Financial Reporting of Kerry Group - Assignment Example

?Contents Summary 2 Market and Industry Risk and competitor analysis 3 3.2 Porter Five Forces Model Analysis 3 Currency related risks 4 3.5 Firm related risks 5 Financial Ratio Analysis 6 Profitability Ratios 7 Liquidity and efficiency Ratios 9 Structure Ratios 10 Conclusion 10 References 12 Annexure 12 Summary Kerry Group PLC is one of the largest companies based in Ireland providing food ingredients and retail and grocery solution worldwide. The study provides the details financial analysis of the company. In the case study the financial and operational evaluation of the company in questions has been undertaken. For the purpose of operational capability of the company, its corporate strategy has been analyzed in addition to the competitive environment and other risks to which it is being exposed. The paper presents the financial evaluation of the company and for this particular purpose, the most effective tool of ratio analysis has been utilized. The financial ratios are usually divided into various sub categories such as profitability, gearing and liquidity, each put emphasis on a different area of the financial outlook of the organization. These analyses form an integral part of the financial statement analysis, especially from the investor’s point of view, which are always looking for avenues to invest in countries having strengthened and stabilized financial ratios and representing an upward trend. In addition to the financial evaluation, for the purpose of risk assessment, several risks has been identified and assessed such as firm related risks, currency risks, capital structure risks and market risks. The Kerry Group PLC actively follows the corporate governance directives issued by the government for the corporation registered in the Ireland. Being a premium company listed on the stock exchange, the company is required to follow the directives of the corporate governance requirements. The company has stated in its latest financial report that it has complied with all of the provisions and directives of the corporate governance as per the regulations. The company has always remained sincere to its corporate social responsibility and has always strived for it. Being a multinational, the policies of corporate social responsibility extends to all of the countries in which the company has its operations. Market and Industry Risk and competitor analysis The company operates in a highly competitive market where its competitors are continuously devising methods through which their profitability and market share can be increased. The company is exposed to a risk where its competitors can introduce a major change in their production process through introducing a state of the art technology. This can not only enhance the efficiency of their production, but it can significantly provide them with the cost leadership as well. In order to analyze market competitive forces, Porter gave a five forces model which analyzes the competitive forces acting in the market which a corporation has to manage in order for it to obtain competitive advantage. 3.2 Porter Five Forces Model Analysis Porter’s five forces model is an effective tool in exploring the competitive forces of the environment in which the organization operates. It allows the business to critically analyze its current business strategy and formulate one which can allow it to achieve a competitive position in the market. With the advancement in Information Technology, it has been prominently observed that the businesses are now focusing more and more on implementing information system in order to make the best use of their resources. In the mentioned case, KERRY GROUP PLC has several functional units carrying out activities related to the manufacturing and delivering of food merchandise. By integrating these units using information system, KERRY GROUP PLC can gain competitive advantage in the market which can by analyzed in the light of Porter’s five forces model. The first competitive force according to the model is the entry of new competitors into the market. New entrants might be able to capture some of the market share of KERRY GROUP PLC and will adversely affect the profitability. With the implementation of Information System, KERRY GROUP PLC can repel this threat to its business. The sales department can maintain a database of the orders which can significantly assist in identifying which type of food merchandise is most popular among the customers. This information can be utilized in building different promotional activities for capturing market share and building brand loyalty. Information System can aid the accounts department in setting up an EDI (Electronic Information Interchange) with its suppliers through which specification regarding the raw materials to be supplied can be sent via network and thus saving time and cost. Threat of substitutes is another competitive force in the Porter’s model. For KERRY GROUP PLC Sports threat of substitutes in the market could mean cheaper merchandise. Implementation of information system can help in improving the customer service in the organization by linking the functional department together and thus adding value to the business strategy. If the inventory management is computerized with the help of information system, cost of holding excess extra stock can be reduced and thus eventually the cost per merchandise is less. When KERRY GROUP PLC is not charging extra money to its customer for merchandise, the cost of switching for the customer is higher and they will refrain from buying any other substitute. KERRY GROUP PLC can maintain a database containing all the prices of the substitute products in the market. Regular Analysis of the database will keep the company inform about the changes in the prices of these products and how they should respond to it. Development of a website on which customers can place their orders and integrate it with all the other functional departments can also enhance the customer convenience. Bargaining power of suppliers is another factor which the KERRY GROUP PLC must consider in order to operate effectively and profitably in the market. The purchasing unit of KERRY GROUP PLC can maintain a comprehensive database of the suppliers in the industry and can short list the most suitable. Computer Aided Designs (CAD) can be used to design components with the suppliers in order for the transaction to be done more continently. Another important aspect in this regard is the switching cost. In order to tackle the bargaining power of the supplier, suppliers can be integrated with the firm’s administrative operations by a system of Electronic Data Interchange (EDI). It is of prime importance to curtail the bargaining power of the customer for acquiring competitive advantage. Installation of an Information System in the organization will enable the company in identifying the concentration of the buyers and also the major buyers. Targeting the customers through product differentiation will prompt the customers from switching to other suppliers. Since sport merchandise and marketing is a flourishing industry thus rivalry from the competitors is another factor to consider. KERRY GROUP PLC can establish a comprehensive network with its Supply Chain and with its customer through information system. Currency related risks The functional and presentation currency of the company is pound sterling and both the stand alone and the consolidated financial statements of the company are presented in the same currency. Being a multinational with operations of the company now crossing borders and making mark in other countries of the globe, KERRY GROUP PLC plc is greatly exposed to currency risk. When a multinational operates in such a number of markets, internationally, it is exposed to a great deal of risks, and in order to operate as per its predetermined objectives, the management of these risks is of prime importance. These risks pose a direct threat to the assets, liabilities and operative income of the firm which commonly results from the variations in interest rates, exchange rates and inflation rates. Macroeconomic environment of different countries plays n important role in setting up these risks which affect different countries according to their structure. For example a multinational which is heavily involved in the import and export business is likely to get affected significantly due to the fluctuation in both the exchange rate and inflation rate of the country it is transacting with, whereas, a multinational having a foreign subsidiary is not likely to be affected by the change in the exchange rate. The following table summarizes the risk and methods used to curtail them. Exposure Hedging Through Exchange rate exposure Forward Contracts, Future Contracts, Foreign Currency Swaps and Options Interest rate Exposure Interest rate swaps and options Commodity rate change exposure Cash Flow Hedges and Commodity Swaps 3.5 Firm related risks There are several risks that the company faces at the firm level. One of the greatest risks that the company might face is the retention of key management personnel in the company. In a competitive market, the competitors of the company are always trying to sign and recruit the important figures of a company so that they can get an insight of the production and financial strategies and can take advantage of that. The skills and knowledge of the executives and key management personnel are of core importance to a company and they should try their best to retain them. In order to do say, KERRY GROUP PLC plc has implemented attractive remuneration packages to reward its employees according to their experience and knowledge. In addition, the company is also working diligently to implement talent strategy incentives in order to provide opportunities to young individuals to develop their careers. Apart from the above mentioned, the company is also exposed to a risk that it may be exposed to a non-compliance of any legislation and regulation. Since the company operates in a diverse market, it is exposed to several laws and regulation imposed by various regulators and legislators. Non-compliance to such laws can not only damage the reputation of the company, but it can also cause outflow of economic benefits in the shape of lost revenues and monetary penalties. Another very important risk which the company is currently exposed to is the failure of maintenance of an effective system of internal financial controls. In the absence of financial internal controls, the company would be exposed to several financial irregularities which can adversely affect the operational capability of the company. Financial irregularities and lack of efficient allocation of economic resources can result in the deterioration of assets of the company. To ensure proper implementation of the internal control, the chief executive officer and the chief financial officer of the company quarterly undertake business and financial reviews of the company and also supervise the internal audit department which provide assurance over the implementation of such controls. Financial Ratio Analysis Ratio analysis is considered to be a very accurate and reliable tool when it comes to analyzing and interpret the financial outlook and performance of an entity. The main reason for performing a ratio analysis is to quantify the results of the financial operations of an entity and analyze them in the light of financial performance of the prior year(s) in order to assess different aspects of the financial feasibility. [Peavler, R. (2001)] The financial ratios are usually divided into various sub categories such as profitability, gearing and liquidity, each put emphasis on a different area of the financial outlook of the organization. These analyses form an integral part of the financial statement analysis, especially from the investor’s point of view, which are always looking for avenues to invest in countries having strengthened and stabilized financial ratios and representing an upward trend. It is of great significance that the ratios must be benchmarked against a standard in order for them to possess a meaning. Keeping that into account, the comparison is usually conducted between companies portraying same business and financial risks, between industries and between different time periods of the same company. [Investopedia.com (2012] The financial ratio performance of Kerry Group Plc has been evaluated for the last three years in order to draw attention to various financial trends and significant changes over the period. The analysis is divided into three main categorize namely Profitability, Liquidity and Gearing. Profitability ratios identify how efficiently and effectively a company is utilizing its resources and how successful it has been in generating a desired rate of return for its shareholders and investors. Liquidity ratios measure the ability of the company to quickly convert its asset into liquid cash to settle its short term liabilities.[ Cheng, A & McNamara, R (2000] Whereas, the Gearing ratios identifies the extent to which the company is financed through debt and to what degree the operations are being conducted from the finance raised through raising equity capital or otherwise. For the purpose of financial ratio analysis, the financial year from 2010-2012 have been evaluated in order to analyze the financial outlook of Kerry Group PLC. The information has been extracted from the annual report of the company and the figure utilized in the financial ratio analysis is of the entire group. Profitability Ratios Gross profit margin is an analyzing tool which assists in identifying how effectively and efficiently the company is utilizing its raw materials [1], variable cost related to labor and fixed costs such as rent and depreciation of property plant and equipment. The ratio is calculated by dividing the sales revenue by the gross profit. If we analyze the gross profit margin trend of Kerry Group PLC it appears that there is considerable change in the percentage over the prior five financial years. This presents that fact that the company has been able to maintain its cost of sales and made sure that it remains in constant proportion with the revenue. The company has been able to manage the impact of inflation in the cost of material and labor. Net profit margin, on the other hand analyzes the profitability of the company before deducting the taxation and finance charges from the earnings [2]. The ratio is calculated by dividing the profit after interest and tax with the sales revenue of the current financial period. The ratio highlights how well the company is managing its selling and administrative expenses it also highlights the other income generated by the company during the course of its operations. The net profit increased significantly in the financial year 2012 as compared to the financial year 2010. The primary reason behind such increase in the net profit margin is that the operating expenses of Kerry Group PLC although increased in the financial year 2012, but they increased with a great proportion as compared to the revenue of the company. In the financial year 2011 the net profit margin has also shown an increase though marginal. Return on total assets (ROA) is, according to the analyst, is considered to be the most significant ratio in order to evaluate a company’s performance from an investor’s point of view. ROA measures a company’s ability to earn a return on all of the capital that is being employed by the company [3]. The ratio is calculated as net income upon total capital employed, which is the sum of debt and equity financings. The return on capital employed is showing a fluctuating pattern as presented in the tabular representation. If we evaluate the tabular information, the ROCE increased sharply from the financial year 2010 to financial year 2011. The net profit of the company increased during the financial year 2011 which resulted in a sharp incline in the return on capital employed. However, in the financial year 2012, the ratio shows a lesser incline. The primary reason behind such incline is the increase in the net profit for the company. There are several reasons for the incline in the net profit of the company. The operating profit of the company increased due to proper management of general and administrative expenses. The reason behind such hiked up administrative expenses is the cost expanded on the refurbishment and setting up of the acquired stores and outlets, which were acquired on account of the merger and acquisition transactions. In addition, the finance charge of the company also increased during the current year due to the fact that the company acquired additional financing facilities from several banks and financial institutions in order to finance its working capital requirements. A comparison with the industry figures will present the fact that when it comes to gross profit margin, the company is performing below the general expectations. This could be due to the fact that the company has not been able to curtail its production cost and at the same time, has not able to generate enough sales resulting in decreasing gross profit margin. On the other hand, the company’s net profit appears to be better than the industry average which is a positive sign showing that the company has been able to control and curtail its administrative expenses. The figure which appears most impressive is the return on capital employed which is significantly greater than the industry average. This might be the primary reason that the share price of the company is at an escalated price. EBIT are considered one of the most important financial ratios from the investor’s point of view. The ratio highlights the average earnings from the shares transacted and is calculated by dividing the profit attributable to the common share holders and multiplying them with the weighted average number of shares outstanding during the period. The earnings per share trend follow the same pattern as that of the net profit margin. Liquidity and efficiency Ratios The liquidity ratio measures the company’s ability to pay its short term liabilities. The ratio illustrates that how quickly a company can convert its assets into cash and cash equivalent in order to pay off its short term liabilities [Investopedia.com (2012)]. The most commonly used liquidity ratio, the current ratio, which is calculated by comparing the current assets and current liabilities. The strengthened the current ratio the more ability the company has to pay its debts and short term obligations over the next 12 months. As apparent from the above financial ratio analysis, the current ratio of the company has always remained above 1 which shows that the company has the ability to discharge its current liabilities. The current ratio of the company has increased from the financial year 2010 to financial year 2011, which was primarily due to the increase in the accounts receivable balance of the company. The accounts receivable of the company increased in line with the revenue. Although from one point of view, it appears to be a positive sign for the financial outlook of the company that its current assets are increasing in the form of accounts receivable. But on the other hand, this shows that the company has been slower in recovering in cash from its customer thus resulting in a higher accounts receivable to revenue percentage. The acid test, which is also regarded as the quick ratio, is calculated by subtracting the inventory balance from the total current assert balance. Out of the current assets mentioned, inventories are regarded as the one which takes comparatively more time to be converted into cash or cash equivalent. The acid test ratio has followed the same trend as the current ratio and only marginal change has been experienced in the acid test ratio. Receivable turnover represents how quickly the cash is received from the debtors. The ratio is calculated by dividing the revenue generated from the sales by the receivable balance as mentioned in the balance sheet of the company. The formula calculates the number of times the debtors are turned over during a year. The higher the value the more efficient the management is or it could also mean that the debts are more liquid. The accounts receivable turnover ratio has remained constant over the past three financial years. Inventory turnover represents how quickly a company’s inventory is sold, which can be calculated by dividing the sales revenue by the average inventory balance as at the year end. High inventory level is not beneficial for the company as it represents that the company’s investment is tied in inventory and currently it is not generating any income. A lower inventory turnover period represents that the sales are poor and there is excess inventory in the storage. Whereas a higher turnover period might represents that sales are comparatively higher. An inventory turnover period can also decreased due to the shift in the operation policy of the management e.g. if the management decides to increase the level of ‘safety stock’ then the balance of closing inventory would be greater and thus inventory turnover period would decrease, although the sales would have increased during the period. The inventory ratio has also remain constant over the past few years and the level which it is on currently presents the fact that the company is able to recover cash from its inventories at a quick pace. Both the current asset and acid test ratio of the company is greater than the industry average which presents the fact that the company has more than enough liquid assets to discharge its current liabilities. Structure Ratios The gearing ratios and indicate the level of risk taken by a company as a result of its capital structure [Peavler, R. (2012)]. These ratios are a great source of determining the level of financial risk to which the company is exposed and thus helps in reducing it to the optimum. The equity ratio indicates how much of the entity’s assets are financed through the finances generated through the revenue generated from the operations of the entity and raising financing through equity issue rather than acquiring debts or other financial institution. The debt to equity ratio of the company has remained almost the same throughout the period. If we analyze the statement of financial position of Kerry Group Plc for the current financial year, it will present the fact that the long term debt has decrease during the current period, but the increase in the equity (mainly due to the retained earnings balance) has maintained the ratio. The company is resorting towards financing its operation and ventures through the funds generated internally and thus has been able to significantly reduce the finance charge during the year Conclusion The financial outlook of the company under consideration appears to be quite strong and it appears the company will thrive in the coming future. Kerry Group Plc operates in a sector in which competition is high and companies resort to various strategies in order to increase their market share and enhance their profitability. The financial ratios of Kerry Group Plc present the fact that the company’s financial present and future is strong and promising. Going through the liquidity financial ratios, the calculation presents that the company has enough liquid assets to discharge its financial obligations. In all of the years under considerations, the ratios show that the company’s liquidity is strong and it is unlikely that it will run out of liquid assets in the near future. The efficiency ratios present the fact that the company is also managing its working capital quite well and is significantly improving its performance through the prudent management of the working capital. An analysis of the capital structure of the company also reveals the fact that the company is financing most of its operations from the money earned during the course of the business and not through debt sanctioned from financial institutions. This is a positive sign for the company. From investor’s point of view, the company is a thriving one and it would be profitable to invest in the shares of this company as the shareholder can gain through capital gain and dividend. References 1 Investopedia.com (2012) Profitability Indicator Ratios: Profit Margin Analysis | Investopedia. [online] Available at: http://www.investopedia.com/university/ratios/profitability-indicator/ratio1.asp [Accessed: 24 Oct 2013]. 2 Investopedia.com (2012) Understanding Financial Liquidity. [online] Available at: http://www.investopedia.com/articles/basics/07/liquidity.asp [Accessed: 24 Oct 2013]. 3 Investopedia.com (2012) Equity Financing Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/e/equityfinancing.asp [Accessed: 24 Oct 2013]. 4 Peavler, R. (2001) Profitability Ratio Analysis. [online] Available at: http://bizfinance.about.com/od/financialratios/a/Profitability_Ratios.htm [Accessed: 24 Oct 2013]. 5 Peavler, R. (2013) Debt and Equity Financing. [online] Available at: http://bizfinance.about.com/od/generalinformatio1/a/debtequityfin.htm [Accessed: 24 Oct 2013]. 6 Qfinance.com (2010) Gearing Ratios - Definition of Gearing Ratios - QFINANCE. [online] Available at: http://www.qfinance.com/dictionary/gearing-ratios [Accessed: 24 Oct 2013]. Annexure Growth Profitability and Financial Ratios for Kerry Group PLC       Financials         2010 2011 2012 Gross Margin % 43.1 40.8 42.7 Operating Margin % 9.1 9 6.4 Earnings Per Share EUR 1.85 2.05 1.52 Dividends EUR 0.21 0.28 Working Capital EUR Mil 53 367 128 Key Ratios -> Profitability Gross Margin 43.09 40.85 42.74 Operating Margin 9.14 9.04 6.38 EBT Margin 7.92 8.17 5.54 Profitability 2010 2011 2012 Net Margin % 6.54 6.8 4.57 Asset Turnover (Average) 1.15 1.09 1.11 Return on Assets % 7.51 7.43 5.05 Financial Leverage (Average) 2.76 2.83 2.65 Return on Equity % 22.27 20.78 13.83 Return on Invested Capital % 10.42 10.45 6.72 Key Ratios -> Financial Health Liquidity/Financial Health 2010 2011 2012 Current Ratio 1.04 1.29 1.09 Quick Ratio 0.61 0.76 0.62 Financial Leverage 2.76 2.83 2.65 Debt/Equity 0.69 0.85 0.64 Key Ratios -> Efficiency Ratios Efficiency 2010 2011 2012 Days Sales Outstanding 38.54 41.55 40.52 Days Inventory 63.09 69.25 70.62 Payables Period 102.35 105.73 107.2 Cash Conversion Cycle -0.72 5.07 3.94 Receivables Turnover 9.47 8.79 9.01 Inventory Turnover 5.79 5.27 5.17 Fixed Assets Turnover 4.72 4.58 4.84 Asset Turnover 1.15 1.09 1.11 Read More