Analyzing the growth

Another important factor when looking at the financial risk is the borrowing rate. If the borrowing rate increases it can have a negative effect on IC Companys. There have been periods where the ROCEnoa

has been at a low level and contributed negatively to the financial risk. The borrowing rate (net interest rate cost/net interest bearing debt) has been at a reasonable level throughout the period. In 2004 it was 2,8% but rose to 5,7% and fell again until 2008 where it got to 3,3%.

It is important for IC Companys that ROCEnoa increases. The main reason is that the borrowing rate is at a reasonable level where the probability for lowering it further is small. If we look at IC Companys ROCEnoa in 2004 we can see it is negative and is the main reason for the negative SPREAD. But when the ROCEnoa has developed into positive figures we get huge positive SPREADS. Because the positive ROCE leads to a positive SPREAD, the leverage will contribute to the lever-effect where it will affect both ROE and the owners return into positive. If the SPREAD is negative it will lead to what is called

“the opposite lever-effect”).

From an overall perspective the financial risk seems to be at a middle/good level. The reason is that the SPREAD is at a good level as well. But what might be a bit of concern is the development for the coming year 2009. But at this particular moment it seems to be at a good level.

We will in the following sections compute IC Companys permanent profit where the transitory will be excluded. By doing this we will only have profit components that has been gained from the companys permanent profit the so called core operating profit.

Permanent profit:

As mentioned in the above section will the historical and present growth rate “blaze the trail” for budgeting the prospective growth.

In appendix 1.7.5 is IC Companys profit divided into permanent and transitory items.

This statement shows that the calculated permanent profit is more or less equal to the operating profit from sale in the last two years of the analytical period. But for the first three accounting years the differences are huge. The difference in the permanent profit compared to the reformulated income statement is caused by the transitory tax components that now has been both calculated and separated to get the tax effect.

The distribution between the permanent and transitory profit has been thoroughly examined in appendix 1.7 and therefore it will not be discussed here. We refer to appendix 1.7.

Figure 4.11 shows the decomposing of ROCEnoa. The financial ratios have first been decomposed into the part that comes from the transitory items and the permanent (core) profit. On behalf of this

distribution it is obvious that the transitory items on the net operating assets have a huge impact on ROCEnoa. Especially in the year 2003/04 IC Companys gets a negative ROCEnoa because of the deficit in the transitory items. The remaining years IC Companys is able to maintain a positive ROCEnoa but the transitory items still have a negative effect on ROCEnoa.

Figure 4.11

    2004  2005  2006  2007  2008 

TI/NOA    ‐61,6%  ‐38,8%  ‐60,7%  ‐44,6%  ‐59,4% 

Core OP/NOA  Core ROCEnoa  40,0%  70,2%  83,3%  70,1%  78,4% 

OP*100/NOA  ROCEnoa  ‐21,6%  31,4%  22,7%  25,4%  19,0% 

OPafter tax 

*100/sale 

PMsale after tax  12,7%  23,6%  23%  23%  23,3% 

OOafter tax 

*100/sale 

PMother op profit after tax  ‐23,3%  ‐14,0%  ‐16,0%  ‐15,0%  ‐17,6% 

OP *100/sale  PM  ‐8,6%  9,6%  7,0%  8,0%  5,7% 

Core OPsale 

*100/sale 

Core PMsale  15,8%  21,5%  25,6%  22,2%  23,6% 

SALE/NOA  AT  2,52  3,27  3,25  3,16  3,33 

We have furthermore made a decomposing of PM into PMsale after tax, PMother op profit after tax and Core PMsale.

From this decomposing of PM we can see that both Core PMsale and Core PMsale are actually more or less at the same level throughout the whole accounting period. But we are still able to see a specific pattern in the development of these two financial ratios. The difference between these two financial ratios is greatest in the first 3 years of the analytical period compared to the last 2 years. The reason for this is that, the first three years has a relative high adjustment of the tax component compared to the last two accounting years. Therefore the effect is greatest in the first three years.

We see here that there is a huge difference. One of the reason is that sales and administration cost has not been included in the core profit but is a part of the transitory item. The reason for that is that we as an external analyst are not able to identify the size of these cost. IC Company has put these cost in

“other operating profit”. But when you look at the note for this particular item it will not clarify anything. Therefore we have been forced to recognize these costs as transitory cost and not as a part of the permanent cost.

Regarding the budgeting and valuation of IC Companys we can make use of the calculated financial ratios. Though, we have to be careful of using the core PMsale specially the first three accounting years because of the huge tax adjustment.

But as it has been mentioned in previous section, IC Companys is going through a turnaround process where there has been change in the strategy. This makes it even more important that we use this historical development with cautiousness. Even though these values indicate a high growth rate we have to keep in mind that the upcoming annual report states that a negative growth is expected. This and some assumptions concerning the core PMsale and other important financial ratios will be used in the final valuation of IC Companys.