Performance Appraisal
Company "A" is a UK-based company producing and selling computer software to computer companies and health trusts. You must report back to your CEO on the financial status and performance of the Company "A", since your firm is interested in purchasing Company "A". First task is to identify the trends in return on equity and the main drivers of the trends using Du Pont analysis.
Table 1: Financial data for Company "A" (£ thousands)
|
2011
|
2010
|
2009
|
|
Year-end data
|
£
|
£
|
£
|
|
Revenue
|
72,448
|
66,487
|
55,781
|
|
Earning before interest and tax
|
6,270
|
4,710
|
3,609
|
|
Earning before tax
|
5,101
|
4,114
|
3,168
|
|
Net income
|
4,038
|
3,345
|
2,576
|
|
Asset turnover
|
0.79
|
0.76
|
0.68
|
|
Assets/Equity
|
3.09
|
3.38
|
3.43
|
Your CEO believes that the return on equity could be increased if the Company "A" divested segments that were generating the lowest returns on capital employed (total assets less non-interest-bearing liabilities). Segment EBIT margins in 2011 were 11% for Automation Equipment, 5% for Power and Industrial, and 8% for Medical Equipment.
Table 2: Year-end Capital employed and capital expenditures
|
Capital Employed
|
Capital Expenditures
(excluding acquisitions)
In year
|
|
Operating Segments
|
2011
|
2010
|
2009
|
2011
|
2010
|
2009
|
|
Automation Equipment
|
10,705
|
6,384
|
5,647
|
700
|
743
|
616
|
|
Power and Industrial
|
15,805
|
13,195
|
12,100
|
900
|
849
|
634
|
|
Medical Equipment
|
22,870
|
22,985
|
22,587
|
908
|
824
|
749
|
|
49,380
|
42,564
|
40,334
|
2,508
|
2,416
|
1,999
|
Questions:
1. An assessment of Company "A" return on equity trend over the three year period.
2. Identify the main driver of your CEO's belief (referred to above) regarding the Company's "A" return on equity.
3. Based on your CEO's criteria pertaining to divestiture (referred to above), identify the business segment best suited for divestiture and discuss the advisability of purchasing Company "A".