m arket and f inancial a nalysis of the s elected market s egment : a c ase of b eer m arket in...

MARKET AND FINANCIAL ANALYSIS OF THE SELECTED MARKET SEGMENT: A CASE OF BEER MARKET IN POLAND, CZECH

REPUBLIC AND OTHER EU MARKETS

Katarzyna Boratyńska, PhD

Warsaw University of Life Sciences PolandFaculty of Economic Sciences

Department of Economics and Organisation of Enterprises

Agenda Introduction

1. Financial Analysis – Theoretical Approach; Applied Ratios and their Interpretation; Advantages and Limitations of Ratios Analysis

(Discussion);2. European Union Beer Market Analysis;3. Beer markets (4V countries) and Financial

Analysis – Case Studies of Capital Group Żywiec S.A. (team work);Summary.

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1. Financial Analysis – Theoretical Approach

Financial Analysis – Theoretical Approach

• Liquidity Ratios• Liquidity ratios measure a company’s ability to

meet its short-term obligations. Calculating such liquidity ratios is important because failure to meet these obligations may lead to bankruptcy.

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• Liquidity Ratios• In general, it can be said that the higher the

ratio is, the more is a company able to pay back its short-term obligations.

• While bankers look at liquidity ratios to check whether to extend short-term credit or not, stockholders use them to see how a company has invested in assets.

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• Liquidity Ratios• Very high values may make stockholders

wonder why not more resources have been invested in higher returning fixed assets instead of more liquid but lower returning current assets.

• The two main ratios in this category are Current and Quick Ratio.

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• Liquidity Ratios• The current ratio compares all the current

assets (cash and other assets that can quickly and easily be converted into cash) with all the company’s current liabilities (liabilities that must be paid soon).

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• Liquidity Ratios

(1)

Current Ratio = Current AssetsCurrent Liabilities

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• The Quick Ratio is similar, however, also more conservative as it excludes inventory from current assets. To calculate it, inventory is subtracted from current assets. The remaining value is then divided by current liabilities.

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(2)

Quick Ratio = Current Assets − InventoryCurrent Liabilities

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• Asset Activity Ratios• Asset activity ratios give information on how

efficiently a company uses its assets. • Thereby, the Working Capital Turnover Ratio

measures how efficiently working capital is used. It is found by dividing cost of sales by net working capital.

• Net working capital is thereby found by subtracting total current liabilities from total current assets.

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• Asset Activity Ratios

(3)

Working Capital Turnover = Cost of SalesNet Work ing Capital

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• Asset Activity Ratios• An efficient use of working capital has a direct

effect on a company’s profitability. • Thereby, a high ratio indicates efficient use of

working capital and quick turnover of current assets.

• However, a very high working capital turnover ratio may also indicate lack of sufficient working capital. In that case, the working capital employed is too little for the scale of operations (Jain, 2004). Contrariwise, a low ratio indicates under-utilization of working capital.

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• Asset Activity Ratios• The Inventory Turnover Ratio tells us how

efficiently a company converts inventory into sales.

• If the company has inventory for which there is high demand, the ratio value will be high.

• If demand is low, also the ratio will be low. • The inventory turnover is calculated by dividing

sales by inventory. A result of 1.5 for example would mean that the company turned its inventory into sales 1.5 times during the year

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• Asset Activity Ratios

(4)

Inventory Turnover = SalesInventory

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• Debt Ratios• Debt ratios measure the size of a firm’s debt and its ability

to pay off the debt. • Two primary debt ratios are Debt to Assets and Debt to

Equity. • When a company’s debt increases significantly, bondholder

as well as lender risk increases because more parties compete for the firm’s resources in times of financial difficulties. Stockholders are also concerned since bondholders are paid before stockholders.

• A healthy debt ratio depends on the industry. Generally, a stable industry can handle higher debt ratios.

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• Asset Activity Ratios• Debt to Total Assets measures the percentage of

a firm’s assets that is financed with debt. It is calculated by dividing total debt by total assets (Gallagher & Andrew, 2007).

(5)

Debt / Assets Ratio = Total DebtTotal Assets

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• Asset Activity Ratios• The Debt to Equity Ratio indicates debt the

company has for every dollar/euro of equity (Brigham and Erhardt, 2011)

(6)

Debt /Equity Ratio = Total DebtTotal Equity

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• Leverage or Long-term Solvency Ratio• The equity ratio indicates the long term or

future solvency position of the business. • It contains the same information as the Debt

to Equity ratio, but presents it slightly different.

• The ratio divides shareholder’s funds by total assets.

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• Leverage or Long-term Solvency Ratio• A ratio of 60 percent indicates that 60 Cents of

each dollar/euro is shareholder contribution, while the remaining 40 cent equal creditor contribution.

• Therefore, it indicates how much of financing is in form of liabilities (Brigham and Erhardt, 2011).

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• Leverage or Long-term Solvency Ratio

(7)

Equity Ratio = Shareholder FundsTotal Assets

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• Profitability Ratios• Profitability ratios measure how much revenue is

eaten up by expenses, respectively, how much is earned compared to sales generated and the amount earned compared to the firms assets and equity.

• Stockholders in particular are interested in profitability ratios as profit leads to cash flow which is a primary source of value for the firm (Gallagher and Andrew, 2007).

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• Profitability Ratios• Five important profitability ratios are Gross

Profit Margin, Net Profit Margin, Return on Equity, Return on Assets and Return on Sales.

• The Gross Profit Margin measures how much profit remains out of each sales dollar after the cost of goods sold is subtracted.

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• Profitability Ratios• The higher the ratio is, the better are costs

controlled. The resulting percentage indicates how much of a profit dollar/euro the company can use for other purposes (Gallagher and Andrew, 2007).

(8)

Gross Profit Margin = Gross ProfitSales

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• Profitability Ratios• The Net Profit Margin measures how much profit

remains out of each sales dollar after all expenses are subtracted. Expenses in this case are operating expenses as well as interest and income tax expense (Gallagher and Andrew, 2007).

(9)

Net Profit Margin = Net IncomeSales

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• Profitability Ratios• Return on Equity (ROE) equals net profit divided

by equity. The resulting figure indicates how many dollars/euro of income were generated for each dollar invested by common stockholders (Gallagher and Andrew, 2007).

(10)

Return on Equity = Net IncomeCommonStockholder ' s Equity

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• Profitability Ratios• The Return on Assets (ROA) shows whether

assets are used effectively. It indicates how much income each dollar of assets equals on average. Therefore, net income is divided by total assets (Gallagher and Andrew, 2007).

(11)

Return on Assets = Net IncomeTotal Assets

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• Profitability Ratios• Return on Sales (ROS) is defined as ratio of net

profit and net revenue. The ratio measures how efficient a company is in converting one sales dollar into a profit dollar. ROS depends very much on the industry the company is operating in (Tyson and Schell, 2012).

(12)

Return on Sales = Net ProfitNet Revenue

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Advantages and Limitations of Ratios Analysis

Discussion

Advantages of Ratios Analysis

• Simplifies financial statements• It simplifies the comprehension of financial

statements. Ratios tell the whole story of changes in the financial condition of the business.

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• Facilitates inter-firm comparison• It provides data for inter-firm comparison.

Ratios highlight the factors associated with successful and unsuccessful company.

• They also reveal strong firms and weak firms, overvalued and undervalued enterprises.

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• Helps in planning • It helps in planning and forecasting. Ratios can

assist management, in its basic functions of forecasting. Planning, co-ordination, control and communications.

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Advantages of Ratios Analysis• Makes inter-firm comparison possible • Ratios analysis also makes possible comparison of

the performance of different divisions of the company. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.

• Help in investment decisions• It helps in investment decisions in the case of

investors and lending decisions in the case of bankers etc.

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Limitations of Ratios Analysis• Limitations of financial statements• Ratios are based only on the information which

has been recorded in the financial statements.

• Financial statements themselves are subject to several limitations. For example, non-financial changes though important for the business are not relevant by the financial statements.

• Personal judgment plays a great part in determining the figures for financial statements.

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Limitations of Ratios Analysis

• Comparative study required• Ratios are useful in judging the efficiency of the

business only when they are compared with past results of the business.

• However, such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. may affect the future operations.

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• Ratios alone are not adequate• Ratios are only indicators, they cannot be

taken as final regarding good or bad financial position of the business. Other things have also to be seen.

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Limitations of Ratios Analysis• Problems of price level changes• A change in a price level can affect the validity of

ratios calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company.

• The financial statements, therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios.

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• Lack of adequate standard• No fixed standard can be laid down for ideal

ratios. There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult.

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• Limited use of single ratios• A single ratio, usually, does not convey much

of a sense. To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision.

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• Personal bias• Ratios are only means of financial analysis and

not an end in itself. Ratios have to interpreted and different people may interpret the same ratio in a different way.

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• Incomparable• Not only industries differ in their nature, but

also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.

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2.European Union Beer Market Analysis

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Table 1. Beer production in selected EU countries

Źródło: The Brewers of Europe, Beer Statistics. 2012 edition, p.4.

0 20 40 60 80 100 120

Malta

Luxembourg

Cyprus

Slovakia

Hungary

Italy

France

Romania

Belgium

Czech Republic

Netherlands

Spain

Poland

United Kingdom

Germany

mln hl

201120102009

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Table 2. Beer consumption per capita in selected EU countries (litres)

Źródło: The Brewers of Europe, Beer Statistics. 2012 edition, p.8.19.04.23 05:48 44

3. Beer markets (4V countries) and Financial Analysis – Case

Studies of Capital Group Żywiec S.A. (team work)

Summary

Thank You for Your Attention

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m arket and f inancial a nalysis of the s elected market s egment : a c ase of b eer m arket in...

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