Exam Number: F11079
Word Count: 1500
CRANFIELD SCHOOL OF MANAGEMENT
Full Time MBA Programme 2011/12
Term: 1
Part: 1
Financial Management
WAC
This assessment/report is all my own work and conforms to the
University’s regulations on plagiarism

An identical copy of this document has been submitted to the Turnitin
system

Dairy Crest’s Financial Performance
Contents
1.
Executive Summary
1
2.
Introduction
2
3.
Discussion of Financial Ratios
2
3.1
Profitability Ratios
2
3.2
Efficiency Ratios
3
3.3
Liquidity Ratios
3
3.4
Financial Gearing Ratios
4
3.5
Investment Ratios
5
4.
Conclusion
5
5.
Appendices
7
i
Dairy Crest’s Financial Performance
1. Executive Summary
The report analyses the position and performance of Dairy Crest Plc using financial
ratios derived from their 2011 published accounts. Financial strengths and weaknesses
of the business are highlighted by comparing the 2010 and 2011 results. Key ratios are
also compared with two industry peers in order to benchmark Dairy Crest’s financial
performance.
2011 saw a better profitability performance in terms of return on capital employed and
operating margin compared to its 2010 results. However, return on ordinary
shareholders’ funds of Dairy Crest declined by 13% from 2010 figures. In comparison
to its peers, its 2011 return on capital employed and operating margin were the least.
2011 liquidity ratios were a bit of a concern compared to 2010 figures as well as to the
liquidity ratios of Dairy Crest’s peers. As liquidity is a signal of the capacity of a
business to survive, the decline in the company’s ability to meet its current maturing
obligations may worry creditors of the business who may react by recalling credit
facilities early or by refusing to offer further credit.
Although ratios provide a simple and useful method of analysing business performance,
they have a number of limitations. One of such limitations is the quality of the financial
statements - ratios will inherit the limitations of the financial statements on which they
are based. Other limitations include the effects of inflation on financial information, the
restricted vision of ratios, difficulty in finding a suitable benchmark company due to
differences between businesses and the snapshot nature of the balance sheet which
could lead to misrepresentation of the financial position of the business.
1
Dairy Crest’s Financial Performance
2. Introduction
This report analyses the position and performance of Dairy Crest Plc using financial
ratios derived from their 2011 published accounts (see Appendix I-III). The company’s
performance in 2010 is compared to that of 2011 using profitability, efficiency,
liquidity, gearing and investment ratios in order to highlight financial strengths and
weaknesses. Dairy Crest’s 2011 performance is then compared to two of its peers,
Cranswick Plc1 and Devro Plc2, from the Food Products sector of the Financial Times,
in order to benchmark performance.
3. Discussion of Financial Ratios
The financial ratios used to analyse the performance of Dairy Crest are presented in
Appendix V – VI. The discussion of the analyses and interpretation of the ratios are
discussed under the following headings:
3.1 Profitability Ratios
The 2011 published accounts show a significant dip in the return on shareholders’ funds
by 13.2% from 2010 figures. Although profit for 2011 rose by 9.5% to £57.5 million,
total shareholders’ equity increased by a larger percentage of 24.8%, due to an increase
in retained earnings, thus cancelling any effects of the higher 2011 profits.
Return on capital employed (ROCE) and operating margin rose slightly by 4.1% and
4.8% respectively from 2010 figures. Gross profit margin remained unchanged despite
the improvement in operating margin as the proportion of cost of goods sold to group
revenue stayed constant.
Compared to the 2011 performance of the benchmarks, the ROCE of Dairy Crest was
22.7% and 73.1% lower than that of Cranswick and Devro respectively. Despite having
1
Cranswick Plc is engaged in the production and supply of food products in the UK and is listed as a peer
to Dairy Crest on FT.
2
Devro Plc is a supplier of collagen casings for food in the UK and is listed as a peer to Dairy Crest on
FT.
2
Dairy Crest’s Financial Performance
a much higher operating profit, Dairy Crest was less effective in generating operating
profits compared to the average long-term capital invested in the business.3
The 2011 operating margin of Dairy Crest is similar to that of Cranswick. However, the
operating margin of Devro is about 200% more than those of the other two peers.
Despite a huge group revenue, Dairy Crest incurred equally huge operating expenses
both in 2010 and in 2011 compared to the two peers. Thus for every £1 of sales revenue
in 2011, an average of 6.21p was left as operating profit, after paying the cost of goods
sold and other operating expenses.
3.2 Efficiency Ratios
In 2011, Dairy Crest’s average inventories turnover period and average settlement
period for trade payables increased by 8.7% and 8% to 53 days and 24 days
respectively. Raw materials and consumables as well as finished goods inventories both
increased in 2011 while the cost of sales decreased slightly. As inventories are usually
expensive to hold, a shorter inventories turnover period is preferred to a long one.
Therefore, the company may have pertinent reasons for increasing inventory held
perhaps in anticipation of a rise in raw material prices or a possibility of a supply
shortage.
The increase in the average settlement period for trade payables is desirable in order to
free up funds. However, such a policy may result in the loss of goodwill of suppliers if
it is taken too far.
The sales revenue per capital employed dipped slightly in 2011 due to lower group
revenue with the capital employed remaining more or less the same. However, sales
revenue per employee increased but only due to a reduction in the number of employees
by 708 between 2010 and 2011.
3.3 Liquidity Ratios
A food products company such as Dairy Crest would be expected to have a relatively
low current ratio as it holds mainly fast moving inventories and a significant part of its
3
Operating profit before exceptional items is used for calculating all ratios.
3
Dairy Crest’s Financial Performance
sales would be made for cash. However, all the liquidity ratios deteriorated in 2011
compared to 2010 values showing a general decline in the ability of the business to meet
its maturing obligations. This is attributed to an increase in current liabilities mainly as a
result of short term borrowing increasing by a massive 29 times and trade and other
payables increasing by about 18%.
At 1.02, a decrease of 19% from 2010, the current assets are just sufficient to cover the
current liabilities of the company. However, as the inventory is excluded from acid test
ratio, the value of the ratio (0.56) shows that Dairy Crest is unable to meet its current
obligations with its remaining current assets. An even more alarming issue is the
decrease by 39% from the 2010 figure for cash generated from operations to maturing
obligations to 0.36. It would be expected that the company should be able to generate
sufficient cash to cover it maturing obligations considering its relatively fast moving
inventory of perishable food products.
Compared to its peers Cranswick (0.84) and Devro (1.02), Dairy Crest is performing
significantly lower with respect to the acid test ratio. Therefore, this performance is
unlikely to be a sector wide phenomenon. However, the apparent liquidity problem may
be planned and short term and of no real cause for concern for the business.
3.4 Financial Gearing Ratios4
The gearing ratio for 2011 decreased by 11%, compared to 2010 value, to 50.77% due
to a net reduction in total financial liabilities (long term and short term) and an increase
in retained earnings. Interest cover improved by 12% to 4.84 showing an improved
capacity to meet maturing interest obligations. Therefore, despite the apparent liquidity
issues, the operating profit of the business is able to cover interest payments by almost 5
times.
Dairy Crest seems quite highly geared compared to Cranswick and Devro at 19.34%
and 17.65% respectively. This has the advantage of increasing the return to shareholders
but makes the returns more volatile by increasing its sensitivity to changes in operating
profits. A gearing ratio of 50.77% compared to an average of 18% for both peers may
4
Long and short term financial obligations have been used in calculating gearing ratios.
4
Dairy Crest’s Financial Performance
increase the perceived risk associated with Dairy Crest thus having an adverse effect on
the share price as well as increasing the cost of the next tranches of capital.
3.5 Investment Ratios
The dividend cover increased by 5% to 2.19 in 2011 due to a higher profit after tax. At
2.19, the dividend cover is in line with the company’s policy to maintain a level of
dividend cover between 2.0 and 2.5 times5. Dividend yield also increased but mainly
due to a decrease in the share price year on year while the dividend increased.
Earnings per share increased by 6.4% to 43.20p. However cash generated from
operations per share decreased by 12% to £96.17 due to a comparatively lower cash
position in 2011.
Price/earnings ratio reduced by 9% to 8.31 on 31st March 2011 compared to 31st March
2010. This signifies a lower market confidence in the growth of the business compared
to 2010 perhaps due to an increased perceived risk as a result of lower liquidity ratios
and return on shareholders’ funds. At close of trading today 15th June 2011,
price/earnings ratio for Dairy Crest was 8.65 while those of Cranswick and Devro were
9.61 and 12.33 respectively.6 This means that the market expects Dairy Crest to perform
less than its peers and hence investors are willing to pay less for the shares of Dairy
Crest in relation to its earnings stream compared to its peers.
4. Conclusion
2011 performance of Dairy Crest saw a decline in key financial ratios compared to 2010
values. Return on shareholders’ funds and cash generated from operations per share
decreased by 13.2% and 12.3% respectively. Furthermore, the company’s ROCE,
operating margin, acid test ratio and price/earnings ratios were all lower than those of its
two peers used as benchmarks.
5
6
From page 13 of the 2011 company accounts.
Share prices obtained from www.stockopedia.co.uk
5
Dairy Crest’s Financial Performance
The liquidity of the company in 2011 is a bit of a concern compared to 2010 figures as
well as to the performance of the benchmarks. Creditors may react by recalling credit
facilities early or by refusing to offer further credit. However, the lower liquidity may
be planned and short term so may not be an issue after all.
The underlying causes of these performance issues must to be investigated prior to
making any bid for Dairy Crest Plc.
6
Dairy Crest’s Financial Performance
5. Appendices
Appendix I7
Excerpts from the company’s published accounts from
http://online.hemscottir.com/ir/dcg/download/Dairy-Crest-AR-2011.pdf
7
7
Dairy Crest’s Financial Performance
Appendix II8
Excerpts from the company’s published accounts from
http://online.hemscottir.com/ir/dcg/download/Dairy-Crest-AR-2011.pdf
8
8
Dairy Crest’s Financial Performance
Appendix III9
Excerpts from the company’s published accounts from
http://online.hemscottir.com/ir/dcg/download/Dairy-Crest-AR-2011.pdf
9
9
Dairy Crest’s Financial Performance
Appendix IV
Explanation of the Financial Ratios10
The ratios are grouped into five categories as follows:
Profitability Ratios: These express the degree of profit made by the business in relation
to other figures in the financial statements or to some business resource. Profitability
ratios include:
1. Return On Ordinary Shareholders Funds Ratio (ROSF):
𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟(𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡)𝑙𝑒𝑠𝑠 𝑎𝑛𝑦 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
× 100
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑅𝑒𝑠𝑒𝑟𝑣𝑒𝑠
2. Return On Capital Employed (ROCE):
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
× 100
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑅𝑒𝑠𝑒𝑟𝑣𝑒𝑠 + 𝐷𝑒𝑏𝑡
3. Operating Profit Margin:
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
× 100
𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
4. Gross Profit Margin:
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
× 100
𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
Efficiency Ratios: These ratios measure the efficiency with which particular resources
have been used in the business. Efficiency ratios include:
1. Average Inventories Turnover Period:
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 ℎ𝑒𝑙𝑑
× 365
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠
10
McLaney, E. and Atrill, P. (2008). Accounting:An Introduction 4ed Essex: Pearson Education Limited
10
Dairy Crest’s Financial Performance
2. Average Settlement Period For Trade Receivables:
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
× 365
𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
3. Average Settlement For Trade Payables
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
× 365
𝐶𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
4. Sales Revenue To Capital Employed ( Net Asset Turnover Ratio):
𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
𝑆ℎ𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑟𝑒𝑠𝑒𝑟𝑣𝑒𝑟𝑠 + 𝑑𝑒𝑏𝑡
5. Sales Revenue Per Employee:
𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠
Liquidity Ratios: These ratios express the relationship between liquid ratios held and
amounts due for payment in the near future. Liquidity ratios include:
1. Current Ratio:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
2. Acid Test Ratio:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠(𝑒𝑥𝑐𝑙𝑢𝑑𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠)
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Gearing Ratios: These measure the relationship between the contributions to financing
the business made by owners vs. amounts contributed by others in terms of loans.
Gearing ratios include:
1. Gearing Ratio:
𝐷𝑒𝑏𝑡
× 100
𝑆ℎ𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑅𝑒𝑠𝑒𝑟𝑣𝑒𝑠 + 𝐷𝑒𝑏𝑡
11
Dairy Crest’s Financial Performance
2. Interest Cover Ratio:
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑎𝑏𝑙𝑒
Investment Ratios: These measure the returns and performance of shares from the
perspective of the shareholders. Investment ratios include:
1. Dividend Pay-Out Ratio:
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑎𝑛𝑛𝑜𝑢𝑛𝑐𝑒𝑑 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
× 100
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
2. Dividend Cover Ratio:
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑎𝑛𝑛𝑜𝑢𝑛𝑐𝑒𝑑 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
3. Dividend Yield Ratio:
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
× 100
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
4. Earnings Per Share:
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑡𝑜 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑛 𝑖𝑠𝑠𝑢𝑒
5. Price/Earnings Ratio:
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
12
Dairy Crest’s Financial Performance
Appendix V
Financial Ratios for Dairy Crest Group Plc
2011
2010
%
Change
Profitability Ratios
● Return on ordinary shareholders’ funds (ROSF).
15.73
18.12
-13.2
● Return on capital employed (ROCE).
14.79
14.22
4.1
6.21
5.93
4.8
29.45
29.42
0.1
● Average inventories turnover period.
53.04
48.77
8.7
● Average settlement period for trade payables.11
24.30
22.50
8.0
● Sales revenue to capital employed.
2.38
2.40
-0.7
● Sales revenue per employee.
0.25
0.22
9.1
● Current ratio.
1.02
1.26
-18.9
● Acid test ratio.
0.56
0.63
-12.0
● Cash generated from operations to maturing obligations.
0.36
0.59
-39.3
50.77
57.07
-11.0
4.84
4.31
12.2
● Dividend cover
2.19
2.09
4.9
● Dividend yield ratio.
5.49
5.08
8.0
● Earnings per share.
43.20
40.60
6.4
● Cash generated from operations per share.
96.17
109.70
-12.3
● Price/earnings ratio.
8.31
9.16
-9.3
● Dividend per share
19.70
18.90
4.2
● Operating profit margin.
● Gross profit margin.
Efficiency Ratios
Liquidity Ratios
Gearing Ratios
● Gearing ratio.
● Interest cover ratio.
Investment Ratios
11
Taken directly from page 47 of company accounts
13
Dairy Crest’s Financial Performance
Appendix VI
Key Financial Ratios for Dairy Crest Group Plc Compared to Cranswick Plc and
Devro Plc
● Return on capital employed (ROCE).
Dairy
Crest
14.79
Cranswick
Devro
18.15
25.60
● Operating profit margin.
6.21
6.46
18.86
● Acid test ratio.
0.56
0.84
1.05
● Gearing ratio.
50.77
19.34
17.65
8.65
9.61
12.33
● Price/earnings ratio on 15 June 2011.
14