Steelcast is the company in question for the November 2017 CIMA Strategic Case Study exam. The pre-seen tells us that Steelcast is a luxury watch manufacturer and is renowned as one of the leading brands in the world, instantly reminding us of real-life giant Rolex (although given Steelcast's focus on sportier luxury watches, it mimics Breitling and Tag Heuer more closely than Rolex). It's an interesting case, one which emphasises the importance of brand which is sometimes a tricky area for accountants to navigate due to the intangible nature of reputation. CIMA being a more rounded qualification than pure accounting qualifications such as ACCA and ACA, expects its students to have keener business acumen though. In any case, VIVA Financial Tuition is here to help and we've put together this article to outline the key points relating to the financial statements of both Steelcast and one of its competitors, Laine.
The consolidated statement of profit or loss for 2017 indicates impressive revenue growth of 17.6% for such a long-established firm. The fact that cost of sales have grown by just 9.9% in comparison indicates that the company has good cost discipline and/or their sales figures have been bolstered by higher selling price. Certainly, Steelcast is a firm with significant power to raise prices given how insensitive to price their customers are. The only cause for concern on the income statement is the rise in other operating expenses by 30% between 2016 and 2017. It's likely marketing costs would fall under this category so you can see the importance of the company's brand and the high cost of maintaining it with sponsorship of exclusive sporting events such as polo and yacht racing.
When we turn to Steelcast's consolidated statement of financial position it doesn't look as though the company has taken much effort to invest in its asset base to secure future revenues and profits. The company's capital employed (equity + non-current liabilities) figure rose by a conservative 3% between 2016 and 2017. We have seen from the revenue and profit figures that those figures rose substantially over the year though, indicating that Steelcast's asset base has produced very good returns in 2017. Indeed, return on capital employed ([operating profit/capital employed] x 100%) improved from 14% in 2016 to 15.1% in 2017. Most of the asset growth in 2017 comes in the form of trade receivables although receivable days stayed the same at 56 days due to the fact that revenues rose in line with receivables. It's also apparent that Steelcast is relying on internal funding to grow assets with retained earnings growing by H$275 million in 2017. It's been paying down long-term debt with gearing ([long-term debt/long-term debt + equity] x 100%) now standing at a relatively stable 26%. Steelcast is also a very liquid firm with its quick ratio ([current assets - inventory]/current liabilities) standing at 3.2, pointing to a company that emphasises liquidity over returns.
Laine is a competitor of Steelcast's that focuses on more ornate and subtle timepieces. Laine's revenues are 30% higher than Steelcast's even though Laine's total assets are just 12% higher, indicating a company whose assets work harder than Steelcast's. While Laine's revenue growth of 9.9% in 2017 is below that of Steelcast, net profit rose by an impressive 24.5%. This is because Laine seems to have a better control on its costs, especially its other operating expenses, which grew by 10.6% compared to growth of 30% for Steelcast. It seems sponsoring opera events as Laine does is less costly than flying polo teams and their horses around the world, as Steelcast does.
There are many similarities between the two companies in terms of their financial figures with profit margins, returns and activity ratios all being very similar. It's notable that Laine carries less debt than Steelcast, with their gearing ratio standing at just 16% in 2017 compared to Steelcast's 26%. Laine also seems to pay out a much higher dividend to its shareholders than Steelcast, with 78% of their 2017 net profit being sent to shareholders compared to just 45% of Steelcast's net profit going to their shareholders. Considering the weak share price performance for Steelcast over the last five years, investors may be tempted to opt for Laine's stock to secure better returns thus making equity financing harder to attain for Steelcast.
In conclusion, Steelcast is a company with relatively few financial problems. Financial performance has been excellent in 2017 with only rising costs in the other operating expenses category a cause for concern. Steelcast is also a liquid and solvent firm although it could look to invest more in its asset base to secure future revenue and profit growth.
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