Your company choice:
Your coursework should be based on the most recent Annual Report of one of the following companies:
• Thomas Cook Group plc (approved 29 November 2018)
• Sports Direct International plc (approved 26 July 2019)
• Ted Baker plc (approved 21 March 2019)
Question
Assume that today is the day after the company you have chosen has approved/published their
Annual Report.
You have applied for a job with that company and completed their psychometric test online.
Following the evaluation of your test, you have just received an email from the company stating that you
have been invited to an interview for a graduate position in the finance department at their head office.
You should assume that you are keen to be successful at that interview.
Requirement:
Based on the Annual Report and any publicly available information about the company on the day after
the Annual Report is approved/published:
(a) Identify, with justification, the key pieces of information relating to the company that the interview
panel are likely to expect you to know about at the interview.
(30 marks)
(b) From your own point of view, analyse the data in the Annual Report by calculating and interpreting
at least 12 relevant financial ratios for at least the last two accounting periods.
You should also state your opinion (based on your analysis) as to whether you would accept the
job if it is offered.
Note: Do not take account of any information that may have come to light since the publication
date of the Annual Report.
(60 marks)
(c) Based on your analysis in part (b), list (with justification) any relevant questions that you would want
to ask the interview panel at the interview.
(10 marks)
Total: 100 marks

the assignment brief is: The interpretation of the published annual
report for a quoted UK company.

//

• With regards to Lufthansa’s profitability ratios, they experienced results (see Appendix A) that would be considered attractive in the eyes of potential investors. In 2017, they saw a fall in their return on equity (ROE) from 2016 which indicates that they were slightly less able to generate shareholders’ investments into profits. However this was caused by a significant rise in equity (see Appendix B) which subsequently meant the ROE decreased, therefore appearing less profitable. However, the return on capital employed (ROCE) increased from the 2016 to 2017 showing that Lufthansa improved their efficiency in generating profits from the capital they utilised which is an indicator of good performance. Furthermore, in 2017 there was a rise in net profit margin (NPM) which suggests that Lufthansa became more effective at controlling their costs as well as improving how much profit they generated from each sale. The operating profit ratio also increased in 2017 which is important for showing how much more profitable Lufthansa’s operations became. This rise further displays how Lufthansa increased profitability over the period.
  Lufthansa also saw a change in their liquidity as current ratio fell from 2016 to 2017 which suggests that their ability to meet their short term obligations became slightly harder.In relation to the long term financial structure of Lufthansa, gearing decreased in 2017 which was consecutive years in which the ratio fell at Lufthansa. This fall in the gearing ratio indicates falling debt which was caused by the aforementioned increase in shareholders’ equity. Furthermore it means that Lufthansa were able to use less debt to continue operations. Typically companies that are highly geared are considered being at high risk of going bankrupt or loan default during periods of falling profit. However in the airline industry where it is more capital intensive, it is not unusual for companies to have a higher degree of leverage.

  Lufthansa’s earnings per share (EPS) increased in 2017 from the figure in 2016 which is consecutive years where EPS rose suggesting that they have become increasingly capable of generating dividends for their incumbent shareholders. They also saw a rise in the price-earnings ratio (PER) at year-end 2017 suggesting there is higher confidence from the market in Lufthansa’s future performance in the airline industry. It also suggests that investors would be willing to pay more for Lufthansa’s stock since they expect their future earnings to grow.

  In the period of January to September 2018, Lufthansa experienced falls in some of their ratios (see Appendix C) compared with the same period in 2017. There was a fall in the ROE, the operating ratio and the NPM. The gearing ratio also fell significantly, further decreasing their financial risk. Their earning power for investors slightly fell as EPS decreased which resulted in the fall in the PER displaying slightly less confidence in Lufthansa from the market.

• In the accounting period between 2016 and 2017, Lufthansa’s PER rose to 6.10 from 3.22 which is a significant increase. It was another year where the PER increased and although it provides confidence in Lufthansa from the market, it could potentially lead to their stock becoming overvalued which makes it become a risky investment since it would pressure Lufthansa to perform to the expectations of investors.

• One main limitation of financial reporting is that it can become difficult for investors to compare the financial reports between different companies in the same industry. For example it would be difficult to compare the financial reports between Lufthansa and Delta Air Lines. This is because Lufthansa reports under the International Financial Reporting Standard (IFRS) which is considered principles-based whilst Delta report under the US Generally Accepted Accounting Principles (GAAP) which is rules-based. For example in the calculation of the diluted EPS, IFRS does not average the interim period results whereas the US GAAP totals the incremental number of shares by computing the weighted average of the incremental shares from the quarterly diluted EPS. Simply, this means that in a yearly reporting period under IFRS, the number of incremental shares is totalled for the whole year whereas under US GAAP it is computed by using the quarterly average of the shares. Therefore this will make it harder to compare the EPS between the two companies because it may be harder for a potential investor to determine which airline will more profitable.Another limitation of financial reporting is that there are standards which give companies the leverage to report misleading figures. One example of this is that currently Lufthansa utilise operating leases which allows them to use assets, such as aircrafts, although the risk and rewards of the asset belong to the lessor. This is a type of off-balance sheet finance which allows them to only record the rental expense of the asset rather than the full cost of buying the asset outright. Operating leases allow the gearing ratio to appear less risky because it will mean that their borrowings will be recorded as smaller figures. For example the gearing ratio has been consecutively falling at Lufthansa although at year-end 2017, the ratio could have been higher than 70.99% if the figures potentially included the cost of buying assets outright. Lufthansa could operate this way because under IAS 17 it is required that operating leases are only “recognised as an expense in the income statement” (iasplus.com, 2015) which could therefore give off a more favourable balance sheet. However as of January 2019, IFRS 16 will be introduced which will require lessees to state assets and liabilities for leases that last longer than 12 months (IFRS, 2016). This will result in significant changes in many companies’, particularly in the airline industry, balance sheets and gearing ratios.

  Another limitation of financial reporting and analysis is that it can be prone to subjectivity by companies. An example of this could potentially be seen in IAS 36 which aims to ensure a company’s assets are not carried at more than its recoverable amount. (Iasplus.com, 2015) The recoverable amount is the higher of the asset’s fair value and value-in-use (VIU). The VIU is described as the present value of future cash flows which is can be very subjective. This is because a company may decide to overstate the value of the cash flows despite having five years to forecast them. If overstated it could mean that the recoverable amount can exceed the carrying value which would mean that the asset would not be recognised as an impairment loss, therefore it won’t appear on the income statement as an expense. This would therefore not give a true reflection of a company’s profits on the income statement.