This paper seeks to provide comprehensive analysis of four companies that are aerospace and defence industry. The paper also aims to show how how the companies report their financial staments using IFRS nad IAS guidelines. The companies in focus are; Rolls Royce holdings,Cobham, Avon Rubber and Cohort plc. The following are some of the terminologies that they use when preparing the financial statements.
net asset value :, the net asset value is used by their shareholders (of the four companies) to know at the time of publication the price at which the companies can be liquidated or acquired. Usually the fund manager publishes it every day, after the closing of the markets or at a specific time if it includes stocks of markets from different continents (A Basic Guide for Valuing a Company, 2002). For Rools roysce holding the net asset value is 16,5 pounds/share , Cobham is 12.93punds /share.Market value-This is the price that the asset would fetch in the Bourse, it is also known as market capitalization and is obtained by multiplying the number of ordinary shares by the share price currently(Britton and Waterston, 2013). The investor will calculate the return on his investment by the difference between the net asset value at the time of purchase and the net asset value at the time of his redemption, having to tax for the capital gains obtained (Cragg and Malkiel, 2009). The market value for each of the four companies under review is different.Discount cash flow- The investment managers at the four companies use the following valuation method that helps the investor to estimate the attractiveness of an investment opportunity. This method uses future cashflow projections and then discounts them toarrive at an estimated present value, which is consequently used to evaluate the potential of an investment. If the present value is greater than the current cost then the investment opportunity is a good one(Damodaran, 2013).
Dividend pay- This is a distribution of the earnings that a company receives in a particular year to its shareholders. Dividend pay is dicided by the board of directors and is paid as either interim or final at the year end. The dividend for the four companies vary depending on the performance and companies policies and also industry’s performace.Dividend growth- This is the rate of growth in perentage that a stock’s dividend undergoes over a period of time.
That is to say, since the net asset value represents the evolution of the value of the investment fund, it will be a relevant indicator to know the performance that this product provides during the period between the moment of its purchase and the moment of its sale or liquidation, as well as the withholding that will be applied on the same from the tax point of view (ELLIOTT, 2017).
Britains aerospace industry is the second largest in the world. Failure to secure a good brexit deal has hurt the industry and it is expected that aerospace companies turnover could decrease in the near future. This means that dividends paid out, earnings per share and price of the share may fall in companies in this industry. On the other hand, the defence industry is on a positive trajectory, with many governments increasing their military wares, companies in this industry have improved dividend growth as well as share price for their shareholders.
The valuation of a company, whether we are talking about a company own or others, is a delicate and crucial exercise in the world of investment. Calculating the value of your business is not easy, just as it is not easy to determine the economic value of any tangible asset or service (Ferna?ndez Lo?pez, 2002).
If we let ourselves be led by our intuitive knowledge and by framing any economic activity within a market economy, we could conclude that any material good or any service has the exact value that a hypothetical buyer is willing to pay for it
It is true that any quantification of an economic value always entails some subjective component. Everything will depend on what the good situation we are valuing and our intentions with that good.
In the case of a company, it is not the same valuing it with intentions in mind or others. We can value a company of our own because we want to get rid of it and put it up for sale. But also to seek financing using its value as collateral, or because we want to take to market shares of our company.In an opposite situation, we may want to value an outside company to acquire it, to obtain part of its shares, to invest in it through other type of formulas, etc (Kimmel, Kieso and Weygandt, n.d.). In this sense, our intention as investors is fundamental in determining the procedure that we must use to value a company. And this procedure, in turn will drastically change the outcome of our assessment.
The market value on many occasions with the price and is that this is not only what is really worth, but what some people are willing to pay for that company at any time of the timeline.It is very interesting therefore in these moments, in which the company faces temporarily in a moment of serious economic recession and crisis of values ??of many markets, considering an extra differentiation between two concepts that are more different and at the same time diffuse of what appear, market value and book value but with a clear objective point of view (Lin and Wang, 2017).
The book value is an undeniable price, a so-called theoretical price that has both the company as a whole and each of its parts in the so-called shares that correspond to its own owners, shareholders. The book value or theoretical price is basically knowing the assets, liabilities and net that the company counts as well as the synergies by know how and positioning of the company in the market.
The book value may vary over time, but in a more measured and safe manner than the market value. The market value is an very explosive value and depends directly on what happens along a certain time line. If the company, for example, gives good news, although it is at that moment its theoretical price has not risen, its market value because many people will start to buy shares of said company and appreciate it will rise.
Under these conditions it is inevitable therefore that many oscillators indicate that we must buy shares of companies, since we can buy them for a much cheaper price than what these shares really are worth and also can contribute each year in the form of dividends. It is therefore very significant the current situation of the markets in terms of market value and accounting value that certainly give meaning to the famous phrase that is always run between analysts(Koller, Goedhart and Wessels, 2015).
In financial accounting historical price of shares are important because they are used to show the growth of the share in terms of both dividend growth and share price. On the other hand, current figures are the ones that show the shares current price (Kurokawa, 2010).
These are methods developed by experts in business and finance, so that their implementation involves a certain degree of complexity. But we can do a simplified approach to understand what factors related to the company takes into account each one of them and which may be more appropriate depending on what situations.
It is a valuation method based on the balance of accounts of the company and is one of the simplest to calculate. It only takes into account the net worth of the company.
In this method, the assets of the company are taken, that is, the assets that it has at that moment (contributions from different partners, movable and immovable property, retained earnings over time of the company activity, etc. .) and then you subtract the liabilities (what the company owes its debts) (Madden, 2003).As is assumed, this type of valuation method will be especially favorable in the case of companies with high assets (real estate, machinery, vehicles, furniture, etc.) and not for other types of companies that base their business on other non-tangible factors (Market capitalisation, 2009). The settlement value Through calculation of the settlement value, what is done is an estimate of the value of the company at a specific time, if all its assets were sold at market price. In this case, the cost prices of the assets are not taken into account, but their value in a possible current sale, adjusting the prices of the goods to what the market dictates.
The multiple sales method is a valuation method that is often used with technology companies. It is based on a guideline calculation that is obtained by multiplying the money contributed by the sales of a company by a coefficient. This coefficient will be determined by a series of analyzes of the activity of the company in a previous period, as well as to analyze other companies of similar activity, so that the value obtained can be extrapolated at the time of valuation.
This method, also known as PER: Price-to-Earnings Ratio (Ratio) is often particularly useful for valuing listed companies. It is a question of determining the relationship between what is paid for each share of the company and the profit it brings annually.
The value of dividends
Through this method the company’s value is calculated according to the dividends per share expected to be obtained. To do this, we must calculate the dividend that each share of the company contributes and divide it by the profitability demanded by the shareholder. For example, let’s say the case of a certain shareholder who has 50 shares of a company, at a value of 10 pounds per share and dividends of 1 euro per share. Suppose that this shareholder demands a return of 3% for their shares: The required 3% of profitability would mean minimum dividends of 0.30 pounds per share. To calculate the present value of each share: formula-per-value Once the value is calculated of each share based on the dividends it reports, we can calculate the total value of the company multiplying it by the number of total shares (Dennis and Rendleman, 2003).
As we have seen, there is no better or worse method that other. Everything will depend on the purpose that we have in mind when valuing the company. What we should know is how the different methods give us one type of information or another about the company, so that this information will help us decide on our investments.
When we invest a part of our money in, say, a certain company, we acquire a part of it in the form of shares, whose price fluctuates according to the evolution of the market. In this case, our gains or losses will be given depending on the number of shares we have and the evolution of their price. That is, if the value of them is less than when we buy them, we will have lost money, and vice versa.
This obvious statement is not so obvious when what we are talking about is mutual funds. In this case, since the results of the fund depend on the weighted evolution of the values ??that compose it, the fact that it increases or decreases one or more of them does not necessarily imply that the value of the fund will necessarily go up or down.
To know, therefore, what is the evolution of the profitability of an investment fund, it is necessary to have an indicator that values ??the assets of the same at a certain time of the time. This indicator is known as the net asset value and gives us an idea of ??how the fund is behaving.
From a technical point of view, the net asset value is the price that is valid for each share of the collective investment product. At first sight, the net asset value is very similar to the share price, since the first represents the amount of a small part of the fund while the second represents the value of a small part of the company.
The calculation of the net asset value of an investment fund is simple. It is calculated by summing the value of all the assets that comprise it (including liquidity among them), subtracting the expenses related to its management and dividing the result by the total number of shares. Mathematically:
Net asset value = Value of the investment fund / Number of units
The value includes not only the amount of the portfolio but also the net returns obtained by the same, that is, after deducting the Corporation Tax.
With regard to the denominator, the number of shares of any investment fund is not fixed, but depends on the manager’s policy and the subscriptions or reimbursements made. Each person will acquire a certain number of shares depending on the money he wants to invest and the net asset value of the fund.
Avon rubber is a company that deals with manufacture of rubber based products. The company is a constituent of FTSE and its largest division. It has a division that produces equipment and components for the UK armed forces which is known as Avon protection and Milk Rite. Some of the products they produce include CBRN(chemical,biological,nuclear and radiological).
Net worth/ Net Asset Value 45 million pounds
Net Asset Value =(Assets-Liabilities)/total number of common shares
Assets and liabilities should be reported at fair market value
=(45,111,000-36,641,000)/770,000million shares=$11/share
Market value=$12.20/share as at 30/6/.2017
Source of data: https://www.marketwatch.com/investing/stock/avnbf/financials/balance-sheet
Cohort is a parent company of four agile, innovative and responsive businesses that provide defence and army products to countries like British, Portugal and other European Countries. The company’s objective like any other company is to create wealth and deliver value to its customers.
Net worth=15million pounds
(Assets-liabilities)/total number of common shares
=(53,145,000-40,120,000)/40.96million share=0.32p per share
Source of Data: https://www.google.com/search?publisherid=51778&st=ds&combofeed=google&u_ip=154.76.19.200&q=Cohort+Plc+balance+sheet
This is English /a British manufacturing company that is listed in the London Stock Exchange and also a constituent member of the FTSE 250 Index. It is a defense company and the fifth largest defense company in the UK.Its share price 136.5 pounds.
Net Asset Value (NAV) = (Assets- Liabilities)/ Total number of Common shares
Assets and liabilities should be reported at fair value (millions)
= (2,793- 2216.1)/44.6
=12.93 pounds/ share
Source; https://www.cobhaminvestors.com/key-financials.aspx
Rolls Royce Holding
It is a British multinational company that designs, manufactures and distributes aviation power systems and motor vehicles. It is also listed in the London stock exchange another markets in the world.
Net Asset Value (NAV) = (Assets- Liabilities)/ Total number of Common shares
While its market capitalization stands at over 22 billion pounds, rolls Royce holdings includes
= (3,293- 1866.23)/ 86.42
= 16.50 pounds/ shares
Source; https://www.rolls-royce.com/investors/annual-report-2016.aspx
It means capturing what is happening, transmitting it, comparing it with what must happen, deciding what is going to be done, converting that decision into information and transmitting it to the executing agencies, ie financial reporting Information systems (O’Neill, 2014).
Starting from what Financial reporting can be defined as: The set of elements, rules, procedures, that are interrelated with each other, with a logical and ordered sequence of steps to achieve a result, they can issue particular criterion of Information Financial reportings, after having reviewed a set of bibliography, and this is: entity, which after being processed, analyzed and compared with what must happen, become information to be used internally or externally, allowing decisions. One of the issues that distinguish the management process is the constant circulation of information, both within the entity and with respect to its external environment (Ottoo, 2000).
The existence of a plan with defined and clear objectives will require a means to provide information about what the company has planned and what it is doing. From Management Financial reporting: Planning and Control, to Budget Financial reporting and Accounting. This means that there must be information financial reporting that operate in the organization, which allow to communicate both planned and realized from the largest financial reporting of administration in the organization, such as the financial reporting of planning and total control of utilities, to financial reporting budgetary control financial reporting and budgetary control financial reporting (Pedersen, 2009).
Estimating the real value of assets incorporates difficulties and subjectivity Its drawback is that it projects to the future, without nuances, the present profitability. The chosen discount rate significantly influences the resulting value. According to Comparable Multiples, a company is valued based on information available from other similar companies (in sector and size)
Company’s assets are valued differently. Mostly they are the tangible and the non-tangible assets including patents and goodwill. The company’s net assets are the difference between the assets and the liabilities of the company.
For the four companies, there assets are
The human resource is an asset that is so essential in a company. In aerospace and defense companies like Rolls Royce, most of the human resource include engineers, designers, aero craft experts, technologists and administrative staff. To get the value of your business or business easily, fast and cheap, consult our professionals who will apply the most efficient and appropriate business valuation techniques for your business. Valuation report: If you want to know how much your company or business is worth in detail, our experts will prepare a valuation report accurately (Damodaran, 2013).
The new regulations include cash flow amendments; deals with a key issue in financing activities. The amendment calls for a reconciliation that allows you to see the movement of cash flows and what is the movement of items that do not move cash to reach the balance sheet balance, Clarifications help, but it remains a rather complex rule to apply (Weil, 2017).
IFRS 15 addresses issues such as the sale of goods and services, acting as agent or principal subject to the existence of economic control of the transaction, without which cannot be main, and licenses (access to intellectual property). Cohorts Plc,they also have made sure that IFRS and IAS reporting standards is adhered to in reporting of financial statements of respective years,
It has many nuances and can have very complicated operational effects.” Changes to IAS 21, IAS 12, IFRS 15 and IFRS 16 I then referred to the IAS 21 update . by the use of IAS and IFRS, the four companies have been able to put their financial reports in order.
For Rolls royce, they have incorporated all their company subsidiaries into one financial report. Cobham plc on the other hand, they have made full disclosure a mandatory practice in thei financial statements in accordance to IAS 1.
Also discussed is IFRS 15 using the expected value model, present in IAS 37; defined this model as the sum of the product of the probabilities of outcome by the value of each probability. Subsequently, it dealt with the new IFRS 16 – on leases – and explained that there are significant changes with respect to the previous rule, in particular in the tenant’s accounting(Ferna?ndez Lo?pez, 2002).
It contains 82 pages and was issued by the IASB this year, which was received with criticism from users. “It is assumed that disclosures are necessary for the information to be sufficient to allow decision making … in practice what is has shown that many of these revelations are not seen by anyone. The cost-benefit of collecting the disclosures has been greatly questioned. The expert reviewed the document’s structure and builds effective financial reporting, and reflected on the inclusion of non-financial information according to local needs and the requirements of current legislation. Some non-financial data have financial effects. Finally, he explained that the IASB could recommend to management to include integrated reports (Schmidlin, 2014). What will be the role of financial information versus the integrated report? Is it an independent element?
Hedging is the diversification of company’s assets in different portfolios, in order to minimize the risk of loss making. On the other hand, risk management is the mitigating excessive damage for the company not to go into deep losses.
According to International Accounting Standards (IAS) , goodwill happens when a company acquires another business altogether which is the cost of business purchase less the fair market value of the assets that are tangible. It is usually an intangible asset.
In aerospace and defense industry, the company’s financial management valuation method is a method of measuring the management of the companies. The asset base of the four companies is almost equal while as members of the same industry, they produce and manufacture almost similar things(Koller, Goedhart and Wessels, 2015)..
This is the net present value and future present value of the company’s cash flows. Discounted cash flows is a good method of measuring a company’s inflow and out flow of money.
This is the rate at which a company’s dividend policy increases with each payment and time of payment. If the dividend increases in a positive manner, the growth rate is positive while if the company reduces the dividend, the dividend growth rate will be negative.
|
Company |
Dividend growth rate |
2015 |
2016 |
|
Avon Rubber p.l.c. |
Dividend Growth = Year X Dividend / (Year X – 1 Dividend) – 1 |
1 x (1 + 3.56%) ^ 3 = $1.489 |
1 x (1 + 3.56%) ^ 4 = $2.43 |
|
Cohort p.l.c. |
Dividend Growth = Year X Dividend / (Year X – 1 Dividend) – 1 |
1 x (1 + 3.56%) ^ 3 = $1.57 |
1 x (1 + 3.56%) ^ 4 = $2.15 |
|
Cobham |
Dividend Growth = Year X Dividend / (Year X – 1 Dividend) – 1 |
1 x (1 + 3.56%) ^ 3 = $1.75 |
1 x (1 + 3.56%) ^ 4= $1.27 |
|
Rolls-Royce Holdings |
Dividend Growth = Year X Dividend / (Year X – 1 Dividend) – 1 |
1 x (1 + 3.56%) ^ 3 = $4.25 |
1 x (1 + 3.56%) ^ 4 = $1.15 |
In aerospace and defense industry, the companies have the same and unique characteristics. New trends in accounting standards and their relationship to sustainable development IFRS and its volatility began his intervention by saying that one of the major drawbacks of IFRS is volatility, as changes are constantly being made in its wording. He then presented a list of the amendments published since the beginning of 2016: some are already in force and others will begin to do so shortly. Later explained the draft changes to IFRS 3 and IFRS 11 on the definition of what a business is and commented on the improvements to IFRS 8-interim financial information in relation to operating segments (Kurokawa, 2010).
The discount rate applied influences the resulting value. The combined use of several valuation methods is quite common. Thus, the cash flow discount is usually used and the value obtained by the resultant is compared with other methods, usually that of the comparable multiples(Ottoo, 2000).. . According to the Capitalization of the Benefit, a company is valued at a rate of actualization of its annual benefit. This method is already considering the current profitability (usually the profit obtained in the last financial year closed).
To determine the value of our company, several techniques have been developed called valuation methods (Schmidlin, 2014). Here are the highlights:According to the Net Book Value, the company is valued for the difference between the sum of the book value of its real asset and the sum of the book value of its liabilities. Its advantage is based on objective data, directly from the Balance Sheet. It has as disadvantages both the neglect of the possible existence of latent capital gains / losses, and the avoidance of present and future returns.
|
Company |
Assets value in pounds |
|
|
Avon Rubber p.l.c. |
45.111 Billion pound |
|
|
Cohort p.l.c. |
53.145 B pounds |
|
|
Cobham |
27.93 B pounds |
|
|
Rolls-Royce Holdings |
32.93 B pounds |
According to the Net Asset Value, the company is valued for the net amount that would result in the assumption of its liquidation, which requires an estimate of the realizable value of its assets and a quantification of its liabilities (Stice et al., n.d.). It overcomes one of the drawbacks noted in the previous method, butit does not consider present and future returns. Estimating the real value of assets incorporates difficulties and subjectivity. According to the Capitalization of the Benefit, a company is valued at a rate of actualization of its annual benefit. This method is already considering the current profitability (usually the profit obtained in the last financial year closed). Its drawback is that it projects to the future, without nuances, the present profitability. The chosen discount rate significantly influences the resulting value. According to Comparable Multiples, a company is valued based on information available from other similar companies (in sector and size). The ratios between the price paid and various parameters (sales, EBITDA, BAI, asset …) are calculated, and these ratios are applied to the same variables of the company that is being valued to obtain its possible price. Its advantage lies in the use of data from real and recent transactions. Its drawback is that the data are not always available and that the comparability of the data is not always adequate. Currently, the method that is generally accepted for valuing a company is the Cash Flow Discount.
Based on the information available, net cash flows expected in the coming years (generally five) are estimated and the residual value at the end of the estimated period (usually as perpetual flow) is estimated. In use of a suitable discount rate, calculate the present value of the future flows that represents the overall value of the company. It is deducted from this the amount of the financial debt – Debt with cost -, the value of the shares of the companys is obtained (Weil, 2017). The discount rate is obtained by adding several risk premiums (due to the country, the industry or the company) to the risk-free rate. Its advantage is its close relationship with the aerospace and defense companies objective: to obtain future profits. Their drawback lies in the subjectivity that requires the estimation of future flows. The discount rate applied influences the resulting value.
The combined use of several valuation methods is quite common. Thus, the cash flow discount is usually used and the value obtained by the resultant is compared with other methods, usually that of the comparable multiples.
Anyone who has a certain level of accounting and financial knowledge can apply the valuation methods to determine the value of a company (Weil, 2017). However, the correct application of the valuation methodology to each case and the proper interpretation of the results obtained require a considerable depth of accounting, financial and, especially, valuation techniques. There are accredited knowledge and experience in the field (Westland, 2003).
Conclusion
It is a valuation method based on the balance of accounts of the company and is one of the simplest to calculate. It only takes into account the net worth of the company (Westland, 2003).
In this method, the assets of the company are taken, that is, the assets that it has at that moment (contributions from different partners, movable and immovable property, retained earnings over time of the company activity, etc. .) and then you subtract the liabilities (what the company owes its debts).
If they have, for example, the companies have formed by three partners in which each contributes certain pounds and in which at the time of the foundation they ask for a credit of pounds to buy a local and begin to operate.
References
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