The objective of this report is to explore the financial performance and competitive position of Associated British Foods plc (ABF) through analyzing its financial statements as well as comparing with another company - Tate & Lyle plc ( T& L). At the same time, some suggestions and recommendations will be provided to potential investors.
2. Summary of the Main Information
2.1 Associated British Foods plc
Associated British Foods plc (ABF) is a diversified company that mainly engages in international food processing and manufacturing and operates in four segments: grocery, sugar and agriculture, ingredients and retail. It is headquartered in London with over 96,000 employees in 44 countries. Found in 1935, it is now the world's second largest sugar producer and the leader in bread and sugar in the UK.
The company has been expanding its business these years. For instance, in April 2009, ABF announced it had completed its acquisition of Azucarera Ebro, the leading sugar producer in Iberia.
Fig.1. ABF five year performance review. (Data source: FAME)
As shown in figure 1, over the past five fiscal years(2005-2009), ABF's total revenue has ncreased by 64.62% and its total assets have increased by 48.76%. In addition, there is a significant increase in the size of the company's workforce over these five years.
2.2 Tate & Lyle plc
Found in 1921, Tate & Lyle plc (T & L) is a United Kingdom based company operates through four divisions: food and industrial ingredients (Americas), food and industrial ingredients(Europe), sugars and sucralose. During the fiscal year ended 31 March 2009 the company completed the disposal of its international sugar trading business.
As shown in the five-year-review figure, the company's total revenue and assets have increased gradually during these years. However, its net income have decreased and unlike ABF, whose size of workforce has been increasing, Tate & Lyle's number of employees has decreased after 2007.
Fig.2 Tate & Lyle five year performance review.
(Data source: FAME)
Both companies are public limited companies listed on the London Stock Exchange. The financial crisis since 2008 has a strong impact on the whole food processing industry in the sense that food ingredients prices and commodity costs have been fluctuating severely. The whole industry experienced the challenges of trading in a recessionary situation.
3. Evaluation of Financial Statements: A Comparative Analysis
3.1 Comparison of Liquidity Ratios
Fig.3. Liquidity ratios of ABF and T & L.
As can be seen from the figure, both companies' current and quick ratios have declined from 2005 to 2009. To some extent this can be interpreted as the decline of their ability to meet short-term cash needs. In addition, T & L has higher current and EBITDA ratios than ABF on average, which means T & L is more liquid to meet the short-term obligations. Moreover, ABF's current and liquidity ratios are both lower than industry average, which means it does not have good liquidity to meet short-term liabilities. Therefore, Tate & Lyle is more favorable for short-term creditors.
3.2 Comparison of Efficiency Ratios
Fig.4. Efficiency ratios of ABF and T & L.
As shown in above figure, Although both ABF and Tate & Lyle' stock turnover ratios have declined in the five years, they remain much higher than the industry and sector average levels. In other words, they spend less time to convert raw materials into finished goods and sell the goods.
In addition, ABF's debtor days are shorter than T & L on average, which means ABF collects debt faster. However, both companies' debtors days are longer than industry level.
The CCC (Cash Conversion Cycle) ratio shows how quickly a company can convert its products into cash through sales. According to the data, ABF's CCC ratio has decreased significantly to 14.42 from 2005 to 2009 while Tate & Lyle's CCC ratio has increased from 24.77 to 32.07 in these five year. The scale expansion of ABF has brought more efficiency in this respect.
In addition, according to the revenue per employee ratios shown in the chart below, a worker in T & L could bring more revenue than a worker in ABF. Moreover, ABF's RPE ratio is far below the industry and sector averages, indicating that there is no corresponding improvement in the production efficiency with the expanding size of workforce.
Fig.5. Comparison of revenue per employee.
4.3 Comparison of Profitability Ratios
As can be seen in figure 6, despite of some fluctuations, both companies' main profitability ratios have declined during these five years. Although the scale and business of ABF have been amplifying, its operating expenses have increased as well. Moreover, the decline of its ROCE (Return On Capital Employed) and ROTA (Return On Total Assets) ratios implies that the expanded capital and assets do not bring better profitability.
As for ROCE (Return On Capital Employed) ratio, T & L performed better for the year 2005-2007 in the sense that its total capital was better utilized to generate revenue. However, after 2007 its ROCE ratio decreased to negative. Overall ABF has better profibability ratios in recent ratios than T & L.
Fig.6. Comparison of profitability ratios
4.4 Comparison of Investment Ratios
As can be seen from figure 7, despite that ABF's total asstes and total revenue are both higher ,T & L's average DPS (Dividend Per Share) is higher than ABF's.
Fig.7. Comparison of dividend per share.
Moreover, as shown in table 1, both companies' average dividend yield ratios are above the industry and sector averages and T & L has a higher average dividend yield than ABF. In this sense T & L is more attractive for investors.
Table1.
Investment Ratios of ABF and T & L
ABF
T&L
Industry
Sector
S&P500
Dividend Yield 5 Year Avg.
2.39
4.29
1.48
1.90
2.38
Dividend 5 Year Growth Rate
5.07
4.02
7.35
8.84
-4.60
Payout Ratio
45.96
202.07
413.58
113.37
26.25
P/E Ratio
19.40
35.90
559.56
141.08
14.18
EPS 5 Year Growth Rate
0.98
-9.87
0.89
6.33
9.85
In addion, a notable mark is that T & L has a much higher payout ratio and P/E ratio relative to ABF and the sector level. On one hand, the higher P/E ratio reflects higher market expectation of company growth for T & L. On the other hand, higher P/E represents higher risk for the investors.
4.5 Comparison of Stability Ratios
Fig.8 .Comparison of stability ratios
During the five fiscal years, ABF's interest cover ratio has declined from 15.09% to 6.21%. The company is burdened by its debt expenses. However, ABF still has a higher interest cover ratio than T & L on average. Moreover, ABF has lower debt ratio, debt to equity ratio and gearing ratio relative to T & L, indicating that ABF is less risky for investors. However, both companies' debt ratios, debt to equity ratios and gearing ratios had been increasing over the past five years. To some extent this reflects the impact by the financial crisis on food processing industry. Both companies have larger long-term debts which may affect the companies' stability.
4.6 Horizontal Analysis
Fig.9. Horizontal Analysis(the year 2005 is used as the base year).
It is apparent from the figure that ABF's total revenue and assets have increased significantly as a result of the expanded scales during these five years. Moreover, ABF's gross dividends have increased by 16.2%, which is an attractive sign for investors. However, the company's growth rate of cost of sales exceeds the growth rate of total revenue. This implies that the company's capital is not well utilized.
In addition, the company's current assets have increased by 23.51%, indicating the improvement of its liquidity and short-term solvency. However, its liabilities growth rate is much faster than the growth rate of total equity, which may increase the company's operation risk.
4.7 Vertical Analysis
Fig.10. Vertical analysis.
As shown in figure 10, relative to the increases of total assets and gross profit, ABF's improvement of net income is not ideal, which can attribute to the increasing operating expenses.
Meanwhile, the proportion of current assets in total assets does not increase as the absolute amounts. Moreover, the proportion of long-term liabilities in total assets has increased, indicating that the company's gearing ratio becomes higher, causing its risk to become higher as well.
5. Conclusion
In conclusion, over the past five years Associated British Foods plc (ABF) has significantly expanded its scale and business. Some scale effects have been realized such as the increases of its total revenue and assets. However, the proportion of its total liabilities especially long-term liabilities has increased as well, causing its risk to become higher. Its payout ratio which is far below the industry and sector levels also suggests that the company is burdened by its debt expenses. Moreover, relative to the expanded scale, the improvement of net income and production efficiency is not ideal.
For short -term creditors T & L maybe a better choice for it has better liquidity. In addition, T & L has better investment ratios such as P/E ratio and dividend yield ratios compared with ABF.
However, there might be some limitations of the analysis. For instance, there are comparability problems in both time-series and cross-sectional comparisons of accounting information because accounting of certain items may vary by company (Waston and Head,2007). Creative accounting may also reduce the reliability of financial statements. Therefore investors should use the ratios with caution and find the factors behind the figures.
Appendix
1. Liquidity Ratios:
Current Ratio = Current Assets / Current Liabilities
Liquidity Ratio = (Current assets - Inventory) / Current Liabilities
Operating Cash Flows Ratio = (Cash + Marketable securities + Operating
Cash Flows)/ Current Liabilities
2. Efficiency Ratios:
Inventory Conversion Period (ICP)= (Closing Inventory Ã-365) / Cost of Sales
Debtors Collection Period (DCP)= (Debtors Ã-365) / Credit Sales
Creditors Deferral Period (CDP) = (Trade CreditorsÃ-365) / Credit Purchases
Cash Conversion Cycle (CCC) = Inventory Conversion Period + Debtors
Collection Period - Creditors Deferral Period
3. Profitability Ratios:
Gross Profit Ratio (GPR)= (Gross Profit / Sales Revenue) Ã-100%
EBIT Margin = (EBIT / Sales Revenue) Ã-100%
Return on total Capital Employed (ROCE)= (EBIT / Total Shareholders Funds
+ Long-term Liabilities) Ã- 100%
Return on Shareholders' Funds (ROSF) = (Net Profit / Total Shareholders'
Funds) Ã-100%
Return on Total Assets (ROTA)=(Net Profit / Total Assets) Ã-100%
4. Investment Ratios
Dividend Per Share (DPS) = Dividend payable to ordinary shareholders /
Number of Issued Shares
Dividend Yield Ratio = DPS / Share Market Price Ã- 100%
Earnings Per Share (EPS) = Profit after Tax / Number of Ordinary Shares
P/E Ratio (Earnings Multiple) = Share Market Price / EPS
Dividend Cover = Profit after Tax for Ordinary Shareholders / Ordinary
Dividends
5. Stability Ratios
Debt Ratio = Total Liabilities / Total Assets
Debt-to-Equity Ratio = Total Liabilities / Total Shareholders' Funds
Gearing Ratio = Long-term Debt / (Long-term Debt + Total Shareholders'
Funds)
