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Analyzing Financial Performance – McBride Plc.

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Analyzing Financial Performance – McBride Plc.

Company Profile

McBride Plc. is one of the leading manufacturing companies of household items and personal care products. The company is registered in the UK and its stocks are listed on FTSE 250. The company is currently operating in major markets across Europe and it has 20 factories in eight countries including China. The company’s strong position in Europe is based on its close relationships with major retailing companies including Auchan, Carrefour, Tesco, Metro, Rewe, Aldi, Wal-Mart, and Sainsbury’s. Over the last five years, the company has experienced major growth in its business and revenues mainly due to its successful strategy of targeting markets that were less affected by the recent financial crisis and cutting back its costs of manufacturing. The company aims to become the leading private label in its products’ categories and increase its geographical presence by tapping the Asian markets.

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Five Years Financial Overview of McBride Plc

A brief examination of the company’s financial results clearly suggests that the company’s revenue has increased significantly from £540.1mn to £812.2mn indicating a rise of 50.38%. Revenues from its UK division and Eastern Continental Europe grew by 3% and 7% over the last year; whereas, Western Continental Europe declined by 1% in its revenue (McBride 2010). The company’s ability to deliver products at lower costs and keep its expenses down has allowed the company to generate a healthy profit after tax of £29.6mn in 2010 that is up by 20.11% as compared to £18.4mn in 2006 (McBride, 2010), after recognizing an exceptional charge of £14.8mn in lieu of the restructuring of the company’s four major manufacturing sites in the UK and Italy (McBride 2010). Derived from strong reported earnings, the company net profit attributable to shareholders has also grown significantly by 56% in the last five years irrespective of the steady weighted average number of shares. The dividends paid by the company have increased at an average rate of 7.57% from 2006 to 2010.

Basis of Financial Ratio Analysis

The purpose of this report is to investigate the financial position of McBride Plc. by exploring different financial aspects of its performance over the last two years i.e. 2009 and 2010. This has been carried out by performing a financial ratio analysis to derive values of key performance indicators, particularly under different categories of analysis liquidity, operational efficiency, solvency, profitability, and cash flow ratios. The findings are then reviewed in light of various sources of information provided by the company.

Descriptive Analysis of Findings

The results from the financial ratio analysis are attached to this report as Appendix I. In this section of the report, the company’s financial performance is discussed to form an overall opinion regarding the company and set forth recommendations for investment potential in the company’s stocks.

Liquidity Position

The company’s short-term liquidity position is assessed on the basis of certain useful KPIs. Firstly, the current ratio which determines the proportion of current assets to current liabilities is presently below one. This implies that the company’s current liabilities exceed its current assets and the company could encounter problems to meet its current obligation if they fall due shortly. This is reaffirmed by values of working capital calculated for both years. In 2009, it was negative £16.80mn which improved to negative £10.80mn. This improvement has been derived from a decline in the company’s short-term borrowing from £26.5mn in 2009 to £15.4mn in 2010. The quick ratio excludes the value of the company’s inventory from total current assets as inventory is regarded as less liquid and companies are unable to sell them during financial duress. Although the inventory value of the company has not changed much in 2010 however, the company’s current assets have increased by £15mn in 2010 (McBride 2010). This has led to a slight improvement in the value of the quick ratio from 0.65 in 2009 to 0.69 in 2010. However, this has remained significantly below the values of the current ratio. From this, it could be inferred that the company’s liquidity position is quite weak despite growth in its sales revenue.

Operational Efficiency Position

Although the company has been able to keep its focus on maintaining the highest standards of timely deliveries and customer satisfaction, and it has been able to achieve a 97% service delivery level in 2010, the analysis of this report suggests major weaknesses in the company’s operations. This is based on the examination of values derived for three major KPIs including receivables turnover, payable turnover, and inventory turnover. It is apparent from the table in Appendix I, that the company’s operational efficiency is weak. In 2010, the company payable turnover has declined which implies that the company is taking more time to pay off its trade payables which have increased by almost £9mn in 2010 (McBride 2010). Furthermore, it could be observed that the company is operating at low inventory turnover and receivables turnover levels. This suggests that the company is holding its inventories and receivables for a longer period before they are converted in sales and subsequently, into cash. Realizing this fact, the company has invested a significant amount of £24mn in the year 2010 for improving its systems and processes to achieve greater cost and operational efficiencies by striving for lean methodology in its production, and another £14.8mn was spent for restructuring its four manufacturing units (McBride 2010). If the company is not able to improve these KPIs then it could face problems from not being able to generate sufficient cash for funding its operational requirements. Furthermore, the analysis clearly indicates that the company is generating only £1.82 of sales from its £1 of assets. This suggests that the company is operating at high-profit margins supportive of the gross profit margin in the profitability assessment section of this report.

Solvency Position

The solvency position of the company is assessed by deriving values of two KPIs including debt to equity ratio and times interest earned. The values of these ratios allow the determination of the company’s ability to meet its external funding obligations in the long run. The debt to equity ratio of the company has slightly improved from 2.64 in 2009 to 2.53 in 2010; however, it remained highly debt-ridden which could be of major concern to the company’s stakeholders. This has resulted from the reduction in the company’s interest-bearing loans and borrowings – both short term and long term by 31% in the year 2010. Another effect on the value of this ratio is in the form of lower retained earnings i.e. £33.7mn of the company as the company made extensive restructuring expenditure and acquisition of a personal care manufacturing company in Malaysia in 2010 (McBride 2010).

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Arising from obligations of external financing is the finance cost that the company needs to incur. The interest cost of the company has declined from an average of 5.28% in 2009 to 4.6% in 2010 as the company is able to reschedule its loans at lower floating interest rates. The majority of the company’s financial liabilities are due between one and two years. The company is generating an operating profit of almost 6.29x of its net financing costs in 2010 has improved from 5.27x in 2009. This is a positive sign as the company’s operating income has increased sharply by 75% in 2010.

Profitability Position

Another important area of investigation is the evaluation of the company’s profitability. The company has shown significant growth in its sales revenue over the last five years and it grew by 2.5% in 2010. However, half of this growth has resulted from currency translation. The company’s organic growth has remained on the lower side mainly because the company’s business is concentrated in European markets which are faced with economic downturns (McBride 2010). Various profitability ratios have been calculated to form an overall opinion regarding the company’s financial position and expectations of the shareholders that they may hold for their investment in the company’s stocks.

The results clearly indicate that the company is operating at higher gross profit margins which have further improved in 2010 to 36.54% from 33.85% in 2009. This is due to the company’s ability to sources its supplies located in different manufacturing hubs and it benefits from cost efficiencies. The company has expanded its sourcing activities in the Asian markets to ensure that it can improve its profitability. Irrespective of the company’s ability to generate high gross margins, the results clearly show that the company is not able to manage its operating expenses well. This is apparent from high distribution and administrative costs in 2010, which are up by £19.5mn. Despite the company’s major initiatives to devise a restructuring program and implement a lean manufacturing setup in its manufacturing sites, the company is operating at very operating margins and net profit margins. The company’s ROA is quite weak; however, this is due to the company’s capital-intensive status. The company’s ability to generate a return for its shareholders has slightly improved in 2010, as ROE has risen to 17.72% from 14.01% in 2009. Furthermore, these results are supported by improvement in ROCE.

From a shareholder’s perspective, it could be indicated the company’s EPS has improved by 33% in 2010. The P/E ratio has declined in 2010 to 17.72 from 23 in 2009. However, it remains high which implies that there is a possibility of an increase in the company’s stock price. The company has also a high dividend payout ratio which supports the trend over the last five years.

Cash Flow Position

The cash flow position of the company is evaluated based on various KPIs including operating cash flow ratio and free cash flow (FCF). The operating cash flow ratio estimates the liquidity position of the company based on a much more reliable figure of cash from operations rather than profit (Kline 2008). The ratio values of 0.29 and 0.25 in 2010 and 2009 respectively imply that the company has a very weak liquidity position. Although the company’s net cash flow from operations increased by £19.5mn however, it is very low compared to the company’s current liabilities, which have increased from £220.4mn in 2009 to £229.4mn in 2010. The company’s cash flow position is further evaluated by FCF which has declined from 15.80mn in 2009 to 11.40mn in 2010. This is majorly due to the acquisition of the business in Malaysia by the company and also investment in capital for restructuring its processes. The company has been making a significant amount of investment over the last five years for expanding its manufacturing facilities and developing new products. This amount has reached £108mn (McBride 2010), which would certainly bring positive outcomes in the coming years as the company plans to enter new markets in Asia. Overall, the company’s net cash position has remained negative with an improvement from £10.3mn in 2009 to £1.1mn in 2010. Thus, it could be suggested that the company’s cash position is presently not strong.

Recommendations

From the above analysis, it could be inferred that the company has an overall weak financial position. The company has made significant investments in expanding its operations and product development; however, it must take measures to expand its customer base outside Europe. Its current markets are somewhat saturated and are adversely affected by the recent economic downturn. Therefore, it is important for the company to undertake serious restructuring of its operations and reevaluate its value chain processes and agreements. This is one way that the company can cut back on its operational expenses and achieve higher profitability. For shareholders investment in the company’s stocks has remained attractive because of its high dividend payout; however, they need to be careful regarding the outcome of the company’s capital expenditures.

2010 2009
Liquidity Ratios
Current Ratio Current Assets / Current Liabilities 218.6/229.4 0.95 203.6/220.4 0.92
Quick Ratio Current Assets – Inventory / Current Liabilities (218.6-69.9)/229.4 0.65 (203.6-68)/220.4 0.62
Net Working Capital Current Assets – Current Liabilities 203.6-220.4 (10.80) 203.6-220.4 (16.80)
Operational Efficiency
Payables Turnover Cost of Sales / Average Payables 515.40/205.4 3.64 524.20/190.3 3.93
Payables Period 365 / Payables Turnover 100.14 92.82
Inventory Turnover Cost of Sales / Average Inventory 515.40/69.9 7.37 524.20/68 7.71
Inventory Period 365/Inventory Turnover 49.50 47.35
Receivables Turnover Sales Revenue / Average Receivables 812.2/140.8 5.77 792.4/132.8 5.97
Receivables Period 365 / Receivables Turnover 63.28 61.17
Asset Turnover Sales Revenue / Total Assets 812.2/440.4 1.84 792.4//431.3 1.84
Solvency
Debt to Equity Ratio Total Liabilities / Total Equity 315.7/124.7 2.53 312.8/118.5 2.64
Times Interest Earned Operating Profit / Net Finance Expense 34.5/5.20 6.29 27.4/5.20 5.27
Profitability
Gross Profit Margin Gross Profit / Sales Revenue 296.8/812.20 36.54% 268.2/792.4 33.85%
Operating Profit Margin Operating Profit / Sales Revenue 34.5//812.20 4.33% 27.4/792.4 3.46%
Net Profit Margin Net Profit / Sales Revenue 22.1/812.20 2.72% 16.6/792.4 2.09%
Return on Assets Net Income / Total Assets 22.1/440.4 5.02% 16.6/431.3 3.85%
Return on Equity Net Income / Total Equity 22.1/124.7 17.72% 16.6/118.5 14.01%
Return on Capital Employed Net Income / (Total Assets – Current Liabilities) 22.1/(440.4-229.4) 10.47% 16.6/(431.3-220.4) 7.87%
Earnings per Share Net Income / Number of Outstanding Ordinary Shares From AR 12.30 From AR 9.20
Price Earnings Ratio Price per Share / EPS 218/12.3 17.72 211.6/9.2 23.00
Dividend Payout Ratio Dividend Per Share/Earnings Per Share 6.3/12.3 51.22% 5.6/9.2 60.87%
Cash Flow Ratios
Operating Cash Flow Ratio Cash Flow from Operations / Current Liabilities 66.9/229.4 0.29 47.4/220.4 0.22
Free Cash Flow Net Income + Depreciation / Amortization – Net Changes in Working Capital – Capital Expenditures 22.1+26.6+2-(-4-1.8+12.5)-24.2-8.4 11.40 16.6+23.8+1.7-(7.6+0.2-6.8)-20+5.3 15.80

List of References

Kline, B., 2008. How to Read & Understand Financial Statements When You Don’t Know What You Are Looking at. Ocala, FL: Atlantic Publishing Company.

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McBride., 2010. Five Year Financial Summary. Web.

McBride, 2010. McBride Plc. Annual Report 2010. London: McBride Plc.

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