analysis of two companies ( i have done the whole question but i need more than 1200 words of this solves question, ill provide data and answer i just need more than 1200 words)

AQ1

Report

From: Financial Analyst

To: Board of Directors Clinton Cards Plc

Subject: Financial Performance Analysis 2009-2011

Date: 29th May 2012

Introduction

In compliance with your instructions I have undertaken a financial analysis of the company’s performance for the three financial periods 2009-2011. This comprises both a financial ratio analysis and a trend analysis of the audited published financial statements. The analysis has been mainly undertaken on the pre-exceptional figures to identify the underlying core performance trends of above average performance.

Profitability

The most recent financial statements give rise to concern of the profitability of the company. The latest period analysis reveals a substantial decline in overall profitability with a negative ROCE being realised after two previous periods of high returns when compared to the CIMA performance benchmarks indicating a high risk. This decline has occurred despite the trend of increased revenue streams being matched in 2010 by a parallel rise in the cost of sales indicating that these costs had been passed on to the customers. The trend of sales revenues has declined in the last financial period but cost of sales have fallen by a lesser proportion resulting in faltering gross profit margins unable to cover operating expenses leading to reported loss in 2011. This is alarming as in the previous financial periods of 2009 and 2010 above average ROCE returns were recorded as were operating profit margins. This recent dramatic decline is also mirrored in the return on assets which has become negative because of the recorded loss although profits were falling previously but this has become substantial during in the last financial period. The asset turnover has been maintained only due to the rationalisation of the asset base demonstrated in the vertical and horizontal trend analyses which have fallen by 20% over the three years.

Liquidity

The trend analysis has shown a growth in current assets principally in the proportion of inventory held and cash arsing from the sales of non-current assets and which have become greater in the last period than the non-current assets. The large cash growth has arisen from the disposals of non-current assets. However the trend in current liabilities had increased due mainly to a combination in the proportionate growth of short-term borrowing and trade payables that has compromised the short term solvency of the company.

The short term solvency of the business as measured by the working capital ratio has been high risk by standard benchmarking over the three periods indicating insolvency although it may be the norm for the business sector if it was supported by growing revenue streams. However, the quick ratio has declined substantially and is below 0.2 to 1 that benchmarks indicate higher levels of inventory are been held as sales demand is growing insufficiently. The inventory turn has increased to 44 days from the previous improvement to 37 days leading to the higher inventory accumulation caused by management inefficiencies coupled to the falling the falling demand.

Efficiency

The level of trade receivables is more or less stable and the company’s credit control has improved whereas the payables have witnessed an upward trend to 56 days approaching 2009 levels. This indicates a positive cash flow although any further deterioration may damage supplier relations and invoke retaliation once the company’s poor financial performance becomes known

The cash operating cycle measures the time between paying out cash for the purchases of inventory, and receiving cash for the subsequent sale. The company’s cash cycle has remained steady in the last two periods with a slight decline and currently remains favourable in the short-term because payments are being delayed.

Gearing

The balance sheet gearing position remains at high risk as it is above average benchmarks and it has increased with the company reliant on short-term borrowing. The business had reduced its long-term debt which it may have found difficult to secure given its financial performance.

However, the ability to service the debt from operating profit streams had dropped significantly interest cover has dropped alarmingly and it now cannot service its debt from its operating profit, i.e.

The 2011 financial statements reveal that the company fortunately had high cash balances from its non-current asset disposals that could meet interest payments albeit within the short -term.

Given the current lack of profitability, and the fear that profitability might deteriorate in future, this will impact on the company’s share price and market capitalisation.

Financial – Share Price

The share price originally recovered in 2010 arising from the reported increased profits and indeed the company outperformed the FTSE 100 Index. This proved only a temporary trend and the poor results and the extent of the losses reported in 2011 led to the collapse the share price as market confidence in the ability of the company’s management to redress the situation disappeared.

Later movements of the share fell even further so that the company’s market capitalisation has fallen 80.71% since its peak in 2010 and has fallen well below the overall market movement as reflected in the FTSE100

Company Share Price Trend Movement and FTSE100 Trend

Conclusion

The main areas of concern regarding Clinton Cards Plc current position are:

1. Low profitability

2. High levels of cash, making Clinton Cards Plc an attractive takeover target,

3. Poor management of working capital, and the risk that supplier relationship might be strained.

Clinton Cards requires urgently needed addressing these issues if it is to escape the downward spiral towards corporate failure. Ominously the dramatic downfall of the share indicates that the market regards the company as unsalvageable and is most likely to be no longer a going-concern and the share represents its asset break-up value.

Appendix 1