(i) Company history, principal activity, products, markets and key financial results
AG Barr is an FTSE 250 company that has been in operation since it was started 140 years ago. The company was first started in Scotland and has maintained its dominance in the UK over the years before exploiting the international markets.
Despite any other business activities that the company may be linked to, the Principal activity attributed to the company over the 140 years has been the manufacture, marketing and sale of soft drinks.
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The company’s products range within a variety of soft drinks in addition to cocktails that it has recently introduced. The company’s main products range from the IRN-BRU soft drink that has been in the market since 1901 courtesy of the AG Barr company. In addition, the company also produces RUBI CON fruit juice drinks, Strathmore spring water and the FUNKIN cocktail that was introduced recently.
Over the years, since its establishment, the company’s market has been centralized within the United Kingdom until in the recent times when it extended its market only to selected international territories within Europe and the rest of the world.
In its latest annual report, at the close of 2016, the company recorded £258.6 million in revenue, which was a slight decrease from the year 2015 by 0.9%. However, the company’s profit margin has been on the rise, registering £41.3 million in terms of profit before tax at the close of 2016. This was a significant rise from the previous year by 7% hence depicting the company’s augmenting profitability. In the same vein, the strength of the company in the market is also reflected by the improving EBITDA margin that the company registered at the close of 2016, recording 19.5% which was and improvement from 2015’s margin by 3.7%; this being a clear manifestation of the AG Barr’s expanding range of profitability.
(ii) Calculation of percentage movement table
| current year | previous year | % movement | |
| Revenue (£ millions) | 258.6 | 260.9 | -0.9% |
| operating profit/loss (£ millions) | 42.1 | 42.1 | 0.0% |
| capital employed (£ millions) | 227.2 | 177.9 | 27.7% |
| Total assets (£ millions) | 282.7 | 271.3 | 4.2% |
| Net Cash generated (£ millions) | 28.8 | 44.9 | -35.9% |
| Number of Employees | 1032 | 1048 | -1.5% |
| Earnings per Share (pence) | 29.63 | 26.00 | 14.0% |
| Total Dividend paid per ordinary share (pence) | 9.97 | 9.01 | 10.7% |
| year-end share price (£) | 5.28 | 6.24 | -15.5% |
| year-end market capitalization using share price(£ millions ) | 610.97 | 719.96 | -15.1% |
Market capitalization = share price x number of shares in issue (Word Bank, 2009, p.283)
Year 2016 = £5.28 x 115,714,487 = £610,972,491
Year 2015 = £6.24 x 115,377,541 = 719,955,855
(iii) Calculation for ratios showing definitions and workings for current and previous years
Current ratio; this is the representation of the company’s ability to settle its short-term and long-term obligations when they are due. It is generated by considering the company’s total assets (including both liquid and illiquid assets) relative to the company’s total current liabilities (Thomsett, 2001, p.75).
Current ratio = Current Assets / Current liabilities
Year 2016 = £282.7 million / 104.8 million = 2.6975
Year 2015 = £271.3 million / 109.7 million = 2.4731
Operating profit margin; this is a representation of the measure of the company’s pricing strategy in terms of its operating efficiency. It considers the proportion of a company’s revenue that is retained after paying for the costs of production. It is generated as a percentage of operating income relative to net sales (Gallagher & Andrew, 2007, p.92).
Operating Profit Margin = Operating Income / Net Sales x 100
Year 2016 = £42.1 million / £258.6 million x 100 = 16.27%
Year 2015 = £42.1 million / £260.9 million x 100 = 16.13%
Trade receivables collection period; this is the amount of time that the company takes to be paid amounts owed to it with regard to accounts receivable. This is obtained by dividing the balance of accounts receivable by the summation of net credit sale for that particular period before multiplying the quotient by number of days in the period (Collis, 2015, p.168).
Trade Receivables Collection Period = (Days x Average amount of Receivables) / Credit Sales.
Gearing ratio; this is a representation of the financial ratio in comparison to the owner’s equity to monies borrowed by the subject company; expressing the extent to which the company funds its own activities relative to those activities being funded by creditors (Dransfield, 2004, p.351).
Gearing ratio = Equity / Assets
Year 2016 = £120.4 million / £282.7 million = 0.4259
Year 2015 = £ 108.3 million / £271.3 million = 0.3992
Return on capital employed; this is the measure of a company’s profitability in terms of the efficiency in which its capital is used.
ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed
Pursuant to AG Barr’s Annual Report ROCE for Year 2016 = 18.8%
ROCE for Year 2015 = 24.0%
(iv) Report to best friend who wants to buy 5000 advising whether the friend should make the investment
The decision to make an investment mainly lies on the company’s financial position as reflected by various values in its economic indicators in order to determine whether an investor would be guaranteed of earnings from their investments. The suitability of investment would also depend on the subjective factors attributed to the investor on expectations such as the duration they expect to start making returns on their investments and at what rate. In this regard, preceding the counsel to invest or not would be a comprehensive analysis of AG Barr’s financial position based on various economic indicators attributed to it in order to determine the extents to which the investment is suitable and the extents to which it is not.
First, with regard to the company’s current ration in the past two fiscal years, it would suffice to infer that the company is strengthening its ability to discharge its financial obligations in terms of paying back its liabilities whenever they are due; which is reflected by the improving trend in its current ratio recorded in 2015 and 2016. It points to the fact that the company is financially healthy recording current ratios above 2 in addition to the fact that it will be able to pay dividends to its shareholders when they are due without delay.
Second, a Company’s Return On Common Equity is another financial aspect that an investor would find essential to take to account while considering to make an investment or not. The underlying circumstances at AG Barr Company represent a depreciating trend in terms of Returns on Common Equity, recording 18.8% in 2016 down from the previous year’s 24.0%. The record is a clear manifestation of the company’s declining profitability with regard to profits and earnings it generates from the resources shareholders have entrusted to it. This doesn’t make the company a viable option to make investment in, to the extent that it is recording a declining trend in its Return on Common Equity.
Another critical indicator for evaluation with regard to investment in the company is the company’s gearing ratio. The prevailing circumstances at AG Barr Company indicate the company recording low gearing ratios, though on the rising trend. The rise in the company’s gearing trend is a clear indicator that the company’s degree of leverage is on the rise. This translates to the company’s vulnerability to economic downturns since it reflects the fact that the company is becoming more inclined to large amounts of equity compared to equity; which manifests the fact that the company is becoming more burdened with debts to service than equity to rely upon. The low value of gearing ratio being less than 1 is commendable, however the fact that it is on the rising trend is and indicator that a prospective investor should be wary of.
Finally, another critical financial indicator that has a major impact in swaying an investment decision to the favor of the company is the company’s end year market capitalization. The underlying circumstances are overt that from the market capitalization in the last two years, the value of the company’s outstanding shares has reduced which would not guarantee an investor consistent increase in their share value and payments made subject to dividends, which to this extent renders the company not a viable investment alternative.
Summarily, it would suffice to infer that based on the company’s financial indicators, the prospected investment in the company would not be advisable. The company’s market capitalization shows a declining trend besides the alarmingly increasing gearing ratio and significant decline in the company’s Return on Common Equity over the last two years. To this extent, it would suffice to advice that the purchase of 5000 shares in the company is not affirmatively advisable. This is attributed to the fact that despite showing good financial health, the company’s ability with regard to competitively promising returns in one’s investment is something to be wary of.
References
World Bank. (2008). World Development Indicators 2008. Washington DC: World Bank Publications.
Dransfield R. (2004). Business Foundation Degrees and High Awards. Heinemann.
Thomsett M. C. (2001). Builder’s Guide to Accounting. Craftsman Book Company.
Collis J. (2015). Financial Accounting. Palgrave Macmillan.
Gallagher T. J. & Andrew J. D. (2007). Financial Management; Principles and Practice . Freeload Press, Inc.
