4. Company’s operation
Second largest company in UK’s soft drink industry.
Current operations comprise Britvic GB, Britvic
Ireland, and Britvic France.
Britvic both manufactures its own brand of drinks
as well as signs bottling deals.
5. Strategy
Critical Success Factors
Differentiation (3 Brand water strategy)
Distinct consumer targeting
High growth segments
Differentiated brand positioning
Licensing / Franchising of Britvic brands
Enable other local companies to use its trademark and ingredients
Produce and sell Pepsi products in GB an Ireland.
Distribution Network
On-the-go distribution
Strong Customer Base
“Big 4” supermarket
6. Strategy
Critical Success Factors Analysis
Differentiation (3 Brand water strategy)
Distinct consumer targeting
High growth segments
Differentiated brand positioning
Licensing / Franchising of Britvic brands
Enable other local companies to use its trademark and ingredients
Produce and sell Pepsi products in GB an Ireland.
Distribution Network
On-the-go distribution
Strong Customer Base
“Big 4” supermarket
7. Strategy
Critical Success Factors Analysis
Differentiation (3 Brand water strategy)
Distinct consumer targeting
High growth segments
Differentiated brand positioning
Licensing / Franchising of Britvic brands
Enable other local companies to use its trademark and ingredients
Produce and sell Pepsi products in GB an Ireland.
Distribution Network
On-the-go distribution
Strong Customer Base
“Big 4” supermarket
8. Strategy
Critical Success Factors Analysis
Differentiation (3 Brand water strategy)
Distinct consumer targeting
High growth segments
Differentiated brand positioning
Licensing / Franchising of Britvic brands
Enable other local companies to use its trademark and ingredients
Produce and sell Pepsi products in GB an Ireland.
Distribution Network
On-the-go distribution
Strong Customer Base
“Big 4” supermarket
9. Strategy
Critical Success Factors Analysis
Differentiation (3 Brand water strategy)
Distinct consumer targeting
High growth segments
Differentiated brand positioning
Licensing / Franchising of Britvic brands
Enable other local companies to use its trademark and ingredients
Produce and sell Pepsi products in GB an Ireland.
Distribution Network
On-the-go distribution
Strong Customer Base
“Big 4” supermarket
11. Step 1: Key accounting policies
Revenue recognition:
Allows for sales related discounts and rebates
Intangible assets and goodwill:
Acquisition method
Goodwill is not amortized
Intangible assets: trademarks; franchises rights, customer lists
and software costs
12. Step 2: Degree of accounting flexibility
Post-retirement benefit:
Assumptions: factors such as discount rate, inflation, pension
plans, salary increase, expected return on scheme assets,
mortality and other demographic assumptions.
The numbers they allocated in the financial
statement did not seem outlandish or vary
greatly from year before
13. Step 3: Evaluation of accounting strategy
Comparing with Nichols (soft drink company)
Similarities: many aspects (revenue recognition)
Differences:
Reasons: Britvic has a lower operation capability
in paying off the debts from suppliers
14. Step 3 (cont.)
Significant change (voluntarily)
The average days of payment:
2008: 36 days; 2009: 49 days (driven by higher
trade payables)
16. Step 4: Quality of disclosure
Dis-aggregation--------The overall items are broken down as its segmental
reporting that is organized into five reportable units through its geographic
areas, which are GB stills- United Kingdom excluding Northern Ireland, GB Carbs-
United Kingdom excluding Northern Ireland, Ireland, International and France
Good relation with shareholders-------Company gives presentations covering
annual and interim results to analysts, investors and perspective investors.
Business reviews section in annual report discloses the details of company’s
financial performance, the risks it faces and plans for future.
17. Step 5: Potential red flag
Impairment in 2010 is 116.7 million while this figure is merely 4.2 million in the
previous year. Possible explanations has been disclosed in the company’s annual
report which states that Ireland business segment encountered a sustained
economic downturn which cause 89.6 million impairment losses.
18. Step 6: Accounting Distortion
“Exceptional items” -----which permitted by the accounting rules group many one-off
events that cause losses. So a company can produce two figures regarding earnings per
share (EPS); the basic EPS figure which includes these losses and an "adjusted" EPS which
doesn't
Britvic did this in its 2010 accounts; a statutory loss of 21.4p per share became an
adjusted profit of 39.8p when the exceptional losses were ignored.
20. Overview
Five categories of ratio: (FY 2008-2011, Britvic Vs. Nichols)
1. Profitability
2. Liquidity
3. Gearing/Leverage
4. Working capital management
5. Investment activities
21. Profitability
ROE is a comprehensive indicator of a firm’s performance. But it cannot be
used to assess Britvic’s performance, because it disinvested one of its
subsidiaries which leads to a huge retained loss in 2006, making the total
shareholders’ equity be negative, and remains negative in following years.
ROA becomes the best choice.
Overall, Nichols performs better than Britvic, and shows quicker recovery
than Britvic.
ROA comparison
25.00%
20.00%
21.46% 20.62%
19.46%
15.00%
10.00% ROA(Britvic)
5.00% 8.08% ROA(Nichols)
5.48% 5.48%
0.00% 4.30%
FY 2008 FY 2009 FY 2010 FY 2011
-5.00%
-4.61%
-10.00%
22. Profitability
Gross profit margin decreases: perform badly in cost control.
Operating expense ratio: very high compared with Nichols
can explain why Britvic has a lower NPM even if its GPM is higher than Nichols.
For future operation, Britvic plc. should pay attention to cost control and
improve efficiency.
Profitability ratios
60.00% 54.01% 53.93% 55.07%
51.39%
50.00% 45.55% 44.76% 42.72%
36.69% Nichols: FY 2011
40.00%
gross profit margin Gross profit margin: 46.74%
30.00%
operating expense ratio Operating expense ratio: 28.39%
20.00%
net profit margin Net profit margin: 13.47%
10.00% 3.43% 4.78% 4.53%
0.00% -4.23%
FY 2008 FY 2009 FY 2010 FY 2011
-10.00%
23. Liquidity
Two ratios are both improved.
Current ratio: (1) increase;
(2) value of ratio is still less than 1 (the ability of repayment).
Quick ratio (assess a company’s ability to meet CL based on higher liquid assets):
(1) use CA to repay CL more quickly than previous years.
Nichols plc. still shows more efficiency in utilizing liquid assets to meet
current obligations.
Liquidity ratios
1.20
1.00 0.99
1.00 0.90
0.81 0.77 0.76
0.80
0.63
0.72
Nichols: FY 2011
0.60 current ratio Current ratio: 2.14
0.40 quick ratio
Quick ratio: 1.88
0.20
0.00
FY 2008 FY 2009 FY 2010 FY 2011
24. Gearing/Leverage
D/E ratio computation is meaningless (negative total SH’s
equity).
But negative total SH’s equity indicates TA is less than TL,
reflecting high risk of liquidation.
Interest coverage: although PBIT can cover interest payment,
compared with Nichols, less safe.
Britvic Britvic Britvic Britvic Nichols
FY 2011 FY 2010 FY 2009 FY 2008 FY 2011
Interest coverage 3.50 3.81 2.90 156.46
25. Working capital management
Days’ inventory increases: limit the ability to manage inventory efficiently.
Days’ receivable increases: having problems in credit terms and collecting
cash from customers.
Days’ payable increases then decreases: a free source of borrowing (due to
negative total SH equity), negative impact on company’s credit rating.
Nichols shows more efficient working capital management.
Working capital management
250.00
228.48
216.90 209.03
200.00
191.67
Nichols: FY 2011
150.00
Days' inventory Days’ inventory: 31.90
100.00 Days' receivable Days’ receivable: 69.88
Days' payable Days’ payable: 118.60
61.64 65.06 67.60
50.00 55.86 48.51 50.07
40.56 41.41
0.00
FY 2008 FY 2009 FY 2010 FY 2011
26. Investment ratios
P/E ratio: a measure of future earnings growth.
Huge loss in Irish market in 2010 had an impact of SH’s expectation of Britvic.
Dividend cover: a measure of security.
Reduce dividend is a bad signal.
Nichols in 2011 shows higher future earnings growth and safe
dividend coverage than Britvic.
Britvic Britvic Britvic Britvic Nichols
FY 2011 FY 2010 FY 2009 FY 2008 FY 2011
P/E ratio 13.01 16.32 14.53 14.46
Dividend cover 1.45 1.68 1.29 2.57
28. Cash flow statement Britvic Britvic Britvic Britvic Nichols
2011 2010 2009 2008 2011
Net Income 79.9 (28.8) 66.2 51.8 11.759
Long-term Income tax paid (20.9) (21.8) (18.9) (8.1) (3.068)
operating Financial costs 32 26.3 23.6 26.6 (0.072)
Accruals Other financial instruments 10.2 1.5 - - -
Impairment of property, plant and equipment and intangible assets 0.5 116.7 4.2 4.2 4.8
Depreciation and amortization 48.5 42.4 38.7 42.6 0.17
Shared-based payments 3.8 7.8 6.9 7.8 -
Net pension charge less contribution (27.9) (16) (13.4) (12.4) (0.748)
Loss on disposal of tangible and intangible assets 4.6 1.3 1.7 3.0 -
Tax expense recognized in the IS - - - - 4.225
Change in provisions - - - - (0.179)
Operating cash flow before working capital investments 130.7 129.4 109 116.1 12.087
(Increase)/decrease in inventory (4.4) 1.3 (1.0) (2.0) (2.302)
(Increase)/decrease in trade and other receivables (24.1) 10.4 (18.9) (15.3) (4.652)
Increase/(decrease) in trade and other payables 22.8 (16.6) 41.8 44.4 7.05
Operating cash flow before investment in long-term assets 125.0 124.5 130.9 143.2 12.183
Net (investments Proceeds from sale of property, plant and equipment 0.6 4.7 9.5 6.1 -
in) or Purchases of property, plant and equipment (37.7) (40.2) (38.3) (45.3) (0.154)
Liquidation of Purchases of intangible assets (11.9) (9.8) (11.9) (5.9) -
operating long-
Acquisition of subsidiary net of cash acquired (4.5) (151.9) - (6.8) (2.3)
term assets and
equipment
Interest received - - - 0.3 -
Finance income - - - - 0.072
Free cash flow available to debt and equity 71.5 (72.7) 90.2 91.6 9.801
After tax net interest income (expense) (31.1) (24.9) (25.2) (26.9) -
Net debt (repayment) or issuance (9.5) 54.8 (7.3) (45.5) -
Free cash flow available to equity 30.9 (42.8) 57.7 19.2 9.801
Dividend (payments) (40.3) (34.9) (27.8) (24.7) (5.195)
Net stock issuance (repurchase) and other equity changes (1.0) 92.5 (3.3) (8.1) 0.083
Net increase (decrease) in cash balance (10.4) 14.8 26.6 (13.6) 4.689
Exchange rate differences (0.6) (0.5) 0.2 0.8 -
Net increase (decrease) in cash balance- As Reported (11.0) 14.3 26.8 (14.4) 4.689
29. Cash Flow Analysis
Operating cash flow before working capital investments
① Depreciation and amortization and financial costs
② Pension charges
③ Outstanding impairment shown in 2010
Operating cash flow before investment in long-term assets
① Constant increase in receivables
② Constant decrease in payables
③ Inverse situation witnessed in 2010
30. Continued Cash Flow Analysis
Operating cash flow before investment in long-term assets
① Constant growth or expansion
② Acquisition of Britvic France was realized in 2010
Free cash flow available to debt and equity
① Constant debt and dividend payments
② In 2010, Britvic issued new debt and new stock to pay back the debt
and to raise fund.
33. Accounting Quality
Red Flags
The ratio of sales and receivables
The ratio of inventories
The ratio of Operating Activities
Recommendation
Paying more attentions to its overall operations to explain these
dramatic and abnormal changes
34. Financial Health
Less Competitive
Lower liquidity
Lower profitability
Higher leverage
Recommendations
Maintaining a certain current ratio in order to ensure adequate liquidity.
Cost control and efficiency performance should be the priority of the
further development.
35. Forecasting
The successive growth of 7% in Sales and 10.8% in Gross profit in
2012
The historical sales trend Business Strategy
An average annual growth rate New-product introducing
of 6.6% Expanding market share
36. Forecasting
The successive growth of Net Revenue on an average of 1.8%
in 2012
The historical sales trend The Conpany situation
An average annual growth rate Mature market
of 1.8% Increasing sales and gross profits
