Skanska PLC Financial Analysis: Ratio Breakdown 2020-2021
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Introduction: Skanska PLC Financial Analysis: Ratio Breakdown 2020-2021
There are various roles and functions of the Department of accounts in an organisation in combination with its department of finance. “SKANSA PLC” is one of the most famous construction companies based in UK, which helps in the construction, upgradation and maintenance of countries' buildings and structures. In this financial report, sources relating to finance that will be beneficial in the expansion of “SKANSA PLC” are going to be discussed along with the roles that the organisation's accounting and finance department is going to play. Additionally, this report will also be calculating and evaluating the different ratios of the company that are related to finance in order to assess the financial performance and recommend potential investors for investment in the organisation.
Task 1
1.1 Significance of Finance and Accounting Functions
In an organization, the department that is in charge of maintaining the records relating to finance, exploring the monetary transactions of the company and recapitulating those data in financial statements that are going to be beneficial to a variety of stakeholders (Dew et al. 2019). The department of finance, on the other side, is the distinct department of the organisation that secures the management of the finance of an entity and helps in obtaining funding for the organisation along with managing every other financial activity.
Department of Accounting
a) Function of Financial Accounting
Financial accounting is a sector of accounting that deals with the recording, summarising and reporting of the organisation's monetary transactions that take place because of its business activities over a limited time. This specific function of the department of accounts in an organisation is keeping a record of the entire money that is going out and coming into the organisation (Boisjoly et al. 2019). The financial accounting functions of SKANSA PLC play various roles that include maintenance of records through and by maintaining “the double entry system” of bookkeeping along with preparations of year-ending statements relating to finance. The duties of the accountants are to generate “quarterly annual reports” of the organisation in the utilisation of the stakeholders and declare the company's financial position in front of them.
b) Function of Managerial accounting
The accounting methods that are used in businesses to examine and communicate various kinds of data relating to finance to business administrators are termed as management accounting. Management accounting helps in activities within organisations that are advantageous in planning, controlling and several decision-making activities done by the top level managerial persons while also supervising the entire performance of the organisation. Managerial function plays a vital part in growing the comprehensive efficiency in the operations of SKANSA PLC while assisting in various decision-making and optimisation of profitability. The duties of management accounting include synchronising the internal business activities, establishing a powerful command over the activities of the organization, and solving troubles that are related to finance.
c) Tax function
The most important element that is related to the departments of accounts of an organisation is known as tax function (Rabiyahet al. 2019). The Tax function of an organisation is responsible for planning the taxes of the organisation and helps in assuring the legality check of all matters relating to tax . SKANSKA PLC tax function is more anxious in deriving solutions of various kinds of errors related to tax and avoidance of incorrect filing of taxes.
d) Auditing function
The inspection that is done within a business organisation to make sure that the financial reports prepared inside the organisation and also the figures reported inside them are not false is termed as auditing (Betti, N. and Sarens, 2019). Within an organisation, the auditing function makes sure the accuracy of reports relating to finance so that it can assist the stakeholders in taking the right decisions. SKANSKA PLC's auditing function has a vital role in the generation of the accuracy of their internal control while encouraging the ideal practices of controls.
The responsibility of Auditing function is to provide credibility in an entity's monetary statements,in order to prevent financial frauds while also achieving stakeholders support for correct reporting of financial reports.
1.2 Department of Finance
a) Investing Function
Within an organization, the function of investment is connected with creating investment . This function helps in pointing out the probable areas where investment can be made while also estimating the risk factor associated with the investment while making decisions. The investment function of SKANSA PLC is entrusted with calculating the viability of their investments by adopting various techniques such as payback period and NPV. The responsibility of the investment function is to analyse and reduce the risk and achieve optimum returns from investment.
b) Financing Function
Financing is associated with various types of techniques which are accepted by an organisation to generate funds in order to meet every expense and also ensure the availability of best finance sources. SKANSA PLC financing function makes sure the availability of sustainable resources of finance present within the organisation so that its financial crisis can be dealt with at any time without any tension. The responsibility of the function is to maintain adequate funds for the organisation to cover all its requirements of investment, generating sales ,boosting profits and also raising cash flows.
C) Dividend Function
Dividends are the allocation of profits earned by a business entity, which is to be divided among its shareholders accordingly with the number of shares they are holding in the company. This function of the department of finance takes various decisions relating to the dividends that the firm is going to pay-out to its shareholders. SKANSA PLC’s dividend function helps take the decision of payment of dividends for its shareholders. responsibilities of the function is to decide the size of annual dividend, ensure sustainability for dividend policies and maintain of higher Dividend pay-out ratio.
D) Working Capital Function
Working capital is a financial term that states the difference in the current assets and liabilities of the company. Working capital is a very vital function for the department of finance of every business entity. It helps in analysing the liquid ability of company and guarantee its smooth operations. “SKANSKA PLC’s” function of working capital helps in making sure that there is sufficiency in working capital along with maintenance of funds for day-to-day operations.
1.3 Implementation of the accounting functions in an organisation
Accounting plays a vital role in improving the business and is also essential in tracking the expenses and income that ensures against statutory compliances and also provides the investors, government, and management department financial information of the organisation (Faccia, A. and Petratos, 2021). Accounting plays a vital role in tracking, recording, storing, summarising, and reporting the financial transaction of the company or an organisation. Accounting functions are needed in keeping the financial record of an organisation according to the day-to-day transactions of the company and many more.
Accounting functions help an organisation in several ways; these are:
(a) Keeping records
Accounting functions help in keeping the records of the transactions of the company according to the day-to-day financial transactions. It tracks all records that are associated with financial terms such as product sales, purchases, receipts, and payments.
(b) Monitoring Financial Transactions
Accounting helps in monitoring the transactions and also tracks the payments. Monitoring financial transactions helps in analysing the expenses that have been spent by the company and the methods to control them.
(c) Making Financial Reports
Accounting functions involve making financial reports on a on a yearly basis that disclose the assets and liabilities of the company. Financial reports help in analysing the profit and losses of the organisation.
(d) Preparing Budget
Accounting functions help in preparing the budget of the organization, and they also help in preparing the budget for the projects as well. Budgets are prepared by analysing the financial position of the organisation. The budget helps an organisation keep spending in check.
(e) Reviewing Performance
Accounting functions involve reviewing the performance of an organisation. It involves reviewing the performance of the company and measuring the performance. Performance is analysed to make changes where necessary and to increase productivity in an organisation.
1.4 Implementation of Financial Functions in Organizations
Finance plays a vital role as it provides a resource that helps the business to run smoothly. The financial functions are related to planning, controlling, maintaining, and executing the financial resources (Chofrehet al. 2019). Financial functions involve maintaining and managing the financial resources of the business to make a profit. There are different kinds of finance functions that are different for different kinds of organisations. The finance functions involve bookkeeping, forecasting, budgeting, managing the tax, and managing the finance of an organisation.
(a) Bookkeeping
Financial functions involved keeping the records of finances in the business, as it is the process of recording the financial transactions of an organisation. Bookkeeping helps an organisation in identifying and summarising transactions in a great manner. It ensures that the transactions are up-to-date and also corrects the accounts.
(b) Forecasting
Financial forecasting is a tool that helps in presenting information in an estimated manner that takes the help of information based on the past. It helps in identifying the revenue of the future and also forecasted expenses that help an organization to control and estimate future revenue. Financial forecasting of a company helps in forecasting and examining the historical activities and data of the company.
(c) Budgeting
A financial budget is the process that helps in planning the process of expenses and revenues for a given period of time. The budget sets a forecasted plan of management and also manages the financial terms of the company. The budget includes identifying the needs of the financial resources and making plans. It also identifies the available cash flows for the spending.
Task 2
Discuss the “financial statements” of the company Skanska PLC for 2020 and 2021, calculate the five ratios in respect of those “financial statements.”
A Ratio analysis
“Skansa PLC” is a construction company in the UK and is on its way to expanding its business in also other countries of Europe. The “Financial statements” for a year of a company mean all the income and expenses summarised for that year and with the help of that statement, the company can understand the profit or loss that the company made in that year.
“Financial statements” of Skanska PLC The Company’s “Financial Statements” of 2020 and 2021 is summarised below through the table.
Figure 1 : “Calculation Of Net Profit”
Figure 2: “Statement Of Financial Position”
The following five ratios need to be summarised; the five ratios are as follow,
“Return on capital employed”
“Net profit Margin”
Current Ratio”
“Debtors collection period”
Creditors collection period”
“Return Capital employed” The return of employed is a ratio by which a company’s earned profit percentage from the capital can be calculated in a certain year (Nielsenet.al 2008).“Return Capital employed” can be summarised under a simple formula, which is “Return Capital Employed = Operating Profit / Total assets - current liabilities * 100”, son at first the value of the “Operating profit” needs to be found to calculate “Return Capital Employed. Formula to find out the “Operating Profit” is, “Operating profit = Gross profit - Operating Expenses” i.e., in 2020 “Operating profit” of Skansa Plc was 1,350,000-600,00 = 750,000 Euros and in 2021 “Operating profit” of the company was 1,650,000-675,000 = 975,000 Euros.
On the basis of above calculations, the “Return Capital Employed” of the company is for 2020 and 201,
2020
“Return Capital employed”=
750,000/4,470,000-645,000 * 100 = 19.61%
2021
“Return Capital employed”=
“975,000 / 8,070,000-2,220,000 * 100 = 16.66%”
Analysis: As from the above calculations it can be seen that in 2020 the “Return Capital Employed” of the company was 19.61% and in 2021 it was 16.66%, so it is clear that the company made less profit from the generated capitals in 2021 than 2020, there can be several reasons for that like effect of the pandemic period or because of inflations. Basically from the diagram it’s clear that the payable amount of the company in trade and transportation in 2020 was 570,000 Euros but in 2021 it was increased nearly four times than previous and that is the reason the “Return Capital Employed” ratio in 2021 was lower than 2020.
Net profit Margin: “Net Profit Margin” is the “profit margin ratio” which states how much profit generated by a company in a certain year, it is an important indicator by which a company can understand its financial health and can take necessary steps for the next year.
There is a certain formula to find out the “Net Profit Margin” of the company, the formula is
“Net Profit Margin = Net Income / Sale Revenue * 100”, so as from that formula the “Net Profit Margin” of Skansa Plc in 2020 and 2021 are as follow,
2020
“Net Profit Margin” =
“600,000 / 4,800,000 * 100 = 12.50%”.
2021
“Net Profit Margin” =
“675,000 / 6,000,000 * 100 = 11.25%”.
Analysis: As from the above calculations it can be seen that the “Net Profit Margin” of the company in 2020 was 12.50% and in 2021 it was 11.25%, so it’s clear just like the “Return Capital Employed” the “Net Profit Margin” of the company was also less than 2020 and this happened because the sale revenue of the company in 2021 was higher than 2021. This is pretty concerning for the company because depleting “Net Profit Margin” means the profit ratio of the company also depleting so the investors of the company must take necessary steps to fix this issue, because this problem in long run can cause the company to go bankrupt.
Current Ratio: “Current Ratio” is an indicator by which the ratio of company’s liquidity can be known in a certain year. To understand a company’s overall performance this indicator plays an important role.
The formula to find out the “Current Ratio” a simple formula is used, which is,
“Current Ratio = Current Assets / Current Liabilities”.
So from this formula the “Current Ratio” of Skansa PLC in 2020 and 2021 are,
2020
“Current Ratio” =
“1,515,000 / 645,000
= 2.35”
2021
“Current Ratio” =
“2,070,000 / 2,220,000 = 0.93”.
Analysis: From the above calculations it is clear that in 2020 the “Current Ratio” of the company was 2.35 and in 2021 it was 0.93, there is a big gap between these two performances. In 2021 the “current liability” was higher than the previous year and that is the main reason of that gap in ratio. Just like the other important indicators depleting in “Current Ratio” also states the misfortune of the company and the concerned investors must look after that problem.
Debtors collection period: “Debtors collection period” or “Receivable Collection Period”. Basically it is an indicator to find out the debt management efficiency of a company in a year. It is an essential indicator ratio and can show the long run company performance on how the company handles its sale and the debts.
There is a formula to find out the “Debtors Collection Period” of a company in a year, such as,
So from the above formula the “Debtors collection period “of Skansa PLC in 2020 and 2021 was,
2020
“Debtors collection period” =
“900000 / 4800000 * 365 = 68”.
2021
“Debtors Collection Period“=
“1200000 / 6000000 * 365 = 73”.
Analysis: In case of “Debtors collection Period” the less the days are better, and it can be clearly seen that in 2020 the number of days were 68 and in 2021 the number of days were 73, the more days it shows that means more days it will take for the debt collection process and it is necessary for the company to take control over that issue and must reduce the days in numbers by putting necessary efforts (Chowdhury , 2021).
Creditors collection Period: “Creditors collection Period” or “Payable period” finds out the days it will take to repay the creditors and this ratio is another important indicator for the company’s financial situations.
There is a simple formula by which “Payable Period” can be found, which is,
“Payable Period = Average Payable / Cost of goods sold * 365”.
So from the above formula the “Payable period” of Skansa PLC of 2020 and 2021 can be calculated as,
Analysis: From the above calculation its clearly can be seen that in 2020 “Payable Period” was 60 days in number ratio and in 2021 it was 176 days. There is a huge difference between those years more less the days in “Payable Period” ratio more better for the company in 2020 statistically it took 60 days to pay the credit but in 2021 it was 176 that means there were certain conditions where the company did a really bad performance in that year.
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Conclusion
The above report is made to point the financial structure of the “Skansa PLC” company, by the “Financial statements” a company can understand its overall performance in a certain year but the ratios are the main indicators by which the company can understand the critical calculations that effects on the infrastructure of the company. By the above 5 ratios, it’s easier to clarify the responsibilities that the separate officials and employees must follow of “Skansa PLC”. However, these ratios are also really helpful to the investors to decide the “Financial Future” of the company and to take necessary actions accordingly.
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