Financial Ratio of the UK Companies

The significance of “market values” of UK Listed Companies

The market value is the current price in the market at which the seller and the buyer are willing to trade their property. The parties who are fixing this price are acting without any pressure. This price results from a thorough market research from the parties involved, it is being assumed that, the parties are satisfied with their decisions. For companies in UK, it is the exact underlying value of its assets in the market. The theoretical standards of business in the UK define the market value as “the true underlying value”. Atrill and McLaney (1997:202) states that; the market value will fluctuate at some instances due to the market performance. This value relies mostly in the country’s current economic status. At the periods of economic booms, the market value will go up. In periods of economic recession, the market value of most assets will fluctuate with the movement of the economic performance. This value is used in the financial analysis of the UK listed companies. In the analysis of the performance of a UK listed company, the listed company’s asset values are reflected in the current market value; this value is then compared to those of the previous accounting periods (University College of Swansea 2005:90).

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Analysis of Market Value of BEALE PLC and MALLETT PLC UK Listed Companies

Brief history of the companies

BEALE PLC is a company dealing in retail business. It supplies apparel products that include home wares and care products. The company operates eight stores located in different outlets in UK and a broad. To widen its market share; it sells its products on the website. The company is listed in the London Stock exchange. The shares have been trading well with an upward trend; this has been a promising trend for investors in the UK and outside the country. The analysis will cover the use of market value of the company and its effectiveness as compared to that of the profitability ratios of the company. There will be also a comparison with the MALLETT PLC Company which is also listed in the London stock exchange (Bernstein and Wild 2000:89).

MALLETT PLC was established in 1991 as a plant company. In the following year, it emerged with other engineering companies to form the now grown company trading in the London Stock market. The company’s’ stocks were first traded in the London stock market in 1998, and has had its stock fluctuate with the economic changes. During the period of the global economic crunch, the company’s shares and asset value reduced and the investors’ confidence was reduced in the company. The company has been struggling to come up with strategies on how to value its assets and compete effectively in the market. Brooks (1980: 69) covers the analysis and states “The analysis to establish the trends in the market is based on the market value for its assets and stock”. This analysis will also compare the market value and the profitability ratios.

Evaluation using the market value

Market value is used by companies to analyze their performance in the market. The companies use the market value to ascertain the value of their assets in the market. In 2008, BEALE PLC recorded a positive increase in the value of its stocks trading in the London stock market by 2%. This increase in the value of stock made investors invest more into the company’s shares making the company improve its value by the same percentage increase. Daniel (1997:122) puts it clear; the value of the company as at this particular date was reflected, and trading in the market was positive. The assets, if valued at that particular date would be a reflection of the market trend.

The market value would show the trends in the market and pin point the areas that need immediate adjustments. In 2009, the stock for MALLETT PLC Company was trading at a lower rate of 1.98; this was a signal to the investors that the trend was not promising. A positive change in the stock of a company indicates that the company is in upward growth and the investors would invest much of their shares into the company. The information is also witnessed in the BEALE PLC trading; the company was trading its stock at the price of 4.5 up from the previous price of 4.2 in 2009, and this made the investors increase their securities investment into this company.

Most of the investors worldwide can easily access and interpret the market value of businesses. The investors do not have much time to analyze the whole of financial date presented through the balance sheet. To the information that is required quickly; they opt for afresh and synthesized information. Mellman et. al. (1994:784) the investors are in a position to analyze and interpret the data provided by the company market price. The balance sheet figures will need further calculations and interpretation to understand. The data in the balance sheet is collected from a given financial period mostly one year and above. This is in contrary to the market value that present the company’s net worth at that particular time in the year. The BEALE PLC and MALLETT PLC companies had profits of -0.9M and -1.6M in 2009 but their shares traded at 1.54 and -0.32 respectively. This indicated that the companies were trading at a loss, but the trading in the market showed that there is an improvement and the companies were making an upward trend. The data for the profit reflects a long period collection, while that daily trading trends indicated the market value of the companies at a snap shot.

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The market value will show exactly what is happening in the market at that particular time and the value at which the company’s assets can be sold. The balance sheet will indicate the book value as it is a historical data. In the UK, companies are valued at their market values and not their historical data. The tax paid to the authorities is based on the market value: the current value and not the previous company’s asset value. This valuation follows the security trend and economic changes in the country. When securities are trading at a higher value, the firms’ values are expected to increase and this is an indication that the company’s market value is increasing. When a company’s assets are valued at that particular date; they will be higher than the previous dates when the securities were trading low (Drucker 1995:8).

Etisalat (2010:24) adds that; another aspect of market value is the prediction of the future performance of the company. The trends showed by the market value of companies predict how the company might perform in the future. But Howells and Brian (2007:532) says that; Investors can therefore, use this information to invest into companies whose future is predictable. The market value of an asset during the times when the company is winding up is different from its initial book value as presented by the balance sheet. The value of the company’s assets will be calculated at the market price at which the buyers and sellers are willing to pay for and sell at, at that time. The predictions into the future of a company may prompt changes in the affairs of the company to avert losses. The company will therefore, take corrective measures to help it come out of financial crisis (Ferrinem 2008:68).

In the UK, when companies are applying for additional funds from the financial institutions, the institutions have to validate their current market price of their assets. This will help the institutions on how much value of loan they can attach to the security asset offered by the company for the loan. The market value of company’s assets is therefore, needed in this valuation. Madura (2009:48) reason that; the historical data used in the past are therefore not applicable in the loan application. The financial institutions can predict the capability of loan repayment from their client by the use of market value trends. When the market value of a company has been in a down-ward trend, then the possibility of the company being liquidated before paying off its loans is high.

While the market value indicates the current value of a company’s value of assets that buyers and investors are willing to incorporate, the balance sheet value gives the historical trend of such value. The balance sheet only gives the value of assets from the book value and how they have changed up to that particular date. The balance sheets are used to show the past trends in the company as opposed to the current trends witnessed in the companies. For the interested parties to get the relevant information at the current movements, investors and other interested parties uses the market value in their decision making. Khan (2004:68)

The balance sheet value cannot be used without further interpretation by analysts. The investors only get the historical analysis that cannot be applied into the future. The company is not in a position to see the current trends that lead to higher losses. This kind of remedy can only be achieved when the company is using the market value of its assets.

When companies are valued using the balance sheet figures, the values may not be true. The values that are found in the balance sheet are the original value in which the assets were acquired, this value changes in most cases. For instance, the value of fixed assets may change as a result of depreciation or sometimes as a result of the exchange rate fluctuations. Knight (1997:90) comments that; “in the valuation of intangible assets, the balance sheet value cannot be used to approximate the prices since there is time value of money”. The business also builds more of goodwill that wasn’t there when the original values were recorded. The balance sheet lists inventories at a lower cost than that prevailing in the market; this is not acceptable at times when the business is to be sold. The liabilities of the company are not permanent and are better be valued at market value since t creditors expect to get the exact value when receiving back their balances. There are also some off balance sheet items that are not taken care of by the balance sheet figures. For a comprehensive analysis all these must be taken into a consideration. The market value principle helps to solve all these discrepancies of the balance sheet. It will present the value of all these items at the price that the buyers and sellers are willing to transact (Ferrinem 2008:202).

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Analysis of Investor and Profitability Ratios of BEALE PLC and MALLETT PLC UK Listed Companies

Financial ratios table

RATIOS COMPANY
INVESTOR RATIOS BEALE PLC (BAE) MALLETT PLC
2008 2009 2010 2008 2009 2010
Earnings per share: EPS 2.56 1.54 1.89 0.5 -0.32 -0.12
Dividends per Share: DPS 1.0 1.1 0.6 0.5 0.0 -0.02
Dividend Yield 1.26 0.2 -242 0.70 -5.33 -2.4
Dividend Cover -2.2 -0.2 4.2 -5.33 -4.6 0.2
Price Earnings Ratio: P/E ratio 16 15.3 12.4 12 14.17 13.16
PROFITABILITY RATIOS
Current Ratio 1.25 1.42 2.02 0.94 1.32 1.42
Quick Ratio 6.2 6.45 5.32 5.13 4.92 4.65
Cash Ratio 6.24 6.20 5.4 4.23 4.52 3.6
Inventory Turnover -14.24 -6.26 2.24 -19.4 -7.21 -4.2
Inventory Period 4.24 3.24 6.24 4.25 8.32 10.24
Debt Ratio 2 1.2 0.2 -2 -1.2 0.2
Debt-to-Equity Ratio 12.64 -2.24 -1.2 -49.87 -11.26 -10.20
Interest Coverage 2.79 2.35 2.29 1.59 -10.26 -8.87
Gross Profit Margin -49.87 -11.26 -10

The earning per share of the companies has been on a down ward trend. In 2008, BEALE PLC had 2.56 while 2010 it had1.89 this indicates that the shareholders equity has gone down. The trend indicates to the investors how the market value of the company is changing. The investors will not invest when their investment cannot give better returns. MALLETT PLC Company has experienced the worst shares trading in the market. The trend has been in a down ward trend. It has moved from 0.5 in 2008 to -0.12 in 2010. The performance in this period indicates that the performance of BEALE PLC has been better than that of MALLETT PLC for the financial periods commencing 2008 to 2010. This trend has made the shareholders not to get dividend share. In 2010 MALLETT PLC has dividend carry over of -002 while BEALE PLC only paid dividend of 0.5 per share value.

McIntyre (1999:445) the investors’ ratios of these two companies are showing an alarming trend in the market. The dividend yield within the years has been unfavorable for the shareholders. For instance, in 2008, both the companies’ recorder a negative growth in their dividend yields. There was a further failure by the companies to get any yield in 2010 when they recorded another negative result. These balance sheet investor ratios, indicates that the companies performance is unfavorable for investors. If the company was using the market price they would have noticed the trend and adjusted immediately. The company has to renew its policies and use the financial policy that ca bring instant remedy to the companies. The relieving return is the price earning ratio of the shares. In the years; 2008, 2009 and 2010 the company has recorded some positive earning per share.

The liquidity ratios test the solvency of the companies. The favorable value is approximated to be 1:1 to that of quick ratio. Neither of the companies has achieved this expected value. The balance sheet of value of BEALE PLC Company has made some positive trend; in 2008 it had a ratio of 1.25 to 2.20 in 2010. There is no new capital into MALLETT PLC since the ratio has not changed any better of the company for these there years. The quick ratio of these two companies indicates that their assets cannot easily be converted into cash to meet the liabilities of the companies. A ratio of 2:1 is considered to be favorable for a business (Sharan 2002:38 and Tan 2005:604)

Every investor only undertakes the risk if the returns are higher than the risk involved. In most cases investors lack information about companies, it is only through these financial ratios that can help them select the best company to invest their capital in with minimum risk. Investors do not have all the time to study the financial statements released by companies, they only need an over-view of the company’s performance to make the investment decision. Financial ratios provide such information to the investors. The use of financial ratios is clearer and point out specifically to the company’s performance. The investor will also monitor the performance of his investments through the investor ratios (Carlsnaes 2002:78).

The profitability ratios will show where the company has not performed well and where the performance has been beneficial to the company. In this case, the company will try to improve in the areas that are adding value to the company. The ratios also act as indicators for the company’s future performance. They predict how the company will perform in the future and what should be done to avert this trend. The debt ratios and capital ratios can help a company to predict the bankruptcy of the company into the future. The management will act fast to help save the situation. For instance the trends in these two companies can help the management to change the policies and expand to new markets. The capital that is borrowed should be reduced and this has been increasing for the two companies. The ratios also indicate that the debts of the company have been increasing. This dilutes the company’s capital and need to be eliminated to eliminate the possibility of insolvency.

References

Atrill, P., and McLaney, E. 1997. Accounting and Finance for Non-Specialists.London: Prentice Hall.

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Bernstein, L., and Wild, J. 200.Analysis of Financial Statements. New York: McGraw-Hill.

Brooks, C. 1980. Introductory Econometrics for Finance. London: Prentice Hall publishers.

Carlsnaes,W. 2002, Handbook of international relations. Mumbai: SAGE.

Daniel, L. 1997. Advanced Accounting.New York: McGraw-Hill College Publishing.

Drucker, F. 1995. The Information Executives Truly Need. Harvard Business Review, January-February 1995, 54-62.

Etisalat, E. 2010. Company Consolidated financial statements and Auditors Report for year ended 31 Dec.2009.

Eugene, F.2008, Financial markets and institutions. New York: Cengage Learning.

Ferrinem, J. 2008. International Qatariness Strategy and Adminstration. Califonia: University of Califonia.

Howells,P., and Brian, K. 2007, financial markets and institutions. London: Prentice Hall/Financial Times.

Khan, M. 2004. Financial Management: Text, Problems And Cases. New York: Tata McGraw-Hill.

Knight, J. 1997. Value Based Management. New York: McGraw Hill.

Madura, J. 2009. International financial management. Sydney: Cengage Learning.

McIntyre, E. 1999. Accounting Choices and EVA. Business Horizons, January-February 1999.

Mellman, M. et. al. 1994. Accounting for Effective Decision Making. Chicago: Irwin Professional Press.

Sharan, V. 2002. International Financial Management,. Sydney: PHI Learning Pvt. Ltd.

Tan, C. 2005. Financial markets and institutions in Singapore.NQATAR Press. Web.

University College of Swansea. 2005. Centre for Development Studies 2005. International development abstracts, Volume 24. Sydney: Geo Abstracts ltd.

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