Course Questions: Reckitt Benckiser and Kingfisher Plc - Essay Example

? Questions: Reckitt Benckiser and Kingfisher Plc. Section A Question 1a Operating profit margin Operating Income (Page 39) 2,435 /Sales (Page39) 9,567 Operating profit margin 0.254520748 Return on Shareholder's Equity Profit after Tax (Page 39) 1,833 / Share Capital + Reserve (Page 40) 5,921 Return on Shareholder's Equity 0.309576085     Interest Cover Profit Before interest and tax (Page 39) 2,435 /Interest Payable (Interest cover ) (Page 39) 41 Interest Cover 59.3902439     Net asset turnover Sales (Page 39) 9,567 / Capital employed (Total Assets-Current Liabilities) (Page 40) 8,593 Net asset turnover 1.113348074     Return on capital employed Profit Before interest and tax (Page 39) 2,435 / Capital employed + Reserves (Page 40) 14,257 Return on capital employed 0.170793295     Inventory days Inventories * 365 (Page 58) 268275 /Cost of goods sold (Page 39) 4,030 Inventory days 66.56947891     Dividend cover Adjusted diluted earnings per share(Page 75) 249 /Ordinary dividends per share (Page 75) 134 Dividend cover 1.9 Trade receivables collection period Trade debtors * 365 (Page 58) 463185 / Sales (Page 39) 9,567 Trade receivables collection period 48.41486359     Trade payable collection period Trade creditors * 365 (Page 65) 346020 / Cost of goods sold (Page 39) 4030 Trade payables collection period 85.861     Capital gearing Debt (Page 64 ) 3271 / Equity (Share Capital +Share Premium) (Page 40) 257 Capital gearing 12.72762646 Sales per Employee Sales (Page 39) 9,567 /Total Employee (Page 19) 35900 Sales/Total Employee 0.26649 Gross Profit Margin Gross Income (Page 39) 5,537 /Sales (Page 39) 9,567 Gross profit margin 0.578760322 Non Current Asset Turnover Net sales (Page 39) 9,567 / Average net fixed assets (plant, machinery and equipment) (Page 40) 737 Net sales / Average net fixed assets 12.98100407 Inventory Turnover Cost of goods sold (Page 39) 4030 / Average inventory (Page 58) (Beginning inventory + Final inventory/2) 746.5 COGS / Average inventory 5.471 (Source: Brealey and Myers, 2011; Ross, Westerfield and Jaffe, 2005; Reckitt Benckiser, 2012) Question 1B 1. Whether to invest in the company or not? The Reckitt Benckiser group has reported sound financial figures. The company has shown a net profit margin at 25% and a gross profit margin of 57%. The two figures, reflected here, speak of a huge difference arising out of interest payments and tax payments that reduce the net profit margin. Since tax rates for the 2012 period have remained unchanged, it is clear that such huge difference in the profit figures is owing to borrowings made. The company has made debt obligations to the tune of ?887 million. Such debt has been in the form of issue of commercial paper which has short run interest bearing. The company has also paid off its bank loans worth ?16 million. Even so, the potential threat arising from short-term investments is that the company has no leverage for long run expansion plans. Some relief in these fronts is brought about by high investment in research and development activities, which speak of potential expansion in future (Izhar, 2001). The company has also bought back shares, stating the need for preventing dilution of employee stock option schemes. This reflects that the company is not borrowing to pay off debts. The borrowings are needed to meet short run obligations. The group has been showing impressive profit figures, the growth of which might have deterred in the past few years. The YOY growth is marginally less than last year and is at 12.44 (Bhattacharya, 2011) Reckitt Benckiser group also provides sound return on capital to its shareholders at the rate of 17%. Also, it has good management of its operating activities, with creditors being paid off in 36 days and debtors complying with their requirements within 48 days. Inventory management stands at a good 66 days. Company sales per employee appear sound and revenue generates per employee is ?0.26 million. The employees appear as highly productive, which is reflected through sound employee management policies and healthy employee culture. This speaks highly of employee confidence in the company. Stakeholder groups rest confidence in company’s operations and future growth potential. Hence, any plan to invest in company debts can be undertaken without much threat. It is strongly advised to invest in the company. 2. Whether invest or sell its holdings? Reckitt Benckiser Group has had a good shareholder value creation. They have been consistently incurring profits and providing dividend returns to its shareholder. For the year 2012, the company had yielded 17% return on capital which is quite healthy. The company also does not have any pressure in managing its daily operational needs and has good cash position. Its stakeholders like, creditors and debtors, appear happy. The debtor turnover ratio is 36 days and debtors pay off within an average of 48 days. Inventory turnover is a good 66 days (Dutta, 2003). The fixed asset turnover ratio is 17, which reflects that the company generates sales worth 17 times of its fixed assets. The company has also reduced its average number of employees and increased employee turnover to ?0.26 million with no effect of reduction in company profits. The employee turnover in 2011 stood at ?0.04 million. This marked improvement in company profits can be attributed to sound management, cost cutting initiatives and additional efficiency of employees. This is a very promising reflection of improvement in management of the company (Needled, Powers and Crosson, 2008). Return on shareholders’ equity stands at 30%. This means that the company is making a yearly profit of 30.8% of that of its shareholders equity. This is a very good indicator of return on investment. The company has been consistently giving good shareholder returns. In 2011, it was close to 31.5%. This provokes individual investors to make investments in shares of Reckitt Benckiser. The profits figures have also been impressive. The net profit ratio stands at 25.45%, indicating that the company is consistently making good profits and has sound management. The figure of net profit in 2011 stood at 25.25%. This might be a slight improvement, but it is to be considered that the debt position has been considerably reduced and high gearing observed only on account of short-term commercial paper borrowings. It is, therefore, highly recommended that a shareholder invests in Reckitt Benckiser group. The company has strong financial position and reflects a good management. It is consistently providing good returns and largely investing in research and development that predicts future growth potential. 3. My company is selling same products to those produced from another company, identify potential weakness of that company. Reckitt Benckiser group has made significant short run borrowing by the issue of commercial paper. It has also paid off a large amount of its long-term debt to the tune of ?3250 million. Shortage of long-term debt states that the company does not have much expansion plans for the future. This also reflects that, at present, the company plans to run as it has been already. However, the company has made huge investments in research and development. Analysis posits that the company might be looking at new product development for which long-term borrowings shall be made at a later date. The competitor can take advantage of this status by introducing better products than Reckitt Benckiser in the current year (Stolowy and Lebas, 2006). Another advantage that competitors can take over Reckitt Benckiser is that the company has a higher debtor’s turnover ratio than creditor’s turnover ratio. This means that it pays off the credit terms of its suppliers quicker than receiving payment from its credit sales. This is not a sound practice from the company’s point of view. Ideally, creditors should be paid off only when the debtors’ payment is received, such that the company has enough cash to run its operations and funds do not get blocked for repaying the creditors, even for a few days. Competitors can consider this ratio in order to improve their cash management scenario, such that better cash flow reflects in better operational management, which might attract investors for sound management practices. The competitors can leverage on these two fronts. They can improve their cash management with a higher trade payables ratio than trade receivable days. Secondly, they can launch better products or invest in marketing of existing products, in the absence of any hint of expansion by the Reckitt Benckiser group (Clarke, 2002). 4. Whether to accept the job offer or not? Reckitt Benckiser group follows a performance driven remuneration pattern which is highly beneficial for high performance and healthy competition among employees. The company also has a policy set that ensures employee security and zero discrimination. There is a system for employee communication. For employee safety, the group has OHSAS 18001 certification, assuring safety standards. As a part of employee development program, the company conducts regular training and elopement activities for its employees. Each employee has 3 to 5 performance objectives, which fall in line with group performance objectives. The employee share option scheme is awarded to employees with high performance and this brings in a sense of ownership and good employee culture. They are also encouraged to buy company shares, through savings, by participating in the Sharesave program. The company conducted a buyback of 15M shares, so as to save any dilution of employee stock ownership scheme and also, plans to save them for outstanding employee performance awards. There are numerous healthcare and other benefits that are stated in company annual reports (Needled and Powers, 2010). The potential drawback of working with the company is the lack of an agreement between the company and its employees over loss of job, in the event of a takeover. This is a potential threat to employment. The company highly lacks on long-term leverage which states that no long run expansion plans exist in the near future. Investments in research offer some relief and reflect that the company might launch newer or better products in the recent future, which might call for leveraging funds later. The company has 25% of operating profit in 2012. This upholds sound financials and good company growth. The company has heavily invested in research and developmental activities to the tune of ?171 million. The sales per employee is also about ?0.26 million which implies that employees are highly efficient. The company has a huge difference in gross profit and net profit margin. This can be due to a high interest cost. Huge short run debts and high short-term interest cost are negative to company image. However, company expenses in research and development and expansion plans provide some relief over future scope for expansion (Drury, 2008). The job offer can be accepted as the company has sound financials and good growth potential. The employee benefits and schemes are good enough for encouraging employees to generate 25% of sales per employee ratio. Zero job security is the only threat, in case of a merger. Section B and C Question 1 Most companies, who want to remain profitable in the long run, devise strategies that more than simply provide products deemed necessary by consumers alone. Such a strategy is known as a sustainability strategy. A major part of the approach in such a strategy goes towards establishing a good brand image of the company amongst its various stakeholders. Only when a company is viewed responsible, in terms of its social obligations and environmental concern, can it sustain itself as a business that considers more than just profits. Figure 1: Effect of social and environmental factors of company’s economic performance The above figure represents the ways in which various environmental and social decisions impact the economic sustenance of any business. It is important for companies to realise the environmentally and socially important company behaviour, which is essential for long run economic sustenance. Such disclosures might not be mandatory, but are viewed important by different stakeholder groups. One such attempt in achieving a socially responsible brand image is stating all non-mandatory disclosures by a business in their annual reports like, social activities and environmental care. There are many investor groups who read the company reports, including individual and institutional investors, analysts and several government agencies. All these different groups of stakeholders analyse acts of the company in relation to its sustainability strategies. A positive approach towards employee benefits would attract top talent and make the recruitment process easier. For example, according to Kingfisher’s ladder approach, good working conditions and maintenance of high health standards have helped it improve employee productivity (Kingfisher, 2011). Question 2 It is important for companies to act in a manner that reflects their socially and environmentally responsible behaviour. It is regarded that all actions of a company, that impact the society or environment, are reflected in the system’s economic pattern in some form or the other. For example, Kingfisher Plc has been ranked in the list of best CSR reports by any company. This has helped it establish good corporate image (Kingfisher, 2010). With a good image, it is easy to attract stakeholders towards the company. Consumers, buying company products, are contributing towards the environment by relating with the company and helping it gain customer loyalty. Investors ascertain client association with the company and rate it as positive, in terms of sustainability, which in turn builds good corporate image. When good corporate image and environmental sustainability policies help in building a brand image, competition is easily edged out. The company enjoys a competitive edge over its competitors who do not score high in socially responsible reputation. Another way to look at effective CSR initiatives by a company is trust building activity that is established in the process. Various stakeholder groups start trusting the company’s initiatives when the company gains acceptance by environment groups as well as the government. Also, governmental support is essential for smooth functioning of the company. A company with a good reputation finds it easy to recruit employees. Employees want to associate themselves with brands and brand building activities, in which CSR initiatives and stakeholder acceptance are major components. Question 3 An unmodified audit report is an auditor’s release with similar formats and exact same contents of the financial statements as published by the company. Such report is said to give a fair view and provide truth of matters relating to company affairs. However, a modified audit report is one, released by the auditor, where any format changes are made in company reports. Unmodified audit reports account for any changes made in the audit opinion or addition made in other matters or emphasis of matter segment. These changes are made only when the auditor notices certain reports and circumstances that need to be reported. Such circumstances include disagreement with IFRS standards, adverse and qualified opinion. Deletion of evidence or disclaimer of opinion needs to be brought forth. Example of changes in the modified audit report can be viewed in Kingfisher Plc’s audit report, wherein the modified audit report states that accounting records fell inadequate, when information was not received from parent company or branches, which were not visited by the audit company. Disclosures on Directors’ remuneration were not completely made. Here, auditors try to draw attention of shareholders towards certain matters that might concern the latter. Audited parts are generally more reliable in a company’s financial report than the unaudited parts. Reports without headings, like, Adverse or Disclaimer, have less severe items for consideration, unlike those with such statements. Question 4 For the purpose of investors, Kingfisher Plc publishes its profit figures and dividend distribution figures to reflect sound company financials and attract investment. As a part of decision making, the company declared dividends in the financial year so as to attract individual and institutional buyers of shares. For credit analysts, the company publishes the cash position, current assets and liabilities, so as to ensure that lending positions are safe with the company. Kingfisher Plc also decides over their debt position, depending upon operating cash position, such that they have enough to pay off the interests. For regulators, the company publishes compliance information, figures of adherence to emission norms and such other information that are necessary for regulator acceptance. The company decides over its environmental approach in order to fall within the regulatory standards. For employees, the company reports the employee benefits that they provide to them. The company also decides over its pay patterns and work conditions so as to maintain employee health and security. Stakeholders, during merger, can use Kingfisher Plc’s investments and profit figures to determine company’s growth potential. The company also discloses purpose of investment which helps to determine scope of company growth. For competitors, Kingfisher Plc’s statements have their key ratios in place, so that comparisons can be drawn. The company also decides over business strategies and efficiency methods to gain a competitive edge and keep competitors informed about such decisions. Reference List Bhattacharya, D., 2011. Management Accounting. New Delhi: Pearson Education India. Brealey, R. A. and Myers, S.C. 2011. Principles of Corporate Finance. New Delhi: McGraw-Hill. Clarke, P. J. 2002. Accounting Information for Managers. Connecticut: Cengage Learning EMEA. Drury, C., 2008. Management and Cost Accounting. Connecticut: Cengage Learning EMEA. Dutta, 2003. Cost Accounting: Principals and Practice. New Delhi: Pearson Education India. Izhar, R., 2001. Accounting, Costing and Management. Oxford: Oxford University Press. Kingfisher, 2010. Press release: Kingfisher wins award for Best CSR Report at the GREEN AWARDS. [online] Available at: < http://www.kingfisher.com/index.asp?pageid=55&newsid=890> [Accessed 9 January 2013]. Kingfisher, 2011. Independent auditors' report to the members of Kingfisher plc. [online] Available at: [Accessed 9 January 2013]. Needled, B. E., and Powers, M., 2010. Financial Accounting. Connecticut: Cengage Learning. Needled, B. E., Powers, M., and Crosson, S. V., 2008. Principals of Accounting. Connecticut: Cengage Learning. Reckitt Benckiser., 2012. Annual Report: 2012. [pdf] Reckitt Benckiser Available at: [Accessed 9 January 2013]. Ross, S. A., Westerfield, R. W. and Jaffe, J. F. 2005. Corporate Finance. New Delhi: McGraw-Hill. Stolowy, H., and Lebas, M., 2006. Financial Accounting and Reporting: A Global Perspective. Connecticut: Cengage Learning. Read More