The Financial Performance Of The Weir Group Plc Finance Essay - Free Essay Example

1.1 Company profile The Weir group PLC was founded in 1872, with its headquarters placed at Glasgow, UK. The company along with its subsidiaries delivers specialized mechanical engineering solutions all over globe. Company operates in three different sectors like Minerals, Oil and Gas and power and industrial. In minerals sector company is involved in manufacturing wide range of slurry equipment solution, including pump, valves, de-watering products and wear resistant lining. The oil and gas segment provides storage and engineering support for the upstream and downstream offshore, marine, and onshore oil and gas markets along with designing and manufacturing of pumps, valves, and ancillary equipment. The Power Industrial segment designs, manufactures, and provides aftermarket support for rotating and flow control equipment to the nuclear power, fossil fuel, and renewable energy production activities in the power generation and industrial sectors. It also provides specialist technical services. In the fiscal year 2008, Weir acquired Mesa Manufacturing Inc. Financial Performance Through a careful analysis of its financial performance, the Weir group PLC can identify opportunities to improve performance at the department, unit, or organizational level and help them to improve its comp etitive position in the marketplace. Ratio analysis is a financial tool that can help the company to measure its financial performance in comparison to any other company or to itself comparing present performance to last year performance. 2.2 Profitability Ratios Profitability Ratios for Years 2010 2009 Return of Capital Employed 16.45% 14.39% Gross Profit Ratio 32.7% 31.28% Net Profit Ratio % % ROCE should always be higher than the rateÂÂ  at whichÂÂ  the company borrows; otherwise any increase in borrowing will reduce shareholders earnings 3. Working capital management 3.1 Liquidity Ratios Liquidity Ratios for Years 2010 2009 Current Ratio 1.30:1 1.18:1 Acid Test ratio 0.76:1 0.74:1 4. Long term Solvency 4.1 Efficiency:- Efficiency Ratios for Years 2010 2009 Inventory days 92 106 Receivables (Debtors) days 63 83 Payables (Creditors) days 131 138 WC Cycle days 160 161 5. Sector analysis As discussed earlier Weir Group PLC operates in three different sectors, so they have been analyzed separately as follows. 5.1 Minerals While project enquiry levels are up and major miners have announced planned increases in their 2010 capital expenditure levels, we remain cautious as to timing of conversion into original equipment orders. Furthermore, product lead times dictate any flow through to revenues will not be evident until later in 2010. These factors together with our lower opening order book mean that original equipment revenues are likely to be lower through the first part of 2010. Aftermarket sales have now stabilized and we would expect these to grow in line with underlying commodity production trends determined by commodity prices and global economic growth. Aftermarket sales will also benefit from a growing installed base of original equipment. The medium term outlook for the division remains positive reflecting growing emerging market demand for resources. 5.2 Oil and Gas Although forward visibility is still limited, the immediate outlook for upstream business is more positive than at the start of 2009. This is based on increases in rig counts since they bottomed in mid-2009 and higher demand for aftermarket products and services as the industry moves to harsher shale formations. Company expects recovery in their Middle East service operations to be slow. Its downstream order book provides a solid underpinning for 2010, although its anticipated to be a more challenging environment for new orders. The medium term outlook for upstream remains strong, with rig counts forecast to continue to raise, an increasing bias towards unconventional drilling and emerging interest in shale fracturing beyond North America. 5.3 Power and Industrial Entering 2010 with a record order book and the divisions financial performance in 2010 will benefit from a strong nuclear workload. Company is cautious of the speed of recovery in industrial markets; the outlook for the global nuclear power market is becoming more positive, driven by environmental concerns combined with a growing demand for power particularly in Asia. At the same time, the need for life extension and refurbishment of existing power plants in the UK, Europe and North America will continue to grow given lead times for new build in these markets. With its global footprint, tr ack record and nuclear expertise means company has well placed to benefit from these opportunities over the medium term. 6. Agency Theory There are times when there is conflict of interest between contracting parties. In case of public limited company these two parties are share holders and corporate managers. The conflict in the following groups arises as they have to agree to remuneration of corporate executive on common grounds. Each party has their own agenda to achieve shareholders think that the corporate managers have not done their job properly and thus should not be remunerated with huge pay checks. While on other hand corporate managers think in exactly opposite manner. In such cases Agency theory developed both theoretically and empirically helps to conduct detail investigation of the causes of the problem such as divergence of interest between share holders and corporate managers. In greed to pursue their own goals, they bear entire cost of failure because if they achieve their set goal then they are remunerated by just a fraction of benefits, which is insufficient to motivate managers. This makes managers to make decision that are risky and are not in the best interest of the company but them selfs, the loss caused in process is called as residual loss. Agency theory when applied can act as bridge between these two parties, analyzing the company performance and remunerating the managers accordingly and ensure proportionate dividend to share holders. Weir Group PLC deals with the agency problem by setting up remuneration committee along with committees like audit committee and nomination committee. The remuneration committee is appointed by the board and consists of more than three independent non-executive directors. The independent non executive directors make decisions that are in favor of both the parties. The members of the remuneration committee conduct meeting thrice or more as required in a year, coinciding with the key dates in the companies bonus and remuneration cycle. The committee has been authorized to investigate any activity within its terms of reference, this helps them to keep track on directors actions. Members of remuneration committee can seek any information that requires from any employee of the company and employees too are directed to co-operate with any request made by the committee. The committee can get external legal aid or independent professional advice at the companies expense, such advisors are may attend company meetings if necessary. To avoid agency problem Weir Group PLC has appointed remuneration committee with following duties (i) To determine and agree with the Board the framework or broad policy for the remuneration of the Chairman of the Company, the Chief Executive, and the members of the Executive Operations Group (the Executives). The remuneration of Non Executive directors should be a matter for the Chairman and Executive members of the Board. No Director or Exe cutive should be involved in any decisions as to their own remuneration; (ii) In determining such a policy, the Committee will take account of all factors which it deems necessary. The objective of such policy shall be to ensure that the Executives are encouraged to enhance the Companys performance and are, in a fair and responsible manner, rewarded for their individual contribution to the success of the Company; (iii) To review the ongoing appropriateness and relevance of the remuneration policy; (iv) In determining such packages and arrangements to give due regard to the comments and recommendations of the Code as well as the UK Listing Authoritys Listing Rules and associated guidance; (v) To approve the design of, and determine the measures and targets for, any annual performance-related pay schemes operated by the Company for the Executives and the individual payments to Executives; (vi) To approve the design of all share incentive plans and for any such plan, the Committee will determine each year whether awards will be made and, if so, the overall amount of such awards, the individual awards to Executives and any performance measures and targets; (vii) To determine the policy for and scope of pension arrangements for each Executive; (viii) To review the terms of service agreements for each of the Executives from time to time and to ensure that contractual terms on termination, and any payments made, are fair to the individual and the Company and that the duty to mitigate loss is fully recognized; (ix) To review and note annually the remuneration trends across the Company; (x) To be responsible for obtaining reliable, up-to-date information about remuneration in other companies with a view to determining where to position the Company relative to other companies. (xi) within the terms of the agreed policy to determine the total individual remuneration package of each Executive including, where appropriate, bonuses and long ter m incentives; (xii) To ensure that provisions regarding disclosure of remuneration, including pensions, as set out in the Directors Remuneration Report Regulations 2002 and the Code, are fulfilled; (xiii) To be responsible for establishing the selection criteria, selecting, appointing and setting the terms of reference for any remuneration consultants who advise the committee; (xiv) To report the frequency of, and attendance by members at, remuneration committee meetings in the annual report; and (xv) To review the Committees terms of reference annually and where necessary, to update them. Reflective Journal I was a kind of student that had fear about accounting and thought accounting is boring subject with numbers that increase and decrease for no cause, but when I over came my fears and paid attention in class when financial concepts was taught It clicked to me that there is reason for all the changes happening in numbers and how finance serves as nervous system of any business, from that day onwards my interest in field of finance is increasing. The major research work done for the assignment was from library books which helped me to understand the basics of financial analysis and other most important source was internet which enabled me to access news articles published in past. At first calculation part was completed and then accordingly difference between values of both years was considered for the base for research, then I tried finding out the reason for deviation in figures. The research data to be studied was more and time as source was to utilized effectively so first I divided the assignment into different sub topics and completed these topics in set time frame. Competition with my class mates motivated me to complete my assignment in best possible manner. This is the first time I conducted research on the company, so it was hard to find financial information, or published news articles of company and I found it difficult to filter quality information. Now that I have learned to find the information in most effective way next time I can save lot of time and get some quality information. The learning outcomes that I found easiest while completing the assignment was Knowledge as I understood the use of financial statement analysis and the concepts applied to do ratio analysis . The learning outcome that I found most difficult was critical thinking as I often came across situations where a judgment was needed to be made in absence of complete data. Critical thinking on complex unstructured financial problems was tough task for me. RATIO ANALYSIS PROFITABILITY RATIOS Return of capital employed = Operating Profit ÃÆ'Æ’- 100 Capital Employed 2010 2009 Capital Employed = Share Capital + Capital Employed = Share Capital + Reserve + Reserve + Non-Current liability Non-Current liability As Total Equity = Share Capital + Reserve as Total Equity = Share Capital + Reserve So Capital employed = Total Equity + So Capital employed = Total Equity + Non-Current liability Non-Current liability = 373.3+742.2 = 442+696.9 = 1115.5 = 1138.9 ROCE = 183.5 ÃÆ'Æ’- 100 ROCE = 163.9 ÃÆ'Æ’- 100 1115.5 1138.9 = 16.45% = 14.39% Gross Profit Margin = Gross Profit ÃÆ'Æ’- 100 Sales Revenue 2010 2009 GPM = 455.2 ÃÆ'Æ’- 100 GPM = 423.5 ÃÆ'Æ’- 100 1390.2 1353.6 = 32.7% = 31.28% Net Profit Margin = Net Profit ÃÆ'Æ’- 100 Sales Revenue 2010 2009 NPM = ÃÆ'Æ’- 100 NPM = ÃÆ'Æ’- 100 1390.2 1353.6 = % = % Current Ratio = Current Assert Current Liabilities 2010 2009 Current Ratio = 569.3 Current Ratio = 732.3 435.8 618.5 = 1.30:1 = 1.18:1 Acid Test Ratio = Current Assert Inventory Current Liability 2010 2009 Acid test Ratio = 569.3 235.3 Acid test Ratio = 732.3-269.6 435.8 618.5 = 0.76:1 = 0.74:1 Inventory Days = Inventory ÃÆ'Æ’- 365 Cost of Sales 2010 2009 Inventory Days = 235.3 ÃÆ'Æ’- 365 Inventory Days = 269.6ÃÆ'Æ’- 365 935 930.1 = 92days = 106 days Receivable Days = Trade Receivables ÃÆ'Æ’- 365 Sales 2010 2009 Receivable Days =240.5 ÃÆ'Æ’- 365 Receivable Days = 309.2ÃÆ'Æ’- 365 1390.2 1353.6 = 63 days = 83 days Payable Days = Trade Payable ÃÆ'Æ’- 365 Cost of Sales 2008 2009 Payable Days = 336.3 ÃÆ'Æ’- 365 Payable Days = 353.6 ÃÆ'Æ’- 365 935 930.1 = 131 days = 138days Working Cycle Days = Receivable Days + Inventory Days Payable Days 2010 2009 Worki ng Cycle Days = 92+131-63 Working Cycle Days = 106+138-83 = 160 days = 161 days Gearing Ratios = Long Term Debt + Preference Share Capital ÃÆ'Æ’- 100 Share Capital + Reserves + Long Term Debt = Debt . ÃÆ'Æ’- 100 Total Equity 2010 2009 Gearing Ratios = 174.2 ÃÆ'Æ’- 100 Gearing Ratio = 242.6 . ÃÆ'Æ’- 100 742.4 696.4 = 23.46% = 34.83%