There is a noticeable decrease in the total current assets, which have gone down from 350.1 m in 2006 to 330.7 m in 2007. It can be a cause of worry for any group. However, it can be seen that the change is brought down by decrease in inventories from 192.6m in 2006 to 147.5m in 2007. The decrease has been primarily caused by the sale of their retailer-branded cheese business, as we can notice the sale transaction in the group’s cash flow statement. The sale was a strategic move in order to concentrate more on the branded cheese business and added value elements.
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Increase in the Long-Term Borrowings:-
The long-term borrowings have increased hugely from 253.8m in 2006 to 339.9m in 2007. But again, the main reason behind borrowings was the acquisition of two businesses. Though, the finance charges have gone up by 15% to 19.2m as a result of increased levels of net debt, yet it has been offset by the profit generated from the amount invested. As a result of the acquisition of the Express Dairies, the Dairies division of the company has increased profit on operations by 52% to 27.1m. Also, the other acquired business- St. Hubert, has enjoyed overall profit increase of 7%. It implies that the Group is on a progressive path.
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Retirement Benefit Obligation:-
Retirement Benefit Obligation was in deficit of 62.0m at the end of Financial Year 2005-06. It has come down to 0.4m in 2006-07. It implies that the investments of the fund have caused a strong return. If we track the operations of the group for the year 2006-07, it is clear that due to 60% equity weighting and strong worldwide equity return, the movement in the fair value of plan assets has gone up by 65.9m. Also, the yields from the corporate bonds have been higher than the yields last year. Bonds and cash together have gone up from 160.3m in 2006 to 245.8m in 2007. And the group itself has also contributed to the pension scheme during 2006-07, equalling 17.0m.
Deferred Tax Liability means, any future tax liability. It is caused by the temporary differences between the book value of assets and liabilities and their tax value. The main reason behind it is the difference between the accounting for shareholders and the Tax Accounting. It has gone up hugely to 82.4m from 13.6m in 2005-06
Share Premium figure has gone up more than twice the figure in 2005-06 from 28.8m to 66.7 m. Also, it is worth noting that the share premium figure is twice the ordinary shares figure in the same accounting year. It reflects that the group has been doing wonderfully well, which is further evident from the group profit figure which has gone up by 41.38% from 34.8m in 2005-06 to 49.2m in 2006-07.
There have been some other changes also, in the balance sheet of Dairy Crest like trade receivables going up from 142.8m to 158.0m, reflecting that the group might have been allowing more credit in 2006-07. Short term borrowings have also gone up substantially (explained in ratio analysis).
Overall it is a strong and efficient Balance Sheet of a group which has been performing well.
- Analysis of Financial Ratios
It is an important technique of financial analysis wherein quantities are converted into ratios in order to arrive at meaningful comparisons, with past ratios and ratios of other firms in the same or different industry.
In order to reach at a just and fair comparison we must ensure that the companies being compared have been trading in the same sector.
In our effort to analyze the key ratios, we have trusted and taken the ratio figures from FAME database.
- Profitability Ratios: -
These are the financial statement ratios which focus on how well a business is performing in terms of profit.
- Return on Capital employed [ROCE]:-
It is a vital ratio while judging the performance of any business. It compares the net profit generated during a period against the long term capital invested in the business in the same period.
ROCE for Dairy Crest in 2006-07 was 8.25%.
Table of comparison of Dairy Crest’s ROCE with its last year’s figure as well as with the competitor, Robert Wiseman:-
- Net Profit margin: -
It is a ratio comparing net profit before to revenue.
Dairy Crest saw a net profit margin equal to 4.93% for the year 2006-07.
Table of comparison of Dairy Crest’s net profit margin with its last year’s figure as well as with the competitor, Robert Wiseman:-
- Gross Profit Margin: -
It relates the gross profit of the business to the sales revenue generated for the same period.
For the financial period 2006-07, the gross profit margin for diary crest was 30.6%.
Table of comparison of Dairy Crest’s gross profit margin with its last year’s figure as well as with the competitor, Robert Wiseman:-
Graph showing comparison between profitability ratios for 2007 and 2006 Dairy Crest:-
Graph showing comparison between profitibality ratios for Dairy Crest and Robert Wiseman in the year 2006-07:-
As can be seen in above comparison graphs, Dairy Crest experienced some increase as compared to previous financial year, in its ROCE, net profit margin and gross profit margin. However, when compared to its competitor- Robert Wiseman, the increase has been comparatively less in ROCE and net profit margin, but clearly more in gross profit margin. It shows that though the group performed at satisfactory level, yet its performance as compared to its competitor can be put under some scrutiny. The group has earned much higher profits equal to 49.20m for the year as compared to Robert Wiseman’s 24.15m. But, ROCE less than Robert Wiseman’s, depicts that the group has used proportionately much higher capital to earn high profits. Also, net profit margin being less and gross profit margin being higher than Robert Wiseman’s implies that though the group was able to control the cost of sales very efficiently, yet they need to take some measures as far as other operating costs like administrative expenses, distribution costs etc. are concerned. The group was able to earn such high profits due to a high sales volume, sales revenue being equal to 1309.3m. Overall, the profitability position of the group is satisfactory, but there is more potential which needs be exploited in the future.
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Efficiency Ratios: - Accounting ratios that measure a firm’s ability to convert different accounts within their balance sheets into cash or sales.
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Inventory Turnover Ratio: - It shows how many times a company’s inventory is sold and replaced over a period.
This ratio has increased from 7.04 days in 2006 to 8.88 days in 2007.
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Receivables Ratio: - It is an accounting measure used to quantify a firm’s effectiveness in extending credit as well as collecting debts.
Group’s receivables ratio has gone up to 40.17 days from 34.47 days in 2006.
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Payables Ratio: - It is a short term liquidity measure used to quantify the rate at which a company pays off its suppliers.
Payables ratio in 2007 has been 19.60.
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Asset Turnover Ratio: - It measures the revenue generated against the capital employed.
This ratio was 1.67% for the year 2006-07.
- MANAGEMENT EFFICIENCY ANALYSIS
Graph showing comparison between Efficiency ratios for 2007 and 2006 for Dairy Crest:-
Graph showing comparison between Efficiency ratios for Dairy Crest and Robert Wiseman in the year 2006-07:-
After taking a look at above tables, we can find that inventory turnover has increased slightly as compared to previous year, but it is very much low as compared to Robert Wiseman’s. This much increase can be welcomed as with reasonable increase in inventory a company can afford to look at its positive side as it can bring down the working capital, holding and opportunity cost. Dairy Crest is in much better position than Robert Wiseman
Now, receivables ratio has increased from 34.47 days to 40.17 days, whereas the current figure for Robert Wiseman is 25.30 days, which is clearly better. Ideally a company taking around 30 days is doing an ideal job; however, it usually gets extended to 60 days. Moreover, this figure can get greatly influenced by a few large customers who pay very slow or very fast for that matter. So, it is not much of a worry.
Payables ratio has decreased from 25.07 to 19.60 in 2006-07, whereas, for Robert Wiseman, it is higher, equal to 31.45 days, which has increased from the previous year. Ideally it is better to have this ratio a bit higher as the finance can be used in business. However, it should not be stretched to a point where it starts hurting the credibility of the company. If a business starts taking around 100 days on average to pay back, then it can cause some problems relative to the goodwill of the group. However, even if Dairy Crest is not doing badly, still we can say that Robert Wiseman has outperformed them in this regard.
Now, turning our attention towards Asset Turnover Ratio, it is apparent that it has dipped from 2.27 to 1.67 for Dairy Crest. It has dipped for Robert Wiseman as well, still they have it higher at 3.78 in 2006-07. Dip in this ratio can be a cause of worry for any company. But here it can be seen in the balance sheet that a humongous rise in the value of goodwill and intangible assets, which was caused by the acquisition of two businesses during the year, has brought this ratio down. So, not much relevance should be given to this ratio in the available scenario.
Overall, the group is performing efficiently and better than Robert Wiseman in this area.
- Liquidity Ratios
It expresses a company’s ability to repay short term creditors out of its total cash.
- Current Ratio: -
It is the financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months.
Current ratio for dairy crest stands at 1.04 for 2007.
Table of comparison of Dairy Crest’s current ratio with its last year’s figure as well as with the competitor, Robert Wiseman:-
- Quick/Acid Test Ratio: -
It’s a measure of how well a company can meet its short term financial liabilities using cash or near cash equivalents.
Quick ratio for the year 2006-07 has been 0.58.
Table of comparison of Dairy Crest’s quick ratio with its last year’s figure as well as with the competitor, Robert Wiseman:-
Graph showing comparison between Liquidity ratios for 2007 and 2006 for Dairy Crest:-
Graph showing comparison between Liquidity ratios for Dairy Crest and Robert Wiseman in the year 2006-07:-
The first ratio to consider while analyzing liquidity is current ratio, which we can see in the above graphs, has gone down to 1.04 from 1.57 in 2006. For Robert Wiseman it is more or less constant, dipping to 0.73 from 0.76, but still Dairy Crest is in a better position than Robert Wiseman. However, it is important to take further look at the acid test ratio. The acid test ratio has also gone down from 0.71 to 0.58 in 2007, whereas, again for Robert Wiseman it’s nearly constant, falling from 0.66 to 0.64. This should not be a happy situation for Dairy Crest Group.
However, if we go deeper, it can be witnessed in the balance sheet of the group that the current liabilities have risen alarmingly, which has brought the quick ratio down and the reason behind the rise is a 364 day loan equaling 100.1m for financing a part of the acquisition of a company- St. Hubert, which took place in the financial year 2006-07. Some very fruitful results can be expected from this investment, in the long-term. So, quick ratio should not give much of a head ache to the management of the group as the acquisition was a progressive step into the future.
Despite the liquidity position looking thin at the present moment of time, the group can afford to believe that the issue is just temporary and they would be in a much better position in the near future.
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Gearing Ratios:- Ratio of a company’s permanent loan capital (preference shares and long term loans) to its equity (ordinary shares plus reserves).
- Gearing Ratio:-
The gearing ratio for dairy crest in 2007 is 56.2%
- Interest Cover Ratio:-
This ratio enables us to find the number of times profit before interest and tax exceeds the interest payable.
This ratio in 2007 stands at 4.36 times.
Gearing Analysis
Graph showing comparison between Gearing ratios for 2007 and 2006 for Dairy Crest:-
Graph showing comparison between Gearing ratios for Dairy Crest and Robert Wiseman in the year 2006-07:-
The gearing ratio of dairy crest is almost constant being 56.80% in 2006 and dipping a bit in 2007 to 56.20%, whereas, Robert Wiseman’s gearing ratio stands at 15.21 in 2007. It shows that Dairy crest is running quite high on gearing, which can give their competitor a competitive advantage over them in terms of credibility in the market. However, it would be a well known fact that dairy crest has acquired two businesses, which is the prime cause of rise in long-term borrowings, ultimately increasing gearing ratio. So, the situation actually should not be as bad as it seems.
But, a high debt has increased the finance charges as well, which can be a reason for low interest cover by Dairy Crest. Though interest cover ratio for dairy crest has risen from 3.47 in 2006 to 4.36 in 2007, yet Robert Wiseman is much better placed with interest cover of 30.74 times in 2007, which is a bit less than their last year’s figure of 33.55 times. But still they have totally outperformed Dairy Crest in this. Dairy Crest’ interest cover would get better if exceptional items are ignored in the calculation as 10.8m was added in cost of sales as exceptional item.
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Investment Ratios: - It helps the investors to assess the returns on their investments.
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Earnings per Share: It is the portion of company’s profit allocated to each outstanding share of common stock, after adjusting for tax, interest and dividends to preference shares.
The company’s basic EPS on profit increased from 27.10 pence in 2006 to 38.50 pence in 2007, and from continuing operations rose from 25.50 pence in 2006 to 41.70 pence in 2007. This significant increase would attract investors that will be critical in boosting the future success and growth of the company.
Balance sheet of Robert Wiseman shows only basic and diluted EPS from continuing operations, showing an increase in basic EPS from 25.35 pence in 2006 to 33.38 pence in 2007.
Dairy Crest has high Gearing Ratio, so there is an increased level of risk over the investment, but at the same time they are offering a high rate return.
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Price/Earning Ratio: - It is a valuation ratio of a company’s current share price compared to it’s per share earnings.
Dairy Crest’s P/E ratio fell from 18.81 years in 2006 to 15.96 years in 2007, indicating the increasing market and solvency risks, and could discourage investors, whereas, Robert Wiseman’s P/E ratio increased from 12.31 years in 2006 to 13.75 years in 2007.
The risk associated with the investment is increasing with Dairy Crest, while in the case of Robert Wiseman it is decreasing.
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Dividend Yield: - It allows the investors to compare the latest dividend they received with the current market value of the share, as an indicator of the return they are earning on their shares.
Dairy Crest’s dividend yield ratio fell from 3.17% in 2006 to 2.43% in 2007. Robert Wiseman’s dividend yield ratio fell from 4.74% in 2006 to 2.09% in 2007, which was partly due to the fact that while calculating the ratio, proposed dividend figure in 2006 was included as it was paid during the year ended 31st March 2007, whereas proposed dividend for 2007 was excluded.
Conclusion
After analyzing all the ratios, comparing Dairy Crest’s this year’s performance with the previous year and comparing it with their competitor Robert Wiseman, it is clear that Dairy Crest is on a progressive path. Though they have some issues to resolve, yet overall position is satisfactory and improving. Dairy Crest has even more potential than what is evident in their performance. Measures should be taken to exploit it to the fullest.
- Corporate Social Responsibility
Dairy Crest appoints a steering group to manage its CSR program, assigning senior managers with specific CSR responsibility who reviews the company’s activities and assesses the needs of their stakeholders.
Dairy Crest’s manufacturing sites and the national distribution centre are independently accredited to the environmental management system ISO 14001. Their established environmental management system approach has enabled them to obtain permits under the regulations relating to Integration Pollution Prevention and Control [IPPC]. As a part of the above process each affected site has set targets for reductions in energy and water usage, as well as for food wastage. Dairy Crest has a target for all sites being accredited to the Quality Management System ISO 9001, their Chadwell Heath and Fenstanton dairies achieved accreditation during the year, leaving only their newly acquired site at Foston to achieve that level. For the past two years Dairy Crest has been into manufacturing improvement and operational excellence program, operational program being run in conjunction with The University of Birmingham.
- Personal Reflection
Initially when we got introduced to Financial Decision Making as a subject, there was a mixed sense of confusion and curiosity, as all of us were working for the last couple of years and were not really used to the idea of having classroom lectures and scribbling notes. But within two weeks we got into the groove and started to enjoy our hectic routine, and as we started to work on our FDM assignment some of our group members started to have concerns as four people in our group did not have any accounts background. After experiencing a member of our group leave and a new one compensating for the loss, we kicked off with the coursework helping each other as and when required.
Within a few days every member, specially the non-accounting ones started getting the hang of FDM, as it wasn’t necessarily pure accounting but with an extra dimension of management added to it. With the help of our Lecturer Mr. Martin Kelly in the class and the handouts provided by him to understand the aspects of Decision Making, every member was able to draw parallels between what we studied in the class to what our assignment was.
Two weeks before the submission date we came to know about a student of MBS who opted for MBA halfway through his semester. The groups were already formed by that time, but we accommodated him in our group.
Every member of the team contributed in the best possible way. We worked as a team contributing and helping each other, where required, and learning the nitty-gritty of FDM, and finally seeing through the successful completion of our Project.
References: -
- Fame- Financial Data
- Dairy Crest Group PLC Annual Report 2007
- Robert Wiseman Dairies PLC Annual Report 2007
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Mc Laney, E.,& Atrill, P.,(2005) Accounting: An Introduction. FT Prentice Hall- 3rd edition
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Dyson,J.,(1994) Accounting for Non-Accounting Students. London: Pitman-3rd edition.
Bibliography: -
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Westwick, C. A.,(1987) How to use management ratios. Aldershot : Gower-2nd edition
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Ron Bird, Anthony D Hall, Francesco Momentè, Francesco Reggiani. Journal of Business Ethics. Dordrecht: Dec 2007. Vol. 76, Iss. 2; p. 189 (18 pages)
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, Source: The Manufacturer. Published : September 2006
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