Professional Documents
Culture Documents
Overview
This study looks at:
◗ Users of financial information
◗ Financial reporting standards
◗ Financial ratios in relation to CRH accounts for 2004
INTRODUCTION
A MODEL OF FINANCIAL
CRH, the International Building Materials Group, has a
strategic vision, which is clear and consistent. It is to "be
PERFORMANCE
an international leader in building materials delivering
Despite significant challenges in its operating environment,
superior performance and growth".
CRH continues to perform well. 2004 was a landmark year
for CRH. Sales were up 16% over the previous trading
CRH plc, headquartered in Ireland, has operations in 24
period. Operating Profit was up 19%. Profit before Tax was
countries, employing more than 60,000 people at over
up 18%, exceeding one billion euro for the first time.
2,100 locations.
Ratio Analysis is where accounts can be interpreted for the benefit WHAT ARE THE IMPORTANT
of interested parties. It can help with the control methods and can
also be used for decision-making by management. Comparisons
FINANCIAL STATEMENTS USED
can be made from year to year, and future plans can be formulated BY A BUSINESS?
based on this information.
◗ Profit & Loss Account - shows gross profit and net profit
CRH has consistently delivered superior long-term growth in total ◗ Balance Sheet - shows assets (items of value that the
shareholder return, averaging over 19% per annum since the Group company/business owns), liabilities (debts the company/business
was formed in 1970. owes) and share capital (money invested by owners/shareholders)
of a business at a point in time
The accounts used for calculations in this study are for CRH plc
WHO ARE THE USERS OF
consolidated (including the accounts of all subsidiary companies).
FINANCIAL INFORMATION? Simplified versions for 2004 are shown.
2/4 CRH
Successful financial performance Business 2000
2005/06
ninth edition
CRH - V.5 5/9/05 5:56 PM Page 3
2. Net Profit Margin This is the dividend paid expressed as a percentage of the market
price. This can then be compared with rates of return from other
Profit before Interest & Tax (PBIT) risk-free investments. For CRH this was 1.7% for 2004, based on
X 100
Sales the Market Price of €19.70 of 31 December 2004.
The CRH Group’s Net Profit Margin in 2004 was 9.42%. 3. Dividend Cover
3. Return on Shareholders Funds Profit (after Tax & Preference Dividend)
Total Ordinary Dividend (Paid & Proposed)
Profit (after Tax & Preference Dividend)
X 100
Ordinary Shares + Reserves This compares the dividends with the profits available. For CRH
this was 4.3 times for 2004.
This shows the company’s return to the ordinary shareholders’
investment. A return of at least 10% together with a satisfactory
4. ‘Real Return’
dividend will be necessary to ensure that shareholders hold on to
their shares. The return for the Group in 2004 was 14.4%. Dividend Yield x Dividend Cover
4. Return on Capital Employed This shows what is called the real rate of return and can more readily
be compared with the return from risk-free investments. For CRH
Profit (before Interest & Tax) this was 7.3% for 2004.
X 100
Ordinary Shares + Reserves + Long Term Liabilities
5. Price Dividend Ratio
This shows the profit generated by the company considering the
total capital invested. A constant return of 10% or above would be Market Price per Share
considered a healthy trend. The return for the CRH Group in 2004 Dividend per Share
was 12%.
This measures how long it would take one ordinary share to recoup
LIQUIDITY (recover) its value at present dividend payout rate. For CRH this
Shareholders • Potential Investors • Management • Banks • Customers was 59 years for 2004.
Debenture Holders • Competitors
6. Earnings per Share (EPS)
1. Current Ratio
Profit (after Tax & Preference Dividend)
Current Assets : Current Liabilities Number of Ordinary Shares Issued
Current Liabilities are known as Creditors’ amounts falling due within This measures the earnings, in cent, of each ordinary share. For
one year. This shows the company’s ability to pay its short-term debts. CRH this was 143.8 cent for 2004.
The value of this ratio for CRH in 2004 was 1.96:1.
7. Price Earnings Ratio (P/E)
2. Quick Ratio (Acid Test/Liquid Ratio)
Market Price per Share
Current Assets - Stock : Current Liabilities Earnings per Share
Here stock is excluded as it is the least liquid or not as easily turned into This measures how long it would take one ordinary share to recoup
cash as the other Current Assets. A ratio of 1:1 is considered acceptable. (recover) its market price if the current performance is maintained.
The value of this ratio for CRH in 2004 was 1.4:1. For CRH this was 13.7 years for 2004.
Business 2000
CRH
Successful financial performance
3/4
2005/06
ninth edition
CRH - V.5 5/9/05 5:56 PM Page 4
While every effort has been made to ensure the accuracy of information contained in this case study, no liability shall attach to either The Irish Times Ltd. or Woodgrange Technologies Ltd. for any errors or omissions in this case study.
Debt Capital consists of Debentures, Loans and Preference Average No. of Ordinary Shares 530m 526m
Shares if any. More than 50% is highly geared, less than 50% is Market Price per share as at 31 Dec €19.70 €16.28
lowly geared and 50% is neutrally geared. For CRH this was
44.9% for 2004. Group Balance Sheet 31 Dec 2004 31 Dec 2003
€m €m
3. Interest Cover
Intangible Assets 1444 1475
Profit (before Interest & Tax) Fixed Assets 6022 5494
Interest
7466 6969
This measures the company’s ability to pay the interest it owes on loans. Current Assets
For CRH this was 8.26 times for 2004.
Stocks 1250 1118
Debtors 1830 1681
Cash 1322 1298
THE LIMITATION OF ACCOUNTS 4402 4097
– WHAT DO THEY NOT REVEAL? Creditors (Amounts falling 2248 2193
due within one year)
Net Current Assets 2154 1904
While Ratio Analysis can be of great use to a business, there are
some limitations. For example: Total Assets less Current Liabilities 9620 8873
◗ Figures to calculate ratios are taken from past performances
and do not tell how a business will do in the future.
Creditors (Amounts falling due 4320 4023
after more than one year) etc.
◗ Not all data may be available, so a business can prepare only
limited ratios. Shareholders Funds 5300 4850
◗ Performance according to Ratio Analysis may be shown to 9620 8873
improve/deteriorate yet this may be outside the control of
management e.g. exchange rate fluctuations, interest rate
changes or taxation.
◗ Different companies in the same industry may use different ACTIVITy
accounting methods or may not have exactly the same product
range, so direct comparisons can be difficult.
Compare and contrast CRH 2003 figures with 2004 figures
◗ Ratio Analysis cannot measure staff morale, staff/management under the following headings:
relations or any other aspect that cannot be measured in direct
monetary terms.
◗ Profitability ◗ Liquidity ◗ Dividend Policy ◗ Gearing
for two different stakeholders: shareholder and bank.
◗ New competition does not show up initially in Ratio Analysis.
◗ If a business changes its accounting procedure direct
comparisons may not be made using old and new methods.
4/4 CRH
Successful financial performance Business 2000
2005/06
ninth edition