Operating Self-Sufficiency Business - Report Example

Student’s name) (Course code+name) (Professor’s name) (University name) Table of Contents Table of Contents 2 1.0 Introduction 3 2.0 The sales growth of the two companies 3 4.0 Return on Equity 6 5.0 Equity multiplier 9 6.0 Return on Assets 11 7.0 Conclusion 11 Performance analysis 1.0 Introduction Each and every business wants to be sustainable and maximize profit throughout its operations. To achieve this, there is need for effective and proper planning starting right away from the top management to the lower person in the hierarchy ranks (Jonstone, 2012). One way through which the company can monitor its performance is through carrying out ratio analysis which is very useful management tool and is able to improve both the management and potential investors’ understanding of an organizational financial performance and trends for a long period of time. Financial ratios provide key indicators of organization performance and in most cases, managers will be able to precisely pinpoint strengths and weaknesses and from there, they will be able to develop strategist and initiatives to boost company’s performance. Also, the investors can use the result to understand the safety of their funds. This paper intends to perform financial statement analysis of two companies which are Uniliver limited and Tate and Lyle global company. The analysis will use three years financial statement from the year 2009-2011. 2.0 The sales growth of the two companies Sales growth shows the sales increase of a company between two periods. It also shows difference in sales of two companies during the same trading period. The sales growth is calculated as follows; Sales Growth = Current Period –Previous Period Sales Previous Period Sales Fig.1.0 Sales growth From figure1.0 above, the sales of Uniliver drastically decreases from the year 2008 to 2010 with the greatest decrease in the year 2009. The sales growth of Tate and Lyle limited also followed the same trend as Uniliver limited with the highest sales increase in the year 2008 while the greatest decrease is in the year 2009. Uniliver limited has a higher sales growth than Tate and Lyle limited for the three years period. This sales growth patterns can be attributed to an increase in overall cost and increase in the inflation index yet the companies are also not recording high sales growth. This should act as a pointer to the management to adjust pricing policy so that it can keep pace with cost increase. From the announcement of the 2010 financial report, the director of Tate and Lyle limited announce that even though the company has made some poor business growth in 2009 and 2010, they would always continue to make good progress out of those challenges (Uniliver limited, 2009). They will open a new commercial branch and food innovation center in Chicago as one way of boosting their sales hence growth. This is a good sign for development and investors should consider investing in the company. 3.0. Operating Self-Sufficiency business In analyzing the company efficiency in its operation, there is need in understanding the operating of self efficiency ratio which is the company income dividend by its expenses. This ratio analyses the degree to which the company expenditure can be covered by the its core business activities and the firm will be able to independently function and support its the grants. This is calculated as follows; Operating Self-Sufficiency = Business Revenue Total Expenses Fig.2.0 Operating Self-Sufficiency business From the figure 2.0 above, Uniliver operating self sufficiency ratio shows a steady decline from the year 2008 to 2010. The ratio decreases from 15.40% in the year 2008 to 1.14% in the year 2010. Unlike Uniliver, Tate and Lyle self reliance and operating ratio shows a steady increase from the year 2008 to 2010 (Uniliver limited, 2009). In general, Uniliver was more healthy and more self reliance in the year 2008 compared to the year 2009and 2010 and also was more reliable more than Tate and Lyle company. A ratio of 1 should mean that the company does not depend on grant revenue or other funding. But from the findings above, none of the two companies have a ratio of 1 which means the Uniliver, Tate and Lyle limited still depend on revenue for their operation. The management should increase their revenue base so that they can reach a point of sustaining themselves without any source of revenue, grants or any kind of external funding. The Directors of the Uniliver Company attributed the poor self sustainability of the firm to the weak currency in most of its branches compared to dollar. This makes the expenses like distribution and staff cost to increase while revenue decreases. The global financial crisis also is blamed for the poor growth pattern of the company in its sustainability. 4.0 Return on Equity To undertake the analysis of both the Uniliver and Credit Tate and Lyle from 2008 to 2010, the return on equity (ROE) decomposition model will further help in understanding the company performance. This model normally takes the return on equity of both the organizations and the decomposition to differentiate the strength and weaknesses that drive the return on equity to a certain figures in each period. In most cases, the initial stage of the analysis is normally to distinguish the return on equity of the two organizations from the year 2008-2010. The return on equity is calculated as follows; Return on Equity = Net Profit Average Shareholder Equity The figure below provides the information: Fig. 3.0: Return on equity 2008-2010 Moving from 2008 to 2010, the return on equity remains fairly steady with a slight reduction on Tate and Lyle while a major reduction in Uniliver is in the same year throughout 2009. The statement from both the chief executive officers of the two organizations depicts a lot of confidence for the future and they did not indicate any sign of crisis to be experienced by the two food industry companies (Tate and Lyle, 2010). The chief executive officer of the Uniliver attributed the decline in return on equity between the year 2009 to market uncertainty which has already been overcome and the Uniliver shareholders should not worry of anything as the Company will immediately pick up in the following financial statements. The return on equity for Tate and Lyle has been consistently higher than that for Uniliver limited for over three years. Figure 3.0 above gives the return on equity movement for the two global food companies for the last three years. There is increase in sales and turn over for both the two organizations. This generated high profits from sale of goods which has contributed to high income which in turn translated to high return on capital. In 2010 and 209, the Uniliver limited recognized a lot of bad debts in its books of account and also increase in capital expenditure resulting to decrease in the income which later translated to low return on capital (Tate and Lyle, 2009) Tate and Lyle on the other hand maintained their profit, the expanding of the Chicago branch and showed that government bonds stored up troubles for the future times. The increase in profit for Tate Lyle 2010 was as a result of strong performance in its corporate and investment business which later offset losses the company lost in the past years .The debt crisis in European had a negative effect in the company’s performance and this plumed its return on capital into a negative. The same effect can be experience by the Uniliver company too in the year 2009and 2010. The Tate and Lyle management acknowledges the fact that it invested a lot of money in the other branches outside Euro zone in assets markets and they promise to inspect the performance of those governments in the near future to evaluate the risk in their investments. 5.0 Equity multiplier Fig. 4.0 Equity Multiplier From the figure above, it is clear that the leverages of the Uniliver were consistent throughout the three year period with a slight decreases and increases. This shows that the good return on equity shown earlier was contributed by a good return on assets which is evident on both companies. Tate and Lyle Company on the other hand have higher leverages than those of Uniliver. The traditional high continuous gearing which has increased in the Tate and Lyle has exposed it to solvency risk and unsurprisingly this risk broke out after the debt crisis in Europe. The Company leverages increases from 30.43 to 31.45 in the year 2008 and 2010. This simply shows that the Company is still borrowing to pay back its debts. This borrowing strategy is not the best for the Company as it is not sustainable for a long time. The share prices for the Uniliver increases throughout the three year period with a slight decrease in the year 2010. This was majorly influence by the European debt crisis but later the Company recovers and the firm was not exposed to other external risk in the stock market. The share prices of the Tate and Lyle on the other hand dropped by 73.9% since 2008 and the most serious decline took place in the year 2009 as a result of European debt crisis of the year 2008 which hit Italy and Greece debt markets and government bonds. The decline was a sign of low investment confidence by the company as a result of market uncertainty in the financial sector and also the large amount of assets which are tied up in the government. The two Companies were greatly affected by the global financial crisis of the year 2008 and 2009. Uniliver Company was able to increase its performance and face the financial crisis with a lot of confidence. Another important feature is the income ratio of the two Companies, the Tate and Lyle has higher ability to earn noninterest income. This is a good indication as compared with the reporting low income in noninterest. The steady increase in the income ratio is of Tate and Lyle is due to high sovereign debt. The asset ratio of the two companies is more less the same throughout the period. The Uniliver has a higher credit rating than Tate and Lyle throughout the five years period. This shows that Uniliver Company is financially healthier than Tate and Lyle 6.0 Return on Assets The return on assets measures the ability of the company to turn its investments into profits. It is calculated as follows: Return on Assets = Net Profit Average Total Assets The Uniliver has a consistent return on assets for the three years something which is also exhibited by the Tate and Lyle Company. The Uniliver has a higher return on assets more than that of Tate and Lyle. 7.0 Conclusion Tate and Lyle also show sign of positive development more so in the year 2010. The Tate and Lyle got more trouble simply because of its dealing with the high debts with its debtors. Both the financial indicators of the two Companies that is the Uniliver and the Tate and Lyle in 2010 indicates that Uniliver had a good performance with little problem in the year 2009 but later picked up and greatly improved. The Tate and Lyle inhibit poor financial position due to its low capital base and increase investment diversification. These are indicated by both the return on equity, share prices and Return on assets of Company. The relative weakness in the Euro zone in the year 2008 and 2009 meant that the negative impact of the exchange rates. It contributed to 6.8% of the overall turnover in the Uniliver Company as reported in the financial year 2009 and 2010.it also gives a drop in operating profit by 1.0% for the company. The two food companies gain much from the oversea investments than those investments within Euro zone though, the global financial meltdown affected the two companies greatly. the management of the companies needs to diversify their investments and increase their market share to act as shock absorber during financial crisis. Reference Jonstone, E. (2012). Banks pull cash from Europe.’ Business day http://business day.com.au/business /banks-pu;;-cash-from-europe-20120126-1qine.html Tate and Lyle (2010) annual Report Tate and Lyle (2009) annual Report Read More