Evaluation of A.G. Barr Inc. Financial Statement from the Shareholders Perspective - Example

Name Professor Title Date Analysis of A.G. Barr Inc. Financial report from shareholder’s perspective Overview of the paper In any type of an organization, the financial health is very crucial as it determines whether the organization is to exist and serve the market for long or not. Any shareholder in any organization need to be assured of his or her financial stake in a company and that is why many shareholders are always concerned about the financial performance of the organizations that they own Bob de (Wit and Ron 10).Shareholders always keep on analyzing their financial objectives and performances of their organizations and if at any time that they are not satisfied, the chances are they may consider selling their shares or still keep them within the organization. The books of accounts forms the main source of information from where shareholders can obtain data from as far as the financial performance of an organization is concerned. From the books of accounts, shareholders are able to analyze and come up with various financial ratios that can be used to predict the future of an organization, both in the short term and in the long run. Shareholders are believed to constantly evaluate the performance of an organization and compare it with previous figures, competitors as well as with the most successful organizations within a given locality. This paper analyses the published annual financial statements for the A.G. Barr Inc. a soft drink manufacturer based in the UK. The statements considered here are for the financial year ending January 2014 and January 2015. This paper critically assesses the value of this organization to the shareholder by analyzing the financial statements as well as through the use of various appropriate financial ratios. This is done by paying attention to the capital structure of the company as well as looking at its chances to survive the current global economic situation. The paper concludes with giving various reasons as to whether as a shareholder, I should sell my shares, hold on to the existing shares or buy more shares from the organization. Overview of the financial position The A.G. Barr Inc. exists as an organization that makes, markets and sells some of the best and loved soft drinks not only in UK but also within Europe.As at the end of the financial year ended January 2015, the chairman of the group, John R. Nicolson, noted in his statement that the results reflected the benefits of a clear strategy, perfect execution of the strategies, sale of differentiated brands in the market as well as a committed and a talented team. As a shareholder, my interests are not only in the financial statements but also in other areas such as the human resources since without a qualified workforce team, chances are that the future of the organization will be compromised (A.G. Barr Inc. 11). Dividends In terms of dividends, the Board announced a final dividend rate of 9.01p for each share and this gave a total dividend for the year at 12.12p per share. As a shareholder, this is a big win as the dividend payout represented a full-year increase of 10.0% from the previous year (2014). This clearly indicates that the organization is doing well for the moment and one may decide to buy more shares since the possibility is that the payout will continue to increase each year (A.G. Barr Inc. 11). As a shareholder, it is key to understand that in everything that the organization does, the main objective is to deliver a sustainable and long-term value to all the shareholders. Before looking at the financial position and viability, there are other things which are ley towards creating a sustainable organization both in the short run as well as in the future (A.G. Barr Inc. 12). A.G. Barr Inc., both as a group and a company, allows strong business fundamentals which give a big focus on the growth of the organization as well as value to the shareholders. A.G. Barr Inc. is financially well positioned to grow further and ensure that the financiers of the company are happy. From research, the management at A.G. Barr Inc. works very hard towards creating a sustainable growth for the organization even as the market continues to become a challenging one. In terms of its products, A.G. Barr Inc. operates in an expandable consumption market and has very powerful brands which are well differentiated and fit well with the consumers’ needs and specifications. In the A.G. Barr Inc. annual report and accounts for the year 2015, it is clearly stated that the model of the business allows the company to focus on creating as well as delivering value in all what is done within the operations. The management of the organization states that the brands are well owned, assets are well backed and there are multiple routes to the market. In addition, the organization has a strong and a winning execution culture that works towards outgrowing the market and at the same time build the business so as to add value to the shareholders, who are the main financial of the business. What drives the company is consumer insight. The business model Before looking at the key performance indicators for the organization, it is good we look at the main aspects of the business model. This will assist the shareholder in ensuring that he is indeed aware of what the organization does and what the short-term and long-term plans are. The shareholder uses such kinds of information so as to assess whether indeed there will be added value or not. The organization focuses on core brands As stated in the organization’s annual report and accounts, A.G. Barr Inc. has developed a wide and a string brand portfolio and have focused much on offering choice. A.G. Barr Inc. directs much efforts towards the core brands which include IRN-BRU, BARR, Strathmore, Rubicon, as well as other franchise partner brands which are the Snapple and the Rockstar (A.G. Barr Inc. 11). An enabled and energized team As stated earlier, the workforce is one of the key assets for any organization and it is the responsibility of the shareholder to assess whether the workforce is ready and able to deliver the company’s objectives. A stated in the 2015 report, the organization relies much on the performance of individuals as well as the entire team so as to build competency, leadership as well as capability across the whole business (A.G. Barr Inc. 11). Excellence in execution As a shareholder, I am interested in knowing whether the organization has been able to excel in its plans for the year and this will help in predicting whether the company will be able to achieve its targets in the years to come (A.G. Barr Inc. 11). The management, in the financial report asserts that as an organization, they have been able to invest significantly in customer facing teams so as to ensure that brand led activities are activated, and to ensure that there are marketing campaigns that are well leveraged (A.G. Barr Inc. 11). Customer relationships Any organization that has loyal customers and clients has a higher chance to succeed in the future, and this depends on the kinds of relationships created by the organization itself. According to the report, building long lasting relationships with customers across the business has been key to the process of creating and building the business for the long term. The aim of the organization is to understand all the customers and collaborate with them so as to come up with wining consumer propositions in the most profitable way possible (A.G. Barr Inc. 11). Efficiency within the supply chain For any organization to ensure that they compete well in the marketplace of today, efficiency in the supply chain must be a priority and this is a concern for the shareholder (A.G. Barr Inc. 11). As indicated in the organizations’ report for the year ended January 2015, A.G. Barr Inc. has been investing in all areas of efficiency in terms of sourcing of raw materials across the world, the design of the materials used in pacing the products as well as the process of manufacturing and distributing facilities across the United Kingdom (A.G. Barr Inc. 11). Key performance indicators In order to understand the status of the organization in terms of whether it is able to survive in the future, there are various metrics that the shareholder must look at and through the process of evaluation and comparing with the previous performances as well as with the available market conditions, he or she can help determine whether to continue investing I the organization or reduce the stake of shareholding in the organization. These metrics do not include only the financial ones, but still covers other aspects such as customer metrics, people metrics and process metrics. Financial ratios/metrics Turnover growth Turn-over growth refers to the increase in value of revenue that is recorded in a given period, relative to the previous period (Heisinger 630). In this case, we look at the increase in revenue for the year ended January 2015 relative to the year ended January 2014 (A.G. Barr Inc. 12). As indicated in the financial report given to the shareholders, the revenue growth in the 12 months to January 25th 2015 was reported at 2.7%, a figure which the management asserts that it has clearly and comfortably out-performed a more challenging market for soft drinks not only in the UK buts also across the globe (A.G. Barr Inc. 13). Turnover ratio/growth= (260,895,000-254,085,000)/260,895,000*100%=2.7% The turnover growth for the year ending January 2014 was reported as 6.9%. This indicates that the turnover growth reduced from 2014 to 2015 by a margin of 4.2%. This can be attributed to the global economic situation as the market has been very much challenging. However, A.G. Barr Inc. can do much better so as to help boost the confidence of shareholders (John and James 339). Gross margin ratio Gross margin is defined as the difference between revenues for a given financial year and the cost of goods sold, then divided by the revues, a value which is then expressed as a percentage (Tyangi and Tyangi 99). The formula for this ratio is given as follows, (Net sales - Cost of goods sold) / Net sales For A.G. Barr Inc. the Gross margin ratio for the year ending January 2015 was 47.3% calculated as follows: (260895-137,582)/ 260,895*100= 47.3% This value reflects a tremendous efficiency for the organization. However, more work need to be done so as to have a minimum of 50% gross margin ratio for a single financial year. Gross margin ratio is used by the shareholder so as to assess and evaluate the financial health of an organization by revealing the proportion of money left over revenues after accounting for the money spend in the form of cost of goods sold. Gross margin is the source of money used to pay additional expenses as well as for the purposes of future savings for the organization. In this particular case, A.G. Barr Inc., has a gross margin of 47.3% which is quite an impressive figure for the shareholder (A.G. Barr Inc. 13). This particular ratio measures the profitability of the company in terms of how it sells its inventory. Higher ratios are more favorable and they mean that a company is selling their inventory at relatively higher profit margins (Tyangi and Tyangi 99). The profit margin ratio for the A.G. Barr Inc. for the financial year ending January 2014 was reported at 45.7% (A.G. Barr Inc. 12). When the profit margin for the two financial years are compared, it can be seen that the profit margin was higher at 2015 by a margin of 1.6%. This is one of the major positive aspects of the organization and can mean that the organization is moving in the right direction despite the market getting unfavorable. This gives much confidence to the shareholder who can make use of this aspect, in addition to others so as to make a decision on increasing his or her shareholding in the organization (Heisinger 634). Operating profit margin This is a ratio that is used to measure the pricing strategy of a company and hence use this to assess the operating efficiency of the same company (John and James 340).Operating profit margin is a measurement of the proportion of the revenues of an organization that has been left over after the organization has paid out for variable costs such as costs for acquiring raw materials, wages among others. This ratio indicates how much profit an organization makes after it has paid out for all its variable costs. It is an expression of the percentage of sales and shows the efficiency of the organization in terms of controlling the variable costs and expenses that are associated with the various operations that the business engages in (Heisinger 634). Operating profit margin is given as the operating profit before exceptional items as well as before the deductions of interests and taxation are made and the divided by revenue. For the financial period ending January 2015, A.G. Barr Inc. reported that its operating profit margin was at 16.1% which is a good figure although it can be improved further (A.G. Barr Inc. 12). On the part of a shareholder, this indicates that the organization has been in a good position to control its variable costs and that there is a possibility of doing better in the future. For the previous financial year 2014, the operating profit margin was 15.1% and this represents a difference margin of 1% (A.G. Barr Inc. 13). This is a major positive aspect that can be a big consideration by shareholders in making decisions on whether to add, reduce or maintain their stake in the organization. This means that the organization improved in terms reduced variable costs, a factor that shareholders considers a lot in determining the efficiency of an organization (Heisinger 636). EBITDA Margin The EBITDA margin measure an organization’s operating profitability in the form of a percentage of the total revenue (John and James 341). It is given as the Earnings before interest, tax, depreciation as well as Amortization (EBITDA) divided by the total revenue for the company. Since the EBITDA does not include interest, depreciation, taxes as well as amortization, the EBITDA Margin provides the shareholder with a clear view of the operating profitability of a company and the cash flow. According to the financial report and accounts given by A.G. Barr Inc. for the financial year ending January 2016, the EBITDA margin was given at 18.8% (A.G. Barr Inc. 13). This represents the A.G. Barr Inc.’s operating profitability without taking into account the aspects of interest, taxes, depreciation and amortization. It is a good figure but a lot can be done by the organization so as to add more value to the shareholder. A higher figure means a higher value to the shareholder and also increases the shareholder’s confidence to the organization in which they have invested in. For the previous financial year ending January 2014, the EBITDA margin for the A.G. Barr Inc. was reported in the financial report and accounts at 17.8%, which represents a margin increase of 1% (A.G. Barr Inc. 11). This means that the organization improved in terms of adding value to the shareholder. This means that if the difference in the EBITDA margin continues to increase year by year, then the shareholder value continues to increase and chances are that any shareholder would consider buying more shares form the organization. Return on capital Return on Capital (ROC) is defined as the measure of the profitability of a company. This ratio is also used by shareholders and other stakeholders of a company to measure the value-creating potentially of an organization after considering the amount of initial invested into the company (Ryan 44).Invested capital can be defined as the period end non-current and current assets less current liabilities and excluding any balance related to any provisions, cash or cash equivalents as well as other financial instruments. Formula=Net operating profits/total assets-current liabilities The Return on Capital for A.G. Barr Inc. is given as follows: 38,847/ (254,743-56181) =19.6% (2015) 34,680 / (226,874-45189) = 19.1% (2014) For the two financial years, it is clear that that the Return on capital improved slightly from 2014 to 2015, and this is a positive value to the shareholder (A.G. Barr Inc. 14). The basic aspect that shareholders consider most is the ability of an organization or a company to improve from year to year as this indicates that the value to the shareholder also increases. On the other hand, assume that the Return on Capital keeps on reducing from year to year, the understanding here is that the organization’s profitability continues to diminish and this also translates directly to diminished shareholder value. It is the responsibility of the organization’s management to ensure that they work hard so as to continuously increase the shareholder value. Free cash flow Free cash flow can be defined as the measure of the financial performance of a company calculated by deducting capital expenditures from the operating cash flow (McClelland and Priest 3). Basically, free cash flow represents the cash that an organization can generate after laying out the total amount that is required to maintain and expand its asset base. Free cash flow is an aspect that is important to the shareholder in that it allows an organization to pursue the available opportunities that promote and enhance their value. Any organization requires adequate cash so as to be able to undertake operations even into the foreseeable future. Without cash, it becomes difficult to develop and sell new products, make acquisitions, pay dividends to shareholders as well as reduce any aspects of debt for the organization (McClelland and Priest 3). For the A.G. Barr Inc., the free cash flow for the financial period ending January 2015 was £40.6m whereas for the financial year ending January 2014, the free cash flow was £37.7 (A.G. Barr Inc. 13). This means that the free cash flow improved from 2014 to 2015 by a margin of £2.9, which represents an added value to the shareholder (A.G. Barr Inc. 14). Such a big difference from one year to another means that the organization has enough cash for the purposes of meeting daily, monthly and yearly expenses and this increases the confidence of the shareholder. As a result, the shareholder can use this aspect in making decisions as to whether to buy more shares, maintain or reduce the number of shares through selling some of them with higher chances being that the shareholder will definitely buy more shares since the organization is doing much better in terms of the flow of cash It is a string belief by shareholders that free cash flow gives a clearer view of the ability of a company to generate cash and hence profits for the company, which translates to added value for the investor. In other cases, organizations can have negative free cash flow values and this doesn’t mean that such organizations are not doing badly. Negative free cash flows means that a company may be engaging in large and heavy investments which have the chances of high returns in the long run. Return on capital employed Return on capital employed (ROCE) is one of the profitability ratio that are used to measure the efficiency of a company in terms of how it generates profits from the company’s capital employed by comparing the net operating profits and the capital employed (Ryan 49). This indicates that the return on capital employed shows the shareholder how much in terms of profits each amount of capital employed is able to generate (Ryan 50).Return on capital employed is one of the long-term profitability ratios since it indicates the effectiveness and efficiency of the performance of assets in terms of long-term financing. This indicates the main reason why many organizations consider the ROCE as a more useful ratio than return on equity in evaluating the longevity of an organization. A higher value of return on capital employed translates to a more efficient use of capital. ROCE is supposed to be a higher value than total capital cost of the company, otherwise, the indication is that the company has not been able to employ its capital effectively and thus does not generate much shareholder value. As for the case of A.G. Barr Inc., the return on capital employed (ROCE) for the financial year ending January 2015 was 24.0% whereas the ROCE for the financial period ending January 2014 was 22.4% (A.G. Barr Inc. 13). This gives a difference of 1.6% and this means that the organization keeps on improving in terms of the efficient use of capital employed. Higher values if ROCE means translates into higher shareholder value and thus a shareholder may use this aspect to buy more shares from the organization. Profit before tax and exceptional items Investors and shareholders are most interested in looking at the profits of an organization before tax and other exceptional items have been deducted. Such exceptional items include: interest, depreciation, amortization among others. When evaluating the profits of a company, shareholders look at the figure as a percentage of the total revenues. A shareholder will always compare the profits before tax and exceptional items for various years and if he or sees that there is a growth, then it means that there is added shareholder value every year and thus he or she may consider buying more shares form such a company (Francis et al 805). For the A.G. Barr Inc., the profit before tax and exceptional terms for the financial year ending January 2015 was £41.9mwhereas for the periods ending January 2014 was £38.1 and this represents an increase of £3.8 (A.G. Barr Inc. 14). According to the chairman of the A.G. Barr Inc. group, the pre-tax profit before exceptional items increased by a margin of 10% from 2014 to 2015 (A.G. Barr Inc. 13). This growth was attributed to the structural operating improvements made in the supply chain and this is considered as a positive aspect by the investors and shareholders. In addition, A.G. Barr Inc. has been able to further control its overhead costs and this is also a tick for the shareholders. The organization has also been able to invest in long-term success through various capital investments in the core brand equities. Innovation has also been key for the financial growth of the organization. Key highlights in the financial statements Statement of financial position The Group’s statement of financial position strengthened from the financial year 2014 to the financial year 2015 despite the challenging market conditions. The group strengthened in terms of net assets with a growth of 1% to £156.5 million. ROCE increased by 1.6% to 24%, non-current assets increased £10m, inventory increased by 4.5%, trade receivables days for the group increased by 4 days to 69 days whereas trade payables days increased to 47 days, representing a margin of 25 days (A.G. Barr Inc. 24). Ideally, the balance sheet for the year 2015 was much better than the previous year 2014 and this gives a sense of more hope to the shareholders as this means that there is obviously an increased shareholder value. As a result, personally as a shareholder, I would consider buying more shares from A.G. Barr Inc. Company and group. Assets, both current and non-current, tend to act as a source of confidence to the investors and shareholders. An organization with more assets means that the chances of growth are high and thus a shareholder cam consider investing further in such an organization. Cash flows In the year 2014/15, A.G. Barr Inc. generated free cash of nearly £40.6m and this represented an increase of £3m in comparison to the previous period, a record for the organization. This increase was attributed to a strong EBITDA as well as a lower exceptional cash outflows (A.G. Barr Inc. 24). Conclusion In conclusion, it is evident that the current global economic situation have not favored A.G. Barr Inc. in this sector. Despite this, the organization’s capital structure as well as the financial position has been a good one and thus as a shareholder, I will definitely consider buying more shares bearing in mind that the global economic situation affects all industries. This means that only a few firms are able to survive these challenging situations and are able to maintain or increase their profitability as well as shareholder value. From the analysis done in the paper, there are various key highlights that I need to consider as a shareholder. First, the profit before tax and exceptional items increased substantially from the 2013/14 financial year to the 12014/15 financial year. This means that A.G. Barr Inc. has been able to defy all odds in the market and this means that the greatest chances are that the organization will definitely maintain its profitability if not increase. This gives shareholders a more opportunity to invest further and be able to buy more shares from A.G. Barr Inc. In terms of the capital structure, two major ratios are considered and have been discussed clearly within the paper. These ratios are the return on capital (ROC) as well as the return on capital employed (ROCE). ROC measure the profitability of an organization and is used by shareholders to determine whether their value increases or not (Ryan 47).Irrespective of the prevailing market situation, A.G. Barr Inc. has been able to maintain a positive ROC. In fact, ROC increased from 19.1% to 19.6% and this represents a positive note for the shareholder. As a result, I would use this aspect to buy more shares from A.G. Barr Inc. Another ratio that measures the capital structure of an organization and that has been highlighted in the paper is the ROCE). Return on capital employed (ROCE), as a profitability ratio, has been defined as a measureof the efficiency of a company in terms of how it generates profits from its capital employed by comparing the net operating profits and the capital employed (Ryan 49). For the case of A.G. Barr Inc., the ROCE increased from 22.4% in 2013/14 financial year to 24% in the financial year 2014/15. This is a very good reason for a shareholder to consider purchasing more stake inform of shares for the organization considering the current global market situation (A.G. Barr Inc. 24). Ideally, I consider buying more shares from A.G. Barr Inc. irrespective of the current global market situation since the organization has defied all these odds and has still increased its profitability as well as its capital structure. Works cited A.G. Barr Inc. A.G. BARR p.l.c. Annual Report and Accounts 2015. 2015 Online Bob de Wit and Ron Meyer. Strategy: Process, Content, Context. Boston: Cengage Learning. 2010. Print. Francis Jennifer, Schipper Katherine, Stickney Clyde and Weil Roman. Financial Accounting: An Introduction to Concepts, Methods and Uses. Boston: Cengage Learning. 2009. Print. Heisinger Kurt. Essentials of Managerial Accounting. Boston: Cengage Learning. 2009. Print. John Wisdom and James Haseelback. U.S. Master Accounting Guide (2008). CCH Company. 2008. Print. McClelland Lindsay and Priest William. Free Cash Flow and Shareholder Yield: New Priorities for the Global Investor. New York: John Wiley and Sons. 2011. Print. Ryan Bob. Corporate Finance and Valuation. Boston: Cengage Learning. 2007. Print. TyangiMadhu and Tyangi, D.L. Financial and Management Accounting. New Delhi: Atlantic Publishers & Dist. 2003. Print. . . Read More