Financial Analysis Croda Plc - Business Plan Example

Financial analysis Croda plc Table of Contents Table of Contents 2 Introduction 3 Strategy and forward planning 3 Accounting methods 5 Interpretationof technical analysis 5 Comparison with Cragielaw Plc 8 Non-financial performance indicators 8 Questions to Finance Director 9 Reference 10 Bibliography 11 Annexure- 12 Introduction Croda International established in 1925 serves the UK cosmetic industry. The group is involved in various activities but has recently shifted its attention to its core business of dealing in cosmetic products and ‘lanolin’ which is the flagship product of the company. Its activities are primarily divided into- Oleochemistry and Miscellaneous. These are again subdivided into varying sectors like health, personal care, household products, packaging & plastic and food applications (Yahoo Finance, 2010). Croda International is listed on the London Stock Exchange under the FTSE ‘chemicals’. Its ticker is ‘CRDA’. It is listed under FTSE All-Share. The company reported a turnover of £289.9 million in the year 2005. This increased to £916.2 million in the year 2009 signifying a compounded annual growth rate (CAGR) of 25%. With the rise in turnover the Profit after tax (PAT) position of the company also increased by nearly 17 percent. In the year 2005 the company did not rely too much on debt as is evident from the low gearing percentage of 30% whereas this increased by 43% to reach 182.4% in the financial year 2009. The turnover and profit of the company has remained positive over the last five year period but the company has not been able to sustain a rise in ROIC. Even the operating profit margin of the company was significantly high at 17.7% in 2005 but over the five year period it has reduced to 13.1% (Croda, 2009). Strategy and forward planning In the Chairman’s Statement it is given that the company is continuously focusing on customers, markets and markets product innovation. Together with this the company works towards reduction of costs given the challenging global economic conditions. In the year 2009 the company announced about site closures at Bromborough in Merseyside and Wilton in North Yorkshire. The former ceased its production operations in 2009 and its operations are treated as ‘discontinued’ following its exit from the “specific commodity market”. The company wishes to align its future dividend with the growth in future earnings (Croda, 2009). Based on the strong market performance of the company towards the end of 2009 and in the financial year 2010 the Chairman expressed confidence in the future growth prospects of the company. As per the Group Chief Executive Mike Humphrey, an important feature of the company’s business model is its ability to sell a wide variety of products to various customers across the world. He has stated how the company has no real control over the pricing of certain commodity products like glycerine and fatty acids. Owing to the low margins on these products as compared to other specialty products the company has sold, restructured or moved away from such unprofitable product products. Even though it is not possible for the company to exit this segment completely but it will devise ways for reducing exposure to these product streams (Croda, 2009). The Finance Director of the company, Sean Christie, states that the Group regularly reviews the risks faced by it and evaluates the necessary procedures and controls for their mitigation. Croda depends on Information Technology systems in order to operate efficiently and effectively. Any lapse in the IT systems can affect its operations with an ultimate impact on its financial position. The company has a “Dividend Reinvestment Plan (DRIP)” in place that enables the investors to use dividends to make further investment in the shares of the company. DRIP is managed by Capita IRG Trustees Ltd (CIRGT). CIRGT issues the necessary instructions to the broker to purchase shares of the company on the date the dividend is paid at the prevailing market price (Croda, n.d.). Accounting methods The company has prepared its “consolidated financial statements” in accordance with historical cost convention with modifications relating to financial instrument revaluation, shares related payments and valuation of pension assets at fair value adjusted through “profit or loss” as required by International Financial Reporting Standards (IFRS). With the switch to IFRS, revisions have been made to IAS. Like IAS 1 relating to “Presentation of financial statements” has been revised; IAS 14 on “Segment Reporting” has been replaced by IFRS 8 “Operating Segments” etc (Croda, 2009). Interpretation of technical analysis Horizontal Analysis- In 2009 the revenue of the company has increased even though marginally by 0.56% over the previous year. Despite a rise in revenue the Cost of sales of the company decreased by 0.21% over the last year. This is a good sign as it signifies that the company has been able to bring down its cost of sales, albeit marginally. But the benefit of this reduced cost is not reflected in the profit figure as the profit for the year 2009 declined by nearly 60.78% as compared to the previous year. Current assets of the company declined by 9.75% as compared to the previous year whereas the Current Liabilities of the company increased by 21.15% over the last year. This means that the company has increased its short term creditors significantly whereas the liquid assets of the company like Cash & equivalent has gone down significantly over the last year. The equity of the company has increased marginally by 3.67% in 2009 but the total debt of the company has declined significantly by 10% over the last year. It suggests that the company has reduced its debt exposure over the previous year. One of the reasons for this could be that the company wants to reduce its fixed financial obligations. Ratio analysis- The asset turnover ratio is a measure of how efficiently the company management is utilizing the asset base. A high asset turnover ratio is a good sign as it signifies that the company is able to generate sales on a limited asset base. This ratio was 1.67 in 2008 and this increased to 1.81 in the following year. It is partly due to a fall in the asset base and rise in the revenue in the year 2009. The asset turnover ratio of is satisfactory suggesting that the management of Croda Plc has been able to utilize its asset base efficiently. The current ratio of the company was 0.23 in 2008 and this deteriorated further to 0.17 in the immediate year owing to a fall in the current assets and rise in the current liabilities. The low current ratio of the company highlights that the liquidity position of the company is not very strong. The gearing ratio of the company is significantly high as evident from the high debt-equity ratio. This ratio was 3.16 in 2008. In the following year the company was able to reduce it 2.72 by decreasing the total debt and increasing the total equity. The gearing ratio suggests that the company is overexposed to debt which the company management is trying to reduce as evident from the fall in the total creditors in 2009 as compared to the last year. A high debt exposure is not in the financial interest of the company as the cost of servicing debt can come in the way of lucrative business opportunities. The investors generally look at the return generated by the company at the time of making investment. The return on equity (ROE) of the company is measured as Profit after tax/Total equity. In the year 2008 the company reported a ROE of 46.75% but this reduced by more than fifty percent in the following year to 17.69%. This was mainly on account of the sharp fall in the net profit of the company in 2009. The significant fall in ROE in 2009 can make the company unattractive in the eyes of the investor which can come in the way of raising adequate financing. The Operating Cash flow ratio of the company measures to what extent the cash flow from operations cover the current liabilities of the business. This ratio gives an indication of the liquidity position of the company in the short run. Croda Plc had an Operating cash flow ratio of 0.56 in 2008; this improved to 1.25 in the following year on account of an increase in the Cash flows from operating activities. This amount was £57 million in 2008 and it increased by more than 150% in the following year to £154.9. Therefore the Operating cash flow ratio of the company presents a reasonable picture of the company’s liquidity strength. Vertical Analysis- According to vertical analysis the proportion of Tangible Assets has increased from 0.37% in 2008 to 0.49% in the following year. The proportion of other assets like Investment, Cash and debtors has either remained same or has increased marginally. There has been a fall in the Creditors from 75.96% in 2008 to 73.14% in 2009. The fall in creditors has been accompanied by an equivalent rise in the Shareholders funds from 24.04% in 2008 to 26.5% in the year after. In the Income Statement the company management reduced the ‘Cost of Sales’ from 76.69% in 2008 to 76.10% in the following year which is a good sign. A fall in the cost percentage can add to the profitability of the company. The net operating expenses have however shot up from 10.95% in 2008 to 12.69% in 2009 which can be one of the reasons for the fall in the profits despite the rise in sales figures and fall in the Cost of sales percentage. The net profit percentage was 6.72% of revenue in 2008 but this decreased to 2.62% in 2008. From this it can be inferred that the company management has failed to exercise control over the operating expenses. Trend Analysis- As already shown under vertical and horizontal analysis the trend in revenue has been positive as this increased to 100.55 in 2009 as compared to the base year 2008. This highlights the efficient business selling activities. Similarly the Cost of Sales in 2009 was 99.78 as compared to the base period which is an indicator of management efficiency as this means that the company has been able to procure goods at lesser prices. The trend has been negative for profit and Current Assets as the index for these items has reached below the base period index of 100. Comparison with Cragielaw Plc The liquidity position of Cragielaw Plc is fairly good as evident from its current ratio 0f 1.11. The gearing ratio of the company is at 1.38 which is reasonable good suggesting that the company does not rely too much on debt funding. In fact the capital mix of the company has a more or less equal proportion of debt and equity. However the ROE of Cragielaw Plc is 14.12% which is less as compared to Croda Plc mainly because the equity component of the former is higher than the latter. Cragielaw Plc’s profit of £95.6 million is roughly four times the profit of Croda Plc (Pearson Education Limited, 2010). Non-financial performance indicators According to Martin Flower, Non-executive Chairman of Croda Plc, the company is focused on the “quality of business over volume growth”. The production of new products through innovative methods across its various global centres has been increasing steadily, keeping in line with the evolving demands of the vibrant industry. The company’s continuous focus on market drovers and market means that it has aligned itself with the future trends that are likely to shape the industrial and consumer markets. Pragmatic innovation which is an inherent part of the company’s culture will ensure that the company will soon emerge as a leading chemical company (Croda, 2009). Questions to Finance Director Q1. What the company plans to do to improve its liquidity position? Q2. Is the debt-equity ratio of the company in line with the industry standards? Q3. Is the company thinking of reducing its debt exposure? Q4. Despite the rise in turnover and fall in ‘cost to sales’ the company has failed to raise its operating profit as a percentage of turnover. Why? Q5. How the company plans to bring down its net operating expenses? Reason- The liquidity position of the company is not good as indicated by the current ratio hence Q1 has been designed. Q2 and Q3 will give an insight into how comfortable the company is with the current debt in the capital base. Q 4 and Q5 have been framed as the fall in the operating profit as a percentage of turnover is a serious matter as this has come in the way of raising profits despite a rise in revenue Reference Croda. No Date. Shareholder information. Investor. Available at: http://www.croda.com/home.aspx?d=content&s=1&r=233&p=122 [Accessed on October 26, 2010]. Croda. 2009. Annual Report & Accounts 2009. [pdf]. Pearson Education Limited. 2010. CRAIGIELAW plc ANNUAL REPORT YEAR 7. Available at: http://media.pearsoncmg.com/intl/ema/ema_uk_he_weetman_finmanacc_5/craigielaw_annual_report.pdf [Accessed on October 26, 2010]. Yahoo Finance. 2010. Profile. CRODA INTL PLC. Available at: http://finance.yahoo.com/q/pr?s=CRDA.L+Profile [Accessed on October 26, 2010]. Bibliography Purdue University. No date. Chapter 3 Notes. Available at: http://www.cfs.purdue.edu/class/HTM241/Notes241_Ch3.pdf Annexure- Ratio Analysis   Croda Plc Croda Plc Cragielaw Plc Management Efficiency- 2009 2008 Year 7 Revenue 916.2 911.1 2081.5 Assets 505.4 544.6 1681 Asset Turnover ratio 1.81 1.67 1.24         Liquidity and working capital-       Current Assets 21.3 23.6 717.1 Current Liabilities 124.3 102.6 646.3 Current Ratio 0.17 0.23 1.11         Cash Flow-       Cash flow from operations 154.9 57 167 Current Liabilities 124.3 102.6 646.3 Operating Cash Flow Ratio 1.25 0.56 0.26         Gearing (Leverage)-       Total Debt 369.7 413.7 936.9 Total equity 135.7 130.9 677.2 Debt-equity ratio 2.72 3.16 1.38 Debt ratio 0.73 0.76 0.58         Investor interest-       Profit for the year 24 61.2 95.6 Total equity 135.7 130.9 677.2 Return on equity (%) 17.69 46.75 14.12 Croda Plc-   2005 2009 CAGR Turnover 289.9 916.2 0.258776 Profit after tax 32.2 71.8 0.173961 Gearing (%) 30 182.4 0.434765 Operating profit as a % of turnover 17.7 13.1 -0.05841 Return on invested capital (ROIC 12.5 10.5 -0.03427 Croda Plc- Horizontal analysis-             2009 2008 Percentage change Revenue   916.2 911.1 0.56% Cost of Sales   697.2 698.7 -0.21% Profit for the year   24 61.2 -60.78% Current Assets   21.3 23.6 -9.75% Current Liabilities   124.3 102.6 21.15% Total Debt   369.7 413.7 -10.64% Total equity   135.7 130.9 3.67% Vertical Analysis-               2009   2008   Tangible assets   2.5 0.49 2 0.37 Investments   481.6 95.29 519 95.30 Debtors   15.1 2.99 14.1 2.59 Cash   6.2 1.23 9.5 1.74     505.4   544.6               Creditors   369.7 73.14998 413.7 75.96 Shareholders funds   135.7 26.85002 130.9 24.04     505.4   544.6                   2009   2008   Cost of Sales   697.2 76.10 698.7 76.69 Net operating expenses   116.3 12.69 99.8 10.95 Net Financial expenses   13.5 1.47 16.3 1.79 Tax   32.5 3.55 31.5 3.46 Profit (or loss) after tax from discontinued operations   32.7 3.57 3.6 0.40 Profit for the year   24 2.62 61.2 6.72 Revenue   916.2   911.1   Trend Analysis-           2009 2008 Revenue   100.5598 100 Cost of Sales   99.78532 100 Profit for the year   39.21569 100 Current Assets   90.25424 100 Total Debt   89.36427 100 Total equity   103.6669 100         Read More