Financial Information for CRODA International Plc - Essay Example

 Financial Information for CRODA International Plc. Introduction Croda produces and promotes specialty chemicals for pharmaceuticals, personal care, industrial and household markets. Croda manufactures emollient esters and quaternary ammonium composites. It tenders a variety of compendia excipients and ingredients, including high purity triglycerides and lipids for the usage in parenteral, topical dosage varieties and injectables forms. Coroda’s products are widely used for many industrial and household applications, including fabric textiles, softeners, metalworking, cleaners for hard surface, and treatment solutions for leathers, industrial applications, lubricants, explosives, agrochemicals and printing inks. (www. investing.businessweek.com). The business activities of Croda can be classified into the following categories. Industrial specialties- which includes base chemicals, home care, polymers and coatings, additives for polymers, lubricant additives, lubricants and processed vegetable oils. (www. investing.businessweek.com). Consumer care division which includes international business in health care, personal care and crop care – engaged in all markets throughout the world with a thumbing need for sustainable ingredients and innovations. Further, Croda has an enterprise technology division (R&D) which recognises and assimilates new technology into Croda’s international business set up. (www.croda.com). Financial Highlights In million £ 2009 2008 2007 2006 2005 Revenue 916.2 911.1 804.8 480.1 305.6 Profit before tax 106.4 96.3 60.8 52.5 50.6 Earnings per share-basic 17.6 p 45.3p 64.8p 6.3 25.6p Dividend per share 21.50p 19.75p 15.75p 14.3p 13.35p Strategy and forward planning Croda was able to post pre-tax profits of 10.5% during the year 2008 in spite of the serious international economic recession. However, due to stable focus on new markets, product innovation and recession mingled with constant reduction in cost has facilitated Croda to accomplish one more year of pre-tax revenue growth in spite of the worst scenario in the international economy. (Chairman speech, AR 2009). The salient feature of the business model of Croda is the capacity to offer a variety of products to a variety of customers all over the globe. Croda’s persistent focus on originality in specialties has offered them the capacity to derive true value for their products. (CEO Speech AR 2009). Croda’s main objective is to a leader independent international specialty chemical company. Croda has a policy to invest in any venture either current or future that can: Be really international Offer innovation that is profitable. Function in end markets that will have long run growth far ahead of international GDP. To have high operating margins realistically. Croda is in a true sense a really global company as it is having only just 7% sales in homeland of U.K. All of its subsidiary company around the world has targeted sales, operating margin, profit growth targets that form fundamental to their strategic plans and budgets. Croda’s report their progress annually against five major financial performance parameters. EPS growth Return on sales Net debt to EBITDA Post tax ROIC EBITDA to interest cover Accounting methods According to Croda’s annual report 2009, Croda International Plc has prepared its financial reports as demanded by the Companies Act, 2006 of U.K and as provided by the U.K accounting standards and its group financial statements have been prepared as per International Accounting Standards. (IAS). Interpretation of technical analysis Metrics that are used to compare and contrast various elements of business operations are known as financial ratios. Financial ratios are employed in many useful ways. They facilitate for an assessment of ratios for a particular company across various financial periods and help to contrast the company with its competitors or a wide set of companies such as those comprised in an index which is famously known as S&P 500 .Thus, Standard & Poor’s 500 is an index which is employed to track a group of companies for comparison purposes. . (Proctor 2009:212) Financial ratios can be classified into the following groups namely: Investment Returns Profit Margins Management Efficiency Profit Margins- This technique is being employed to interpret relative profitability in many different styles. With these ratios, one can analyse return on capital. the profit margins and the return on equity. . (Proctor 2009:213) Investment Returns: These ratios evaluate how economically and efficiently a business employs its financial resources. Financial resources will include assets, debt or equity. (Proctor 2009:215) Management Efficiency: This financial ratio is being employed to evaluate how effectively a business is being managed. Per-employee ratio analyse operating metrics and evaluates such as Sales and Net Income to the number of employees of a company. On the contrary, turnover ratios analyse various balance sheet items like inventory and accounts receivables to cost of goods sold or sales.( Proctor 2009 :308) Horizontal Analysis of Croda International Plc. - Table 1 EPS has fallen during 2009 by 1.76% as compared to 2008. Shareholders and market may not like this. Company should improve its EPS by cutting down exceptional items and by minimising overheads or by increasing the sales during 2011. Net debt / EBITDA has fallen during 2009 which indicates there is a vibrant EBITDA related to working capital minimisation as Croda has finalised the chief elements of their international sales and restructuring of its distribution, which created adequate cash. All other items in horizontal analysis show positive signs which are noteworthy. Trend Analysis of Croda International Plc. Chart 1: ROIC of Croda was at its peak of 12.5% in 2005 but declined in succeeding years and rested at 10.5% in 2009. This implies that Croda should endeavour to increase its profitability on its investment by cutting costs or by increasing revenues in the future. Vertical Analysis of Croda International Plc- Table 2 There is a substantial increase both in fixed assets and current assets, which are mainly funded by an increase in current liabilities and from debts in the year 2009 as compared to 2008. There is a reduction of capital in 2009 (buy-back of shares) which is funded by debts. This indicates that the gearing is maximised. Analysis of Croda’s financial ratios –Table 3 Croda’s chief borrowing ratio namely net debt / EBITDA down to 1.8 times in 2009 as that of 2008. This indicates Croda is able to generate good internal accruals through its sales. Croda’s current ratio has fallen in 2009 as compared to 2008 and this indicates Croda is able to fund its current liabilities through its internal accruals. Interest coverage ratio of Croda has soared to 11.3 times in 2009 as that of 2008. This indicates the underlying resilience and strength of Croda group’s turnover mingled with decreased core debt needs. Non-financial performance indicators During the first half of 2008, there was high volatility among demand and supply of glycerine and led to high prices of glycerine and ended in a “windfall “profit in 2008. According to Mike Humphrey , chief executive of Croda ,salient feature of the business model of Croda is the capacity to market thousands of varied products to varied customers spread all over the globe and their persistent spotlight on innovation in specialties, which has helped to attain the ability to avail true value for Croda’s products. In North America and Europe , Croda’s product namely “ Perfad fuel additive” which is a renewable and sustainable raw material are being used in ultra low sulphur diesel, which will help to minimise and offer long life to fuel pumps. Croda’s product namely Atlox Semkote is a polymer range which is an innovative solution offered for the improvement sugar cane production which facilitates cost-effective seed coating. Croda’s one another innovative business area is Geo Tech, which employs technology advantage in oil field chemicals, mining chemicals and water treatment. Croda’s product “Atmer 7325” is extensively used as a synergistic compound of anti-static agents which is extensively used in plastic shampoo bottles. (Chief Executive Review 2010:8). The information contained in the CEO’s review is really highlighting the areas of predominance of Croda’s products. Questions to Finance Director I wish to raise the following questions to the finance director of Croda International Inc. Croda’s full year revenue for the year 2009 was £916.20 million and this was shorter of 4.20% of 2008 results. Why Croda has not taken steps to increase its sales in the farm sector? Why it has not taken steps to minimise overheads to increase its profitability to that of the previous year? (FT.COM 2010). Croda has posted £251.4 m revenues during the second quarter of 2010. This has escaped the harmony projections of two analysts who are following the company and this was 5.02% lesser than the earlier year’s 2nd quarter performance. Why Croda has not posted profit not to the tune of the earlier year 2nd quarter? Which caused erosion in sales during 2nd quarter of 2010? (FT.COM 2010). During the year 2009, the price/mix was down by 1.6% as that of the earlier year. Volume of sales was also down by 9.6% as compared to last year. Why Croda has not taken any corrective steps for the negative price/mix and why it has not ensured lowering the production cost in the falling commodity prices during the year 2009. During the year 2009, the industrial specialties sales were down by 9% as compared to year 2008. Why Croda has not taken to improve the sales of Industrial Specialties during the year 2009? Finance Director Review states that there was £21.9 m as exceptional item which is pertaining to the closing down of Wilton and Bromborough units. Further, there were non cash asset writing off to the tune of £ 29.9 m. Why Croda management has not taken adequate steps to avoid these exceptional items? Why Croda management has not made efforts to rejuvenate these plants with additional investments through debt funding? (Financial Review 2010:12). List of References Proctor, K Scott. (2009). Building Financial Models with Microsoft Excel: A Guide for Business. London: John Wiley and Sons. www.croda.com (2010). Annual Report 2009. [online] available from >www.croda.com < [accessed 24 October 2010] www.ft.com. (2010). Croda International Plc. [online] available from >http://markets.ft.com/tearsheets/analysis.asp?s=CRDA:LSE [http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=CRDA:LN< [accessed 24 October 2010] Appendix Horizontal Analysis of Croda International Plc Horizontal Analysis of CRODA International Plc Table 1 2009 2008 Variance £ m £ m Turnover 916.2 911.1 0.559763 Profit After tax 71.8 64.8 10.80247 % % Operating Profit as a % of turnover 13.1 12 8.333333 Return on Invested capital 10.5 9.8 7.142857 Pence Pence Earnings Per Share (before exceptional items) 50.2 51.1 -1.76125 Dividend per share 21.5 19.75 8.860759 Net Debt / EBITDA 1.8 2.6 -30.7692 EBITDA / Interest Cover 11.1 9.4 18.08511 2009 2008 £ m £ m Net Debt/ EBITDA 1.8 2.6 -30.7692 EBITDA Interest Cover 11.1 9.4 18.08511 Chart 1-Trend Analysis of CRODA International Inc Return on invested capital for the year 2005 to 2009 Table 2- Vertical Analysis Use of Funds 2009 2008 £ m £ m Net Fixed Assets 556.3 124 608.5 92 Current assets 307.9 69 387.7 59 Current Liabilities -417.2 -93 -335.2 -51 Capital Employed 447 100 661 100 Source of Funds Shareholder's funds 156.5 35 263.3 40 Net Debt 290.2 65 400.1 60 Total 446.7 100 663.4 100 Table 3-Croda’s Financial indicators calculation results, 2009-2008 Ratio Year 2009 2008 Profitability 1. Gross Profit Margin/Return on Sales 25.78% 23.31% 2. Operating Profit Margin As a percentage of turnover 13.1% 12% 3. Return on Assets 13.74 12.68 4. Return on Capital Employed 10.5% 9.8% 5. Return on Equity 45.39 24.45 Efficiency 1. Total Asset Utilisation 93.27 83.73 Liquidity Current Ratio 1.29 1.51 Stability Gearing 182.4 150.1 Interest cover 11.1 times 9.4 times Table -4 –Croda’s Five Year Financial Summary: Table 5: Croda’s Financial KPI’s Read More