Assignment

Report on Financial Performance and Financial Position Analysis for Internal Management of Spirax – Sarco,
UK.

UNIVERSITY OF GLOUCESTERSHIRE

Student Name: Keyur Vyas

Student Number: s4215227

Module: Financial Management for Engineers

Module Code: EG7505

Module Leader: Dr. Chris Gould and Mr. David Plummer

Course: MSc Engineering Management

TABLE OF CONTENTS
1 Introduction........................................................................................................................................................2
2 Internal Management..........................................................................................................................................2
2.1 Role of Management...................................................................................................................................2
2.2 Key needs of Internal Management and Purpose of Analysis......................................................................2
2.2.1 Background..........................................................................................................................................2
2.2.2 Key needs of Internal Management:....................................................................................................2
2.2.3 Purpose of Analysis..............................................................................................................................2
3 Firm Analysis.....................................................................................................................................................3
3.1 Firm type and Mode of Value Generation...................................................................................................3
3.2 Strategic Position........................................................................................................................................3
3.2.1 SWOT analysis of Spirax – Sarco for evaluating Strategic Position.......................................................4
3.3 Financial Issues............................................................................................................................................5
4 Financial Performance and Financial Position Analysis.....................................................................................5
4.1 Framework for Ratio Analysis:.....................................................................................................................5
4.2 Financial Performance and Position analysis...............................................................................................6
5 CONCLUSIONS................................................................................................................................................7
5.1 Financial Outlook of the Firm.....................................................................................................................7
5.2 Recommendations.......................................................................................................................................8
6 References..........................................................................................................................................................8

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1 INTRODUCTION

This following report analyses Spirax – Sarco Engineering Plc, focusing on management's role,
internal management needs, firm analysis, strategic position, and financial performance. The report
highlights the importance of management in creating value for clients through productivity and
innovation. It emphasizes the need for fresh strategies and analytical steps for success. The internal
management needs of Spirax – Sarco are explored, particularly in achieving sustainability goals while
remaining profitable and satisfying investors. The company's purpose is outlined as engineering a
more effective, safe, and sustainable world. Financial issues such as operating profit margins, ETS
reorganizing impact, and impact of external factors are discussed, emphasizing the significance of
financial analysis which is performed in accordance with a structured framework. The report
concludes by summarizing the financial outlook and offering recommendations for sustainable
growth.

2 INTERNAL MANAGEMENT

2.1 ROLE OF MANAGEMENT

The primary responsibility of management is to create value for the client by fostering increased
productivity and innovation among the workforces (Magretta, J., 2012). Since management is
responsible for of making key decisions, an organization's performance reflects on its management
(Hambrick, D. C., 1987). It may not always be effective in the long run to continue doing what is
being done now or in the past, thus fresh strategies and methods for reaching goals are required
(Sanne, R., 2023). This requires performing necessary analytical steps to increase the possibility of
success of the new strategies. Figure 1 shows the current management team at Spirax – Sarco
Engineering Plc.

2.2 KEY NEEDS OF INTERNAL MANAGEMENT AND PURPOSE OF ANALYSIS

2.2.1 BACKGROUND

Spirax – Sarco (2023c) clarifies that sustainable future is at the centre of Spirax – Sarco purpose and
hence holds critical importance for orchestrating future strategy. For example, Steam specialities
contributes highest revenue for Spirax Sarco (Spirax – Sarco, 2023d). For year 2022, Steam
specialities generated £866 million in revenue (Spirax – Sarco, 2023d). This shows the any strategy
employed by management must consider its impact on this revenue stream to maintain firm’s
health.

2.2.2 KEY NEEDS OF INTERNAL MANAGEMENT: Management is committed to build sustainable

future and has made commitments towards it (Spirax – Sarco, 2023a). It will require to invest in all
three segments – Steam specialities, Electric thermal and Watson – Marlow to achieve sustainability
goals while maintaining profitability and delivering for its investors.

2.2.3 PURPOSE OF ANALYSIS:

Spirax – Sarco has made few decisions to achieve its strategic goals. For example, in 2023, Spirax -
Sarco will invest in solar projects. A significant CapEx proposal includes investments in sustainability,
such as those that reduce carbon emissions, the Board will explicitly approve those investments. By

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 the end of 2023, Spirax - Sarco wants to integrate digital metering and monitoring at all its Group
manufacturing facilities thanks to an investment made by firm in partnership with Cotopaxi (Spirax –
Sarco, 2023f).

Commitments such as mentioned above, requires management to identify how strongly the
company is performing on its own as well as compared to its competitors to remain profitable and
sustainable as a firm, and this can be achieved by performing appropriate analysis.

3 FIRM ANALYSIS

3.1 FIRM TYPE AND MODE OF VALUE GENERATION

International industrial engineering firm Spirax Sarco specialises in the management and control of
thermal, electric, steam, and peristaltic pumping systems as well as related fluid path technology
(Spirax – Sarco, 2023b). Purpose of Spirax – Sarco is engineering a more effective, safe, and
sustainable world while creating sustained value for all its stakeholders (Spirax – Sarco, 2023c).

Spirax – Sarco aims to generate value for its customers by assisting them to manage energy issues,
high operating expenses, and stringent regulations. It plans to deliver this by helping them to cut
emission, reduce energy waste, cut water consumption, boost reliability and productivity, drive
operational reliability, and lower their operating costs (Spirax – Sarco, 2023a). Figure 2 shows the
revenue streams of Spirax – Sarco. More than 160 operating units, more than10400 people, more
than 2100 sales and service engineers, more than 1700 core product lines, and more than 110,000
direct buying customers contributed to the revenue of £1,160 million for the year 2022 (Spirax –
Sarco, 2023b).

As major energy consumers and drivers of

energy waste in food processing facilities, hot
water and steam generating efficiency
improvements are a crucial opportunity that
must be prioritised. According to DOE, an
average industrial steam evaluation can find
annual energy savings of 10% to 15% (United
States Department of Energy, 2022). Spirax -
Sarco Engineering Plc Engineering Plc serves
many industries including food and beverages
which also can benefit with its Steam products
and services. Electric thermal and Watson –
Marlow generate £356.1 million and £488.5
million in revenue respectively (Spirax – Sarco,
2023d).

Figure 2: Spirax – Sarco Revenue Streams; Source: Author’s Own Work

3.2 STRATEGIC POSITION

Often operational effectiveness is confused as Strategic position of a company. Strategy and

operational efficacy are both necessary for excellent performance, which is the main objective of
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every organisation. Strategy is about being different. It is about maintaining competitive advantage
for as long as possible. (Díaz-Garrido, Martín-Peña, and Sánchez-López, 2011). SWOT analysis is a
great tool to analyse company’s Strategic position.

Spirax - Sarco's dedication to sustainability and its blueprint for creating a more sustainable future
are embodied in One Planet: Engineering with Purpose. Since the launch of One Planet strategy in
2021, group energy usage reduced by 4% compared to 2021, and greenhouse gas (GHG) emissions
decreased by 30%. The consumption of electricity from renewable sources increased to 57%.
Furthermore, 47% of operational companies implemented biodiversity programs, waste to landfills
reduced from 12% to 10%, and volunteering hours increased by over 22,000 since 2021 (Spirax –
Sarco, 2023f)

3.2.1 SWOT ANALYSIS OF SPIRAX – SARCO FOR EVALUATING STRATEGIC POSITION

3.2.1.1 Strengths (S) (Spirax – Sarco, 2023e)

 46% of total revenue comes from organic sales which reduces sales and marketing cost.
 91% response rate to employee engagement which supports sustainable culture.
 33% women in Senior management and 40% as Board Members which shows progress
towards sustainable targets.
 £24.6 million spend towards employee benefits which contributes towards sustainable
culture.
 The intermediate dividend was 38.5 pence per share, up 15%, and was paid on November
12th, 2021, builds trusts in Investors.
 Increase direct sales effectiveness through market sector focus which proves firm’s ability to
generate revenue.

3.2.1.2 Weaknesses (W) (Spirax – Sarco, 2023e)

 Inefficient supply chain: in 2021, the profit margins were lowered due to lower shipment
rate than expected from manufacturing facilities in Ogden (USA) and Soissons (France).
 Susceptible to currency movements: With translation losses of £10.3 million and an extra
transactional loss of £0.8 million, currency fluctuations reduced adjusted operating profit by
nearly 4%.
 Susceptible to Economic and Political Instabilities: Due to the impact of economic and
political volatility on the output of the global industrial production, Spirax-Sarco predicted a
17% loss in sales and assumed the Group hadn't implemented any preventative measures.
 Susceptible to cyber-attacks: Spirax - Sarco Engineering Plc Engineering Plc predicated an
interruption in business operations, followed by a decline in sales in succeeding years
because of the accompanying reputational damage, with a net loss of 5% of sales over the
course of the term.

3.2.1.3 Opportunities (O) (Spirax – Sarco, 2023e)

 The Thermal Synergies project presents an opportunity for Electric Thermal Solutions and
new technology to decarbonize steam systems in the next five years.

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  In the next five to ten years, the rise of electric vehicles may offer Spirax - Sarco Engineering
Plc Engineering Plc a chance to increase sales in the vehicle battery sector.
 Build better culture by giving all qualified UK-based workers the chance to accumulate
shares in a tax-efficient manner.

3.2.1.4 Threats (T) (Spirax – Sarco 2023e); Fern Fort University (no date available))

 More challenging goals are required to reduce the existential threats brought on by climate
change which would demand more investment from the company.
 Rising wages, particularly movements like $15 an hour, and rising costs in China might put
major strain on Spirax-Sarco Engineering Plc's profitability.
 The product of Spirax-Sarco Engineering Plc is also at risk from imitation of low-quality,
counterfeit goods, particularly in developing and low-income countries.
 Disruption in supply chain due to global event, for example, Russia – Ukraine war: IP growth
for 2022 has been revised downward to 2.7% from the company's February 2022 prediction
of 4.4% due to the conflict in Ukraine and disruptions to global supply chains (Alliance News,
2023).

Conclusion of SWOT analysis: Spirax - Sarco's SWOT analysis highlights strengths like robust
sales, high employee engagement, and sustainable progress. However, weaknesses include an
inefficient supply chain and vulnerability to currency fluctuations and cyber-attacks.
Opportunities lie in the Thermal Synergies project and electric vehicle sector growth, while
threats include climate change, rising costs, counterfeit goods, and supply chain disruptions.
Strategic planning, risk management, and sustainable growth strategies are vital for maintaining
a strong position and long-term success.

3.3 FINANCIAL ISSUES (DELOITTE LLP, 2022)

 For year 2022, operating profit margins dropped to 18.9% from 23.9% in 2021.
 Due to ETS reorganising, statutory operating profit decreased by 7%, while margin decreased by 500
basis points.
 After Spirax - Sarco Engineering Plc Engineering Plc made the decision to halt all Group transactions
with or within Russia public in March, it lost 1% of Group revenues in 2021.
 With a Group-wide Lost Time Accident Rate of 0.13 in 2022 compared 0.12 in 2021, also
presents risks to the organization's productivity hence negatively affecting revenue
generation as well as negatively affecting the sustainability targets.

4 FINANCIAL PERFORMANCE AND FINANCIAL POSITION ANALYSIS

Business valuation is regarded as a crucial financial concept. To make sound judgments, an

understanding of the key factors is required to determine a company's financial standing and be able
to measure its value. This analysis plays a crucial role in evaluating the potential future ramifications
of managerial decisions (Kumar, D.N.S., P., 2019).

Achieving strategic alignment and maintaining the financial health of a company necessitates
effective coordination among the organization's strategy, the individuals involved in its
implementation, and the actual performance of the organization (Van Dinten, R., and De Waal, B.M.,
2018). Financial Ratios can be utilised as key performance indicators for financial analysis.

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4.1 FRAMEWORK FOR RATIO ANALYSIS:

It is necessary to have analytical framework to help with computations and analysis when utilising
ratios to analyse financial performance. Ratios are categorised into groups in the framework used for
financial analysis. These groups are Profitability ratios, Activity Ratios, Liquidity ratios, Gearing
Ratios, and Investor Ratios. (Watson, D, & Head, A., 2019)

Since the current analysis is performed to be presented to the internal management, Investor Ratios
are not considered.

4.2 FINANCIAL PERFORMANCE AND POSITION ANALYSIS

The ratios shown in Table 1, are calculated based on the information available in Spirax – Sarco
Engineering Plc’s Annual reports (Spirax – Sarco, (2023e), and L. Hargreaves, (2023)).

Ratios used for the analysis are as following (Watson, D, & Head, A., 2019):

Profitability Ratios:

1. ROCE (Return on Capital Employed) =

( Profit before interest∧tax ÷Capital employed ) x 100
This ratio reflects profit making abilities to the capital used to generate it.
2. Net Profit Margin = ( Profit before interest ∧tax ÷ Revenue ) x 100
This ratio shows firm’s efficiency for controlling cost.

Activity Ratios:

1. Non – Current Asset Turnover = ( Turnover ÷ Non−Current Assets )

The sales being produced by a company's non-current asset base are shown by the non-
current asset turnover.
2. Sales to Net Working Capital = (Sales÷ Net Current Asset s)
This ratio illustrates how much working capital is required to support sales.

Liquidity Ratio:

1. Current Ratio = (Current Assets÷ Current Liabilities)

This ratio evaluates a company's capacity to settle its debts when they become due.

Gearing Ratio:

1. Capital Gearing Ratio = (Long−term Debt ÷Capital Employed )

This ratio's objective is to demonstrate how much debt financing a company has utilised.

2022 2021 2020 2019

ROCE 8.78128 10.38296 9.393951 9.556479
Profitability Ratios
Net Profit Margin 19.12952 23.3916 20.11899 19.05988
Non – Current Asset Turnover 0.93023 1.268995 1.137763 1.177072
Activity Ratios
Sales to Net Working Capital 1.528809 1.672888 1.723321 1.551255

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 Turnover
Current Ratio 4.368471 4.88132 7.637719 4.498183
Liquidity Ratio
Gearing Ratio Capital Gearing Ratio 0.27863 0.155662 0.258656 0.249163
Table 1: Ratio Analysis for Spirax – Sarco Engineering Plc

Figure 3: Ratio Analysis of Spirax – Sarco’s Performance

Conclusion of Ratio Analysis: Figure 3 shows the ratio analysis of Spirax – Sarco’s performance. The
ratio analysis reveals a decline in the company's profitability, efficiency in capital utilization, and
ability to generate profit from sales. The non-current asset turnover ratio and sales to net-working
capital turnover ratio have also decreased, indicating a decline in asset utilization and sales
generation. However, the current ratio has remained stable, indicating satisfactory short-term
liquidity. The increase in the gearing ratio suggests increased reliance on debt financing. Overall, the
company needs to address its profitability, asset utilization, liquidity, and debt management to
improve its financial health.

Grundf ROCE Net Non - Sales to Current Gearing

os Profit Current Net- Ratio Ratio
Margin Asset Workin
Turn g
Over Capital
Turnov
er
2021 247.226 11.4780 3.29847 2.36116 2.55872 15.6521
4 9 3 4 9 7
2020 227.305 9.73424 3.77634 2.16167 2.95429 16.9858
4 4 4 2
2019 238.244 10.7529 4.07976 2.33065 2.77229 14.9372
8 6 3 1 1
2018 203.677 8.70476 3.68311 2.73836 1.91935 14.9667
8 4 5 9 2 3
Table 2: Ratio Analysis of Grundfos

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The data used for calculating ratios in Table 2 for Grundfos belongs to the Grundfos’ Annual Report
2021 Grundfos, (2022). Grundfos' ratio analysis reveals positive trends in key financial indicators. The
Return on Capital Employed (ROCE) and Net Profit Margin have both increased over the years,
indicating improved capital efficiency and profitability. The company has demonstrated consistent
efficiency in utilizing non-current assets and efficient utilization of net-working capital in generating
sales. The Current Ratio has remained stable or slightly improved, ensuring satisfactory short-term
liquidity. The Gearing Ratio has also remained relatively stable, indicating a moderate reliance on
debt financing. Overall, these findings indicate that Grundfos has effectively managed its capital,
resulting in improved profitability and financial performance.

5 CONCLUSIONS

5.1 FINANCIAL OUTLOOK OF THE FIRM

Financial Performance and its strategic goals: As identified earlier, Spirax – Sarco needs to stretch
its sustainability targets however ratio analysis of company’s performance suggests that the firm
need to address the issues of profitability, asset utilization, liquidity, and debt management to
improve its financial health before committing any further investment to maintain company’s health
and avoid potential economic loss.

Spirax – Sarco’s performance compared to market leader Grundfos:

In summary, the ratio analysis reveals that Grundfos generally outperforms Spirax-Sarco in terms of
profitability, capital efficiency, and liquidity. Grundfos has shown improving trends in ROCE, net
profit margin, and stable efficiency in asset utilization. Spirax-Sarco, on the other hand, has
experienced declining profitability and capital efficiency. These differences suggest that Grundfos
has been more successful in managing its capital and generating profitability compared to Spirax-
Sarco.

5.2 RECOMMENDATIONS

Spirax - Sarco's management should focus on sustainability by investing in renewable energy and
digital metering. They should also work on improving supply chain efficiency, addressing currency
fluctuations and economic instabilities, enhancing cybersecurity measures, strengthening
profitability and asset utilization, optimizing liquidity and debt management, learning from
competitors' success, and developing long-term strategic plans. By implementing these
recommendations, the company can create value for clients, stakeholders, and ensure long-term
success.

6 REFERENCES

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Castro, N.R. and Chousa, J.P., (2006), An integrated framework for the financial analysis of
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