Financial statement analysis is used to evaluate a company's historical performance, identify the reasons for changes in its financial position, and provide a basis for assessing future performance.
For Morgan Sindall Group plc, an analysis covering 2013–2015 should examine both the absolute figures in the financial statements and the relationships between them. Important areas include revenue growth, profitability, liquidity, efficiency, gearing and shareholder returns. Comparing these measures across the three years can reveal whether the company's financial position strengthened or deteriorated and, importantly, why.
For example, the analysis could calculate and compare:
- Profitability: gross/operating profit margin, net profit margin, ROCE and ROE.
- Liquidity: current ratio and quick ratio.
- Efficiency: receivables days, payables days and asset turnover.
- Gearing: debt-to-equity and interest coverage.
- Investor performance: EPS and dividend-related measures.
The report should not stop at calculating ratios. Each significant movement should be connected to information in Morgan Sindall's annual reports. For example, a declining operating margin could result from increasing project costs, contract provisions, restructuring expenses or poor performance within a particular business division. Conversely, improving cash flow or profitability could indicate better contract selection, working-capital management or stronger divisional performance.
Forecasting should then build upon the historical analysis. Rather than assuming that every 2013–2015 trend will simply continue, forecasts should consider whether the underlying causes are likely to persist. Revenue, margins, working capital and cash flow can be projected under reasonable assumptions, ideally using base, optimistic and pessimistic scenarios.
Finally, recommendations should follow directly from the problems identified. If the analysis shows weak margins, recommendations might concern project selection and cost control; if liquidity is deteriorating, the focus could be working-capital management; and if leverage is excessive, management could prioritize cash generation and debt reduction.
This approach makes the report more useful than simply describing the financial statements because it follows the sequence:
historical results → ratio/trend analysis → causes → forecast → recommendations.
