Analysis of Financial Performance of Pz Cussons 2012

ANALYSIS OF THE FINANCIAL PERFORMANCE OF PZ CUSSONS PLC AND RESEARCH MATRIX Background Information of the Company PZ Cussons Plc. is a UK ground consumer products group. The school principal activities of the group be the manufacture and distri scarcelyion of soaps, detergents, toiletries, beauty products, pharmaceuticals, edible oils, fats, electrical heartfelts and nutritional products.The play alongs products faecal matter therefore be categorised into in the flesh(predicate) compassionate, home care, baby care, beauty products, food and nutrition and electrical skilfuls. They have supply filament and distribution ne cardinalrks in Africa, Asia and Europe. Their mission is to enhance the lives of customers with quality, value and in noation. Their survey is to be a growing and dynamic company who are passionate about their leading brands and drive innovation in everything they do.The company has four study strategies which are operating in selected categories where the ir brands have a strategic advantage and offering egression opportunities which are profitcapable operating in selected geographies either finished their own infrastructure or through partnership operating a flexible and evolving supply chain designed to service their categories and work with people who luck their unique CAN DO values. The companys major competitors are Mcbride Plc. , Kao UK Ltd, Creightons Plc. , and Swal humblefield Plc. Marketline, 2012). Interpretation of Financial Statements Using Ratio Analysis Profit cleverness Ratios These ratios measure the ability of a company to generate earnings in coition to its sales, assets and equity (Ready Ratios, 2012). 2012 2011 Return on Capital Employed 49. 6 = 8. 16% 107. 3 =16. 43% (PBIT/Total Assets-Current liabilities) 930. 5 322. 4 938. 5 285. 6 Return on Equity (ROE) 34. 4 = 7. 1% 70. 4 = 14. 85% (Profit after tax/Shareholders funds) 458. 3 474 operational Profit Margin 49. 6 = 5. 77% 107. 3 = 13. 1% (PBIT/Sales) 8 58. 9 820. 7 Gross Profit Margin 309. 2 = 40% 325. 2 = 39. 6% (Gross Profit/Sales) 858. 820. 7 Overheads/Sales 134 + 125. 4 = 30% 135 + 83. 3 = 26. 6% 858. 9 820. 7 Sales Growth 858. 9- 820. 7 = 4. 65% (Yr 2 Sales- Yr 1 Sales/ Yr 1 Sales) 820. 7 The ROE is minuscule 7. 51%, have from 14. 85% in 2011 which shows that a some(prenominal) lower profit has been made on the shareholders investments.This is largely out-of-pocket to the decrease in profits for the class. The reduction in profit has also impacted on the ROCE which is down to 8. 16% from 16. 43% in 2011. There is a marginal increase in the gross margin. This is as a result of an increase in the cost of sales which could have been affected by the rise in costs of raw materials as pointed out in the Chairmans mastery and offset by a small 4. 65% increase in sales. The operating profit to sales has reduced drastically, as a result of a mellow increase in overheads and the revenue increase.The increase in overheads was r eferable to exceptional relics related to administrative expenses. From the annual report, it can be seen that there was a supply chain optimisation project initiated to tackle rising material costs, wage inflation in emerging markets and to reduce overheads of manufacturing activities. This project is an exceptional item included in the operating profit. Other exceptional items included are the acquisition of Fudge by the company and an impairment of the Australian home care brand due to worsening trade conditions.It could be said these are one-off items which impacted on overheads and resulted in a reduced operating profit for the grade but the group will need to improve its margins and control overheads to enhance its profitability. Liquidity Ratios These ratios measure the ability of a company to meet its short shape obligations as they fall due (Ready Ratios, 2012). 2012 2011 Current Ratio 393. 3 = 1. 22 417. 4 = 1. 46 (Current Assets/Current Liabilities) 322. 285. 6 Current Ratio excluding oc reliable debt 393. 3 = 1. 70 417. 4 = 1. 65 322. 4 90. 8 285. 6- 32. 5 Acid Test/ Quick Ratio 393. 3 173. 6 = 0. 68 417. 4 151. 7 = 0. 93 (CA Inventories/ CL) 322. 4 285. 6 Acid discharge excluding stream debt 393. 3 173. 6 = 0. 95 417. 4 151. = 1. 05 322. 4 90. 8 285. 6 32. 5 The current ratio has fallen from 1. 46 to 1. 22 likewise the acid test ratio which has fallen from 0. 93 to 0. 68. There is an increased inventory level which whitethorn justify the statement in the financial review that there were high functional dandy levels especially in Nigeria. Another aspect to consider is the gold balance which was significantly lower by 34. 6 % to the previous year. It is recyclable to consider the business context. From the same eview, it could be noted that some capital intake took place which affected the cash level, the major one macrocosm the acquisition of Fudge which was mentioned above and an investment in a joint venture. Another reveal c ash outlay was their contribution to the closed UK salary scheme during the de-risking exercise. The ratios are also impacted by the inclusion of gets in current liabilities which means the debt is due in the current year. If the ratios are recalculated by excluding the current debt, the current ratio would be much acceptable 1. 70, a marginal increase from 2011.The acid test ratio excluding the borrowings is 0. 95, a marginal decrease from 1. 05. This is beca make use of for the acid test, current liabilities (excluding debt) have increased more than current assets (excluding inventory). Given the explanations stated, these ratios are probably dandy results but a trend analysis may shed more light on the ratios. Activity/ Efficiency Ratios These ratios analyse how well the companys assets and liabilities are utilised (Collier, 2012). 2012 2011 Debtors Collection Period 114. = 49 days 122. 5 = 54 days (Trade Receivables/Sales) (858. 9/365) (820. 7/365) Payment Period 104 = 69 da ys 117. 8 = 87 days (Trade Payables/Cost of Sales) (549. 7/365) (495. 5/365) Asset Turnover 858. 9 = 92. 3 % 820. 7 = 87. 4% (Sales/Total Assets) 930. 5 938. 5Inventory Turnover 549. 7 = 3. 16 x 495. 5 = 3. 26 x (Cost of Sales/Inventories) 173. 6 151. 7 365/3. 16 = 116 days 365/3. 26 = 112 days It may appear that the company is doing a good job at managing its receivables and payables with a decrease in both the collection and payment periods but knowledge of the credit limit and wrong might have helped in analysing the situation as well as comparison with the industry average.Asset turnover has risen from 87. 4% to 92. 3% indicating that the company has been able to generate more sales with their asset base. This is as a result of an increase in sales revenue and a lower level of current assets, especially the decrease in cash level. Inventory turnover has declined from 112 days of inventory holding to 116 days. Both ratios are quite high which implies that inventory is been unp loughed in the stores for a long time between its purchase and its sale. The company would need to be able to manage its inventories more efficiently.Gearing Ratios It measures the level of debt/borrowings in relation to shareholders equity (Collier, 2012). 2012 2011 Gearing 0 = 0 15 = 3% (Long term debt/equity + debt) 458. 3 + 0 474 + 15 Gearing (including current debt) 0 + 90. 8 = 16. 54% 15 + 32. 5 = 9. 87% 458. 3 + 0 + 90. 474 + 15 + 32. 5 Interest Cover 49. 6 = 13. 78 x 107. 3 = 41. 26 x (PBIT/Interest Payable) 3. 6 2. 6 The gearing is 0 for 2012 indicating that the debt is repayable within the current year. By including the current debt, the gearing ratio shows an increase from 9. 87% in 2011 to 16. 54% in 2012. This is a more realistic debt level as the Statement of Cash Flows in the annual report reveals a ? 9. 4m borrowing in 2012. The worry cover has declined from 41. 26 times to 13. 78 in 2012. This is due to the decrease in operating profits but nevertheless the inte rest cover is still healthy. Shareholder Return Ratios These ratios measure the return to shareholders on their investment in the business (Collier, 2012). 2012 2011 Dividend per share (DPS) 6. 717p 6. 06p Market value per Share ? 3. 23 ? 3. 4 (Both disclosed in the annual report) Dividend payout ratio 28. 8 = 83. 72% 26 = 36. 93% (Dividends paid/Profit after tax) 34. 4 70. 4 Dividend restoration ? 0. 06717 = 2. 08% ? 0. 0606 = 1. 66% (DPS/Market value per share) ? 3. 23 ? 3. 64 Earnings per share (EPS) (Disclosed in income statement) 8. 03p 16. 48pPrice/earnings ratio ? 3. 23 = 40. 22 x ? 3. 64 = 22. 09 x (Market value per share/EPS) ? 0. 0803 ? 0. 1648 The earnings per share have greatly reduced from 16. 48 to 8. 03 due to the decrease in profits, as there has been no vary in shareholder capital. The dividend paid has increased slightly, despite the fact that profits were low and this consumed a high portion of the after-tax profits as shown by the dividend payout ratio. This wo uld insinuate the company has a high shareholder value.The dividend yield is an effective interest rate which fluctuates in relation to the share price. The yield has increased slightly due to the marginal increase in dividends paid and the reduction in the market value of the shares. The price/earnings ratio has seen a dramatic increase from 22. 09 to 40. 22 which is largely due to the decrease in the EPS. It however reflects that investors may have a high expectation for proximo growing. Ratio analysis is more effectual when the ratios are interpreted as a trend over time or by comparison to industry averages, to competitor ratios or to predetermined targets.As such, two years is too short to draw meaningful conclusions about the performance of the group (Collier, 2012). Below is a five year abbreviation from which the trend can be understood more clearly. PZ Cussons Five-Year Summary of cognitive process In ? m 2012 2011 2010 2009 2008 Sales Revenue 858. 9 820. 7 771. 6 83 8. 1 660. 9 Operating Profit 49. 6 107. 101. 4 86. 2 76. 4 Operating Margin 5. 77% 13. 1% 13. 14% 10. 28% 11. 56% Sales growth (year on year) 4. 65% 6. 36% -7. 93% 26. 8% - Current Ratio 1. 22 1. 46 1. 84 1. 94 2. 25 Gearing 0 3% 6. 19% 10. 3% 14. 66% Earnings per share 8. 03p 16. 48p 14. 89p 11. 64p 11. 04p Dividends per share 6. 717p 6. 61p 5. 90p 5. 27p 4. 70p Note The EPS and DPS were disclosed in the financial statement. Whilst the operating margin and sales growth are based on the information in the table which were also gotten from the companys financials, the calculation of current and gearing ratios are below 010 2009 2008 Current ratio 403. 7/219. 1 354. 9/182. 6 327. 4/145. 4 Gearing 30/(458. 8 + 30) 44. 9/(389. 9+ 44. 9) 59. 9/(348. 7 + 59. 9) The figures show an increase in sales over the years with a sharp decrease from year 2009 to 2010, though a good operating margin was generated. This could imply that a low cost base was being maintained.There has been a st eady improvement in profits with a substantial reduction in 2012 though there was a lower margin in 2009 which would suggest that profits as a return on sales was quite low. The EPS has increased year on year with a drastic decrease in 2012 due to lower profits. The DPS has increased marginally year on year which reflects a high shareholder value. The current ratio has declined over the years. It could be that there have been high inventory levels. It is vital to note that a working capital ratio that is too high may imply that the company is not utilizing its assets effectively as could have been the case in 2008.The company should seek to manage its working capital more efficiently. The gearing ratio has been on the decrease to a point of no long term debt in 2012. This may appear to be a good thing but it is worth noting that long term borrowings are needed to fund current assets. Research Matrix The matrix below shows a summary of the journal articles read in relation to this wo rk. It identifies some themes found in the literature. The themes are ranked on a scale of importance with 1 being less important and 5 being extremely important to the analysis of my work. Authors of Journal Articles Scale of Importance 1 2 3 4 5 Roman (2011) Sundkvist, Hedman Profitability and Almstrom (2012) Muradoglu, Bakke and Kvernes Gearing (2005) Cette, Durant and Vilette (2011) Profitability ROCE Koonce and Lipe (2010) Earnings Bierman and Hass (2009) Earnings Growth Banos-Caballero, Garcia-Teruel Working Capital and Martinez-Solano (2012) De Wet and Du Toit (2007) Profitability ROE Lifland (2011) Working Capital Dossi and Patelli (2010) Non-financial Measures business relationship and Analysis of Research Matrix According to Sundkvist, Hedman and Almstrom (2012), the profitability of a company is driven by controllable factors which are the internal resources of the firm such as raw materials and unc ontrollable factors such as government regulations.One way of increasing profitability is to reduce costs. In doing this, the costs have to be broken down and cost drivers identified (Roman, 2011 Sundkvist, Hedman and Almstrom, 2012). This theme is important as cost reduction is a crucial way to maintain profitability. In the case of PZ Cussons, the supply chain optimisation project was initialised to cut down on manufacturing overheads. Muradoglu, Bakke and Kvernes (2005), argue that gearing ratio is vital in apprasing bankruptcy risk and investors like a low gearing ratio as there is a lower risk that they lose money on their investments. This theme is very important as a very high gearing increases the financial risk of a company.Cette, Durant and Villetelle (2011) stress the limitation of ROCE in that when a firms future outlook is good and this in turns leads to an increase in assets and there is no change in profit, then the ratio goes down implying the firm is less profitable irrespective of meliorate prospects. This is extremely important as it highlights issues that should be taken into account when interpreting this ratio. Koonce and Lipe (2010) argue that the earnings trend of a company affects the investors acumen about the future prospects of that company as such a positive earnings trend enhances the price-earnings ratio. This theme is very important as it helps in our understanding of the price-earnings ratio. According to Bierman and Hass (2009), EPS growth can be ascertained by the use of share/stock repurchase and the variations in the rates used in profit retention. He argues for the use of earnings growth models.This theme is of little important to my analysis as there was no share repurchase in the current year of PZ Cussons and growth models were not used in my work. Based on the research carried out by Banos-Caballero, Garcia-Teruel and Martinez-Solano (2012), they claim that a high investment in working capital has the ability to impro ve the performance of a firm in profit-terms up to an optimal point at which higher working capital levels would have a negative effect on performance and this point is reached when the cost of holding working capital exceed the benefits. This theme is important as it seeks to explain working capital commission. De Wet and Du Toit (2007) emphasise the pitfalls of return on equity measure.As such the earnings figure can be subject to manipulation legally due to changes in accounting policy. This is extremely important as it cautions us in our interpretation of the ROE. Lifland (2011) argues that effective working capital management is characterised by an increase in asset turnover and a decrease in receivables and inventories. He also highlights the fact that companies may have to seek external finance to meet working capital requirements. This is very important as it seeks to give insight on the interpretation of working capital ratios In determining financial performance, it is al so useful to consider non-financial measures such as employee and customer satisfaction as well as measuring business processes.Though these are supplementary measures, they cannot be substituted for financial measures (Dossi and Patelli, 2010). It is good to draw attention to this but it is of less importance to my work as I only consider the financial ratios. It is crucial to bear in spirit that there are limitations inherent in the use of ratio analysis, some of which were pointed above. Another factor is that they are based on historical records. The values could be affected by inflation so it is useful to modify the profits to reflect holding gains and losses which result from variation in the value of assets and liabilities (Cette, Durant and Villetelle, 2011). despite all this, ratios remain a significant tool in analysing financial statements (Collier, 2012).Based on my analysis, PZ Cussons seems to performing quite well the business environment and the challenges in the dissimilar divisions might account for the lower performance this year. However, it is vital to note that this analysis was based on annual reports which are produced in part for public relations. As such companies seek to promote their interests therein. To fully understand the company performance, an evaluation of the industry information and competitor performance would be required. References Banos-Caballero, S. , Garcia-Teruel, P. and Martinez-Solano, P. (2012) How does working capital management affect the profitability of Spanish SMEs? Small Business Economics, vol. 39, no. 2, pp. 517-529. Bierman Jr , Harold and Hass, J.E. (2009) Explaining Earnings Per Share Growth, Journal of Portfolio Management, vol. 35, no. 4, pp. 166-169. Cette, G. , Durant, D. and Villetelle, J. (2011) Asset Price Changes and Macroeconomic criterion of Profitability, Review of Income & Wealth, vol. 57, no. 2, pp. 364-378. Collier, P. M. (2012) Accounting for Managers Interpreting Accounting Informat ion for Decision Making 4th edn. Sussex John Wiley & Sons. De Wet, J. H. V. H. and Du Toit, E. (2007) Return on equity A popular, but flawed measure of corporate financial performance, South African Journal of Business Management, vol. 38, no. 1, pp. 59-69. Dossi, A. and Patelli, L. 2010) You Learn From What You Measure Financial and Non-financial Performance Measures in Multinational Companies, Long range planning, vol. 43, no. 4, pp. 498-526. Koonce, L. and Lipe, M. G. (2010) Earnings Trend and Performance Relative to Benchmarks How Consistency Influences Their Joint Use, Journal of Accounting Research, vol. 48, no. 4, pp. 859-884. Lifland, S. A. (2011) The Corporate Soap-Opera As the Cash Turns Management of Working Capital and Potential External Financing Needs, Review of Business, vol. 32, no. 1, pp. 35-46. Marketline (2012) Company Profile PZ Cussons Plc. Marketline composition Online. on tap(predicate) at www. marketline. com (Accessed 7 November 2012). Muradoglu, G. , Bakk e, M. nd Kvernes, G. L. (2005) An investment strategy based on gearing ratio, Applied Economics Letters, vol. 12, no. 13, pp. 801-804. PZ Cussons (2012) Annual Reports and Accounts. Available at http//www. pzcussons. com/pzc/ir/reports (Accessed 6 November 2012). Ready Ratios (2012) Reference. Available at http//www. readyratios. com/reference (Accessed 5 December 2012). Roman, F. J. (2011) A Case Study on Cost adherence and Profitability Analysis at Continental Airlines, American Accounting Association. Sundkvist, R. , Hedman, R. and Almstrom, P. (2012) A model for linking shop floor improvements to manufacturing cost and profitability, International