FREE ESSAY ON FINANCIAL ANALYSIS

FINANCIAL ANALYSIS

TABLE OF CONTENTS.
INTRODUCTION.
PROCEDURE.
FINDINGS.
1.0 INVESTMENT RATIOS - MEASURES OF EFFICIENCY.
1.1 Earnings per Share.
1.2 P/E Ratio or Price / Earnings Ratio
1.3 Dividend Yield.
1.4 Dividend Cover. 
2.0 PRIMARY OPERATING RATIOS - MEASURES OF EFFICIENCY.
2.1 Return on Capital Employed
2.2 Debtors Turnover Ratio
2.3 Creditors Turnover Ratio
2.4 Return on Shareholders' Fund
3.0 PRIMARY FINANCIAL RATIOS - GEARING AND LIQUITY.
3.1 Gearing Ratio
3.2 Liquidity Ratio
3.2.1 Current Ratio
3.2.2 Quick or Acid Ratio
4.0 CASH FLOW
CONCLUSION
RECOMMENDATIONS
APPENDICES
BIBLIOGRAPHY - REFERENCES
INTRODUCTION
It can be suggested that accounting consists of identifying, measuring and communicating
business information to facilitate judgements and decision making for the further future.
This specific report is pointed at investigate National Grid Group Plc's report and
accounts in order to decide whether someone should invest or not in this company.
Someone, who is able to analyse this company, must have its Annual Report for at least
two years, which will help the person, because it contains basic components like the
Profit and Loss Account, the Balance Sheet, the Cash Flow Statement and the Director's
Report. 
PROCEDURE
In order to guide you to understand about this specific company, I have used the Annual
Review by following some steps:
1) To summarise the size, the structure and the profit of the company I have first check
the balance sheet and the profit and loss accounts.
2) I have read very carefully the chairman's statement and the director's report, which
helped me to understand better things about the company. 
3) I have also calculated the trends and ratios.
The performance data, P&L A/C, Balance Sheet, Ratios and Trends were obtain from the
following sources:
- Annual Review of National Grid Group of 1997-98.
- Articles from Financial Times newspaper.
- Books related to the subject. 
FINDINGS.
1.0 INVESTMENT RATIOS - MEASURES OF EFFICIENCY.
Investment ratios are the ratios used by the investors when deciding whether a share
should be bought, sold or held.
1.1 Earnings per Share.
Earnings per share (EPS) indicate the amount of profit after tax, interest and preference
shares earned for each ordinary share. It is also more reliable for comparing the
performance of any company because it can not be affected by the policy of the
directors.
Profit after tax + interest
EPS = 
No. Of Ordinary shares
The earnings per share of National Grid Group, excluding the exceptional profit relating
to Energis, were 19.8 pence, compared with 24.3 pence in 1996/97. This reduction resulted
from lower transmission profits following the implementation of the new price control.
1.2 Price Earnings Ratio.
The Price Earnings Ratio (PE ratio) is a measure of market confidence in the shares of a
company. Also the PER play a significant role not only in the company itself, but on the
industry in which it operates and, of course, on the level of the stock market, which
tends to rise more than reported profits when the business cycle swings up and to fall
more than profits in a downturn. 
Arithmetically, the ratio measures the number of years it would take to repay the share's
current value in earnings. It can be define like this:
Market price per share
Price Earnings Ratio = 
Earnings per share
At 31 March 1998, NGG's share price was 353 pence compared with 209 pence at the start of
the year, an increase of 68 per cent. The shares traded during the year within the range
206 pence to 353 pence. The market capitalisation of the Company at year-end was $5.2
billion.
(The National Grid Group plc Annual Review 1997-98)
1.3 Dividend Yield.
Dividend Yield expenses dividends as a proportion of the market value of total shares.
They are also based on gross dividends per share, that is, on the dividends actually paid
plus the associated tax credit. It can be defined like this:
Dividend per share
Dividend Yield = x 100
Market value per share 
On the 25th of November 1997, NGG announced that it was taking steps to improve the
financial efficiency of the Group by returning excess capital to shareholders by way of a
special dividend of 44.7 pence net per ordinary share. The special dividend, which
represented approximately 15 per cent of the Group's market capitalisation at the close
of business on the 24th of November 1997, amounted to ?786.6 million and was paid on the
17th of February of1998.
On 5th of February 1998, the shareholders approved a share consolidation to reflect this
return of value. As a consequence, 1,718 billion new ordinary shares of 11 pence each, a
reduction of 15 per cent in the total number of ordinary shares in issue.
1.4 Dividend Cover.
Dividend Cover compares net profit with dividends to show how many times over the
dividends could be paid and how safe this annual yield is. With other words, the dividend
cover shows how many times a dividend covered by earnings after tax profit.
Earnings per share
Dividend Cover = 
Net dividend per share
The recommenced final divided of 7.24 pence net per ordinary share, with the interim
dividend of 4,83 pence net paid on 17th of February 1998, brings the total ordinary
dividend for the year to 12.07 pence net per ordinary share. This represents an increase
of 8.4 per cent over 1996/97. Dividend cover, excluding the exceptional profit relating
to Energis was 1.6 times.
2.0 PRIMARY OPERATING RATIOS - MEASURES OF EFFICIENCY.
2.1 Return on Capital Employed (ROCE).
The ROCE is a fundamental measure of the profitability of a company. The ratio is a
popular indicator of management efficiency because it contrasts the net profit d by the
company with the total value of fixed and current assets, which are presumed to be under
management control. Therefore, the ROCE demonstrates how well the management has utilised
total assets. 
It can be argued that ROCE is the most important measure of the profitability of any
specific company. Mathematically can be measured by this:
Net Operating Profit before tax, interest and dividends
ROCE = 
Capital Employed
Operating profit from continuing operations (Group undertakings) fell from $716.1 million
to ?570.6 million as a result of the significantly reduced contribution from transmission
following the implementation of the new price control. The operating profit contribution
from the associate and joint ventures amounted to ?1.3 million (1996/97-? nil). 
2.2 Debtors Turnover Ratio.
The DTR measures the length of time it takes the debtors to pay the company 
for purchases. It can be either expressed in days, months or as a percentage.
(The Annual Review 1997/98 of the National Grid Group Plc doesn't show exactly how much
is the amount of the debtors)
2.3 Creditors Turnover Ratio.
The CTR gives some indication of the amount of credit a company is allowed by its
suppliers, and quite a good indication, provided stock levels and profit margins and
reasonably steady and the business is not highly seasonal. This can be measured like
this:
Average Creditors
Creditors Turnover Ratio = x 365 (days)
Purchases
? 937.7(million) 
The ratio for 1997 was: = 1.499 x 365 = 547.17 
?625.5(million)
?1105300
The ratio for 1998 is: = 1.578 x 365 = 576.06
?700350 
2.4 Return on Shareholders' Fund.
The Return on Shareholders' Fund represents the net profit of a company as a percentage.
It can be expressed by the following ratio:
Profit after tax and dividends
Return On Shareholders Fund = 
Shareholders' Funds
?224,5(million)
The ratio for 1997 was: = 16.16%
?1388.9 (million)
For the year 1998 because the company has given more dividends that the Profit of
Ordinary activities after Taxation, thus it has Retained Loss instead of Retained
Profit.
3.0 PRIMARY FINANCIAL RATIOS - GEARING AND LIQUITY.
3.1 Gearing Ratio.
Whatever method is used to compute gearing, a company with 'low gearing' is one financed
predominantly by equity, whereas a 'highly geared' company is one which relies on
borrowings for a significant proportion of its capital. It can be defined like this:
Long - Term Debt
Gearing Ratio = 
Shareholder Fund
?804(million)
The Gearing Ratio for 1997 was: = 57.8%
?1388.9(million) 
?1320.5(million)
The Gearing Ratio for 1998 is: = 148.6%
?888.6(million)
The National Grid Group Plc Company may it has loss in 1998 because they have given more
total dividend to their shareholders than 1997, and that's why they have retained loss in
1998 (?516.3 million), instead the Company used to have Profit on Ordinary activities
after taxation (?441.3 million) so the shareholders funds had been reduced from ?1388.9
million in 1997 to ?888.6 million in 1998. But from the other side of view Creditors
(amounts following due after more than one year) have been increased in 1998 to $1320.5
million from ?804 million in 1997. Because of this all the above exist this high Gearing
Ratios to that Company so the managers must take in to consideration this phenomenon. 
3.2 Liquidity Ratio.
Liquidity ratios are ratios that show the relationship of a firm's cash and other current
assets to its current liabilities. It is also concerned with the amount of assets held as
cash or cash equivalents.
3.2.1 Current Ratio.
The Current Ratio is calculated by dividing current assets by current liabilities:
Current Assets
Current Ratio = 
Current liabilities
Current assets normally include cash, marketable securities, accounts receivable, and
inventories. Current liabilities consist of accounts payable, short-term notes payable,
current maturities of long-term debt, accrued income taxes, and other accrued expenses
(principally wages).
If a company is getting into financial difficulty, it begins paying its bills (account
payable) more slowly, borrowing more from its bank, and so on. If current liabilities are
rising faster than current assets, the current ratio will fall, and this could spell
trouble. Because the current ratio provides the best single indicator of the extent to
which the claims of short-term creditors are covered by assets that are expected to be
converted to cash fairly quickly, it is most commonly used measure of short-term
solvency. Care must be taken when examining the current ratio, just as it should be when
examining any ratio individually. For example, just because a firm has a low current
ratio, even one bellow 1.0, this does not mean the current obligations cannot be met.
?368.2 (million)
The Current Ratio for 1997 was: = 0.378:1
?973.7 (million)
?384 (million)
The Current Ratio for 1998 is: = 0.347:1
?1105.3 (million)
3.2.2 Quick or Acid Ratio.
The Quick or Acid Ratio is calculated by deducting inventories from current assets and
then dividing the remainder by current liabilities:
Current Assets - Stock
Quick or Acid Ratio = 
Current Liabilities
Stock (Inventories) typically are the least liquid of a firm's current assets, hence they
are the assets on which losses are most likely to occur in the event of liquidation.
Therefore, a measure of the firm's ability to pay off short-term obligations without
relying on the sale of inventories is important.
?368 - ?100 (million)
The Ratio of 1997 was: = 0.257:1
?973.7 (million)
?384 - ?84 (million)
The ratio for 1998 is: = 0.271:1 
?1105.3(million)
4.0 CASH FLOW
The statement of Cash Flow is designed to show how the firm's operations have affected
its cash position by examining the investment (uses of cash) and financing decisions
(sources of cash) of the firm. The information contained in the statement of cash flows
can help answer such questions as: Is the firm generating the cash needed to purchase
additional fixed assets for growth? Is growth so rapid that external financing is
required both to maintain operations and for investment in new fixed assets? Does the
firm have excess cash flows that can be used to repay debt or to invest in new products?
This information is useful both for financial managers and investors, so the statement of
cash flows is an important part of the annual report.
For National Grid Group Plc, net cash inflow from continuing operations fell from ?877.3
million in 1996/97 to ?615.2 million, primarily as a result of lower operating profits.
Cash inflow benefited by ?203.1 million as a consequence of the global offer and listing
of Energies shares.
Payments to the providers of finance, in the form of dividends and interest, totalled
?997.6 million, compared with ?269.8 million in 1996/97: of this, ?768.6 million related
to the special dividend. Net purchases of tangible fixed assets absorbed cash of ?286.4
million, compared to ?279.1 million in 1996/97. ?29.9 million was invested in increasing
the Group's interest in Citelec from 15 per cent to 41.25 per cent and?15.4 million in
acquiring a 38.9 per cent interest in the Copperbeit Energy Corporation, Zambia.
The most significant financing initiative of the year was the issue of ?460 million of
4.25 per cent exchangeable bonds due 2008, the net proceeds of which were ?448.0 million.
The exchangeable bonds represent competitive medium-term financing for the Group and the
structure of the bonds affords the Group significant flexibility in deterring its
longer-term capital structure based on its future requirements. 
CONCLUSION.
I can now believe that I have guided you about the National Grid Group Plc Company with
the Annual Review. So if someone wants to invest in this Company must first read this
assignment in order to understand something about this and after that to decide what to
do.
RECOMENTATIONS.
As far as I am concerned, I truly believe that the National Grid Group Plc Company must
take into consideration some factors that may help them in order to improve their company
as a hall or to increase their profit and minimise their expenses. First of all they must
find ways in order to increase the Return on Shareholder funds. For example minimise the
cost by integrating and enforcing a Computerise new Company. In other words to have a
consistently high rate of return on shareholders' equity.
Second they must have an above-average record of earning per share. In 1997 for the
Company it was ?24.3 pence and 1998 has increased to ?26.1 pence.
Next they must have a strong level of retained earnings. So the company must reduced the
dividends to the minimum in order to have more retained earnings and no losses, and then
they will increase their shareholders funds and to reduced the current and long turn
liabilities. 
The Profit Margin of the Company in 1998 is: (PBIT / SALES = 40%). So this is a nice
thing for the Company, but because they own a lot of money in Debts (Long Turn), they pay
a lot of interest so it minimises at the end of the day the Retained Profit. That's why
they have to increase the at least the Profit Margin. 
About the Cash flow, because of the decreasing rate of profits of the year 1998, the Net
Cash Inflow has been decreased (increases the Cash Outflow) because of the interest of
the increased and Dividend paid. 
As well as, they have to decrease the Current Liabilities and to increase the Current
Assets. Also to decrease the Gearing Ratio, (decrease the Long Turn Liabilities).
Bibliography
1. Geoffrey H., Alan S. (1993) Interpreting Company Reports and Accounts. 
Woodhead-Faulkner Limited.
2. Barry E., Jamie E. 1996 Financial Accounting & Reporting. Prentice Hall.
3. Allan P. (1994) Accounting and Finance. UK: Redwood Books.
4. Weston B. B. (1996) Essentials of Managerial Finance. Dryden Press.