Financial Performance of Reckitt Benckiser and Imperial Tobacco Group - Example

Report on Comparison of Financial Performance

Introduction

In any organization, there exist financial statements that help in the assessment of the firm’s performance. These financial statements entail the B/S and the P&L reports. The balance sheet helps in the determination of the economic position of an organization at any given time. The P&L statement helps in the identification of either the net profit or loss of an organization for a particular period (Ciurariu 2015, p.95). The study and analysis of these reports over a given period help in drawing significant conclusions regarding the variations in the financial position and the necessary policies followed as well as the trends in the profits and losses. The analysis and interpretation of the financial statements are essential in credit appraisal and making decisions on firms to invest money.

The analysis of the financial declarations of an organization is also necessary to evaluate its stability, liquidity, and profitability. Future decisions and strategies also rely heavily on the analyzed financial records. The report, therefore, intends to analyze the financial records of Reckitt Benckiser and Imperial Tobacco group, which are two of the major FMCG firms in the UK. The analysis of their economic performances is to be achieved through extraction of the financial ratios, which will be used to examine and compare their performances. Finally, the analyzed rates help to recommend on which of the two companies is best for investment.

The Rationale for the Choice of the Companies

Some of the reasons for choosing the two companies include the fact that they are both multinational consumer goods companies. The two companies engage in the trade of consumer goods to many countries with Reckitt Benckiser Group (RB) selling their products to over 200 countries in the world. On the other hand, Imperial Tobacco has factories worldwide and sells their products to more than 160 countries. Both the companies are in the list on the London Stock Exchange; hence, their shares are traded publicly. Both companies have been in operation for more than a century hence their brands are popular worldwide.

Imperial Tobacco is one of the leading multinational cigarette firm in the world with several brands of tobacco products patented to the enterprise. On the other hand, RB is as well one of the major multinational companies that produce health, hygiene, and home products. In the tobacco category, Imperial Tobacco Group is the world’s leading company in the production of several tobacco products. RB leads in the role of production of the hygiene and healthcare products. The products manufactured by RB have enabled it to be a leading FMCG brand in most of the countries.

Performance Analysis

The analyses of the fulfillment of the two firms are to be achieved through the analysis of the various ratios. The analysis of the ratios qualitatively and quantitatively enables the achievement of the research objectives. However, to achieve the ration analysis methodology, it is important to consider the types of data that are necessary. The main data needed for the effective achievement of the research objectives are the primary and secondary data. The main data entail the information collected from the first-hand experience. The information is reliable, authentic, and objective as it not published or altered. Primary data is more valid than the secondary data because it is always unaltered.

The secondary data, on the other hand, implies it is published in any form. Secondary data is advantageous because it is summarized; hence, easy to analyze. Some information can be easily obtained from the secondary data rather than having to analyze the primary data first. In the report for the financial performance of the two companies, Imperial Tobacco Group and RB it is much easier to use the secondary data rather than the primary data. The secondary information, in this case, implies the financial statements of the companies over the years. The primary tools for the achievement of the objective of the research are the ratio analysis. The study mainly covers a period of 5 years (2011-2015) for both organizations.

Ratio Analysis

Ratio analysis implies a technique of analyzing the financial records of an organization using rates as the yardstick for the evaluation of the economic conditions as well as the performance of a firm. Alexander Wall introduced the ratio analysis was introduced by during his presentation of the system ration analysis in 1909. The term ‘ratio’ implies the mathematical relationship between two items expressed quantitatively. The different modes of expressing ratios include proportion, rate or coefficient, and percentage. Some of the advantages of ratio analysis include making it easier to forecast the performance of an organization, easing the managerial control, facilitating communication and making it simpler to measure the efficiency of an organization. Ratio analysis also facilitates investment decisions and enables inter-firm comparison besides being useful in the measurement of the financial solvency.

The classification of the ratios is in agreement with the groups interested in their use. From the users, the ratios are categorized as ratios for management, creditors, and the shareholders. The rates essential for the management include the operating ratio, return on investment, stock turnover, the debtor’s turnover, debt equity, fixed asset turnover, the creditor’s turnover, the net profit ratio, the short and long-term liquidity, gross and net profit ratios. The ratios that are necessary for the creditors include the current ratio, the solvency ratio, debt-equity ratio, the interest cover, the assets cover, and the fixed asset ratio. On the other hand, the ratios that are significant to the shareholders include the return on shareholder’s fund, the payout ratio, the capital gearing ratio, the dividends cover, and yield.

The classification of the ratios is also achievable by their relative importance. Based on the relative importance the ratios can be categorized into the first ratios, secondary performance ratios, and the secondary credit ratios. The primary ratios include the return on capital employed, the assets turnover, and the profit ratios.

Ratio Analysis of Imperial Tobacco Group and Reckitt Benckiser Group

1. Profitability Ratios

The profitability ratios are essential in gauging the operating success of a firm over a given period.

(a) Net Profit Margin (NPM)

The NPM implies the rate of profitability that is evaluated by the division of the post-tax net income by the total sales. The NPM ratio is usually derived as a percentage. Net profit margin is usually essential ratio in the analysis of the profitability of an organization. The net profit margin ratio is as well important in the comparison of companies in similar industries. Higher net profit margin is usually associated with efficiency of a firm in the conversion of its sales into ideal profits.

NPM Ratio = [After tax Profit / Sales]* 100%

NPM Ratio

Year

Imperial Tobacco Group

Reckitt Benckiser Group

2011

6.2

18.5

2012

2.4

19.1

2013

3.4

18.8

2014

5.5

36.5

2015

6.8

19.7

Source: Secondary data.

Interpretation

From the data in the above table, it is evident that both firms have an upward trend in the net profit ratio thus; it is prudent to conclude that both companies are earning more profits. However, the comparison of the Net Profit Margin ratio of Imperial Tobacco group and RB indicates that RB has a noticeably higher NPM ratio than Imperial Tobacco group over the period. The high NPM of RB shows that the organization is more efficient with its conversion of the sales to actual profits as compared to Imperial Tobacco.

(a) Returns on Assets

The return on assets is a financial ratio that evaluates the efficiency of the use of the company’s assets in the production of sales. The ratio measures the efficiency by which the management uses the available assets in the promotion of the sales. The rate is significant in measuring the productivity of the firm’s assets.

Returns on Assets = Revenue / Average Total Assets

The Revenue above refers to the total revenue that is available in the report of the comprehensive income of the firm. Average Total Assets refers to the value of the assets available in the balance sheet of the organization. The companies that have low-profit margins are usually associated with high assets turnover. The firms with high-profit margins usually associated with minimal assets turnover.

Rates of Return on Assets

Year

Imperial Tobacco Group

Reckitt Benckiser Group

2011

3.79

0.67

2012

4.70

0.64

2013

5.01

0.61

2014

4.69

0.57

2015

4.44

0.58

Source: Secondary data

Interpretation

From the results of the above calculation, it is observed that the ratio it is seen that the ratio asset turnover ratio of Imperial Tobacco is evidently higher than that of RB over the period. The calculations also indicate that Imperial Tobacco group has experienced growth in the assets turnover ratio until 2013 then a gradual drop in the property turnover rate. On the other hand, RB has experienced a gradual decrease in the asset turnover ratio since 2011. Therefore, Imperial Tobacco group is more efficient in the use of its assets to generate revenue as compared to RB group. The results also prove that the companies with small profit margins (Imperial Tobacco Group) tend to have higher asset turnover ratio.

(a) Return on Equity (ROE) ratio

Restitution on equity ratio is a tool used to measure profitability that evaluates the proportion of the profits, which an organization generates for every portion of the shareholder’s equity. ROE is essential in measuring the efficiency of a firm. An increase in ROE over a given period indicates that the company’s ability to generate profits without the need for many capital increases. Rising ROE also shows that the efficiency of company’s management in the deployment of the shareholder’s capital. Therefore, higher ROE is usually preferred with low ROE indicating the presence of a problem than needs to be sorted. ROE is usually affected significantly by the variation in the value of the shareholder’s equity whereby a decrease in the value results in a rise of ROE. High levels of debt also leads to increase in ROE because the more debt a firm has, the less the shareholder’s equity hence higher ROE.

ROE = Net Income/Shareholder’s Equity

Returns on Equity Ratio

Year

Imperial Tobacco Group

Reckitt Benckiser Group

2011

0.24

0.30

2012

0.11

0.31

2013

0.17

0.27

2014

0.26

0.47

2015

0.30

0.25

Source: Secondary data

Interpretation

The calculated data indicates that RB has a significantly higher ROE than Imperial Tobacco between 2011 and 2014. However, in 2015 Imperial Tobacco tends to have a slightly higher ROE than RB. While RB has a changing trend in the ROE, Imperial Tobacco group has a rising trend in ROE which indicates that the firm is more efficient in the generation of the profits through the deployment of the shareholder’s capital.

2. Liquidity Ratios

The liquidity ratios refer to the rates that are applicable in the measure of an organization’s ability to meet its financial duties. The liquidity ratios are essential in measuring the firm’s ability to pay off its short-term liabilities whenever they fall due. The liquidity ratios usually show the number of times that both the monetary and liquid assets can meet the company’s short-term debts. Higher liquidity ratios usually imply a higher margin of safety that the firm has of meeting its current liabilities.

(a) Liquidity ratio

The acid test ratio implies the proportion of the liquid assets to the liquid liabilities. The acid test ratio usually measures the current liquidity and position of a firm. The liquid assets are converted to their monetary values and entail the cash balances as well as the bills receivables. The liquid assets also include the debtors and short-term investments of the organization. A value of the liquidity ratio of value below one implies that the firm is less stable hence likely to face challenges in paying off their short term debts. The acid test ratio plays a significant role in helping the company understand the result clearly.

Liquidity Ratio = Current Assets less Inventory / Current Liabilities

Liquidity Ratio

Year

Imperial Tobacco Group

Reckitt Benckiser Group

2011

2.59

2.35

2012

2.68

2.22

2013

2.27

2.54

2014

2.98

2.79

2015

2.99

2.89

Source: Secondary data

Interpretation

The calculated data indicates that both firms have liquidity ratio that exceeds 2. 2 exceeds the ideal liquidity ratio which is 1:1, therefore, both firms have liquid assets that are sufficient to meet their current liabilities. The acid test ratio of Imperial Tobacco group is also higher than that of RB during the period except in 2013. The differences in the acid-test ratios between the firms are also minimal indicating that both firms have suitable liquidity ratios.

(b) Current ratio (CR)

The current rate is essential in the use of the balance sheet to measure the financial performance of an organization through evaluation of its liquidity. The current ratio usually indicates the company’s ability to pay its debts within the next 12 months. The current ratio is usually utilized by potential lenders in making decisions on whether to offer loans to the firm. Higher ratios usually indicate high liquidity of the firm. The acceptable current ratio is typically two with significant variance of the limit existing between industries.

CR = Current Assets / Current Debts

CR

Year

Imperial Tobacco Group

Reckitt Benckiser Group

2011

0.70

0.52

2012

0.78

0.47

2013

0.76

0.51

2014

0.94

0.60

2015

0.82

0.57

Source: Secondary data

Interpretation

The results above indicate that Imperial Tobacco group tends to depict higher current ratio during the period as compared to RB. Therefore, Imperial Tobacco group is more capable of meeting its current financial obligations as compared to RB.

3. Investment Ratios

(a) Earning Retention (ER) ratio

The ER ratio evaluates value of earnings that is withheld after the payment of dividends to the shareholders. High ER ratio increases the chances of organizational growth. Investors usually have preference for higher ER ratios in rapidly growing businesses and lower ER ratios in slow-growing companies.

ER Ratio = Retained Earnings / Net Profit after tax

ER Ratio

Year

Imperial Tobacco Group

Reckitt Benckiser Group

2011

53

62

2012

21

59

2013

83

81

2014

52

75

2015

18

80

Source: Secondary data

Interpretation

RB group has a higher earnings retention ratio as compared to Imperial Tobacco group. Over the years, the retention ratio of Imperial Tobacco group seems to vary significantly. The random variation of the retention ratio indicates that there is no uniform policy of retention of the funds thus making it difficult for an investor to make a decision.

(b) Earnings per Share (EPS) Ratio

EPS ratio helps in the evaluation of the profit that is present to the equity owners for each unit of share. Owners of firms (investors) mainly apply EPS as a point of view of the profitability of the enterprise.

EPS = Net Profit Present for the Owners / Ordinary Shares

EPS

Year

Imperial Tobacco Group

Reckitt Benckiser Group

2011

188.0

125

2012

195.1

134

2013

210.7

137

2014

203.4

139

2015

212.5

139

Source: Secondary Data

Interpretation

The calculated results indicate that Imperial Tobacco has higher EPS as compared to RB. Imperial Tobacco has also experienced steady growth in the EPS during the period of analysis. RB group, on the other hand, has experienced a steady increase in its EPS over the years. The increase in EPS of the firms indicates that the levels of profitability of the firms increase.

4. Gearing Ratio

The gearing ratio is essential in measuring the proportion of a firm’s funds that are borrowed to its equity. It shows the financial risk that the business faces. The high ratio indicates that the proportion of the debt is greater as compared to the equity while low gearing ratio indicates that there is the low proportion of the debts of the firm to equity.

Gearing ratio = (Long-term and Short-term debts + bank overdrafts) / (Shareholder’s equity)

Gearing Ratio

Year

Imperial Tobacco Group

Reckitt Benckiser Group

2011

2.96

1.46

2012

3.54

1.00

2013

4.03

1.44

2014

3.75

1.27

2015

4.29

1.21

Source: Secondary Data

Interpretation

The results above indicate that Imperial Tobacco group has a higher gearing ratio over the period as compared to RB. The data also suggests that both companies have a changing trend in the gearing ratios over the years. The calculated results, therefore, show that the proportion of the debts as compared to the equity of the shareholders of Imperial Tobacco group is higher as compared to that of RB.

Summary of Analysis

Imperial Tobacco Group

Reckitt Benckiser Group

Comments

1.

Low Net Profit margin

Higher net profit margin

RB makes more profits as compared to Imperial Tobacco group.

2.

More efficient in the use of its assets

Less efficient in the use of its assets

Assets of Imperial tobacco are used effectively to generate profits.

3.

Steadily increasing ROE

Irregular variation of ROE

The ROE of Imperial Tobacco Group varies steadily hence is predictable.

4.

Has higher liquidity ratio

Low but steady liquidity ratio

Imperial Tobacco is able to meet its financial obligations on time.

5.

Has higher but varying EPS

Has low but stable EPS

The returns on every share are higher at Imperial Tobacco group hence suitable for investment.

6.

Extremely higher gearing ratios

Low gearing ratios

RB group has small amount of debts in comparison to the shareholder’s equity.

Limitations of the Method used to perform the Analysis

Some of these constraints include the need for practical knowledge to implement the ratio analysis successfully. The ratios used in the analysis are usually averages hence inaccurate to some extent (Faello 2015, p.80). The non-availability of the standards or norms of evaluating the rates also pose limitation. The accuracy of the financial information obtained from the ratios is usually questionable.

Conclusion and Recommendation

• The earnings per share of Imperial Tobacco group are higher as compared to that of RB, but the firm should strive to stabilize its EPS.

• Imperial Tobacco group should minimize the use of debts to finance its activities as a means of lowering the gearing ratio, which is essential to the evaluation of the performance of a firm.

• Both companies should take the necessary steps in ensuring that the net profit margins are elevated.

In consideration of the analyzed results of the two companies, RB group tends to be more consistent in its performance hence the best choice for investment. The profit margin of RB also indicates that it performs better than Imperial Tobacco hence the suitability of the investment.