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A Financial Analysis Of Cadburys Finance Essay

Do a business analysis is not a piece of cake as it requires heavy amount of research and study. According to a large number of researchers, business analysis wants that the analyst must put his head in the analytical process to get the desired result.

Every company wants to enhance its productivity and financial health and to accomplish the same; the company has to take number of provisions into account.

The main prospective of this study is to do a business analysis of a selected company. The entity which we have chosen on which this entire study will be based on is Cadbury. The assignment is somewhat difficult in nature that is why the researcher has used a planned approach to complete this piece of work. In the first section, a small background about the company’s operations have been incorporated to have a better understanding about the company after then the researcher has shifted the gears towards the main theme of the paper.

Cadbury: An Outlook

Cadbury is a British confectionery multinational company and has been referred as the second biggest global confectionery company of the world after Mars. The company has its headquartering located in London and its shares are actively traded in London Stock Exchange (LSE).

Recently after the merger with Kraft Foods, Cadbury has become the largest confectionary company of the world. Cadbury is a member of Financial Times Stock Exchange (FTSE) 100 index and the shares of the company are referred as blue chip shares. Cadbury is in good financial health and eager to expand its network throughout the world. The recent merger with Kraft foods enables the company to enhance its portfolio positively. The company has now its active operations in more than 30 countries worldwide with annual revenue of GB£ 204,254 million. The company has more than 70,000 employees working in different regions.

Profitability Ratios

An order of financial metrics that are used to assess an industry's ability to engender return as compared to its expenses and other important outlay during an aspect and span of time. For most of these ratios, having an upper quantity relative to a competitor's ratio or the same ratio from a previous spot is indicative that the circle is liability well

NET PROFIT MARGIN (NPM) OF CADBURY

Profit margin is very effective when comparing companies in analogous industries. An advanced profit margin shows more profitable ratios that has better monitor over its costs compared to its competitors. The NPM of Cadbury which we have computed is mentioned below,

Year

Net Profit

Revenue

Net Profit Margin

 

in Millions $

in Millions $

NPM %

 

 

 

 

2009

12,731

374,526

3.40

2010

13,400

401,244

3.34

Cadbury’s Net Profit Margin (hereafter NPM) has been consistent throughout the period from 2005 to 2009, which is indeed a positive sign either for the company or for the investors who intends to put their money in the company’s stocks. A marginal decrease of 32 basis points had been envisaged For Year (FY) 2007 because the company was only able to earned net income which is only 0.47% higher than the previous period. This type of marginal fluctuations can be neglect, but the consistency the company maintained in its NPM throughout this five year period is marvelous which certainly helps the organization to achieve their desired objective soon.

Efficiency Ratio

RETURN ON ASSET (ROA) OF CADBURY

The assets of the company are composed of the debt and equity. Both of these types of financing are worn to deposit the operations of the guests. The ROA table gives investors an idea of how effectively the guests are converting the money it has to invest into net proceeds. The advanced the ROA number, the better, because the company is earning more money on minus investment. ROA figures apprise the investors that how the assets of the company doing in generating revenues. This particular measure is very important before a number of analysts. The computation along with chart of ROA of Cadbury is mentioned below,

Year

Net Profit

Total Assets

Return on Assets

 

in Millions $

in Millions $

ROA %

 

 

 

 

2009

12,731

163,514

7.79

2010

13,400

163,429

8.20

The Return on Asset (ROA) figures of Cadbury is little bit volatile throughout the selected period. A minimal decrease of 0.41% and 0.69% has been envisaged in the years 2007 and 2008 respectively. The Net Profit (NP) of the company only grew by 0.47% in the year 2008 which decreased the figure of ROA as well. A heavy increase of 12.35% in NP was envisaged in the year 2009 as compared to the same period of last year which increased the ROA figure by 35 basis points or 0.35% in the year 2009. The company did not effect by the brutality of the current economic crisis and the NP of Cadbury increased by 5.25% FY 2010 and increased the ROA figure as well by 0.41% as compared with the same period of last year, indicating that the company is operating efficiently and utilizing its assets wonderfully well.

RETURN ON EQUITY (ROE) OF CADBURY

Shareholders are much more worried with the profitability of the visitors and simply stress on ROE. The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. The calculated figure’s table of ROE is mentioned below,

Year

Net Profit

Equity

ROE

 

in Millions $

in Millions $

%

 

 

 

 

2009

12,731

64,608

19.70

2010

13,400

65,285

20.53

Return on Equity (ROE) is one of the most widely used tools used by the analysts to value the company. ROE graph shows that the company is enjoying profit year on year (YOY). ROE increased by 0.33% in the year 2007 because the Net Profit of Cadbury had increased by 9.39% in the same year as compared to the same period of last year. A Sharp decrease of 2.79% envisaged in the year 2008 because of the decrease of shareholder’s equity of 10.87%. That deceleration was due to the fact that people bought back their money from the company’s stocks. After year 2008, a YOY increase has been envisaged by Cadbury as in the year 2009 and 2010 as the ROE of the company increased by 1.37% and 0.83% respectively. That acceleration was due to the surge of 12.82% in NP in the year 2008. From this analysis, one can say that the company is efficiently operated with their equity investment.

LIQUIDITY RATIO

Liquidity ratios effort to appraise a business's ability to pay off its petite-designate debt obligations. This is done by comparing a band's most liquid assets (or, those that can be simply converted to money), its brusque-name liabilities. In general, the better the coverage of liquid assets to fleeting-designate liabilities the better as it is an obvious hint that a troupe can pay its debts that are upcoming due in the near outlook and still support its ongoing operations. On the other hand, a cast with a low coverage quotient should advance a red mark for investors as it may be a poster that the visitors will have difficulty summit running its operations, as well as meeting its obligations.

CURRENT RATIO OF CADBURY

Current ratio is a liquidity ratio which measures the ability of a company to pay its short term obligations with the help of its short term assets like cash, inventory and receivables. Table is mentioned below,

Year

Current Assets

Current Liabilities

Current Ratio

 

in Millions $

in Millions $

%

2009

47,585

58,454

0.81

2010

48,949

55,390

0.88

The current ratio (CR) of the company is not supportive for the organization. Throughout the chosen period, the CR of the company is below than 1 which means that the company has to sell some part of their assets to meet its short term obligations. The CR is the same for two consecutive years depicting a figure of 0.90 and then decrease by 0.9% in the year 2009 just because of the severity of the financial crisis, which induced the company to sell some part of their current assets to meet with their short term financial obligations.

ACID TEST RATIO OF CADBURY

A stringent test that indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory is called acid test ratio also called quick ratio. The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets. The calculation of acid test ratio is mentioned below,

Year

Current Assets - Inventories

Current Liabilities

Quick Ratio

 

in Millions $

in Millions $

%

 

 

 

 

2008

12,405

58,454

0.21

2009

14,438

55,390

0.26

The quick ratio of Cadbury is again showing a chaotic situation for the organization. The Quick Ratio throughout the chosen period is below 1 which is indeed a dangerous sign for the organization as a whole. It means that the companies sold some of their assets and inventories to fulfill their short term financial obligations which may hamper their long term sustainability growth.

DEBT/EQUITY RATIO OF CADBURY

Debt to Equity (D/E) is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It is one of the most widely used ratios especially by the banks and creditors to evaluate the credit worthiness of the counter person. The computation of D/E ratio is mentioned below,

Years

Total Debt

Total Equity

D/E

 

Millions $

(In Million $)

%

2009

98,906

64,608

1.53

2010

98,144

65,285

1.50

The D/E of Cadbury is somewhat in a chaos. A D/E of more than 1 indicates that the company often uses debt to meet with their financial promises. A sharp increase of 23 basis points or 0.23% was envisaged in the year 2006, but then it came on an acceptable level. However the company has to reduce its D/E ratio and increased their current ratio to sustain in the long run in front of their competitors.

Gearing Ratio of Cadbury

Gearing ratio is like a leverage to check the financial leverage of the firm. Gearing ratio demonstrates the degree that how much firm activities is been funded by firm’s personal equity against the creditor fund. A company which has a higher number of gearing ratio is more risky and seems more vulnerable as compared to the company with a small number of ratios.

A broad term describing a fiscal ratio that compares some form of possessor's equity (or rites) to borrowed wake. Gearing is a measure of economic weight, demonstrating the amount to which a holder's income funded business's activities versus creditor's funds. The senior a troupe's quantity of power, the more, the visitors is considered risky. As for most ratios, an acceptable quantity is determined by its comparison to ratios of companies in the same diligence. The computation is mentioned below.

Gearing Ratio

Year

Earning Before Interest

Interest

Gearing Ratio

 

&Taxes (in Million $)

(In Million $)

%

2009

6115

210

29.12

2010

5108

215

23.76

The Gearing Ratio (GR) of 3M Corporation manifesting interesting and great facts about the organization. The risk associated with the investment in this company is quite low. The company great managed its gearing ratio and a YOY decrease in the GR is quite beneficial for the investors in long run.

INVESTMENT RATIO

Return on Capital Employed (ROCE)

It’s a measure of return which a company realizes from its capital employed. It is one of the main profitability ratios to compare the performance of the organization with the industry’s performance. ROCE must always be higher than the rate at which the company borrows money form financial institutions or from the shareholders. If ROCE declines from the capital investment then it will result to reduce the earnings of the shareholders. Look at the table mentioned below,

Return on Capital Employed (ROCE)

Year

Earning Before Interest

Capital

Return on Capital Employed

 

&Taxes (in Million $)

Employed (In Million $)

(ROCE) %

2009

6115

19332

31.63

2010

5108

19708

25.92

ROCE shows the propensity and potential of the company to generate profit from the capital accumulation. It is the ratio which apprises the investors and analysts that how much the company is earning on their capital investment. Table above shows that the stance of income generation of Cadbury is remarkable, however a significant amount of fluctuations have been envisaged throughout the period. The ROCE ratio was in a range of 30% to 40% during the period 2006 to 2008, but a major decline had encountered for year (FY) 2009 of 570 basis points due to the deduction in the Earning before Interest & Taxes (hereafter EBIT) of $ 1007 Million or 16.4% as compared to the same period of last year, the company is still in a good financial health and has the power of resiliency to get back to its previous momentum soon.

BUY/SELL RECOMMENDATIONS FOR CADBURY

In this section we have to calculate the intrinsic value (IV) of Cadbury. There can be a number of methods to compute the IV of a company like NPV Geo Model, Pricing Models but the model which we have chosen is Dividend Discount Model (DDM) made by an American Gold Medalist Gordon Grown. That is why DDM is also known with the name of Gordon Grown Method (GGM).

The dividend discount model’s equation is mentioned below,

P = D (1+g)/Re – g ----------------------------------------------------------------------------- (a)

g = Retention Ration * ROE

g = 0.72 * 20.53

g = 17%

Re = 15%

P = 866 £,

The actual price on which Cadbury’s share is trading on the London Stock Exchange (LSE) is $ 863 £; it means the stock is undervalued. So investors have to buy the shares of Cadbury because the intrinsic value is way above the actual market price of the company’s stock.

Conclusion

Business and financial analysis of an organization will always be difficult and challenging because it needs heavy research and study to do a perfect research. In this assignment, the researcher did a business and financial analysis of Cadbury Plc. From the overall analysis we have found that the company is in a great financial health but the thing which can be a problem for their future is their Current and Quick Ratio. Both these ratios highlighted the issues that the company has less assets to meet with their short term financial obligations. However the success story is till with the company which attracts existing as well as new investors as well to park their money in the stocks of the company. The company is operating with its full capacity and potential which will be good for them to achieve their goals in the long term.

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