Accounting: Ratio Analysis of Cadbury PLC

Marsilius Graf Von Ingelheim

University of Saint Andrews - School of Management

Lumeng Jia
University of Saint Andrews

Kevin L. Meyer
St Andrews University - School of Management; HEC Lausanne, UNIL; ICADE, UP Comillas,
Madrid

December 8, 2009

Abstract:
Our group decided to give a detailed analysis of Cadbury PLC due to the interesting market
situation of Cadbury and after the split of Cadbury Schweppes into Cadbury PLC, the new holding
company of the worldwide confectionery operations and the Australian beverages business; and
Dr. Pepper Snapple Group (DPS), the new holding company of the Americas beverages
business. This situation gives us the possibility to check how the company’s performance evolved
over the last two financial years with a different focus on their operations.
A second reason for our company choice is the hostile bid from US based Kraft Foods Inc. The
group decided to write out of the perspective of a Kraft Foods shareholder. This is particularly
interesting, as we want to find out if Cadbury is a good target company in terms of financial
strength from a Kraft Foods point of view. In addition this report is going to show if the consortium
Ferrero and Hershey’s might be in a better position to takeover Cadbury’s operations after a
possible hostile bid or even if they can play the role of a white knight, rescuing Cadbury from a
takeover.

Keywords: Cadbury, ratio analysis, accounting, financial, ratio, debt, Kraft

Financial Analysis and Control - Financial Ratio Analysis (Slides in Spanish)

Ignacio Velez-Pareja
Universidad Tecnologica de Bolivar Department of Finance and International Business - Instituto
de Estudios para el Desarrollo (IDE)

March 22, 2009

Abstract:
This is a course material (slides in pdf format) for the chapter Financial Analysis and Control
Financial Ratio Analysis already in SSRN. The chapter is originally in Spanish. In these slides we
present a detailed explanation of different financial ratios commonly used in financial
management. We introduce some examples in the slides and they serve more as quick review for
the written material of the main chapter than a summarized (bulleted) guide for conducting a
lecture. However, we use them as a guide for our lectures. The original slides are available on
request.
Keywords: Accounting, financial management, financial statements, balance sheet, Income
Statement, financial ratios, Dupont analysis

JEL Classifications: A20, M41, G29

Ratio Analysis and Equity Valuation

Doron Nissim
Columbia Business School - Department of Accounting

Stephen H. Penman
Columbia University - Department of Accounting

March 1999

Abstract:
This paper outlines a financial statement analysis for use in equity valuation. Standard profitability
analysis is incorporated, and extended, and is complemented with an analysis of growth. The
perspective is one of forecasting payoffs to equities. So financial statement analysis is presented
first as a matter of pro forma analysis of the future, with forecasted ratios viewed as building
blocks of forecasts of payoffs. The analysis of current financial statements is then seen as a
matter of identifying current ratios as predictors of the future ratios that drive equity payoffs. The
financial statement analysis is hierarchical, with ratios lower in the ordering identified as finer
information about those higher up. To provide historical benchmarks for forecasting, typical
values for ratios are documented for the period 1963-1996, along with their cross-sectional
variation and correlation. And, again with a view to forecasting, the time series behavior of many
of the ratios is also described and their typical "long-run, steady-state" levels are documented.

A Comparative Analysis of Proxies for an Optimal Leverage Ratio

Ranjan D'Mello
affiliation not provided to SSRN

Joseph Farhat
Central Connecticut State University - Department of Finance

Review of Financial Economics, Vol. 17, No. 3, 2008

Abstract:
Previous studies that test the tradeoff theory commonly use one of the following debt ratio
measures to proxy for a firm's hypothesized optimal ratio: firm's time-series mean leverage,
moving average leverage based on a firm's historical debt ratios, industry median leverage, and
predicted leverage ratio based on cross-sectional regressions. We find that these alternative
proxies yield results that are significantly different from each other. Further, regression results of
models that use the optimum target leverage and the conclusions drawn from the findings are
sensitive to the model's proxy. Of the proxies that are commonly used in the literature, the moving
average debt measure exhibits characteristics that are most consistent with the theoretical
optimal leverage ratio.

Keywords: Optimum capital structure, Optimal leverage ratio, Tradeoff theory

Financial Statement Analysis: A Data Envelopment Analysis Approach

Ehsan H. Feroz
University of Washington - Tacoma-Milgard School of Business; Vernon Zimmerman Center,
University of Illinois; US Government Accountability Office

Sungsoo Kim
Rutgers Business School - Camden

Raymond L. Raab
University of Minnesota, Duluth - Labovitz School of Business and Economics (LSBE)

Journal of the Operational Research Society, Vol. 54, pp. 48-58, 2003

Abstract:
Ratio analysis is a commonly used analytical tool for verifying the performance of a firm. While
ratios are easy to compute, which in part explains their wide appeal, their interpretation is
problematic when two or more ratios provide conflicting signals. Indeed, ratio analysis is often
criticized on the grounds of subjectivity, that is the analysts must pick and choose ratios in order
to asses the overall performance of a firm.

In this paper, we demonstrate that Data Envelopment Analysis (DEA) can augment the traditional
ratio analysis. DEA can provide a consistent and reliable measure of the managerial or
operational efficiency of the firm. We test the null hypothesis that there is no relationship between
DEA and traditional accounting ratios as a measure of performance of a firm. Our results reject
the null hypothesis indicating that DEA can provide information to analysts that is additional to
that provided by the traditional ratio analysis. We illustrate the application of DEA to the oil and
gas industry to demonstrate how financial analysts can employ DEA as a complement to ratio
analysis.

Keywords: Financial Statement Analysis, Ratio Analysis, Fundamental Analysis, DEA

JEL Classifications: C44, C61, C67, D57,G1, G2, G3

An Overview of Financial Statement Analysis: The Mechanics

Brandt R. Allen
University of Virginia (UVA) - Darden Graduate School of Business Administration

Paul J. Simko
University of Virginia (UVA) - Darden Graduate School of Business Administration

Darden Case No. UVA-C-2255

Abstract:
On September 20, 2000, Jonathan Weill, a Wall Street Journal reporter in Dallas, Texas,
published a piece questioning the profitability and accounting of Enron Corporation. He based his
article on a study of Enron’s financial statements and conversations with staff at the Financial
Accounting Standards’ Board (FASB), accounting professors, financial analysts, and others. "It
took me a while to figure out everything I needed to... It probably took a good month or so. There
was a lot of noise in the financial statements." His piece was read by James Chanos, founder and
president of Kynikos Associates, a firm that specialized in short-selling. How did Weill and
Chanos figure Enron out when so many others were pushing up the stock price? How did they
know to do that kind of analysis? Only the answer is simple: through study, application, and more
application. You cannot develop financial analysis expertise overnight. Our objective in this
document, however, is to present a very basic structure for financial analysis that will help move
you toward that goal. We focus on what to look for in the financial statements, how to do basic
ratio analysis, what financial forecasting entails, and how analysts use financial statement data in
valuation. We intentionally focus on the mechanistic nature of financial analysis because these
tools are fundamental building blocks common to the analysis of most firms. Without
understanding this basic structure the unique issues facing a firm would be difficult to interpret.

Keywords: forecasting, ratio analysis

BMW AG; Financial Performance Analysis

Asif Ahmed
University of Dhaka - Department of Accounting & Information Systems

May 27, 2010

Abstract:
The world is just recovering from a big recession. Various big corporations became bankrupt
because of this. Many of the automaker giant posted loss during the last 2 or three years, like –
Toyota and the biggest corporation of the world General Electric (GE) became bankrupt. More or
less all the big corporations are affected by it. BMW, one of the automaker giant, could retain its’
profitability over last three years when the global recession take place. It also affected by the
recession but cannot lose the profitability. This interesting thing inspires me to conduct research
on the financial performance of BMW AG. In the beginning of my paper I give an overview on the
BMW. Later I analyze the net profit, sales revenue, costs and assets base of the corporation for
the last 10 years. Then I go for ratio analysis to judge the financial health of the organization. In
ratio analysis I use Return of Assets (ROA), Return on Equity (ROE), Basic Earning Power
(BEP), Liquidity ratio, Profitability Ratio, Divided Payout (DP) Ratio and Du Pont Chart to conduct
my analysis. The findings on the analysis are discussed along with the respective chapter,
besides making separate chapter for it.

Keywords: BMW, financial performance

A Study on Financial Performance of Indian Non-Life Insurance Industry

Chirag Gosalia
TASMAC; Goa Engineering College

August 4, 2008

Abstract:
Study involves an analysis of financial performance of the Non-Life insurance sector in India
using financial ratios such as claims ratio and combined ratio. It also involves assessment of
compliance with IRDA regulations - Solvency margins and Rural and Social Sector Obligations -
by the existing insurers.

Keywords: Non-Life insurance sector, ratio analysis, financial performance

JEL Classifications: G22

Working Paper Series

Financial Performance of Foreign and Domestic Owned Companies in India

Kuntluru Sudershan
affiliation not provided to SSRN

Venkata Reddy Muppani

Dow Chemical; Shailesh J. Mehta School of Management

Mohd. Akbar Ali Khan

affiliation not provided to SSRN

Journal of Asia-Pacific Business, Vol. 9, Issue 1, pp. 28-54, April 2008

Abstract:
Foreign direct investment (FDI) is attracted into transitional economies like India for reasons like
capital, technology, international markets, and managerial skills. Extant literature has focused on
studying the impact of FDI inflows on financial performance at an aggregate level ignoring the
differences in state regulations in industries. Further, in the case of India, the literature is confined
to analysis in specific years. In this study, we examined whether foreign ownership has any
impact on financial performance of firms in India over a period of time. We have conducted a
pooled cross section time series analysis of 102 Indian pharmaceutical firms for the period 1998-
2005. For the analysis, we used a novel, robust method of handling missing data thus making
available twenty % more information than is otherwise possible. Foreign ownership is found to
have a positive and statistically significant impact on the financial performance of pharmaceutical
companies in India.

Keywords: Foreign direct investment, financial performance, econometrics, India

JEL Classifications: F21, F23

Central Bank Financial Strength and Policy Performance: An Econometric Evaluation

Ulrich H. Klueh
International Monetary Fund (IMF); German Council of Economic Experts

Peter Stella
Stellar Consulting

July 2008

IMF Working Paper No. 08/176

Abstract:
The financial health of central banks and its relation to policy outcomes has recently been
recognized as an important policy issue. While case study evidence clearly indicates that weak
central bank finances can hamper effective policy implementation, the question of whether central
bank financial strength influences policy performance remains controversial. This is due, in part,
to a lack of econometric evidence. The paper presents a first step toward filling this gap, by
providing a quantitative evaluation of the relationship between measures of central bank financial
strength and policy performance, in particular inflation. The paper's major finding is that there
indeed is a negative relationship between central bank financial strength and inflation outcomes.
This relationship appears to be robust to the choice of alternative country samples, control
variables, estimation strategies, and conceptualizations of central bank financial strength.

Article: Industry Ratio Analysis and the Commercial Loan Review Process

Article from:
Credit & Financial Management Review
Article date:
October 1, 2006
Author:
Beneda, Nancy CopyrightCopyright Credit Research Foundation Fourth Quarter 2008.
Provided by ProQuest LLC. All inquiries regarding rights or concerns about this content should be
directed to customer service. (Hide copyright information)

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Abstract

This paper examines the use of financial statement industry ratio analysis by businesses from the
perspective of commercial lenders. The findings of this paper suggest that commercial lenders
consider industry ratio analysis an important component of cash flow projections and of the
commercial loan application package. The study also indicates that commercial lenders often
consider the use of industry ratio analysis to be critical with regard to the potential success of the
business. Twenty-five individual commercial lenders were interviewed and asked questions
regarding the importance of industry ratio analysis as part of the commercial loan application for
expansion and …

CORPORATION BANK-RATIO ANALYSIS (has a credit-deposit ratio of 57.71 percent).

Asia Africa Intelligence Wire
| January 31, 2005 | COPYRIGHT 2003 Financial Times Ltd. This material is published under
license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries
regarding rights should be directed to the Gale Group. (Hide copyright information)Copyright
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(From India Business Insight)

Corporation Bank has a credit-deposit ratio of 57.71 percent. The ratio analysis of the company
was done taking balance sheet figures as a simple average of 2003-2004 and 2002-2003 and
annualising profit and loss account figures.

Its cash-deposit ratio was at 6.63 percent and ratio of interest expended/interest earned, at

Sep '05 Sep '06 Sep '07 Sep '08 Sep '09
Investment Valuation Ratios
Face Value 10.00 10.00 10.00 10.00 10.00
Dividend Per Share -- -- -- -- 1.00
Operating Profit Per Share (Rs) -14.70 12.84 14.47 11.78 22.00
Net Operating Profit Per Share (Rs) 179.77 245.40 249.96 221.81 240.17
Free Reserves Per Share (Rs) 50.69 55.21 59.07 64.05 85.24
Bonus in Equity Capital 26.90 26.90 23.21 21.41 21.41
Profitability Ratios
Operating Profit Margin(%) -8.17 5.23 5.79 5.30 9.16
Profit Before Interest And Tax Margin(%) -12.17 2.98 3.60 3.15 7.39
Gross Profit Margin(%) -18.96 1.32 3.30 3.17 7.42
Cash Profit Margin(%) 7.03 3.28 1.82 0.18 5.79
Adjusted Cash Margin(%) -19.74 -0.42 2.98 0.18 5.79
Net Profit Margin(%) 2.99 1.06 -0.30 0.58 4.10
Adjusted Net Profit Margin(%) -24.11 -2.84 0.70 0.58 4.10
Return On Capital Employed(%) -13.06 5.35 8.57 6.30 10.29
Return On Net Worth(%) 7.50 3.52 -1.00 1.63 6.57
Adjusted Return on Net Worth(%) -62.72 -9.69 2.34 -5.79 6.29
Return on Assets Excluding Revaluations 1.88 0.73 -0.24 79.95 150.34
Return on Assets Including Revaluations 1.97 0.89 -0.30 131.37 158.61
Return on Long Term Funds(%) -18.43 7.50 9.70 7.38 10.97
Liquidity And Solvency Ratios
Current Ratio 0.76 0.82 1.01 1.02 0.83
Quick Ratio 0.97 0.94 0.95 1.07 0.71
Debt Equity Ratio 1.28 1.09 0.69 0.59 0.19
Long Term Debt Equity Ratio 0.62 0.49 0.49 0.36 0.12
Debt Coverage Ratios
Interest Cover -1.04 0.76 1.30 1.19 3.34
Total Debt to Owners Fund 1.28 1.09 0.69 0.59 0.19
Financial Charges Coverage Ratio -0.59 1.08 1.58 1.74 3.42
Financial Charges Coverage Ratio Post Tax 1.57 1.65 1.47 1.84 3.14
Management Efficiency Ratios
Inventory Turnover Ratio 10.37 10.34 13.33 11.56 11.99
Debtors Turnover Ratio 6.03 7.55 6.22 4.48 5.14
Investments Turnover Ratio 11.69 11.70 15.47 11.56 11.99
Fixed Assets Turnover Ratio 3.03 4.46 5.44 1.44 1.07
Total Assets Turnover Ratio 1.11 1.59 1.95 1.74 1.35
Asset Turnover Ratio 1.31 1.28 1.47 1.44 1.07

Average Raw Material Holding 45.53 30.06 25.14 27.70 26.53

Average Finished Goods Held 6.50 8.35 3.91 9.39 13.36
Number of Days In Working Capital 88.31 50.40 44.04 65.49 -0.08
Profit & Loss Account Ratios
Material Cost Composition 71.42 74.37 72.78 74.61 67.97
Imported Composition of Raw Materials Consumed 7.01 4.07 3.95 1.76 2.30
Selling Distribution Cost Composition 7.15 6.56 5.67 5.69 7.31
Expenses as Composition of Total Sales 10.81 12.79 11.83 5.41 7.08
Cash Flow Indicator Ratios
Dividend Payout Ratio Net Profit -- -- -- -- 11.82
Dividend Payout Ratio Cash Profit -- -- -- -- 8.12
Earning Retention Ratio 100.00 100.00 -- 100.00 87.64
Cash Earning Retention Ratio 100.00 100.00 100.00 100.00 91.63
AdjustedCash Flow Times 7.27 5.43 7.05 114.72 2.08
Sep '05 Sep '06 Sep '07 Sep '08 Sep '09
Earnings Per Share 5.41 2.63 -0.77 1.31 9.89
Book Value 72.13 74.76 77.31 81.16 150.94

http://www.moneycontrol.com/financials/escorts/ratios/E

Escorts' non-tractor businesses dent June quarter performance

By Vatsala Kamat Mint, New Delhi
Publication: Mint, New Delhi
Date: Wednesday, July 21 2010
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July 21-- Escorts Ltd's tractor business did extremely well in the June quarter, but the much
smaller auto ancillary and railway equipment divisions stole some of sheen from the company's
results. The tractor division reported a 46% rise in revenue and a 70% jump in earnings before
interest and tax (Ebit). This division accounted for around 91% of its sales in the June quarter.

The remaining two businesses which are much smaller in size witnessed an unusual drop in
profitability. Revenue of the railway equipment business, which accounted for 5% of total
revenues, fell by 17% year-on-year (y-o-y). But more importantly, its Ebit fell from Rs10.80 crore
in the year-ago period to Rs10.80 lakh last quarter. According to an analyst, who did not want to
be identified, the sharp fall in profit is because of a drop in the proportion of high-margin work
executed by the railway segment last quarter. He added that the high-end safety and brake
equipment business generates high margin of around 20%. But the firm also does other low-
margin work for the railways and a higher proportion of this form of work seems to have dragged
down the division's margins.

The auto ancillary has been running losses at the Ebit level, but the level of losses rose sharply
last quarter--from Rs2.30 crore in the year-ago period to Rs7.10 crore in the last quarter. So even
though the Ebit of the mainstay tractor business grew by as much as 70%; at the company level,
Ebit grew by a much lower 34%. Ebit margins fell by 31 basis points, but this isn't reflective of the
performance of the company's tractor business, where margins have risen by over 150 basis
points. One basis point is one-hundredth of a percentage point.

Profit before tax and exceptionals rose by an impressive 67%, thanks to a large reduction in
interest costs. The firm reduced its working capital and paid back its term debt, which led to a
sharp drop in financing costs.

Revenue grew by 39% y-o-y to Rs811 crore, again driven by the tractor business. Tractor
volumes grew 39% and, aided by a rise in realizations, the segment's revenue grew 46%.

The sales outlook for the ensuing quarters is promising, according to analysts. However, the drop
in company-wide margins owing to the poor performance of the railway equipment and auto
ancillary businesses is a worry. Its shares have corrected by 4% since the results were
announced. At current levels of around Rs200, the stock discounts its estimated fiscal 2011
earnings (September year-ending) by around 11 times.

Vatsala Kamat