.. ARY FINANCIAL RATIOS GEARING AND LIQUITY. 3.1 Gearing Ratio. Whatever method is used to compute gearing, a company with low gearing is one financed predominantly by equity, whereas a highly geared company is one which relies on borrowings for a significant proportion of its capital. It can be defined like this: Long Term Debt Gearing Ratio = Shareholder Fund 804(million) The Gearing Ratio for 1997 was: = 57.8% 1388.9(million) 1320.5(million) The Gearing Ratio for 1998 is: = 148.6% 888.6(million) The National Grid Group Plc Company may it has loss in 1998 because they have given more total dividend to their shareholders than 1997, and thats why they have retained loss in 1998 (516.3 million), instead the Company used to have Profit on Ordinary activities after taxation (441.3 million) so the shareholders funds had been reduced from 1388.9 million in 1997 to 888.6 million in 1998.

But from the other side of view Creditors (amounts following due after more than one year) have been increased in 1998 to \$1320.5 million from 804 million in 1997. Because of this all the above exist this high Gearing Ratios to that Company so the managers must take in to consideration this phenomenon. 3.2 Liquidity Ratio. Liquidity ratios are ratios that show the relationship of a firms cash and other current assets to its current liabilities. It is also concerned with the amount of assets held as cash or cash equivalents.

3.2.1 Current Ratio. The Current Ratio is calculated by dividing current assets by current liabilities: Current Assets Current Ratio = Current liabilities Current assets normally include cash, marketable securities, accounts receivable, and inventories. Current liabilities consist of accounts payable, short-term notes payable, current maturities of long-term debt, accrued income taxes, and other accrued expenses (principally wages). If a company is getting into financial difficulty, it begins paying its bills (account payable) more slowly, borrowing more from its bank, and so on. If current liabilities are rising faster than current assets, the current ratio will fall, and this could spell trouble.

Essay due? We'll write it for you!
For You For Only \$13.90/page!

order now

Because the current ratio provides the best single indicator of the extent to which the claims of short-term creditors are covered by assets that are expected to be converted to cash fairly quickly, it is most commonly used measure of short-term solvency. Care must be taken when examining the current ratio, just as it should be when examining any ratio individually. For example, just because a firm has a low current ratio, even one bellow 1.0, this does not mean the current obligations cannot be met. 368.2 (million) The Current Ratio for 1997 was: = 0.378:1 973.7 (million) 384 (million) The Current Ratio for 1998 is: = 0.347:1 1105.3 (million) 3.2.2 Quick or Acid Ratio. The Quick or Acid Ratio is calculated by deducting inventories from current assets and then dividing the remainder by current liabilities: Current Assets Stock Quick or Acid Ratio = Current Liabilities Stock (Inventories) typically are the least liquid of a firms current assets, hence they are the assets on which losses are most likely to occur in the event of liquidation.

Therefore, a measure of the firms ability to pay off short-term obligations without relying on the sale of inventories is important. 368 100 (million) The Ratio of 1997 was: = 0.257:1 973.7 (million) 384 – 84 (million) The ratio for 1998 is: = 0.271:1 1105.3(million) 4.0 CASH FLOW The statement of Cash Flow is designed to show how the firms operations have affected its cash position by examining the investment (uses of cash) and financing decisions (sources of cash) of the firm. The information contained in the statement of cash flows can help answer such questions as: Is the firm generating the cash needed to purchase additional fixed assets for growth? Is growth so rapid that external financing is required both to maintain operations and for investment in new fixed assets? Does the firm have excess cash flows that can be used to repay debt or to invest in new products? This information is useful both for financial managers and investors, so the statement of cash flows is an important part of the annual report. For National Grid Group Plc, net cash inflow from continuing operations fell from 877.3 million in 1996/97 to 615.2 million, primarily as a result of lower operating profits. Cash inflow benefited by 203.1 million as a consequence of the global offer and listing of Energies shares. Payments to the providers of finance, in the form of dividends and interest, totalled 997.6 million, compared with 269.8 million in 1996/97: of this, 768.6 million related to the special dividend. Net purchases of tangible fixed assets absorbed cash of 286.4 million, compared to 279.1 million in 1996/97.

29.9 million was invested in increasing the Groups interest in Citelec from 15 per cent to 41.25 per cent and15.4 million in acquiring a 38.9 per cent interest in the Copperbeit Energy Corporation, Zambia. The most significant financing initiative of the year was the issue of 460 million of 4.25 per cent exchangeable bonds due 2008, the net proceeds of which were 448.0 million. The exchangeable bonds represent competitive medium-term financing for the Group and the structure of the bonds affords the Group significant flexibility in deterring its longer-term capital structure based on its future requirements. CONCLUSION. I can now believe that I have guided you about the National Grid Group Plc Company with the Annual Review.

So if someone wants to invest in this Company must first read this assignment in order to understand something about this and after that to decide what to do. RECOMENTATIONS. As far as I am concerned, I truly believe that the National Grid Group Plc Company must take into consideration some factors that may help them in order to improve their company as a hall or to increase their profit and minimise their expenses. First of all they must find ways in order to increase the Return on Shareholder funds. For example minimise the cost by integrating and enforcing a Computerise new Company. In other words to have a consistently high rate of return on shareholders equity.

Second they must have an above-average record of earning per share. In 1997 for the Company it was 24.3 pence and 1998 has increased to 26.1 pence. Next they must have a strong level of retained earnings. So the company must reduced the dividends to the minimum in order to have more retained earnings and no losses, and then they will increase their shareholders funds and to reduced the current and long turn liabilities. The Profit Margin of the Company in 1998 is: (PBIT / SALES = 40%).

So this is a nice thing for the Company, but because they own a lot of money in Debts (Long Turn), they pay a lot of interest so it minimises at the end of the day the Retained Profit. Thats why they have to increase the at least the Profit Margin. About the Cash flow, because of the decreasing rate of profits of the year 1998, the Net Cash Inflow has been decreased (increases the Cash Outflow) because of the interest of the increased and Dividend paid. As well as, they have to decrease the Current Liabilities and to increase the Current Assets. Also to decrease the Gearing Ratio, (decrease the Long Turn Liabilities). Bibliography 1.

Geoffrey H., Alan S. (1993) Interpreting Company Reports and Accounts. Woodhead-Faulkner Limited. 2. Barry E., Jamie E.

1996 Financial Accounting & Reporting. Prentice Hall. 3. Allan P. (1994) Accounting and Finance.

UK: Redwood Books. 4. Weston B. B. (1996) Essentials of Managerial Finance. Dryden Press.