FINANCIAL PERFORMANCE REPORT FOR MPLC

DATE: 12 June 2011

TO BOARD OF DIRECTORS MICROCHIPS PLC

FROM VINAY RAMAMURTHY

SUBJECT FINANCIAL PERFORMANCE ASSESSMENT OF MPLC

VINAY RAMAMURTHY, SMU

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FINANCIAL PERFORMANCE REPORT FOR MPLC

INDEX OF THE FINANCIAL REPORT

TITLE

Page no.

1. INTRODUCTION 3 2. PROFITABILITY. 4 2.1 GROSS PROFIT... 4 2.2 NET PROFIT. 4 2.3 RETURN ON CAPITAL EMPLOYED... 5 3. LIQUIDITY 6 3.1 CURRENT RATIO 6 3.2 QUICK RATIO (Acid Test).. 7 4. EFFICIENCY 7 4.1 STOCK TURN OVER IN DAYS. 7 4.2 FIXED ASSET PRODUCTIVITY 8 4.3 WORKING CAPTIAL TURNOVER 9 4.4 STOCK TURNOVER... 10 4.5 DEBTORS CONTROL 10 4.6 CREDITORS CONTROL 11 5. INVESTMENT 12 5.1 EARNINGS PER SHARE... 12 5.2 INTEREST COVER. 13 5.3 DIVIDEND COVER.. 14 5.4 DIVIDEND YIELD 14 5.5 RETURN ON EQUITY 15 5.6 AVERAGE SHARE PRICE. 16 5.7 PRICE/EARNING (P/E) RATIO.. 16 6. GEARING.. 17 7. CONCLUSIONS 19 8. RECOMMENDATIONS AND SUGGESTIONS 20

VINAY RAMAMURTHY, SMU

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FINANCIAL PERFORMANCE REPORT FOR MPLC

1. INTRODUCTION: In the following report on Microchips PLC which is a manufacturer of electronic components- I have analysed, made recommendations and suggested few areas which have a need for further investigation based on the financial information of the past four years alongside its comparisons with similar sized businesses and the business sector norms. Considering the financial data provided, the report speaks on five major areas of discussion like Profitability Liquidity Efficiency Investment Gearing By the end of this report the board of directors of Microchips PLC would be able to clearly understand the major areas of concerns to the business which needs to be considered for further betterment.

VINAY RAMAMURTHY, SMU

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FINANCIAL PERFORMANCE REPORT FOR MPLC

2. PROFITABILITY 2.1. Gross profit

Gross profit % 100%

2006 Gross Profit 37.1% 2007 34.8%

sales cos t of sales sales

2008 32.5% 2009 29.0% Similar Business sized Sector competitor Norms 29% 34%

Comments: The figures suggests a downward trend which is not a good sign as this needs to be maintained as high as possible because the business expenses also need be deducted from it. Can see a 21.7% reduction from 2006 to 2009 in the gross profit. The gross profit of MPLC is equal to similar sized competitor which is 29% but falls below by 5% in comparison with the business sector norms which is 34%. There is a need for increase in gross profits as compared to business sector norms which are not satisfactory at the moment.

Possible Reasons: The company has lost control over sales prices and the volume of sales. The cost of sales has increased faster than the rate of sales. The company has not managed the cost of material and all direct costs efficiently.

2.2. Net profit

Net profit % 100%

2006 Net profit 2.0%

Profit Before I nt eres t A n d Tax sales

2008 4.4% 2009 3.3% Similar Business sized Sector competitor Norms 7% 9%

2007 3.8%

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FINANCIAL PERFORMANCE REPORT FOR MPLC

Comments: The net profits were shooting up from the year 2006-2008 and came down in the coming year 2009. The overall net profit ratio is 3.3% which is very low when compared to the business norm which is 9%. Whereas the similar sized competitor ratio is 7% which is much higher compare to that of MPLC.

Possible Reasons: 2006-2007 8.6% 2007-2008 6.7% 2008-2009 4.0%

Sales

There may be rapid increase in administration and the overhead costs in comparison to the actual sales itself. The rise in maintenance of warehouses, fuel hike (transport), the price of products with competitors may be one among the possible reasons. Further investigations are needed into the alarming increase in overhead expenses which are a priority at this point of time.

2.3. Return on capital employed

Re turn on capital employed % 100%

2006 Return on Capital 3.4% employed Comments: 2007

Profit Before I nt eres t A n d Tax Capital Employed

2009 Similar Business sized Sector competitor Norms 5.7% 6.4%

2008

3.2%

3.0%

2.7%

The goal is to maintain the capital employed as high as possible. There was a downward trend of 3.4% in 2005 to 2.7% in 2008. Return on capital employed is 2.7% which is insufficient compared to similar sized competitors return of 5.7%. Even the Business Sector Norms had to be 6.4% and the ratio falls behind by a big margin. The company seems to be inefficient as the ratio indicated is very low.

VINAY RAMAMURTHY, SMU

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FINANCIAL PERFORMANCE REPORT FOR MPLC

Possible Reasons: The main reason for the situation may be the company taking up long term loans form banks. The cost of sales and distribution costs are growing at a faster rate than the actual sales. Need for new technology to be in place and look out for business expansion may have increased costs. Strict rules and regulations by the European regulations may force additional costs to the company.

3. LIQUIDITY 3.1. Current ratio

Current Ratio

Current Assets Current liabilities

2007 3.5 2008 3.6 2009 3.7 Similar Business sized Sector competitor Norms 2.2 2.0

2006 Current Ratio Comments: 3.5

The normal range for manufacturing sector is between 1.52.0. It is less costly but risky if the value is less than 1.5 on the other hand it would be more costly but secure if it is the more than 2.0. The current ratio is always higher than 2.0 which is not a very good indicator also indicates poor control over stocks, creditors and debtors. The value of the competitors is close to the normal range which is not a good indication to the company.

Possible Reasons: This situation may arise due to improper or poor financial management. Proper management of current assets and liabilities would be better to the company.

VINAY RAMAMURTHY, SMU

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FINANCIAL PERFORMANCE REPORT FOR MPLC

3.2. Quick ratio (Acid Test)

Quick Ratio

Current Assets Stock Current liabilities

Similar Business sized Sector competitor Norms 1.9 2.0

2006 Quick Ratio 2.50

2007 2.30

2008 2.00

2009 1.30

Comments: The normal business sector norm is between 1.0-1.5 If this ratio is less than 1.0 it means less costly, good but more risky and the business is known as technically insolvent , whereas if it is more than 1.5 it is not good, costly and not secure. From 2006-2009 the ratio is falling from 2.50 to 1.30 which is a good indicator. The companys ratio in 2009 has gone down to 1.30 which is satisfactory when compared to the business sector norms. The similar sized competitors ratio is 1.9 which is good as compared to the companys quick ratio and satisfying the business norm. The quick ratio was too high in 2006 at 2.5, but reduces to satisfactory level of 1.3 in 2009.

Possible Reasons: Poor stock or inventory control management may one of the reasons. Might have no proper control on flow of current assets and current liabilities.

4. EFFICIENCY 4.1. Stock turnover in days

Stock Turnover in days 365

stock cos t of sales

2008 2009 Similar Business sized Sector competitor Norms 48 42

2006 Stock turnover in days

2007

65

69

80

89

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FINANCIAL PERFORMANCE REPORT FOR MPLC

Comments: The objective here is to hold back as little as possible but make sure it does not affect production and sales. The figures suggest an upward trend which is not a sign of better efficiency in management of stock holdings. The stock turn over in days is indicated as 89 days which is very high compared to the business sector norm of 42 days. If the similar sized competitors can do the same in 48 days why is the company holding it for 89 days? The costs of holding stocks are high which adds to overhead of business and thereby reducing profits. The company can follow just in time stock management would further increase the level of efficiency and solving the problem down the supplier chain.

Possible Reasons: The costs of holding and financing stocks are high adding to the overhead. Lack of suppliers due to increase in competition. There might have been boycotts and strikes which would affect the company at this point of time.

4.2. Fixed asset productivity

Fixed asset productivity

sales fixed assets

Similar Business sized Sector competitor Norms 2 2.5

2006 Fixed assets productivity Comments: Year on year change 2006-2007 Sales +8.6 Fixed Assets +10.67 1.46

2007 1.43

2008 1.39

2009 1.27

2007-2008 +6.74 +9.64

2008-2009 +4.02 +13.60

VINAY RAMAMURTHY, SMU

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FINANCIAL PERFORMANCE REPORT FOR MPLC

There is a significant downward trend seen, as the figures indicate from the period of 2006 to 2009 by a range of 1.46 to 1.27. This ratio is an indicator of how effectively the business is using its fixed assets to generate sales. The companys ratio is 1.27 which indicates inefficient management when compared to that of the business sector norm which is 2.5. This ratio is linked with return on capital employed and this investment is mainly financed from bank loans and overdrafts. The percentage of growth in fixed assets is greater than percentage of growth in sales. This signifies the possible new investment in Fixed Assets or expansion. The companys fixed assets productivity is 1.27 whereas similar sized competitor productivity is 2 which is far better.

Possible Reasons: The company might be on the look for new technology, innovation and invest in other long term projects which may yield profits later. The company may be going through the classic product life cycle at this point of time. The reason for the reduction in this is due to the growth in fixed assets which is far higher than the growth of sales.

4.3. Working Capital Turnover

Working Capital Turnover

2006 Working Capital turnover Comments: 2007

Sales Working Capital

2008 2009 Similar Business sized Sector competitor Norms 3.5 4.0

2.80

2.60

2.40

2.30

The objective is to have a high working capital turnover. Poor financial management indicates lower working capital of the company. The working capital is positive when the current assets exceed current liabilities and becomes negative if current liabilities are more than current assets. The figures suggest a downward trend which indicates poor management.
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VINAY RAMAMURTHY, SMU

FINANCIAL PERFORMANCE REPORT FOR MPLC

The companys efficiency is poor as its capital turnover is 2.5 compared to similar sized competitors turnover of 3.5 times. Financial management is inefficient and not satisfactory as the business sector norm is 4.0 times and they lag behind by a comparative margin.

Possible Reasons: Lacks control over working capital of the company. The company may have invested in capital assets which not may be unsuccessful. The new investment would not have generated sales and revenue for the benefits of company in making profits.

4.4. Stock turnover Stock turnover = cost of sales Stock 2006 Stock turnover Comments: The downward trend indicates better efficiency in management of stock holdings. The stock turnover rate which is 4.80 at the moment is good when compared to the similar sized competitors rate of 6.0 which is high. The business sector norm is 9.0 but the company turnover is only 4.80 which is an area which needs to be looked into consideration for the future. 5.90 2007 5.60 2008 5.0 2009 4.80 Similar Business sized sector competitor norms 6.0 9.0

Possible Reasons: Costs of stock holdings may be higher compared to earlier. There may be an increase in financial stocks. Decrease in sales may also be one of the reasons.

4.5. Debtors control

Debtors (Re ceivables )Control 365

Debtors sales

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FINANCIAL PERFORMANCE REPORT FOR MPLC

2006 Debtors collection period Comments:

2007

2008

2009

Similar Business sized sector competitor norms 56 70

80

88

92

96

The objective is to recover the money from the creditors at the earliest. The figures suggest an increasing trend which is not good for any company. It indicates poor and weak financial management as the number of days has increased from 80 to 92 during the period of 2006 to 2009. On an average the company takes 89 days to recover money from the customers which is too high when compared to the business sector norm of 70 days. On the other hand similar sized businesses take 56 days which is very efficient than compared to the company.

Possible reasons: The company might not have proper policies or fine customers who pay their debts late. Smaller organizations dealing with big companies may not be able to excerpt pressure for quicker payments. Due to increase in the number of competitors the company may be forced to increase the collection period.

4.6. Creditors control

Creditors ( Payables )Control 365

Trade Creditors cos t of sales

Similar Business sized sector competitor norms 46 53

2006 Creditors collection period

2007

2008

2009

45

48

49

40

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Comments: The standard credit limit ranges from 30 to 45 days in general depending on the type of business or contract agreed upon prior. The operating cash cycle which is the time period between payment made to the creditor to the goods supplied and receipt of cash from the debtor is too high. The longer time this cash cycle means the company requires more finance and it is at greater financial risks. On an average the figures indicate more than usual which poor management according to financial terms. The company is paying its bills within 45 days which is way too early than the business sector norms which is 53 days. The similar sized competitor is paying in 46 days and taking the advantage of paying the credit whereas the company is not taking the advantage of Normal terms of credit.

Possible Reasons: The longer duration of cash cycle may be the main cause for the situation. Make early payments to get any offers. Maintain a good terms on business lines for the future.

5. INVESTMENT 5.1. Earnings per share Earnings per share = Profit after tax and interest Number of ordinary shares Similar Business sized sector competitor norms 0.75 1.25

2006 Earnings per share 0.9

2007 0.98

2008 1.04

2009 0.95

Comments: There is fluctuation in the share values throughout the period. In 2006 the share holders were getting 0.9 in 2006 to 0.95 in 2009 and there was a decrease of 0.09 from previous year. The company may not be very inefficient or poor financial management as per the business sector norms of 1.25.

VINAY RAMAMURTHY, SMU

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FINANCIAL PERFORMANCE REPORT FOR MPLC

The decline of gross, net profit and return on capital employed may be the reason for the above. According to business sector norms for every 1 (1 share) invested the returns should be 1.25 whereas the company is getting returns of 0.95 which is not a good indication.

Possible Reasons: The fall of net profits and return on capital employed may be one of the reasons for this. The company is influenced by expansion and has invested in fixed assets which have not gone well into sales turnover and profits.

5.2. Interest cover

Interest Cover
2006 Interest cover Comments: 2.5

Profit Before I nt eres t A n d Tax Interest on loans

2007 2.2 2008 2.0 2009 1.4 Similar Business sized sector competitor norms 4.6 5.0

The figures suggest a downward trend which is not good for the company as it puts the banks in a state of bother about the companys future in the business and banks may start worrying about non-payment of interest. According to the business sector norms banks look out for reasonable interest cover of 4-6 times for safety. If the figures do not fall into this range bank may call in for overdraft or file petition for liquidation or bankruptcy to obtain repayment of the loans. The interest cover of the similar sized company is 4.6 which is better when compared to 1.4 times.

Possible Reasons: The reason may be the company taking up long term loans. The profits may not be falling into place at relative terms as the new sales or profit from sales is not coming through yet.
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FINANCIAL PERFORMANCE REPORT FOR MPLC

5.3. Dividend cover Dividend cover = profit after interest and tax Dividend paid

2006 Dividend cover 1.5

2007 2.4

2008 2.7

2009 3.0

Similar Business sized Sector competitor Norms 2.9 3.5

Comments: This could also be seen as a retention ratio. A high dividend cover ratio signifies high retention and investment of profit in business and a high dividend cover ratio signifies low retention. The figures suggest an upward trend as it has increased from 1.5 in the year 2006 to 3.0 in the year 2009. It is prudent for a company to retain at least some of its earnings to provide future investment and hopefully therefore higher future profits and insufficient dividend cover may prejudice capital growth. The company dividend cover is high compare to similar sized competitor which is 2.9 and it is not bad according to the business sector norm which is 3.5 times. From a share holders perspective it may be disappointing as they will be paid lower dividends accordingly.

Possible Reasons: The company has invested in future projects and looking for a better state of improvement shortly.

5.4. Divided Yield

Dividend Yied

Dividend per share 100% Market value per share

2006 2007 2008 Similar Business sized sector competitor norms
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2005

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FINANCIAL PERFORMANCE REPORT FOR MPLC

Dividend yield Comments:

5.3%

3.22%

2.64%

2.09%

3.15%

1.60%

The dividend yield is directly proportional to the cover so it is obvious that the average share price increases. An ordinary share holder expects dividend as well as capital growth of the company which measures the rate of income of the company. The downward trend indicates poor financial management as well. The dividend is favorable for the company at this moment as it is higher than the business sector norm but it is heading in the wrong direction in the future.

Possible Reasons: The change in dividend per share and also the market per value share may be the reasons for this.

5.5. Return on Equity Return on Equity = profit after interest and tax 100% Ordinary shares + reserves 2006 Return on equity Comments: The return on equity can be used to find out the profit the business makes over a period of time. As the figures suggest the company makes a profit from 2006 to 2008 as there is an increase from 4.8% to 5.5%. In the coming year there is a decrease by 0.5% in the profit which is not a good sign and indicates risk for the investors. Similar sized competitor returns are 7.5% when compared to companys 5.0%. The companys return on equity is 5.0% which is half of the business sector norm and says clearly that it is not a good indicator for a business. 4.8% 2007 5.2% 2008 5.5% 2009 5.0% Similar sized competitor 7.5% Business sector norms 10%

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Possible reasons: There may be investment in new upcoming technologies and products which can be considered as future assets. This might be the reason for low profits.

5.6 Average Share price: Similar Business sized sector competitor norms 8.25 22.5

2006 Average share price Comments:

2007

2008

2009

11.70

12.74

14.56

15.20

The upward trend is a good indication to the company. The companys average price share which is 15.20 is not poor but falls on the lower end when compared to the business sector norm which is at 22.5. It is quite good when compared the similar sized competitors whose average share price is 8.25 per share. These suggest good management of earnings per share by the company.

5.7. Price/Earning (P/E) Ratio Price/earning = current share market price Earning per share Similar sized competitor 11 Business sector norms 18

2006 P/E ratio 13

2007 13

2008 14

2009 16

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Comments: The increase in the P/E ratio indicates the strength of the investors. As the share value is growing by year the investor is confident to buy more shares which is a source of investment to the companys future. From the figures we can see the business P/E trend was increase from 13 in 2005 to 16 in 2008. The company P/E ratio is 16 which is a good indicator when compared to similar sized competitor which is 11. The business sector norm is 18 so the company lags by just a small margin which is not a major area of concern at this moment of time.

Possible Reasons: The earnings per share may be the reason. As the current market share is good the companys P/E ratio is doing well at this point of time.

6. Gearing

Gearing 100%
Gearing 100%

Long Term Loans Ord .shareholders Funds

Long Term Loans Total Capital Employed

OR

2006 Gearing Comments: 45%

2007 50%

2008 55%

2009 74%

Similar sized competitor 54%

Business sector norms 50%

Ranges of gearing for ratio are: Low Gearing is between 20% - 35% which indicates Low risk. Medium Gearing is between 35% - 55% which indicates Medium risk. High Gearing is above 55% and indicates High risk.

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The figures suggest the gearing ratio was less than 55% from 2006 to 2007. In the coming years the gearing ratios increased to 55% and above whih indicates a high risk. As per the business sector norms the gearing ratio should be 50% but the company is having 74% which is at very high risk. Similar sized competitor gearing ratio is 54% where as the companys ratio is 74% which is at more risk than its competitors. The gearing ratio is pushed to a high due to the long term bank loans and the investment in new future assets. With respect to the data the company is making losses due to high gearing ratio with low profits this time.

Possible Reasons: A downward trend can be seen in the company. The company making a low profit can be one of the reasons for this and the earnings per share and interest cover is not meeting the business norms. A low interest cover could also be one of the reasons.

VINAY RAMAMURTHY, SMU

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7. CONCLUSIONS: Analysis of the financial data at first indicates the company is at high risk due to the high gearing ratio which may also lead the company to become insolvent. The interest cover of the company is indicated very low which needs to be considered as a priority. The financial ratios indicate the company is at a state of survival or running under losses as they are not satisfying the business sector norms. The report also indicates the competitors or the similar sized business are doing well and have efficient financial management systems in place when compared to the company. We can see the companys interest towards their growth by investing in new future technology, new products and other assets which may be of significant importance in the near future to see better development and progress. The share holders and investors can look forward to invest in the company if the progress in the future is in a positive direction.

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8. RECOMMENDATIONS AND SUGGESTIONS:

The company must figure out why the cost of sales are increasing are increasing every year at a high rate and try to increase the gross profit. A detailed examination into the distribution costs like warehouses, costs of products taken to customers, fuel hike etc is very essential to keep up the net profit of the company. There must be a proper control on flow of current assets, liabilities, efficient financial management system to keep up the liquidity ratio of the company which at the moment seems to be very inefficient. The company should minimize investing in further capital assets, new technologies and increase the working capital which reflects on its overall efficiency. The company must start making use of normal terms of credit period and minimize the debtors collection periods. The company should stop taking long term loans from banks and should focus more on high returns on the investment which in turn can keep up the earning per share value high. It must focus on increasing the sales and making profits and at the same time have control on the interest cover as the gearing ratio is high indicating risk to the companys survival.

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