Assignment 2 – Steps 7-9 – Draft

Hi Everyone,

I will place my spreadsheet here so it is easier to find but please find an in depth rundown on my findings of my company’s information through the ratio process below as per the instructions in Step 8.

Assignment Stage 2, step 7-10- Sarah Zillmann  ***UPDATED 28.05.17***

Britvic-PLC-Company-Spreadsheet-Final-by-Sarah-Zillmann 03.05.17 ***UPDATED 28.05.17***

I actually enjoyed completing this task a lot more than originally anticipated. I’m not sure if it was due to the previous work in restating or if I have grown more confident to trust myself when completing the task. A big learning curve for me last time was to complete the task while watching Maria’s lecture and while she is super-duper speedy in completing the task I just kept rewinding and re watching until I got it. Another positive to this was that I had Kerryn Zimmerman online with me while I was completing it and each time I hit a sticky spot we would discuss different options on whether our figures looked right or not and whether we had got the information from the right places or not. All in all it was a pleasantly surprising experience.

Ratio Analysis

Profitability Ratios
I had to break this down, so for those reading I apologise in advance for my lengthy explanations, you will probably sense me learning as I am typing. My understanding of profit ratios is that they give us the opportunity to look at Britvic’s financials to and compare the expenses and relevant costs over the year to assess if the business is heading in the right direction to gain profit. Looking at Britvic’s Net Profit Margin I was really concerned because it is very very low compared to Kerryn Zimmerman’s and Danielle Bradley’s. Bother of their companies have over -48% whereas my company is 8% and under. One thing I did observe however was that my company has doubled its net profit margin since 2013 so looking at this we are on the right track. If I understand correctly though I would say that my company is not very good at generating earnings after tax.

When I investigated the return on assets my company has tried to stabilise however hasn’t been consistent. Compared to Danielle Bradley’s company Britvic is gaining more return on assets and is a lot more stable whereas Kerryn’s company has big fluctuations, I wonder why this is? I can’t help but think that Britvic hasn’t increased their assets over the past 4 years whereas it looks like Danielle’s company has gained large assets especially in 2014. My understanding of return on assets is that the more assets the company has then the more return they will make from them, looking at the other two companies I would say that my company does not take many risks when it comes to gaining or selling assets. I can’t help but wonder if this is because they are manufacturing company and they already have what they need asset wise to produce large amounts of their products… hmm the search continues.

Efficiency or Asset Management) Ratios
Reviewing the efficiency or asset management ratios concerned me a little bit. I’m still trying to grasp the concept on what they do and after reading a few different documents I can only work out that this ratio shows me that Britvic is not very efficient in asset turnover, this suggests that my company is not using its assets very well and/or having production problems. In fact as each year that has occurred they have gone from bad to worse. However when I compared them to Danielle and Kerryn’s companies I can’t help but notice that Britvic has a higher asset turnover and my inventory is not stored for very long at all. I once again think this is because the company produces the product and there is no need for them to store it as they move the products onto the distributers quickly. I wonder if moving the items onto the distributors also impacts the asset turnover?

Liquidity Ratios
After reading up on what liquidity ratios are I started to panic for my company. As they have (1.21) in 2016 and this is the lowest one so Britvic has progressively gotten worse in respect of being in a positive position to pay out their current debt payments. As this is a negative figure I can only assume that my company relies on finance from others mean likes the bank or financial institutions. My feelings of distress for my company were only reinforced when I looked at Danielle’s and Kerryn’s companies as they were all in the positive and had the ability to pay their debts out. How can my company appear to have such good profit when it appears that they don’t use their own money…?

Financial Structure Ratios
When I read that Debt/Equity ratio will show me how much debt a company is using to finance its assets I was in absolute shock! Britvic is -482% in 2016. So I think that is telling me that my company uses A LOT of finance from financial institutions compared to shareholder funds. I’m not convinced I have this part correct but I followed everything Maria said in the lectures and as it has already been identified that my company does not have a lot of equity I feel this explains why this ratio is so high and impacts the equity ratio. When I compared this to Danielle and Kerryn’s ratio’s I was very disheartened as this confirmed my thoughts.

Market Ratios
It was fascinating to read about what market ratios are and what the purpose is. After completing the ratio task I was disappointed to see that my company’s shares are only receiving 0.04 after net profit however it did help me understand that this would be impacted by the company’s profit.  One thing I didn’t really understand is that the earnings per share for 2016 is 0.04 however the price earnings ratio is 0.27. Does this mean from an investor’s point of view that this would be a relatively cheap share to purchase with the potential of getting a small return on? When I looked at Danielle and Kerryn’s ratios I once again thought that these share prices are greatly affected by the fact that Britvic is using financial institutions money and not their own because they have very little equity. This was once again confirmed when I looked at the debt ratio because this ratio identified that Britvic is 82.81% in debt… uh-oh…. I guess a positive profit doesn’t mean everything. It’s not all bad though because originally in 2013 it was 96.15% so they are obviously trying to reduce their debt, but how?

Economic Profit
Ratio Based on Reformulated Financial Statements
I’ll be honest here, this section surprised me. Everything so far has given me the impression that my company has been using their borrowings from financial institutes to continue business. However when I got the ratio based on reformulated financial statements and understanding that Return on Equity (ROE) is based on identifying how much profit can be made from the shareholders investments and I was impressed to see that in the past my company has made wise decisions especially in 2014 when it was 90.85%. It was however disheartening to see that this has dramatically decreased since then to 42.81% while it is still an okay return it does make me wonder what internal changes have occurred to make this decrease.

While reviewing the return on net operating assets and looking at Kerryn’s and Danielle’s company spreadsheets again it was positive to see that Britvic was trekking towards the right direction in respect of operating income. I can’t help but think that while this company is in great debt they are good at selling their products. But then when I looked more closely I realised that once again compared to 26.58% in2015 our operating income has once again dipped. It was around this time that Britvic had a failed product and were trying to implement the media campaign to drive Fruit Shoot’s image back into the drink world as a better product for children.

When I investigated the net borrowing cost (NBC) I thought that this would highlight further concerns for me as it is using the borrowed money less cash on hand, as you know my company appears to borrow a lot of money so I expected this to be a negative. After completing the ratios though I was relieve to read that my company is tracking okay. Not great but okay. While they have once again decreased the NBC from 7.91% in 2015 to 5.93% in 2016 it was nice to see that they were relatively stable in 2014 and 2013. I once again can’t help but feel this has been affected by the decrease in ROE and RNOA.

Needless to say the profit margin (PM) showed that my company does make a small profit. It identified that the PM has doubled since 2013 and while it had a slight peak in 2015 it levelled out to 8.67% in 2016. I had a discussion with fellow peers in regards to how this process has changed my opinion in respect of initial impression and what I have discovered and this particular one showed me that even though a company is making a profit it doesn’t have to be huge for business to continue.

After learning in the restating task that Asset Turnover is used to ascertain the ability of my company to generate sales from its assets it was again interesting to learn that my company is decreasing is ATO…(seriously what is going on!) in 2013 they were turning over 2.95 compared to 2.06 in 2016, I can only assume here that the impacts of consumer opinion and the sugar tax is making an impact on the reduction in sales. When I compared this to Danielle’s and Kerryn’s companies it was good to see that in respect of sales Britvic is still tracking okay. This of course is because it is a manufacturer of mass products where as their companies are not however if I just look at the figures it provided a glimmer of hope.

This ratio exercise has definitely given me a lot of insight into my company and that while a company in the financial statements can provide a misconception on how the company is really progressing. I really enjoyed this process!

I would like to highlight that I used 10% for the WACC, while I could locate the correct figures in my annual report I chose to follow Maria’s lead in the lecture and stuck with 10%. While I am still trying to fully comprehend this information overload I strongly believe that ROE is the main driving force for Britvic to continue making profit. As the economic profit is a positive figure I can’t help but notice that the use of shareholders equity and sales are the key indicators for Britvic still making a profit even though they have a lot of debt.  The economic profit is all over the place for Britvic however it has shown significant growth from 2013 to 2016. Once again I can’t help but highlight the peak in 2015 which I feel is due to several marketing campaigns and Britvic strategy to join the forces of reducing sugar in their drinks to avoid the sugar tax that was implemented. When I compared Britvic to Danielle and Kerryn’s companies economic profit it was interesting to see that while both of their companies are doing well they had negative economic profits. I think my company is so different to Danielle’s economic profit due to the fact that her company was significantly impacted by natural disasters and they used their insurance payout to reduce their liability of debt . As for Kerryn’s company, we are still in discussions with how different our companies are. One thing I would suggest why our companies are so different is because Kerryn’s company produces a specific specialised item where my company mass produces various types of small products. While it would take my company a lot more to sell to reach similar profit, Kerryn’s company is a one of a kind object that only certain peoples would want to purchase therefore I feel would have less sales.

I really enjoyed this entire process. I learnt from my restating incident (and meltdowns) that I needed to have a more strategic approach this time round and it was so much more pleasant!

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