A public company Kerry Group has it’s headquarter in Ireland. The company is a food company and has its shares listed in London stock exchange. Started as a private company back in 1972 with merely three shareholders, the company has come across a long way to be a well-known public food company in the United Kingdom. With the objective of providing an in-depth discussion on the interim financial performance of the company for the period ending in 2016 this document has been prepared. Interim management report of the company issued on August 4, 2016 contains necessary financial information on the basis of which the financial analysis has been done here. In order to enhance the usefulness of the report additional information about company relating to its financial performance and other aspects have been collected from official website of the company.
Before getting into the analysis about the specific elements of financial statements of the company for the first half of 2016 let us have a table containing the brief highlights about the financial performance of the company in the period along with its performance in the corresponding period of previous year.
The above table would be extremely helpful in analysing the financial performance of the company for the H1 of 2016 as well as in evaluating how the company has done compared to its own performance in the corresponding period of previous year (Acharya & Ryan, 2016).
As per the interim report of the company, the gross revenue of Kerry has increased by 3.2% in H1 of 2016 with the company earning €3,037 million as gross revenue in the period. Hence, the increase in revenue is a positive indicator about the performance of the company in the first half of 2016 financial year. The diagram below shows the difference between the amount of gross revenue earned by the company in H1 2016 and H1 2015 respectively (Bryce, 2017).
The above diagram makes it clear that the company has earned significantly higher amount of revenue from its business operations in the first half (H1) of 2016 compared to the corresponding period of previous year.
Dissection of revenue of the group into its primary components:
Out of the total revenue of €3,037 million in H1 2016, €2,379 million is from Taste & Nutrition and the balance, i.e. €697 million is from consumer foods section of the group. The Taste & Nutrition has experienced an increase of 3.5% in the period and 2.3% increase in gross revenue has been experienced by the Consumer Foods section of the Group (Cheng, Ioannou & Serafeim, 2014).
The above pie chart shows the dissection of entire gross revenue of the Group into is two primary components, i.e. Taste & Nutrition and Consumer Foods.
Trading profit of the company in H1 of 2016 is €322 million is much more than the amount of trading profit for the corresponding period of 2015. In H1 of 2015 the company earned a trading of €300 million. Thus, the quantum of increase in trading profit in H1 2016 is quite significant. The following diagram shall reflect the difference between the trading profits between H1 2016 and H1 2015 (Drake, Quinn & Thornock, 2017).
As can be seen that the orange building representing the trading profit of Kerry earned in H1 2015 is significantly small comparatively the tall blue building representing the amount of trading profit earned by the company in H1 of 2016.
Dissection of trading profit of the Group between its two primary components:
The group has earned a total trading profit of €322 million in H1 2016. Out of the total trading profit of €322 million, €304 million is from the Taste & Nutrition whereas the balance of €18 million is from Consumer Foods section of the Group. The pie chart below depicts the dissection of trading profit between the two components of the Group better (Fazzini, 2018).
It is clear from the above that overwhelming portion of trading profit of the company is from Taste & Nutrition, i.e. 94% compared to 6% of trading profit from Consumer Foods.
Trading profit ratio:
Trading profit ratio is calculated by using the following formula:
Trading profit or respective period X 100 / Gross revenue of respective period.
For H1 2016:
322 million x 100 / 3,037 million = 10.60%
For H1 2015:
300 million x 100 / 3,028 million = 9.91%
In the above diagram two different plots have been pointed out in the chart to show the trading profit ratios of the company earned in H1 of 2016 and corresponding period of previous year. It is clear from the above diagram that compared to 9.91% of trading profit ratio for 2015 (H1 period) the trading profit ratio of 10.60% of H1 2016 is quite high (Filip, 2016).
Apart from the gross revenue and trading profit another important element which is often even more significant for assessing the performance of an organization is its ability generate free cash flows from business. The entire functioning of an organization on the day to day basis is primarily dependent on the liquidity position of the company. Free cash flows reflect the liquidity position of an organization to a significant extent (Grant, 2016).
In the first half of 2016, Kerry has able to earn a free cash flow of €379 million. This is an incredible improvement in the free cash flow generation ability of the company if the figure is compared with the corresponding free cash flow of the company from previous year. In H1 2015 the company generated merely €192 million as free cash flows from business. Thus, in H1 2016 the company has managed to almost double its free cash flows from business from the corresponding period of 2015 (Grimm & Blazovich, 2016).
Free cash flow as can be seen in the above diagram for the first half of 2016 is way higher than the corresponding period of 2015. Thus, it is clear that the ability of the company to generate free cash flows from business operations in 2016 has improved significantly from 2015. This is an important indicator in the improvement of the company’s financial position (Henry & Robinson, 2015).
The day to day business operations of an organization is to a large extent dependent on the working capital position of the organization. Thus, assessing the working capital position of Kerry would indicate how the position of net working capital as on the last date of H1 2016 period. A comparative analysis with the corresponding working capital position as on the same period of previous year would be helpful in determining whether the working capital position of the company has improved or deteriorated (Hill, 2017).
The extract taken from the interim financial management report of Kerry for H1 2016 period will show the net working capital position of the company over the last few years including the H1 periods of 2016 and 2015.
As can be seen in the above extract from the interim report of the company, the working capital position of the company in H1 2016 has deteriorated significantly compared to the working capital position of the company for the corresponding period of previous year. In H1 2016, the working capital of the company has decreased by €120 million from the net working capital of the company for the H1 of 2015. This is a significant finding especially considering the fact that the free cash flow of the company has increased in H1 2016 to €379 million compared to merely €192 million in H1 2015. Taking into consideration the above the reason for such decrease in net working capital of the company in H1 2016 must be evaluated (Hill, Jones & Schilling, 2014).
Net debt to EBITDA in H1 2016 stood at 1.7 compared to 1.6 of H1 2015. It is a clear indication improvement in net debt to earnings before tax and depreciation of the company in 2016.
EBITDA to net interest of the company in H1 2016 has deteriorated to 15.7 times compare to 19.4 times in the corresponding period of 2015. This indicates deterioration in the ability of the company to pay its interest from earnings. This is a significant concern for the management in the period of 2016 (Karadag, 2015).
Return on average capital employed (ROACE): In the first half of 2016 the return on capital employed of the company has deteriorated to 13.1% as compared to 14.1% of the corresponding period in 2015. Return on capital employed shows the ability of the company to earn return on the amount invested in the business as capital employed. The significant decrease in the return on capital employed is not very motivating for the existing shareholders as well as to the potential investors of the company (Kaur, Aggarwal & Gupta, 2017).
Return on Average Equity (ROAE): ROAE shows the rate of return earned by the company on the amount invested as the shareholders’ equity in the business. The higher the return on equity the better it is for the equity shareholders. Compared to 18.1% in H1 2015 the company has earned merely 16.8% as ROAE in the current period. The reduction in rate of return earned on the equity shareholders’ fund is a clear indication of deterioration in the performance of the company in the H1 2016 (Kraft, Vashishtha & Venkatachalam, 2017).
The net debt maturity profile of the company shown below in the image makes it clear that how the company is expected to increase its net debt in the future. This is a clear indication about the company’s expansion strategy in the future.
The weighted average number of years to maturity in H1 2016 is 7.0 years as compared to 6.1 years in H1 2015. Thus, the company is expected to use significantly higher amount of debt to finance its operations. This makes it clear that the company’s expansion strategy is primarily oriented with the debt capital (Lasserre, 2017).
It is important to ensure that the company maintains a strong solvency position in the future as the expected use of debt finance in the future is quite high. The company must ensure that it has proportionate amount of owners’ equity to maintain stable long term solvency position of the company in the future. Issuing additional shares to the public to raise fund is one of the option to increase owners’ capital in the business along with earning higher profits and keeping larger portion of profit as retained earnings in the business (Minnis & Sutherland, 2017).
The finance costs of the company is €39 million for the period of H1 2016. This is higher by €3 million due to acquisition financing. The strong cash generation of the company however, has offset the increase in finance costs.
Significant increase in net deficit in pension:
In H1 2016 the net deficit in pension has increased to €314 million. In the corresponding period of 2015 the net deficit in pension of the company was merely €253 million. Thus, the deficit in pension of the company has increased by €61 million. The reason for such increase in deficit is due to the decrease in discount rate as per the observation of the management (Nguyen, 2015).
One of the positive news for the business is that the deflationary trend in the raw materials is expected to continue even in the second half of 2016. As a result the operating costs will stay low to improve the operating margin of the company as it has in H1 2016 compared to H1 of 2015.
The sterling exchange rate is expected to have a significant negative impact of the business of the company subsequent to the Brexit. Since, the company has significant amount of business it is expected to have significant impact from the sterling exchange rate (Scarborough, 2016).
There have been unprecedented changes expected in the Food and Beverage industry in the country. It is important to be prepared for these expected changes in the future to stay ahead of the competition in the market. The following changes are expected in the industry:
The demand for local authentic food is expected to increase in every market in the coming days. The company must keep that in mind while developing an effective long term strategy for the business.
The consumers are now more interested to hear about the items in the menu which they want to eat rather than the items which they do not want to eat. Thus, it is expected that 60% of the consumers would discuss about the items of foods they are willing to eat as opposed to the items of foods they are not willing to buy (Sulaiman & Ahmad, 2015).
On line retail giant Amazon is looking to invade the traditional F&B supply chain in the United Kingdom. If the company manages to break the traditional path of F&B food supply chain then this will obviously influence the business of the company in the future. The company must be ready for the future with appropriate strategy to deal with the threat of Amazon as well as such other companies trying to enter the F&B supply market.
In order to deal with the increased competition in the market the company must take appropriate steps in the future. The company has the following advantage in the Food and Beverage industry as compared to any of its contemporaries and competitions in the market (Thomas, Van Greuning, Henry & Michael, 2016).
The company is the best in the United Kingdom when it comes to taste and nutrition. With more than 40 years’ experience in F&B industry the company has amassed a huge amount of goodwill in the market.
The company is well known for its use of natural ingredients in manufacturing different items of foods and beverages. The company has a huge goodwill in the market for its authentic food products. The company must use its goodwill to stay ahead of the competition in the future along with dealing the new competitors in the market.
The company has an integrated manufacturing infrastructure that has global technology and upgraded system. This gives the company huge advantage over its competitors in the market.
The company has invested highest amount of money on research and development initiatives in the F&B industry in the country. This has helped the company to make number of patent for different food items in the industry. With its continuous investment in R&D activities the company will be able to stay ahead of its competitors in the future (Sulaiman & Ahmad, 2015).
With continuous innovation and excellence the company is poised for further growth and development in the future. Also the alliance of the company with its customers gives the company huge advantages over its competitors to keep on growing its business in the future. The company has number of branded products and with significant amount of research activities the company is looking to expand its business even further in the future.
The company has a clear strategy to strongly conduct business in electronic medium by using its huge consumer base. Looking at the future of business, it is a great decision for the company to strengthen its e-commerce credentials by investing necessary funds in e-commerce business of the company.
The company has a huge business both domestically as well as internationally. However, there are lots of opportunity for the company to improve its domestic business as well as its business internationally. With its huge customer base, goodwill and e-commerce credentials the company has all the resources to go big at the international level.
Conclusion:
A clear picture has emerged from the above document about the financial performance of Kerry Group. The interim report for the H1 of 2016 clearly shows that the company has managed to achieve overall growth of business with increase of 3.5% increase in gross revenue in the period compared to the corresponding period of previous year. Similarly the trading profit of the company has also improved significantly. However, the deterioration in working capital and financial position of the company is quite surprising considering the overall improvement in free cash flows and the profitability of the company in H1 2016. From the above it is also clear that despite increased amount of competition in F&B industry, the company has all the resources to cope with the increased pressure from the competitors in the market in the future.
References:
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Bryce, H. J. (2017). Financial and strategic management for nonprofit organizations. Walter de Gruyter GmbH & Co KG.
Cheng, B., Ioannou, I., & Serafeim, G. (2014). Corporate social responsibility and access to finance. Strategic management journal, 35(1), 1-23.
Drake, M. S., Quinn, P. J., & Thornock, J. R. (2017). Who uses financial statements? a demographic analysis of financial statement downloads from edgar. Accounting Horizons, 31(3), 55-68.
Fazzini, M. (2018). Financial Statement Analysis. In Business Valuation (pp. 39-76). Palgrave Macmillan, Cham.
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Grant, R. M. (2016). Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.
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Kaur, M., Aggarwal, N., & Gupta, M. (2017). An Investigation into Returns from Financial Statement Analysis among High Book-to-Market Stocks. Indian Journal of Economics and Development, 13(2), 353-358.
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Sulaiman, O. I., & Ahmad, A. M. (2015). The Impact Of Reviewing Interim Financial Reports On The Investors Decisions In Kurdistan Region. International Journal of Scientific & Technology Research, 4(8), 221-225. Sulaiman, O. I., & Ahmad, A. M. (2015). The Impact Of Reviewing Interim Financial Reports On The Investors Decisions In Kurdistan Region. International Journal of Scientific & Technology Research, 4(8), 221-225.
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