British Polythene Industries (BPI)

British Polythene Industries (BPI)

Introduction

About the assignment

After the class, I was allocated a company and their website reference. The undertaking of my assignment is to download and analyse the 2008 Annual Report of the company whose name is British Polythene Industries from the web site. In this assignment, first I should give a brief overview of the company public presentation based on the 5 twelvemonth reappraisal. Then I should hold an in-depth treatment of this concern public presentation through their fiscal statements and utilize some fiscal ratios to analyse their Income Statement, Balance Sheet and Cash Flow. At last, I will do a decision harmonizing to my analysis.

Brief background of the company

British Polythene Industries ( BPI ) has developed over 20 old ages. Today, it is one of the largest manufacturers of polyethylene movie merchandises in Europe and a taking planetary provider of agricultural movie merchandises. BPI has six highly-focused operate concerns within the group, fabricating a broad assortment of merchandises and services. Because BPI pays more attending on high-quality degrees, has decennaries of experience and proficient know-how and so on, all these factors have besides led BPI become aleader in the production of polyethylene packaging.

Before 2009, BPI operated in three geographic parts, UK & A ; Ireland, Mainland Europe and North America. But now BPI besides has operated in China for several months. The concern has three chief merchandises: Plain Film on The Reel, Printed and Converted Products and Recycled Material. In these merchandises, the turnover of the Film occupied 45 % , the Converted accounted for 38 % and the Recycled was 17 % in the 2008. There are six markets they sell their merchandises: Retail Food Chain, Agriculture & A ; Horticulture, Services, Industrial, Construction and Non-food Retail. In these markets, their chief markets are Retail Food Chain and Agriculture & A ; Horticulture.

Analysis of Annual Report

To acquire more elaborate apprehension of the concern public presentation, foremost, we have a simple analysis to understand the tendency of the company ‘s development through the fiscal statements of the past five old ages. Then we will give a elaborate analysis of the concern public presentation through the fiscal statements of the latest two old ages.

Brief position of past 5 old ages

The Income Statement of Five Year Record ( appendix 1 ) shows that the turnover increased significantly from 359,400,000 GBP ( 2004 ) to 410,200,000 GBP ( 2005 ) . Then there was a smooth growing from 414,200,000 GBP to 424,100,000 GBP between the twelvemonth 2006 and 2007. In the 2008, the turnover was really high at 480,700,000 GBP. Operating net income before all restructuring cost besides increased from 13,700,000 GBP ( 2004 ) to 23,300,000 GBP ( 2005 ) . But after the 2005 twelvemonth, it had a sustained lessening and eventually arrived at 12,600,000 at the terminal of 2008. Harmonizing to these figures we can happen that although turnover had increased over the past 5 old ages, the Operating net income had non grown with the growing of turnover. The ground was that the cost of natural stuff and energy increased bit by bit during the past five twelvemonth. The mean polymer monetary values per ton were approximately 680 GBP in 2004, 790 GBP in 2005, 820 GBP in 2006, 870 GBP in 2007, and 1050 GBP in 2008. Particularly in 2008, although the merchandise had a high merchandising monetary value, the cost of merchandise besides was high. In 2005, though the cost of stuffs was slightly higher than 2004, the growing rate of turnover was faster than the stuffs cost. This is why the operating net income was higher than 2004. Net income before revenue enhancement, diluted net incomes per ordinary portion and dividend per ordinary portion had a similar state of affairs with the operating net income. But it is notable that the BPI closed some mills in the 2008, so the restructuring costs increased significantly and this is the ground that BPI had a low net income before revenue enhancement at merely 3,900,000 GBP in 2008. Diluted net incomes per ordinary portion besides increased from 31,500,000 GBP to 54,280,000 GBP in 2004-2005. Then it dropped to 38,460,000 GBP in 2006 and decreased uninterrupted to 32,360,000 GBP in 2007. At the terminal of the 2008, it was merely 10,670,000 GBP. Dividend per ordinary portion was about 21,000,000 GBP between 2004 twelvemonth and 2007 twelvemonth. But in the 2008, it besides had a important diminution at 14,500,000 GBP.

Harmonizing to the Balance Sheet, we can place that BPI ‘s fixed plus besides had a steady growing from 82,100,000 GBP ( 2004 ) to 92,600,000 GBP ( 2008 ) . In 2008, because building clients continued to cut down demand from BPI, they had to shut some mills. But BPI invested some equipments and mills in other countries, and they besides used more money to develop China market, so the fixed assets had non been reduced in this twelvemonth. The stock lists had maintained the same degree about 60,000,000 GBP over the past few old ages except 2005 twelvemonth at 55,300,000 GBP. There were merely a little fluctuation in trade & A ; other receivable and trade & A ; other collectible. They had kept about 60,000,000 GBP since 2004. From these figures and the tabular array, we can cognize that the capital employed besides increased for the 5 old ages and why it went up to 153,200,000 GBP in 2008. We besides should observe that the entire equity attributable to equity holders of the parent besides increased swimmingly from 36,000,000 GBP to 62,200,000 GBP in 2004-2007, and reduced somewhat in 2008 at 52,700,000 GBP. But the net debt went to 76,000,000 GBP in 2008. The chief ground was the consequence of exchange rate.

From the Five Year Record, we can happen that BPI had a steady concern public presentation during the last five old ages. From 2004 to 2007, turnover and net incomes were stable fluctuation on a little graduated table. In 2008, due to a figure of factors, such as demand decrease, high natural stuffs cost, led they had a low net income. But they adopted some steps opportunely to cover with these jobs. Although the diminution of net income was speedy in this twelvemonth, they still were profitable and these steps could cut down the influence on the hereafter.

Analysis of Financial Statement in latest 2 old ages

From the Income Statement of the 2007 and 2008, we can happen that the turnover increased approximately 11.8 % ( from & A ; lb ; 424.1m to & A ; lb ; 480.7m ) , but the net income from operations before net restructuring cost decreased from & A ; lb ; 14.6m to & A ; lb ; 12.6m. The operating costs had a similar degree between 2007 and 2008, but the cost of gross revenues rose by a great per centum about 16.6 % ( from & A ; lb ; 363.1m to & A ; lb ; 423.2m, Notes 2 ) . The chief ground was the high cost of natural stuffs and energy. In 2008, the mean polymer monetary values per ton were about 1050 GBP and the oil monetary values reached a record about 120-135 $ per barrel. In this twelvemonth, because of the less demand of their building clients, BPI had to shut some mills which earnestly depended on the building. Therefore, net restructuring cost besides rose from & A ; lb ; 0.7m ( 2007 ) to & A ; lb ; 5.4m ( 2008 ) . And because the net adoptions increased to & A ; lb ; 76m ( Note 16 ) , the net adoption costs besides went up to & A ; lb ; 4.2m. These factors finally led the company ‘s net income before revenue enhancement in 2008 ( & A ; lb ; 3.9m ) was lower than last twelvemonth ( & A ; lb ; 11.5m ) . So the company ‘s operating state of affairs was non optimistic in 2008.

Harmonizing to the Balance Sheet, BPI ‘s non-current assets increased from & A ; lb ; 86.6m to & A ; lb ; 99.9m in 2007-2008. The Cash Flow Statement shows that the purchase of belongings, works and equipment was & A ; lb ; 14.2m in 2008 and & A ; lb ; 15.4m in 2007, furthermore, the net purchase of these assets was & A ; lb ; 8.7m and & A ; lb ; 15.4m. But the disposals in 2007 were higher than 2008 ( Notes 11 ) . And deferred revenue enhancement assets in 2008 were & A ; lb ; 7.3m which were higher than 2007 ( & A ; lb ; 1.9m ) . So the non-current still increased by approximately 15.4 % .

There was besides an addition in the motions in working capital from & A ; lb ; 2.8m ( 2007 ) to & A ; lb ; 8.4m ( 2008 ) . Inventories increased by approximately 0.6 % , trade and other receivables decreased from & A ; lb ; 64.0m to & A ; lb ; 60.4m, trade and other payables reduced from & A ; lb ; 62.1m to & A ; lb ; 62.5m between 2007 and 2008. Decrease in receivables agencies that they received more existent payment ( non recognition ) from the clients. On the contrary, lessening in payables besides means they had to pay more existent hard currency to their providers. But harmonizing to the Balance Sheet and Cash Flow Statement, receivables had a greater lessening than payables and the stock lists merely had a small addition, so this was why they had more on the job capital in 2008.

In current liabilities, it increased by about 13.3 % . Although bank overdraft was reduced to & A ; lb ; 8.4m, the other loans and adoptions increased quickly to & A ; lb ; 21.3m in 2008 ( merely & amp ; lb ; 1.1m in 2007 ) . In non-current liabilities, the other loans and adoptions had similar figures between 2007 and 2008, but retirement and employee benefit duties increased from & A ; lb ; 19.1m to & A ; lb ; 27.1m. Through the computation, we can see their net assets were & A ; lb ; 62.4m in 2007 and & A ; lb ; 53.1m in 2008. These figures show that if they want to borrow money from other loaners in the hereafter, they may be offered money by loaners. Because when they can non refund loans, they can utilize these assets to alternatively of money. Normally the loaners will see the fixed assets and current assets as warrant and security. But because of the decrease of the net assets in 2008, they may be offered fewer loans than 2007.

Analysis of Financial Statement by ratios

In this portion, we will utilize ratios to analyse BPI ‘ Financial Statement through four facets: Profitableness, Efficiency, Liquidity and Gearing. We are traveling to utilize 10 ratios to analyse their Statements and all these ratio expression we use come from our faculty notes.

Profitableness

Gross Margin: This ratio chiefly reflects the relationship between cost of gross revenues and turnover ( gross revenues ) . Normally utilizing gross net income divided by turnover ( gross revenues ) and gross net income is equal to turnover ( gross revenues ) less cost of gross revenues. In BPI, we consider the cost of gross revenues is before net restructuring costs

We can clearly place that gross net income in 2008 was lower than 2007. There were many factors could take to the lessening of gross net income: the growing cost of merchandise had increased or the merchandising monetary values had reduced, and it besides might be both the merchandise cost and gross revenues monetary values had increased but the growing rate of the gross revenues less than the cost. In this company, the entire gross revenues volumes were 305,000 metric tons in 2008 and 316,000 metric tons in 2007. The volumes in 2008 was lower than 2007, but turnover was higher in 2008, so the sale monetary values was besides higher in 2008. Harmonizing to these figures and the overview of the past 2 old ages, we can state that the ground of gross net income decreased in 2008 was high natural stuffs cost and energy. Although they increased the merchandising monetary values of merchandise, the growing rate of goods cost was greater than the merchandising monetary values rate.

Operating Margin: The operating net income is gross net income less operating costs and before the revenue enhancement and involvement. Harmonizing to this ratio we can see how much net income we existent acquire except all costs relate to merchandises, and we besides can happen whether the operation of the concern is place or failing.

In BPI, we should see net restructuring costs, when we calculate the operating border. Because the restructuring costs included the costs of traveling equipments, human or stuffs from a mill to other mill, these assets would go on to bring forth merchandises after they arrived at the new mill. These costs might belong to the direction costs. So we could impute them to the operating cost. The operating border for 2007 is:

From this rate we can see that there was a lessening of approximately 50 % in operating net income from 2007 to 2008. The chief ground was the addition in net restructuring cost. The operating costs before the net restructuring cost had a similar degree between 2007 and 2008 ( Note 2 ) . However, net restructuring cost in 2008 was 7.5 times than 2007. The company ‘s net income was lower in 2008 and had a higher operating cost. Their operational public presentation was non good in this twelvemonth.

Tax return on Capital Employed: This ratio means that company borrow capital from Bankss or loaners, or other people and stockholders invest capital to company, so the capital employed per lb can bring forth how much net net income. This rate may straight associate to the involvements and dividends of the investors and besides can see that the company ‘s efficiency of utilizing these capital.

In 2007, every & A ; lb ; 1 of capital employed could bring forth about 10.5p net net income, but this net income decreased to merely 5.5p in 2008. So the concern ‘ efficiency of capital employed was lower in 2008. If the company ‘s ROCE has maintained this degree or is lower than this degree in the hereafter. Then investors may see whether they should go on to put money to this company. Low ROCE means that investor ‘s financess invested in this company failed to bring forth high net incomes, besides means that their dividends and involvements will be low. They may put in other companies and non pay attending to this company.

Efficiency

Inventory Turnover Ratio: It represents the degree of a company ‘s stock list turnover. More inventory turnover means the company has a lower mean stock list degree and lower stock list costs, so they will hold more hard currency to put in other topographic point. However, stock list turnover is excessively high can besides take to many jobs. For illustration, when the company faces an unexpected period of peak demand or unequal supply of natural stuffs, low stock list may do deficit. When we calculate this ratio, we had better use the mean stock list to computation. It represents the times of mean stock list turnover for the twelvemonth.

If we consider a twelvemonth is 365 yearss and we use 365 divided by this ratio, we are able to acquire an mean yearss of stock list turnover. The yearss for 2007 were 61.1 and for 2008 were 53.7. This may show that the stock lists were replenished every these yearss. The stock list turnover ratio in 2008 was slightly higher than 2007, so inventory direction was more efficient and they had lower stock list costs in 2008.

Debtor Collection Period: The ratio is calculated by receivables divided by gross revenues. Sometimes, clients will non pay hard currency to the company instantly but on recognition when they receive the merchandises ( particularly when their clients were supermarkets and so on ) , so clients may pay money after several yearss, hebdomads or months. Many companies are willing to make this because they can acquire more clients. But the longer receivables mean that the company may hold few financess to put to other profitable activities. This ratio can indicate out that how many yearss, on norm, the company can acquire hard currency from their clients.

In 2007, BPI could have the receivable money from their clients was about 55 yearss. And the mean yearss of having money decreased to 45.9 yearss in 2008. For BPI, this was a good intelligence. It means that they received more money in 2008 than 2007 from their clients and they had more hard currency for concern and production activities. This besides means that their clients had a better repute, and cut downing the hazard of bad debts.

Creditor Payment Period: This is contrary to the Debtor Collection Period. This clip, the company plays a function as the client. Like other clients, the company may besides trust hold more money and resources to transport out production, in order to acquire more net income. The payables of the short term are merely a cloaked signifier of free beginning to companies, so lots of concerns want to increase the clip of payables. However, this manner may take to worsen of company ‘s recognition worthiness and finally lose many providers. A good provider is besides an of import resource to enterprise, so we had better non lose them. This ratio expresses how long, on norm, the company should pay the payables to their providers.

The mean yearss for payables dropped off to 46.7 yearss in 2008. This means that the BPI paid more money to their providers than 2007. Although there was non profit to their hard currency flow, it could increase their good will with providers. In modern-day society,

It is deserving to utilize a little sum of hard currency to interchange more trust and cooperation between the concerns and providers.

Asset Turnover: It can be simple understood as how much gross revenues derived from investing in the concern in a period or every & A ; lb ; 1 of capital employed can bring forth how much gross revenues gross. Normally, higher plus turnover means the concern has a high efficiency in the usage of capital.

The plus turnover increased from 3.18 to 3.65 in 2007 and 2008. It means that every & A ; lb ; 1 of capital employed could do more gross revenues gross and the use of investing was higher in 2008.

Liquid

Current Ratio: This ratio is the current plus divided by current liabilities. It reflects a capacity that when the company ‘s operation acquire into a crisis, whether their current plus can be used to cover their current liabilities. Sometimes, this rate will non needfully ever maintain higher than 1. It depends on the types of concerns.

BPI ‘ current ratio decreased from 1.57 to 1.34 in 2007 and 2008. The chief ground was they had more other loans and adoption ( short term, Note 16 ) in 2008. Although the current ratio was reduced in 2008, it maintained at a normal degree. Surely, the higher current ratio means that they can more easy acquire financess from Bankss or investors. When a company borrows money from loaners, the loaner will see their current ratio to guarantee when the company can non maintain on traveling running, their current assets can be use to counterbalance the loans. While the loaners may be willing to impart money to BPI in the hereafter, but the loan sum may be less than 2007. If this ratio will go on to diminish in the hereafter, BPI will be difficult to acquire loans from others.

Acid Test: This ratio has a similar expression with current ratio, but excepting stock. There are some grounds to explicate why we should disregard the stock. First, if we want to alter stock lists into hard currency, we need a long period. In the BPI, harmonizing to the old computation, we know that their mean stock list turnover is about 50-60 yearss. Second, under normal fortunes, when we need alter the stock lists into money, it normally means that the concern is confronting a great crisis. In this instance, the value of their merchandises will no longer hold the old value. And in order to recognize the merchandises to hard currency, merchandise monetary values will besides has a great diminution. The value of stock lists in Financial Statement besides has non practical significance. But in this instance, compared with other concerns, there is less impact on BPI. This is determined by the nature of their merchandises. Most of their merchandises do non like autos or cosmetics, but we use them ( such as plastic bags ) about every twenty-four hours and devour them. So it may be slightly easy to alter them into hard currency with original value and cut down the dealing period.

Harmonizing to these ratios, we can happen the acerb trial is more strict and practical than current ratio. The acerb trial was decreased to merely 0.67 in 2008, because of the addition of stock list. Although they might hold some liquidness jobs in 2007, sing BPI ‘ merchandises and repute in polyethylene industries, they besides might acquire loans from loaners. However, the ratio was excessively low in 2008, this may do them to be more hard to acquire loan in the hereafter. So they should pay attending to this job and forestall the diminution of the ratio in future. After all, the loaners normally tend to take a more unafraid manner to measure the liquidness.

Gearing

Gearing: Internet adoptions divided by stockholders financess and net adoptions is equal to hanker term-loan less hard currency at bank. It reflects the ratio between the stockholders ‘ investing and long-run loan from loaners.

Clearly, pitching increased from 2007 to 2008 and both 2 old ages had a high geartrain ( above normal degree ) . These figures represent if BPI ‘s stockholders ‘ fund were & A ; lb ; 100m in 2007, so BPI besides borrowed money about & A ; lb ; 75.5m from other loaners as their capital employed, such as bank. And this ratio increased in 2008. The each & A ; lb ; 100m of stockholders ‘ financess of investing in BPI, BPI would besides borrowed 87.2 from loaners. These figures might be non a good intelligence for BPI ‘s stockholders. Because before dividends, BPI must pay the involvements to loaners at first and they besides should refund the loan when the loan expires, which can ensue in lower dividends to stockholders.

Decision

Based on the above analysis, we can see that the profitableness in 2008 was lower than 2007. This was chiefly due to high natural stuff, energy costs and sulky demand of building industries. Although restructuring costs was higher in 2008 than 2007, reconstituting had about been finished at the terminal of 2008. Therefore, reconstituting costs will be reduced in 2009. In add-on, in late 2008, natural stuffs and energy monetary values had a important diminution. In response to this, BPI ‘s net income may be considerable growing, while turnover will be probably to fall in 2009. They besides had a good efficiency in the 2 old ages. And their debitor and collectible period had a normal degree. In 2009, they still decide trade merchandises on recognition as their chief manner, so they should go on to keep the current theoretical account. But they should observe that some of their clients may go bankruptcy in the hereafter as the current economic crisis, so they should take some steps to beef up their clients ‘ direction and rating.

However, we should observe that BPI ‘s liquidness is non really good. They should heighten their stock list direction, cut down stock list costs and keep appropriate stock list degree. And they should besides command their loans and adoption ( short term ) . From pitching ratio, on the one manus, they should guarantee normal production. On the other manus, they should minimise long-run loans, thereby cut downing the involvements. If gearing continue growing, it will impact the dividends of stockholders.

Q2

In this simulation, I was a teller in our squad. In the first twelvemonth of the simulation, the manufacturer forecasted demand and deliberate capacity to set up production planning at first. Then I should cipher all costs of production based on the planning. Harmonizing to costs and the hard currency we had, I determined whether we could transport out the program or whether we needed borrow money from bank to guarantee we had adequate money. This was a pre-estimate of hard currency for production. When we received the orders, we would get down existent production. In the production procedure, I recorded hard currency motions on the hard currency sheet in every measure of production. Then I would cipher and look into the position of residuary hard currency seasonably. And I would feedback information about how much money we can utilize to production to our manufacturer, so he could set the production planning quickly. At the terminal of the twelvemonth, I checked the hard currency flow with our finance director to guarantee we have a right hard currency flow record. Then I recorded it on hard currency flow statement.

From the above activity, we can see that my chief undertaking was to pull off the hard currency of concern. In conformity with the programs of different sections, I should calculate, program and apportion the hard currency of the concern. And harmonizing to the existent operation, I should continuously set and redistribute the hard currency. I besides needed know hard currency flow in any minute to guarantee the concern have adequate money to production.

In this game, we could borrow money from bank limitless. But bank will non make this in existent universe. If we have hard currency job, we are likely to be bankruptcy. Therefore, the function of financial officer in world is more of import. We need pull off and be after concern hard currency flow more careful. When the financess come in concern, we need to cognize when it comes in, how much it comes in and how much the company demand during the period. When we need pay hard currency to others, we besides need to cognize when we should pay it, how much we should pay, the sum of hard currency is adequate or unequal, how can we apportion the excess hard currency and so on. In the concern, each amount of hard currency flow must go through through the financial officer and be registered on the hard currency flow sheet by financial officer. No 1 can utilize concern financess without mandate. This is another map for teller to forestall corrupt patterns and fraud in a concern, and protect the financess of concern. On the other side, through a elaborate record and audit of concern financess, teller will reflect the hard currency place of company to the leader seasonably. Then the leader will establish on the position of concern financess to reasonably apportion the hard currency to different sections and maximise efficiency of financess usage. If hard currency is the blood of concern, so the teller may be the ruddy blood cells of concern. To keep normal degrees of blood and aid it has a smooth flow in concern.

Q3

A concern has different merchandises and different merchandises have different costs, such as direct costs and indirect costs. For the direct costs ( direct altogether stuffs, direct labour ) , it can be straight included in merchandise costs. But the indirect costs, sometimes, we can non clearly sort them to the different merchandises, such as energy, operating expenses, fabrication disbursals. The traditional attack is to apportion them every bit to all merchandises. However, this attack may apportion the merchandise cost which is high ingestion to other merchandises ( low cost ) . ABC is a more intuitive and scientific methods to administer these indirect costs. In ABC, the whole procedure of production is divided into different activities and the entire production costs ( indirect costs ) will be allocated to these activities harmonizing to the different rate. Merchandises in an activity give rise to certain resource ingestion, so we allocate this ingestion to the different merchandises of the activity. Finally, the merchandise ingestion in assorted activities will be aggregated as the cost of a merchandise. ABC is greater accent on ratio.

In the beginning of the simulation, because the individual market and merchandise, we merely needed allocate the costs into the merchandise we merely had. In the medium term, we had new markets and merchandises, so we could no longer cipher costs merely. Through the ABC, we allocated the costs to different merchandises harmonizing to the different resource ingestions, demand rhythm, production rhythm, set-up costs and so on. So we could more clearly understand which merchandise was profitable, and which one was low net income. Then we could set our production agenda. In existent universe, ABC is more complex and many factors are besides taken into history. Through the ABC, company can more clearly understand which merchandise and client are valuable or no valuable, which production activities are efficient and the low-efficiency activities comes from which section. And in conformity with the end product, alterations in resources costs, they can accurately foretell production costs, net income, and the demand of resources.

Q3b

Absorption costing is a method to find entire production costs of merchandises. These costs include direct stuffs, direct labour, variable production and fixed production costs. This attack chief focal point on fixed costs and see that the merchandise costs should include the fixed costs. Because work-in-process besides relates to utilize the fixed production cost, they should besides be considered in this method. Direct stuffs, direct labour and variable costs normally will increase with the growing of bring forthing merchandises. But the definition of fixed costs is different. In soaking up costing, the fixed costs are taken into history in entire costs. So a company produces more merchandises, so the mean fixed costs in every merchandise will be less and the merchandise will hold higher net income.

In our simulation, because we did non see the stock list costs and could borrow money from bank limitless, the more merchandises we had, the low mean fixed costs for each merchandise. It was a good manner for us to acquire more net income. However, in existent universe, Absorption costing is non suited for every concern. A big figure of merchandises will demo a good net income on a company ‘s fiscal statement in this twelvemonth, but it will do great force per unit area in following twelvemonth. And if a company produces excessively many merchandises but the company has deficient orders, it will ensue in a merchandise backlog. This state of affairs may finally take to missing working capital to company, so company may be bankruptcy. Therefore, this method is more appropriate in the company which needs large-scale production or some subcontractors who have non their ain merchandises and they help other companies produce goods.. Especially in Asian, such as China, sufficient capacity normally enable them have a astonishing capacity!