OFFERS Buy 4 assignments and get 1 absolutely FREE!
Search
25% off
+
FREETurnitin
report

Prices from

£7.41

£5.56
Safe & Trusted

Introduction

The principles of corporate finance are important in analysing the performance of industry in effective way. Present report deals with investment portfolio of various companies in different sectors. In relation to this, Cairn Energy Plc is chosen in Oil and Gas sector, while, Sports Direct International Plc is taken in General Retailers. On the other hand, Inmarsat Plc is taken from the sector of Mobile communication. The investment portfolio is prepared for all the companies to assess financial performance and outline company which is earning good profits and so that investors may take better decision in this context. Valuation of shares are prepared and investment strategy is made as well. Furthermore, analysis of current economic situation is also explained with regards to GDP, taxation, Balance of Payments and inflation as the economic indicators. Sectorial reports are also listed for three companies of varied industry sectors. Various methods-of-valuation-of-shares are also listed in this report.

Part 1

Analysis of UK economic situation

UK is one of the largest economy in the world and as such, nation has various economic indicators. In relation to this, macroeconomic indicators are GDP, Balance of Payments (BoP), inflation and taxation which impacts overall economy of UK. Current year growth of GDP of UK at the end of February 2018 is decent and is expected to rise by 1.5 % in the financial year 2018. However, as the year will progress, economy will slow down because of the uncertainty of Brexit on GDP of the nation (Low, Yao and Faff, 2016). Moreover, it is assumed that fixed investment and private consumption growth would lower down as well. While, UK's GDP has been injected in the current situation which will benefit whole nation in the coming period. This is evident from the fact that in February month, services PMI (Purchasing Managers Index) is hiked four times because of quick new orders growth. Unemployment rate is come down as well.

BoP is the economic transactions between UK and Rest of the World. This is narrowed by GBP 2 billion to 0.965 billion at the end of February 2018. Imports of goods and services has been fallen down by 4.8 % which is 53.41 billion in comparison to 56.11 billion in the month of January. On the other hand, exports of goods and services are also lowered down up to 1.34 %. Thus, it can be said that there is deficit in the UK economy as it is hiked by 0.4 billion to GBP 6.4 which is all time from January to February 2018. The main reason behind is that imports were maximised despite of increase in exports.

Inflation rate is another macroeconomic indicator affecting whole economy. Monetary policy is been revised by the Bank of England and bank rate is kept at 0.5 % in the month of February. It has been forecasted that inflation will remain around 3 % in short-run because of high oil prices (Kosov and et.al, 2016). The inflation rate is 3 % and is peaked up to high extent in the past ten years. However, unemployment rate is significantly lowered down from 8.5 % to 4.3 % in the last month. The fall in inflation is likely to be attain in the future. Taxation also plays important role in the economy. The income tax and capital gains receipts were segregated and amounted to 18.4 billion at the end of February. This figure is 0.9 billion less in comparison to receipts attained in past year.

Sectorial report on groupings

The sectorial reports are prepared with the intention to provide performance of various departments and units which provides the basis for analysing efficiency of the units. Sectorial reporting is also known as segmental reporting which is accompanied with the financial statements attached in the company's annual report. This help investors to assess performance of operating segments of organisation and take enhanced decisions with much ease. In this report, Cairn Energy Plc is taken from Oil and gas sector. On the other hand, Inmarsat Plc is taken from the technology sector (Montford and Goldsmith, 2016). While, Sports Direct International Plc is selected from the retail sector.

Cairn Energy Plc is one of the biggest oil and gas producer in the UK. The strategy of the company is to extend its brand portfolio and expand its operational segments to lead in the oil and gas industry of the nation. Each of the units are headed by regional director (Chandra, 2017). Among this, Senegal business is focus on government exploration plan. Other units are UK and Norway, International, Other Cairn Energy Group. The net loss was observed in Senegal of 0.6 in $million. On the other hand, net profit was obtained in UK and Norway unit of $10.9 million and 303 million in Other Cairn Energy Group. While, net loss of 50.4 was incurred in International segment. Operating lease commitments on administration costs were $9.3 million in the financial year 2017. Total assets amounts to 3255.5 while capital expenditure is 592.7.

Inmarsat Plc is engaged in mobile communication sector. It is a satellite communication organisation headquartered in UK. There are five operating segments of the company which are reported to Chief Operating Decision Maker. The segments are Maritime focusing on commercial maritime services, US government on civil and military services, Global government on worldwide civil services, Aviation segment and Enterprise on energy, M2M (Machine to Machine) services etc. EBITDA obtained in Maritime segment of 441.9, Aviation segment of 103.9 and in Enterprise of 91.9 (Petri, 2018). While, US and Global government has been segregated because of same services and 265.2 of EBITDA. In all net profit attained from operating segments amounts to 182.3. Total capital expenditures are 598.7.

Sports Direct International Plc is one of the greatest sports retailer headquartered in UK. There are four operating segments are UK Sports Retail, International Retail, Premium Lifestyle,  Brands etc. The operating profit garnered in UK Sports Retail amounts to 157.4 million, profit in  Brands are 76.1. On the other hand, operating loss has been incurred in International Sports Retail and Premium Lifestyle of 69.2 and 4.2 respectively. In relation to this, net profit obtained in the financial year 231.7. The total assets amount to 2448.8 and total expenditure comes to 426.9 in 2017. Thus, it can be interpreted that Sports Direct International Plc is able to generate good net profits in the past (Guo, Zhou, Luo, Liu and Xiong, 2016).

Part 2

Investment rationale

Assessing financial performance of the companies chosen under different sectors

 

Sports direct international

Return in %

Cairn energy

Return in %

Inmarsat

Return in %

3/5/2017

362

 

191.3

 

473.6

 

3/6/2017

370.5

2.35%

197

2.98%

481.2

1.60%

3/7/2017

371.7

0.32%

194.4

-1.32%

462.9

-3.80%

3/8/2017

372

0.08%

196.2

0.93%

463.9

0.22%

3/9/2017

367

-1.34%

196.4

0.10%

432.7

-6.73%

3/10/2017

367.2

0.05%

210.8

7.33%

409.7

-5.32%

3/13/2017

361.6

-1.53%

193.6

-8.16%

386.7

-5.61%

3/14/2017

362.9

0.36%

201.4

4.03%

399.7

3.36%

3/15/2017

368.4

1.52%

199

-1.19%

400.4

0.18%

3/16/2017

371.3

0.79%

205

3.02%

400.6

0.05%

3/17/2017

377

1.54%

205.2

0.10%

392.5

-2.02%

3/20/2017

374.1

-0.77%

206

0.39%

382

-2.68%

3/21/2017

369.5

-1.23%

211.6

2.72%

371

-2.88%

3/22/2017

368.8

-0.19%

208.4

-1.51%

369.3

-0.46%

3/23/2017

371.9

0.84%

204.4

-1.92%

372.9

0.97%

3/24/2017

371.2

-0.19%

206

0.78%

361.4

-3.08%

3/27/2017

370.3

-0.24%

211

2.43%

369.1

2.13%

3/28/2017

369

-0.35%

207.4

-1.71%

372.4

0.89%

3/29/2017

367.6

-0.38%

206

-0.68%

362.1

-2.77%

 

Particulars

Sports direct international

Cairn energy

Inmarsat

Average

0.09%

0.46%

-1.4%

Standard deviation

1.0%

3.2%

2.9%

 

Companies

R(f)

beta

Market return

Expected return

Sports direct international

0.44%

-0.14

-0.03%

0.51%

Cairn energy

0.44%

0.93

-0.03%

0.005%

Inmarsat

0.44%

1.01

-0.03%

-0.03%

 

Covariance analysis

Companies name

SD

Cairn energy

Inmarsat

SD

0.000101

8.84093E-05

0.000155

Cairn energy

8.84E-05

0.000989532

0.000155

Inmarsat

0.000155

0.000191491

0.000774

Correlation analysis

 

SD

Cairn energy

Inmarsat

SD

1

0.279322726

0.554297

Cairn energy

0.279323

1

0.22

0.554297

 

0.21886379

1

 

Expected return

weights

Weight * expected return

Sports direct international

0.51%

0.8

0.41%

Cairn energy

0.01%

0.1

0.001%

Inmarsat

-0.03%

0.1

-0.003%

 

 

 

 

 

 

Portfolio return 

0.41%

Weight

80%

10%

10%

Investment value on 5th March 2018

1600000

200000

200000

Share prices on 5 March 2018

362.00

191.30

473.60

Number of securities

4420

1045

422

Share prices on 29th March 2018

367.6

206

362.1

Investment value on 29th March 2018

1624751.381

215368.5

152913.9

Capital gain

24751.38122

15368.53

-47086.1

By taking into account above depicted evaluation, it can be presented that average return associated with SD and Cairn energy is higher over others. On the other side, Inmarsat’s average return accounted for -1.4% respectively. The rationale behind this, beta value of Inmarsat is 1 which in turn presents that stock is highly volatile. In accordance with the changes in stock market share prices of Inmarsat will be fluctuated to a great extent (Lombardi and Ravazzolo, 2016). Currently, FTSE 250 index average return is -0.03%. Considering the trend of financial position and performance it can be stated that in the near future all the stocks will grow. Now, portfolio return with the investment amount of 2 GBP million accounts for .44% which is slightly lower in comparison to the UK month treasury bills return. Hence, now due to the persistence of trade war in UK stock market investor will face difficulty in earning high returns within the short span (Guo, Yu, Li and Kar, 2016). Thus, it can be depicted that for earning high returns' investor needs to carry out and maintain such portfolio for longer duration.

Valuation of shares

Valuation of shares are quite important in order to assess current worth of the company. This means that valuing the shares help to analyse worthiness of the assets of organisation. Thus, performance of company can be analysed with the help of shares valuation (Swayamjit. 2018). There are several methods of valuing shares which are listed below-

  1. Asset-Backing method

            This method implies that shares are valued on internal value of assets. It has further bifurcation such as ongoing concern and break-up value of the basis of the company. The ongoing method means that utility of assets are taken for extracting value while in other one, realisable value is taken for the purpose of valuation of shares.

  1. Yield-Basis method

            The shares are valued on the basis of yield which is generated from the investments. This is always expressed in the form of percentage. The valuation is made on profit and dividend basis. In case of former, average profit is taken and capitalised value is determined by taking rate of return and number of shares are divided to extract value. While, dividend is taken for deriving share value (Kashyap, 2016).

  1. Fair Value method

            This technique of valuing shares on the basis of yield-basis and asset-backing method. It implies that fair value can be obtained by taking into account intrinsic and yield value and are taken as average for arriving better valuation of shares.

  1. Return on Capital Employed method

            Rate of return on capital is taken for the purpose of valuation. This method is taken as pre-determined expected rate of return. After analysing expected earnings, capital sum of return is calculated (Bilbao-Terol and et.al, 2016).

  1. Price-Earnings Ratio method

            This method is ascertained by relating market price of shares with EPS (Earnings Per Share).

Sports Direct International Plc

The Price-Earnings ratio 13.40 and EPS is 11.1

Therefore, value of share = EPS * Price-Earnings Ratio

= 11.1 * 13.40

= 148.70

Inmarsat Plc

Price-Earnings ratio is 12.91 and EPS is 0.41

Applying the same formula,

= 0.41 * 12.91

= 5.29

Cairn Energy Plc

Price-Earnings ratio is 6.94 and EPS is 44.52

= 6.94 * 44.52

= 308.96

Ratios analysis

Sports Direct International Plc

Particulars

Formula

2017

2016

Profitability ratios

 

 

 

Gross profit ratio

Gross profit / net sales * 100

41

44.2

Net profit ratio

Net profit / Net sales * 100

7.08

9.55

Return on Assets

Net earnings / Total assets

9.56

13.42

Return on Equity (ROE)

Net Profit / Shareholders' Equity

17.51

21.75

 

 

 

 

Liquidity ratios

 

 

 

Current ratio

Current assets / Current Liabilities

1.72

2.43

Quick ratio

Liquid assets / Current Liabilities

0.77

0.93

 

 

 

 

Efficiency ratios

 

 

 

Debtors Turnover ratio

Net credit sales / Average accounts receivable

69.3

48.53

Stock Turnover ratio

Cost of sales / Average inventory

2.88

2.66

Creditors Turnover ratio

Total suppliers purchases / Average accounts payable

33.58

43.84

 

 

 

 

Solvency ratios

 

 

 

Gearing ratio

Debt / Equity

0

0.24

Debt to assets ratio

Debt / Assets

0

0.14

It can be interpreted from the above ratios of Sports Direct International Plc that company has performed satisfactorily. The profitability ratios such as Gross Profit and Net Profit ratio are declined. Gross profit was 44.2 in 2016 and 41 in the 2017. Net profit ratio was 9.55 in 2016 and 7.08 in next year. This means that organisation has to initiate control on its expenses. Return on Assets and Return on Equity has also been lowered (Vershinina and et.al., 2016). Thus, profitability position is required to be improved. On the other hand, current ratio has come down to 1.72 while, it was 2.43 in the financial year 2016. Quick ratio is also good and as such, it can be said that organisation has good liquidity position and is able to pay-off short-term liabilities within stipulated time.

Efficiency ratios such as Debtors Turnover ratio was 48.53 in 2016 and 69.3 in the financial year 2017. This implies that strict credit policies are required to be implemented. Creditors Turnover ratio is decreased which means that firm is making faster payments to suppliers. Stock turnover ratio is slightly reduced (Ries, 2018). While, Gearing ratio was 0.24 in the financial year 2016 and in next year, it is zero. This means that no debt has been used in 2017. On the other hand, Debt to assets ratios was 0.14 in 2016 and zero in next financial year.

Inmarsat Plc

Particulars

Formula

2017

2016

Profitability ratios

 

 

 

Gross profit ratio

Gross profit / net sales * 100

89.7

90.5

Net profit ratio

Net profit / Net sales * 100

12.98

18.27

Return on Assets

Net earnings / Total assets

3.71

5.34

Return on Equity (ROE)

Net Profit / Shareholders' Equity

14.57

19.51

 

 

 

 

Liquidity ratios

 

 

 

Current ratio

Current assets / Current Liabilities

0.99

1.35

Quick ratio

Liquid assets / Current Liabilities

0.82

1.2

 

 

 

 

Efficiency ratios

 

 

 

Debtors Turnover ratio

Net credit sales / Average accounts receivable

6.86

6.53

Stock Turnover ratio

Cost of sales / Average inventory

4.21

4.27

Creditors Turnover ratio

Total suppliers purchases / Average accounts payable

437.26

324.93

 

 

 

 

Solvency ratios

 

 

 

Gearing ratio

Debt / Equity

1.94

1.97

Debt to assets ratio

Debt / Assets

0.49

0.51

The financial ratios have been computed for Inmarsat Plc. Profitability ratios such as gross profit ratio was 90.5 in 2016 and in next period was 89.7. This shows that gross margin had come down and net profit ratio was 18.27 and 12.98 in 2016 and 2017 respectively. This implies that firm has to control its costs to generate more revenue. Return on Assets was 5.34 in 2016 and 3.71 in 2017. This means that assets should be effectively utilised by company to produce revenue. Return on Equity was 19.51 in previous year while came down to 14.57. Thus, profitability position needs to be enhanced (Zou, Wang and Wu, 2018).

Liquidity ratios such as current ratio was 1.35 in 2016 and 0.99 in next year. On the other hand, quick ratio was 1.2 in 2016 and 0.82 in the financial year 2017. This means that firm has to improve upon its liquidity to make short-term payments. Efficiency ratio such as Debtors Turnover ratio is enhanced in 2017 which means that credit policies are good enough to recover payments. Creditors Turnover ratio is however, increased which implies that company is not making quick payments to suppliers. While, stock turnover ratio is reduced which shows that inventory is replenished quickly. Solvency ratios such as Gearing ratio is more and implies that company has more debt in its capital structure. Debt to assets ratio is reduced which is quite good for the organisation as lower risk (Wang and Huang, 2017).

Cairn Energy Plc

Particulars

Formula

2017

2016

Profitability ratios

 

 

 

Gross profit ratio

Gross profit / net sales * 100

19.8

0

Net profit ratio

Net profit / Net sales * 100

7.97

0

Return on Assets

Net earnings / Total assets

9.21

-3.99

Return on Equity (ROE)

Net Profit / Shareholders' Equity

11.23

-4.43

 

 

 

 

Liquidity ratios

 

 

 

Current ratio

Current assets / Current Liabilities

0.85

3.86

Quick ratio

Liquid assets / Current Liabilities

0.59

3.47

 

 

 

 

Efficiency ratios

 

 

 

Debtors Turnover ratio

Net credit sales / Average accounts receivable

0.63

0

Stock Turnover ratio

Cost of sales / Average inventory

5.13

0

Creditors Turnover ratio

Total suppliers purchases / Average accounts payable

68.35

0

 

 

 

 

Solvency ratios

 

 

 

Gearing ratio

Debt / Equity

0

0

Debt to assets ratio

Debt / Assets

0.07

0

Financial ratios of Cairn Energy Plc is calculated which shows company has good gross profit in 2017 as no profit was made in 2016. Net profit ratio was 0 and in next year 7.97 was attained. This shows organisation has formulated structured strategies that has benefited with profits. Return on assets was negative in 2016 and 9.21 in next period which highlights company has effectively utilised assets for producing revenue. Return on Equity has also increased as it was negative in the previous year. This means that profitability position has effectively maximised (Chirkunova, Kireeva, Kornilova and Pschenichnikova, 2016).

Current ratio and quick ratio both are lowered down as it was much in previous year. This means that assets are quickly converted into cash. Efficiency ratio such was zero in 2016 and increased in next year which means that efficiency has maximised in terms of debtors, creditors and stock turnover ratio. Solvency ratios such as gearing ratio was zero in both years. Moreover, debts to asset ratio was zero in 2016 and 0.07 in the financial year 2017. This implies that more debt is required to be used by company (Braun, Schmeiser and Schreiber, 2017).

Stating the manner in which concerned investment will meet investment strategy

The investment can be made in Sports Direct International Plc and even in Cairn Energy Plc as both have higher average returns. While, Inmarsat Plc has high volatility which means that  price of shares will remain unstable. Thus, in accordance to the investment portfolio, investors may get low returns in short-term. However, adequate returns will be generated in long run.

Conclusion

Hereby it can be concluded that corporate finance plays crucial role in the company. Principles of finance help not only management but also investors. This is the main reason behind assessing whether investment should be made in the securities of the organisation or not. The investors come to know whether adequate returns will be imparted by company or not. Moreover, investment portfolio is quite important with regards to individual or firm holding the value of assets. Investors are keen to know whether good average returns would be provided by the company or not and thus, enhanced decisions are made by them. Furthermore, it can be analysed that Inmarsat Plc has volatility which is not preferable for investors in the short-run as returns would fluctuate. On the other hand, financial ratios are calculated for assessing overall performance of all the three companies. This help to analyse which organisation is performing good in the market. Furthermore, methods of valuation of shares are also been discussed for carrying out price of shares.

References

  • Bilbao-Terol, A. and et.al, 2016. Multi-criteria decision making for choosing socially responsible investment within a behavioral portfolio theory framework: a new way of investing into a crisis environment. Annals of Operations Research. 247(2). pp.549-580.
  • Braun, A., Schmeiser, H. and Schreiber, F., 2017. Portfolio optimization under solvency II: implicit constraints imposed by the market risk standard formula. Journal of Risk and Insurance. 84(1). pp.177-207.
  • Chandra, P., 2017. Investment analysis and portfolio management. McGraw-Hill Education.
  • Chirkunova, E. K., Kireeva, E. E., Kornilova, A. D. and Pschenichnikova, J. S., 2016. Research of instruments for financing of innovation and investment construction projects.Procedia Engineering. 153. pp.112-117.
  • Guo, S., Yu, L., Li, X. and Kar, S., 2016. Fuzzy multi-period portfolio selection with different investment horizons.European Journal of Operational Research. 254(3). pp.1026-1035.
  • Guo, Y., Zhou, W., Luo, C., Liu, C. and Xiong, H., 2016. Instance-based credit risk assessment for investment decisions in P2P lending. European Journal of Operational Research.249(2). pp.417-426.
  • Kashyap, R., 2016. The Circle of Investment: Connecting the Dots of the Portfolio Management Cycle... arXiv preprint arXiv:1603.06047.
  • Kosov, M. E. and et.al, 2016. Economic practicability substantiation of financial instrument choice.Journal of Applied Economic Sciences. 11(8). pp.1613-1623.
  • Lombardi, M. J. and Ravazzolo, F., 2016. On the correlation between commodity and equity returns: implications for portfolio allocation. Journal of Commodity Markets. 2(1). pp.45-57.
  • Low, R.K.Y., Yao, Y. and Faff, R., 2016. Diamonds vs. precious metals: What shines brightest in your investment portfolio?. International Review of Financial Analysis. 43. pp.1-14.
  • Montford, W. and Goldsmith, R. E., 2016. How gender and financial self‐efficacy influence investment risk taking.International journal of consumer studies. 40(1). pp.101-106.
  • Petri, P. A., 2018. The interdependence of trade and investment in the Pacific. In Corporate links and foreign direct investment in Asia and the Pacific (pp. 29-55). Routledge.
  • Ries, C. P., 2018. Introduction and overview. In Capital Controls In Emerging Economies (pp. 1-12). Routledge.
  • Vershinina, A.A. and et.al., 2016. State of the Investment Fund Market of as an Indicator of the Country's Socio-Economic Development. Journal of Internet Banking and Commerce.21(S3). p.1.
  • Wang, H. and Huang, J., 2017. Joint investment and operation of microgrid. IEEE Transactions on Smart Grid.8(2). pp.833-845.
  • Zou, J., Wang, F. and Wu, Y., 2018. Large portfolio allocation using high-frequency financial data. Statistics and Its Interface. 11(1). pp.141-152.