Long Term Solvency Ratios of Molson Coor - Assignment Example

Supervisor Investment Analysis Table of Contents 0 Introduction 2.0 Carlsberg A/S 2 Financial Ratio Analysis for CARLSBERG 2.2 Liquidity Ratio of Carlsberg A/S 2.3 Long-Term Solvency Ratios of Carlsberg A/S. 3.0 Overview of Molson Coor 3.1 Financial ratio analysis for Molson Coor 3.2 Liquidity Ratio of Molson Coor 3.3 Long Term solvency ratios of Molson Coor 4.0 Comparative Financial Analysis Carlsberg & Molson Coor 4.1 Conclusion and Recommendation to Investors 1.0 Introduction Recent developments in the world economy such as globalisation, the new information technology, deregulation of financial markets and the increasing quest for market dominance have eased the provision and search of finance. Today Millions of shares are not just traded freely world’s stock markets but the condition under which decisions to trade these shares are made remain uncertain (Penman, 2003, Eliot & Eliot 2006). Eliots and Eliots (2005) went further to postulate that, usually investors seek the opinion of analyst who in most cases provide an almost endless stream of information and recommendations to sort out and by the end of the day, there are often claims that some stocks are overvalued while others are undervalued (Eliots & Eliots 2005, Penman 2005). Penman (2003) further supported this argument by echoing that, with too much information available to investors, investors end up taking their decisions based on their personal instinct and market information. Penman (2003) referred to this class of investors as intuitive investors while those who make investment decisions based on capital market efficiency Penman (2003) classify them as passive investors. The later set of investors make their decisions under the assumption that that the market price is a fair price for the risk taken, that is, that market forces have driven the price to the appropriate point (Penman 2003). However, Eliot & Eliot argue that in the two situations, both investors run risks that are even more than the risks of the firms they are investing in since they can either pay too much or sell for less and as a result suffer a decrease in returns on their investments. (Penman, 2003). Against this background, this paper is aim at analyzing two companies (Carlsberg and Molson Coor) listed in the financial Times or listed on the London stock exchange so as to recommend to potential investors which of the companies is a good value for money. In the sections that follow, I will analyse the companies individually (Profitability, liquidity and solvency ratio) so as to form a reasonable bases for my recommendation. There after I will compare the result of the analysis in a tabulated form and make a conclusion. 2.0 Overview of Carlsberg A/S Carlsberg is one of the worlds largest brewery groups with the company’s break through advertisement strategy “probably the best beer in the world” (Annual report 2006). The company has a beer for every occasion and for every palate and lifestyle. The Groups broad portfolio of beer brands includes Carlsberg Pilsner, known as probably the best beer in the world, and strong regional brands such as Tuborg, Baltika and Holsten and other wide range of leading local brands. Currently, the company operates primarily in mature markets in Western Europe but is generating an ever-growing share of revenue in selected growth markets in Russia, other parts of Eastern Europe and Asia (Annual report 2006). Carlsbergs business builds on a proud history. Founded in 1847, and has always been renowned for consistently high quality. In recent years things have really taken off. Expansion and dynamic marketing externally, and streamlining and innovation internally, have brought growth in both revenue and earnings. Carlsberg A/S, the Parent Company of the Group, is owned by 20,000 institutional and private investors all over the world and is listed on the Copenhagen Stock Exchange. 51% of the shares are held by the Carlsberg Foundation, established by Carlsbergs founder J.C. Jacobsen, which backs the Company as an active and long-term shareholder as well as supporting scientific research and art (Annual Report 2006). 2.1 Financial Ratio Analysis for CARLSBERG Ratio Formula 2006 2007 Profit Margin Operating income after tax Sales 2171 =4% 55753 2596 =5.8% 44750 ROCE Net Income Before tax Total Assets 3029 =5% 58541 3634 =5.9% 61246 ROE Profit after interest and taxes Equity 2171=11% 18987 2596 =13.01% 19944 ROI Profit after taxes Over total assets 2171 =4% 58451 2596 =4.24% 61246 The profitability ratios show that the company is doing well and there have been improvements from 2006 in almost all the ratios. Compared with the ratios for the Molson Coor, and the industry average we see that Carlsberg A/S is not doing badly. 2.2 Liquidity Ratio of Carlsberg A/S Ratio Formula 2006 2007 Current Ratio Current assets Current Liabilities 13972 =76% 18371 14967 =73% 17211 Quick Ratio Cash and short term inv + rec Current liabilities 13047=71% 18371 11149=86.96% 17211 Cash Ratio Cash + Short term Investment Current Liabilities 5718 =31% 18371 11149 =64.77% 17211 Carlsberg analysis of liquidity position shows that, the current ratios have also witnessed improvements from 2006. The current ratio and quick ratio show that Carlsberg has enough current assets to cover its short-term liabilities without facing business risk that is the risk that it might not meet its short-term commitments. However, the cash ratio shows that Carlsberg could only cover 76% of its short-term liabilities in 2006 and 73% in 2006. It is again doing better in this domain when compared to Morison. This is a good sign of prosperity. 2.3 Long-Term Solvency Ratios of Carlsberg A/S. Ratio Formula 2006 2007 Debt to Total Assets Total Debt Current & Long term = Total Assets 39464=67% 58541 41276=67.39% 61246 Debt to Equity Total Debt Total Equity 39464=207% 18987 41276=206.96% 19944 Long term debt Ratio Long term debt Long term Debt +Total Equity 24065=545.5% 44009 From above, it can be observed that the company uses more debt than equity in financing its activities. This is evidenced by the debt-t-equity ratio of 2:7. There is therefore some minimal effects of financial risk. That is, the risk that the firm might not meet its long-term debt obligations. Such approach reduces agency costs. 3.0 Overview of Molson Coor Molson Coors Brewing Company is a company that resulted from the merger of two of North Americas largest breweries: Molson of Canada, and Coors of the United States, on February 9, 2005. The Canadian subsidiary of Molson Coors Brewing Company is a part-owner of Brewers Retail Inc., operator of Ontarios The Beer Store retail chain. According to the Molson Coors website, Molson Coors Brewing Company is the fifth-largest brewer by volume with 48.3 million hectolitres or 41.2 million barrels sold in 2005 (2005 annual report) Molson Coors Brewing Company (MCBC), formerly known as Adolph Coors Company, is principally a holding company, and its operating subsidiaries include Coors Brewing Company, operating in the United States; Coors Brewers Limited, operating in the United Kingdom; Molson Canada, operating in Canada, and its other corporate entities. MCBC, through its subsidiaries are engaged in manufacturing, marketing and selling of malt beverage products. MCBC has three operating segments: Canada, the United States and 3.1 Financial ratio analysis for Molson Coor 3.1Profitability Ratio of Molson Coor Ratio Formula 2006 2007 Profit Margin Operating income after tax Sales 361031 =6% 5844985 530.19 =0.085% 619059 ROCE Net Income Before tax Total Assets 615120 =5% 11603413 534.38 =4% 13451.47 ROE Profit after interest and taxes Equity 361031 =62% 581736 497.19 =7% 7149.39 ROI Profit after taxes Over total assets 351031 =3% 11603413 497.19 =3.7% 13451.57 The analysis for the profitability ratios for Molson Coor shows that the company is doing fairly as the have been a decrease from the 2006 position in all the ratios. The company lags behind Carlsberg in its Return on Equity (ROE) and other major ratio. 3.2 Liquidity Ratio of Molson Coor Ratio Formula 2006 2007 Current Ratio Current assets Current Liabilities 145836 =81% 180012 1776.81 =102.4% 1735.58 Quick Ratio Cash and short term inv + rec Current liabilities 10172.62=56.5 180012 1407.29 =81.1% 1735.58 Cash Ratio Cash + Short term Investment Current Liabilities 182186 =101% 180012 1407.29 =81.1% 1735.58 Molson Coor again is showing some sign of improvement which is common to companies at the growth stage of the company life cycle. It liquidity position has greatly improved but keeping such a huge amount of cash to be able to meet short term obligation is questionable since, it can be invested in short term securities and other income generated for the company. The current ratio and quick ratio show that Molson Coor has enough current assets to cover its short-term liabilities without facing business risk that is the risk that it might not meet its short-term commitments. However, the quick ratio shows that Molson Coor could only cover 56% of its short-term liabilities in 2006 and 81.1% in 2007. It is again doing better in this domain a good sign of prosperity 3. 3 Long Term solvency ratios of Molson Coor Ratio Formula 2006 2007 Debt to Total Assets Total Debt Current & Long term = Total Assets 578606 =49% 1160341 6302.18=46.9% 13451.57 Debt to Equity Total Debt Total Equity 578606 =99% 581736 6302.18 =88.2% 7149.39 Long term debt Ratio Long term debt Long term Debt +Total Equity 2260.60 =24.02% 9409.99 An analysis of the long term solvency ratios shows that the company has increased its debt to equity ratio from2006 to 2007 figure. This is a good sign to guard against managerial mismanagement of funds. 4.0 Comparative Financial Analysis Carlsberg & Molson Coor Ratios Carlsberg Molson Coor 2006% 2007% 2006% 2007% 1 Profit Margin 4 5.8 6 0.085 2 ROCE 5 5.9 5 4 3 ROE 11 13.01 62 7 4 ROI 4 4.24 3 3.7 5 Current Ratio 76 73 81 102.4 6 Quick Ratio 71 86.96 56 81.1 7 Cash Ratio 31 64.77 101 81.1 8 Debt to Total Assets 67 67.39 49 46.9 9 Debt to Equity 207 206.96 99 88.2 From the above table, one will not hesitate to draw the attention of investors that the two company are doing well but however Carlsberg AS has a high level of Return to owners equity and I will highly recommend a strong buy for the shares and a hold. While for the other company I will recommend a buy. 4.1 Conclusion and Recommendation to Investors This study carried out an analysis of two companies in the brewery industry. In the course of the study, the two companies were found to be very profitable Carlsberg and Molson Coor. The valuation analysis also proves the two companies are good value for money and thus we recommend that people currently holding these stocks shouldn’t sell them as the profit is gradually increasing. On the other hand, we find that Carlsberg is at a better position to maximise shareholder value because currently its return to investment and owners equity is higher. Thus we recommend a hold and buy decision for their stocks. References Atrill P and Elliot J., (2005). Financial Accounting for non specialists. 3th Edition. Prentice Hall: London BBC (2007). UK interest rates raised to 5.75% The Bank of England has raised UK interest rates from 5.5% to 5.75%, its fifth rate rise since last August. www.bbc.co.uk Bodie Z. Kane A., Marcus A. J. (2005). Investments. 6th Edition. McGraw-Hill Elliot B, and Elliot J., (2005).Financial Accounting and Reporting. 9th Edition Prentice Hall. Holmes G, Sugden A ,Gee P., (2002). Interpreting Company Reports and Accounts 8th Edition.prentice Hall: London Bodie Z. Kane A., Marcus A. J. (2002). Investments. 5th Ediction. McGraw-Hill Penman S. H. (2003). Financial Statement Analysis and Securities Valuation. Second International Edition. McGraw-Hill Read More