Analysis For Proposed Acquisition Of F & F Limited

30-Nov-2011

Table of Contents
1. Executive Summary 2. Introduction 2.1. Purpose 2.2. Scope 2.3. Limitations 3. Discussion 3.1. Financial Performance 3.2. Financial Position 3.3. Qualitative Factors 3.4. Additional Information 4. Conclusion 5. Appendix 2 2 2 2 2 3 3 4 5 5 6 7

2|Page

1.Executive Summary
The purpose of this report was to analyze quantitative as well as qualitative aspects for proposed acquisition of F & F Limited to capture local market of automotive components. This report has considered the available financial information and various qualitative factors that can give an insight in order to analyze the financial performance and position of the company. Financial performance is analyzed vertically and horizontally. Vertical analysis does not show any significant fluctuation (upward or downward) in performance and investment ratios except dividend yield ratio which is reduced by 5.12% in 2011. This reduction in caused by substantial rise in capital gain. Horizontal analysis depicted promising results and considerable growth evidenced in sales (by 12.01%), gross profit (by 8.25%), profit after tax (by 22.19%), and dividends (by 21.00%) in year 2011. Financial position of the company also seems very strong in 2011 compared to 2010. The company invested heavily in non-current assets resulting in an increase by 41.94% which not only shows its growth strategy but also guarantees that it possesses latest technology in machinery and equipment. Furthermore, there is a decline witnessed in current assets and current liabilities by 2.82% and 43.89% respectively which represents better utilization of resources and less short-term liquidity issues. Although facts and figures are going in favour of F & F Limited, it is recommended to wait until the qualitative analysis has been completed, and then adjust the baseline quantitative results with estimates of the additional impact of those qualitative analysis.

2.Introduction
2.1. Purpose
The purpose of this report was to analyze financial performance, financial position, and qualitative aspects for proposed acquisition of F & F Limited in order to increase presence of Annaplis Limited in the local automotive components market.

2.2. Scope
While analyzing the proposal, available financial data, qualitative factors, and any other additional information helpful in making meaningful analysis are considered.

2.3. Limitations

Sector information are not available to compare F & F Limited with other companies in the same sector. Foreign investment and foreign exchange regulations are not taken into account.

3|Page

Local laws such as tax laws, corporate laws, labour laws etc. are to be considered as well.

1.Discussion
1.1. Financial Performance
The following table summarizes the results of vertical analysis undertaken to judge financial performance of F & F Limited for year 2011 and 2010. Table-1: Financial Performance - Vertical Analysis (Comparison between 2010 & 2011)* PERFORMANCE & INVESTMENT RATIOS Gross Profit to Sales Profit to Sales Return on Equity Dividend Yield Earnings per Share** YEAR 2011 29.00% 12.01% 23.58% 9.17% 3.65 2010 30.01% 11.01% 24.85% 14.29% 3.29 INCREASE/ DECREASE Decrease Increase Decrease Decrease Increase

* Refer Chart-1 in Appendix at the end of this report ** Earning per share is based on shares outstanding at end of each year.

Although there is a substantial rise evidenced in sales by Rs. 359,000/-, gross profit by Rs. 74,000/-, and profit after tax by Rs. 73,000/-, no considerable increase seen in companys performance and investment ratios. In fact all the ratios, except profit to sales and earnings per share, are on decreasing side. The reason of decline in gross profit ratio is that gross profit is not increased at the rate at which sales increases. Decrease in return on equity and in dividend yield is the result of rise in total equity and capital gain (market price of share). We will expand our discussion on performance analysis with help of given below table, Table-2. Table-2: Financial Performance Horizontal Analysis* PARTICULARS YEAR % INCREASE/

4|Page

2011 Sales Gross Profit Profit after Tax Dividend 3,348,000 971,000 402,000 121,000

2010 2,989,000 897,000 329,000 100,000

CHANGE DECREASE 12.01% 8.25% 22.19% 21.00% Increase Increase Increase Increase

* Refer Chart-2A and Chart-2B in Appendix at the end of this report Horizontal analysis shows encouraging results and sizeable progress is demonstrated in sales, gross profit, profit after tax, and dividend in year 2011 resulting in an increase of 12.01%, 8.25%, 22.19%, and 21.00% respectively. These results show that the company is progressing towards a prosper future.

1.2. Financial Position

After having discussed financial performance of F & F Limited, we will now move towards analyzing financial position. The table below is showing some ratios in this regard. Table-3: Financial Position (Ratio Analysis) RATIOS Current Ratio Working Capital Gearing Ratio YEAR 2011 2.03 350,000 33.14% 2010 1.17 104,000 19.95%

Before commenting on the Table-3, it is better to analyze another aspect of financial position which is provided in Table-4 below. Table-4: Financial Position (Changes in Assets, Liabilities, & Equity in 2011)*
PARTICULARS 2011 YEAR 2010 % CHANGE INCREASE/ DECREASE

5|Page

Non-Current Assets Current Assets Long-Term Liabilities Current Liabilities Market Capital of Equity

2,200,000 690,000 845,000 340,000 1,320,000

1,550,000 710,000 330,000 606,000 700,000

41.94% -2.82% 156.06% -43.89% 88.57%

Increase
Decrease

Increase
Decrease

Increase

* Refer Chart-3A and Chart-3B in Appendix at the end of this report As shown in Table-3, current ratio and working capital in 2011 is better than the previous year. Although, gearing ratio of the company is increased sharply in 2011 but still the company is not highly geared, in fact, gearing ratio of 33.14% is a moderate one. Analysis of Table-4 is evidencing companys better position in year 2011. The company has invested heavily in its non-current assets (an increase of 41.94%) which guarantee that they are equipped with latest technology and, therefore, there is no fear of technological obsolescence. Decline in current assets of 2.82% reveals better management and utilization of resources. Huge rise in long-term liabilities and decline in current liabilities show managements policy of relying on fixed debts which improves short-term solvency issues and this decline in current liabilities results in a better current ratio. Although analysis of financial performance and financial position are showing favourable results of F & F Limited but qualitative factors should also be considered before choosing a course of action.

1.3. Qualitative Factors

There is a broad array of qualitative factors that must be considered. Here is a sampling of the more common ones:
1.3.1. Risk of expiring contracts. It is better to see whether F & F Limiteds

revenues are tied to short-term sales, without immediate prospects for renewing the backlog. If this the case, the performance of the company will not last long.
1.3.2. Management. A sellers cost structure, perception in the marketplace, and

customer relations are driven in large part by the quality of its management team. If management team of F & F Limited is perceived to be the first class, it can increase the corporate valuation, since these people typically have exceptional skills in growing businesses and in anticipating and overcoming operational problems.

6|Page

1.3.3. Lawsuits. Nothing will drive a buyer away faster than an unresolved lawsuit,

especially one with a demand for a large settlement. So this factor is also worth consideration.
1.3.4. Patents. Another qualitative factor that should be taken in consideration is the

establishment of key patents or processes that can give F & & a clear competitive advantage.
1.3.5. Branding. If F & F has invested a great deal of time and effort in creating

brands for its product or service, this can give it a significant boost in valuation. Also note that whether F & F has continued to invest in its brands or not, if not then there is a risk of brand degradation that will require years to rebuild.
1.3.6. Cultural and social environment. As Annapolis Limited is keen to acquire a

controlling interest in a company situated in another country, their cultural and social aspects are also considered.

1.4. Additional Information

In order to make a meaningful analysis, following information should be required.
1.4.1. Sector information. In order to make an insight financial analysis, sector

information is required. This data enables comparison of companys performance with industry standards. Sector information can collected from annual reports of competing firms easily available at stock exchange.
1.4.2. Foreign investment and foreign exchange regulations. Foreign investment

and foreign exchange rules and regulations should also be considered. This information will be helpful in determining whether there is a free entry or exist for foreign investors.
1.4.3. Local laws. Consideration to local laws such as taxation laws, corporate laws,

labour laws should be given

2.Conclusion
After analyzing financial performance and financial position, it was found that the proposed acquisition of F & F Limited can give Annapolis Limited a large market share. It is important to consider the long-term benefit of the company when considering business acquisition. Apart from financial analysis, risk of expiring contracts, lawsuits, patents, and branding were some qualitative factors which have been taken into account. Additional information was also considered.

7|Page

Though qualitative factors do not give conclusive evidence of companys performance, strengths, and weaknesses, it can be said, on the basis of quantitative analysis, that this acquisition will be beneficial in capturing large market share in the industry.

3.Appendix
Chart-1

Chart-2A

Chart-2B

Chart-3A

8|Page

Chart-3B

9|Page