Barclays bank Ratio analysis
A financial statement ratio is computed by dividing the pound amount of one item reported in the financial statements by the pound amount of another item reported. The aim is to express a relationship between two relevant items that are easy to interpret and compare with other information. Accounting ratios, rarely point towards the same direction as some may decline while others increase, hence a balanced assessment of the company’s progress will require a careful assessment of the relative significance of each ratio (Altman, 1968).
Barclays’ Accounting Ratios
Liquidity Ratios: they measure the ability of a firm to meet its obligations as they fall in the short-term period. The inability of a firm to pay its creditors may be forced into insolvency. These ratios include:
Current ratio: This ratio indicates the ability of Barclays bank to meet its short-term debts from its current assets.
It is given as Current assets/Current liabilities. For Barclays bank then it can be computed for the two years under study as follows.
Year 2009Â 1,214,451/1170487=1.04:1
year 2010 2034944/1975265=1.03:1
From the above, Barclays is in apposition to meet its short-term financial obligations.
Quick asset ratio: is computed as Current assets-stock/Current liabilities.
Year 2009Â 1,214,451-173,726/1170487=0.89:1
year 2010Â 2034944-185,646/1975265=0.93:1
There was a slight increase in this ratio in the year 2010.Thus Barclays was in a relatively better position to meet its short-term financial obligations.
Solvency Ratios: These are ratios are associated with the Long-term borrowing of Barclays Bank. Long-term borrowing increases the risk default in loan repayment. These ratios analyze the firm’s ability to satisfy its long-term commitments and still have sufficient capital to operate successfully. Barclay’s solvency ratios to be analyzed include:
Debt to total assets=total liabilities/total assets.
Year 2009 1195, 762/1,227,583=0.97:1
year 2010Â 2,009,455/2,053,029Â =0.97:1
This ratio has been maintained for the two years at the same level.
Times interest earned. This measures the ability of the firm to meet its interest payments out of current earnings. For Barclays this will be given as earnings before interest and taxinterest expense. For the years 2009 and 2010
Year 2009 7107/15,707=0.45:1
year 2010Â 6,035/16,595Â =0.36:1
The ratio dropped, indicating that the company’s interest expenses increased from the previous year 2009
Gearing ratio. This ratio is concerned with the company’s long-term capital structure. It measures how much a company owes its creditors in relation to its size. It is given as long-term debtshareholders equity+ long-term debt
Year 2009Â 120,228 /31821+20,226 =0.79:1
year 2010Â 153,426/43,574+153,426 =.078:1
The amount that the company owed creditors relative to its size reduced in the year 2010, meaning that the company was able to generate part of its financing capital relative to year 2009.
Other ratios
EARNINGS PER SHARE =profit after tax preference dividendsnumber of ordinary shares.
Year 2009 5126/ 2398 =2.19 pounds
year 2010Â 5249 /2398 =2.15 pounds.
Gross profit ratio =gross profitTotal income.
Year 2009 7107 /23523= 0.30%
year 2010Â 6035/23306=0.26%
Operating profit ratio=net profit after taxTotal income
Year 2009 5126 /23323= 0.22%
year 2010 5249 /23306=0.23%
There was an increase in operating profit ratio in the year 2010.
However, it has to be noted that evaluating an organization using financial perspective alone has some disadvantages that include:
Financial analysis is performed on historical data with the view to forecast future performance. The historical relationship may not continue to hold because of policies established by management, the general state of the economy and the business environment. It is assumed that constant relationship may lead to misleading results (Larson, Wild & Chapman, 1999).
Historical cost is used as a base of measuring the ratios. Failure to adjust to changing in fair value may result in some misleading information on a trend basis. Ratios are calculated based on year data, which may not be a reflection of the firms operations. Management may improve some ratios to reflect the information they want. Using ratios in comparing companies may not be very meaningful due to different methods of accounting used and the size of companies.
Financial strategies undertaken by Barclays bank
Financial strategies refer to various ways that the firm undertakes to achieve its financial objectives. These financial strategies are investment strategies, financing strategies, legal relations strategies and profit distribution strategies.
Barclays bank undertakes its financing strategies by accruing share capital from the shareholders, which at 31 December 20010 stood at 43,574 million pounds. This amount finances the operations of Barclays ensuring its continued meeting of its financial obligations as they fall through.
Barclays bank would be able to engage in investment activities through acquisition of portfolio assets that generate interests to the company. The long-term debt also ensures that the bank is able to undertake various investments (Martin & William, 2000).
Barclays bank also ensures that legal obligations are met; the company submits taxes to taxing authority, which at 31 December 2010 was 6,035 million pounds.
Barclays bank also distributes dividends to its shareholders as part of profit distribution, and at 31 December 2010, the amount distributed accounted for 4,446 million pounds. By undertaking the above obligations, the company ensures that it fulfills its various financial obligations and by doing so, the company thus attains its financial objectives.
Task 2: Undertaking new Projects
Scarcity of Capital that Barclays has to Consider before Undertaking the new Investments
The company, Barclays is to access the projects to invest in, and thus an analysis is to be undertaken.
The fact that capital is limited, the lenders of capital are restrictive in lending the funds to finance projects, because of the strict rules regarding the lending. Banks that extend lending tend to offer capital to those firms that can guarantee payment of principal and interest as they fall due and hence the lenders tend to consider firms having healthy financial statements. Moreover, federal reserve system also limit the amount to lend, requiring banks to maintain a certain ratio of their capital with them, thus restricting the amount of funds available for lending purposes.
For those companies who can float their stock on stock exchange, the stocks are also limited thus limiting the amount of funds that can be raised to fund the new investment. Companies are cautious on floating their shares because this limits the controlling stake. Borrowing has a limit because of high interests charged on the principal and the collateral required, and this limits the availability of resources that a firm can channel in the new project
To arrive at the best projects, the finance manager has to evaluate the viability of two projects and decide which project or projects to initiate. The finance manager has to consider the available resources to finance the projects and the future earning of those projects to be undertaken. At a times project tend to be mutually exclusive requiring only one project to be undertaken and such cases, the project to be undertaken has to have a higher Net Present Value and a higher internal rate of return than the other project. For independent projects, then the financial manager can undertake any project having a positive NPV, incase both projects have a positive NPV then they are all implemented. Capital budgeting is the essential tool for evaluating the projects and deciding which one among them is the best alternative to undertake.
Some terms to Consider under the Analysis of the Projects
NPV -net present value is the sum of the discounted values of the net cash flows from the investment.
IRR-is the discount rate that, when applied to the cash flows of a project, causes it to have a zero NPV (William, Hake & Meigs, 1996).
Illustration of Projects Proposed to be Undertaken By Barclays Bank
Consider that Barclays bank is considering such a move
Barclays bank is considering including two projects, project A and project B, project A is for installing 20 new ATM machines and project B will be for opening up a new branch. The cash outlay for the project is ÂŁ200,000 for installing new ATM machines and ÂŁ300,000 for opening up a new branch. The firm’s cost of capital is 12%.After tax cash flows, including depreciation, are as follows.
Installing New ATM Machines
Total present value 205,570
Thus the net present value=205,570-200,000=5,570
IRR analysis of the project
IRR= Given that IRR=L+ {A (A-B)} (H-L)
Where L= lower discounting rate yielding positive NPV.
H= higher discounting rate yielding negative NPV.
A= positive NPV
B=negative NPV
Thus IRR=
NPV at 12% is 5,570
Then we calculate NPV at 14%, since the cash flows are the same thought thus we use the present value interest factor annuity.
NPV at 14%= 50,000*PVIFA 14%, 6yrs
=50000*3.8887 =194,435
Thus NPV will be =194,435-200,000 = (5,565)
IRR=12+ {55705570+5565} [14-12] =13.0%
Setting Up a New Barclays Branch.
Total Present Value 308,355
Thus the net present value=308,355-300,000=8,355
NPV at 12% is 8,355
Then we calculate NPV at 14%, since the cash flows are the same thought thus we use the present value interest factor annuity.
NPV at 14%= 75,000*PVIFA 14%, 6yrs
=75000*3.8887 =291,625.5
Thus NPV will be =291,625.5-300,000 = (8,347.3)
IRR=12+ {8,3558,355+8,347.3} [14-12] =13.0%
An analysis based on the above computations:
Independent Projects
If the projects are independent then all of them should be considered because they both yield positive NPV under the current cost of capital.
Mutually Exclusive Projects
If the projects are mutually exclusive then it will be ideal to initiate the building of a new bank because its NPV is greater than the installing of new ATM machines.
Task 3: a Report on Seeking Capital by Barclays Bank through Floating shares on London Stock Exchange
To assess the viability of Barclays seeking capital through floating shares on London stock exchange.
Introduction
For Barclays to get acquire share capital from various investors then it has to float shares on London stock exchange, through an arrangement known as initial public offer. The public is invited to purchase the shares with an exchange of part ownership in the company. Reasons for Barclays seeking more capital are to finance the potential projects that the company seeks to undertake, in this case, the projects could range from more ATM installations on existing branches to undertaking an expansion project like setting up new bank branches.
Sources of capital available to a business
Capital markets-companies wishing to acquire more capital to finance various investments do so by floating shares on stock markets, under initial public offer arrangement, where the public is invited to buy a certain stake in the company. Venture capital, which is offered by organizations who engage in financing relatively high-risk investments, which other lenders of capital may be unwilling to provide. These organizations also offer screening of the projects that are undertaken by the companies seeking their funds; as a result, venture organizations are given a share of the profits that these businesses make (Gitman, 2009).
Family and friends-Entrepreneurs tend to seek support of friends and family members after exhausting their own initial investment funds. They seek funds for expansion purposes or for settling debts that fall due.
Debt in terms of borrowed capital from banks and other financial institutions
The companies repay the borrowed capital and the accruing interest has to be noted that the lender assess the viability of the company before advancing the loan.
Reasons why Barclays would opt for seeking this kind of financing
Share capital is relatively easy to acquire because an offer is made to the whole public inviting them to buy the shares and this increases the chance of raising such an amount, because it attracts varied potential shareholders who would be interested in investing in the company. Share capital interests are relatively easy to meet because the shareholders are only disbursed a share of profit, known as dividends.
Listing requirements on the London stock exchange that Barclays bank has to consider
The directors must prepare a prospectus, which outlines, the shares to be floated to potential investors (Richard & Dennis, 2009). Three years of the company accounts must be available and thus be submitted to the United Kingdom Listing Authority, a body which regulates listing of company on the London stock exchange (Rappaport, 1998). The bank needs a person or another organization that can sponsor its business activities while reassuring the UK listing authority that the firm still has sufficient quality and a going concern.
The debt securities and the shares must be £200,000 and £700,000 respectively in order to meet the required anticipated market value of all securities to be listed on the London stock exchange. After being listed, then Barclays and the directors have to ensure and continue providing information concerning the company’s market price. The management of the bank must also fully disclose its information accurately while the company directors are required to stick to the regulations pertaining the purchase and sale of the share they own in the bank. For Barclays bank thus to consider this kind of seeking funds for financing the projects, it has to adapt to these strict requirements and rules laid down by the United Kingdom listing Authority (Barclays, 2010).
Benefits of Barclays being listed on London stock exchange
Gaining new investors-potential investors are motivated to invest in listed companies because they are assured of protection and this protection is enhanced by stock market exchanges that regulate various operations of the listed companies (James & John, 2008).
Its a way of raising capital, incase Barclays seeks to finance a new project or continue funding an existing project as the company is about to do, then the company floats its shares on stock exchange market. This is ideal when the type of investment requires relatively huge amount of cash outlay and company at that point do not have the available amount to undertake such an investment (Kroll, 2004).
It enhances the liquidity of Barclays bank, due to continued trading in them by the investors and the potential investors.
The reputation and recognition of Barclays bank will be enhanced and thereby increasing its competitiveness among its competitors and thereby increasing its survival and continued growth.
Governance of Barclays bank will be enhanced. Management will be required to adhere to strict corporate governance rules and principles.
Employees will be highly motivated because they are also given an opportunity to purchase the traded stocks. This sense of ownership propels the workers to increase their productivity.
Limitations of being listed
Some ownership of Barclays has to relinquish to the investors and this limits the freedom to which Barclays can undertake its running. Management is forced to adhere to very strict rule set out by the United Kingdom listing authority, this may be demanding to the management
Conclusion
It will be of great value for Barclays to seek fund by being listed on London stock exchange because the benefits outweigh the limitations.
References
Altman, I. (1968) Financial ratios, Discriminate analysis and prediction of corporate bankruptcy, Journal of finance, 23, pp.589-609.
Barclays, (2010) Consolidated financial statements, balance sheet and income statement. Web.
Gitman, L. (2009) Principles of managerial finance: Financial statement and analysis, Boston: Pearson international edition.
James, V. & John, W. (2008) Fundamentals of financial management: tools of financial analysis, 13th edition, Boston: Pearson international edition.
Kroll, K. (2004) The Lowdown on Lean Accounting: A New Way of Looking at the Numbers. Journal of Accountancy. 198(1), 69.
Larson, K.D., Wild, J.J. & Chapman, B. (1999) Fundamentals of accounting principles: Ratio analysis.15th Ed. New York, NY: McGraw-Hill incorporation.
Martin, D. & William, J. (2000) Value based management: the corporate response to shareholder revolution. Boston, Harvard business school press.
Rappaport, A. (1998) Creating shareholder value: a guide for managers and investors, 2nd edition, New York, NY. The free press.
Richard, A. & Dennis, W. (2009) Quantitative investment analysis: Investment decisions. Edinburg: Person Educational limited.
William, J.R., Hake, S.F. & Meigs, R.F. (1996) Financial accounting: The basis of business decisions.12 Ed. New York, NY: McGraw-Hill Incorporation.
Appendices 1
Financial statement for the year ended 31 December 2010and 2009 Barclays bank
Barclay’s income statement Income statement.
Consolidated balance sheet statement.