Finance for Non Financial Managers (UFMFTQ-15-M)

Financial Report Comparing and Contrasing

Avingtrans plc – 2020 and Flowtech Fluid Power - 2019
Thanapas Buranapichet

Student Number: 20016759

Content Page

Introduction 2
Background of The Two Companies 2
Highlight from The Companies’ Chairman Statement 2
Financial Statement 3
Evaluation of The Long-Term Solvency of The Two Companies (Ratio Analysis) 6
The Synthesis 9
Conclusion 10
References 11

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Introduction

The annual report serves two distinct purposes. The first is an explanation of past performance. The
shareholder can use the annual report to gain insight into the reasons for that part performance.
Furthermore, it serves as an accumulation of the data to make it worthwhile to understand past
performance. The insight in the annual report is also offered the firm's future by explaining future
strategy and techniques. So the shareholder can gain a substantial amount of information and uses the
information as making prediction and decision.

The companies in this paper are located in the United Kingdom and operated their businesses in
engineering industries but different sectors worldwide. The report will be used the currency in British
Pound Sterling to demonstrate comparing and contrasting data from their annual reports. These two
companies are Avingtrans and Flowtech Fluidpower PLC.

Background of the two companies

Avingtrans [1]
Avingtrans plc is a company that generally engages in providing engineered components, systems,
and services to the energy, medical, and infrastructure management industries worldwide. The
company is based in the United Kingdom which operates in the energy and medical segment that
involves designing and manufacturing. In addition, the company has an established buy and build a
strategy in highly regulated engineering markets. The strategy is known as the Pinpoint-Invest-Exit
strategy (PIE).

Flowtech Fluid Power [2]

Flowtech Fluidpower plc is a UK-headquartered company that operates through two segments,
including components and services to distributes engineering components and assemblies in the areas
of the fluid power industry in the United Kingdom, the rest of European countries, and internationally.
The company also provides pneumatic and hydraulic components to serve several and various kinds of
industries.

Highlights from the companies' chairman statement

Avingtrans – Roger McDowell, Chairman.

Avingtrans continues to execute desirable progress during the Covid-19 and has shown to be resilient.
Despite the pandemic, numerous new orders have been received, and prior work orders have been
completed successfully. Following the PIE strategy, both Booth Industries in the UK and Energy Steel
in the USA continue to improve since the potential acquisition in the first year. Besides, it is an
exciting probability for the medical division. The period result shows improving profits along with
increasing revenues, which more demonstrating agility, even in adversities that include temporary
factory closure, delayed order, and supplier parts delays. Since the situation in China is now
comparatively stable, the production channel from that region has been revived. According to the
analysis thus far this year, the financial year 2021 is expected to be more profitable than the previous
year.

Flowtech Fluid Power - Malcolm Diamond MBE, Chairman.

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Despite the economic uncertainty caused by the pandemic, the chairman and directors have decided to
suspend all dividend payments in order to retain as much capital in the business as possible. Profits are
also declining against flat revenues in the years' ended result. Accordingly, simultaneously with the
decision, there will not be a final dividend paid in respect of the financial year ended December 31,
2019. Furthermore, the notable transformation was that the chairman, Malcolm Diamond, announces
his retirement after the year ended and designate Bill Wilson to hand over his position. In addition,
despite enduring a year-long crisis as a result of the COVID-19, the company is in a far better position
than ever to face those challenges.

Financial Statement

Financial statements are valuable summaries of financial activities because the companies can
organise information and make it easier and more precise to see and understand. The income
statement and statement of financial position convey a different aspect of the financial understanding.
When gathering both of them, the understanding is considered complete. The two statements provide a
summary of earnings and expenses, cash flows, and assets and debts.
The shareholder can utilise the statements to understand the overall health of the companies as well as
to evaluate financial performance for making-decision purposes.

The Income Statement [3]

The income statement displays a company's financial health over a specified period. It also provides a
company with valuable information about revenue, sales, and expenses. These statements are used to
make important financial decisions. Typically, investors and shareholders pay careful attention to the
operating section of the income statement to determine whether a business made a profit or loss for
the period. It provides valuable knowledge and demonstrates the effectiveness of the company's
management and its success in comparison to industry companions.

Avingtrans PLC
Income Statement for the year ended 2020 and 2019
2020 2019
£'000 £'000
Revenue 113,913 104,044
Cost of Sales 82,284 76,349
Gross Profit 31,629 27,695

Distribution Expenses 4,931 4,599

Administrative Expenses 22,557 19,477
Operating Profit 4,141 3,619
Finance Income 38 132
Finance Cost 1,141 602
Profit before Taxation 3,038 3,149
Taxation 634 714
Profit after Taxation 2,404 2,435
Loss from Discontinuing Operation 1,018 76
Net Profit 1,386 2,511

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 Flowtech Fluid Power PLC
Income Statement for the year ended 2019 and 2018
2019 2018
£'000 £'000
Revenue 112,418 112,108
Cost of Sales 72,235 73,159
Gross Profit 40,183 38,949

Distribution Expenses 4,547 4,561

Administrative Expenses 29,891 26,710
Operating Profit 5,745 7,678
Finance Income - 11
Finance Cost 1,038 766
Profit before Taxation 4,707 6,923
Taxation 968 1,992
Profit after Taxation 3,739 4,931
Loss from Discontinuing Operation - 20
Net Profit 3,739 4,911

The Statement of Financial Position [4]

The statement of financial position describes the company's assets and liabilities at any given time,
which is used in conjunction with other important financial statements such as cash flows and income
statements to perform financial analysis. The purpose of the statement of financial position is to
demonstrate the company's net value at a specific point in time and provide interested parties with
information about the company's financial position.
Avingtrans PLC
Statement of Financial Position for the year ended 2020 and 2019
2020 2019
£'000 £'000
Non Current Asssets
Goodwill 23,459 23,369
Other Intangable Assets 13,834 14,483
Property, Plant, and Equipment 34,445 26,576
Deferred Tax 1,241 1,423
Pension and Other Employee Obligation 1,646 1,299
Total Non Current Assets 74,625 67,150

Current Assets
Inventories 13,390 14,441
Trade and Other Receivables 36,910 31,549
Current Tax Assets 1,221 234
Cash and Cash Equivalents 5,088 8,909

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Total Current Assets 56,609 55,133

Total Assets 131,234 122,283

Current Liabilities
Borrowing (Interest Expenses) 6,005 4,945
Lease Liability 2,125 750
Trade and Other Payables 30,308 31,405
Others 5,620 5,453
Total Current Liabilities 44,058 42,553

Non Current Liabilities

Borrowing 3,965 3,817
Lease Liability 9,340 1,420
Others 3,963 5,199
Total Non Current Liabilities 17,268 10,436

Total Liabilities 61,326 52,989

Total Equity 69,908 69,294

Flowtech Fluid Power PLC

Statement of Financial Position for the year ended 2019 and 2018
2019 2018
£'000 £'000
Non Current Asssets
Goodwill 63,014 63,022
Other Intangable Assets 6,573 7,624
Property, Plant, and Equipment 6,528 6,735
Right of Use Assets 8,228 -
Total Non Current Assets 84,343 77,381

Current Assets
Inventories 24,000 28,667
Trade and Other Receivables 21,377 25,475
Current Tax Assets 759 668
Cash and Cash Equivalents 3,446 2,248
Total Current Assets 49,582 57,058

Total Assets 133,925 134,439

Current Liabilities
Borrowing (Interest Expenses) 16,055 18,078
Lease Liability 1,635 -

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 Trade and Other Payables 15,510 18,372
Others 512 4,355
Total Current Liabilities 33,712 40,805

Non Current Liabilities

Borrowing 4,008 4,051
Lease Liability 6,753 -
Others 1,936 2,150
Total Non Current Liabilities 12,697 6,201

Total Liabilities 46,409 47,006

Total Equity 87,534 87,433

Evaluation of the long-term solvency of the two companies

In this section, the shareholder can glance at the business sustainability by utilising the financial ratio
analysis to compare the Avingtrans and the Flowtech financial statement ratio. It will consist of the
information of profitability ratio, liquidity ratio, efficiency ratio, financial gearing, and shareholder
and investment ratio. Nevertheless, the years in the annual reports were described 2018-2019 for
Flowtech and 2019-2020 for Avingtrans.

Profitability [5]
The gross profit ratio and operating profit ratio are both used to determine how well a company's
management is generating profits. In addition, for the two companies that are within the same
industry, the ratios are helpful to compare the profit margins over multiple periods.
The return on capital employed measures both companies to generate profits from their capital as they
are utilised.

Profitability Ratio
Year of Annual Report
Ratio Metrics Avingtrans FlowTech
2020 2019 2019 2018
Gross Profit Ratio 27.77% 26.63% 35.74% 34.72%
Operating Profit Ratio 3.64% 3.48% 5.11% 6.85%
ROCE 4.75% 4.54% 5.73% 8.20%

The table illustrates that the companies have improved a percentage of gross profit ratio. However,
Avingtrans was behind for around 8% when looking at the percentage comparing to Flowtech.
Otherwise, Avingtrans was increased its operating profit by 0.16% from the previous year of 2019,
while the latter's operating profit dropped significantly from 6.85% in 2018 to 5.11% in 2019. The
business of Flowtech will be suggested to increase the operating profit margin by increasing the sale
revenue and seek a better strategy for sales division as the chairman was mentioned in the annual
report that the staff would be retraining in sale technique converting from order taker to order maker
strategy.
Moreover, the return of capital employed (ROCE) of Flowtech was also decreased drastically around
2.5% from 8.2% in 2018. On the other hand, the ROCE of Avingtrans was slightly increased. To

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increase ROCE, Flowtech needs to reconsider the overall expenses and reduce the unnecessary
expenses.
Liquidity [6]
Both the current ratio and quick ratio evaluate a company's short-term liquidity or its ability to
generate enough cash to pay off all of its debts if they all came due at the same time. Although both
ratios are indicators of a company's financial health, they differ slightly.
The current ratio evaluates a company's ability to pay current liabilities (debts and payables) with
current assets (cash, inventory, and receivables).
The quick ratio evaluates a company's liquidity by determining how efficiently its current assets will
offset its current liabilities. On the other hand, the quick ratio is a more conservative indicator of
liquidity since it does not contain any of the elements in the current ratio.

Liquidity Ratio
Year of Annual Report
Ratio Metrics Avingtrans FlowTech
2020 2019 2019 2018
Current Ratio (Times) 1.285 1.295 1.47 1.39
Quick Ratio (Times) 0.98 0.96 0.75 0.69

This table indicates that both companies had the ability to pay the debt in the short term over one time in every
1 Pound. Avingtrans had 1.285 Pound to cover the current liabilities, which it was decreased by 0.01 from
2019. On the other hand, the current ratio of Flowtech shows that it was also able to pay a debt in the short
term, with almost 0.1 times increasing from the previous year.
Both companies had the quick ratio lower than the current ratio, which is also lower than 1.0, indicating the
companies were not reliable to pay the short-term debts when minus the closing inventories.
Therefore, the liquidity ratio shows that both companies have the potential to increase a current liability if it is
required, such as a short-term loan to improve the operation and reduce the number of ratios closer to 1.0.

Efficiency [7]

The efficiency ratio is commonly used to assess how well a company uses its assets and liabilities on
an internal basis.
Analysts use the efficiency ratio to evaluate a company's short-term or existing performance. All of
these ratios use data from a company's current assets or current liabilities to measure the company's
operations.
An efficiency ratio assesses a company's potential to extract revenue from its assets. An efficiency
ratio, for example, also considers various aspects of the company, such as the time it takes to receive
cash from customers or the time it takes to convert inventory to cash. This makes efficiency ratios
significant since an increase in efficiency ratios typically transforms into an increase in profitability.
These ratios can be compared to rivals in the same industry to distinguish companies that are better
managed than the others. Trade receivable period, trade payable period, and inventory period are
examples of typical efficiency ratios.

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 Efficiency Ratio (Days)
Year of Annual Report
Ratio Metrics Avingtrans FlowTech
2020 2019 2019 2018
Trade Receivable Period 118.27 110.67 69.41 82.94
Inventory Period 59.39 69.04 121.27 143.02
Trade Payable Period 134.44 150.14 78.37 91.66

The table demonstrates that Flowtech had improved their trade receivable day for around 14.5 days
from 82.94 days in 2018, while the receivable day for Avingtrans was increased for almost eight days
to 118.27 in 2020. On the other hand, the inventory and trade payable were improved for both
companies. The former value was 22 days decreased for Flowtech and ten days reduced for
Avingtrans from the previous year. Moreover, the latter value was improved for both companies for
over twelve days from 91.66 days in the year of 2018 and from 150.44 days in the year of 2019 for
Flowtech and Avingtrans, respectively.
Despite the shareholder, they will demonstrate how many days the cash will be returned to the
business at the cash conversion cycle. In this case, the cash conversion cycle of the business displays
negative values, -78.37 days for Flowtech and -134.44 days for Avingtrans. Therefore, this statement
could be described that the companies are able to sell the products and have cash returned to business
and sufficient for payment to the suppliers, approximate 78 and 134 days behind.

Financial Gearing [8]

Gearing ratios are financial ratios that equate the owner's equity to the company's debts or borrowing
funds. Thus, gearing is a calculation of an entity's financial leverage that illustrates how much of a
firm's operations are funded by shareholders' funds against creditors' funds.
The gearing ratio is a financial leverage metric that shows how much of a company's operations are
funded by equity capital and debt funding.
The D/E ratio is a key metric in corporate finance. It is an indicator of how much of a company's
profits are funded by debt as contrasted to entirely owned funds. It expresses the ability of shareholder
interest to cover all remaining debts in the case of a business recession.

Financial Gearing
Year of Annual Report
Ratio Metrics Avingtrans FlowTech
2020 2019 2019 2018
Gearing Ratio 46.73% 43.33% 34.64% 34.96%
Dept-to-Equity Ratio 87.72% 76.47% 52.99% 53.76%

The gearing ratio determines that both companies receive a good percentage of ratio, which means the
shareholders could be received an income from profits. However, Flowtech had a slightly improved
ratio with a flat value of around 34% from 2018 to 2019. In contrast, the Avingtrans' ratio was
increased by 3% from 2019 that means the company has a potential risk for providing an income to
the owner when it has low profits.

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In this ratio, it could be analysed that Flowtech was done well to continues to pay a bank loan. The
gearing ratio was slightly decreased and almost stable. Nevertheless, Avingtrans received an
increasing percentage, implying that the company should decide to raise the capital or transfer the
company from sole trader to a limited company in order to increase the equity, which would
substantially reduce the gearing ratio.

Shareholder and Investment Ratio

Earnings per share (EPS) [9] measures a company's performance and is one of the most commonly
used indicators by investors when measuring a stock. EPS is perhaps a measurement of a company's
net income allocated to each share of common stock. Companies typically announce earnings per
share that have been corrected for unusual transactions and potential share dilution.
The price earnings ratio (P/E ratio) [10] is a valuation ratio that compares a company's current share
price towards its per-share earnings. Investors and analysts use P/E ratios to calculate the relative
worth of a company's shares in a comparison. It can also compare a company to its own past
performance or compare composite markets to one another.

Shareholder and Investment Ratio

Year of Annual Report
Ratio Metrics Avingtrans FlowTech
2020 2019 2019 2018
Earning per Share 3.34p 6.27p 6.12p 8.37p
P/E Ratio 35.23% 27.83% 19.93% 13.29%

In this table, it is illustrated that the companies' earnings per share declined from year to year, with the
Flowtech's share dropping by 2.2p from 8.37p in 2018. Notably, the Avingtrans' share was
significantly dropped by half to 3.34p in 2020.
On the other hand, the P/E ratios exemplify that the companies were improved their performance
compared to the previous year, which both were improved by around 7.5%.

The Synthesis
Flowtech would be advised to improve its operating profit margin by increasing sales revenue, and to
follow a better plan for its sales segment as the chairman stated in the annual report that the employees
will be retrained in sales techniques, switching from an order taker to an order maker strategy.
Moreover, in order to maximise their ROCE, Flowtech must rethink their overall expenses and
eliminate or reduce excessive expenses.
As a result, the liquidity ratio demonstrates that both companies can raise a current liability, such as a
short-term loan, if necessary, to boost the operation and lower the number of ratios closer to a
benchmark number.
The efficiency ratio is comparatively high, indicating that the company's earnings are declining or that
it is overinvesting in facilities, infrastructure, inventory, or other properties that are not producing
additional income. As a result, these companies are advised to keep the excess investment. However,
it may be a long-term investment for further gains.

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Avingtrans received an increasing percentage of gearing ratio, implying that the company should
decide to raise the capital or transfer the company from sole trader to a limited company in order to
maximise the equity, which would substantially reduce the gearing ratio.

Conclusion
Investing is a long way from putting money in a saving account to collect interest. Investing is similar
to gambling in that there are no guaranteed returns. Instead, the risk will be taken with invested
money, which means the money can rise as well as down in value. However, the company's financial
statements, both Avingtrans and Flowtech, were impacted by the Covid-19 pandemic. Nevertheless, if
I am going to invest in one of these companies, I would prefer to put my money in Avingstrans PLC
because they can be grown in the future. They also have the ability to pay the debt in the short term,
and the revenue was also increased, even in this challenging situation.
In addition from the chairman stated that he certainly confirmed that the financial year 2021 is
expected to be more profitable than the previous year. In contrast, the notable transformation from
Flowtech was that the chairman announces his retirement after the year ended and designate the new
one to hand over his position, which leads to unreliability for the investor that the new chairman will
manage the company with good stability or not.
To be examined, I will spend 1,000£ for the initial point, then wait a month to see whether the
improvement of their financial results has changed or deteriorated based on the online graph. Then I
will decide whether I will continue to invest in this company in the long term or look for other
opportunities.

References

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 Avingtrans PLC (2021) 2020 Annual Report [online]. Cambridgeshire: Avingtrans PLC.
Available from: Avingtrans-Annual-Report-2020.pdf [Accessed 20 April 2021]
 Flowtech Fluid Power PLC (2020) Annual Report for the year ended 31 December 2019
[online]. Wilmslow: Flowtech Fluid Power PLC. Available from: flowtech-annual-report-
2018.pdf (flowtechfluidpower.com) [Accessed 20 April 2021]
 [1] Avingrans (2020) About Us. Available from: About us - Avingtrans PLC [Accessed 16
May 2021]
 [2] Flowtech Fluid Power (2021) Group Overview. Available from: Group Overview |
Flowtech Fluidpower plc [Accessed 16 May 2021]
 [3] Investopedia (2021) The Income Statement. Available from: Income Statement Definition
(investopedia.com) [Accessed 17 May 2021]
 [4] Investopedia (2021) Balance Sheet. Available from: Balance Sheet Definition
(investopedia.com) [Accessed 17 May 2021]
 [5] Investopedia (2021) Profitability Ratios. Available from: Profitability Ratios Definition
(investopedia.com) [Accessed 18 May 2021]
 [6] Investopedia (2021) Liquidity Ratios Definition. Available from: Liquidity Ratio Definition
(investopedia.com) [Accessed 18 May 2021]
 [7] Investopedia (2021) Efficiency Ratios Definition. Available from: Efficiency Ratio
Definition (investopedia.com) [Accessed 18 May 2021]
 [8] Investopedia (2021) Gearing Ratio. Available from: Gearing Ratio Definition
(investopedia.com) [Accessed 18 May 2021]
 [9] Investopedia (2021) Earning Per Share (EPS). Available from: Earnings Per Share (EPS)
Definition (investopedia.com) [Accessed 19 May 2021]
 [10] Investopedia (2021) Price-to-Earnings Ratio – P/E Ratio. Available from: Price-to-
Earnings Ratio – P/E Ratio Definition, Formula and Examples (investopedia.com) [Accessed
19 May 2021]

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