Table of Contents

Company’s Overview

Associated British Food, founded in 1935, is an international manufacturer of consumer goods Company whose headquarter is located in London, United Kingdom. It has a mission of aiming to achieve strong, sustainable leadership positions in the market with potentially profitable growth by delivering quality products and services that make part of the peoples’ lives. Its current chairman is Mr. Charles Sinclair. Chief executive officer is George Weston and finance director is John Bason. The company employs about 130,000 employees and operates in 50 different countries in Europe, Americas, Asia, Australia Continents as well as parts Southern Africa (ABF Annual Report 2015).

The company operates different segments which include; retail, agriculture, grocery, sugar and ingredients. Through its retail segment, it sells clothes and accessories via Primark and Penneys retail stores. Through its grocery segment in produces bread and baked products, sweeteners, beverages, vegetable oils, meat products, herbs, spices as well as cereals. It also produces and distributes animal feeds through its agricultural segment. Yeast and yeast extracts, enzymes, lipids and other bakery recipes are produced through its ingredient segment. The sugar segment is involved in producing and marketing of sugar beet and well as sugar cane. The ordinary shares as at January 2017 is 5, 15/22p Shares, Selling at 2,654.00p and buying at 2,655.00p. The company’s main competitors include Nestle, Sudzucker and Tesco Companies (EUROMONITOR 2000, p. 342).

Table 1: Financial Details and Ratios

Ratio	Formula	2014	2015
Liquidity ratios
Current Ratio	Current Assets/Current Liabilities	3,626/2684 = 1.350	3849/2742 = 1.404
Cash ratio Get a brand-new guide on essay writing Everything you need to get A+ this semester! Get it By continuing, you agree to the Terms And conditions and Privacy policy The download will start within seconds. Good luck! Download	Cash in hand/bank + Short term marketable securities/current liabilities	(519/2684) = 0.1934	(702/2,742) = 0.2560
Acid test ratio	(Current Assets – stock)/Current Liabilities)	(3626-1631)/2684 = 0.7432	(3849-1827)/2742 = 0.7374
Activity ratios
Accounts Receivable Turnover	Sales / Trade Accounts Receivable	(12,943/ 1,293) = 10.01 times	(12,800/1,176) = 10.88 times
Debtor’s collection period	365/Accounts receivable turnover	(365/10.01) = 36.46 days	(365/10.88) = 33.55 days
Total asset turnover	Sales / Total Assets	(12,943/10,472) = 1.236	(12800/10,272) = 1.246
Fixed asset turnover	Sales / fixed assets	(12,943/ 6846) = 1.891	(12800/6423) = 1.993
Profitability ratios
Operating Profit Margin	Operating profit / Sales × 100	(1,080/12,943)× 100 = 8.344%	(947/12800)× 100 = 7.398%
Financial structure ratios
Debt ratio	Total debt/Total Assets	(3,719/10,472)*100 = 35.51%	(947/12800) × 100 = 7.398%
Investment ratios
Earnings per share	Earnings to ordinary shareholders/No. of ordinary shares	96.5 pence	67.3 pence
Dividend per share	Dividends paid/No. of ordinary shares	34 pence	35 pence

Interpretation

In analyzing the above ratios, this paper looked at liquidity, activity, profitability, financial structure and investment ratios. To begin with, the liquidity of the Associated British Foods Company is satisfactory. For instance in comparing the current ratio of this company which is 1.350 for 2014 and 1.404 for 2015 (Fridson et al. 2011, p. 76). Based on the ratios, the company was able to meet its current obligation using current assets. There has been an increase in the current ratio between the two periods due to a more than proportionate increase in current assets as compared to current liabilities. This increase may have resulted in the ability of the company to pay its creditors as assets were converted readily to cash (ABF Annual Report 2014).

Second, cash ratio shows the ability of a company to meet its current expenses using its most liquid assets. For the company in question, the ratio shows an increase from 0.1934 in 2014 to 0.2560 in 2015. The increase is attributed to an increase in cash in hand/bank in 2015. Based on the ratios, the company’s cash in hand/bank cannot sufficiently cover the current obligations in both years. Third is acid test ratio which shows the ability of the company to meet its current obligations using current assets except for inventory. The ratio shows a slight decrease from 0.7432 in 2014 to 0.7374 in 2015. The decrease is attributed to an increase in current liabilities in 2015 (Fridson et al. 2011, p. 113).

Fourth is account receivable turnover which shows the number of times credit buyers paid their dues within a year. The ratio shows a slight increase from 10.01 times in 2014 to 10.88 times in 2015 (Walsh 2008, p. 35). The increase is attributed to a slight decrease in trade account receivable in 2015. Base on the ratios, customers came to buy on credit a few number of times thus, payment for purchases took longer. Fifth is debtor’s collection period which shows the period given to the credit purchasers within which all dues must be paid. The period decreased from 36.46 days in 2014 to 33.55 days in 2015 (Walsh 2008, p. 35). The decrease is attributed to an increase in accounts receivable turnover in 2015. Based on the ratios, the debtor’s collection period was fairly long.

Sixth is total asset turnover which shows the level of revenue generated by utilizing the total assets. The ratio slightly increased from 1.236 in 2014 to 1.246 in 2015. The decreased is attributed to a slight decrease in the total assets in 2015 (Vance 2003, p. 121). Based on the ratios, ABF plc was able to generate more than £ 1.2 towards revenue by utilizing every £ 1 worth of its total assets. Therefore, the asset utilization level is fair. Seven is fixed asset turnover which shows the level of revenue generated by utilizing the fixed assets. The ratio is increased from 1.891 in 2014 to 1.993 in 2015 (Vance 2003, p. 121). The increase is attributed to a decrease in the level of fixed assets in 2015. Based on the ratios, ABF Plc could generate more than £ 1.89 towards revenue by utilizing £ 1 worth of the fixed assets which shows a fair utilization level of fixed assets.

Eighth is operating profit margin which shows the ability of the company to manage its operating costs such as salary expenses, electricity charges, among others. The ratio decreased from 8.344% in 2014 to 7.398% in 2015. The decrease is attributed to a decrease in operating profit in 2015. Based on the ratios, less than 10% of the sales were operating profit for both years. Therefore, the company’s ability to manage operating costs is insufficient. Ninth is debt ratio which shows the proportion of total assets financed by long-term debt and liabilities. The ratio shows a decrease from 35.51% in 2014 to 26.69% in 2015 (Leach 2010, p. 26). The decrease is attributed to a more than proportionate decrease in total debt as compared to total assets. Therefore, it can be inferred that the company’s total assets are less leveraged.

The tenth is Earnings Per Share (EPS) which shows the amount of profits attributed to every share. The ratio showed a decrease from 96.5 pence in 2014 to 67.3 pence in 2015. The decrease is attributed to a decrease in net profit in 2015 (See appendices). The EPS is low due to the low level of the company’s profitability. The eleventh is Dividend per Share (DPS) which shows the amount of cash dividend received by shareholders for every share held. The ratio increased from 34 pence in 2014 to 35 pence in 2015. The level of dividend is also low (Sarngadharan & Kumar 2011, p. 34).

Possible Improvement

Firstly, in order to improve liquidity ratio of Associated British Foods, the days in account receivables should be reduced in the coming financial years so that assets can be improved through frequent evaluation of account receivables. Also, more efforts should be made in a collection of account receivables as well as delinquent accounts so that the days are reduced. Again, it is important that the company conducts thorough cash forecasts so as to be in a position to put in place mechanisms for ensuring that both the long term and short term goals and objectives of ABF plc are met. Lastly, the company can consider paying short term debts if there is cash to do so or converting the short term debt to long term debt to enable better liquidity (Fridson et al. 2011, p. 83).

Second, ABF Plc should be focused on reducing the operating cost. When the operating cost is more, the operating profit decreases. The company’s operating costs were high in both years. This can be proven by the low operating profit margins (See Table 1). When the operating costs are managed, the profitability levels will certainly improve (Walsh 2008, p. 3).

The third area that needs improvement is sales or revenue. An intervention that Associated British Foods Company can use to improve its sales and thus raise its gross profit ratios is through providing incentives to ensure customers pay in time as well as winning new customers who can help in raising the sales volume. The revenue can be increased by increasing the utilization rate of assets. If assets are utilized more, the production rate increases (the amount of products produced), thus, the sales levels which in turn increases the revenue. The cost of sales should also be reduced through using point stores that will ensure that overhead costs are reduced thus raising the profit margin of the company.

Lastly, communicating with customers can motivate them to pay promptly, therefore, the management of Associated British Foods can engage the customers through various platforms so as to enable them to learn about various factors such as credit policies and credit references. This could also give them the idea to which customer is a problem customer and which one is a valuable customer and hence make plans and decision based on facts (Vance 2003, p. 3).

Conclusion

In conclusion, Associated British Foods has good financial ratios that reflect its financial health is good. For instance, the liquidity ratios are fairly strong as the company is able to meet its current liabilities using it’s the current assets. Second, the debt ratio is fair meaning that the assets are lightly leveraged. The company thus has less risk as far as solvency is concerned. However, some areas such as operating costs, asset utilization, and revenue generation need improvement.

Appendix 1: Balance Sheet in Million £s.

Non-Current Assets	2015	2014
Intangible Assets	1,367	1,467
Property, Plants and Equipment	4,488	4,665
Biological Assets	83	96
Investments in joint ventures	180	180
Investments in associates	32	32
Employee benefits assets	125	90
Deferred tax assets	125	152
Other receivables	23	164
Total non-current assets	6,423	6,846
Current Assets
Inventories	1,827	1,631
Biological assets	70	109
Trade and other receivables	1,176	1,293
Derivative assets	74	74
Cash and cash equivalents	702	519
Total current assets	3,849	3,626
Total assets	10,272	10,472
Current Liabilities
Loans and overdrafts	717	1,020
Trade and other payables	1,034	1,105
Derivative liabilities	8	11
Income tax
Provisions	55	72
Total current liabilities	524	783
Non-current Liabilities
Loans	577	607
Provisions	28	29
Deferred tax liabilities	233	266
Employee benefits liabilities	141	133
Total non-current liabilities	979	1,035
Total liabilities	3,721	3,719
Net assets	6,551	6,753
Equity
Issued capital	45	45
Other reserves	175	175
Translation reserve	125	238
Hedging reserve	11	29
Retained earnings	6,252	5,950
Total equity attributable to equity shareholders	6,336	6,437
Non-controlling interests	215	316
Total equity	6,551	6,753

Source: ABF Report 2015

Appendix 2: Income Statement

	2015	2014
Revenue	12,800	12,943
Operating costs before exceptional item	(11,811)	(11,865)
Exceptional item	98	–
Share of profit after tax from joint ventures and associates	48	13
Profits less losses on disposal of non-current assets	8	11
Operating profit	947	1,080
Adjusted operating profit	1,092	1,163
Profits less losses on disposal of non-current assets	8	11
Amortization of non-operating intangibles	55	72
Exceptional item	4	+5
Profits less losses on sale and closure of businesses	98	–
Profit before interest	775	1,078
Finance expense	61	73
Profit before taxation	717	1,020
Adjusted profit before taxation	1,034	1,105
Profits less losses on disposal of non-current assets	8	11
Amortisation of non-operating intangibles	55	72
Profit for the period	524	783

Cash Flow from operating activities	2015	2014
Profit before taxation	717	1,020
Profits less losses on disposal of non-current assets	172	2
Profits less losses on sale and closure of businesses	83	96
Finance income	8	15
Finance expense	61	73
Share of profit after tax from joint ventures and associates	48	13
Amortisation	81	94
Depreciation	401	402
Exceptional item	98	–
Net change in the fair value of biological assets	4	21
Share-based payment expense	11	15
Pension costs less contributions	6	7
Increase in inventories	310	119
Decrease in receivables	10	19
Increase in payables	234	200
Purchases less sales of current biological assets	2	3
(Decrease)/increase in provisions	28	13
Cash generated from operations	1,396	1,685
Income taxes paid	(230)	(246)
Net cash from operating activities	1,166	1,439
Cash flows from investing activities
Dividends received from joint ventures and associates	50	17
Purchase of property, plant and equipment	(582)	(676)
Purchase of intangibles	32	31
Purchase of non-current biological assets	1	–
Sale of property, plant and equipment	72	17
Purchase of subsidiaries, joint ventures and associates	52	8
Sale of subsidiaries, joint ventures and associates	5	15
Loans to joint ventures	7	15
Interest received	7	10
Net cash from investing activities	(539)	(672)
Cash flow from financing activities
Dividends paid to non-controlling interests	16	21
Dividends paid to equity shareholders	(271)	(256)
Decrease in short-term loans	(115)	(158)
Increase/(decrease) in long-term loans	15	10
Sale of shares in subsidiary undertakings to non-controlling interests	11	1
Movements from changes in own shares held	–	(59)
Net cash from financing activities	(440)	(580)
Net increase in cash and cash equivalents	187	187
Cash and cash equivalents at the beginning of the period	399	243
Cash and cash equivalents at the end of the period	585	399