This item is an abbreviated restatement of the Profit and Loss account. The effect of this statement is to show the profit or loss figure as if no revaluation of assets had occurred. This statement is useful to the user, as it allows them to compare more easily one company with another on the same basis, by comparing historic costs, rather than predictions of future values, etc. Statement of Total Recognized Gains and Losses FRS 3 introduces the Statement of Total Recognized Gains and Losses to the accounts for the first time.

The effect of this statement is to highlight items which regulations dictate must be sent to reserves, rather than appearing in the Profit and Loss Account, or the Balance Sheet. This again clarifies for the user the Return on Equity, and how it was achieved within the company. For instance, in the ’99 accounts, items such as Currency Translation, Revaluation of Land and Buildings and Deferred Taxation are recognized. These items would formally have been recognized in Notes to the Accounts, so this Statement adds considerably to the clarity and ease of use of the accounts to shareholders.

Reconciliation of Movements in Shareholders Funds This reconciliation is designed to show movements that may not have been shown in either the Profit and Loss Account, or the Statement of Total Recognized Gains and Losses. This would include entries in the ’99 accounts such as New Share Capital Subscribed, and shares issued in relation to a merger. Once again these items would have been recognized else where, in Notes to the accounts, but are presented here in a clearer, easier to use and more recognizable format. Comparative Figures

FRS 3 requires that comparative figures be given for all primary statements in the company accounts, and any notes that accompany these statements. These comparatives are of considerable use and convenience to those using the accounts. Whilst comparisons are available by accessing previous years accounts, producing comparatives allows much easier use of the accounts to assess trends, etc. Conclusion In conclusion, FRS 3 makes a considerable change to the format of the annual Company Report. In all areas information is more clearly presented, and easier to use, particularly for the non-accountant.

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The effect of large amounts of new information can, in some cases, make a confusing situation less clear, but in the case of FRS 3 this has been avoided buy easily understood formats and style of presentation. The Annual Report of BAe Systems has been made clearer, and significantly more informative, particularly for the non-financial investor by the introduction of FRS 3, and as such, adds to shareholder knowledge and value. Performance Analysis of BAe Systems plc It is the purpose of this section of the report to analyse the performance of the company using financial ratios, as listed below.

All ratios calculated have been included, but only the most significant will be discussed. It should be noted in all analysis below that in the year ended ’98 the company sold an investment in Orange plc, realising an exceptional profit of i?? 368 million, causing a distortion of results, and hence ratio’s throughout that year. There is also a similar distortion in the year ended ’96, so the ratio’s most reliable for the forecasts of past and future trends are the years ’95, ’97 and ’99. Return on Capital Employed ROCE has moved between 20. 63% (’98) to 4. 36% for the year ended ’99, with an average figure of 9. 23%.

The figure for the years ’99, ’97 and ’95 would appear to be the most reliable figures in this group, moving between 4. 36% and 5. 68%. This figure would appear to give a low return to shareholders and lenders, but due to the interest cover and gearing figures reviewed below, it can be assumed that due to the large size of the company and it’s borrowings, a low rate of interest has been negotiated. Also, as mentioned below the high, and sometimes very high level of gearing has led to a much higher return to shareholders than the ROCE figure would indicate, as observed in Return on Shareholders Funds, in the table above.

The probable cause of the low ROCE figure is the low Net Profit Margin figure, which will be discussed below. Net Profit Margin The companies Net Profit Margin has moved in the range of 3. 16% to 13. 82% over the last 5 years. As above the figures most reliable for analyse are the years ’99, ’97 and ’95. The range then becomes 3. 16% to 6. 52%. This is a relatively low figure compared with the ideals of a smaller business, but it should be remembered that BAe turned over in excess of 7 billion pounds for the last financial year, producing a large profit from a low margin.

For a company involved in large scale project and tender work the profit margin will be eroded by the need to produce a competitive quote against global competition, and the need to finance massive Research and Development spending in order to keep the company at the fore front of technology. The company employs a highly skilled workforce, with an average wage of  34,500 for the year ended ’99, which although eroding the profit margin, allows the company to keep their global position.

The rise in Profit Margin this year to 6. 52%, has been helped by a net decrease in Debtors of 122 million, and a decrease in Stocks of  100 million, as seen in the Cash Flow Statement, and the Debtor Collection Days, and the Stock Turnover days in the table above. As mentioned in Liquidity Ratio, below, the company is working toward a leaner, more efficient structure, which if successful, should produce a continued increase in Net Profit Margin in years to come. Sales/Capital Employed This figure has risen virtually ever year, and gives a good indication of increasing efficiency within the company, as has been highlighted above and below.

This figure also gives a clearer view of the efficiency of the company than those involving profit, as this figure excludes any extraordinary or exceptional items that may otherwise distort the view of the finances of the company through ratio analysis. The continued rise of this ratio will allow the company to increase their ROCE figure, which becomes even more desirable as they continue to reduce their gearing. Liquidity Ratios Current Ratio The Current Ratio has moved in a band of 1. 2 – 1. 67:1 between ’95 and ’99, with ’99 being the lowest year at 1. 2. Although the apocryphal normal is 2:1, this should by no means be an absolute figure.

BAe is a very large company engaged in large-scale projects, therefore the level of net current assets will change over time depending upon the level of completion of WIP, etc. The company has maintained a Current Ratio of a similar size over the last 5 years, so this level must be sustainable, as long as the current decreasing trend does not continue. Liquidity Ratio The Liquidity Ratio proves that the decline in the Current Ratio is attributable to a reduction in stock, as the Liquidity Ratio, whilst declining slightly, has not fallen in proportion with the Current Ratio.

More advanced stock control techniques, such as JIT, are contributing to this reduction by allowing the company to carry less stock, allowing them to reduce costs. Gearing and Interest Cover Gearing has moved over a wide range over the last 5 years, from 364% to 72%. The year that gearing reached 364% would have been a major cause of concern to both shareholders and creditors, as the amount of debt that the company had, had placed the shareholders under considerable risk.

This is borne out buy the interest cover figures, which show a low figure of 2.44 times for the year ended ’95. Happily, in later years, the company has pursued a policy of reducing gearing, ending in a much less risky figure of 72% gearing, with interest cover of 3. 83 times. As with the current ratio, the interest cover has fluctuated over the previous five years due to the cyclical nature of the aerospace and defence market. The interest cover figure seams lower than is desire able, but has been sustained over a period of five years and is therefore sustainable, as long as a persistent downward movement in profits is not encountered.


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