Financial AnalysisOn

CAPITA PLC.Student (s) Number as per your student card:

Om Amrit 10026834

Lecturer Name: Michael Kealy

Module/Subject Title: Financial Analysis (B9AC036)

Assignment Title: Financial Analysis on CAPITA

No of Words: 2573

Table of ContentsIntroduction 3

Strategic Analysis 4

Ratio Analysis 5

Ratio Analysis Conclusion 11

Conclusion 12

Appendices 13

References……………………………………………………………………………………………………………………………………………22

1. Introduction

Capita was formed in 1984 as a division of the non-profit CIPFA (Chartered Institute of Public Finance and Accountancy). In 1987 it turned into an autonomous company with 33 staff as a buy-out of an administration purchase out, headed by Rod Aldridge, and was initially recorded on the London Stock Exchange in 1991.Capita works over eight businesses - local government, central government, education, transport, health, life and pensions, insurance, and other private segment organisations (counting financial administrations). Capita leads the fast growing business process outsourcing (BPO) market in the UK. Capita has developed a broad-based services business with multiple relationships covering a wide range of different sectors and we continually explore new market areas, such as health and the emergency services, where we believe there is potential to add value. Capita currently target 10 markets across the public and private sectors. (Capita, 2012)The purpose of this report is to provide a comprehensive analysis of the historic financial performance of Capita PLC and outline the Company’s strategic direction, including outlining the potential risk factors and their possible effects on the Company.

2. Strategic Analysis

Targeting growth markets - Capita targets public and private sectors in the outsourcing business. The company strives to realize this strategy by convincing clients about specialist support, economies of scale and flexible options.

Building capability and scale - Capita’s long term growth is primarily driven by securing medium to long term major customer management and BPM contracts which currently represent around 65% of overall Group revenue.

Creating Innovative Solution – This strategy is achieved by understanding the current and future requirements of the clients and more importantly the end-user of the service. Capita also reported that listening to client’s needs, creating appropriate solutions, measuring results and delivering changes is the medium of achieving this strategy.

Securing organic growth - Capita’s long term growth is primarily driven by securing medium to long term major customer management and BPM contracts which currently represent around 65% of overall Group revenue.

3. Ratio Analysis

Ratio analysis is a good tool to evaluate financial results and assesses a company’s performance. Ratios enable a company to compare its results over a certain number of years and also with industry standards, which ultimately help forecast near future performance. There are 5 main broad categories of ratios namely Profitability, Solvency, Activity, Capital Structure and Stock Market Measures ratios.

3.1 Profitability Ratios

Profitability ratio measures how profitable Capita has been relative to revenue generated through sales and funds that were available to the company (capital employed and equity).

Ratio Capita

2012

Capita

2011

Gross

Margin

28.06% 28.51%

Net

Margin

10.17% 10.6%

ROCE 11.93% 13.52%

ROTA 26.87% 45.41%

ROSF 7.5% 8.5%

3.1.1 Gross Profit Margin (GPM)

The GPM for the financial years ending 2012 and 2011 are 28.06% and 28.51% respectively. This means Capita realized a gross profit of 28.06% and 28.51% for the year 2012 and 2011 per every £1 of turnover. The GPM for 2012 is 28.06% which is almost equal as compared to 28.51% for the year 2011.

3.1.2 Net Profit Margin (NPM)

The NPM for the financial years ending 2012 and 2011 are 10.17% and 10.6% respectively. This implies that on every £1 of turnover, Capita realized a net profit of 10.17% and 10.6% in 2012 and 2011 respectively. NPM has increased in 2011 following a lower percentage change in turnover and decreased in 2012 in light of higher percentage change in turnover relative to the percentage change in Net profit.The GPM for the year 2012 is 28.06% and the NPM is 10.17%. This means that marketing and other operating expenses account for over 50% of the gross profit. This is the same for the years 2011 and 2010. It can be assumed that the company’s future gross and net profit margin will revolve around 28% and 10% respectfully.

3.1.3 Return on Capital Employed

The ROCE fell in 2012 to 11.93% from 13.52% in 2011. This is due to a surge in capital employed accompanied by a smaller rise in net profits. Hence, investors might take the view that management did not make efficient use of the funds made available to them in yielding higher profits. Interestingly, ROCE improved in 2012 in the face of an insignificant change in operating profit and a fall in capital employed. This means that the company generated a higher return on its amount of capital employed in that year. Investors will compare ROCE with the return which would have been generated on investing the same amount of money elsewhere. If the ROCE is greater, then it is deemed judicious for a shareholder to invest in Capita PLC as opposed to alternative investments.

3.1.4 Return on Shareholders Fund

The ROSF for the years 2012 and 2011 mean that shareholders of Capita PLC respectively receive 7.5cents and 8.5 cents per every £1 of their investment in the company. In 2011, equity increased while net profit after interest and tax almost stayed the same and ROSF fell by nearly 10%. This implies that management did not make judicious use of the extra equity available to it. In 2012, ROSF further dropped to 7.5% despite an increase in the availability of equity capital.One of the main objectives of any business organization is the maximization of shareholders wealth. This profitability ratio illustrates how poorly Capita PLC has been achieving it through the declining ROSF. Current shareholders will be less inclined to invest in the company as their returns are falling every year. Prospective shareholders might also be reluctant to invest in Capita PLC following the continuous three year declining ROSF.

3.1.5 Return on Total Assets

Capita PLC has two options in improving the decreasing ROA. The company can either increase its operating profit before interest and tax or reduce the value of its net assets. The former can be achieved by raising selling prices and hence generating higher margins or enhancing sales though excellent customer service. On the other hand, Capita PLC can attempt to minimize the cost of its plants, equipment or inventories.

3.2 Solvency Ratios

Liquidity ratio is a measure of a company’s ability to meet its short term debts obligation. This ratio is commonly used to assess the short term liquidity position of a company.

Ratio Capita

2012

Capita

2011

Current 0.99:1 0.89:1

Quick/

Acid

0.75:1 0.93:1

Cash 0.40 0.31

Cover

times times

Quality 1.52:1 1.02:1

3.2.1 Current Ratio

The current ratio for Capita PLC for the years 2011 and 2012 are 0.89:1 and 0.99:1 respectively. These figures show that Capita PLC exceeds average benchmark current ratio of 0.94:1. This means that the company is investing its cash rather than saving them in banks or in the form of other current assets. These ratios also imply that the company has sufficient working capital to run its day to day expenses. Moreover, the firm can easily turn its current assets into cash to offset current liabilities in the event that creditors or lenders are unexpectedly seeking their money. Finally, it can be deduced that Capita PLC has an average level of liquidity in place.

3.2.2 Quick Ratio

Since there is no mention of inventories in annual report of capita 2012 Quick ratio cannot be calculated. The company ability to meet liquidity through inventory turnover cannot be determined as well.

3.2.3 Cash ratio

In 2011, Capita PLC had £0.31 of cash to meet every £1 of its current liabilities. This increased to £0.40 in 2012. This suggests that the company keep enough cash to meet its short term debt obligations. Since the company had good current and quick ratios, investors might take the view that Capita PLC still had a good level of liquidity at its disposal. A view can arise that the company will still maintain sound levels of liquidity positions in the future.

3.2.4 Quality of Profits ratio

Capita PLC had the best quality of profits ratio in 2012 and 2011. It is desirable to have a quality of profits ratio of 100%. It is irrefutable that Capita PLC has significantly improved this ratio in 2011 and 2012 as more cash was being converted per every £1 of operating profit.

3.3. Activity Ratios

Efficiency ratios can be used to measure the quality of trade receivables and payables of Capita PLC and how efficiently it had managed its assets. Four main types of ratios are used to examine the efficiency of Capita PLC and they are discussed below.

Ratio Capita

2012

Capita

2011

TRD 91.37

days

105.41

days

TPD 148.90

days

166.66

days

ID 307 days 283 days

ATR 0.86

times

0.82

times

3.3.1 Trade Receivables Days

It is to be noted that credit sales would have provided a clearer picture of trade receivables days. However, due to the lack of this information total sales have been used in calculating the above ratios. The above calculations reveal that the credit control department have efficiently reduced debtors’ collection period over the last three years.

3.3.2 Trade Payable Days

The number of days Capita PLC takes to settle payments of its creditors have been increasing. Shorter trade receivable days coupled with longer trade payable days imply positive working capital management. This suggests that the company has more funds to meet its day to day expenses.

3.3.3 Inventory Days

Capita PLC has a stock turnover of 1 time which is in line with its policy of keeping its inventories for a maturity period of 1 year.

3.3.4 Asset Turnover Ratio

The Asset Turnover ratios for Capita PLC have been roughly the same over the last three years with an average of 0.86 times. This means that the company generated a turnover of 86 cents per every £1 of assets available to it.

3.3 Capital Structure Ratios

Financing ratios look at the capital structure of Capita PLC and compares the level of debt with the level of equity the company is financed with.

Ratio Capita

2012

Capita

2011

D/ E 1.75:1 3.23:1

Interest

Cover

5.85

times

7.14

times

3.4.1 Debt/ Equity Ratio

Capita PLC was a risky company in 2010 and 2011 with the gearing ratios being above the benchmark of 1:1. However, the company had improved its gearing with a ratio of 1.75:1 in 2012. This significant improvement might lead investors and lenders to take the view that the company now has the capacity of future borrowings without difficulties.

3.4.2 Interest Cover

Capita PLC has maintained a sound interest cover ratio over the last 2 years. In 2012, the company had 5.85 times the amount of profits at its disposal to meet its interest payments. This highlights that the company is financially healthy in the short term. Moreover, investors and lenders will be happy in that there is no potential risk of the company defaulting on its interest payments which could have impacted on their investments in Capita PLC.

3.5. Stock Market ratios

Investment ratios are of particular importance to shareholders as they provide information on the return on their investments. These ratios are instrumental in helping investors selecting stocks of real value. The main investment ratios that an investor or analyst shall consider are earnings per share, price/earnings ratio, dividend cover and dividend yield.

Ratio Capita

2012

Capita

2011

EPS 37.08p 39.16p

P/E 20.36 16.04

Dividend

Cover

1.55

times

1.83

times

Dividend

Yield

3.11% 3.4%

3.5.1 Earnings per Share

EPS indicates how much profit per share Capita PLC is yielding. It is calculated by dividing net profit after interest and tax by the weighted number of ordinary shares. The EPS are already calculated and can be found on the face of the income statement. EPS for the year 2012 and 2011 are 37.08p and 39.16p respectively (from income statement in annual report 2012). These increasing figures might boost shareholders confidence in Capita PLC. Investors can take the view that Capita PLC has been generating higher earnings for shareholders over the last 2 years.

3.5.2 Price/Earnings (P/E) Ratio

The share price in 2012 was approximately 20 (20.36 rounded off to the nearest integer) times higher than the Earnings per Share PS. In 2011 it was approximately 16 times higher than the EPS.

3.5.3 Dividend Cover

Capita PLC had the capability to pay dividends in all the 2 years from its Earnings before Interest and Tax (EBIT). In 2012, the company was able to cover dividends 1.55 times by its EBIT.

3.5.4 Dividend Yield

For every £1 invested in by ordinary shareholders, they are bagging a return of 3.11% and 3.4% for the years 2011 and 2012 respectively.

4. Ratio Analysis Conclusion

A comprehensive ratio analysis for Capita PLC has provided an insight about the profitability, liquidity, efficiency, gearing and investment positions of the company for the years 2012 and 2011. Capita PLC has proved to be profitable particularly in generating higher return on shareholders’ investment which is one of the predominant objectives of any company. It has also maintained a sound level of liquidity in the event to meet unexpected short term liabilities obligations. The company has been efficient in managing trade receivables and payables through longer repayment period and shorter collection period.

Capita PLC has impressively improved its gearing over the last 2 years enabling to have access to future borrowings with less hassle. From an investment perspective, the company has been generating higher EPS and has achieved sound dividend yields. Moreover, it has been in an excellent position of substantially covering its dividend payment obligations through its EBIT. When compared to two of its major competitor it provides a greater dividend yield for the investor. Eventually, there is irrefutable empirical evidence (through the ratio analysis) that Capita PLC is a financially healthy company and can induce an investor to invest in it.

5. Usefulness of Ratio AnalysisRatio analysis is an important tool for analyzing the company's financial performance. The following are the important advantages of the accounting ratios.

1. Analyzing Financial StatementsRatio analysis is an important technique of financial statement analysis. Accounting ratios are useful for understanding the financial position of the company. Different users such as investors, management. Bankers and creditors use the ratio to analyze the financial situation of the company for their decision making purpose.2. Judging EfficiencyAccounting ratios are important for judging the company's efficiency in terms of its operations and management. They help judge how well the company has been able to utilize its assets and earn profits.3. Locating WeaknessAccounting ratios can also be used in locating weakness of the company's operations even though its overall performance may be quite good. Management can then pay attention to the weakness and take remedial measures to overcome them.4. Formulating Plans

Although accounting ratios are used to analyze the company's past financial performance, they can also be used to establish future trends of its financial performance. As a result, they help formulate the company's future plans.5. Comparing PerformanceIt is essential for a company to know how well it is performing over the years and as compared to the other firms of the similar nature. Besides, it is also important to know how well its different divisions are performing among themselves in different years. Ratio analysis facilitates such comparison. (By Keshav Poudel)

6. Conclusion

Capita’s obvious strengths are its size, which enables the group to achieve economies of scale which are paramount to have a competitive edge over rivals in a global marketplace, and its leading market position, which gives them greater bargaining power with both suppliers and customers alike. Their scale however does not make them immune to changes in the market environment therefore Capita has to be aware of potential risks and introduce countermeasures to reduce the potential effect of one or all of the identified risks being realized.Capita has a strong historic financial performance demonstrated by out-performance of two key competitors in many of the financial ratios calculated. Capita have a strong management with a clear vision and defined strategic plan for each of its specific brands and markets enabling them to adapt quickly at a local level to changes in both their macro and micro environments. Overall Capita look like a sound investment with a strong growth strategy and a steady dividend return.

7. Appendices

Workings Capita PLC

7.1. Profitability

7.1.1. Gross Profit Margin (GPM)

The Gross Profit Margin ratio indicates how much profit Capita made on its sales. In other words, it tells how much gross profit per £1 of turnover Capita made. It is calculated as such: GPM = Gross Profit /Turnover* 100GPM for 2012 =£940.8m / £3351.8m * 100= 28.06%GPM for 2011 = £835.5m / £2930.2 m * 100= 28.51%

2011 2012Gross Profit (£m) 835.5 940.8

Turnover (£m) 2930.2 3351.8

7.1.2 Net Profit Margin (NPM)

The NPM identifies how much net profit per £1 of turnover Capita has earned taking into account the cost of sales, marketing and operating expenses. It is calculated as suchNPM = Net Profit before Interest and Taxation / Turnover* 100NPM for 2012 = £340.9m / £3351.8m * 100= 10.17%NPM for 2011 = £355.5m /2930.2m * 100 = 10.6%

2012 2011Net Profit (£m) 340.9 355.5Turnover (£m) 3351.8 2930.2

7.1.3 Return on Capital Employed

Return on Capital Employed (ROCE) is a ratio that provides information on how well Capita PLC has used the funds made available to it through shareholders and long term creditors in generating a net profit. Therefore, provisions, deferred tax liabilities and post-employment benefits liabilities are excluded from long term debt in the calculation of capital employed. It is calculated as follows:ROCE = Net Profit before Interest and Tax / Capital Employed * 100Capital employed = Total Equity + Long Term DebtROCE for 2012 = £290m /£878.m + (£1539.7m + £12.5m)* 100

= 11.93%ROCE for 2011 = £302.9m /£524.1m + (£1695m + £20m)= 13.52%

7.1.4 Return on Shareholders Fund

The Return on Shareholders Fund (ROSF) examines the relationship between net profit after interest and tax and the shareholders’ funds in the business. In essence, it is a measure of how well Capita PLC is using the money which shareholders have invested in the company in generating a profit. This is why it is a profitability ratio. The formula for ROSF is ROSF = Net Profit after Interest and Tax / Total Equity* 100ROSF for 2012 = £236m / £878.1m*100= 26.87%ROSF for 2011 = £238m / £524.1m*100= 45.41%The ROSF for the years 2011 and 2012 mean that shareholders of Capita PLC respectively receive 45.11cents and 26.87 cents per every £1 of their investment in the company. One of the main objectives of any business organization is the maximization of shareholders wealth. This profitability ratio illustrates how poorly Capita PLC has been achieving it through the declining ROSF. Current shareholders will be less inclined to invest in the company as their returns are falling every year. Prospective shareholders might also be reluctant to invest in Capita PLC following the continuous three year declining ROSF.

7.1.5 Return on Total Assets

Return on Total Assets (ROA) is a measure of much profit Capita PLC is generating from its net assets. The formula for ROA is:Net profit before Interest and Tax / Total Assets* 100ROA for 2012 = £290m/ £3863.4m * 100= 7.5%This implies that Capita PLC generated a return of 7.5 cents relative to every £1 of total assets used for the year 2012. ROA for 2011 = £302m/ £3537.5m * 100= 8.5%This suggests that Capita PLC generated a return of 8.5 cents relative to every £1 of total assets used for the year 2012. Capita PLC has two options in improving the decreasing ROA. The company can either increase its operating profit before interest and tax or reduce the value of its net assets. The former can be achieved by raising selling prices and hence generating higher margins or enhancing sales though excellent customer service. On the other hand, Capita PLC can attempt to minimize the cost of its plants, equipment or inventories.

7.2 Liquidity Ratios Liquidity ratio is a measure of a company’s ability to meet its short term debts obligation. This ratio is commonly used to assess the short term liquidity position of a company.

7.2.1 Current Ratio

The current ratio is a liquidity measure of Capita PLC’s ability to pay off its current liabilities within one year by converting its current assets into cash in the same year. This ratio is calculated by dividing total current assets by total current liabilities. It can be deduced from the formula that higher the ratio, the more liquid the company is. However, a too high ratio can also imply inefficient use of funds. As such, a benchmark of 2:1 or 1.5:1 is deemed reasonable.Current ratio for Capita PLC in 2012 = £1275m: £1284.1m= 0.99: 1Current ratio for Capita PLC in 2011 = £1018.1m: £1144.1m= 0.89: 1The current ratio for Capita PLC for the years 2012 and 2011 are 0.99:1 and 0.89:1 respectively. These figures show that Capita PLC exceeds average benchmark current ratio of 0.94:1. This means that the company is investing its cash rather than saving them in banks or in the form of other current assets. These ratios also imply that the company has sufficient working capital to run its day to day expenses. Moreover, the firm can easily turn its current assets into cash to offset current liabilities in the event that creditors or lenders are unexpectedly seeking their money. Finally, it can be deduced that Capita PLC has a good level of liquidity in place.

7.2.2 Quick Ratio

Quick ratio or Acid Test ratio indicates Capita PLC ability to meet its short term liabilities from its current assets while excluding inventories. This ratio provides a deeper insight of the liquidity position of the company as the least liquid asset – inventory – is not considered. A ratio of 0.7:1 to 1:1 is deemed to be a reasonable benchmark. It is calculated by the following formula;Quick Ratio = (Current Assets – Inventory) /Current Liabilities.

Since there is no mention of inventories in annual report of capita 2012 Quick ratio cannot be calculated. The company ability to meet liquidity through inventory turnover cannot be determined as well.

7.3 Cash ratio

The cash ratio compares the amount of total cash Capita PLC has relative to its current liabilities. It is a measure of the company’s liquidity position and determines the capacity of a business to repay its short term liabilities from exclusively cash and cash equivalents. This ratio is instrumental for Capita PLC’s creditors as it determines their lending decisions. Cash flow ratio is calculated as follows: Cash flow from operations / Current LiabilitiesCash flow in 2012 = £519.2m / £1284.1m= 0.40Cash flow in 2011 = £1018.8m / £1144.1m= 0.31

7.2.3 Quality of Profits ratio

This ratio compares the cash flow generated from trading activities with the operating profits. In essence, it gives a picture of how quickly profits are converted into cash. Hence, it is an indicator of the financial health of the company and help management make strategic investment decisions. The quality of profits ratio is calculated by dividing cash flow from operating activities by operating profits.Quality of Profits for the year 2012 = £519.2m: £340.9m= 1.52: 1Quality of Profits for the year 2011 = £364m: £355.5m= 1.02: 1

7.3 Activity Ratio

Activity ratios can be used to measure the quality of trade receivables and payables of Capita PLC and how efficiently it had managed its assets. Four main types of ratios are used to examine the efficiency of Capita PLC and they are discussed below.

7.3.1 Trade Receivables Days

This is the number of days debtors of Capita PLC took to settle their outstanding debts. It is calculated as such: Trade Receivables /Sales * 365 DaysTrade Receivables Days for 2012 = £839.1m / £3351.8 * 365= 91.37 daysTrade Receivables Days for 2011 = £846.3m / £2930.2m * 365= 105.41 daysIt is to be noted that credit sales would have provided a clearer picture of trade receivables days. However, due to the lack of this information total sales have been used in calculating the above ratios. The above calculations reveal that the credit control department have efficiently reduced debtors’ collection period over the last three years.

7.3.2 Trade Payables Days

This refers to the number of days Capita PLC took to settle payments to its creditors. It is calculated as such:Trade Payables /Purchases * 365Due to the unavailability of purchases in the financial statements of Capita PLC, cost of sales shall be used instead of purchases to calculate trade payables.Trade Payables Days for 2012 = £ (971.1+12.5) m / £2411m* 365= 148.9 daysTrade Payables Days for 2011 = £ (936.5+20) m / £2094.7m* 365= 166.66 days

7.3.3 Inventory Days

This is the number of days stocks are held in the company’s warehouses or stockrooms before they are sold. It is calculated as follows:Inventory Days = Average stock /Cost of Sales * 365

)7.3.4 Asset Turnover Ratio

The Asset Turnover ratio measures how efficiently management of Capita PLC had managed the total assets (fixed assets + current assets) at its disposal in generating a turnover. It is calculated as such:Asset Turnover Ratio = Turnover / Total Assets (Fixed + current assets)Asset Turnover ratio for 2012 = £3351.8/£3863.4= 0.86 TimesAsset Turnover ratio for 2011 = £2930.2/£3537.5= 0.82 TimesThe Asset Turnover ratios for Capita PLC have been roughly the same over the last three years with an average of 0.84 times. This means that the company generated a turnover of 84 cents per every £1 of assets available to it.

7.4. Financing Ratios

Financing ratios look at the capital structure of Capita PLC and compares the level of debt with the level of equity the company is financed with.6.4.1 Debt to equity ratio

Debt to Equity ratio 2012= £1539.7m: £878.1m = 1.75: 1

Debt to Equity ratio 2011 = £1659.5m: £524.1m = 3.23: 1Capita PLC was a risky company in 2012 and 2011 with the gearing ratios being above the benchmark of 1:1. However, the company had improved its gearing with a ratio of 1.75:1 in 2012. This significant improvement might lead investors and lenders to take the view that the company now has the capacity of future borrowings without difficulties.

7.4.2. Interest Cover

Interest cover ratio indicates the company’s ability to meet its interest commitments through its net profits. It is deemed judicious to maintain a ratio of more than 2:1. It is calculated by dividing net profit before interest and tax by interest payable.Interest cover for 2012 = £290m / £46.5m = 6.23 timesInterest cover for 2011 = £302.9m / £42.4m = 7.14timesCapita PLC has maintained a sound interest cover ratio over the last 3 years. In 2011, the company had 4 times the amount of profits at its disposal to meet its interest payments. This highlights that the company is financially healthy in the short term. Moreover, investors and lenders will be happy in that there is no potential risk of the company defaulting on its interest payments which could have impacted on their investments in Capita PLC.

7.5 Investment ratios

Investment ratios are of particular importance to shareholders as they provide information on the return on their investments. These ratios are instrumental in helping investors selecting stocks of real value. The main investment ratios that an investor or analyst shall consider are earnings per share, price/earnings ratio, dividend cover and dividend yield.

7.5.1 Earnings per Share (EPS)

EPS indicates how much profit per share Capita PLC is yielding. It is calculated by dividing net profit after interest and tax by the weighted number of ordinary shares. The EPS are already calculated and can be found on the face of the income statement. EPS for the year 2011 and 2012 are 37.08p and 39.16p respectively (from income statement in annual report 2011 & 2012). These increasing figures might boost shareholders confidence in Capita PLC. Investors can take the view that Capita PLC has been generating higher earnings for shareholders over the last 2 years.

7.5.2 Price/Earnings (P/E) Ratio

The P/E ratio measures the market price of Capita PLC’s share relative to the company’s EPS. It is calculated as such:P/E Ratio = Market price per share/ EPSP/E Ratio for 2012 = £ 755/ 37.08p = 20.36pShare price in 2012 was approximately 20 times higher than the earnings per share.P/E Ratio for 2011 = £628.5 / 39.16p = 16.04p Share price in 2011 was approximately 16 times higher than the earnings per share.

7.5.3 Dividend Cover

Dividend cover measures the company’s ability to pay dividend. A higher dividend cover implies higher possibility of dividend. Dividend Cover = Net Profit after Interest and Tax / Dividend announced for the yearTotal dividend announced can be obtained from page 152 in the annual report 2012. It is calculated as follows:

2012 2011Interim dividend (per share) pence 7.90 7.20Final dividend (per share) 15.60 14.20Total dividend announced for year (per share) 23.5 21.4Total dividend £mInterim 51 44Final 101 86Total 152 130Dividend Cover for 2012 = £236m / £152m = 1.55 timesDividend Cover for 2011 = £238m /£130m= 1.83 timesCapita PLC had the capability to pay dividends in all the 2 years from its Earnings before Interest and Tax (EBIT). In 2011, the company was able to cover dividends twice by its EBIT.

7.5.4. Dividend Yield

Dividend yield measures how much Capita PLC pays out in dividend relative to its share price. It is calculated as follows: Dividend Yield = Dividend per share / Market Price per share*100Dividend Yield for 2012 = 23.5p /755p* 100= 3.11 %Dividend Yield for 2011 = 21.4p /628.5p * 100 = 3.404 %For every £1 invested in by ordinary shareholders, they are bagging a return of 3.11% and 3.4% for the years 2012 and 2011 respectively.

8. PESTLE

Capita’s obvious strengths are its size, which enables the Group to achieve the economies of scale necessary to be competitive in a global marketplace, and its leading market position, which gives them greater bargaining power with both suppliers and customers alike. Their scale however does not make them immune to changes in the market environment therefore Capita have to be aware of potential risks and introduce countermeasures to reduce the potential effect of one or all of the identified risks being realized.In the Group’s June 2011 Annual Accounts Capita identify a large number of potential risk factors (P.35-39) that may be encountered in the short to mid-term. These potential risk factors can be grouped into several distinct pressure groups with commonalities which present a potential detriment to the Group’s financial future. Some of the risks identified straddle more than one particular group but each, if came to pass, would have a distinct effect on the financial performance of the Group. These risk factors have been organized into common groups by the use of a PESTLE analysis.

8.1. Political

Political Risk; while Capita’s primary sales are to the mature Western Markets, Capita’s greatest potential for growth is in Emerging Markets but this potential must be balanced by the associated risks of political instability in countries experiencing growing wealth for the first time. When considering Foreign Direct Investment (FDI) in these Emerging Markets Capita engage in a comprehensive macro-economic environmental analysis especially in the areas of nationalization, expropriation, forced equity sales, barriers to repatriation of funds, discrimination against foreign firms, protection of technology or intellectual property, management control, bribery and corruption.Terrorism; a growing global phenomenon primarily driven by fundamentalism and dislike for western culture and values. The rise of extremism in any particular Emerging Market has to be carefully monitored to ensure Capita are not the target of any attacks or executive kidnappings.

8.2 Economic

Currency fluctuation or Hyper Inflation; the Global economic recession has affected every organization in some manner. The threat of an inflationary effect in countries where Capita has production capabilities would have a negative effect on labour costs and potentially raw material costs thus increasing cost pressures which may either lead to erosion of margin, product price

increases, or ultimately the closure of the production facility. Capita must undertake significant macro-environment analysis before committing to production facilities in any market, especially emerging markets.Negative Stock Market Fluctuations; as an employer of good standing Capita makes provision for its employee’s retirement through a pension fund. This pension fund currently has a deficit of £838 million on the potential liability. The pension fund is invested in a wide range of equities, bonds and other investment vehicles. If the stock market or the overall economy performs negatively and the existing value of the fund decreases from its current position of £60 million the pension fund will have to be capitalized with either cash or shareholder’s funds which will also have a negative impact on the income statement in the given period. Capita must monitor the risk attached to their pension investment strategy and implement failsafe systems to prevent significant erosion of the current post employment benefit assets. Failure of a supplier; Capita pride themselves on the strength of their supply chain. If a supplier were to fail as a result of poor management, economic conditions, or nefarious dealings, there are a number of potential effects on Capita. Like most big companies they secure raw materials for many years in advance and have developed partnerships with suppliers. The loss of a secure supply source means that they would have to target a secondary supplier where (1) price, (2) quality, and (3) availability could all have potential downsides. The effect of this (1) could be cost pressure leading to margin erosion or product price increases, (2) product recalls or legal actions due to lower quality or contamination leading to direct costs but also a dilution of the Groups’ intangible assets, (3) or interruption of supply resulting in the loss of revenue and an increase in operating costs due under utilization of plant and less volume to achieve overhead recovery.Failure of a customer; the other end of the supply chain is just as important for Capita. If a customer were to fail for any reason the potential effects would be; possible bad debts negatively affecting the income statement, short-term lost revenue due to the need to find and establish a new distribution channel, possible overstocking due to stock profiles built up on a combination of historic demand and forecast basis. Once again the suggestion is to look at some form of monitoring/ auditing system although this may be harder to implement with customers due to the nature of the relationship.Consolidation; the result of globalization has increased consolidation by both suppliers and customers. Greater scale will enable customers to negotiate keener pricing therefore eroding margins for Capita. While this is difficult to counteract Capita must promote partnership with distributors and customers factoring in potential growth through merger or acquisition into any long-term pricing proposals.Just as customers are consolidating so too are competitors. This obviously creates greater economies of scale and enables Capita’s competitors to engage in price wars which will ultimately lead to margin erosion and a reduction in profits. Price fixing and collusion are illegal so Capita must look to its brand strengths and maintain its premium offering to the market.

8.3 Social

Social attitude to drinking; drink awareness campaigns and a reduction in disposable income are two factors which pose different but viable threats to Capita’s business. Society is becoming more conscious of the dangers of alcohol, if abused, and the related costs for treating the associated health risks. More Government pressure is being placed on the Drinks Industry to

ensure sensible marketing and the promotion of alcoholic drink awareness initiatives. If the social attitude to alcohol were to change significantly to a negative perception this would have a significant detrimental effect to Capita revenue and long term business prospects. Positive marketing and adaption of products to society’s needs and wants should enable Capita to maintain their leading market position.Reduction in disposable income; the reduction of disposable income in most households, as a result of the economic recession, has also contributed to a change in the drinking culture in certain countries. Home drinking is increasing in popularity and the increase in Capita’s off-sales reports are bearing this fact out. Capita must continue to focus on their existing off sales strategy and correctly identifying their optimum product/ price mix for each market to ensure no further margin erosion due the reduction in on sales.Changes in consumer behavior; as with any consumer product alcoholic beverages are very prone to changes in consumer lifestyles and tastes. Capita have a broad portfolio covering most alcohol categories with a heavy recent focus on wine which is emerging as a key growth category in many markets.

8.4 Technological

Systems Failure or infiltration by hackers; like all large corporations Capita has a comprehensive IT infrastructure. The potential failure or infiltration of these systems could be disastrous for Capita on many levels including lost revenue, data protection issues, production shut downs, logistical issues, et cetera. The employment of the latest failsafe and security systems will enable Capita to minimize the potential detriment of an IT failure.

8.5 Legal

Class Action or Litigation; Capita could possibly be exposed to litigation in the event of product contamination causing health problems for consumers. The negative impact would obviously hit the income statement in the form of lost revenue and additional costs in relation to product recall and/or compensation costs but there is also a potential detrimental effect to the intangible assets, goodwill. Obviously Capita have very high quality control standards in both production and bottling facilities and this should enable them to minimize the risk in this area.Intellectual Property Rights; Capita’s presence in Emerging Markets highlights potential issues in relation to IPR and the legislative protection afforded to them in these markets. Potential effects on the Income Statement of a breach of IPR; decrease in revenue due to the competitive sale of counterfeit products, and expensive litigation costs prosecuting trademark infringements. This ultimately will result in profit erosion.Regulatory Changes in Tax Law; as a global company Capita operates in multiple markets and has to deal with a lot of complexity in terms of legal compliance. Tax law is one area where multinationals dedicate plenty of resources in order to be compliant while paying the minimum amount of tax. Higher or more punitive tax regimes will dictate the type of business that Capita will set up in any particular country as higher taxes result in the erosion of net profit and ultimately shareholder value.

8.6 Environmental

Sustainable raw material supplies; issues such as climate change, natural disasters, intensive farming, water shortages or pollution could all have a potential negative effect on Capita’s ability to continue their revenue growth and profitability pattern. Raw material shortages can lead to the loss of revenue and an increase in operating costs due under utilization of plant and less volume to achieve overhead recovery. A sustainable development plan using best practice agricultural practice aligned with sourcing raw materials from regions which are not known to be prone to natural disasters could minimize the potential impact of this risk.

9. References

Deresky, H. (2011) International Management, Managing across Borders and Cultures. 7th ed. New Jersey: Pearson.

SAM (2011) The sustainability year book, p, 55. [online] Available at: http://www.sam-group.com/en/sustainability-insight/the-sustainability-yearbook.jsp [Accessed: 10-03-2014].

Securities and Exchange Commission (2011) SEC Charges Liquor Giant Diageo with FCPA Violations. [online] Available at: http://www.sec.gov/news/press/2011/2011-158.htm [Accessed: 02-03-2014].

Deresky, H. (2011) International Management, Managing across Borders and Cultures. 7th ed. New Jersey: Pearson.

Capita. 2011. Report 2011. [report] London: Capita, p. 4. Capita. 2012. Annual Report. [report] London: Capita, p. 11. Capita. 2012. Annual Report. [report] London: Capita, p. 10. Capita. 2012. Anual Report. [report] London: p. 11 Poudel, K. 2014.  Importance And Advantages Of Ratio Analysis | Account-Management-

Economics. [online] Available at: http://accountlearning.blogspot.ie/2010/02/importance-and-advantages-of-ratio.html [Accessed: 16 Mar 2014].