Summarised Financial Accounts 2012 for Spin Plc

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v. Earnings per Share: Net income/ Share Issued = 9.5/5 = £1.9m

It is an important factor to determine the company’s share price. The figure reflects how profitable the business is per share and is often compared between different companies.

vi. Price/ Earnings ratio: Share price/ Earnings per share = 5.88/ 1.9 = 3.09

The ratio is the willingness of the investors to spend on the company. P/E often considers the firm’s past performance and is often associated with the economy background, which influences the market’s future expectations. Since the ratio is based on investors’ future expectations of the company, whether it is operating efficiently may have an influence on it. If the ratio is high, it is possible to assume that the business is efficient in order to meet the high rate in the future. It can be compared to the company’s growth rate and the industry’s average ratio in order to see the firm’s future prospect. The P/E ratio indicates the business’s potential value in the future. The P/E ratio of Spin is quite low and is possibly showing that the investors have low confidence with the company.

With the calculated figures above, it is possible to say that the company’s is not performing as well as expecting. The company has a high proportion of stock. This could decrease its liquidity and may make the company unable to pay for its immediate liabilities. The long debtors day could also has the same effect. This could put the business’s finance into trouble if the current liabilities require immediate payment. In addition, Spin also has a considerable amount of long-term loans and this could possibly decrease its profitability in the long-term. The low returns on investment may possibly imply the lack of efficiency. This may not be in stakeholders’ interests and could possibly decrease external investments. Investors’ future expectation of the business, regarding its growth, is low and this may probably imply the fall of stakeholders’ confidence towards the company. This also reflected on the Spin’s share price, as it slightly decrease 4% between 2014 and current price. To conclude, it may be risky to invest the company due to the factors above.

C.

When seeking for finance sources, the company should first look at its internal sources. Spin plc. is investing money to expand the business and help its future growth. It could use its reserves and retained earnings to fund the new investment. It may be the most convenient way for business to fund its expansion since the owner can make the decision by him/herself. It does not dilute the ownership, comparing to releasing more shares, since it is using its existing resource. However, it does come along with opportunity costs, such as bank’s interest rate. In addition, there is a possibility of reducing profits and dividends if the investment failed. Despite of the disadvantages, it is one of the most significant ways for company to obtain funds for reinvestment.

Nonetheless, the amount of reserves and retained earnings is not enough to finance the entire programme, Spin should search for other sources of funds.

The business can apply for bank loan. Applying for bank loan can be available for big amount of borrowing and may help Spin to cover the rest of the expenses. The interest rate can vary depending on the amount of lending and can either be fixed or variable, however, there are both advantages and disadvantages. The interest rate may be fixed if it’s a medium-term lending and the rate may base on future predictions. This may either benefit or be problematic for the company, depending on whether the rate rise or fall. The variable interest rate may fluctuate according to the interest rate and act as an uncertainty to the business. There is a possibility for bank to refuse the application, depending on the company’s financial position. The capital gearing ratio is 34.1% (140/(270+140)*100=34.1) and percentage is relatively low comparing to the average around 50%. The low percentage of liabilities may better enhance the chance of borrowing from the bank. However, the low liquidity of its assets may indicate the possibility of Spin of not being able to pay the debt. Additionally, the big amount of borrowing may mean lower return to investors and may not be in their interests.

Another way to gather fund is to issue more shares. This could help quickly gather cash because the shareholder will have to pay for a new issue of shares or can retain profit. Investors may look at the company’s earnings per share and P/E ratio to see the company’s profitability and its future growth to decide whether to buy its share. Spin has increased its market share by 25% since 2007 and the share price has doubled from £5.88 in 2012 to the current £11.76, although there is a 4% drop of share price compare to 2014. This may attract its stakeholders to buy its share. The company will not need to repay for the issued shares in the short term. Nevertheless, the company will have to pay more dividends to its shareholders in the long term and may possibly lower the company’s market price. In addition, the amount of share issued should be carefully controlled. If it issues too many shares, it may dilute the company’s ownership. The low rate of return and P/E ratio may also decrease stakeholders’ willingness to buy its share, since it may be difficult for them to receive the expecting profit.

Spin plc. could also convert its current assets into cash to fund its investment. The company could sell its inventories which are worth £37m or collect its receivables of £30m and use it with the current available cash or even combine both ways. Either way could meet its need of £52m. This method is better to control within the company since it does not need to seek for external resources. However, the funding sources may require a longer time and may not be available in the short term. According to clothing retailing industry’s nature, it takes approximately 3 months to turnover its stocks. The stock turnover for Spin is 3.9, which is slightly higher than the industry’s average. This shows that it is having too much stock and should sell some of it. Spin’s debtor collection period also shows that it may require around 75 days to collect its debits. These methods may require less cost, such as bank repayment, but may not be available in the short term. Nevertheless, it could be one of the most sustainable ways for a company to raise funds in terms of its long-term finance and, also, depends on how urgent the company needs the money or can it pay the expenses separately. Compare to the previous two means, this method reduce less uncertainty