[Accessed on 26-04-2023]
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