Introduction:
This report is going to use the annual report of Associated British Foods plc to analysis why this company is attractiveness to investing. And it would be analysis some of the main trends and some different accounting ratio such as profitability and Investment Ratios to see the performance of Company Associated British Foods plc. A good ratio analysis would help to build a picture of a companies, the richness of the picture depends on the quality of the financial information on which the ratios are based. Associated British Foods plc is a global food, ingredients and Retail Company. Its ingredients division is the world's second largest producer of both sugar and baker's yeast. Its grocery division is a major manufacturer of both branded and private label grocery products. Its retail division, Primark, has 205 stores with over 6.5 million sq ft of selling space. In 2010, Associated British Foods plc has sales of 10.2bn and 97,000 employees in 44 countries.
Associated British Foods plc has five key business areas: Sugar, Agriculture, Retail, Grocery and Ingredients. It is major competitor in corresponding market.
Gearing ratio is the contribution of owner's equity to borrowed funds. The ratio explains the degree to which the business is funded by the owner as against the borrowed funds. The gearing ratio of ABF plc is 19.8% in 2010. In a capital intensive gearing ratio of 50% or less can be considered reasonable which means that Associated British Foods plc is low risk company. The price earnings ratio (PES) fell all the way from 2005 to 2007. The PES of Shell was 16.26, 15.59, and 11.85 between 2005 and 2007 respectively. This ratio allows us to see how long it takes to pay back. For example in 2005, it will have ï¿¡16.26 in that year. Furthermore, the dividend per share is the amount of the dividend that shareholders have (or will) receive for each share they own. According to the record, Shell company has increased from $1.27 in 2005 to $1.44 in 2006, and then to $1.55 in 2007. The total growth rate was 22% and the average annual growth rate was 10.5%.
In this part it wills analysis the investment ratio. The total dividend paid in 2007 was $8,106 million, compared with $7,686 million in 2006. The dividend paid per share was 42.30 cents, an increase of 10% compared with 2006. In sterling terms, the dividend remained flat due to the weakness of the dollar. From 2005 to 2007, the number of the capital gearing ratio of Shell was lower than BP, and the number of dividend cover was higher than BP. Therefore, ABF plc could consider a better investment because it has a lower financial risk, and is more profitable. Also, although Shell has lower dividend yield, it probably offers growth in earnings resulting from retained profit.
Current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. For ABF Company, the current ratios are 1.2 and 1.3 between 2009 and 2010 respectively. This is an indication of a company's ability to meet their short-term debt obligations; the higher the ratio, the more liquidity the company is. A high ratio indicates that a good probability the enterprise can retire their current debts. A ratio of 2.0 or higher is a comfortable financial position for most enterprises.
Quick ratio shows how all assets quickly convertible into cash and all current liabilities. It can also be called Acid test ratio. This quick ratio figure has increased from 0.71 in 2009 to 0.73 in 2010. The good thing about using quick ratio is that it specifically exclude inventory and this shows that the company can pay their current liabilities without relying on the sales inventory. The increasing rate was 3% in total, which was not too bad comparing to the profitability ratios. Overall, from liquidity ratios we could see that ABF plc really have a strong and stable working capital.
As it is more profitable and has a higher level of activity and better control of working capital. Moreover, Shell has a greater liquidity position.
In profitability ratio, the return on capital employed; gross profit and net profit margin are a suitable ratio to analysis Associated British Foods Company. Return on capital employed is a measure of profitability that is used to indicate how efficiently of a company has utilized its assets during a given period. ABF's return on capital employed has increased by 25.6% from 15.6% in 2009 to 19.6% in 2010. Furthermore, the gross profit margin figure was 6.7% in 2009, but ends up 8% in 2010. This means that the production cost has slightly increased which leads to a lower percentage during these years. The net profit margin ratio has rise from 6.1% in 2009 to 8.3% in 2010. This shows the net profit ratio was slightly better than gross profit margin. This is because the percentage is slightly higher than the gross profit ratio even though the gross profit ratio does not fluctuate as much as the net profit ratio.
Asset turnover is a ratio that measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company. The net assets turnover ratio for Shell Company has gone down from 2.3 in 2005 to 2.0 in 2006 and stayed the same in 2007. The total decreasing rate and average annual rate were 15% and 7.2% respectively.
Stock turnover is measures how well a company coverts stock into revenues. It is closely similar to asset turnover and is also a measure of efficiency. Stock turnover is more specific than asset turnover. It measures how well the company is making use of the part of its working capital that has been invested in stock. For the Shell Company, the stock turnover period increased from 28.6 days in 2005 to 32.2 days in 2006, and then to 38.2 days in 2007, which rose by 33.6% in total. The average annual increasing rate was 15.6%.
In 2005, BP's Net Assets Turnover was 3.02 times, and rises to 3.17 times in 2006. But than decrease in 2007, which is 3.05 times. Shell's Net Assets Turnover ratio appears to be lower than BP. This may be because of the company is capital intensive.
The period of ABF plc from July of 2008 to July of 2010 is relatively a peaceful period. The share price increased gradually and reached the peak in the December of 2010, as illustrated in below Figure 1. Similar trends are found in other competitors' share prices. Thus, this growth happened to the overall industry and is an indicator of the global economy growth.
Figure 1 ABF plc and FTSE 100 share price from 2008-2010
Since July of 2008, share price keep stable. It keeps until April 2009, as illustrated in above Figure 1. It rises up sharply to the peak in December 2010. Generally, the rise and fall of ABF plc share price go with the general market, for example, its curve is similar to FTSE 100 curve.
Conclusion
Appendix 1:
Associated British Foods plc
Profitability
2010 2009
Gross profit Margin 8% 6.7%
Net profit Margin 8.3% 6.1%
Liquidity
Current Ratio 1.3 1.2
Quick Ratio 0.73 0.71
Efficiency
Net Assets Turnover 1.77 times 1.82 times
Inventory holding period 48.3 days 53.3 days
Investment
Capital Gearing ratio 19.8 % 22.8%
Earnings per share
Price earnings ratio
Appendix 2:
1. Profitability
1.1 Gross Profit margin=*100
2010: *100=8%
2009: *100=6.7%
1.2 Net Profit margin=*100
2010: *100=8.3%
2009: *100=6.1%
2. Liquidity
2.1 Current Ratio=
2010: =1.3
2009: =1.2
2.2 Quick Ratio=
2010: =0.73
2009: =0.71
3. Efficiency
3.1 Net Assets turnover ==
2010: =1.42times
2009: =1.41times
3.2 Inventory Holding Period=
2010: =48.3days
2009: =53.3days
4. Investment ratios:
4.1 Capital Gearing Ratio
=*100
2010: *100=19.8%
2009: *100=22.8%
4.2 Interest Cover =
2010: =10.1times
2009: =6.29times
4.3. Earning per share =
2010: = $4.27
2009: = $5.00
4.4 Price/Earnings Ratio=
Note: the share prices are taken at the end of each accounting period. eg, the share price for calculating the 2010 PE ratio is the price at 31 December, 2010 on New York Stock Exchange. The figures are taken from Yahoo Finance website.
2010:=11.85
2009: =15.59
Note:
1. Dividends paid were as follows:
Ordinary dividends of in 2010, in 2009
2. Market prices of ordinary shares was
31 December 2010
31 December 2009
