BES Group: Financial Statements Analysis

The May 2017 Management Case Study pre-seen was published very recently by CIMA. The pre-seen gives us ample financial information to work through and we’ve been digging into the numbers at VIVA Financial Tuition.

CIMA May 2017 MCS

The following article explains some of the main points relating to the financial statements for both the BES Group and its main rival in country E, VES.

BES: Profit and Loss Analysis

Starting with the BES Group’s Consolidated Statement of Profit or Loss and we see healthy revenue growth for the year with an increase of 11.4% compared to the 2015 figure. The fact that BES’s cost of sales figure has increased at a slightly lower rate of 11.1% in 2016 means that the company’s gross profit has improved by an even higher rate of 11.9% between 2015 and 2016.

Cost discipline is vital to this company if it is to maintain healthy profit margins.

This is because it is tied to its single price point (SPP) of just E$1 and has no room to increase prices if costs rise. Clearly BES has been good at keeping costs low because as we move down the profit or loss statement we see increasing rates of growth for the operating profit figures (14.3% increase) and net profit figures (17.9% improvement in 2016). The only slight concern is the increase of 15.1% in administrative expenses and the increasing finance costs.

Overall though, BES’s profit margins have all improved in 2016. The net profit margin (net profit/revenues) was 8.9% in 2015 while it stands at 9.5% in 2016.

Furthermore, James Kotter, the BES Group’s Chairman, mentions in the pre-seen that 2016 saw record levels of revenues and profits. So, all in all, 2016 has witnessed a strong financial performance for the company. 

BES: Balance Sheet Review

Turning to the BES Group’s Consolidated Statement of Financial Position and there are a few problems to contend with.

The two main issues relate to indebtedness and liquidity which we will see are even bigger problems for BES’s rival, VES. Because there is no detail given as to what non-current liabilities is comprised of, it’s difficult to say exactly what the firm’s level of gearing is. For the sake of simplicity, I’m going to assume that all of the non-current liabilities section is made up of long-term debt.

If we make that assumption, we see that BES has gearing (long-term debt/equity) of 66% which is very high. Furthermore, current liabilities exceed current assets with BES having a current ratio (current assets/current liabilities) of 0.6 and a quick ratio ([current assets – inventory]/current liabilities) of 0.4.

Ideally, you would want to see those above 1.0. This means that BES does not have enough liquid assets to cover its short-term obligations such as trade payables, short-term loans etc.

Competitor Analysis: VES

Now we consider BES’s main rival in the single price point (SPP) category of the value retail sector, VES. VES has revenues about one-third the size of BES’s. This is due to their lower sales prices and smaller store sizes along with the fact that they have fewer stores.

They demonstrate an even better ability to control cost of sales than BES with an increase of just 7.4% compared to revenue growth of 8.5%.

The good news stops there however!

As we move down through the Statement of Profit or Loss we see real problems with distribution costs rising 26% and administrative expenses rising by a massive 42% in 2016. This completely undoes the good work done in securing higher gross profits and by the time we get to the net profit figure we see that it has decreased 54% in 2016 to just E$1.8 million.

VES’s operating (operating profit/revenue) and net profit margins (net profit/revenue) are much lower than their rivals, standing at just 3.4% and 1.2% in 2016 respectively.

VES’s Statement of Financial Position demonstrates the same problems as BES’s, only worse. The company’s cash is just E$200,000 and the quick ratio ([current assets – inventory]/current liabilities) is just 0.2.

Furthermore, if we again make the assumption that non-current liabilities is comprised entirely of long-term debt obligations, then VES’s gearing (long-term debt/equity) stands at a massive 101%.

VES now faces a situation where its operating profit barely covers its interest payments – its interest coverage (operating profit/interest expense) has fallen from 3.1 in 2015 to just 1.8 in 2016.

The one ray of light I witness on VES’s balance sheet is the fact that their assets seem to work harder than BES’s in generating revenues. VES’s total assets are just one-fifth the size of BES’s yet, as we said before, they generate revenues that are one-third the size of BES’s. VES’s asset turnover ratio (revenues/capital employed) is 2.1 in 2016 compared to BES’s figure of just 1.0.

This article is a snippet of what’s available as part of the complete Smarter Study Pack. The pack includes almost four hours of pre-seen and industry analysis, mock exams weighted in accordance with official exams, financial ratio analysis and much more (https://vivatuition.com/store/).

Don’t forget to check out VIVA financial other great free MCS May 2017 articles here and here for more great insights ahead of your exam

Visit their YouTube channel for free, exclusive video content

CIMA MCS May 2017: BES

CIMA released the pre-seen materials for the upcoming MCS exam in May 2017 this week and this gives students the chances to prepare themselves to pass the exam first time.

The MCS exam combines the theory you have learnt from the E2, P2 and F2 objective tests and pulls it together in the form of a practical case study.

The MCS exam is challenging given the depth of the knowledge and skills required to pass but they are much more interesting from a students point of view.

Remember! Your role in this exam is that of Financial Manager – undertstanding your role within the company is important – you can read more it on a blog post I wrote here.

You can find the official pre-seen materials from CIMA here.

Likewise, I posted an article earlier this month with some general advice on the case study exams for all levels for the May 2017 sitting here.

I’d also recommend looking at the CIMA connect site for the MCS exam to find other students discussion and practical advice from CIMA.

BES: Pre-seen video analysis

You can find the full set of videos on the May 2017 MCS here.

BES: Strategic Analysis

You can find the full set of videos on the May 2017 MCS here.

BES: Top 10 Issues

You can find the full set of videos on the May 2017 MCS here.

MCS: Astranti Full Course

If you found the pre-seen videos helpful then the MCS course from Astranti is worth looking into as they provide a clear study plan with LOTS of materials, mock exams and support to help you pass the MCS.

CIMA Case Study Advice: May 2017

The May 2017 CIMA case studies are just around the corner and this article should put you on the right track for a pass mark.

CIMA May 2017 Case Study Exam Tips

Having passed the OCS exam myself last year – you can read more on that here – I hope I can offer students who are facing the same problems and questions I had, guidance and some useful case study resources.

Here are my 3 top tips for passing your next CIMA case study.

Don’t be scared of the pre-seen materials

As soon as the pre-seen materials are released you should cover them back to front, make notes and re-read them over again. You may have the tendency to stick to revising theory based on the syllabus content but the six weeks between pre-seen materials being released and the exam date are crucial and you should focus your attention mainly on the pre-seen materials.

Plan Your Answers

You may be out of practice with longer written style exams since the introduction of the new style “multiple choice” CIMA objective tests. So this makes planning your answers in the case study even more critical. It will prevent you for rambling and also keep you on track to make sure you answer the requirements in the exam questions.

Be clever with your time and be sure to give yourself 10 minutes planning time before you start writing your answers. Read the question and requirements and make some brief headings on your answer paper, then add more depth under each heading making sure to include reference to pre-seen and industry analysis where possible.

Now you will be in a position to start your answers in full and ensuring in the process you will have ticked all of the boxes in terms of relevant content.

Take Mock Exams Seriously

Testing yourself is always the toughest part in any exam preparation. But mock exams are key to success and this rings true for CIMA case studies as well.

Being able to concentrate for three hours and answer question after question in a pressured environment is not easy. The only way to be confident and exam ready is take a few mock exams before the real thing. Not only will have the experience under your belt, you will find out which areas you need to improve on (i.e. more links to pre-seen) and it will enhance your exam technique in the process.

Astranti Case Study Course

 

Astranti are growing in reputation with each passing year and I was glad to use their resources for the OCS exam I passed first time. In fact, it was an Astranti OCS student who ranked 1st in global November CIMA results.

But to take full advantage and guarantee yourself a pass mark (see the Astranti Pass Guarantee), their full OCS, MCS and SCS courses cover everything you need to pass the May 2017 CIMA case study.

CIMA OCS Exam Tips

  • Study Text 1: how to approach the exam.
  • Study Text 2: syllabus content that is easy to digest.
  • Pre-Seen Analysis: where it all begins! video analysis of the pre-seen.
  • Strategic Analysis: how to understand the scenario from a strategic point
  • Top 10 Issues: a tutors view on the top 10 issues with the case study scenario
  • Industry Analysis: a look into the industry surrounding the case study.
  • Masterclass 1: live session with CIMA tutor on how to pass the case study.
  • Masterclass 2: another live session focusing on CIMA syllabus revision.
  • 3 Mock Exams: based on the actual case study (with marking and feedback!!).
  • Personal Advice and Guidance – via private forums and progress reviews.
  • Ethics Pack – a favourite CIMA topic that should never be under estimated!!

You can find full details of their courses for all levels below for the May 2017 exams.

OCS Course – May 2017

MCS Course – May 2017

SCS Course – May 2017

CIMA Examiners Guidance

CIMA Exam Tips

A keen feature of this article in previous editions has been the links to the post-exam kits from CIMA on the case study exams. However, this time around, I have gone through the examiners report for each level OCS, MCS and SCS for November exams and picked out the key remarks from the examiner.

It’s clear from the comments below that students, must;

  • improve their technical knowledge of the CIMA syllabus.
  • remember ethical principles.
  • answer the requirements of the question and not just blurt all they know on that subject without any thought.

OCS: November examiners feedback

There was little evidence that time pressure caused any problems. However there were elements of answers missing or only briefly addressed in some cases; often in the more technical areas.

This was either due to a lack of technical knowledge or possibly the result of candidates not reading the task properly.

In a case study the most important thing to do is to answer the task asked within the context of the business. The random inclusion of models, with no application, earned no marks. In addition weaker answers included a tendency to knowledge dump rather than focus on the task given.

It is important to prepare for this examination by studying previous case studies and practice putting knowledge into context by answering past questions.

MCS: November examiners feedback

As with previous case studies, the strongest answers were those which were clearly applied to the scenario.

This case study continued the trend first observed in the August exam of candidates appearing to be getting weaker in technical accounting and stronger in general management.

Candidates must be better prepared in technical accounting areas in the future.

Some candidates demonstrated a worryingly poor understanding of several syllabus areas, including crucial material such as the accounting standards, transfer pricing, ethics, rights issues and even net present value.

This was clearly very disappointing; however there were also some very good answers where candidates made good use of the pre-seen material, were technically competent and made excellent attempts at answering what was asked.

SCS: November examiners feedback

Many candidates could not name the ethical principles or apply them. In some cases they were unable to recognise an ethical issue.

Finance was another weak area, where the lack of ability was surprising. It is clear that candidates are becoming weaker at technical accounting questions, though better at management questions.

You can find the full details of the examiners guidance from previous CIMA case study exams by visiting the CIMA connect site here – and searching under the relevant resources.

Good Luck and happy studying!!