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Introduction

Financial analysis relates to application of financial monetary information for detailed assessment of a corporation's performance in all terms and provide effective recommendations for improving performance. Financial analysis is a method by which organization's expenditures and other monetary transactions are evaluated to assess their relevancy and appropriateness. Financial analysis is usually employed to determine whether an enterprise is effectively operating, solvent, having favourable liquidity position, or competitive to justify any investment in capital (Williams and Dobelman, 2017). This study involves critical evaluation of fiscal performance and financial condition of organisation Farsons and Heiniken. Both companies are leading beer and soft drink manufacturing companies. Study also contains comparative analysis of working capital and cash flows of respective companies.

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Overview of Companies

Farsons: Simonds Farsons Cisk plc or Farsons group is situated in Mediterranean, Malta. Company is engaged in production, brewing, sales and distribution of premium quality beers and other beverages. Company also selling wholesale as well as retail items of beverages and foods including spirits, wines and other related products. With wider range of food and beverage product items, company is leading brand in industry. Company's famous beers and beverage brands are Blue Label Ale, Kinnie range of soft drinks, Hopleaf Pale Ale, San Michel table water, Cisk Lager etc. Company is first non-banking and private sector company which is listed on Malta Stock Exchange, where corporation's shares are recognised as SFC for trading purpose.

Heiniken: It is a Dutch company and leading producer and seller of superior quality beer and cider. Company has approx above 300 global, local and speciality ciders and beers. Comapny has globally diversified, skilled and entrepreneurial team of approximately more-than 85000 operate breweries, workers and employees. Company is currently operating in approx 70 nation and coving a major part in global market. Company has large history in production of beer and well known for innovation in industry. Value creation is main agenda of company which is strength of company and core of success in industry.

Evaluation of the financial performance and financial position of Farsons and Heiniken

Vertical analysis: Vertical analysis refers to financial statement's proportional evaluation, in which each presented item on company's financial statement is described as a (%)proportion of another key item (Palepu and Healy, 2013). It simply means that each presented item in Income Statement is recognized as specific percentage of aggregate gross sales/revenue, whereas each item of balance sheet is presented as specific percentage of value of aggregate assets. Following is vertical analysis of financial position of selected companies, as shown below:

Heiniken

Income Statement:

Form above vertical analysis of income statement of Heiniken Plc it has been analyzed that company's gross profits in proportion to sales has been declined in year 2018 to 51.29% after a continuous improvement during period year 2015 to 2017. While company's net profit proportion which was 4.67% in 2015 has been declined in year 2016 to 3.75% which further reached at 4.46% and 4.28% in year 2017 and 2018 respectively (Annual Report of Heiniken. 2019).

Statement of financial position:

Balance sheet's vertical analysis of company shows that company's non current assets are 84.32%, 79.31%, 79.90% and 78.38% of total assets in year 2015,2016,2017 and 2018 respectively, indicating a decline during respective period. While company's cash proportion in total assets increased in year 2018 i.e. 6.92% while in previous years it was 2.23% in year 2015, 7.72% in year 2016 and 5.95% in year 2017.  Company's current assets are 15.68%, 20.69%, 20.10% and 21.62% of total assets of company during the year 2015,2016,2017 and 2018 respectively.

Company's shareholder's funds are 17.06% of total assets in year 2018 which was 17.90%, 16.78% and 16.16% during year 2015,2016 and 2017 respectively. Company's current liabilities proportion has been decreased from 26.44% to 24.91% during 2016 to 2018. Also percentage proportion of non-current liabilities decreased from 59.52% to 58.03% during the period 2015 to 2018.

Farsons

Income Statement:

As per vertical analysis of Farsons's income statement it has been evaluated that company 's gross profit in proportion of aggregate sales was 37.97% in year 2015 which has been increased to 38.82% in year 2016 and further it has been reached to 38.64% and 38.95% in year 2017 and 2018 respectively. While company's net income is 14.74% of total sales which was 10.13%, 12.94% and 13.64% in year 2015,2016 and 2017 respectively. Which shows that company net income generation capacity has been increased.

Statement of Financial Position:

Analysis of balance sheet of company Farsons shows that company's shareholder's equity was 67.11% of total assets in year 2015 which was further moved to 66.87%, 67.21% and 59.88% in year 2016, 2017 and 2018 respectively. While total value of liabilities is 20.37% in year 2018 which was 32.79%, 32.52% and 32.89% during year 2015, 2016 and 2017 respectively (Annual Report of Farsons. 2019).

Company's non-current assets has been declined to 77.16% in 2018 of total assets which was 81.42% in 2017, 79.14% in 2016 and 78.52% in year 2015. While company's total current asset proportion has been increased from 18.58% to 22.22% which was 21.48% and 20.25% in year 2015 and 2016 respectively.

Horizontal Analysis:

Horizontal analysis consists of analyzing past financial data over a number of monitoring periods or ratios extracted out of such information. It's utilized to see what other figures for bracketing times are excessively high or low relative to the data, which can then cause a detailed examination of the cause for gap. It could also be applied to project into the coming years amounts of separate line items (Vogel, 2014). This evaluation is an easy confederation of data sorted by time-span, but the figures in each subsequent period could also be calculated as percentage of base year proportion, with baseline amount specified as 100%. A typical issue with this analysis is that, because of ongoing adjustments in figures of accounts, the distribution of data in financial statements can changed over time, such that sales, expenditures, assets or obligations that vary between various accounts and thus tend to trigger variances while comparing outstanding balance from period-to-period. Following is horizontal analysis of respective companies, as follows:

Heiniken

Income Statement:

Horizontal analysis of Heiniken's income statement exhibits that variance increase in sales during  2017 is maximum i.e. 5.27% which is 2.66% in year 2018. Company's gross profit has been decreased in year 2018 by 2.08% while in year 2017 it shown maximum increment of  6.04%. While net profits of company has been decreased by 1.64% in year 2018 as compare to 2017. In 2017 profit of company increased by 25.42% after a decrease of 18.60% in year 2016. A decline in net profit indicates towards adverse profitability conditions.

Statement of financial position:

Analysis of of financial statement of Heiniken revels that there has been increment of 7.91% has been reported by company in shareholder's funds in year 2018. While such percentage change in year 2016 and 2017 was -2.25% and 0.53% respectively. Company's non-current liabilities balance has been increased only by 1.69% in year 2018 which was previously increased by 7.24% in year 2017. Current liabilities has been declined by -0.08% in year 2018 which was increased by 22.09% and 0.59% in year 2016 and 2017.

Cash funds of company increased by 268.33% in year 2016 which was subsequently decreased by 19.54%, however in year 2018 these was an increase of 18.88% has been reported.  Current assets was increased by 37.59%, 1.36% and 9.97% in year 2016, 2017 and 2018 respectively. While company's non-current assets are just increased by 0.31% in year 2018, such increase in year 2017 was 5.14%. In year 2016 non-current assets was decreased by 1.94%.

Farsons

Income Statement:

Farsons company's revenue has been increased by 7.95% in year 2018 which was increased by 3.53% and 7.59% in year 2017 and 2018. Company's gross profit figures increased by 8.82% in year 2018 while this increment in year 2016 and 2017 was 10% and 3.03% respectively. Company's net profits has shown increment of 16.67% in year 2018 which was 37.50% and 9.09% in year 2016 and 2017.

Statement of financial Position:

As per reported figures of Farsons through horizontal analysis it has been observed that company's shareholder's funds has been declined by 21.14% in year 2018 while in year 2016 and 2017 there was an increase of 9% and 12.84%. Corporation's total non-current liabilities are increased by 11.67% in year 2018, 13.21% in year 2017 and 8.16% in year 2016. Aggregate current liabilities level increased by 33.33% in year 2018. In year 2017 there was no change in year 2017. Company's total assets value declined by 11.48% in year 2018 but increased in 2017 and 2016 by 12.27% and 9.40% respectively. In year 2018, non-current assets are decreased by 16.11% which was previously increased by 15.50% in 2017 and 10.26% in year 2016. While corporation's current assets has been increased by 5.88%, 3.03% and 3.13% in year 2018, 2017 and 2016 respectively.

Ratio Analysis:

Ratio analysis recognized as a systematic formula based comparison among different key  financial figures or information stated in company's financial statements for one or more year. This is primarily applied by management and analysts to assess different aspects/elements of company's performance like profitability, solvency and liquidity (Sheikhi, Ranjbar and Oraee, 2012).

Net-profit Ratio: This ratio simply shows proportion between net income earned by company after providing all it's expenses and company's net aggregate revenue. It present company's capabilities to provide net earnings for shareholders (Bragg, 2012). Following table shows net profit ratio of both company:

 

Farsons

Heiniken

 

2015

2016

2017

2018

2015

2016

2017

2018

Net Margin

10.11%

13.22%

13.77%

14.49%

4.67%

3.75%

4.46%

4.28%

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.

Gross Profit: This ratio is an indicator of company's operating effectiveness as in this ratio gross profit is used. Gross profit is income of company after deducting all direct expenses related to company's core operations (El Kasmioui and Ceulemans, 2012). Following is table containing gross profit margin of respective corporations, as follows:

 

Farsons

Heiniken

 

2015

2016

2017

2018

2015

2016

2017

2018

Gross Margin

37.97%

38.82%

38.64%

38.95%

52.75

53.39

53.77

51.29

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. Whereas Heiniken gross-profit ratio has been decreased 53.77% in 2017 to 51.29% in year 2018 indicating that company's effectiveness to provide return form core business operations has been declined. Overall comparison exhibit that even a decline in gross profitability ratio Heiniken's ratio is more than Farson' which points out that Heiniken is more able to generate income through its core business activities.

Current Ratio: The main aim of this ratio is to present corporation's current liquidity position. It simply measured by proportion between current assets and total current liabilities. It show how efficient company is to pay its all current liabilities applying current assets (Blum and Dacorogna, 2014). Current ratio 2:1 is most acceptable ratio below this criteria shows that company is financially not sound. Here below table contains both companies current ratio, as follows:

 

Farsons

Heiniken

 

2015

2016

2017

2018

2015

2016

2017

2018

Current Ratio

1.72

1.39

1.39

1.12

0.69

0.78

0.79

0.87

Both companies have current ratio below 2:1 but Farsons company's ratio is more appropriate as compare to other company. Table shows that Farsons current ratio has been declined from 1.72 to 1.12 during 2015 to 2018. On other hand, Heiniken's current ratio during same period are 0.69, 0.78, 0.79 and 0.87. In both companies there is decline in year 2018 but Farsons liquidity position in more acceptable.

Return on Equity: The return on equity (ROE) in finance term is a measurement of a business ' efficiency relative to debt, also recognized as net assets or assets minus liabilities. ROE is indicator of how effectively investments are used by a corporation to achieve growth in income (Post and Byron, 2015). Following table presents ROE of both chosen companies, as follows:

 

Farsons

Heiniken

2015

2016

2017

2018

2015

2016

2017

2018

Return on Equity

12.52%

10.43%

10.70%

8.19%

14.87%

11.67%

14.77%

13.94%

Farsons ratio of ROE has been declined from 10.70% in year 2017 to 8.19% in year 2018. During 2015 and 2016 this ratio was 12.52% and 10.43%. On another side Heiniken's ROE has been decreased 14.77% in 2017 to 13.94% in year 2018. During 2015 and 2016, ROE was 14.87% and 11.67%. Aggregate comparative analysis shows that Heiniken with 13.94% ROE is more efficient to generate return of employed equity in business.

Evaluation of the Working Capital

Working capital, also termed as net-working capital or NWC implies to simple difference between corporation's aggregate current assets (which includes cash balance, accounts receivable different inventories balance and other short term liquid investment) and corporation's current liabilities (which includes balance of accounts payable and other short-term obligation). It act as indicator of corporation's liquidity position. In simple word it is a sum or fund which is used by companies to operate their day-to-day operations. Evaluation of working capital provides details about effectively company is operating and able to operate business.

 

Farsons

Heiniken

(EUR in Million)

2015

2016

2017

2018

2015

2016

2017

2018

Current Assets

32

33

34

36

5914

8137

8248

9070

Current Liabilties

18

24

24

32

8516

10397

10458

10450

Working Capital

14

9

10

4

-2602

-2260

-2210

-1380

Heiniken: Company has reported total current assets of 5914, 8137, 8248 and 9070 million in year 2015,2016,207 and 2018 respectively. While company's current liabilities are 8516, 10397, 10458 and 10450 during same period which is more than company's current assets' figures. Due to which company's working capital is negative during all four years. However there is decline in negative working capital form 2015 to 2018. As in 2015 WC was -2602 in year 2005 which further goes to -2260 in year 2016, -2210 in 2017 and -1380 in 2018.

Farsons: Company's current assets during 2015 to 2018 was 32, 33, 34 and 36 respectively whereas current liabilities during same period was 18, 24, 24 and 32. From these figures of current assets and current liabilities company's assessed working capital are 14, 9, 10 and 4 million in year 2015,2016,2017 and 2018 respectively. Company has positive working capital however company's working capital has been decreased.

From evaluation its has been founded that company Farsons is more efficient to company fund its business operations and in making investment in future business activities. While for Heiniken it is advisable to maintain positive WC as continuous negative WC shows that company's liquidity position in not good or may go into liquidation.

Evaluation of the Cash Flow

The cash flow statement indicates how well a business spends money (cash funds outflows) and where a business collects its money (cash outflows). Cash-flow statement incorporates all cash in flows attained by corporation via its on-going trading operations and outside sources of investing, and all cash out-lays paid for business organization's activities over a specified time-frame (García, Martínez-Cutillas and Romero, 2012). Following is evaluation of cash-flows as attached in appendix, of selected companies, as follows:

Heiniken: Company Heiniken's cash-flows from operational activities during year 2015,2016,2017 and 2018 are 3489 million, 3718 million, 3882 million and 4388 million respectively. Comapny  out flows form investing activities are 2064 million, 2,007 million, 2965 million and 2355 million during same period respectively. While outflows form financing activities are 1,173 million, 672 million, 966 million and 967 million in year 2015,2016,2017 and 2018 respectively. Overall free cash-flows of company are 1,759 million, 1,852 million, 2,049 million and 2,333 during period 2015 to 2018 respectively. During all four years company has positive net cash flow which shows that company is financially sound and can meet its all debts.

Farsons: 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 oversame period. This indicates that after year 2016, the organization strengthened its cash-flow and was able to finance its main operations.

Form above evaluation it has been analyzed that  Company Heiniken is more efficient to maintain cash-flows as in all 4 years company's cash-flows are positive whereas Farsons's free cash-flows contains negative figure in year 2016 and 2017.

Overall analysis

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. On other side Farsons is proving more net-profit margin and has reported positive working capital. Company's current ratio is also more acceptable as in comparison with Heininken.  Farsons is operating at smaller level as compared to Heininken, but financially seems more sound.

Conclusion

From above discussed study it has been analyzed that Financial analysis is a wider and crucial term as its help to assess the financial soundness and actual fiscal performance of a business enterprise. It mainly covers evaluation of financial statements, cash-flows and ratio analysis. These all provides a clear view about different financial aspects of company.

References

  • Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific Book Chapters, pp.109-169.
  • Palepu, K.G. and Healy, P.M., 2013. Business analysis and valuation: Using financial statements, text and cases.
  • Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
  • Sheikhi, A., Ranjbar, A.M. and Oraee, H., 2012. Financial analysis and optimal size and operation for a multicarrier energy system. Energy and buildings, 48, pp.71-78.
  • Bragg, S.M., 2012. Financial Analysis.: A Controller's Guide. John Wiley & Sons.
  • 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.
  • Blum, P. and Dacorogna, M., 2014. DFA‐Dynamic Financial Analysis. Wiley StatsRef: Statistics Reference Online.
  • Post, C. and Byron, K., 2015. Women on boards and firm financial performance: A meta-analysis. Academy of Management Journal, 58(5), pp.1546-1571.
  • 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.
  • 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.

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