ANALYSIS OF FINANCIAL STATEMENTS
In this report we will first look at the risks identified by Kingfisher and then cross check it with their annual statement. We will then use profitability and efficiency ratios to give comments on how well we think the directors have managed the risks and maybe some suggestions on what other steps they could have taken. Following that we will discuss the financing choices made by Kingfisher Plc, what we think may have motivated these choices and alternative forms of financing that they could have used. We will also look at Kingfisher plc from the point of view of shareholders; and how their actions and forecast results will affect the returns of shareholders and whether Kingfisher plc still represents a healthy investment for long or short term shareholders.
Contracting consumer markets, exacerbated by worsening economic conditions, will impact sales.
How and why?
Succeeded in increased sales from 9,050 to 10,026
Kingfisher plc saw their turnover increase from £9050m to £10026m, an increase of £976m. We speculate that this could be due to an increase in sales or perhaps kingfisher was able to realise value like they said they would
The income statement reflected a pre tax loss of -72m, a drop from the previous year from 366m to 294m. But the chairman's statement indicated an adjusted pre tax profit of £368m
We are left to speculate why there is a discrepancy in these figures. It may be that the adjusted amount is not listed in the report given.
As with the actions that come out of statement A and B, we can see the board has taken some steps to improve these. We can see they have reduced the amount of inventories held as well as the amount of trade receivables. This could have been done by collecting on money already owed as well as limiting the amount of credit they offer to customers. Reducing the amount of inventories held frees up more funds to invest elsewhere as well as reducing the storage costs the company will need. The board was then as a result able to increase their operating profit.
Profit for the year down, mainly on the exceptional items and as the on the cost of finance. Does lead to us asking why they were so exposed to variable rates. A business of that size could and probably should have had a long term fixed loan with a fixed interest rate. Fixed rate loans allow the business to more effectively plan what their expenditure will be at any given time regardless of what is happening in the financial markets. In their current liabilities declaration we can see they doubled their short term borrowing. This is expensive; an agreed overdraft would probably have saved the firm money and would have cost them less on their profit statement.
The risk that we are unable to secure external financing at a commercially viable rate
Although Kingfisher plans on monitoring their costs of finance more closely, the company has borrowed on a variable rate interest. This affects their ability to effectively budget.
Ratio: 07/08 08/09
Gearing ratio 45% 47%
The company has seen an increase in its gearing but it can cover the costs of financing it's loans at the moment. The main risks lie with the variable loans.
How and why?
Net debt was reduced yet Kingfisher saw an increase in its gearing ratios
Most probably due to sale of Castorama Italy, Kingfisher was able to buy back MTN's from shareholders and reduce its debt commitment, however Kingfisher increased its current liabilities which makes us wonder how they have met this objective.
How and why?
Dip in non-current assets from 6762 to 6634. Inventories reduce as well. Also there's a significant increase in cash: from 218 to 1157.
Disposal of businesses
Reduced working capital
Increase in current ratio figures signify an increase in working capital
Increased borrowings both short term and long term. The company explains that they have a greater focus on cash and have decreased their net debt by 41%. Much of these have moved to their current liabilities.
Given the failure of Kingfisher's operations in other foreign markets it is a bit of a wonder as to what hurdle rates they expect their potential investments to reach. They have taken on loans at variable interest rates; this strategy is only feasible if the interest rates remain low. As was seen in the recent financial crisis, interest rates depend on a number of variables, and can increase seemingly overnight. Such an occurrence would significantly hamper Kingfisher. Whatever the case they must estimate they will make enough of a profit to be able to keep paying the high interest rates or maybe they intend to pay off these loans rather quickly. This sounds less likely when you take into account that they just sold businesses in three foreign locations. They hope to enter new or emerging markets at some point. Emerging markets require some detailed knowledge of the regions chosen and we hope Kingfisher chose these markets more carefully than the businesses they recently sold to reduce their risk of failure.
It is dangerous to finance permanent long term assets with short-term finance that can be withdrawn. Knowing this and with a start up arm of the business we would hope that Kingfisher have some contingency plans to deal with either greatly raised interest rates or a withdrawal of funds.
Profitability and efficiency ratios
Ratios 07/08 08/09
Return on shareholder's funds 4.73% 4.45%
Return on capital employed 6.26% 6.22%
Net profit margin 4.73% 4.45%
Gross profit margin 34.75% 34.91%
Inventories turnover period 116 days 100 days
Current ratio 1.03: 1 1.17: 1
Quick ratio 0.3: 1 0.6: 1
The Return on shareholder funds is lower as a result of an increase in expenses relative to sales. The dividend paid to shareholders reduced from £0.11 per share to £0.05 per share, thus reducing the return on shareholder's funds from 4.73% to 4.45%, however the company bought back some MTNs, reducing the number of shareholders.
In the short term, the increased cost of financing short term loans is and will continue to erode the increases in sales revenue and operating profit that should otherwise have turned into increased shareholder dividend. In the long term however, there will be fewer shareholders and that should then result in either increased value of shares, leading to increased shareholder dividends or to increased amounts to be kept as retained profits.
Looking at the statements, the major erosion on profit was the sales of assets. Although Italy provided a gain, we are led to believe that the losses shown in the balance sheet from the sales in the UK and China could have been better predicted if firstly, Kingfisher took the time to find a buyer willing to pay the asking price or secondly, had been more realistic in the value of the asset. It is possible that they were biased in their estimation of the sale value and this could have been avoided had they looked at fair values of similar sites, used a more accurate calculation of historical costs- factoring in depreciation. For shareholders and potential investors this could signal that some of the company's assets are overvalued and this could be worrying.
The return on capital employed fell from 6.26% to 6.22% in 2008/09, but when this is compared to a 3% interest rate Kingfisher plc has a better return on capital as opposed to saving your money in the bank. There seems to be a positive relationship between the return on capital employed and net profit. Because when profit was 272 in 2007/08, we saw that return on capital employed increased but on the other hand in 2008/09 profit was reduced to 206 and we saw return on capital employed reduced.
Net profit, although sales revenue increased, with this comes an increased cost of sales. This may have contributed to the decrease in net profit margin from 4.73% to 4.45%. This is probably partly a result of an increase in operating expenses , in which finance is contributing a larger share.
The Gross profit margin has increased from 34.75% to 34.91%. From the point of view of a stakeholder, the business is doing better than it did the year before, with its main hindrances being the cost of financing and of disposing of the previous businesses.
Inventories turnover: it shows that it takes an average of 100 days in 2008/09 which is a decrease from 116 days on the year before. Stock held can be sold off quicker and reduces on storage costs, and also frees up funds quickly. Since stock remains relatively around the same price and cost of sales has increased by 10.5% this account for the improvement in ratio.
Collection period for receivables, which is the time in which it takes a debtor to pay has reduced, which partly accounts for the increase in cash. This has reduced from 21days to about 18 days on average, meaning either more of Kingfisher plc's customers have become better at paying for their goods or the company has become more efficient at managing these debts like they mentioned in their statement.
Kingfisher plc has achieved sales growth, efficiency in dealing with both inventory and trade receivables. The company still remains a good investment, particularly for long term investors. It is definitely headed in the right direction. Granted it can keep the cost of financing its debt down, it should provide a fruitful return for investors.
The company has some strong growth aims and if it plans on entering the emerging markets, it may succeed. There are great opportunities here if the company can use its learning's on efficiency to its advantage. It has shed its loss making operations and reduced the overall shareholder pool.
Due to the sale of assets and the risks Kingfisher are taking by entering emerging markets, we would not recommend this company for short term investors. The likely losses the company may suffer in the first few years of operation in these new markets make it unsuitable for short term investors.