Financial Statement Analysis ASSIGNMENT

Financial Statement Analysis This paper presents the analysis of Barclays Bank PLC. The analysis covers the internal and external risks facing the firm. It also covers the financial health of the firm, the creditworthiness of the firm, and the accounting and financial procedures pursued by the firm. In section two of the paper, the report covers the analysis of the existence of any financial distress in the company.
Case Study Analysis- Barclays Bank PLC Task 1 Internal and External risk factors for Barclays Bank PLC The analysis of the financial reports of Barclays Bank PLC for the financial years 2014 and 2015 reveals that the company faces various internal and external risks. The report outlines five critical risks that the board terms as material risks. These risks are organized into general categories that include credit risk, market risk, operational risk, funding risk, and conduct risk. Of the five categories of risks that the organization considers as principal, material, and key risks, the market risk is the only risk that is considered to be an external risk while all other risks are considered to be internal risks.
Internal risks are risks that arise from within the organization, and that involve the normal operations of the company. In this instance, the internal risks include the operational risk, credit risk, funding risk, and the conduct risk.
The internal risks share a common characteristic which is the fact that they are all related to the day-to-day activities of Barclays Bank PLC and that they may be easier to mitigate as compared to the external risks.
Breaking down the risks under this category, the credit risk refers to the risk that the borrowers will default on the debt, which include the interest and the principal amount extended by the bank.
Notably, this is the greatest risk for the company considering the fact that the company is in the business of selling loan products as the core business. The second risk is the funding risk which relates to how the bank finance sits business.
The major source of funding includes the customer deposits and contractions in these deposits poses a high risk for the organization. Notably, there has been regulations affecting the way that banks can use the deposits considering the too-big-to-fail problem which is why the funding risk becomes one of the major risks.
The other two risks include the operational risk and the conduct risk, which involve operations and conduct of the employees of the firm (Barclay Bank PLC,
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The other two risks include the operational risk and the conduct risk, which involve operations and conduct of the employees of the firm (Barclay Bank PLC,
2015). On the other hand, external risks are risks beyond the control of the company. In this particular case and
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2015). On the other hand, external risks are risks beyond the control of the company. In this particular case and according to information published by the Barclays Bank PLC in the 2014 and 2015 financial reports, the major external risk facing the firm is the market risk that entails changes in the market structure that are beyond the control of the organization. Mitigating the market risk requires a good understanding of the changes in the business environment and the way these factors affect the business of the firm.
Financial Health of the Firm Financial health is simply a term used to describe the state of the firm’s financial situation. There are many dimensions to the firm’s financial health. The most common indicators of the firm’s financial health include revenue growth, expenses reduction or staying flat, cash balances, debt ratios, profitability, and activity ratios. From the general analysis of the Barclays Bank PLC case, the firm can be considered to be in good financial health (Sullivan, 2016). The following paragraph provides a detailed description of why this decision was reached based on the financial reports of the company for the years 2014 and 2015.
The analysis of the company’s financial statements indicates the main revenue to be interest income. In 2014, the interest revenue stood at £12.08 billion. This figure improved to £12.558 in 2015 indicating growth in the core business. Net operating income also improved commendably from £23.120 billion to £23.340 billion over the financial years 2014-2015. However, the operating expenses increased slightly over the same period resulting in a lower profit after tax of £623 million in 2015 as compared to a higher profit after tax of £845 in 2014 (Barclay Bank PLC, 2014).
From the consolidated balance sheet, Barclays PLC recorded an improvement in its cash position with the increase in cash and
balances in central banks from £39,695 million to £49,711 million over the period in focus.
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balances in central banks from £39,695 million to £49,711 million over the period in focus.
The improved cash position indicates that the financial health of the company is better.
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The improved cash position indicates that the financial health of the company is better.
The assets of the company reduced slightly over the period resulting in £1,120,012 in 2015 as compared to £1,357,906 in 2014.
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The assets of the company reduced slightly over the period resulting in £1,120,012 in 2015 as compared to £1,357,906 in 2014.
Two of the items that were affected by the reduction of assets were the loans and advances to customers and other banks, and this is why the core business of Barclays PLC ought to be reconsidered.
Overall, the total assets of the company exceeded the total liabilities indicating that the company is likely to go into solvency in the coming years. These factors led to the conclusion that Barclays PLC is financially healthy, and this is in line with the firm’s focus for the year which was ‘returning to stability’ as captured in the financial report for the year 2015.
Analysis of all financial ratios of the company supported the conclusion that the firm is financial healthy (Sullivan, 2016). Credit Worthiness of Barclays Bank PLC The credit worthiness of a firm refers to a valuation performed by a lending entity to determine whether the borrower is likely to default in the payment of principal and interest in debt obligations (Investopedia, 2008). The credit worthiness is considered from the perspective of a firm’s loan repayment history, but since this information is not plainly available for large corporations such as Barclays Bank PLC, the credit rating or credit score presents one of the indicators of the firm’s creditworthiness. However, further analysis of the firm’s assets and liabilities outstanding provides a detailed view of the firm’s credit worthiness.
Barclay’s Bank PLC is AA- by Moody’s for the long-term credit facility and P-1 for the short term credit. This indicates a good credit rating for the organization indicating that the firm is worthy of credit extensions. From a general interpretation, the credit rating as presented by Moody’s indicates that the firm’s likelihood of default in debt repayments is extremely low, almost close to that of treasury instruments most of which have AAA rating (Barclay Bank PLC, 2016).
From the company’s financial reports, the total assets for the years in focus stood at £1,120,012 in 2015 and £1,357,906 in 2014 with these figures being in millions. The total liabilities stood at £1,054,148 in 2015 while in 2014 the figure was at £1,291,948.
Notably, the liabilities reduced over the year indicating that the firm was settling and meeting its debt obligations. Secondly, the debt to assets ratios of the company for the two years stood at 1.062 and 1.051 in 2015 and 2014 respectively indicating notable improvement over the year.
This improvement was also noted in the debt to equity ratios and the firm’s days in receivables. Coupled with the improvements in the revenues and the net operating profits of the company, it is prudent that the company has a good credit rating and that it is credit worthy.
Analysts may, however, recommend that the firm desists from taking credit shortly to continue improving its financial position (Barclay Bank PLC, 2015). Financial and Accounting Procedures at Barclays Bank PLC The Barclays Bank PLC reports analyzed in this case are the consolidated statements and reports of the undertaking. Consequently, the key accounting procedure that one must take note of in the analysis of the company’s financial statements is the manner in which consolidation is handled. From the notes to the financial statements, the company clearly indicates that it complies with international financial reporting standards on consolidation processes, and this relates specifically to the IFRS 10, which details the preparation of consolidated financial statements (Barclay Bank PLC, 2015). Notably, these accounting procedures help the company in complying with the exchange laws as well as the tax laws in the country of primary registration.
On the financial aspects of reporting, the company captures the concern of foreign currency translation. This captures the effect that transaction and
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On the financial aspects of reporting, the company captures the concern of foreign currency translation. This captures the effect that transaction and balances in foreign currencies are translated into the reporting currency that is the Sterling Pound (Barclay Bank PLC, 2015). The company reported that it uses the end of period exchange rates for the recognition of these rates. Consequently, the company recognizes a gain or loss on the translation of the foreign exchange denominated transactions and balance sheet items.
Notably, the consolidation reporting and the foreign currency translation are the two major reporting procedures that would be of interest to any analyst of the company’s financial reports considering the many loopholes that exist in the company’s reporting. However, there are also other procedures that the analyst would look into, and these include reporting by single entities or segmented reporting. This is important to the understanding of the entities in the consolidation that are underperforming.
Task 2 Distress Analysis Distress analysis in this particular case relates specifically to financial distress as it relates to the case of Barclays Bank PLC. Financial distress refers to a condition where a company fails to meet, or it has difficulties paying off the debt owed to its creditors. This is majorly due to high fixed assets, the holding of illiquid assets on its balance sheet, as well as highly sensitive revenues, such that simple economic downturns are likely to highly affect the performance of the firm. The implications of being in financial distress include having to acquire financing at high costs, opportunity costs, and the implications on the morale of the workforce. Chances of insolvency increase with increased financial distress and the firm may at times file for bankruptcy (Johnston, 2016).
From the analysis of the financial statements and specifically the balance sheet of the Barclay Bank PLC, the firm is not going through financial distress. Notably, the firm can settle both the short term and long term debt without any need for the firm to pay the short-term liabilities with long-term funds that are more expensive. The analysis also indicates that the firm continues to pay its liabilities with the liabilities in 2015 being lower than the liabilities in 2014 (Barclay Bank PLC, 2015). The other facet of the distress analysis is the observation that the debt to equity ratios and well as the coverage of the assets to the debt improved over the period in consideration. The firm is therefore highly unlikely to get into financial stress soon.
One of the major indicators of any financial distress would be the firm’s cash position. Notably, the firm’s cash and balances at hand improved tremendously over the period in consideration (Barclay Bank PLC, 2015). This was supported by improvements in the revenues and the net operating profits in general. This indicates the continued ability of Barclays Banks PLC to meet any debt obligations considering that this is paid from the firm’s operating income. The only small discrepancy in the financial statements of the entity was the reduction in net profits after tax, which was affected by an increase in the cost financing or the interest of the company. Overall, the firm is not facing any financial distress.
Conclusion This paper presents the analysis of Barclays Bank PLC. The analysis encompasses various facts of the firm’s financial situation, and the analysis indicates a company that is performing well. The firm improved the revenues and the operating profits of the company. The assets of the company exceed the liabilities, and the firm reduced its liabilities over the period indicating that it can meet its liabilities. Additionally, the firm’s cash balances improved indicating that the firm is not suffering from any financial distress.
Recommendations The analysis recommends the improvement of the firm’s assets to liabilities ratio to at least 1.25 before considering taking in more debt. The improvement will improve the firm’s credit rating and ability to acquire funding at a lower cost.