Financial Accounting or Practice and Principles - Case Study Example

BUNZL PLC Student name Student number Assessors Name Date Introduction Bunzl plc was formed and incorporated in 1940; in 1957 the company was listed on the London stock exchange. With time, the business has grown and become an international distribution company. Bunzl plc started as a small haberdashery in the capital of Slovakia. The company has expanded its markets to South America acquiring Brazil; it has further grown to acquire Chile, Argentina, Colombia and Peru (Connolly 2010). The organization is active in more than 25 countries that are divided into four businesses namely, UK, Europe, North America and the other parts of the world. The organization strategy is based on some areas of focus that are, commitment to growth organically, in acquisitions and the improvements of its operating model. Bunzl detailed share price Bunzl.com, (2015) How Stock Markets Work and How They Relate To Public Limited Companies In stock markets, a share of stock is a small fraction representing an ownership of a company. When Bunzl plc share of stock is bought, then the buyer is entitled to some amount of earnings and assets of the company. For instance assets can fall into the following category, that is trademarks, buildings and equipment the company listing the shares owns (Becket 2012). Earnings will include all the money the listing company makes from the trade of its products and services. Bunzl plc will share its assets and earnings to the public with an aim of raising capital. The organization has several options of raising money for development this can be done by debt financing or by equity financing. The advantage in sale of stocks is that Bunzl plc will acquire more capital for expansion purposes with fewer obligations. Debt financing is borrowing money from financial institutions, however, this form of borrowing is considered expensive due to the fact that the company incurs huge cost while repaying the loan due to interest payment. However, while the company raise money through equity, it’s cheaper since no interest’s payments are made. Stocks help to distribute the risks of running the organization to a large number of stockholders. The founders of a public limited company will not lose all their money if the company goes bankrupt but a little amount together with the other stockholders little money (Becket 2012). In a stock market, among other companies Bunzl plc give out its shares to the general public, the organization pay a fee for the listing and an obligation to provide crucial information to the markets. The organization then lists its shares on the stock market board and then people can buy these shares as they are in the stock market. When issuing shares to the public for the first time, the company is said to be making an initial public offer, company shares will now be bought and sold in the stock market board. Buying and selling of shares is facilitated by the stock brokers they are the one who connect the buyers with the sellers. Most of these stock broker are appointed by the exchanges to ease the work of dealing with individuals (Becket 2012). The risk/s and return/s investing in a stock market Various Risks are involved while investing in a stock market; it is important for an investor to comprehend various risks involved in the stock trade. Major risks in a stock market are; the risk of interest rate, different stocks will be affected by shifts in the interest rates to various extents. Bunzl plc stock prices can be directly affected by movements in the interest rates in other nations. Global risk, the openness of the London stock exchange market makes it volatile to influences of economic issues in major markets. Economic issues and events globally need to be factored in the risk assessment plan while investing in the stock market. Business risk, Poor management, competition and industry slowdown can lead to bankruptcy or decline in profits of an organization, this will put the investors stocks investments at stake. Organization mismanagement, the company you invest in the form of stocks, can be poorly managed or act against the will of the stockholders. For instance, the company can acquire an overvalued asset (Fryer 2002). Suspension of trading, when this happens no trading will be taking place and therefore, investors cannot purchase company stocks. Suspension of trading may occur due to incorrect or misleading information about the organization stocks. The risk of liquidity, is likely be caused by lack of sufficient stocks for liquidation. For instance there are stocks on the market that are hard to sell or liquidate. Low capitalization stocks are less liquid as compared to those with high capitalization (Whiteside et al. 2002). Currency risk, the London stock exchange, is pegged to the US dollar, if you invest in the London stock exchange from overseas, there will be some foreign exchange losses especially when the local currency is weaker than the dollar. Policy risk, Regulations, and government policies change with time, both in the UK and in the other countries; this will have various impacts on the companies whose stocks are listed on the stock market. However, there are multiple gains that are realized by investors who make a choice to invest in the stock markets and they include. Investment gains, in the stock market, there is a great chance on investors' money growing. With time stocks rise in value for the companies that grows steadily. An investor can buy stocks from various companies to spread the risks since some companies stocks lose value faster than others. Incomes in the form of dividends, some companies and organizations pay dividends to their stockholders. The dividend income is paid even after the stocks lose value. Income from dividend can rise with time and can help in funding a retirement (Whiteside et al. 2002). Diversification is important for investors to put their money in the different form of investment diversification can be acquired by investing in a stock market. Stocks can help cater for losses realized from other investments undertaken. Ownership, when an investor buys stocks from a listed company, it means he has an ownership stake in that organization. The investor becomes a business owner and can play a major role in the making serious decisions in the organization (Frryer 2002). The limitations of financial information in making investment decisions on a stock market Bunzl plc financials 2013 to 2014 Bunzl.com, (2015) While making investment decisions on a stock market, there is couple of limitations that investors encounter. However, most of the investors are influenced depending on the organization's past performance. Most organizations use different accounting methods in addition to that, most investors will rely on the organizations financial information to make comparisons before deciding where to put their money. If an investor decides to use financial accounts of different organizations that apply different accounting methods, they are likely to make wrong investment decision (Bebbington et al. 2001). Financial information is in the form of numbers and ratios, financial ratios, and figures on their own without explanation it will be difficult for the investors to get true picture of the company thus making it difficult for them to invest (Bebbington et al. 2001). Though the financial ratios are beneficial, organizations may fail to disclose some of important rations such as gearing especially when they have liquidity problems. While making an investment decision, there is the challenge of different companies using different fiscal years in accounting their financial information. Financial information for a full year is required to make a good comparison of various companies for stock investment purposes. Accurate comparison of various companies will be impossible where these companies have different fiscal years. Classification of companies is difficult especially for large organizations that deal in diversified products. Companies with vast sources of income do not fit in a particular class and accounting for them does not give their complete picture. Information in company financial statements may be misleading due to intentional manipulation and inaccuracy of figures (Bebbington et al. 2001). This is true because financial information is based on the past, it is historical and using this information to make present investment decisions will result to making wrong decisions. Bunzl plc dividends payments 2015 Bunzl.com, (2015) The possible investor returns. TSR; EPS and PE Total shareholders return For a given period, Bunzl plc stock price changes, its free cash flow for the same period and this is as a percentage of the stock price at the beginning of a year. For instance Bunzl plc has a price of the stock at 150 US dollars at the beginning of the year, and 3 US dollars free cash flow for the year. At the end of the year, the stock price being 110 US dollars, then its total shareholders return for the year is 13%. Companies like Bunzl plc total shareholders return is measurable since its stock prices are observable. When total shareholders return is measured for a long time, it gives a clear picture of the success of an organization (Lexisnexis 2003). In Bunzl plc total shareholders return = (Price end- price begin+ dividends)/Price begin Where: Price begin= beginning of the year share price= Price end= End of the year share price Dividends= dividends paid for the year Total shareholders return of 2014= (86.2-82.4+22.4)/82.4 = 26.2/82.4 = 0.318% Earnings per share This is the part of profits from a company that is given or allocated to every share of the common stock. This acts as an indicator of the organizations profitability. Stocks value is best measured using earnings per share. Bunzl plc earnings per share= profit or losses attributable to the shareholders of the company divided by the weighted number of shares issued for the period. EPS= Net income/ outstanding common shares on average = 6156.5m/1831.87 = 3.36 m P/E ratio This ratio measures Bunzl plc ability to make sales in relation to its assets. The ratio should go hand in hand with other ratios to measure the effectiveness in the use of assets to create sales. Bunzl plc P/E ratio= Net annual sales/ Gross fixed assets less depreciation. = 6156.5/1618.2(Less depreciation) = 3.805. annual turnover Bunzl Plc Gearing Level and the Issues of Debt Funding For an Investor Bunzl plc gearing level and the issues of debt funding for an investor Bunzl plc gearing level is the measure of debt that is the borrowed fund to equity. The gearing level indicates the subjectivity of the organization to the financial risk; this is because more borrowed capital can cause financial strain to the organization. When gearing level is high, debt to equity proportion is high, and when the gearing level is low, debt to equity ratio is also low. To an investor, a company with a high gearing ratio has a high leverage; this is because a company that mostly uses borrowed funds to run its operations is at high risk in times of business downturn (Lexisnexis 2003). Conservative management at Bunzl plc can lead to low gearing levels but only on occasions where the organization is situated in a more cynical industry. Bunzl plc gearing level = long-term debt + short-term debt + bank overdrafts/ shareholders’ equity Times earned interest level also shows the firm’s gearing level This shows the ability of an organization to generate enough profits to cover its ongoing interest payments Bunzl plc gearing level = Earnings before interest and taxes/ interest payable Earnings before interest and taxes = 299.8 Interest bearing loans and borrowings = 913.3 = 299.8/913.3 =3.21 Bunzl plc can reduce its gearing level by undertaking some measures; Authorization by the board of directors to sell shares can be useful to reduce the debt. Lenders can trade the existing debt with the organization shares through negotiations. The organization can look for more avenues to increase profits to pay easy debt and can also reduce the working capital by increasing accounts receivable collections and increase accounts payable period (Bebbington et al. 2001). References Bebbington, J., Gray, R., & Laughlin, R. 2001. Financial accounting: practice and principles. London, Thomson Learning. Becket, M. 2012. How the stock market operates a beginner's guide to investment. London, Kogan Page. Bunzl.com, 2015. Detailed share price. [online] Available at: http://www.bunzl.com/investors/share-price/detailed-share-price.aspx [Accessed 16 Oct. 2015]. Bunzl.com., 2015. Dividend information. [online] Available at: http://www.bunzl.com/investors/other-shareholder-information/dividend-information.aspx [Accessed 16 Oct. 2015]. Bunzl.com, 2015. Highlights. [online] Available at: http://www.bunzl.com/investors/financial-information/highlights.aspx [Accessed 16 Oct. 2015]. Connolly, D. 2010. The UK trader's bible: a complete guide to trading the UK stock market. Fryer, G. H., 2002. Stock Exchange official yearbook. [S.l.], MacMillan. Lexisnexis, F. 2003. LexisNexis corporate affiliations. Volume 8, Volume 8. New Providence, N.J., LexisNexis Group. Whiteside, R. M., Wilson, A.2002. Major Companies of Europe 2002/03 Volume 2 Major Companies of United Kingdom. Dordrecht, Springer Netherlands. Read More