Financial analysis implies to review of fiscal data in order to achieve efficient decision making in business. Generally, this analysis requires a review of both historical as well as forecasted profit margins, cash-flows and fiscal risks. This may lead to resource allocation into or out of a particular company or internal process. Financial analysis also relates to company assessment in order to assess its performance, obligations, assets and possible future income (Blum and Dacorogna, 2014). A wide range of practices can be used to determine the financial feasibility of a corporation including horizontal & vertical analysis and ratio analysis methods.
This study involves comprehensive analysis of financial statements along with ratio analysis of companies selected: Heiniken and Farsons. Both these corporation are engaged in production of beer and beverages. Further study also covers the detailed evaluation of cash-flows position and working capital condition to provide conclusion on different aspects.
Overview of Companies:
Heineken is a Dutch brewing corporation located in Amsterdam. Company is world's second-largest beer maker. Comapny has a global range of more than 170 beer products, including Heineken, Tiger Beer, Zagorka, Dos Equis, Amstel and Strongbow. Company is famous for it's premium quality beer and soft-drinks, and now an established brand in industry. Company is currently operating in around more than 70 countries. It is also selling cider brands and other innovative product range in beverages. Sustainability is ingrained in business by "Brewing a Better World" and provides value to all its stakeholders (About Heiniken. 2019).
Simonds Farsons Cisk plc which is normally called or recognised as Farsons is Malta based company well known for providing quality beer, food and other beverages. Company sis engaged in brewing, producing, selling of different beers brands and soft drinks. Company also importing, wholesaling and retailing foods and beverages, and operating franchised retail. In Malta and other near countries company is leading beer manufacturer and also company is rapidly moving towards international market. Blue-Label Beer, Kinnie line of soft-drinks, Cisk Lager, San Michel table water, Hopleaf Pale Ale etc. are the corporation's popular breweries and liquor labels. Company is the very first non-bank private corporation listed on the Malta's Stock Exchange, wherein the shares of the organization are known for trade purposes as SFC (About Farsons, 2019).
Evaluation of the financial performance and financial position of Farsons and Heiniken:
Vertical analysis refers to form of examination of financial information where each material item is described in report as a proportion of base figures. So, line items stated in statement of income could be specified as a certain percentage of gross revenues, whereas line items stated in balance sheet could be specified as a certain percentage of aggregate value of assets or liabilities. In specific columns, financial statements which include vertical analysis specifically display line items a percentages (Bragg, 2012).
From vertical analysis of Profit and Loss or Income Statement of company Heiniken it has been evaluated that corporation's aggregate gross profits as in percentage of total revenue has been decreased during 2018 to 51.29% after reporting a sustaining improvement form year 2015 to year 2017. During 2015 to 2017 gross profit proportion was 52.57%, 53.39% and 53.77% respectively. Whereas net profits in proportion of total revenue was 4.67% in year 2015 has been decreased to 3.75% in year 2016 which was increased to 4.46% and 4.28% in year 2017 and year 2018. Above trends shows that after 2017 company's profitability level in proportion of its sales has been declined (Annual Report of Heiniken. 2019).
Statement of financial position:
Vertical Balance sheet's analysis of corporation exhibits that entire non-current assets has covered 78.38%, 79.90%, 79.31% and 84.32% part of company's total stated assets during 2018, 2017, 2016 and 2015 respectively, which points out towards decreasing trend during such period. Whereas cash/cash-equivalents' proportion has been increased during year2018 i.e. 6.92% in that year while it was 2.23% during year2015, 7.72% (in 2016) and 5.95% (in 2017). Corporation's total current assets occupied 15.68%, 20.69%, 20.10% and 21.62%, 20.10%, 20.69% and 15.68% in year 2018, 2017, 2016 and 2015 respectively.
In company shareholder equity covered 17.06% portion of entire assets in 2018 which was 16.16%, 16.78% and 17.90% in year 2017, 2016 and 2015 respectively. Current liabilities' level has been declined from 26.44% to 24.91% during period of year2016 to 2018. Moreover, non-current liabilities' level has been declined from 59.52% to 58.03% from year2015 to 2018.
Vertical income statement as attached in appendix of Farsons shows that corporation's gross profits percentage relative to total revenues was 37.97% in 2015 which increased in 2016 and reached at 38.82%. Also further it was 38.95% and 38.64% during 2018 and 2017 respectively. Whereas net income occupied 14.74% of aggregate revenues in 2018 which was 10.13%, 12.94% and 13.64%, 12.94% and 10.13% in year 2017, 2016 and 2015 respectively. Above increasing trend in gross-profit and net-profit shows that company's profit generation capabilities has been increased over the period (Annual Report of Farsons. 2019).
Statement of Financial Position:
Balance sheet (Vertical) analysis of corporation Farsons indicates that total equity occupied 67.11% of aggregate value of assets in 2015 which reached at 59.88%, 67.21% and 66.87% during year 2018,2017 and 2016 respectively. On other side total liabilities were 20.37% in 2018 and this percentage were 32.89%, 32.52% and 32.79% during year 2017, 2016 and 2015 (Annual Report of Farsons. 2019).
Corporation's non-current or fixed assets proportion has been reduced to 77.16% in year2018 which was 78.52% in 2015, 79.14% in 2016 and 81.42% in 2017. Whereas corporation's aggregate current asset level has been reached 18.58% to 22.22% (2017 to 2018) that was 20.25% and 21.48% in year 2016 and 2015 respectively.
Horizontal analysis simply relates to analysis of previous period's fiscal data/figures by taking recent previous year as baseline. This is simple comparative financial statement along with columns of variance/change in figures. Horizontal analysis clearly states the growth either positive or negative in figures reported. It provides more clear comparative analysis of financial figures. This analysis is significant assess exact variance in different line items reported in financial statements (Cucchiella, D’Adamo and Gastaldi, 2015).
Horizontal income-statement's analysis of company Heiniken's it has been evaluated that growth in sales in year2017 was highest of 5.27% which was around 2.66% in 2018. Corporation's gross-profits have been reduced in 2018 by around 2.08% while in 2017 it reflected maximal increase of 6.04%. Net profits has also been declined by 1.64% in 2018 from 2017. While 2017's profits raised by around25.42% after decrements of 18.60% in 2016. This declining growth rate in net profits points outs that company's efficiency to provide net-profits has been reduced over the period.
Statement of financial position:
Analyzing horizontal balance sheet of company shows that there was growth of 7.91% in company's shareholder's equity during 2018. Such percentage has been changed to 0.53% and -2.25% in year 2017 and 2016. Corporation's non-current liabilities or long term debts has been raised only by around 1.69% during 2018 while previously it has been raised by around 7.24% in 2017. Corporation's current liabilities decreased by around -0.08% in 2018 in which growth of 22.09% and 0.59% has been reported in year 2016 and 2017.
Balance of Cash/cash equivalents in company was increased by around 268.33% in 2016 that was shown decrements of 19.54% in year 2017, however in 2018 this figures grown by 18.88%. Balance of current assets was increased by 9.97%, 1.36% and 37.59% during period 2018, 2017 and 2016. Whereas non-current or fixed assets are only shown a growth of 0.31% in 2018, these growth in 2017 was around 5.14%. While in 2016 fixed assets balance was dropped by approx 1.94%.
In 2018, the revenues of the Farsons corporation improved by 7.95%, that enhanced by 3.53% and 7.59% in 2017 and 2018. The gross margin statistics of the company expanded by 8.82% in year 2018, although increase were 3.03% and 10% respectively in 2016 and 2017. Net earnings of the organization showed an increase of 16.67 percent in year 2018, that was 37.50 percent in year2016 and 9.09 percent in 2017.
Statement of financial Position:
According to Farsons figures reported, horizontal analysis shows that funds of company's shareholder decreased by 21.14 percent in 2018, while there was a 9percent and 12.84percent addition in 2016 and 2017. The cumulative non-current liabilities of the organization expanded by 11.67% in year 2018, by around 13.21% in year 2017 and by around 8.16% in year 2016. In 2018, the overall level of current liabilities expanded by 33.33%. Corporation's entire assets value dropped down by around 11.48% in 2018 but has been increased by 9.40 percent and 12.27 percent respectively in year 2017 and 2016. During 2018, non-current assets were dropped by around 16.11% that was expanded by 10.26 percent in 2016 and 15.50 percent in year2017. While in business current assets balance has been grown by 3.13 percent, 5.88 percent and 3.03 percent respectively in year 2016, 2017 and 2018.
Ratio analysis known as a standardized calculation-based comparison between various key financial statistics or data reported over one or more years in the company's annual financial statements. This is used mainly by managers and economists to analyze various areas/ components of business performance such as efficiency, liquidity, solvency and profitability (El Kasmioui and Ceulemans, 2012).
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This is a ratio of PAT to company's net sales. It shows remaining balance of profits after providing entire production costs, selling and administration costs, any financing costs and taxes. It is quite crucial measure to assess overall results of corporation and indicating the exact profitability situation (García, Martínez-Cutillas and Romero, 2012).
The above table shows that the net profit proportion of Farsons constantly risen from 10.11% to 14.49% between 2015 to 2018. While the profit margins of company Heiniken dropped in 2018 ( form 4.46 percent to 4.28 percent). The net-profit margins of the corporation in year2015,2016 and 2017 was around 4.67 percent, 3.75 percent and 4.46 percent. comparative evaluation shows that company Heiniken is more competent and capable than Farsons of generating profit. The net profit ratio of Heiniken also has been dropped significantly, indicating that the efficiency of the corporation to offer profits has been diminished.
GP ratio shows relationship among gross margin and net total product sales. It is a convenient tool for evaluating the company's operational efficiency. Through dividing gross profit figures through net revenue, the ratio is determined (Isberg and Pitta, 2013). Below table contains gross-profit margin(%) of both corporations, as shown:
Evaluation of the above presented table shows that the gross-margin of company Farsons was enhanced to 38.95 percent in year2017 with a slight decline. While the gross profit rate of Heiniken dropped from 53.77 percent in year 2017 to 51.29 percent in 2018, suggesting a drop in the efficiency of the group in providing return from key business activities. Overall contrast reveals even a fall in Heiniken's gross-profits are much more than Farson's, which pointed out that Heiniken's key business operations are more capable of generating profits.
It is applied by management and analysts to determine an organization's short-term liquidity position by using current assets and liabilities. In simple words, it represents the capacity of a corporation to produce sufficient cash to payout all of its liabilities once it is due. It is used worldwide as a means of measuring a company's total short-run credit worthiness. 2:1 is regarded as most appropriate current ratio (Palepu and Healy, 2013). Following are current ratio of selected organizations, as follows:
The table reveals that the current ratio of Farsons has fallen from 1.72 in year 2015 to 1.12 in year 2018. On other side, during same time-span, Heiniken's current ratios are 0.69, 0.78, 0.79, and 0.87. There is a downturn in both businesses in 2018, but liquidity status of Farsons is much more appropriate.
Return on Equity:
It is an efficiency ratio which indicates how effectively company is generating return on funds employed by shareholders and capital. In this relationship between ratio company's net-profits and shareholder's equity is evaluated to determine company's financial viability (Post and Byron, 2015). Here are the ratios companies during different, as follows:
The ROE ratio of company Farsons has fallen from 10.70 percent in 2017 to 8.19 percent in 2018. This proportion was 12.52 percent and 10.43 percent in 2015 and year 2016. The Heiniken's ROE was down from 14.77 percent in 2017 to 13.94 percent in 2018 on other hand. In year2015 and year2016, ROE were 14.87 percent and 11.67 percent. Collective comparison indicates that Heiniken company with around 13.94 percent of ROE is much more efficient in generating returns on employed business equity.
Evaluation of the Working Capital:
Working capital, also recognized as net-working capital or NWC, simply means a basic difference between both the overall current assets of company (including cash balances, different inventory balance of receivable accounts as well as other short-term assets) and current liabilities of business (including trade creditors and other current-liabilities). This serves as a measure of liquidity status of the company. Simply put, it is an amount or account that businesses use to run their day-to-day activities (Sheikhi, Ranjbar and Oraee, 2012). Working capital evaluation/assessment includes details of how the enterprise is running successfully and is capable of conducting business.
Corporation has stated current assets in balance sheet of 5914 million, 8137 million, 8248million and 9070million respectively in context of year 2015, 2016, 2017 and 2018. Whereas corporation's current liabilities reported are: 8516 million, 10397 million, 10458 million and 10450million in respective periods that are significantly more than value of current assets. Resulted form current assets and liabilities figures company's net-working capital are negative during all year. Although there is a diminution in negative figures of working capital during year 2015 to year 2018, such as in year2015, working capital was -2602 million that further reached to -1380 million in 2018, -2210 million in 2017 and -2260million in 2016.
(EUR in Million)
The current assets of the business were 32 million, 33 million, 34 million and 36 million respectively during 2015 to 2018, while the current liabilities were 18 million, 24 million, 24 million and 32 million over the same time-span. From such figures, company's working capital are 14 million, 9 million, 10 million and 4 million in year 2015,2016,2017 and 2018 respectively. Business has good working capital, but the working capital of the business has been growing.
It was founded from the analysis that Farsons is much more effective to finance its trade/business activities and to spend in potential business operations. Although sustaining positive WC for Heiniken is preferable as persistent negative WC indicates that the liquidity status of the organization is not nice or might go into insolvency (Vogel, 2014).
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The assertion of cash flow demonstrates how well company spends money (cash outflows) and through where a company receives the money (cash outflows). Cash-flow statement combines all cash in flows achieved by the firm through its continued trading activities and external sources of investment, and that all cash expenditures paid across a prescribed time-frame for the activities of the company (Williams and Dobelman, 2017). The following is the analysis of cash-flows as annexed to the appendix:
Corporation Heiniken has reported 3489million, 3718million, 3882million and 4388million of cash flows obtained through operating activities respectively, during year 2015, 2016, 2017 and 2018. Company's net out-flows though investment operations are 2064million, 2007million, 2965million and 2355million respectively in same periods. Whereas net outflows though different financing activities during year2015,2016,2017 and 2018 are 1173million, 672million, 966million and 967million respectively. Through combining all cash flows form these activities, company's net cash-flows are 2333million, 2049 million, 1852 million and 1759 million respectively during period 2018 to 2015. During entire period company has reported positive net-cash flow which reflects that corporation is financially stable and sound, also able to meet all its obligations and liabilities.
In 2015, 2016, 2017 and 2018, the corporation reported net-cash flows through its different operating activities of 16 million, 16 million, 13 million and 21 million respectively, indicating that the company operates efficiently.While net-cash outflows of the corporation via investment operations in year2015, 2016, 2017 and 2018 are 7million, 18million, 20million and 21million respectively. Net-Cash inflows/outflows are -4million, -2million, 4million and -1million respectively in year2015,2016, 2017 and 2018 from all its financing activities. The free net-cash flows of organization were receptively 9 million, -1 million, -6 million and 7 million over same period. This indicates that after year 2016, the organization strengthened its cash-flow and was able to finance its main operations.
Form above presented evaluation of cash-flows of companies it has been founded that Heiniken company is much more effective in maintaining cash-flows since during 4 years cash-flows of corporation are positive while Farsons's net cash-flows comprises negative figures in year 2017 and 2016.
It was stated from above various evaluations that company Heininken is more effective in producing capital returns but also has a gross margin higher than Farsons' ratio. However with a favorable and positive cash flow, the organization still struggled with unfavorable working capital. Whereas Farsons has more favorable net-profit margin with positive net-working capital. Corporation's current ratios throughout all year are also more acceptable as compared to Heininken. Company Farsons is trading at small scale as in comparison with Heininken, but financially looks more efficient.
From the study mentioned above, it was evaluated that term Financial Analysis is a broader and critical concept as its aid in evaluating a company's financial robustness and true financial efficiency. Which also concerns financial statements assessment, cash flows and review of ratios. All these provides concise view of the business's multiple financial factors.
Blum, P. and Dacorogna, M., 2014. DFA‐Dynamic Financial Analysis. Wiley StatsRef: Statistics Reference Online.
Bragg, S.M., 2012. Financial Analysis.: A Controller's Guide. John Wiley & Sons.
Cucchiella, F., D’Adamo, I. and Gastaldi, M., 2015. Financial analysis for investment and policy decisions in the renewable energy sector. Clean Technologies and Environmental Policy, 17(4), pp.887-904.
El Kasmioui, O. and Ceulemans, R., 2012. Financial analysis of the cultivation of poplar and willow for bioenergy. Biomass and bioenergy, 43, pp.52-64.
García, J.G., Martínez-Cutillas, A. and Romero, P., 2012. Financial analysis of wine grape production using regulated deficit irrigation and partial-root zone drying strategies. Irrigation Science, 30(3), pp.179-188.
Isberg, S. and Pitta, D., 2013. Using financial analysis to assess brand equity. Journal of Product & Brand Management, 22(1), pp.65-78.
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