A financial comparison between Rexam PLC and Crown Holding

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Rexam Private Limited Company is one of the leading global consumer packaging companies and one of the global leaders in rigid plastic packaging company. It offers wide range of products to different markets including beverage, personal care, healthcare and food markets.

In this paper we are analyzing two companies Rexam PLC and its competitor Crown Holding which deals in making Beverages Cans and in Packaging products. Rexam PLC and Crown Holding's share prices are 290.50p and $25.21.

Current ratio:

In 2007 and 2008, current ratio was 1.03 and 0.83. Currently, it faces problems to meet its current liabilities. On the other hand, we see some level of decrease in company's liquidity in 2008, due to the acquisition of Rostar, the Russian beverage can maker and the increase in Fixed Assets by 1228 million comparing to 2007. Rexam is less liquid than Crown Holding since their liquidity is higher so it will be difficult to meet its current debt obligations. The current ratio of Crown Holding is 1.18 which shows company has sufficient cash to pay its liabilities, therefore uses its excess short term Working Capital to generate profits.  

Acid test ratios:

In 2007 and 2008, the acid test ratio of Rexam is 0.67 and 0.51. This means firm won't meet its current (short-term) debt obligations without selling inventory due to acquisition of Rostar. Due to lack of quick assets/ current assets that can be quickly converted into cash. On the other side its competitor Crown Holding's acid test ratio is 0.71 which is also less than 1 due to its investment (Brazil and Spain, new beverage can plants). So we can say, liquidity of both companies is not good in current scenario but it can change by the results of their investments.

Profitability ratios:

Ratios that we have used to show the business ability to produce earnings in respect to expenses over a certain period of time.

Gross profit margin:

Rexam has a gross margin of 69.72% in 2008 and 68.20% in 2007. This shows there is more liquidity of cash flow which is good, which can be used for future costs and reinvestment. Investors want this ratio consistent because they want to avoid motion sickness. Rexam has lower gross profit margin then Crown Holding 82%, it means Crown holding manages its fixed costs very efficiently to generate profits. Both the companies are gaining good profits margins.

Net Profit margin:

Company has a steady net profit after tax figures around 45% for last two years. Consistent net profit figures are very important for investors. Net profit margin of the company is well above from Crown Holding. As we have seen Rexam's operating expenses have increased due to acquisition of Rostar. This will bring benefits to Rexam in the long run. 

Operating Margin: 

Rexam operating margin has been 10.27%, 8.22%, in 2007 and 2008, it shows slowing downturn trend. Though the figure shows that sales are increasing by £1007 million compared with 2007 it's because of acquisition of Rostar. But operating expenses increased by 998m, due to that this profit percentage before tax decreased from 7.2% to 5.1% in 2007-2008. After acquisition their market got increased so as sales. Whereas Crown Holding has much lower operating margin 2.72%.i.e. because of recession faced. Rexam should keep its operating margin trend higher than its rivals to survive.  

 

Return on Capital Employed (ROCE): 

Rexam ROCE exhibited decreasing trend over the past two years, since funds invested in the company are generating lower income. This is due to foreign exchange rate variation in 2008 due to recession. Financial statement of Rexam (2008), we find huge loss due to the cross currency swaps. However Rexam is higher than Crown Holding's 6%, which makes Rexam a better company to invest. As Rexam is able to grasp more earnings for every dollar of capital it employs. 

Return on Shareholders fund:

This ratio helps present, prospective shareholders and management in assessing overall efficiency of a firm. This ratios revels efficient usage of resources. Higher the ratio, better the results. For Rexam  although net profit for 2008 (380m pounds) is higher than 2007 (371m pounds), a lower ROSF ratio in 2008 could be due to loss of 66m pounds that Rexam suffered in 2008 due to discontinued operations. However Rexam has higher ROSF value from its major competitor Crown Holding. This means Rexam business is more profitable to Shareholders/shareholders. 

In budgeting or management accounting in general is the difference between a budgeted, planned or standard amount and the actual amount incurred/sold. Variances can be computed for both costs and revenues. The concept of variance is intrinsically connected with planned and actual results and effects of the difference between those two on the performance of the entity or company.

Variances can be divided as per the nature of the underlying amounts. There are two types of variance:

When actual results are better than expected results given variance is described as favorable variance. In common use favorable variance is denoted by the letter F - usually in parentheses (F).

When actual results are worse than expected results given variance is described as adverse variance, or unfavourable variance. In common use adverse variance is denoted by the letter A or the letter U - usually in parentheses (A).

The second typology is also determined by the needs of the users of the variance information and may include e.g.

Direct Cost Variances: In variance analysis direct material total variance is the difference between the actual cost of actual number of units produced and its budgeted cost in terms of material. Direct material total variance can be divided into two components:

The direct material price variance.

The direct material usage variance.

Direct Labour Variance:

Direct labour cost variance is the difference between the standard cost of actual production and the actual cost in production. There are two kinds of labour variances. Labour Rate Variance is the difference between the standard cost and the actual cost paid for the actual number of hours. Labour efficiency variance is the difference between the standard labour hour that should have been worked for the actual number of units produced and the actual number of hours worked when the labour hours are valued at the standard rate.

The other variances which also play an important role in budgeting are Variable production, Fixed overheads and Sales variances.

Actual Costing and Variance Analysis components provide a Performance Management tool that will enable you to:-

Analyse operational performance as well as costs and profitability.  ........... .

By using a 'cost-pull' quantity based approach to product costing that separatesconsumption from value, SBM's costing structure means that you can analyse your company's operational performance as well as costs.

Analyse Variances over time. ................... ........................... ......................... .......

.By automatically recording costs as they are calculated, SBM: Cost Management Solutions provide you with a comprehensive history of how your costs change over time. By enabling you to analyse cost and consumption data over any combination of daily, weekly or monthly analysis periods it provides a valuable source of cost data that enables you to fully understand the performance of your business.

Use data imported from other company systems.  ......................... .............. ...

The price and consumption data needed for the analysis can be imported from spreadsheets, your company's ERP and process control systems or entered manually in data tables that you pre format to meet your needs.

Monitor the use of activities and resources.    .......................  ................... .

.Excess and idle capacity is clearly identified and reported as a variance and not allocated automatically to individual product costs. Instead, the attribution of the cost of unused activities and resources is a separate costing and analysis procedure that enables you to see precisely how your product costs change when costs are fully absorbed.

Compare Standard, Actual and Budget Costs between plants and departments.  .. 

By establishing budget, standard and actual consumption and cost data, SBM's Variance Analysis components enable you to carry out sophisticated analyses. Because the system understands the business logic of how your products are made, you can undertake Variance Analyses at each stage of the manufacturing process and examine activity, resource and materials consumption, price, mix and yield variances in detail. You can examine costs at the local and divisional level, compare the productivity and profitability of different manufacturing locations and examine your production mix and its impact on profitability.

There are three important terms which can be used to determine the performance of a company. They are as follows:

Accounting Based Concept

The Balanced Scorecard

Value Chain Analysis

The company "B" operates in the field of spring industry. The company manufactures spring products. Company "B" specializes in the design, development, manufacture and testing of the products. The company owns a factory and the number of its workforce is 154 employees. The company is currently using traditional costing systems. According to the participant, the firm is still using TCS as it tries to keep its costs as simple as it could. Also the culture of the company is to keep its costs simple and its management team updated and flexible to decision making. However the company believes that should focus on its development in the manufacturing knowledge. The organization invests in new technology and in flexible manufacturing systems like CNC machinery, as it believes that provide improvements in manufacturing and managerial procedures.

Manufacturing costing methods are said to be the accounting methods that is used to help know the value of inputs and outputs incurred in the production process. It helps in tracking and categorizing information through rigrous accounting wherein the corporate management determines with a precision, the cost per unit of production and other important performances. Management requires this information to make decisions on their production levels, pricing, competitive strategy and for future investment. These information are essential for internal use or managerial accounting.

Overhead standards are the most difficult to calculate, as they are typically calculated for an approximate manner. The problem of accounting overhead costs per unit of output was observed above-it is often difficult to trace the indirect costs that is occurred particularly in product. The problem is made more difficult if these costs are pointed within a plant and if multiple products are produced within a particular plant.

Predetermined rate is computed by dividing the budgeted overhead expenses for a period by the number of units of base for a particular buget period.

This helps in controlling the cost quick preparation of cost estimates and fixing price in cost plus the other contracts. The only limitation of this rate is that it may give rist to over and under absorption of expenses.

Blanket rate is said when the single overhead rate is calculated for the factory as a whole as one and is known as single or blanket rate.

Development of a third party intervening in logistic companies has been very important. There are several reasons for generating the most important being the trend to concentrate in the core business by manufacturing companies and new technological advances. In this context, conventional approaches to costing might generate changed information. This can result in making wrong decisions. When the companies realize this potential danger, they opt for activity based costing (ABC) methodologies increases within third-party logistics.

The Traditional Budgeting is said to be a list of all planned expenses and revenues. It accounts on what the managers spend on rather on what resources they require. It does not recognizes wastes, the workloads coming to the firm and other cost drivers; it doesn't even abide and continues improvement and seems to have been lacking the ownership and buy in. Several critics have alo found out that it is a very time consuming process to get benefit out of this. Hence, traditional budgeting practices does not appear to be linked to the overall organizational strategy. Another major drawback is the assumption that the current year's expenditure level is justifiable, even though it may not be true as it may be high or low.

To talk about zero based budgeting it is considered that the expenditures are always based on zer budgeting. It focuses to get an optimal allocation of resources that incremental and other budgeting systems cannot get it. Zero Based Budgeting lets an effective allocation of resources, as it is actually based on the needs and benefits. It also recognizes and voids the wastage and obsolete operations, increases staff motivation as well as the communication and coordination within the organization, detects inflated subjects and drives managers to find out cost effective ways to improve operations. But despite of all the benefits, there are also criticisms and drawback against it such as it may lead to micro management, it involves a huge amount of money and it may lead to a material shift in the use of resources. 

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