The main purpose of this report is to analyse the financial performance of DIAGEO Plc. and then compare it to SABMILLER Company. It is going to analyse the financial statements such as the income statement and the balance sheet for the last five years. It will mainly focus on the last two years which are 2009 and 2008. Ratio analysis such as profitability ratios will be used to assess the position of the company and show what direction the company should take in the future. Diageo was chosen for this report as it has outstanding recognition within its market. The results will be compared to SABMiller Company.
DIAGEO Plc. is a global alcoholic beverage company. According to Global data it is one of the leading companies in the branded beverage alcohol industry. It is involved with the production and distribution of beer, spirits and wine. Thompson (2010) confirms it is the largest maker of spirits
It owns 34% of Moet Hennessy (brands include Moet & Chandon, Veuve Clicquot and Hennessy), It distributes Dom Pérignon. Its own brands include Johnnie walker (world's leading whisky), baileys (world leading liqueur), Smirnoff (the world leading vodka), Guinness (world leading stout). The company and its subsidiaries sell its products in 180 markets across the world. It has offices in 80 countries with its headquarters in London.
SABMiller Company is a global brewing and bottling company it is the second biggest brewing by revenue. It is the major bottler of coco-cola.
Background
Diageo was created in 1997; it was created as result of a merger of Grand Metropolitan and Guinness. This made the company become a food and drink company. Between 2000 and 2002, the company decided to dispose of the food ventures which were two large investments (Burger King and Pilsbury). In 2001 the company acquired additional spirits and wine brand.
The companies which made Diageo had been around for years before 1997 some as early as 1749 (Justerini & Brooks). In 1759 Arthur Guinness signed the lease on St James Gate Brewery in Dublin. Over the years they grew and expanded under various parent companies.
ABBREVIATIONS
C.A - CURRENT ASSETS
C.L - CURRENT LIABILITIES
COS - COST OF SALES
DR- DEBTOR
CR - CREDITOR
GR.PROFIT - GROSS PROFIT
OP.INCOME - OPERATING INCOME
OP.PROFIT - OPERATING PROFIT
ROCE - RETURN ON CAPITAL EMPLOYED
STK - STOCK
T.S.E - TOTAL SHAREHOLDER EQUITY
Comparisons
Percentage change of relevant balance sheet and income statement figures
DIAGEO
SABMILLER
2008
2008
2009
2008
Description
US$m
US$m
% change
US$m
US$m
% change
Sales
12958
12283
5.50%
18,020
18,703
-3.65%
cost of sales
4099
3893
5.29%
4,531
5,134
-11.75%
Gross profit
5681
5418
4.85%
3,091
3,148
-1.81%
Operating profit
2574
2418
6.45%
2619
3,146
-16.75%
Equity
4786
3874
23.54%
20,599
16,117
27.81%
Debt
10724
10158
5.57%
10928
10,166
7.50%
Net profit
1743
1706
2.17%
2,081
2,157
-3.52%
Current Asset
6952
6067
14.59%
3,895
3,472
12.18%
Total Asset
19454
18018
7.97%
37,504
31,628
18.58%
Current liability
3944
3986
-1.05%
5,977
5,345
11.82%
Stocks
3281
3078
6.60%
1,295
1,241
4.35%
Receivable
2008
1977
1.57%
1,665
1,576
5.65%
Payable
2615
2172
20.40%
3,227
2,400
34.46%
Number of employees
23287
24039
-3.13%
78,241
75,448
3.70%
.
5 Years Diageo
Profitability
2009
2008
2007
2006
ROCE =
16.60%
17.23%
19.60%
22.13%
Gross margin
43.84%
44.11%
45.44%
45.15%
Profit Margin
13.45%
13.89%
14.90%
15.69%
Operating Margin
19.86%
19.69%
20.78%
21.77%
Return on Assets
8.96%
9.47%
9.92%
11.15%
Efficiency
Asset T/O
0.8
0.9
0.9
1.0
Inventory turnover
1.2
1.3
1.2
0.7
stock Days
292.16
288.59
301.51
510.37
Average collection period
56.56
58.74827
69.10411
64.74085
Average payable period
232.86
203.64
242.40
229.48
Operating cash Cycle
-119.73
-86.15
-104.19
-100.00
Liquidity
Current Ratio
1.76
1.52
1.17
1.24
Acid Test
0.93
0.75
0.60
0.24
Solvency
Gearing
69.14%
72.39%
63.38%
57.26%
Debt to Equity
224.07%
262.21%
173.05%
133.98%
Shareholders
Return on Equity
36.42%
44.04%
38.37%
37.31%
Return on Total Assets
8.96%
9.47%
9.92%
11.15%
Sales per employee
556,447.80
510961.4
440813.5
440364.1
Ratio Analysis
DIAGEO
Formula
2009
2009
2008
2008
Profitability
DETAIL
RESULT
DETAIL
RESULT
ROCE
OP.PROFIT/(T.A-C.L)
12958/(19454-3944)
16.60%
12283/(18018-3986)
17.23%
Gross margin
GROSS PROFIT/SALES
5681/12958
43.84%
5418/12283
44.11%
Profit Margin
NET PROFIT/SALES
1743/12958
13.45%
1706/12283
13.89%
Operating Margin
OP.PROFIT/SALES
2574/12958
19.86%
2418/12283
19.69%
Return on Assets
NET PROFIT/T.A
1743/19454
8.96%
1706/18018
9.47%
Cost of sales Ratio
COS/REVENUE
4099/12958
31.63%
3893/12283
31.69%
Efficiency
Asset T/O
REVENUE/(T.A-C.L)
12958/(19454-3944)
0.84 TIMES
12283/(18018-3986)
0.88
Inventory turnover
COS/INVENTORY
4099/3281
1.25
3893/3078
1.26
stock Days
(STK*365)/COS
(3281*365)/4099
292.16
(3078*365)/3893
288.59
Average collection period
(DR*365)/REVENUE
(2008*365)/12958
56.56
(1977*365)/12283
58.75
Average payable period
(CR*365)/COS
(2615*365)/4099
232.86
(2172*365)/3893
203.64
Liquidity
Current Ratio
C.A/C.L
6952/3944
1.76
6067/3986
1.52
Acid Test
(C.A-STOCK)/C.L
(6952-3281)/3944
0.93
(6067-3078)/3986
0.75
Solvency
Gearing
DEBT/(EQUITY +DEBT)
10724/(4786+10724)
69.14%
10158/(3874+10158)
72.39%
Debt to Equity
DEBT/EQUITY
10724/4786
224.07%
10158/3874
262.21%
Shareholders
Return on Equity
PAT/EQUITY
1743/4786
36.42%
1706/3874
44.04%
Sales per employee
SALES/NO OF EMPLOYEE
12958000000/23287
556,447.80
12283000000/24039
510961.35
Shareholders equity ratio
T.S.E/TOTAL ASSET
4007/19454
0.21
3169/18018
0.18
The results which have percentage at the end have been multiplied by 100 to get the figure.
COMPARISION OF RATIO BETWEEN THE TWO COMPANIES
DIAGEO
SABMILEER
Profitability
Formula
2009
2008
2009
ROCE
OP.PROFIT/(T.A-C.L)
16.60%
17.23%
8.31%
Gross margin
GR. PROFIT/SALES
43.84%
44.11%
17.15%
Profit Margin
NET PROFIT/SALES
13.45%
13.89%
11.55%
Operating Margin
OP.PROFIT/SALES
19.86%
19.69%
14.53%
Return on Assets
NET PROFIT/T.A
8.96%
9.47%
5.55%
Cost of sales Ratio
COS/REVENUE
31.63%
31.69%
25.14%
Efficiency
Asset T/O
REVENUE/(T.A-C.L)
0.84
0.88
0.57
Inventory turnover
COS/INVENTORY
1.25
1.26
3.50
stock Days
(STK*365)/COS
292.16
288.59
104.32
Average collection period
(DR*365)/REVENUE
56.56
58.75
33.73
Average payable period
(CR*365)/COS
232.86
203.64
259.95
Liquidity
Current Ratio
C.A/C.L
1.76
1.52
0.65
Acid Test
(C.A-STOCK)/C.L
0.93
0.75
0.44
Solvency
Gearing
DEBT/(EQUITY +DEBT)
69.14%
72.39%
34.66%
Debt to Equity
DEBT/EQUITY
224.07%
262.21%
53.05%
Shareholders
Return on Equity
PAT/EQUITY
36.42%
44.04%
10.10%
Sales per employee
SALES/NO OF EMPLOYEE
556,447.80
510,961.35
230,314.03
INTERPRETATION OF RATIO ANALYSIS
Return on capital employed (ROCE): The return on capital employed decreased from 17.23% in 2008 to 16.60% in 2009. The ROCE of Diageo is positive which means the company is profitable, this reduction is because of the present climate however the company has been fluctuating in the last 5 years. In 2005 it was 19.30% but rose to 22.13% and has been reducing every year since then. The profitability of the company as a whole is dropping. The decrease could be because people have less disposable income; the lowest in ten years (Wallop 2007) and are willing to buy cheaper alcoholic beverage.
SABMiller being a relative company to Diageo also had a reduction from 11.97%in 2008 to 8.31% in 2009. This indicates that this might be a general market issue and Diageo is still improving and more profitable than SABMiller.
Gross margin: In Diageo the gross margin is reduced from 44.11% in 2008 to 43.84% in 2009. A high Gross margin is good, as it shows the company is profitable. The company knows how to turn raw materials into income. The reduction in gross margin can be said to be caused by the increased input cost and the trading down within brands.
SABMiller gross margin increased, this means the financial health of the company is getting better, however even though Diageo has reduced its gross margin is still so much more than SABMiller.
Profit Margin: there was a reduction in profit margin in Diageo and a slight increase in SABMiller to 11.55% from 11.53%. The reduction is not significant and it is more still more than SABMiller. It means Diageo has exceptional products which customers are willing to pay a substantial premium for.
Operating Margin: The operating margin increased in Diageo from 19.69% to 19.86% and there was a reduction in SABMiller to 14.53%. This means that Diageo knows how to manage it expenses better and its costs are under control. It might also means that sales rose above cost.
Return on assets: The return on assets fell for both companies around the same percentage. The returns on assets show how profitable a company is in terms of assets. Diageo and SABMiller are 8.26% and 5.55% in 2009 respectively. The SABMiller can improve on its return on asset as comparing it to Diageo it is falling short. A reduction in the value of the assets held by the plans, and a lower discount rate, partly offset by a lower inflation rate affected the assets.
Cost of sales Ratio: The both companies reduced, Diageo reduced by .06% and SABMiller reduced by 2.31% which means there is still opportunity for Diageo to reduce its cost of sale. It shows how much of the revenue is used by the cost of sales. It shows both the the effectiveness and profitability of the company. Jose Cuervo Gold drove an increase in distribution and the launch of Jose Cuervo Silver more than offset weakness in the on-trade (Thompson 2010).
Asset turnover: The result of Diageo is 0.84 times for 2009 and 0.88 times for 2008. This means that turnover is 0.84 times bigger than total assets. Asset turnover shows how successful a company is in terms of its assets. It is less than 1 which is not good however in comparisons to SABMiller which is 0.57 in 2009 and 0.71 in 2008. That industry might be one which the asset turnover is generally low.
Inventory turnover: inventory turnover measures the productivity of the business in managing and selling its inventory. In other to determine how good the inventory turnover is, it is good to compare with companies in the same category. Diageo inventory turnover is low in comparison to SABMiller however SABMiller could be too high which may be caused by lack of inventory. This is due to the fact that some of their aged products such as Scotch whisky and Canadian whisky take time to mature; it can take up to 30 years.
Stock days: There was an increase in the stock days from 288.6 days to 292.16 days. This shows how many days stock is kept before being converted to revenue. It is quite high however it is an alcohol company which usually means the older it is the better and more expensive it is. The increase shows there is less demand for the product. In previous years the figures have been higher such as 510 days in 2006. SABMiller also increased; in comparison it is better than Diageo.
Average Collection Period: This shows how many days the company usually collects money from its debtors. For Diageo it reduced by about two days which is now 56.6 days, This is good for the business but can do better has SABMiller is as low as 33 days. The reason for the 56.6 days is because of the variety and level of products which it sells is higher than SABMiller.
Average payable period: This shows how many days the company takes to pay its creditors. Diageo increased to 232.9days from 203.7 days. Which can be good as it gives the company more time however if the creditors decide to withdraw their credit it will affect the company. If it can be reduced, it will be advantageous. SABMiller which was quite low in 2008 has increased drastically even more than Diageo to 260 days. This is the general standard of days agreed for payable in the market.
Current Ratio: This ratio gives an idea of the capability of the company to pay back short-term liabilities. Diageo increased from 1.52 to 1.76 this is very positive as it shows the company is capable of paying its obligations. SABMiller is under 1 which show it is struggles to meet it short term liabilities. While this shows the company is not in good financial health, it does not mean the company is in financial crisis.
Acid Test: The both companies have increased; Diageo from 0.75 to 0.93 and SABMiller from 0.42 to 0.44 in 2008 and 2009. It shows if a firm has enough short-term assets to cover its immediate liabilities without selling inventory. Companies with over 1 are said to be in better position in terms of liquidity.
GEARING: Gearing, called leverage in the US, shows how overloaded a company is with debt as it compares equity to borrowed funds. The higher a company's degree of leverage, the more the company is considered risky. Diageo gearing is reduced by 3.25% while SABMiller stayed the same at 34.66%.
DEBT TO EQUITY: This is an indicator of the proportion of equity and debt used. It shows the relationship between the long term funds and funds provided by shareholders. Diageo reduced from 262.21% to 224.07% while SABMiller reduced by 10%.
RETURN ON EQUITY: The return on equity dropped in 2009 for both companies, in Diageo it dropped by about 8% and in SABMiller 3%. Is shows the there is a reduction in the net income of shareholders equity.
RETURN ON TOTAL ASSETS: There has been reduction on the return on total asset for the past five years, which means the profit before tax associated with the asset has reduced every year for the last 5 years.
SALES PER EMPLOYEE: There has been a reduction on the employee in both companies it can be associated with the general reduction of employment in the economy. The has been an increase in the sales per employee in Diageo which could be linked to either increase in sale or the reduction of employee while in SABMiller there has been a reduction from 247,892.59 to 230,314.03.
Effects and Impacts of Results
In general, most of the ratios of Diageo plc are better than SABMiller, this could be for many reasons; such as they do not have the same standards of product.
The profitability of the company can be said to be standard and can improve there are changes over the years but it has been a gradual process nothing drastic. The return on asset can be enhanced in other to make it better.
The efficiency ratios are good as the payable period is longer than the receivable period which allows for more cash to come in before it has to pay out however the days are period for payable is too long. The liquidity ratios are not good; there needs to be an improvement on the acid test as it is less than 1.
The solvency and shareholder ratios can be improved however in comparison to SABMiller it is doing so much better. It can do better as it is not reaching its full capacity and it is lacking in some important areas.
Most products which Diageo use are price volatile and could affect the overall income and price. Budgets in the future should take this into account and the general standard of the economy.
Recommendation and Predictions for the Future
Diageo should capitalise on its non-alcoholic ventures as in the future there might be restriction on advertising alcohol on television. It will give room for extra revenue in case alcohol beverage intake should reduce.
There should be more ways of proofing the Diageo drinks are real as in their annual report it states that they are making some loss through counterfeit product and this might affect their future sales.
Confidence would be restored in the economy which would improve the sales figure for Diageo as the Q1 in 2010 is already seeing some improvement.
The economy will pick up, which would give more disposal income and increase sales.
Conclusion
This report has analysed Diageo and SABMiller financial report through the use of ratios. It has concluded that Diageo is doing better that SABMiller and it sales has increased and it is doing above its previous years.
The management of the accounts such as the payable accounts can be improved and other aspects of the company. Comment on the health and Financial position of the company has been made. Recommendation and predictions as also been made.
In conclusion Diageo should pick up its sales and become a healthy company once the economy gets better.
.
Reference and Bibliography
Atrill, P. and McLaney E., 2006. Accounting and finance for non-specialist. 5th ed. Harlow: FT Prentice Hall.
Diageo Annual Report 2010 and 2009 [Online]
http://www.diageo.com/Lists/Resources/Attachments/640/Diageo_AR10_full_report.pdf [accessed 20 December 2010]
Dyson, J. R., 2007. Accounting for Non-accounting Students. 7th ed. Harlow: FT Prentice Hall.
Elliott,B. and Elliott, J. 2009. Financial Accounting & Reporting. 13th ed. Prentice Hall.
Return on Assets Investopedia, a Forbes Digital Library [Online]
http://www.investopedia.com/terms/r/returnonassets.asp [accessed 03 January 2011]
SABMiller Annual Report 2010 and 2009. [Online]
http://www.SABMiller.com/files/reports/ar2010/2010_annual_report.pdf [accessed 20 December 2010]
Thompson, J (2010). Johnnie Walker popularity helps Diageo to toast profits. [Online]. http://africa.ibtimes.com/articles/71871/20101014/diageo-spirits-guinness-smirnoff-and-johnnie-walker.htm
Wallop H. (2007). Telegraph Disposable income at lowest level in 10 years. [Online].
http://www.telegraph.co.uk/news/uknews/1565499/Disposable-income-at-lowest-level-in-10-years.html. [Accessed on 06 January 2011].
