Financial Appraisal

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Financial Appraisal

1.0 Analysis

This report provides an analysis of the performance of ITE Group over three consecutive years (2007-2009), using various financial ratios; for the benefit of potential shareholders, lenders or suppliers. The report also indicates how non-financial performance indicators can help an organisation measure performance. This report will also look into the net present value method of appraisal, and explain its advantages and disadvantages.

2.0 Main Content

The focus of the first part of this report is to analyse the performance of the ITE Group. The “ITE is one of the world’s leading organisers of international trade exhibitions and conferences and specialises in organising events in growing and developing markets.” It has expanded its portfolio in many different countries all around the world. They are organisers of trade exhibitions, conferences and professional congresses.

(ITE Group PLC, 2010)

In order to analyse their performance a range of financial measures need to be looked into. Financial ratios are a useful measure on a company’s performance and financial situation. The various ratios that will be covered in this report to analyse the performance of the ITE Group are:

Profitability ratios
Investment ratios
Efficiency ratios
Capital gearing ratios

2.1 An analysis of the performance of the company for the benefit of a potential shareholder

2.1.1 Profitability Ratios

Profitability ratios measure how effective the firm is at generating profits given sales and or its capital assets.

Gross Profit Margin Ratio

The gross profit margin is a measure of the gross profit earned on sales. The gross profit margin considers the firm's cost of goods sold, but does not include other costs. It helps investors gain an idea of how well sales and cost of goods sold are being managed relative to sales. Potential shareholders will want to see how effective the company that they intend on investing into is at making a profit from the goods sold, hence the importance that a company is able to successfully manage it sales and costs of goods.

With regards to the ITE Group their gross profit margin ratio has altered over the past three years: (see appendices 1.1) in 2007 it was 50.2% and then fell slightly in 2008 to 49.9% however in 2009 it rose to 51.7%. The slight changes could be a result of the ITE Group possibly having to pay more for the production of the the events therefore resulting in the gross profit margin falling. The rise in gross profit margin from 2008 to 2009 may occur if ITE Group are getting a higher price for their events without corresponding increase in costs. Or if they have found a cheaper way of producing the event without equivalent reduction in selling price. The higher the gross profit margin the better for the ITE Group, and proves that they can effectively convert sales into profit.

Net Profit Margin

Net profit is often referred to as the bottom line, it reveals a company's profits after it pays all of its costs and expenses, including the cost of goods sold, administrative costs, selling costs, interest and taxes. Net profit will increase the value of the company by adding to retained earnings, and or by going to shareholders as dividends. When a company’s net profit grows, the shareholder has a better chance of receiving dividends. It also means that retained earnings grow consequently resulting in more money being put back into the company. Potential shareholders will be attracted to the company because of it success at achieving this. (Investor Words, 2010)

ITE Group’s net profit margin showed a very little decrease (see appendices 1.2) from 33.3% in 2007 to 33.2% in 2008. However from 33.2 % in 2008 to 36.8% 2009 there is a larger increase of 3.6%. This is beneficial for the ITE Group as investors want consistently high net profit margins, so that a slight drop in sales will not incur a net loss.

Return on Capital...
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