Financial Analysis Uniliver PLC - Case Study Example

? November 12, of Table of Contents Table of Contents……………………………………………………...2 Introduction……………………………………………………………3 Company Profile: Unilever…………………………………………….3-4 Financial Analysis……………………………………………………...4-6 Conclusion……………………………………………………………...6 References……………………………………………………………....7-8 Introduction The nutritional, personal healthcare and well being industry is one of the largest industries in the world. The industry has the unique quality of having a target market of the entire global population of 7.05 billion people (Census, 2012). Unilever is a company that has achieved great success in the industry with a market penetration of 28.36% or two billion customers. The firm is positioned as one of the leading companies in the industry. This report will provide an overview of the company as well as financial analysis of Unilever for the fiscal year 2011 in order to determine whether the company is worth investing ?1 million. One of the mail analytic tools used in the paper is ratio analysis. Company Profile: Unilever Unilever was founded in the 1890s, but the actual Unilever brand was not created until 1930. The company is dedicated to the nutritional and well being industry. The firm has over 400 branded products. Some of the most popular brands of the company are Dove, Knorr, Lipton, Hellmann, and Axe. The corporate vision of the company is, “Helping people to look good, feel good and get more out of life” (Unilever, 2012). One of the keys to the company’s success has been its product innovation. Innovation is fostered by investing in research and development initiatives. The company has a network of scientists located across the world. The company spends over €1 billion a year in R&D. In 2010 the company was named advertiser of the year by Cannes Advertising Awards. The products of the company are sold across 190 countries. The firm has over two billion customers worldwide. Unilever generates 55% of its sales from emerging economies including China, Brazil, India, and Indonesia (Unilever, 2012). Dove is one of the most successful brands of the company with sales of over €3 billion yearly. The organization has 171,000 employees. The firm believes in the use of diversity. A lot of the firm’s products target the children population to increase their quality of life. Financial Analysis – Unilever In 2011 Unilever generate revenues of €46,467 million. The revenues of the company increased by 16.68% in comparison with 2009, while it increased by 4.98% in comparison with 2010. The net income of the company was €4,623 million in 2011. The net income of the firm went up by 0.54% between 2010 and 2011. The cash account of the company at the end of 2011 had a balance of €3,484 million. Unilever’s total assets at the end of 2011 were €47,512 million, while its current assets were €14,291 million. In 2011 the total liabilities of the company were €32,591 million. Unilever’s total equity at the end of 2011 was €14,291 million. A ratio analysis of the company is illustrated below: Financial Ratios 2011 Net margin 9.95% Operating margin 13.84% Earnings per share (EPS) € 1.51 Return on assets (ROA) 9.73% Return on equity (ROE) 30.98% Current ratio 0.80 Quick acid ratio 0.54 Working capital -€3638 million Debt to equity 218.42% Debt ratio 68.60% The net margin of Unilever during 2011 was 9.95%, while its operating margin was 13.84%. Both financial metrics measure the profitability of the business. The net margin reflects the absolute net profitability of the business. The formula to calculate net margin is net income divided by total sales (Besley & Brigham, 2000). Unilever had earnings per share of €1.51. The earnings per share are the portion of a company's profit allocated to each outstanding share of common stock (Investopedia, 2012). EPS tends to have an effect in the market price of a company. High earnings per share results are a desirable outcome. During 2011 the return on assets of Unilever was 9.73%. To calculate ROA the formula is net income divided by total assets (Mysmp, 2011). ROA measures how effective management has been at generating income from its assets. A desirable outcome for companies is to have a high ROA. In 2011 the return on equity of Unilever was 30.98. In order to calculate return on assets a person must use the following formula: net income divided by total equity. “ROE encompasses the three pillars of corporate management -- profitability, asset management, and financial leverage” (Fool, 2012). The current ratio measures the ability of an enterprise to pay off its short term debt. Current ratio is calculated dividing current assets by current liabilities (Accounting4management, 2012). A current ratio is normal as long as the metric is above 1.0. In 2011 the current ratio of Unilever was 0.80, while its quick acid ratio was 0.54. Both metrics are low which means that the management team of the company has to pay close attention to the liquidity of the firm. Another indicator that shows that Unilever is facing liquidity problems is reflected in the working capital of the company. The firm has working capital of - €3,638 million. The debt to equity ratio of the company is 218.42%. This financial metric measures the amount of assets provided by creditors for each dollar of assets being provided by stockholders. Unilever’s debt to equity ratio reflects that the company is financing most of its operations through the use of debt instead of equity. The debt ratio of the firm is 68.60%. The debt ratio can be defined as a comparison of the firm’s debt versus its assets (Debt-ratio). Conclusion Unilever has done a great job during its 122 year history of meeting the needs of its customers. “Meeting the objective needs and subjective wants of customers to drive sales is the basis of most businesses” (Millett, 2012). The company has done a fabulous job of expanding its global reach by penetrating 190 countries. The use of effective marketing strategies has help built up the brand value of the company. The marketing efforts of the company have won awards and the recognition of the global business community. The net margin, return on assets, and return on equity of the company showed that the firm has good profitability numbers. The EPS of the firm at €1.51 per share is attractive for investors. A worrisome sign in the ratio analysis was the liquidity position of the company. The current ratio is below the norm of 1.0, while the working capital of the company is a horrendous - €3,638 million. The managers of the firm must find an immediate solution to improve the liquidity of the firm. My recommendation based on the financial analysis is that liquidity position of the firm is too much of a risk to invest ?1 million. The company has a negative number in its working capital. The deficiency in working capital implies that the firm might not be able to pay its short term liabilities on time. The problem could escalate and the firm might not be able to pay its short term debt. At the time the firm might have to file for bankruptcy. It is better for the investor to invest its ?1 million in another firm. References Accounting4management.com (2012). Current Ratio. Available from [Accessed 10 November 2012] Besley, S, & Brigham, E. (2000). Essential of Managerial Finance (12th ed.). Forth Worth: The Dryden Press. Census.gov (2012). U.S. and World Population Clock. United States Census Bureau. Available from [Accessed 10 November 2012] Debt-ratio.org. What Is a Debt Ratio? Available from [Accessed 10 November 2012] Fool.com (2012). Return on Equity: An Introduction. Available from [Accessed 10 November 2012] Investopedia.com (2012). Earnings per Share – EPS. Available from [Accessed 10 November 2012] Millett, T. (2012). Meeting Customers Needs and Wants. Available from [Accessed 10 November 2012] Mysmp.com (2011. Return on Assets. Available from [Accessed 10 November 2012] Unilever.com (2012). Our History. Available from [Accessed 10 November 2012] Unilever.com (2012). Unilever facts. Available from Read More