Assessing Company Value

When individuals are interested in purchasing, investing or working with a company it may also be a good idea to assess it’s financial status, using public information available through government sources, two documents can allow proper assessment. A statement of comprehensive income and a statement of financial position.

Company value calculations

Statement of comprehensive income

A statement of comprehensive income is a usually detailed report listing the inflows and outflows of capital of a business. They often include exceptional expenses and net profit for a business and subsequently can be difficult to follow but should provide a good understanding on how a business functions through the financial year.

Statement of financial position

A statement of financial position outlines the inventories, assets and equity a business has at the end of a year or season. It may also help to identify where most of a businesses cash is being spent or held in assets.

What are the benefits of these documents?

A statement of comprehensive income will help to identify the basic operations of a business, for example the yearly turnover. A company that makes more turnover than another, however may not be financially better or worse however as it can depend on how the money is used, fortunately there are many equations that can help us to define a standard for these figures that we can use to compare between businesses or yearly statistics.

Gross Profits

Gross profits allow us to determine how much profit a company makes after selling it’s products, this is already better than revenue as it shows that a company may be making a lot of revenue, but may be spending it all on sales. It is usually defined in the statement of comprehensive income.

Gross profit is Sales Revenue – Cost of Sales.

This figure is useful, but can be more effective when coupled with a percentage, as it is would allow us to compare for example previous years income, as below, it is for this reason we use the Gross Profit Margin to calculate a percentage.

Gross Profit Margin is (Sales Revenue – Cost of Sales) ÷ Sales Revenue. Higher is better.

BusinessGross ProfitGross Profit Margin
XYZ Telecoms$470,00051.32%
AB Telecom$460,00079.92%
AT TEL$430,00030.10%

As you can see from above the company XYZ Telecoms makes more money than AB Telecom however it is much more inefficient in it’s spending and therefore could reduce the cost of it’s sales to get higher returns. Note that although AB Telecom makes a higher Gross Profit Margin it does not make more money. Here is a breakdown of another Telecom company Telecomatic and they spend roughly 40% of their Revenue on sales, and therefore have a gross profit margin of 60%. In other words, if 40% is spent on sales, the company keeps the other 60% barring any other costs, like fixed costs.

RevenueCost of SalesGross ProfitGross Profit Margin
$100,000$40,000$60,00060%

Using gross profit and the gross profit margin is advantageous because it;

  • Enables you to calculate if spending on sales is too great.
  • Identify which company is better at sales spending.
  • Enables to identify if year on year a businesses spending on sales has been successful or not.
  • If there are two company chains, in two different locations with similar sales revenue, if they were to use different methods of advertising the sales profit margin would allow you to determine the best method based on the higher percentage.

However it does not;

  • Account for exceptional items or income.
  • Account for Fixed costs, such as machinery rent or leasing.

Operating Profits

Operating Profits are the next step of a businesses true income, operating profit accounts for overheads (expenses) that a business has to pay in order to function, expenses like factory ownership or employee pay and should easily be very close to a businesses true profit for the year if the business is new or homogeneous in nature. Operating profits however do not account for or should not account for;

  • Exceptional expenses, like purchasing new facilities or machinery.
  • Assets a business may hold of value.
  • Creditors.
  • Financial income or company dividend.

Operating Profit is calculated by Gross Profit – Overheads. Operating Profit Margin is calculated by (Operating Profit) ÷ Sales Revenue.

Yell TellThis year
Sales Revenue$848,100
Sales Expenditure$298,100
Gross Profit$550,000
Gross Profit Margin54.20%
Expenses$130,000
Operating Profit$420,000
Operating Profit Margin28.30%

Net Profit Margin

Lastly, for the comprehensive income sheet, the Net Profit Margin will show the overall effectiveness of the businesses expenditure. And represents how much raw profit a company makes based off its revenue, to put this into perspective its how much money is profit when multiplied by the turnover, so if a company’s net profit margin is 17%, and they turnover $1m a year, the company will have $170,000 unconditional capital left over at the end of the year barring complications.

The Net Profit Margin is calculated by Profit for the year ÷ Sales Revenue.

Capacity Utilisation

Capacity utilisation within a business can be easy or hard to calculate, for a printing shop, it is easy to calculate how many sheets they can produce per hour for example and in a metal fabricators, it is easy to calculate how many sheets of metal they can produce per hour, however for a company that has varied demand, it can be very hard to predict how much the business should utilise its capacity, a clearly noticeable example would be an understaffed restaurant, although they have staff working the shift, it is clear that they did not account for the demand that the customers require.

Capacity Utilisation = Actual level of output / Maximum possible output x 100

Productivity = Total output / Number of workers

Capacity utilisation should never be at 100%, as this could mean that if something were to fail, the business may not be able to fulfil the orders, Companies may choose to ask multiple ‘what if?’ questions that may indicate if the business may want to reconsider its utilisation levels.

  • What if the employment rate fell?
  • What if workers were too highly skilled?
  • What if forecasts are not conservative?
  • What if costs increased?
  • What if minimum wage increased further?

The Impact on EU Trade Imports and Exports vs Capacity Utilisation

For UK Businesses, there is a handy acronym when working with exchange rates, SPICED. ‘ strong pound imports cheap, exports dear ‘. This applies to any companies in the UK who may wish to export or import goods from elsewhere.

If the UK were to leave the EU, the cost of imports/exports could be greater/lesser depending on the trade deals we could secure with countries.

  • Specialised workers would find it harder to move freely into the UK.
  • Tariffs are not imposed in the EU, tariffs could cost businesses money, however it could be argued that they increase competition.
  • The Common Market could potentially be lost.
  • The work ethic of some foreign national employees could change.

These factors could all affect the overall capacity utilisation of UK companies.

 

Advantages and Disadvantages of a Public Limited Company

What is a Public Limited Company?

A Public Limited Company is a business that has decided to offer it’s shares on the public stock market. The Stock Market is where anyone can invest in a Public Limited Company. These are usually high value, large businesses that can have massive profits, and offer dividends to those who invest.

In order to become a Public Limited Company, PLC, you need;

  • At least two directors.
  • A Secretary
  • And you must float at least $50,000 shares on the stock exchange, to become a PLC.

Unlike other businesses, a PLC is often owned by a board of directors, that dictate the decisions of a business. PLC’s must also pay Dividend, which is money that the investors receive from the business, determined by their share value. As PLC’s have external influences, they also fluctuate in value and therefore can loose money. Some businesses owners also find that they can loose control. Being a PLC can bring in more capital and make the business more known publically on the sock exchange.chart market up of public limited company

For contrast, to become a Sole Trader. All you have to do is contact HMRC (Her Majesty’s Revenue and Customs) and every year fill in a self assessment. An LTD must send a Memorandum of Association and Articles of Association. For this reason it becomes a lot harder to do so and often people will employ a Secretary. To be a PLC can take lots of time and can sometimes not be possible for companies with a very bad image. Companies also may struggle if they are unreliable or have seasonal traits, such as a manufacturer of Christmas gifts.

Advantages of a Public Limited Company

  • Having Shares will fund expansion, allowing the business to grow.
  • This also raises company profile.
  • The business can raise a lot of capital because there is no limit for shareholders to invest.
  • Shares are transferable, so investors can split profits.
  • You can get input from investors.
  • Investors may try to grow the business, through things like discounted advertising, if they own part of another business.

Disadvantages of being a Public Limited Company

  • There could be a possible loss of control, as people may find that shareholders own over 50% of the shares, entitling them to the ownership of the business. This is also known as a divorce of control.
  • Shareholders may have other plans to maximise profits over social and ethical goals.
  • Share prices could collapse.
  • There are a lot of legal formalities.
  • Fluctuations in share price could make a company worthless overnight.
  • PLC’s are hard to maintain. As they are usually large, often everyone has their own ideas.
  • Some companies may be overvalued.
  • Some do not have $50,000 worth of shares to float.

A PLC is usually for large companies. Small businesses will not always expect to grow, Corner shops for example, will not grow beyond what is possible due to the local footfall. Therefore PLC’s are often global businesses.