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Ratio Analysis
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Table of Contents
Introduction:....................................................................................................................................2
Ratio Analysis:.................................................................................................................................2
Liquidity Ratio.............................................................................................................................2
1.

Quick Ratio....................................................................................................................2

2.

Cash Ratio.....................................................................................................................3

3.

Net Working Capital to Total Assets.............................................................................3

Profitability Ratio:.......................................................................................................................3
1.

Return on Asset:............................................................................................................4

2.

Return on Equity:..........................................................................................................4

Efficiency Ratio:..........................................................................................................................5
1.

Fixed Asset Turnover:...................................................................................................5

2.

NWC Turnover:.............................................................................................................6

Gearing Ratio:..............................................................................................................................7
A Report to Shareholder:.................................................................................................................8
Conclusion:....................................................................................................................................13
Reference.......................................................................................................................................13

Introduction:
This report consists of ratio analysis and a brief for shareholders how they need to analysis the
financial information. Before investing in the share a stake holder must go through some basic
ratio analysis to determine investing decisions. In this report a comparison is done among four
years annual reports of DGE DIAGEO PLC. What is their fundamental financial condition and
how shareholders are reacting with it is also discussed in this report. How they are using their
networking capitals effectively and efficiently in the business and generating profits.

Ratio Analysis:
Ratio analysis is the formula of understanding the relation of different items in an organization,
how they are dependent on each other and how they react with the slightest change of each item.

Liquidity Ratio
The ability of a company to pay its short-term debts, payables is sorted out by liquidity
ratio(Bodie and Merton, 2000).
1. Quick Ratio
Current
2014
0.67

2013
0.78

AssetInventory
Liabilities
2012
0.69

2011
0.75

Quick ratio refers that DGE DIAGEO PLC has 0.67 cent valued cash and cash equivalent asset
(according to 2014 financial statement) to meet each dollar of liability. The higher the quick ratio
the better the condition of a company(Brigham and Houston, 2004). As the inventory is not
quickly cash convertible it is deducted from the current assets. Here a lot of variation is seen of
this companys quick ratio. 2013 quick ratio is the highest and 2014s is the lowest. The
percentage changes from the year 2011 to 2014 are 8.7%, 11.54% and 16.42%. The noticing
thing is the percentage has been increasing about 4% every year which is very constant and
significant. In 2012 the ratio has decreased to 8.7%; next year it had increased to 11.54% and
lastly it has again decreased to 16.42% from previous year.

2. Cash Ratio
Cash
Current Liabilities
2014
0.13

2013
0.32

2012
0.22

2011
0.32

Cash ratio is measuring the ability of a companys repayment of liabilities only in cash(Hallman
and Rosenbloom, 2003). Here cash base is the exact amount after meeting all the expenses and
reception of cash in this company during every particular year. The above ration says that DGE
DIAGEO PLC has above cents in each year to repay 1 pound liability. In 2014 the cash ratio has
got its lowest value. This has happened due to low receivable turnover, more loan acceptance,
not so much increase of sales over the year which in case has affected the cash balance of this
premium company.
3. Net Working Capital to Total Assets
NWC
Total Assets

2014
11%

2013
12%

2012
11%

2011
11%

The net working capital to total assets turnover is also a significant liquidity ratio analysis. This
refers the ability of meeting the obligation through working capitals. The more the ratio the
better the situation of company. The above analysis shows that the ration has been very
consistent from the year 2011 to 2014. This is average sign for the investors that the ratio is not
so low and not so high but moderate. Lenders, suppliers can have faith on it to sanction loan and
get paid.

Profitability Ratio:
Profitability ratio helps to understand a companys capability to generate earnings against other
expenses, assets and equity etc (Mellan and Christie, 2001).
1. Return on Asset:
Net Income
Total Assets
2014
9.5%

2013
10%

2012
9.2%

2011
10%

ROA gives the idea about how management is effectively and efficiently manages its resources
to generate income in the business (Palmer, 2009). The above result is quiet significant and
consistent in nature. This also indicates that the investment of asset in the business is limited as
well as production and profit generation. No major fluctuation has been noticed in these four
years return on asset ratio.
2. Return on Equity:
Net Income
Total Equtiy
2014
29%

2013
31%

2012
30%

2011
34%

Return on equity discloses the per cent of income which returns to the equity of the owners. This
also shows the profitability ratio of the entire amount injected by investors in the company
(Ramachandran and Kakani, 2005). The net income here used is not the amount after dividend
payment but it gives a basic satisfactionary result to the investors about the payback. The
percentage quite fluctuates years to years.

Source: DGE PLC Annual Report 2012, 2011

Efficiency Ratio:
Efficiency ratio refers to the idea about how well a company uses its assets and liability to meet
up internal affairs (Ross, Westerfield and Jordan, 2000).
1. Fixed Asset Turnover:
Net
Sales
Assets
2014
4.07 times

2013
4.46 times

2012
4.91 times

2011
5.18 times

Fixed asset turnover shows how much a company generates income from the investment of fixed
asset in the business (Livingstone and Grossman, 2002). The scenario of the above analysis is

quite decreasing. As it is being seen that the turnover times have been changing from year to year
and 2014 is the lowest from the above 4 years ratio analysis. The per cent changes are 5.5%,
10.08% and 9.58% respectively. As this is a premium drink producer company the investment of
fixed asset like property, plants to increase production plus sales is concerning thing for
shareholders.
2. NWC Turnover:
Sales
NWC
2014
5.34 times

2013
5.11 times

2012
5.91 times

2011
5.89 times

The working capital is used for purchasing raw materials and inventory in a
business which later turns into revenue after selling (Fernandez, 2002). The DGE
DIAGEO PLC Companys working capital turnover is quite impressive because it is maintaining
consistency. From the year 2011 to 2014 the ration is always 5 point something. No major
fluctuation has been noticed. This also refers the limited productivity in the market. They always
buy same quantity of raw materials for production and sell all of them which are the main
characteristic of a premium company.

Source: DGE PLC Annual Report 2014, 2013

Gearing Ratio:
Gearing ratio mainly used by financial institutions like banks, insurance company to understand
a companys repayment performances whether to lend, insurance them or not.
Earnings before interest taxes
Interest Payable
2014
2.85%

2013
3.97%

2012
5.85%

2011
4.65%

The higher the gearing ratio the more vulnerable a company is (Fields, 2002). The above ratio
analysis shows that DGE DIAGEO PLC has decreasing gearing ratio. It has to pay its debt even
after incurring loss in the business but still it hasnt which is a good news for the shareholders.
The per cent changes are 20.65%, 47.37% and 39.30%. From the year 2011 to 2014 the ratio has

been decreasing about fluctuating percentage. This means the company has been lessening its
tendency to take loan and operating its business by own capital.

A Report to Shareholder:
Shareholders are the owners of a company. Their injected money is circulated for years to
generate profits. For this reason they are needed to be satisfied by providing dividend or a certain
per cent age from the income. DGE DIAGEO PLC is a global premium beverage alcohol brand
and has been providing drinks in the market for many years. It has markets around hundred and
eighty countries in the world (Diageo.com, 2015).
It is a listed company both in London and New York stock market (Diageo.com, 2015).
Basically shareholders take decision on the basis of profit earnings and earnings per share
reported in the annual reports. Average shareholders do this before investment and get pranked.
The shareholders can get knowledge about the four drivers of a company and these are
Corporate objectives
Value addition
Management decisions
DGE DIAGEO PLC is a renowned global beverage alcohol brand in the world and its objective
is to serve alcohol lovers by providing healthy drinks (Diageo.com, 2015). The corporate
objective is adding value to the shareholders and providing them dividends as promised at the
time of investment. This company has been acting like a faithful one in this case. The dividend
payemt scenario is shown in below:

Source: (Hargreaves Lansdown, 2015)


In this picture shareholder can see how much dividend company is paying on per share. The
payment increasing scenario is quite impressive and to be stake holders are allowed to be lured to
inject their money. DGE has been performing outstandingly in the capital market which also

indicates its profitability. The more the profit the more dividend pay-out ratio. There the return
on equity ratio has also brought out a significant picture to the shareholders. This profit is after
tax and preferred stock dividends payment. Because preferred stock holders are the first priority
of every company (Bush, 2010). This is very well scenario that DGE meets all types of
shareholders dividends in satisfactionery way and the dividend ratio is growing every year. The
shareholders can invest more in the company and help to generate more profit.
Liquidity ratio also expresses that competency of DGE to meet up the payables. Shareholders
also need to assess this ability. The ratio analysis shows that DGE has enough cash, cash
equivalents and networking capital to repay the liabilities. During conducting business deals in
credit needs to happen. Especially raw materials suppliers are the main payables here. Company
reserves money so that it comes in help during emergency help. It fixes some periods to meet the
payables in particular instalments. This liquidity ratio has clarified this very clearly that DGE has
three types of resources to meet this need. Both three types of resources are performing very well
within their own places (Hansen and Palmer, 1997).
Networking capital is a very crucial factor in conducting business. It measure how much
resources left after meeting the all the current liabilities. The more the net working capital the
better the performance. DGE has quiet significant amount of net working capital.
Year
2014
2013
2012
2011

NWC((million))
2618
2991
2469
2246

The above information included in the table shows such an complimentary performance of DGE
because it has gained enough networking capital to conduct its business very well. The company
has surplus in case of current assets which means it can meet all the current liabilities easily. Also
the ratio of NWC turnover interprets that it purchases raw materials for making alcohol
beverages and makes them profit about 5/6 times per year which is very outstanding. This
turnover times could increase more but as it is a premium brand, it produces limited product
every year with limited increasing demands. According to the companies size the NWC amount
is not that much high because high NWC would have negative effect like idle money will
increase which is not good for companys operation. In business this is a rule the more money
will circulate, the more company will be able to expand business profitability.

Source: DGE PLC Annual Report 2014, 2013


On the management of networking capital also pictured the management departments efficiency.
Managers are the one who takes important decisions and prepares financial statements. The
above table shows how managers controlling current liabilities so that companys resources does
not fall short and also generates profits by increasing productions. Shareholder can have faith on
the company about the investment.
As return on equity has shown how much the company has been successful in satisfying its
shareholders, another profitability ratios return on assets has also significance on shareholders
decision. How DGE Company has been using its assets for income generation, return on asset
ratio has been ensuring this. It also mentioned before that the performance is very consistent in
these four years. Shareholders can take breathe without tension after investment.

Source: DGE PLC Annual Report 2012, 2011


After net working capital there also comes fixed asset turnover ratio. This fixed asset refers to the
property, plan, machines, equipment which are used to produce products. The ratio reveals the
investment efficiency and turning them into productivity and selling all the products to generate
incomes (Horrigan, 2008). The turnover times are quiet impressive like it turns fixed asset
investment into profit for 5/6 times per year. The perfect use of fixed asset comes from DGE, this
idea will peep into every shareholders mind.
Year

2014
2013
2012

Fixed Asset
(million)
3433
3425
2972

Selling((million))

Profit((million))

13980
15276
14594

2181
2550
2072

2011

2552

13232

2017

This above table shows the comparison of fixed assets and selling plus profit generation. Though
the amount gives fluctuationery image, the quality and performance havent been compromised;
the above dividend diagram proves this. This also ensures the going concern principle of
company which refers that a company will execute its performance for an enforceable time. This
enforceable time will be possible when it will earn profit from the market otherwise one day it
will have to shut down business. DGE has been performing this principle very well by generating
profit every year (Kimmel, Weygandt and Kieso, 2007). Though the current years profit has
decreased from previous year due to some unavoidable inconveniences, it is not a big factor right
now. Shareholders can inject their hard money with safe planning.
So the fixed asset turnover and networking capital turnover ratio clearly ensures efficiency
regarding management, financing of DGE renowned beverage alcohol brand.
Gearing ratio is a very commonly used ratio tool of every shareholder. To measure the gear ratio
earnings before interest and taxation and interest payable are taken as the base. Earnings before
interest and taxation show the real earning from operation of every company and so does DGE
PLC. Interest payable is also vital factor as it includes loan and borrowings. This ratio refers the
capital structure very well and so it has gained much popularity among shareholders before
investment (Porter and Norton, 2008).
The essence of gearing ratio is if the result comes out low, this means common stockholder bag
packs more profit in their equity portion which is not good. Besides high gearing ratio refers that
the company divides its profit to the fixed dividends or interests.
All these discussions also ensure that company is operated by whether own invested capital or
loan. The more the loan, the more the money will go outside from the company and for the
shareholders it is not good news.
The above ratio analysis shows such good news for the DGE current shareholders as well as to
be shareholders because the gearing ratio is decreasing year to year. It indicates that DGE PLC
has been conducting its business by circulating its own shareholders invested money and
shareholders are getting satisfactionery benefits from the company. The dividend pay-out data
also indicates this (Steffy, Zearley and Strunk, 2006).
Year to year the per share dividend pay-out amount is increasing. Brand like DGE PLC is
earning strong goodwill among consumers due to their qualityful products as well as among the
shareholders due to high dividend pay-out.
This also indicates lower risk because DGE will not abandon its operations after paying all the
interest payables. It will have more than enough after meeting up the needs of shareholders.
So all these discussion are related to shareholders and showing them their scenario in the DGE
PLC company. The scenario is impressive regarding companys performance and concerns about
shareholders. This is the best investment for the existing plus potential shareholders of this

company. The capital structures, managements efficiency, responsibility all are remarkable like a
renowned branded company. Some important things have been pointed out which will help
shareholders to understand in short.

DGE has growing dividend pay-out ratio per share


The gearing ratio is very safe investment indicator
NWC amount is idleness indicator
Income generators are very efficient like fixed assets
Possess enough cash balance to meet payables
Profitability ratio is also complementary
Capital structure is tight and strong

DGE PLC has been demonstrating own performance like a self-competitor. Fighting with self
and trying to improve every year are also important things to notice. So all these analysis,
information, diagram, tables, figures ensures that this is the best performing company in the
capital market right now.

Conclusion:
Reading and analysing a financial statement of any company is very important for every
shareholder. Only profitability is not a main factor for determining investment decision. Other
factors like networking capital, assets, payables, and cash are also important. Understanding the
statements need to have some financial knowledge. This report has provided all those guide lines
for this regard. Ratio analysis is not absolute though it gives some insurance to shareholders. A
safety lines can be measured through these ratio analysis. This report is a sample guideline
though, it will give shareholders enough decision making platform as every ratio is scrutinised
with relevant information.

Reference
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