Print Email Download Reference This Send to Kindle Reddit This
submit to reddit

Analysing Financial Information From Balance Sheets Finance Essay

The purpose of this research is to investigate and determine which of the following companies is the healthiest by extracting and analysing financial information from their Balance sheets and income statements. These companies are PZ Cussons Plc, Reckitt Benckiser Plc and McBride Plc and they operate in the industry called “Personal Care and House Products”. For the purpose of this research the analysis covered a 2 year period spanning from 2009 to 2008

PZ CUSSONS PLC has its headquarters in the UK and was formerly Paterson Zochonis (PZ) but it changed its name in 2002 to PZ cussons Plc. It is a FTSE 250 listed Consumer Products Group based in the UK, with operations in Africa, Asia and Europe. Some of its products are imperial leather and the cussons brand. Its major competitors include, Unilever and Procter and Gamble.

RECKITT BENCKISER PLC was formed in 1823 and presently operates in 60 countries with its headquarters in the UK and their products are used in over 180 countries. Some of its products are Dettol and Finish. It is a major player in the same industry with PZ Cussons Plc and its competitors include PZ Cussons Plc, Unilever Plc and Procter and Gamble.

McBRIDE PLC is a supplier of Private Label Household and Personal Care products for Europe's largest and most successful retailers. The headquarters is in London and it operates in 11 countries with 20 factories. Some of its products are Cora vitro and Lime Lite. McBride Plc is not a strong competitor to the other companies mentioned in this review but was chosen to be able to assess the level of activity at this level.

To determine the objectives above, Ratio analysis was employed as one of the many accounting tools used in identifying the key aspect of a business performance. The information generated in this report will be of great importance to the internal and external users of accounting information as it will guide them in making informed decisions and judgement about the companies. (See appendix 1)

APPENDIX 1

INTEREST GROUPS

RATIOS TO WATCH

IMPORTANCE

INVESTORS

RETURN ON CAPITAL EMPLOYED

To help them determine whether they should buy shares in the business, hold on to the shares they already own or reduce their shareholdings by selling some. They also want to assess the ability of the business to pay dividends.

MANAGERS

PROFITABILITY RATIO

Might need segmental and total information to see how they fit into the overall picture.

LENDERS

GEARING RATIO

To determine whether their loans and interest will be paid when they fall due.

EMPLOYEES

RETURN ON CAPITAL EMPLOYED

Information about the stability and profitability of their employers to assess the ability of the business to provide remuneration, retirement benefits and employment opportunities

SUPPLIERS AND OTHER TRADE CREDITORS

LIQUIDITY

Businesses supplying goods and materials to other businesses will read their accounts to know if they are credit-worthy or not: after all, any supplier wants to know if his customers are going to pay their bills.

CUSTOMERS

PROFITABILITY

The continuance of a business, especially when they have a long term involvement with, or are dependent on, the business.

FINANCIAL ANALYST.

ALL THE RATIOS MIGHT BE USEFUL

They need to know, for example, the accounting concepts employed for inventories, depreciation, bad debts and so on.

GOVERNMENT

PROFITRABILITY

The allocation of resources and, therefore, the activities of business. To regulate the activities of business, determine taxation policies and as the basis for national income and similar statistics.

.

FINANCIAL RATIOS USED.

1. Profitability Ratio- Net Profit Margin and Return on Capital Employed (ROCE).

2. Liquidity Ratio- Current Ratio and Acid Test Ratio

3. Gearing Ratio- Debt to Equity Ratio.

Efficiency ratios – Account receivables/payables.

Ratio analysis was used in this report because it has the following advantages:

 It simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business.

 It provides data for inter-firm comparison. Ratios highlight the factors associated with successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms.

 It helps in planning and forecasting. Ratios can assist management in its basic functions of forecasting, planning, co-ordination, control and communications.

 Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.

Finally, it helps in investment decisions in the case of investors and lending decisions in the case of bankers etc.

Also like every other phenomenon of life, ratio analysis has its short comings too and they are:

 Not only industries differ in their nature, but also the firms of the similar business widely differ in their sizes and accounting procedures etc. It makes comparison of ratios difficult and misleading

Ratios are useful in judging the efficiency of the business only when they are compared with past results of the business. However, such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. may affect the future operations.

Ratios are only indicators; they cannot be taken as final regarding good or bad financial position of the business. Other things have also to be seen.

 A change in price level can affect the validity of ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company. The financial statements, therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios.

No fixed standard can be laid down for ideal ratios. There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult. http://www.accountingformanagement.com/financial_statement_analysis_accounting_ratios.htm [ Accessed 6 December 2010]

PROFITABILITY RATIO FOR THE YEAR 2009 AND 2008 (Net Profit Margin)

COMPANY

FORMULAR

2009

%

2008

%

PZ CUSSONS PLC

NET PROFIT

SALES

10.3

11.6

RECKITT BENCKISER PLC

24.4

22.9

McBRIDE PLC

3.45

3.1

(See Appendix 3 for calculations)

PZ Cussons Plc’s NPM in 2008 was 11.6% but fell by 1.3% to 10.3% in 2009, this was as a result of an increase in distribution cost and cost of sales. Distribution cost rose from £238.7m in 2008 to £288.0m in 2009, while cost of sales also increased from £422.2m to £550.1m. This increase in variable cost could be as a result of recession or an inefficient cost structure.

Reckitt Benckiser Plc. in contrast to PZ Cussons Plc recorded an increase of 1.5%, from 2008’s margin of 22.9%. Reckitt Benckiser finance income dropped considerably from £31m in 2008 to £17m in 2009 but its finance expense even went lower. It dropped from £62m in 2008 to £16m in 2009. The decrease in finance expense doubtless reflected in Reckitt Benckiser Plc’s NPM in the period under review.

McBride Plc recorded a marginal increase of 0.4% in its NPM from 3.05% in 2008 to 3.45% in 2009. This could be attributed to an increase in its finance income from £6.0m to £6.2m while it finance expenses dropped considerably from £11.7 in 2008 to £11.9 in 2009. Reckitt Benckiser gained 24.4 p on every £1 employed in 2009 in contrast to 22.9p in 2008.McBride gained 3.45p in the same year as compared to 3.05 in 2008 while PZ recorded a loss of 1.3p per £1 in 2009 when compared to their performance in 2008.

PROFITABILITY RATIOFOR THE YEAR 2009 AND 2008 (Return on Capital Employed %)

COMPANY

FORMULAR

Expressed as percentage

2009

%

2008

%

PZ CUSSONS PLC

PROFIT FOR THE YEAR

CAPITAL EMPLOYED

13.4

13.6

RECKITT BENCKISER PLC

35.3

34.0

McBRIDE PLC

14.0

9.7

Return on Capital Employed was also used to further determine the level of profitability for the three companies under review in comparison to the Capital Employed. For the year 2008, PZ’s ROCE was 13.6% and the Capital Employed was £405.9m which increased to £448.9m in 2009. It’s ROCE in 2009 though dropped by 0.2% indicating a drop in their profit level. This correlates the relationship with NPM because in the same year, it had a decrease of 1.3% in the NPM indicating a drop in their profit generating abilities on its Capital Employed.

Reckitt Benckiser Plc’s ROCE grew by 1.3% from 2008’s value of 34.0% while Capital Employed also increased from £3294m to £4014m.The change in Capital Employed resulted into a 1.5% growth in its NPM. This suggests that Reckitt Benckiser Plc managed its cost structure and were more efficient in the use of its capital in comparison to PZ for the same period under review. Reckitt Benckiser is therefore earning sufficient volumes and profits from its operations.

Surprisingly, McBride Plc made a 4.3% increase on its ROCE of 2008 which stood at 9.7%, while it Capital Employed in 2008 was £118.9 and it dropped by £0.4m to £118.5. This though did not reflect with much margin in its NPM when compared to its ROCE. This suggests that the company made some distributions by meeting some of its obligations. Like Reckitt Benckiser, it shows that though the firm is small when compared to PZ Cussons Plc and Reckitt Benckiser Plc, it was consistent in generating returns from its operations.

From the above analysis, an insight into the return-generating capacity of the companies for capital provided by debt holders as well as shareholders is given. Though a consistent ROCE through studying of the trend and not just a single year performance is a better indicator of how efficiently a company utilises its capital employed.

LIQUIDITY RATIO FOR THE YEAR 2009 AND 2008 (Current Ratio)

COMPANY

FORMULAR

expressed to the ratio of 1

2009

: 1

2008

:1

PZ CUSSONS PLC

CURRENT ASSET

CURRENT LIABILITIES

1.9:1

2.3:1

RECKITT BENCKISER PLC

0.6:1

0.5:1

McBRIDE PLC

0.9:1

1:1

“Liquidity ratio measures a company's ability to pay its bills. The denominator of a liquidity ratio is the company's current liabilities, i.e., obligations that the company must meet soon, usually within one year. The numerator of a liquidity ratio is part or all of current assets”. [http://www.investorglossary.com/liquidity-ratio.htm]

PZ cussons Plc in current ratio in 2008 stood at 2.3:1 and in 2009 it was 1.9:1. This suggests an increase in ratio of 0.4. PZ cussons was more liquid in 2008 than in 2009 because it had more current assets than current liabilities. Its current assets in 2008 were £354.9m and £327.4m in 2009 while its current liabilities were £182.6m and £145.0m respectively. This change was as a result of movement in trade receivables, payables, prepayments, investments and inventory level. Hence the need to compute the quick ratio to determine the effect of the inventory level on its liquidity.

Reckitt Benckiser’s current ratio in 2008 and 2009 was 0.5 and 0.6 respectively. Notably both ratios were less than 1 for the period under review. Its current asset in 2008 was £1954m but it reduced to £1770m in 2009. Current liabilities for 2008 and 2009 were £4,216 and £2,891 respectively. This trend suggests that Reckitt Benckiser may be using some of its current liabilities like tax liabilities as a form of short loan to fund some of its operations. Though, the greater implication is that meeting its short term obligations poses great challenge for it as a result of its liquidity state which is below the 1:1 rule of thumb.

McBride plc was able to maintain the rule of thumb in 2008 but fell slightly in 2009 to 0.9:1 this implies a rising current liability traceable to a change in its provisions, trade and other payables.

This ratio is of great interest to lenders as it tells them the financial position of the firm and the ability of the firm to payback its borrowings.

LIQUIDITY RATIO FOR THE YEAR 2009 AND 2008 (Acid Test Ratio)

COMPANY

FORMULAR

Expressed to the ratio of 1

2009

:1

2008

:1

PZ CUSSONS PLC

CURRENT ASSET- INVENTORIES

CURRENT LIABILITIES

1.1

1.1:1

RECKITT BENCKISER PLC

0.4:1

0.3:1

McBRIDE PLC

0.6:1

0.7:1

This ratio is also an indicator of a firm’s liquidity position. When computing this ratio, inventories is not included thereby giving a more accurate position of the firm’s liquidity.

PZ Cussons Plc had a ratio of 1.1 in 2008 this when compared to its current ratio for the same year of 2.3 shows a difference of 1.2. This difference can be attributed to the high stock of inventory because its inventory level in 2008 was £158.3 when compared to £167.4 for 2009. The trend was the same for 2009 where its current ratio was 1.9 and its acid test ratio was 1.1. Inventory accounts for the notable difference of 0.8 in its ratio.

Reckitt Benckiser and McBride Plc had a consistent current and acid test ratio for both years with a difference of 0.2 and 0.3 respectively which can be attributed to stock level also. Their stock level was kept minimal and consistent throughout the period under review. Both firms can be seen as having a better inventory management approach when compared to PZ cussons.

EFFICIENCY RATIO FOR THE YEAR 2009 AND 2008 (Debtors Turnover)

COMPANY

FORMULAR

Expressed in days

2009

DAYS

2008

DAYS

PZ CUSSONS PLC

ACCOUNT RECEIVABLES

CREDIT SALES / 365

48.5

62.5

RECKITTBECKINSER PLC

43.7

50.4

McBRIDE PLC

0.6

0.7

EFFICIENCY RATIO FOR THE YEAR 2009 AND 2008 (Creditors/Debtors Turnover)

These two measures of efficiency will be viewed together in order to know the number of days it takes for each company to its trade creditors and also collect its receivables. This will help to determine through comparison the most efficient of these companies as to how they manage cash flows, particularly working capital. This ratio is of particular use to trade creditors and trade debtors as it informs them of the time frame for their payments.

COMPANY

FORMULAR

Expressed in days

2009

DAYS

2008

DAYS

PZ CUSSONS PLC

ACCOUNT PAYABLES

COST OF SALES

94.3

93.4

RECKITT BENCKISER PLC

270.1

298.9

McBRIDE PLC

132.5

142

DEBTORS/CREDITORS TURNOVER

In 2008, PZ Cussons Plc pays its creditors in 93.4 days and collect its receivables in 62.5 days. This gives it a grace period of 30.4 days to utilise the funds receive before paying its creditors, and this can serve as a short term loan for them to run their operations pending the time their payables are due but in 2009 it increased to 45.8 days thereby providing them with more time to utilize the funds for its operations without recourse to borrowing and also transfer its debt liabilities to its creditors temporarily.

Reckitt Benckiser Plc pays its creditors in 298.9 days in 2008 (205.5 days later than PZ) while its receivables are due in 50.4 days (12.1 days later than PZ), this gives it a grace period of 248.5 days. For the year 2009 it reduced to 226.4 days (a difference of 22.1 days from 2008). The grace period of RB gives it more time to utilize its creditors fund when compared to PZ. This access to short term fund that is free of interest increases RB’s efficiency level and minimal effect on its working capital.

McBRIDE Plc was the most efficient in collecting its receivables when compared to RB and PZ. Its receivables are collected in 0.7 days and 0.6 days for 2008 and 2009 respectively while it payables are made in 142 days and 132.5 days for 2008 and 2009 respectively. The effect of this is that McBride Plc’s own resources were not used in funding its debt obligation for more than a day thereby increasing its fund utilization efficiency.

GEARING RATIO FOR THE YEAR 2009 AND 2008 (Debt To Equity Ratio)

COMPANY

FORMULAR

Expressed as a ratio of 1

2009

:1

2008

:1

PZ CUSSONS PLC

TOTAL LIABLITIES

TOTAL ASSET

0.4:1

0.4:1

RECKITT BENCKISER PLC

0.5:1

0.6:1

McBRIDE PLC

0.7:1

0.7:1

This ratio helps to determine a company’s leverage and the extent to which a company relies on debt financing for its operations.

PZ Cussons Plc in 2008 and 2009 maintained same ratio of 0.4 even though there was an increase from £298.8m in 2008 to £305.3m. Long term borrowings reduced from £59.9m in 2008 to £44.9m in 2009 while short term borrowings was at the same level of £16.4m in both years. Total assets rose from £704.7 in 2008 to £755.1 in 2009, this variable shows an improvement in PZ Cussons income as their receivables also dropped from £113.2 in 2008 to £111.3 in 2009 thereby increasing its net asset from £405.9n in 2008 to £449.8 in 2009. PZ Cussons debts obligations are on the long run and as such poses not much concern for its debt to equity level as this is within its industry average.

Reckitt Benckiser Plc on the other hand experienced a drop in its ratio from 0.6 in 2008 to 0.5 in 2009. This is because its short term obligation rose from £73m in 2008 to £88m in 2009.It also witnessed an increase in its deferred tax liabilities suggesting that this was used to finance some of its operations on the short run, it was also able to collect more receivables in 2008 than in 2009. In all, its total liabilities dropped £5,888 in 2008 to £4,647 in 2009 while its total assets also dropped from £9,182 in 2008 to £8,661m in 2009 with its net asset rising from £3,294m to £4,014m in 2009. Just like PZ cussons, its debt financing also poses no great threat to its operations as it falls within the industry tolerance ratio.

McBride Plc’s was able to maintain a ratio of 0.7 for both years under review, though its total asset dropped from £436.5m in 2008 to £431.3m in 2009 as a result of an increase in its short and long term liabilities. Its short term obligations rose from £24.5m in 2008 to £26.5 in 2009 while its long term obligations followed suit also. It rose from £10.0m in 2008 to £26.5 in 2009. This resulted in a reduction in its net asset from £118.9 m in 2008 to £118.5m in 2009.

CONCLUSION

In comparison to PZ Cussons Plc and Reckitt Benckiser Plc, McBride Plc is more solvent in its operations with higher and healthier ratios, HOWEVER as reported earlier in this report that ratio analysis though has its merits, it also has great limitations. This is because a company may have an outstanding performance in some ratios and may be performing abysmally low in other areas. Ratios are based only on the information which has been recorded in the financial statements. Financial statements themselves are subject to several limitations. Thus ratios derived, there from, are also subject to those limitations, e.g. Non-financial changes though important for the business, are not relevant by the financial statements. Financial statements are affected to a very great extent by accounting conventions and concepts. Personal judgment plays a great part in determining the figures for financial statements.

Print Email Download Reference This Send to Kindle Reddit This

Share This Essay

To share this essay on Reddit, Facebook, Twitter, or Google+ just click on the buttons below:

Request Removal

If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on the link below to request removal:

Request the removal of this essay.


More from UK Essays

Doing your resits? We can help!