Wednesday, May 6, 2020

Return On Capital employed (McBride plc) Example

Essays on Return On Capital employed (McBride plc) Essay Introduction Critical study of capital structure attempt to show the growth in capital employed and also explains the mixture of securities as well as other capital sources use by corporation and individuals to finance any real investment. Most of the research on capital structure focuses on the proportions of equity to debt ratio observed on the company’s balance sheet statement. Considering the first landmark work of Millar and Modigliani (1963), a number of theories would be used to predict and explain the company leverage behavior as one of the key cornerstone for determining the worthiness of a sound investment. Therefore this research will provide a more insight into empirical determent of the target capital structure of McBride Plc so as to evaluate the return on capital employed which is the main component is assessing the money value realized by any investor in the shares of this companies that are listed in the UK stock exchange. Return on capital employed is conside red to be the most appropriate and the best measure of profitability of any company in order to assess and determine the overall performance. It shows how well management has used the investment made by the creditors and owners into the business. For any investor who would like to make an appropriate and a profitable investment decision, then, determination of return on capital employed would be one of the key indicators of firm’s worthiness as well as financial soundness. Findings McBride is one of the largest suppliers of private personal care and labeled household product in its major markets in the United Kingdom and increasingly to Poland. It works so closely with the stake holder who has a significant influence on the ongoing success of the business. The group customers are the most leading retailers across Europe which has been achieved by maintaining and developing an excellent customer service relation. The UK market private Label House sales grows by 4 % in an overall market that grew by 1%, where as personal care also grew by 4%, this shows that group operates in a highly competitive and dynamic market characterized by increasing customer concentration, the growth of discount retailers, numerous private label as well as branded competitors evolving customer product preferences and the selling pressure. This positive and stable trend has given McBride an advantage over other rival companies, therefore guaranteeing all the investors a higher return of the capital employed while investing in this company. The capital structure of McBride shows a constant common stock of 18.1M for all the three year and a huge additional capital. This clearly indicates that the company is anticipating to improving the financial position in future. Analysis To determine the growth of McBride Company, there is need to screen the companies year to year as well as three year growth in the overall sales and earnings which is preferable 20% 0r above for any financially sound company. Where as, the return on capital (ROC) should be at least 10% so as to find some potential competitive advantage over investors. According to the findings above, there is more capital employed in to business so as to finance the company operation rather than over relying on debt as a source of capital. In determining the capital employed the following formulas is used; Return on capital employed=fixed assets+ investment+ Current assets Net capital employed= Fixed assets+ investment+ working Capital Where working capital =current assets-current liabilities Comparing the three consecutive years 2009, 2010 and 2011, based on the balance sheet statement provided in the appendix 1, the following results would be used to evaluate the progress to the company in order for the investor to make a health investment decision. In the year 2009, ROCE=227.5+1+203.6=432.1 NCE=227.5+1+ (203.6-220.4) =211.7 In the year 2010, ROCE=220+1+218.1=439.1 NCE=220+1+ (218.1-229.3) =209.8 In the year 2011, ROCE=265.9+1+252.1=519 NCE=256.9+1 + (252.1-278.9) =231.8 % growth in = (231-209)/209*100=22% The result shows that the overall return on capital employed is increasing from the year 2009 to 2011, which shows a positive growth of 22% as seen in the current period computation. This is attributable as a result or more sale made by the company which intern increases the amount of revenue collected. A growth of investment strategy can be combined with the value investing concept so as to give a performance a lift and limit the downside risk exposure. One has to remember buying growth companies stock when the prices are cheap i.e. growth at a reasonable price (GARP) and later sale when the prices are high so as to realize more returns. Conclusions The investment strategy adopted by the client is referred to as growth investing strategy which involves investing in accompany that grows very fast. Any stock with superb growth prospect, financial health, steady growing stock price and expanding profitability tend to attract more investors, fund managers and bankers who are the key movers of the market. Considering the calculation in determining the overall return expected for investing in McBride plc, then it is worthy for the client to invest his pound one million in this companies. This amount will considerably be realized in future as the market condition of UK is guaranteed as well as the company performance is anticipated to perform better. Appendix 1: McBride Plc Balance sheet statements for the three years (2009, 2010, 2011)    2011 2010 2009 Period End Date 06/30/2011 06/30/2010 06/30/2009 Assets          Cash and Short Term Investments 9.6 5.0 2.8 Total Receivables, Net 149.1 133.8 128.8 Total Inventory 81.6 69.9 68.0 Prepaid Expenses 5.5 3.6 4.0 Other Current Assets, Total 6.3 6.3 0.0 Total Current Assets 252.1 218.6 203.6             Property/Plant/Equipment, Total - Net 190.9 179.9 189.2 Goodwill, Net 34.9 32.9 29.7 Intangibles, Net 3.7 5.4 5.7 Long Term Investments 0.0 0.0 0.0 Note Receivable - Long Term 0.0 0.0 0.0 Other Long Term Assets, Total 3.1 3.5 3.1 Other Assets, Total 0.0 0.0 0.0 Total Assets 484.7 440.3 431.3 Liabilities and Shareholders Equity          Accounts Payable 169.5 141.4 133.3 Payable/Accrued 0.0 0.0 0.0 Accrued Expenses 35.6 39.5 38.8 Notes Payable/Short Term Debt 46.5 15.0 25.7 Current Port. of LT Debt/Capital Leases 0.8 0.4 0.8 Other Current Liabilities, Total 26.5 33.0 21.8 Total Current Liabilities 278.9 229.3 220.4 Total Long Term Debt 46.0 49.6 58.7 Deferred Income Tax 11.4 11.4 14.3 Minority Interest 0.6 0.6 0.0 Other Liabilities, Total 23.0 25.3 19.4 Total Liabilities 359.9 316.2 312.8 Redeemable Preferred Stock 0.0 0.0 0.0 Preferred Stock - Non Redeemable, Net 0.0 0.0 0.0 Common Stock 18.1 18.1 18.0 Additional Paid-In Capital 139.9 143.5 143.5 Retained Earnings (Accumulated Deficit) -33.2 -37.5 -43.9 Other Equity, Total 0.0 0.0 0.9 Total Equity 124.8 124.1 118.5             Total Liabilities Shareholders’ Equity 484.7 440.3 431.3                                  Bibliography; Rajang, R, G, Zing ales, L, 1977, what do we know about capital structure choice? 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