Unilever plc is one of the parent companies of the Unilever group .Unilever is one of the world's leading suppliers of fast-moving consumer goods (www.unilever.com). The business ethics and integrity has earned reputation for the company over the years. The main strategy of the company is to grow shareholders fund and balance liquidity and debt for the company.
It's one of consistent Fortune 500 companies continuously from last several years. Unilever is a reputed brand and manufactures diversified range of products. The market value of the company and presence worldwide created inclination to understand the financial perspective of the company.
This report analyses the company's financial perspective through the financial tool ratio analysis. It evaluates the company's performance on profitability, liquidity, long-term gearing of the company and cash flow per share. The report also covers the shareholder's perspective and suggests the investors on the company's future performance.
RATIO ANALYSIS
Ratio analysis is a quantitative analysis of information in a company's financial statements which is used by individuals to compare the economy performance of the firm with previous years and with some other leading firms or industry. (Rees, B, 1995)
1. Financial Analysis of Unilever
Profitability Ratio
Gross Profit Margin
It represent the percentage of total sales revenue that the company gets after deducting the direct cost incurred in producing goods and services it sells. The higher percentage is, company retains each euro of sales. (Houghton Mifflin Company, 2003)
The Gross profit margin of the company has increased by 2.1%. Total revenue of the company has slightly decreased by 1.73% but due to strong marketing and price strategy their gross profit has increased from €19,181m in 2008 to €19,243m in 2009.Inspite of the decelerate in the economy, company somehow manages to increase the profit.
Net profit margin
Unilever's net profit margin was 17.68% in 2008 and 12.60% in 2009 respectively. The company has incurred net loss of €2147 million in 2009 as the operating profit of the company is decreased by 29.96% in 2009, as compared with 2008. The two main reasons for that declination are:
1. In 2009, €29 million are more used up in form of Depreciation, amortization and impairment.
2. In 2008, company got a profit of €1269 million through a number of disposals. (Unilever annual report, 2009)
Which can be easily calculated by the fact that the operating profits before RDI's (Restructuring, business disposals and other one-off items) are approximately equal for 2008 and 2009 i.e. €5,898 million and €5,888 million respectively .
Return on capital employed (ROCE):-
ROCE of Unilever for year 2008 and 2009 is 32.078% and 19.75% respectively, which state a decrease of 2.57% because the capital employed has increase by 13.76% and drastic decline in the operating profit from €7,167 million in 2008 to €5,020 million in2009. The decrease in ROCE can be understood by the fact that the non-current liability has increased specially NC borrowings (Financial liabilities due after one year) which led to increase in capital employed. Borrowings have increased by €1,329 million due to bonds issued in 2009.(Unilever annual report, 2009).
Liquidity Ratio
Liquidity ratio helps in knowing a company's ability to pay off its short-term debts obligation. The higher the value of the ratio is, the larger the margin of safety that the company possesses to cover short-term debts (Elliot & Elliot, 2002).
Current ratio
Current ratio measures the ability of company to pay short term obligation. Higher the current ratio higher the ability to pay back company's obligation (David L. Scott,2003).
Unilever current ratio for 2009 and 2008 is 0.93:1 and 0.81:1 respectively, which means that Unilever's cash and cash equivalents have increased by 14.81% compared to 2008. The increase is because of the decrease in current liability (15.95%) is much higher than decrease in current assets (3.26%) for the two years. Current liability is being decreased by paying more than 50% payments of Bonds and other loans. Borrowing decreases, as the main strategy of the company is to decrease the borrowing to improve the bank statement which helps the company to give the platform for expansion when the market returned to normal condition. (Annual report, 2009)
Acid test ratio
It is a test that indicates whether the company has enough short term assets to cover its immediate liabilities without selling inventory. If the acid-test ratio is lower than working capital ratio, it means current assets are highly dependent on inventory. (Atrill & Mclaney, 2008)
Quick ratio for year 2009 and 2008 is 0.6235882:1 and 0.527971:1 respectively which indicates that Unilever has €0.6235882of quick assets for €1 liability. Significantly quick ratio should be more than 1 but it depends on the nature of the business. There is increase in quick acid test ratio because there is massive decrease (15.95%) in current liabilities of the company. The decrease is due to drastic decline in the financial liabilities. The financial liabilities are decreased by €2,563 million in FY2009 as compared to FY2008. (Unilever annual report, 2009)
Trade receivable and payable days
Receivable days of the company for year 2009 is 41.1 days and for 2008 is 47.6 days, which shows there is decrease in the receivable days by 6.5 days in comparison to year 2008. This is because the %decrease in the sales is less than the %decrease in the trade receivable. Sale is decreases because of the market slowdown. The payable days of company for 2009 and 2008 is 70.6 days and 66.2 days respectively, which means it is being increased by 4.4 days. Increase in payable days is due to marginal increase in the trade payable and slight decrease in cost of sales. Cost of sales depends upon the sales, which is affected by the recession or credit crunch in the market. (Unilever annual report2009)
Inventory (Stock) Days
The inventory days for 2008 is 66.5 days and for 2009 is 63.5 days there is the decrease of 3 days because of decrease in inventory is more than decrease in cost of sales. Cost of sales decrease by 3.58% due to decrease in sales.
Gearing Ratios
Debt to Equity Ratio
The gearing ratio of the company is almost same from 61.347% in 2008 to 61.359% in 2009. However company is low geared as it should be above 100% to be high geared. The borrowings of the company are increased by €1,329 million as it is €6,363 million in 2009 whereas it was by €7,692 million in 2008 also the equity is increased by 20.55% in FY2009. Main plan of the company is to reduce borrowings and to make headroom so that company can avail bank amenities once market situation will be normal. (Unilever annual report, 2009)
Interest Cover Ratio
Ratio describes how many times the profit is greater than the interest charges .it gives the creditors an indication of how secure the repayments are (Elliot and Elliot,J.2002).The interest cover ratio of the company in FY 2009 is 9.96031 times which shows that company has good net earnings to cover interest payable. Although it is decreased by 29.67% in comparison with the interest cover ratio in 2008 i.e.14.1640 times. The reduction is because of loss in operating profit and increase in borrowings reported by the company. The interest cover will improve in coming months, this is achieved by issuing fixed rate long-term debt and by modifying the interest rate exposure of debt and cash positions.
2. Cash Flow
Cash Flow per Share
Net cash flow from operating activities increased by €1903 million due to less income tax paid in 2009, fine management of working capital and net of one-off contributions to several pension funds,. Moreover, number of shares remains the same due to which Cash flow per share ratio increased by 49.16% in 2009.
3. Attractiveness for an investor
Investment Ratio
The earnings per share given by Unilever to its investors are €1.21 in 2009 and were €1.79 in 2008 which has decreased marginally by €0.58 due to decrease in profit after tax. Company is also providing a decent dividend per share of 41cent in 2009, although it is less as compare to previous year (77cent in 2008) yet a respectable amount considering the current market scenario. Taking into consideration good Profit provided by company to share holders increased its value in market, which is a good sign for the investor to invest money in its shares.
The value of a company is an important aspect while calculating the price to earnings ratio. The market value of the company has increased over the last two years. This can be attributed to a raise in total market capitalization (from €22,342 to €25,417 million) and also great increase in its share price in last five years has been witnessed (as seen in below snap shot from 500GBp on 01/01/2005 to 1857GBp on 2/12/2010). Even though the decrease in earnings per share has made a difference yet the price per earnings ratio inclined by a high margin of almost €9.1 as it was €12.3695 in FY2008 and is €21.4610 in FY2009. This has been a tendency over the past several years.
Graph 1 http://www.unilever.com/investorrelations/share_price/default.aspx
Furthermore, Dividend cover is increased by 18.53% (from 2.32 in FY2008 to 2.75 in FY2009) due to decline in earnings per share and the same happened due to less profit after tax of company. Moreover, earning per share and dividend per share decreased yet Dividend cover increased. This clearly states the company's good position, to maximize the dividend given to its investors. Furthermore cash flow is a more reliable method to analyze the investment structure of a company. Although Price to cash flow is decreased by €3.24 (from €21.17 to €17.93) due to increase in cash flow per share and increase in cash flow from operating derivatives, overall that is beneficial for investors since they are getting higher dividend. By analyzing the above ratios Unilever's equity shares clearly seem to be HIGH ATTRACTION for INVESTORS.
4. Market Position Short and Long Term
Company is in strong condition considering both the position, as working capital ratio of company (0.93) is increased and almost equivalent to 1:1 in 2009 although 2:1 is known as best. However FMCG industries normally don't have a high ratio due to rapid conversion of inventory to liquidity or cash. Moreover Liquid ratio is also increased in 2009 (0.63) whereas 1:1 is considered as best but it is less since Unilever is paying its current commitments on accurate time and also high ratio may lead to deficiency of funds . Above statements conclude sound short-term position.
Company's debt to equity increased marginally and reached to 61.35 that are good according to industry, as high debt ratio leads to bankruptcy and vice versa low value increase takeover chances of company. Company's share price has also increased steadily over five years (Graph 1). Although dividends paid have decreased yet there is an excellent increase in PER. This added extra bounce to the value of the company in an investor's assortment. Apart from the return and earnings the company came well in further class of business such as quality of products and service given to customers. Top of these, company performance is much better its growth pushed it ahead of its competitors which is clearly seen in the below graph that compares its performance with its competitors in last three years.
Graph 2
http://www.unilever.com/investorrelations/share_price/default.aspx
Conclusion
The annual report of Unilever has been analyzed with the help of Ratio analysis. Profitability, Gearing, Liquidity, Investment, Cash Flow ratios are evaluated for the year 2009 in comparison with those of 2008. Unilever's sales revenue has decreased marginally by 1.73% in 2009 as compared to previous year. Recession has affected whole global market, yet company has been able to provide a decent gross profit.
Unilever has suffered marginal losses as per the Annual Report of year 2009; however company has regained its strong position in 2010. The company has declared increased net profit by €803 million and turnover by €3,279 million during first nine months of FY2010 compared to FY2009. Company is heading to a new strategy for shareholders to maximize their dividends. Finally, Unilever is secure company for investors which has good future scope because of its current position and well maintained strategy.
Appendix
UNILEVER RATIO'S AT GLANCE
PARTICULARS
YEAR 2009
YEAR 2008
Return on capital employed (ROCE)
19.75056%
32.07859%
Gross profit ratio
48.32%
47.33%
Net profit ratio
12.60578%
17.68625%
Current ratio
0.9320631:1
0.8097826:1
Liquid or acid test ratio
0.6235882:1
0.527971:1
Stocks days
66.511339 days
63.458211 days
Trade receivables days
41.04033 days
47.681 days
Trade payables days
70.6234 days
66.2377 days
Gearing ratio
61.35928%
61.34785%
Cash flow per Share
131.914cent
88.438cent
Profitability Ratios
Gross Profit Margin:
Gross Profit/Revenue x 100
2008: 19181/40523*100 = 47.3337
2009: 19243/39823*100 = 48.32132
Operating Profit Margin:
Operating Profit/Revenue x 100
2008: 7167/40523*100 = 17.68625
2009: 5020/39823*100 = 12.60578
Pre-Tax Profit Margin:
Pre-tax Profit/Revenue x 100
2008: 7129/40523*100 = 17.59247
2009: 4916/39823*100 = 12.34462
Return on capital Employed (ROCE):
Operating Profit/Total capital employed x 100
2008: 7167/22342*100 = 32.07859
2009: 5020/25417*100 = 19.75056
Return on Equity (ROE):
Profit after tax/Equity x 100
2008: 5285/10372*100 = 50.95449
2009: 3659/12536*100 = 29.187793
Liquidity Ratios
Working capital or current ratio:
Current Assets/Current Liabilities
2008: 11175/13800 = 0.8097826
2009: 10811/11599 = 0.9320631
Liquid or acid test ratio:
Current assets excluding inventory/Current Liabilities
2008: (11175-3889) 7286/13800 = 0.527971
2009: (10811-3578) 7233/11599 = 0.6235882
Inventory (stock) days:
2008: 3889/21342*365 = 66.511339
2009: 3578/20580*365 = 63.458211
Trade receivables days:
Trade Receivable/Revenue x 365 days
2008: 2788/21342*365 = 47.681
2009: 2314/20580*365 = 41.04033
Trade payables days:
Trade Payables/Cost of sales x 365 days
2008: 3873/21342*365 = 66.2377
2009: 3982/20580*365 = 70.6234
Gearing Ratios
Debt to Equity:
Non-current Borrowings/Equity x 100
2008: 6363/10372*100 = 61.34785
2009: 7692/12536*100 = 61.35928
Net Debt to Equity:
Non-current Borrowings less cash and cash equivalents/Equity x 100
2008: (6363-2561) 3802/10372*100 = 36.656
2009: (7692-2642) 5050/12536*100 = 40.2839
Income Gearing:
2008: 506/7167*100 = 7.06013
2009: 504/5020*100 = 10.03984
Interest cover:
2008: 7167/506 = 14.1640
2009: 5020/504 = 9.96031
Investment Ratios
Earnings per Share:
2008: 1.79€
2009: 1.21€
Dividend per Share:
2008: 77cent
2009: 41cent
Dividend cover:
2008: 179/77 = 2.32 cent
2009: 121/41 = 2.75 cent
PER (Price/earnings ratio)
Stock market price/ Earning per Share
1 British pound = 1.17951434 Euros
15.79GBP*1.18=18.63€
19.91GBP*1.18=21.84€
2008: 18.63/1.79= 10.40€ share price on 31/12/2008
2009: 23.49/1.21= 19.41€ share price on 31/12/2009
http://www.unilever.com/investorrelations/share_price/?WT.LHNAV=Share_price
Price to cash flow:
Current market price/ cash flow per share
2008: 18.63/ 0.88438 = 21.1704€ share price on 31/12/2008
2009: 23.49/1.319 = 17.931€ share price on 31/12/2009
Cash Flow Ratios
Cash flow per Share:
Net cash from operating activities/ No of equity shares
2008: 3871000000/4377075492*100 = 88.438cent
2009: 5774000000/4377075492*100= 131.914cent
