Spectris Plc Company Analysis - Case Study Example

Student’s Name Professor’s Name Course Date SPECTRIS PLC FINANCIAL ANALYSIS Industry Analysis Spectris operates under the electronic and electrical equipment sector in the United Kingdom. The industry has only two companies with a market value in excess of two billion pounds; Halma enjoys a market capitalisation of £3,359.07M and Spectris, which has market capitalisation of £2,092.41M. Other notable competitors within the industry include; Renishaw with a market cap of £1,281.81M; e2v Technologies with a market cap of £470.65M and Morgan Advanced Materials with a market cap of £658.06M (The Telegraph1). The company with the largest shares placement in the London Stock Exchange is Ceres Power Holdings with 773M shares. Halma has approximately 378M shares; e2v Technologies 219M; Morgan Advanced Materials, 285M and Renishaw with 73M shares as at the end of 2015(The Telegraph1). Most of the companies indicate a negative P/E ratio like Servision and TT Electronics while others like Ross Group postulate a stronger ratio of 780 within the same period. The dividend yield for the top companies is presented as follows; e2v technologies with 2.42, Halma with 1.38; Morgan Advanced Materials with 4.77; Renishaw with 2.64; and Spectris whose yield is positioned at 2.82 (The Telegraph1). In relation to revenues capacity, the top competitors enjoy the following share of market revenues. e2v technologies with £225M, Halma with £726M; Morgan Advanced Materials with £912M; Renishaw with £495M; and Spectris whose yield is positioned at £1,190M Spectris Plc Company Analysis Spectris Plc was founded in 1950s and it has its headquarters in the United Kingdom. It has employed more than 8,000 employees that work in more than 30 countries across the world. It is made up of four distinctive business segments that include; In-line instrumentation, Industrial Controls, Materials Analysis and Test & Measurement business segments, all operating under a single business model that uphold similar customer values and distinctive corporate strategies (Spectris Plc 1). It controls the largest market share as can be seen with the company’s overall revenues that amounts to £1,190M in 2015. Early this year, the company completed a successful acquisition of a private-owned business, CAS Clean Air Service AG. The move ascertains the expansion strategies of the company. In fact, it is noted that the firm had engaged in successful acquisition of six businesses as at the end of 2015 financial year. Subsequently, a non-executive director of the company; Ulf Quellman purchased more than 500 shares, which represents a 0.00% of all share issue (Spectris Plc 1). Company Financial Analysis Profitability Ratios Year/ Ratio 2012 2013 2014 Net profit margin=net income/ sales Spectris Plc: Morgan Advanced Materials Renishaw e2v technologies Halma 141.3/1,230.8 *100% =11.48% 76.1 / 1,007.5 *100% =7.55% 69,038/331,892 *100% =20.8% 23,540/234,615 *100% =10.03 86,714/579,883 *100% =14.95% 200/1,202 *100% =16.64% 44.7 /957.8 *100% = 4.66% 68,825/346,881* 100% =19.84% 26,729/200,363 *100% =13.34% 95,216/619,210 *100% =15.38% 135.1/1,173.7*100% =11.51% 12.3/921.7*100% = 1.33% 85,666/355,498 *100% =24.09% 25,025/217,745 *100% =11.49% 106,327/ 676,506 *100%= 15.72% ROA= net income/total assets Spectris Plc Morgan Advanced Materials Renishaw e2v technologies Halma 141.3/1,331.7 *100% = 10.61% 76.1 /968.3*100% = 7.86% 69,038/370,056 *100% =18.66% 23,540/239,805 *100% =9.82% 86,714/645,183 *100% =13.44% 200/1,308.8*100% = 15.28% 44.7 /911.9 *100% = 4.9% 68,825/394,257 *100% =17.45% 26,729/229,328 *100% = 11.65% 95,216/849,874 *100% = 11.2% 135.1/1,406.5*100% = 9.61% 12.3/920*100% =1.34% 85,666/458,377 *100% = 18.68% 25,025/238,285 *100% = 10.5% 106,327/789,624 *100% =13.46% ROE= net income/ total equity Spectris Plc Morgan Advanced Materials Renishaw e2v technologies Halma 141.3/691.1*100% = 20.45% 76.1 /271.6*100% =28.02% 69,038/242,399 *100% = 28.48% 23,540/131,436 *100% = 17.9% 86,714/398,112 *100%= 21.78% 200/844.1*100% =23.69% 44.7 /274.1 *100% =16.3% 68,825/276,719 *100% = 24.87% 26,729/229,378*100% = 11.65% 95,216/453,267 *100%=21% 135.1/916.0*100% = 14.75% 12.3/187.7*100% =6.55% 85,666/350,763 *100% =24.42% 25,025/238,285*100% =10.5% 106,327/486,000 *100% = 21.88% Profitability Analysis Spectris’ net profit margin remains steady within the three-year period at 11.51%. Most of the competitors also have a ratio value slightly above that within the same financial period. It thus means that the firm has been able to translate enough sales revenues into net income for other uses. In fact, despite the fact that there was a decrease in the level of sales revenues within the same period due to weaker demand of some of its products especially the materials analysis and test segment, it still manages to remain within the industry averages, which depicts overall efficiency in pricing and marketing strategies for its product-base. The return on assets drops slightly from 10.61% to 9.61% in 2012 and 2014 respectively. The drop in this ratio value has slightly distorted its position in comparison to most of its immediate competitors, which have a ratio value of above 10.5% except for Morgan Advanced Materials. This is not a good indication and it might mean that the company’s management team has not made efficient efforts to formulate and implement stringent policies needed for effective and optimal utilisation of assets. It is important to note that Spectris Plc is currently focused on expanding into other significant markets hence it is engaged in intensive acquisition processess. It thus means that the management is only focused on using available cash resources to purchase business at the expense of devising such important asset policies as wear and tear needed for replacing unproductive assets to ensure sustained profit growth. Subsequently, the firm’s return on equity ratio decreases significantly within the three-year financial period from 20.45% to 14.75%. With this decrease, the firm’s ratio is set below some of its notable competitors like Renishaw and Halma whose ratio sits above the 21% mark. The decrease indicates that the firm does not focus on using the profits to trigger enough income rather it has diverted attention to using the equities to fund expansion projects. In fact, it has been noted that in the recent financial period, Spectris had managed to acquire more than six companies that are now operating as its subsidiaries. Liquidity Ratios Year/ Ratio 2012 2013 2014 Current ratio=current assets/current liabilities Spectris Plc Morgan Advanced Materials Renishaw e2v technologies Halma 422.0/ 359.3 =1.17 407.1/212.7 = 1.91 186,578/56,380 = 3.09 114,692/61,257= 1.87 218,104/108,113=2.01 427.1/ 249.8 =1.71 384.8/252 = 1.53 186,551/43,775 =4.26 101,938/47,773=2.13 253,366/120,623=2.10 444.2/ 298.7 =1.49 394/250.8 = 1.58 223,837/40,202 =5.57 114,365/53,224=2.14 241,410/ 108,416 = 2.23 Quick ratio= current assets-inventory/current liabilities Spectris Plc Morgan Advanced Materials Renishaw e2v technologies Halma 422.0-163.8/ 359.3 = 0.72 407.1-139.9/212.7 =1.26 186,578-53,983/ 56,380 =2.35 114,692-43,584/ 61,257 =1.16 218,104-57,368/ 108,113 =1.49 427.1-162.0/ 249.8 =1.06 384.8-118.9/252 =1.05 186,551-65,268/ 43,775 = 2.77 101,938-43,954/47,773 =1.21 253,366-69,713/120,623 =1.52 444.2-175.7/ 298.7 =0.89 394-126.6/250.8 =1.06 223,837-62,979 /40,202 =4.00 114,365-39,629/53,224 =1.40 241,410-71,034 / 108,416 =1.57 Liquidity Analysis Spectris’ current ratio increases slightly within the three year financial period from 1.17 to 1.49 in 2012 and 2014 respectively. Despite this increase, the firm’s ratio value sits below all of its immediate competitors whose ratio sits above 2 ratio value except for Morgan Advanced Materials. This rather low ratio value indicates that the firm is slowly losing its grip needed for meeting possible short term commitments as and whenever they fall due. The decrease in the value can be attributed to its current acquisition strategy, which seems to utilising most of current assets especially cash and cash equivalent resources to purchase business segments. The same can be noted with its quick ratio, which decreases slightly within the same period from 0.72 to 0.89 in 2012 and 2014 respectively. The decrease ascertains that it is slowly lost its capacity to meet short term obligations due excessive use of cash resource to acquire other business segments. Financial Risk Ratios Ratio/ Year 2012 2013 2014 Debt-to-equity ratio= total debt/total equity Spectris Plc Morgan Advanced Materials Renishaw e2v technologies Halma 82.8+ 200.3/ 691.1 = 0.41 265+ 7.8/271.6 =1.0 - 38,303/131,436=0.29 64,014/398,112 =0.16 2.2+ 145.7/ 844.1 =0.18 201.5+61.0/274.1 =0.96 - 20,758/229,378=0.09 5,147+154,866/453,267 =0.35 50.9+ 109.5/ 916.0 =0.18 232.9+37.1/187.7 =1.44 - 13,705/238,285=0.06 4,136+ 104,891/ 486,000 =0.22 Interest coverage= EBIT/ Interest Cost Spectris Plc Morgan Advanced Materials: Renishaw: e2v technologies Halma 196.5/18.3 =10.74 99.4/24.3= 4.09 83,188/6,811=12.21 35,206/3,252=10.83 100,462/11,512= 8.72 185.9/13.7 =13.56 89.6/24.6 =3.64 81,974/6,169= 13.28 35,631/1,448=24.61 109,459/12,795=8.55 168.3/5.9 =28.53 54.3/22.9= 2.37 70,388/1,736=40.54 34,242/1,175=29.14 133337/5,340=24.97 Financial Risk Analysis The firm’s debt-to-equity ratio falls significantly within the three-year financial period from 0.41 to 0.18 in 2012 and 2014 respectively. The decrease is at par with most of the industry averages. It means that the company is trying so hard to eliminate debt finances within its capital composition in order to save on possible future payments of exorbitant finance costs. It also confirms that it is using most of equity funds to finance its acquisition strategy. Its interest coverage ratio also improves significantly within the same period to gain a favourable industry average position. It therefore means that it can successfully meet its finance costs more easily just like its immediate competitors like Halma, e2v technologies and Renishaw. Conclusion & Recommendation From the analysis above, it can be noted that Spectris’ profitability position is somehow poor in comparison to its immediate competitors and this is attributed to inefficient management policies in relation to asset and equity utilisation. The liquidity and financial risk position is somehow positive in comparison with the industry averages or rather competitors given that most of these firms tend to eliminate the existence of debt funds within its capital composition. Most of the firm’s profits and current assets especially cash resource is being used for expansion strategies. Therefore, my recommendation to DFM is to hold onto any shares they have with the company since there is a higher likelihood that the currently acquired business segments will catapult profits in future, which technically means that a larger percentage will be distributed as dividends. In fact, it can be seen that one of the non-executive directors of the company increased his share base by 500 more shares opting for future positive returns. Works Cited Spectris Plc. 2012-14 Annual reports. 2015, Retrieved from http://www.spectris.com/~/media/Files/S/Spectris/annual-interm-reports/2015/annual-report-2014-interactive.pdf The Telegraph. Performance by sectors. 2016, Retrieved on March 11, 2016 from http://shares.telegraph.co.uk/sectors/financials/sector/2730 Read More