Financial Performance Review: Belhaven Group Plc - Case Study Example

1- INTRODUCTION This article provides a review of Belhaven Group Plc's financial performance for the financial year ended 2005. It gives a through insight into the company's financial strengths and weakness by discussing its financial performance, position and future prospects. It demonstrates the use of an appropriate range of ratios in order to analyse the company's position from the management, investors and lenders' viewpoints. All the data for ratio calculation has been obtained from the annual accounts of the companies for the year ended 2005. Belhaven Group Plc is based in Edinburgh in the coastal town of Dunbar. Belhaven Brewery is the largest regional brewer in Scotland. From its historic brewery it produces a portfolio of branded beers which it sells to its own estate of public houses in Scotland and to a wide range of free trade customers, as well as to the take-home and export markets (Belhaven Breweries, accessed 19.11.2005). Belhaven Group Plc belongs to Beverage industry. The group's major activities include Belhaven drinks (beer brewing and drink distribution) and pubs (managed and tenanted public houses). 2- FINANCIAL PERFORMANCE Belhaven Group Plc's financial performance for the year 2005, as revealed by the company's financial statements and annual report indicates that the company has been able to enhance its sales as compared to the previous year, which is followed by an increased gross profit margin. There has been 32% increase in Belhaven Pubs sales, whereas the turnover of Belhaven Drinks has increased by 5%. This makes evident that most of the companies' revenue has come from Belhaven Pubs sales in the year 2005. On the other hand, there has also been an increasing trend in the company's operating expenses, which has its impact on operating profit for the year, as indicated by the considerable gap between the company's gross profit and net profit. The company gross profit margin is 51.91% of sales, while the net profit margin is only 18.45% sales. This noticeable gap is because of the amount spent by the company on operating expenses during the year. A major part of these expenses comes from the administrative expenses. The company's basic Earnings Per Share has increased over the financial year from 37.2p to 43.7p, which is a good sign for the investors who are interested in the company's share price. The dividend per share paid by the company has also increased from 8.00p to 7.25p over the financial year. The company also paid interim dividend to its shareholders at 4.35p per share, which also is more than that of the previous year's 3.95p interim dividend per share. This shows the sustainable financial performance of the company, being an attractive sign for the company's investors. 3- FINANCIAL POSITION The Belhaven Group Plc's financial position at the end of the financial year in 2005 can also be assessed with the help of the company's annual reports and financial statements. The following factors may be helpful in analysing the company's financial position: The company's working capital can be obtained by subtracting the current liabilities from the current assets. The company's current liabilities are 56,760,000 whereas; it owns current assets of 15,505,000. It means that the company's current liabilities are about 127% of its current assets. This is not a feasible sign for a company's financial position, as every company needs sufficient current assets to pay off its short-term debts and liabilities whenever a need arises. The Belhaven Group Plc's short term debts and liabilities are more than double at the end of the current financial year as revealed by the company's annual accounts. These liabilities are to be paid within the period of one year, but the company doesn't have enough current assets to pay them off. The company long-term debts and liabilities that are to be paid after more than one year have decreased by 28% at the end of the financial year. It is therefore apparent that the company has been able to payoff some of its long-term liabilities. At this position, the company is under less debt burden and faces less financial risk. 4- RATIO ANALYSIS The financial ratio analysis is considered very important in assessing the financial position and condition of a company. The following ratios have been calculated and analysed on the basis of data obtained from the company's annual report and financial statements: Return on Investment (ROI) 15.77% The Return on Investment ratio is helpful in analysing the profitability of a business. It shows how much a business is earning on its assets. The ratio attempts to measure the overall return the firm is generating on the amount of money invested in its assets. Belhaven Group Plc's Return on Investment ratio is 15.77%, which shows that the management is fairly utilising the company's assets towards profitability. Gross Profit Ratio 51.91% The Gross Profit ratio shows how much profit a business earns on its cost of sales, or the cost of goods sold. It also measures the profitability and trading efficiency of a business. The Belhaven Group Plc's gross profit ratio of 51.91% shows that the company has been managing its cost of sales in a profitable manner so as to earn good return on the sales. It gives an idea that the company is earning a gross profit of 51.91% on every 1 of the turnover. Net Profit Ratio 18.45% The Net Profit ratio is calculated after taking into account all the costs borne by a company. Therefore, it shows the net profit earned by a company on every 1 of the turnover. The Belhaven Group Plc's net profit ratio of 18.45% reveals that the company is paying a higher amount of its revenue on administrative and other costs, which is not a good sign for a business. But according to reuters.com, if we look at the industrial average (Beverages (Alcoholic) Industry, accessed 20.11.2005) for net profit ratio, it becomes clear than the Belhaven Group Plc's net profit ratio is better than its competitors. Stock Turnover 9.19 or 9 days This ratio assesses the management efficiency in utilising a company's current asset of stock in generating sales for the business (Mcmenamin Jim, 1999). The Belhaven Group Plc's stock turnover ratio shows that the company finishes its entire stock in 9 days of its operation. It is a good sign for the business, as it is always better for a company to get rid of old stock as early as possible in order to generate more sales, which is followed by increased profits. Current Ratio 0.27:1 The current ratio is the most important liquidity measure for a company. It shows the availability of working capital within a company to meet its current liabilities or pay off its short-term debt, whenever a need arises. The Belhaven Group Plc's current ratio is 0.27:1, which is highly questionable. This can become a dangerous sign for the company's stability and also a doubtful situation for the lenders of the company. According to Reuters, the company's current ratio is also very less than that of its competitors (Reuters, accessed 20.11.2005). Acid Test (Or Quick) Ratio 0.21:1 This ratio calculates the working capital availability within a company after keeping aside the company's current asset of stock. The Belhaven Group Plc belongs to beverage industry and thus relies mostly on its stock as current assets. The company's acid test ratio of 0.21:1 shows that the company doesn't have a huge level of stock holdings. But again, this ratio doesn't reveal a favourable position for the business. Debt Ratio 13.8% This ratio is an important consideration for the long-term lenders of the firm. It reveals how much of a company's assets are financed by external borrowings and debts. This ratio is used as an indicator of financial risks. The Belhaven Group Plc's annual reports show that about 13.8% of the company's total assets are financed by external borrowings. Interest Cover 5.7 times This ratio reveals a company's solvency state in terms of its ability to pay interest on the borrowings. Therefore, it is a helpful measure of a company's financial risk. The Belhaven Group Plc's interest cover ratio shows that after taking into account all the operating costs of a business, the company still has the ability to pay off its interest liability 5 more times. This can be an attractive factor for the long-term lenders of the company. Debt to Equity 27.82% This ratio indicates the long-term solvency of a company by showing the proportion of a company's external debt and borrowings to its equity finance. The Belhaven Group Plc's debt to equity ratio shows that the company doesn't over depend on external financing; thus is exposed to less financial risk and apparently is a good indication for lenders of the company. Earnings Per Share (EPS) 43.7p Common shareholders and potential investors in common stock first look at a company's earning record (Meigs & Meigs, p934, 1993). The investment is made in the shares of stocks; therefore Earning per Share determines the market value of a company's shares. The EPS ratio indicates how much a company pays to its investors out of its earnings. The Belhaven Group Plc's EPS for the year 2005 is 43.7p, which is greater than that of the previous year's 37.2p, as per the company's financial statements. This shows an increasing trend in investors' earnings, hence being an attractive sign for the company's investors, who are interested in the market price of company's shares. 5- FUTURE PROSPECTS The future prospects for Belhaven Group Plc can be evaluated with the help of the results acquired from the analysis of company annual report and financial ratios. A company's investors are interested either in the market price of the company's shares or the dividend paid by the company to its shareholders. Belhaven Group Plc's financial performance is satisfactory for both the kinds of investors. The Belhaven Group Plc's Earnings Per Share has increased over the last financial year, which is a good sign for the investors that are interested in the market of company's shares. The Dividend Per Share paid by the company (both interim and annual) to its shareholders is also seen to be rising continuously over the financial year, being a good reason for the investors to invest in the company's shares. The short-term lenders of a company are interested in the stability of the business in terms of its ability to pay off its short-term debts and liabilities without any hassle, whenever needed. This can only be possible when a company has enough working capital to pay off its current liabilities. In the case of Belhaven Group Plc, the company has a negative working capital and doesn't own enough current assets to meet its short-term debts as shown by company's financial statements and ratio analysis. This may diminish the confidence of short-term lenders in the company's financial stability. The long-term investors of a company are interested in the company's ability to pay off its long-term debts and liabilities conveniently. The Belhaven Group Plc's financial statements and ratio analysis show that the company has been paying off its long-term dues over the years. Not much of its assets are financed by external borrowings and the company's external debts amount to about 27.82% of company's total equity, which indicates that the company is not under long-term financial risk. This offers a good prospect for the company's long-term lenders. 6- CONCLUSION After analysing the Belhaven Group Plc's annual reports and financial statements, we can come to the point that the company has been showing a satisfactory financial performance. The company's financial statements show an increased turnover in both the business segments, earnings per share and dividend per share etc. The company's long-term liabilities are also reported to be decreasing, but there have also been some aspects where the company's management needs to pay keen attention. These aspects include an insufficient working capital, increasing operating expenses and increasing current liabilities. The ratio analysis of the company's financial statements also reveals the same financial position of the company. Therefore, it can be said that the company has overall tremendous future prospects for its investors. APPENDIX: Belhaven Group Plc '000 Return on Investment (ROI) Profit before interest and tax (PBIT)__ x 100 = 21,115 x 100 Investment (Total Assets- Current Liabilities) 133,921 = 15.77% Gross Profit Ratio Gross Profit x 100 = 59,405_ x 100 Sales (Turnover) 114,438 = 51.91% Net Profit Ratio Profit before interest and tax (PBIT) x 100 = 21,115_ x 100 Sales 114,438 = 18.45% Stock Turnover Average Stocks = 2,884 (Total Sales/365) 313.53 = 9.19 or 9 days Current Ratio Current Assets___ = 15,505 Current Liabilities 56,760 = 0.27 Acid Test (Or Quick) Ratio Current Assets- Stock = 12,451 Current Liabilities 56,760 = 0.21 Debt Ratio Total Debt Finance_________ x 100 = 26,396 x 100 Total Assets (Fixed + Current) 190,681 = 13.8% Interest Cover Profit Before Interest and Tax (PBIT) = 21,115_ Total Interest Payable 3,687 = 5.7 times Debt to Equity Total Debt ___ x100 = 26,396 x 100 Total Shareholders' equity 94,880 = 27.82% References Belhaven Breweries, accessed November 19, 2005 from the World Wide Web: http://www.belhaven.co.uk/index01.html Belhaven, Annual Report 2005, accessed November 20, 2005 from the World Wide Web: http://www.belhaven.co.uk/corp/pdf/annual-report-2005.pdf Beverages (Alcoholic) Industry, accessed November 20, 2005 from the World Wide Web: http://www.investor.reuters.com/IndustryCenter.aspxindustry=BEVALC&target=%2findustries%2findhighlights%2findustrycenter Meigs & Meigs (1993), "Accounting: The Basis For Business Decision Making", Mc Graw Hill: New York, p934 Mcmenamin Jim (1999), "Financial Management: An Introduction", Routledge, London Read More