Introduction
Businesses are developing to suffice the need of the society. In any current business organization, progress that the company is making is recorded as basis for, among a host of other essential things, decision-making and as a benchmark for measuring the firm’s performance for the period under scrutiny (Daroca, FP & Nourayi, MM 1996). A financial situation analysis is one such measure that documents current and future financial situation in an attempt to determine a financial strategy to help achieve organizational goals.
In any contemporary operating organization, progress that the company is making is recorded as basis of assessing the stewardship of management and for making economic decisions. A financial statement analysis is one such yardstick that takes into consideration current and future financial situation in an attempt to determine a financial strategy to help achieve organizational goals. Various accounts from the published financial statements are evaluated in relation to each other to form performance indicators, which are then compared to ‘established’ standards. Financial statements are, according to Pike, R & Neale, B (1999; 15), the ‘universally accepted tools for analysis of a business entity’. If properly understood, they let the users know how good a company looks and how well it has been doing. They are, at best, an approximation of economic reality because of the selective reporting of economic events by the accounting system, compounded by alternative accounting methods and estimates (Barton, D., Newell, R & Wilson. G, 2002). The purpose of financial statements is to provide users (business owners, lenders, managers, suppliers, customers, attorneys and litigants and employees and job seekers) with a set of financial data that, in summary form, fairly represents the financial strength and performance of a business (Pike, R & Neale, B 1999; 15). They reveal opportunities and provide protection against financial pitfalls. Ideally, financial statements analysis provides information that is useful to present and potential investors and creditors and other users in making rational investment, credit and other similar decisions (Barton, D., Newell, R. & Wilson. G. 2002). Further, they are comparative measurements of risk and return to make investment or credit decisions as they provide one basis for projecting future earnings and cash flows.
About the Company[1]
Tomkins plc is the mother of a large number of subsidiaries that are organized into two separate business groups: Industrial & Automotive and Building Products. Basically, both businesses have strong market positions and technical leadership and own some of the best-known brands in their respective fields. The group is listed in both London and New York stock exchange with revenue in the 1st half of 2008 of 2.9m USD and over 33,000 people worldwide i.e. 21,635 employees with 73 production facilities for their Industrial and Automotive sector and 11,817 employees with 65 production facilities for their Building Products sector. As of the first half of 2008, the group revenue is quite impressive despite of the current global financial crisis compared to other global businesses.
SWOT Analysis
The SWOT analysis provides information that is helpful in matching the firm’s resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. (Bradford, R.W., Bradford R.W, Duncan, J. Peter, & Brian Tarcy ,1999). This section addresses hypothetical key strengths, weaknesses, threats and opportunities for TOMKINS PLC establishment in United Kingdom.
Table 1. SWOT
Strengths:
Weaknesses:
Infrastructure in place
Basis for strong management team
Possibility to evolve into range of offerings
Location is highly suitable
Very focused management/staff
Well-rounded and managed business
Marketing plan in place
Focus maybe too narrow
Lack of awareness amongst prospective customers
Potential need for larger premises
Threats:
Opportunities:
Major player may enter targeted market segment
Economic slowdown could reduce demand
Market may become price sensitive
Market segment’s growth could attract major competition
Market segment is poised for rapid growth
New markets offer great potential
Distribution channels seeking new services
Potential to diversify into related market segments
Basically, firms are competing to achieve above normal return, but being monopoly is not the only way to achieve it. Firms can differentiate themselves with others through innovation: competing to be different. Although the innovation itself maybe profitable, the innovating firm itself may not profit from it. Therefore it is important to establish complementary assets alongside firm’s innovative capability to capitalise majority of the gain (Teece, 1986). Scholars refer the development of complementary assets as the sixth force (Grant, 2001), in addition to Porter’s seminal five forces model (Porter, 1980). Another major problem for companies not profiting from their innovation is that they spend too much time on seeking and creating innovation but “inability of corporation to turn knowledge into practical applications and profit” (Leonard-Barton et al., 1996). Firms need to look deeper into their knowledge base, and often to exploit hidden knowledge inside the firm is more profitable than to explore new knowledge. This is partly because of the cost saving. However, when hidden knowledge inside the firms are well exploited, it is important for the firm to innovate through reconfiguration of existing knowledge and/or seeking new knowledge externally (Kluge et al., 2001).
When the knowledge of an innovation is spill over across firms, companies expect appropriability to fall during the life cycle of a technology as the cumulated search efforts and the fraction of agents knowing the code increase. However, this long-term trend may be counteracted by a number of strategies designed to limit or to compensate the fall in appropriability. The most promising way of achieving competitive advantage through innovation is to continuously innovate, and innovate in a way that competitors are unable to catch up through their incremental innovation and unmotivated for radical innovation. An interesting case would be TOMKINS PLC, a company constantly improves the services/products that suits to the taste of different nations.
Financial Analysis
Typically, financial measures as well as the relationships utilized in performance measurement are designed to stress outcomes with minimal or no consideration of the decision processes of the manager. The traditional or conventional measures of performance are based on periodic profitability indicators without the consideration to particular variables that drive these measures (Daroca and Nourayi, 2002). Performance in the past is mainly based on conventional accounting and measures based on market performance. Specifically, these measures include the evaluation on net income, return on equity/capital employed, earnings per share as well as share-price return. Some financial outrages have put corporate governance in the business spotlight. Basically, the issues and interest in the subject corporate finance can be traced back at least to the eighteenth century and economists such as Adam Smith. Certainly, there is probably little new in the existing debate involving to financial negligence, except for the range of the financial and economic consequences which replicate the greater importance of finance in the current economy. The purpose of this part of the paper is to examine the financial context of corporate governance of TOMKINS PLC. It attempts to evaluate the performance of the company in terms of financial reports. Basically, corporate governance has significant implications for the performance of the financial sector and, by addition, the economy as whole. Well-organized resource allocation is supported by strapping shareholder control rights, which assists investment in fresh development actions and confines the scope for corporate over-investment. Apparently, investment decisions are further linked to corporate governance insofar as investors prefer to invest in appropriately supervised corporations and be apt to avoid investing in ambiguous environments. In this way, the investor assurance created by sound corporate governance provisions and the security of minority shareholders encourages the financial market progress by encouraging share ownership and capable capital allocation across firms. Transparent financial reporting is necessary to sending efficient corporate governance.
For the last ten years, the engineering and machinery industries in United Kingdom have seen the rapid growth of the number of firms offering financial situation analysis services. This serves as a proof that more and more organizations are realizing the importance the analysis of their financial situation in order to keep up with the demands of the business world.
Analysis of Information
- Dividends and Share Price
Table 1. Dividend Information
1997
1998
1999
2000
2001
Apr-02
Dec-02
2003
2004
2005
2006
2007
Interim (GBp per Share)
3.06
3.5
4
4.6
4.6
4.6
8
4.6
4.83
5.07
5.32
5.32
Final (GBp per Share)
8.39
9.67
11.15
12.85
7.4
7.4
0
7.4
7.77
8.16
8.57
8.57
Source: http://www.tomkins.co.uk/tomk/ir/shservices/divinfo
In accordance to the previous years of performance, Tomkins plc dividend for their shareholders reaches its peak in year 2000 and slows down as the new millennium enters. However, as seen in the cycle, the dividend shows positive future even though there are crisis in the global business. Even tough the 2007 is a failure as compare to their previous years of operation, the downfall of 7.4 in 2001 was still promising since the dividend as of 2007 becomes 8.57.
Figure 1. 2009 Share Price
Last Trade: 16:35 02/03/2009
With regards to share price, the group was currently experiencing some impact of the global financial crisis in which their current price fell to 1.5 in London Stock Exchange and 0.24 in New York Stock Exchange. This surge down is hopefully not too terrible for the performance of the group. However, the group should create and innovate extensive ways to maintain their profitability and progress.
- Income Statements
From the given summary of income statement (see figure 2), as of 2007 Tomkins Plc’s net profit margin fell 0.83%. This along with an increase in selling, general and administrative costs has contributed to a reduction in net income. The return on Assets fell to 1.12%, return on equity fell to 3.42% and return on investment fell to 1.45%. Basically, we can deviate from these values that TOMKINS PLC is not expressively performing not only in UK alone but also to other parts of the world. As we can see in figure 2 both the revenue and net income of the company suffers from a decline particularly in 2007 net income.
Figure 2. Summary of Revenue and Net Income of TOMKINS PLC
Source: www.ft.com
From the given situation and results of revenue and net income of TOMKINS PLC Ltd., it seems that the company is not expressively performing in their industry. Thus, the organization still needs to evaluate not only their business strategies but also the political, economic, and cultural factors of their host country i.e. United kingdom. It is not whether the business is in a market oriented status or not, but the important thing is the value of their products as perceived by the consumers. The business norms in United Kingdom and global community have been changing and are becoming more compatible with international codes and norms after a series of economic reforms (Barton, D., Newell, R. & Wilson. G. 2002). Given the nature of the UK economy and the large potential of the market, doing business with UK requires a continuous process of learning, caution for instability, and flexibility to catch opportunities.
· Balance Sheet and Cash Flow
From the information gathered and as seen in Figure 3, the 2007 cash reserves at TOMKINS by 37.34m. However, the company earned 393.54m from its operations for a Cash Flow Margin of 9.34%. In addition the company generated 8.69m cash from investing, though they paid out 435.73m more in financing than they received. From this discussion, it shows that TOMKINS PLC performed very well in 2005 compared to their performance in 2007 or even in 2009.As seen in the figures, cash flow often describes as the amount of cash being received and spent by a business during a defined period of time, sometimes tied to a specific project. Cash flow can be used to determine the performance of a certain company. With this regards we can see that TOMKINS PLC cash flow is declining after the expressive performance in 2005. Moreover, the increase of cash reserves of TOMKINS PLC generated in 2005 was used in 2006 development and expansion projects. According to the website TOMKINS PLC, their decline in terms of their sales performance is because of their current marketing strategies. With this regard, the company needs to evaluate the effectiveness of their current marketing strategy. There should have a careful evaluation in order gain business success.
Figure 3. Summary of Cash Flow of TOMKINS PLC
Source: www.ft.com
In financial analysis, the balance sheets of company reports conform to the financial ratios. The purpose of ratios is to find out how profitable the company is, we can calculate if company has enough liquid resources to pay its creditors, employees and finance charges. It is a useful to shareholders to find out their value of shares. Ratios are most powerful and simplest tool to evaluate company’s performance and its validity (Riahi-Belkaoui, A 1998).
Atril & Mclaney (2004) mentioned that by calculating a relatively small number of ratios, it is often possible to build up a reasonably good picture of the position and performance of a business. Ratios help to highlight the financial strengths and weaknesses of a business, but they can not, by themselves, explain why certain strengths or weaknesses exist, or why certain changes occurred. Just by details investigation will find the reasons. Ratios can be grouped into certain categories; each of them identifies a particular aspect of financial performance or, position. In this paper, we’ll be considering the liquidity ratios and debt ratio of TOMKINS PLC. Liquidity ratios show how quickly the company can meet its short-term obligations using its current assets (Riahi-Belkaoui, A 1998).
Figure 3. Summary of Liquidity Ratios of TOMKINS PLC
Source: www.ft.com
It is evident in the computations that TOMKINS PLC was performing expressively in 2005 and slows down as the years went up. However, the entry of 2009 shows good future for the group. This means that TOMKINS PLC is always bale to meet their current liabilities using their current assets (cash, inventory, receivables). As shown in the figure, the company should now start to use their assets to grow the business. However, the company should be still be observant to their financial ratios i.e. not too low so as to drive creditors away with respect to the level of risk present. Since quick ratios are perceived as a sign of the company’s financial strength or weakness, the figures in the previous table shows the relative stability of the financial strength of TOMKINS PLC. A higher number would indicate stronger financial performance, and a lower one means weaker performance.
Apparently, the high financial leverage ratios of a company provide an implication that the organization is solvent in the long-term. With this regard, the debt ratio shows the TOMKINS PLC’s position to meet it long-term obligation or liabilities. Debt ratios are dependent of the company’s classification of long-term leases and other items as long-term debt (Pike, R & Neale, B 1999). Pike, R & Neale, B 1999, stated that this is the gauge with which the financial strength of a company is a sign of the ratio of capital that has been funded by liability, counting preference shares.
A higher debt ratio (which means the company has low equity ratio) does not give the firm’s creditors the security they require from an organization (Pike, R & Neale, B 1999). The firm would, as a result, find difficulty in raising supplementary financial support coming from outside sources if the firm wishes to take such action. Therefore it reveals that the higher the debt ratio, the harder it is for the company to raise funds from the outside.
Recommendations
Today, most companies like TOMKINS PLC find it impossible to create any kind of sustainable competitive advantage based on product alone. It is common knowledge that every one of the successful companies sought and found a precise understanding of how it could create a customer-centered competitive advantage. Thus, there are numerous aspects that every management should tackle. In TOMKINS PLC, the key internal strengths are the appropriate and effective marketing strategies used. On the other hand, the flaws of the marketing strategies implemented by the company serve as its major internal setback. Then again, the continuous effort of every company likes TOMKINS PLC to improve its operational standards is the ultimate solution to emerging conditions brought about by different occurrences such as stiff competition, globalization, technological innovations and others.
Based on the business strategies used by the company and the analyses presented, TOMKINS PLC is indeed a company that has achieved success in the engineering and machine industry. Nonetheless, the company still has to perform other strategic moves so as to maintain its successful status. With the identified weakness and threats of the company, the following strategic moves are recommended:
There are reasons behind these recommendations. One of which is the growing competition in their industry. Considering the activeness of TOMKINS PLC’s rivals in enhancing their businesses, the strategies of the companies should focus on two major essentials: profit increase and market growth. These two factors are important not only in keeping TOMKINS PLC afloat in the industry but also in supporting other internal or external projects of the company. Another reason for these strategic moves is the capability of TOMKINS PLC to put them into action. Aside from the finances, the company needed to increase their access to other foreign markets not only United Kingdom for market growth and technologies for increased profit. In other words, these two predicted strategic moves are not only beneficial for the company’s current status but feasible as well.
Since it is recommended for the company to expand their distribution to other foreign countries, then it is also likely for the company to have partners with other local retailers in order to distribute its products to other foreign locations while it continues on applying its direct business model to other areas. One of the important strategies that TOMKINS PLC may consider is to operate alongside a local business partner. This will help the firm adapt easily to the new and foreign business environment (Overby, 2000). A local partner can also assist in learning the culture, practices, regulations and means of interaction in the area. This will support the company’s consumer study efforts. More importantly, a foreign business partner can also help in achieving progress faster. Training the staff becomes even more important in foreign business ventures. The workforce must be supported fully particularly in adapting the business’ new concepts, standards and technologies (Humberg, 2003). The management should ensure that the local staff is also well-adjusted to the new system so as to encourage them to contribute more for the business.
Conclusion
In order for a certain business to sustain their development, they should regularly assess the value of their portfolio. Stakeholders should be given importance by the company. Stakeholders, sometimes also called sponsors, or management, are extremely important to the business. Financial information is important to them because they are the ones that give political as well as resource support for the project. However, normal stakeholders are people that are influenced by any business decisions – they include stockholders but are hot limited to just that. They also include employees, surrounding businesses, competing businesses, neighborhoods of the business, customers, etc. When that business makes important decisions, including bad ones – everyone is affected by it. Thus, from this we may say that stakeholder typically refers to anyone who has a direct financial stake in a company, therefore financial report are important for them. This does include shareholders if the company issues stock, any other owner/partner and employees. Although it is argued that the vendors servicing a business and even the competing business have a financial stake in the company, these entities are beyond the scope of the definition.
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http://www.ft.com
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[1] All information are from http://corporate.Tomkins Plc.com/
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