Accounting and Financial Analysis

Table of Contents

1 Introduction

2 Summary Section
2.1 Clarkson Plc Background Summary
2.1.1 Financial Highlights
2.2 Competitors Summary
2.2.1 Sutton Harbour Holdings Plc
2.2.2 Stobart Group Ltd
2.2.3 Braemar Shipping Services Plc
2.2.4 Wincanton Ltd

3 Accounting Analysis
3.1 Accounting Policies
3.1.1 Basis of Preparation and Statement of Compliance
3.1.2 Key Accounting Judgments and Estimates
3.1.2.1 Trade Receivables
3.1.2.2 Revenue Recognition
3.1.2.3 Operating Leases
3.1.2.4 Adjusting Items
3.1.2.5 Goodwill
3.1.2.6 Depreciation
3.2 Accounting Evaluation
3.3 Potential Risk and Necessary Adjustments

4 Financial Analysis
4.1 Profitability Ratios
4.1.1 Return on Capital Employed (ROCE)
4.1.2 Return on Sharholders Funds (ROSF)
4.1.3 Gross Profit Margin (GPM)
4.1.4 Net Profit Margin (NPM)
4.2 Liquidity Ratios
4.2.1 Current Ratio
4.2.2 Quick Ratio (Acid Test)
4.3 Efficiency/ Working Capital Ratios
4.3.1 Inventory Turnover
4.3.2 Receivable Days
4.3.3 Payable Days
4.3.4 Cash Conversion Cycle
4.4 Financial Structure
4.4.1 Gearing
4.4.2 Interest Cover
4.5 Investment Ratios
4.5.1 Dividend Yield
4.5.2 Dividend cover
4.5.3 Earnings per Share (EPS)
4.5.4 Price/ Earnings Ratio (P/E Ratio)

5 Conclusion and Recommendations

References

Appendix

List of Figures

Figure 1. Companies Logos

Figure 2. Dividend Summary

Figure 3. Performance Summary

Figure 4. Return on Capital Employed

Figure 5. Return on Shareholders Funds

Figure 6. Gross Profit Margin

Figure 7. Net Profit Margin

Figure 8. Current Ratio

Figure 9. Quick Ratio

Figure 10. Inventory Turnover

Figure 11. Receivable Days

Figure 12. Payable Days

Figure 13. Cash Conversion Cycle

Figure 14. Gearing

Figure 15. Interest Cover

Figure 16. Dividend Yield

Figure 17. Dividend Cover

Figure 18. Earnings per Share

Figure 19. Price/ Earnings Ratio

List of Tables

Table 1. Adjustment of Accounting Periods

Table 2. Auditors

Table 3. Depreciation Overview

Table 4. Return on Capital Employed

Table 5. Return on Shareholders Funds

Table 6. Gross Profit Margin

Table 7. Net Profit Margin

Table 8. Current Ratio

Table 9. Quick Ratio

Table 10. Inventory Turnover

Table 11. Receivable Days

Table 12. Payable Days

Table 13. Cash Conversion Cycle

Table 14. Gearing

Table 15. Interest Cover

Table 16. Dividend Yield

Table 17. Dividend Cover

Table 19. Price/ Earnings Ratio

1 Introduction

The purpose of this report is to present the best company from the peer group based on accounting and financial analysis. The peer group contains five companies from the industrial goods and services sector – Clarkson Plc, Stobart Group Ltd, Braemar Shipping Services Plc and Wincanton Ltd that listed on the main market of London Stock Exchange and Sutton Harbour Holdings Plc, which is listed on the Alternative Investment Market of London Stock Exchange.

On the basis of analysis conducted, we highly recommend Clarkson Plc as a company worth of investment. The data used for production of this report is historical data which are publically available.

In the summary section of this report, we will provide detailed background of the selected company, including its financial highlights as well as comparison with other four peers’ financial performance.

The accounting analysis presents an overview of the accounting policies in the peer group.

The financial analysis is the last part of this report containing profitability, liquidity, efficiency analysis and financial structure. Lastly, a comparison of investment figures is provided.

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Figure 1. Companies Logos

2 Summary Section

2.1 Clarkson Plc Background Summary

Clarkson Plc is a company based in UK with its headquarters in London. 75% of the company’s revenue is constituted by broking. The Company was founded in 1852 by Horace Anderton Clarkson. The main aim is to build long term relationships with the clients and to expertise to the even-wider and increasingly diverse client base across all sectors of the shipping and offshore industries, providing unrivalled professionalism. It has a market capitalization of GBP 893.39 million (Clarkson Plc, 2017).

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Figure 2. Dividend Summary (Clarkson Plc, 2016)

The company has been providing the investors with the confidence to invest in with its high-level of profitability, creditability, reliability and execution of its securities, so it is a great choice for the investors to overweight the equity. Clarkson has maintained a staggering average gross profit margin of 96.28% in the last 5 years which ultimately results in more of the retained earnings helping the company to provide higher returns on investments to the investors on time and at an increased rate. Talking about the returns, the share price and the earning per share are also to be taken into consideration because that is the one of the majors where Clarkson has continuously shown a tremendous growth. The share price of the company went up to GBP 21.73 in 2016 from GBP 11.80 in the starting of the year 2012, eventually leading to increase in earnings per share for the shareholders from GBP 0.85 per share (2012) to GBP 1.20 per share (2016). Clarkson continues to maintain its remarkable dividend record, having increased the dividend paid for 14 consecutive years, every year since 2002. In line with this progressive dividend policy, Clarkson again intends to raise the dividend paid to its shareholders. The Board recommended a total dividend of GBP 0.65 per share (2015: GBP 0.62 per share), resulting in a 5% increase.

2.1.1 Financial Highlights

The primary achievement by Clarkson was the successful annual increase in dividend since 2002. As evident in the figures below, the underlying profit before taxation grew from GBP 25.1 million in 2013 to GBP 44.8 million in 2016.

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Figure 3. Performance Summary (Clarkson Plc, 2016)

Clarkson continuously had an increase in the operating profit from GBP 19.1 million (2012) to GBP 45.6 million (2016).

The overall performance of Clarkson can be described as stable and in some cases growing. The return on capital employed has always increased exclusive of the year 2013 and 2014 when it had a downfall. Similarly, the return on shareholders funds has been quiet stable with a few ups and downs in the year 2015 and 2016. The net profit margin suffered a dip in 2013, 2014 and 2015 whereas the gross profit margin always grew except the year 2014.

The company has tried to reduce its gearing ratio but in some instances, it has also gone up while the interest cover shows reliable performance. The interest cover has always been in negative because the company has interest incomes rather than interest expenses (Clarkson Plc, 2016).

2.2 Competitors Summary

2.2.1 Sutton Harbour Holdings Plc

Sutton Harbour is the parent company of a number of subsidiary companies including: Plymouth Fisheries, the marina at Sutton Harbour and King Point Marina at Millbay, businesses engaged in waterfront property investment, various car parking facilities in Plymouth and Plymouth City Airport Ltd (Sutton Harbour Holdings Plc, 2017a). The company operated solidly in the last five years. However, no dividend was distributed in any of the years and the stock price is constant over the last 5 years as well. So, we do not recommend Sutton Harbour as our best investment choice.

2.2.2 Stobart Group Ltd

Stobart was founded in 2007 and is engaged in infrastructure and support service businesses operating in the biomass energy, aviation and railway maintenance sectors, as well as has investments in a national property and logistics portfolio. Its segments are energy, aviation, rail, infrastructure and investments (Stobart Group Ltd, 2017a). Company’s net profit margin was negative for the years 2014 and 2016 which can be a cause less retained earnings making it difficult for the company to distribute dividends. So, we do not recommend Stobart as our company to invest in.

2.2.3 Braemar Shipping Services Plc

Braemar provides international services on shipping, marine, energy, offshore and insurance industries. Braemar divides business into three divisions: shipbroking, technical and logistics (Braemar Shipping Services Plc, 2017a). Although Braemar has good performance in some ratios such as GPM and ROCE, the negative trend appears when we compare these ratios to its historical data, so we do not recommend Braemar as our best investment choice.

2.2.4 Wincanton Ltd

The company was founded in 1925. For over 90 years the company have entered industry sectors, venture into new geographies, broadened the services and used the technology to manage the increasing pace and complexity of the supply chain (Wincanton Ltd, 2017a). The company’s gearing is too high and that may create some risk, so that is the reason that we do not choose this company.

3 Accounting Analysis

Our analysis is based on the consolidated financial statements from companies' accounting period 2012 to 2016. The table below shows different accounting periods in our peer group, we have adjusted the accounting period of companies' financial statements to the same period in order to make ratio analysis comparable.

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Table 1. Adjustment of Accounting Periods

Our analysis and calculations are all based on data from companies' annual reports, all the data is presented in pounds sterling, rounded to the nearest hundred thousand. Independent auditor's reports indicate all companies' financial statements give a true and fair view of the state of the group’s. The table below presents auditors of all five companies.

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Table 2. Auditors

3.1 Accounting Policies

3.1.1 Basis of Preparation and Statement of Compliance

The financial statements of Clarkson and the other four companies have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretation Committee (IFRIC) interpretations as adopted by the European Union. The financial statements of Stobart are also prepared in accordance with the Companies (Guernsey) Law 2008.

3.1.2 Key Accounting Judgments and Estimates

All companies' financial statements have been prepared on the going concern basis. The financial statements are prepared under the historical cost convention, except where assets or liabilities are required to be stated at their fair value.

3.1.2.1 Trade Receivables

Trade receivables of Clarkson and Sutton Harbour are classified as current assets if collection is due within one year or less (or in the normal operating cycle of the business if longer), otherwise will considered as non-current assets. Companies in our peer group record trade receivables in fair value less any amortized cost and made provisions for the unrecoverable amounts.

3.1.2.2 Revenue Recognition

All companies in our peer group recognize revenue based on the fulfilment of certain obligations to the extent that it is probable that the economic benefits will flow to the group and the revenue can be reliably measured.

3.1.2.3 Operating Leases

Clarkson has entered into commercial leases in relation to land and buildings and other assets. Other companies recognize payments made under operating leases to the income statement as an expense on a straight-line basis over the lease term. Operating lease income is recognized in the income statement on a straight-line basis over the lease term.

3.1.2.4 Adjusting Items

Clarkson and Braemar believe that excluding the adjusting items (exceptional items and acquisition related costs) from its underlying earnings measure and disclose these items separately, it will provide a better understanding of the company's financial statement. No related terms in other companies of our peer group.

3.1.2.5 Goodwill

Companies in our peer group (except Sutton Harbour) are using acquisition method in business combination. Goodwill is initially measured at cost being the excess of the cost of the business combination over the group’s share in the net fair value of the acquired company's identifiable assets, liabilities and contingent liabilities. Goodwill is stated at cost less any impairment losses and allocated to cash-generating units and is tested annually for impairment. In Clarkson’s accounting policies, any transaction costs are expensed in the income statement as incurred.

3.1.2.6 Depreciation

All companies in our peer group are using straight-line method to calculate depreciation and estimates of useful lives and residual scrap values are assessed annually. In Clarkson’s depreciation policy, land is not depreciated and any land held for use in the production or supply of goods or services or for administrative purposes is recorded at its historic cost. Freehold and long leasehold properties, leasehold improvements, office furniture and equipment and motor vehicles are recorded at cost less accumulated depreciation and any recognized impairment loss. Companies have their own estimates in useful lives of their assets. The table on the next page presents depreciation policies in our peer group.

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Table 3. Depreciation Overview

3.2 Accounting Evaluation

In analysing companies' accounting policies in our peer group, we found the accounting principles of Clarkson are making great effort to prevent misunderstanding and distortion and meet both the accounting standard and legal requirements. We didn't recognize any unusual accounting policy that could affect our calculations about financial analysis.

3.3 Potential Risk and Necessary Adjustments

We found Braemar has a significant lower estimate useful life in their assets, this special depreciation policy may raise an underestimate of taxable revenue, so we consider Braemar is not the best choice of investment. Similarly, Stobart only disclose their proportions in depreciation, with no further information. So, we have identified that this company has potential problems in asset management and assessment. Among the rest of the companies in our peer group, Clarkson shows an appropriate explanation of their adjustments made to accounting policies and our assessment detects no unusual changes in items that could cause distortions. These results indicate that Clarkson has the best performance in accounting practices, so we prefer Clarkson on the basis of our accounting analysis.

4 Financial Analysis

4.1 Profitability Ratios

The last 5 years Clarkson has achieved a steady growth in revenue. Clarkson has a huge 63.57% increase in revenue from 2012 to 2016 which is largely due to a significant increase in their sales. Meanwhile, the net profit of this company grows 26.87% in the last 5 years, this has a large impact on ROCE, ROSF, GPM, and NPM. Therefore, comparison between peer companies is taken out to help assessing Clarkson’s profitability.

4.1.1 Return on Capital Employed (ROCE)

This ratio shows us how efficiently company employs capital – long-term borrowings and equity in order to make net profits before interest payment and taxes.

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Table 4. Return on Capital Employed

ROCE of Clarkson is far more superior than the industry average and it increased from 2012 to 2016 with a dip in the year 2014. Clarkson is currently under a high growth situation that normally leads to a lower return on invested capital, but that is not the case here. The retained earnings of Clarkson grew fast from 2012 to 2016. This means Clarkson have a good ability of selling and investing.

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Figure 4. Return on Capital Employed

4.1.2 Return on Shareholders Funds (ROSF)

Similar to ROCE, ROSF shows us how is company performing in measures of its profits that are attributable to shareholders and the employed equity capital.

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Table 5. Return on Shareholders Funds

Clarkson consistently dip a little in ROSF ratio during 2012 - 2015. It might be because of slow economy. However, as explained ROCE above, from 2012 - 2016, Clarkson has a good performance in investment, so the retained earnings grow fast. Generally, the trend indicates that Clarkson could use shareholders equity efficiently to produce profits.

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Figure 5. Return on Shareholders Funds

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