Financial Analysis of Electrocomponents

Brief: 193028

Title: Fiscal Analysis of Electrocomponents

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Electrocomponents is a distributer of electronic, electrical and industrial merchandises to clients chiefly in the research and development or care field. The company was established as Allied Electronic in North America in 1928 and as Radiospares in London in 1937 [ 1 ] . It floated as Electrocomponents plc on the London Stock Exchange in 1967. The company has a planetary presence with operating companies in 26 states and distributers in many more states. It trades as RS in most of Europe, Africa and Asia, Radiospares in France and Allied Electronic in North America.

For the twelvemonth ended 31 March 2006, the company had an one-year turnover of ?828.5 million, an addition of 7.1 % over the twelvemonth ended 31 March 2005 ( See Appendix I for inside informations ) . Though the grosss increased by 7.1 % , gross net incomes increased by 3.5 % merely bespeaking a bead in gross border and tighter markets. Operating net incomes were lower by 32 % due to higher selling and distribution costs. Net incomes before revenue enhancement were lower by 34.8 % due to higher fiscal disbursals and reorganization costs. The net income after revenue enhancement border in the twelvemonth 2006 was 5.3 % while the corresponding figure in 2005 was 8.7 % . This bead indicates lower profitableness partly due to one-off reorganization costs and partly due to selling and distribution disbursals.

The distribution industry is much segmented with a big figure of little and medium participants. One ground for big figure of distributers is the presence of big figure of little makers who have entered sole distribution rights with different distributers.

The company faces following chief hazards:

  • Economic lag. Slowdown in planetary economic system will cut down the demand of its merchandises and hence net incomes. Fixed costs in footings of warehouse installations can’t be scaled down easy impacting profitableness more.
  • Foreign exchange. As Electrocomponents operates worldwide, beef uping of Pound against Euro, US Dollar and other major currencies will take down its grosss and net incomes in Pounds.
  • Interest rate. Addition in involvement rate will cut down net incomes

Chart I shows the biennial portion monetary value graph of Electrocomponents. After the terminal of last fiscal twelvemonth in March 2006, portion monetary value dropped due to take down net incomes. But since Sep 2006, portion monetary value has once more moved upwards anticipating higher net incomes in future. Company announced six months consequences after Sep 2006. The after revenue enhancement increased by 4.4 % over the corresponding period ended Sep 2005. Increase in net incomes after a bead in the old twelvemonth gave assurance about the company and its portion monetary value has increased since so.

Chart I – Electrocomponents’ portion monetary value motion


( Beginning: Yokel Finance, hypertext transfer protocol: // s=ECM.L & A ; t=2y & A ; l=on & A ; z=m & A ; q=l & A ; c= )

Electrocomponents’ portion monetary value is 290.5 pence [ 2 ] . Price to gaining ratio is 28 based on the fiscal twelvemonth March 2006. Even if Electrocomponent reaches 2005 gaining per portion of 15.5, P/E ratio will still be 20, which is high.

2 )

Appendix II shows the different beginnings of finance for the twelvemonth ended 31 March 2006. Electrocomponents had entire assets of ?703.3 million. These assets were financed by entire liabilities of ?366.9 million. Liabilitiess represent 52.5 % of entire assets intending that out of every ?1 of plus, 52.2 pence is owed to non-shareholders.

The company has adoptions of ?160.2 million merely as most of the current liabilities are sum owed to merchandise creditors and non-interest bearing. Net adoptions are merely ?120.8 million. As seen in appendix I – balance sheet, Electrocomponents had ?133.8 million of touchable assets and hence loaners are to the full secured through touchable assets.

Gearing ratio = Net debt / ( Net debt + Shareholders financess )

= 120.8 / ( 120.8 + 336.4 ) = 26.4 %

Electrocomponents pitching ratio of 26.4 % means that fiscal geartrain is moderate and there is non important fright of bankruptcy due to high geartrain. Besides if need arises in future, it can take on more debt.

Appendix II shows the 5-year dividend history of Electrocomponents. There was no alteration in dividend in the last fiscal twelvemonth in malice of important bead in gaining per portion. This is likely because the direction thinks that the bead in net incomes is impermanent and net incomes will increase shortly. This is besides a manner of directing strong signal about future public presentation to the market. Besides notable is the fact that in all five old ages, dividend to gaining per portion ratio is more than 1. This is possible because hard currency flows from operations were more than the net net income and hard currency escape was higher than hard currency influx.

Now we analyse the cost of capital which has two constituents – cost of debt and cost of equity.

Most of the debt was at 3.7 % [ 3 ] . Since so the bank rates have gone up by 0.75 % , so cost of debt, Rd = 4.45 % [ 4 ] .

Cost of equity capital = Re = Rf + Be* ( Rm – Rf )

Risk-free rate, Rf = 4.96 % [ 5 ] ( 10-year output on UK gilding )

Expected market return, Rm = 12 %

Beta = Be = 1.52, as calculated in inquiry 4

Re = 4.96 % + 1.52* ( 12 % – 4.96 % ) = 15.66 %

Cost of capital = R = Rd* ( 1-T ) *D/ ( D+E ) + Re*E/ ( D+E )


E = Shareholders financess = ?336.4 million

D = Debt = ?160.2 million

Cost of capital, Re = 11.61 %

Appendix IV shows the on the job capital analysis. Current ratio ( current assets / current liabilities ) , a step of the liquidness, is 2.26 in 2006 which means for every ?1 of current liability, the company has ?2.26 worth of current assets. Current ratio of more than 1 agencies that current liabilities can easy be met without fall backing to fixed assets.

A more conservative step of liquidness is speedy ratio which is current assets minus stock divided by current liabilities. Electrocomponents’ speedy ratio is besides more than 1 and hence liquidness is good.

Debtor yearss have increased from 60 to 63 in 2006. The company is utilizing more of its money in financing the concern. Creditor yearss have besides increased by 1 to 34 in 2006. As debitor yearss are higher, the company has positive working capital demands and hence demands more external funding.

3 )

Harmonizing to the efficient market hypothesis, it is impossible to systematically surpass the market. There are three chief types of market efficiencies [ 6 ] :

  • Weak-form efficiency. Harmonizing to this, no extra returns can be earned by utilizing investing schemes based on proficient analysis although cardinal analysis may give better returns.
  • Semi-strong signifier efficiency. Share monetary values adjust within little sum of clip and in an indifferent manner to publically available new information and hence no consistent unnatural additions cane be achieved by cardinal analysis.
  • Strong signifier of efficiency. Share monetary values reflect all information and no 1 can gain extra returns.

Stock Market Efficiency is of import for any house where directors are different from the proprietors and can take to principal-agent job. Absence of SME will cut down the religion of proprietors and in such scenarios stockholders usually demand a price reduction in portion monetary value. Hence SME is of import for the assurance of the stockholders and avoiding a price reduction in portion monetary value.

SME is tested by the unnatural portion monetary value motion following an of import proclamation by the company. We check the unnatural portion monetary value motion on the twenty-four hours of proclamation. Abnormal portion monetary value motion is calculated by happening the difference between the portion monetary value and expected normal returns based on the market value. Expected normal return is calculated by utilizing beta of the portion. If portion monetary value shows unnatural return, so all the intelligence was non reflected in the monetary value and hence a misdemeanor of the strong signifier of efficiency.

The benchmark market return used for ciphering the portion price’s unnatural return is the FTSE 100 return as it represents the market by including companies from all sectors. The presence of big figure of companies in FTSE 100 index diversifies the particular hazard associated with the single companies and hence gives merely market hazard.

The top 5 monetary value motions were selected on the footing of absolute unnatural portion monetary value motion with regard to the FTSE 100 index. Abnormal portion monetary value motions were the difference between the day-to-day return on the portion monetary value and the expected day-to-day return based on the FTSE 100 index. First we selected the top 10 portion monetary value motions – 28 Sep 06 and 27 Sep 06 are treated as one event. Then we calculated the FTSE 100 returns on those yearss and unnatural returns utilizing beta as below

Abnormal return = Share return – Beta * FTSE return

Appendix V shows the consequences. The top five absolute abnormal returns are for the undermentioned day of the months

  1. 17 Jan 2007
  2. 06 Dec 2006
  3. 28 and 27 Sep 2006
  4. 28 Jun 2006
  5. 16 Mar 2006

To analyze the events and /or proclamations on these yearss, we looked at the ‘Financial Times’ and ‘Investegate’ web site for the articles. Financial Times website gives all the market and company intelligence along with their analysis of the proclamations. Investegate website gives all the company announcements.

17 Jan 2007

No proclamation in Investegate web site and no intelligence on Financial Times. As per any signifier of efficient market hypothesis there shouldn’t be an unnatural return on this twenty-four hours.

06 Dec 2006

No official proclamation in Investegate. No intelligence in Financial Times either. Again a instance of failure of efficient market hypothesis.

28 and 27 Sep 2006

Release of trading statement on 27 Sep 2006 demoing 9 % growing in grosss [ 7 ] . Market takes one more twenty-four hours, 28 Sep 2006, to set monetary value. Hence semi-strong and strong signifier of efficiencies are non at that place.

28 Jun 2006

No new intelligence released except for a formal proclamation of poster of one-year records [ 8 ] . Abnormal motion non justified by efficient market theory.

16 Mar 2006

No new intelligence released and therefore unnatural motion non justified by efficient market theory.

The above unnatural portion monetary value movements’ show the absence of strong and semi-strong signifier of efficiencies.

Academicians have presented assorted surveies on market efficiency. Many have besides presented market anomalousnesss like January consequence. Broader decision would be that market is overall efficient, though non strong signifier, but anomalousnesss do be.

4 )

Market hazard is the hazard associated with the economic system as a whole and specific to any industry or a company. Interest rate, GDP growing and rising prices represent some of the parametric quantities of market hazard. Though they impact companies besides but their impact is non limited to some particular companies merely. Market hazard can’t be diversified off by organizing a portfolio of companies. The hazard that remains in the portfolio of all companies is called as market hazard. It is besides known as the systematic hazard and is common to all securities.

Beta is calculated by comparing the returns of the company with that of market. FTSE 100 index is taken as the representative of the market. We have used the monthly returns over the five twelvemonth period for ciphering beta. The monthly returns are calculated by comparing the portion monetary value or index with the portion monetary value or index degree of the old month. Then the portion monetary value returns are plotted on the Y-axis and market returns are plotted on the X-axis. Linear arrested development is used to plot the least square line and the incline of the line gives beta. The incline of the line is calculated by the arrested development analysis and the consequences are shown in Appendix VI.

Beta value = 1.45

Adjusted R square of 0.34 indicates that 34 % of the portion monetary value motion is because of market motion.

Another manner of ciphering beta is to compare the ratio of monthly returns of stock with monthly returns of the index. Appendix VII shows the values of monthly returns for the last one twelvemonth. We find beta value for each month by spliting portion monetary value returns by FTSE 100 index return. We so take the mean value of the betas.

Beta value = 1.58

The consequences of the above two methods are non really different. Normally a 5-year period is used for ciphering beta. The one twelvemonth analysis shows the current motion in the beta compared to the whole 5 twelvemonth motion and reflects the current tendencies. The higher value in the last one twelvemonth indicates that Electrocomponents’ portion monetary value moves more in response to motion in the market index.

We now take the norm of above two values as the beta of Electrocomponents.

Beta = ( 1.45 + 1.58 ) /2 = 1.52

5 )

Portfolio effects

Individual portions carry both systematic and specific hazards. Specific hazards relate to the company merely whereas systematic hazard relate to whole market. When we build a portfolio of portions, different portions have changing grade of correlativity with each other. Suppose two portions have negative correlativity, so a downward motion in one portion would be countered by the positive motion in the other portion. Because of the different correlativities, the hazard of the portfolio is reduced. So utilizing a portfolio of assets, it is possible to increase the wages to put on the line ratio by take downing hazard. This is portfolio consequence.

6 )

We now one time once more look at subdivision 2 for elaborate analysis. Electrocomponents cost of debt is estimated to be about 4.5 % whereas its cost of equity is 15.66 % . When we include the revenue enhancement tax write-off on involvement payable, cost of debt comes down farther. This means the company should utilize more of debt than equity. Since pitching ratio is merely 26.4 % . Electrocomponents should utilize more of debt than equity to fund future growing and return extra capital to stockholders to convey down entire cost of capital.

Electrocomponents is paying more dividend than hard currency generated from internal resources. If it reduces dividend, it will direct negative signal to the market. But with the addition in net incomes in future, it should seek to turn dividend easy than net incomes growing to bring forth more dividend from within.

Electrocomponents debitor yearss are about twice its creditor yearss intending that it has demand of working capital. It is due to the nature of the concern where it has to stock stuff before it can transport to its clients. It would be better if the company can increase creditor yearss and cut down debitor yearss. This would cut down the on the job capital and hence entire support demand.

7 )

Electrocomponents is a distributer of electrical, electronic and mechanical merchandises and has a planetary presence. It has grown over the twelvemonth by spread outing globally. The profitableness of the concern reduced in the twelvemonth ended 31 Mar 2006 but has announced addition in six months net incomes for the period ended 30 Sep 2006. Gross borders are healthy at 50 % plus and any addition in gross revenues will hike net incomes. The company is reasonably geared at 26 % and can take up farther debt either to spread out or cut down cost of capital.

Cash flow is an issue because of high dividend payouts. Electrocomponents besides needs to pull off its working capital because of debitor yearss being dual of its creditor yearss.

Though the company is once more increasing net incomes, the high P/E ratio even on 2005 net incomes degree makes it expensive. Besides slow down in economic system may hold an impact on net incomes.


Electrocomponents, Annual Report 2006 hypertext transfer protocol: //, 13 Feb 2007Appendix I – Drumhead Financials

Net income and Loss statement

Balance Sheet

Cash flow

( Beginning: Electrocomponents, Annual Report 2006 )

Appendix II – Sources of finance

( Beginning: Electrocomponents, Annual Report 2006 )

Appendix III – Dividend history

( Beginning: Electrocomponents, Annual Report 2006 )

Appendix IV – Working capital analysis

( Beginning: Electrocomponents, Annual Report 2006 )

Appendix V – Abnormal return computation

( Beginning: For Electrocomponents portion monetary value – hypertext transfer protocol: // s=ECM.L

For FTSE 100 index – hypertext transfer protocol: // s= % 5EFTSE )

Appendix VI – Beta computations

( Beginning: For Electrocomponents portion monetary value – hypertext transfer protocol: // s=ECM.L

For FTSE 100 index – hypertext transfer protocol: // s= % 5EFTSE )

Graph of Electrocomponents’ monthly returns and FTSE 100 monthly returns

Arrested development Analysis

Appendix VII – Second manner of ciphering beta

( Beginning: For Electrocomponents portion monetary value – hypertext transfer protocol: // s=ECM.L

For FTSE 100 index – hypertext transfer protocol: // s= % 5EFTSE )



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