Tate and Lyle Performance Analysis
Tate and Lyle Performance Analysis
Introduction
Every well-run company and investors extensively make use of different financial analysis tools in order to determine the current and future prospects of a company. Different tools and techniques are used to analyse financial statements to derive estimates and inferences useful for decision making. […] posits the need to conduct a business strategy analysis in order to understand the industry, where the nature of the industry could change the interpretation of the figures. Furthermore, accounting and prospective analysis are performed to adjust the figures to reflect the economic reality and to bring the figures up-to-date respectively. These steps are suggested to be necessary in order to improve the quality of analysis. This report will focus on evaluating the different tools used for financial statement analysis, where annual report data from Tate & Lyle PLC (T&L) will be used to illustrate the tools.
Company Profile
Tate & Lyle is a world-leading manufacturer of renewable food and industrial ingredients. All the ingredients of the firm are produced from renewable crops, predominantly corn (maize) and sugar cane. The firm takes these renewable crops and transforms them through the use of innovative technology into value added ingredients for food, beverage and industrial customers. In 1921, Tate & Lyle was founded in the UK, but its roots can be traced back to a number of firms established in the middle of the 19th century focused on sugars in Europe and corn milling in the US and Europe.
Horizontal and Vertical Analysis
Table 1: Horizontal Analysis of Tate & Lyle
ITEMS
2017
2016
Change (%)
Total Revenue
2.75B
2.36B
16.52
Cost of Goods Sold
1.93B
1.65B
17.50
Gross Income
827M
710M
16.47
Pretax Income
201M
98M
114.28
Net Income
255M
121M
110.74
Info retrieved from Market Watch https://goo.gl/RBZ6n9
Horizontal analysis looks at the trend of financial statements over multiple periods, using a specified base period. Additionally, analysts and investors could use horizontal analysis to compare a company’s growth rates in relation to its competitors and industry. From the above table…
ITEM
2017
%
2016
%
Revenue
2.75B
2.36B
COGS
1.93B
1.65B
Gross Income
827M
710M
Profit Before Tax
201M
98M
Net Income
255M
121M
Vertical analysis reports each line item of a financial statement as a representation of the percentage of the statement’s main focus. Vertical analysis allows for a company’s financial statement to be represented within a standard process across all industries.
Although it may show that Tate and Lyle has positive growth with a significant increase in 2015, comparison with the past is not necessarily helpful when the objectives of most analysis is to predict future prospects. Furthermore, since this form of analysis do account the effects of inflation and major fluctuation in figures due to abnormal actions, further analysis and an effective benchmark is necessary.
Balanced Scorecard
BSCs are used extensively in business and industry, government, and nonprofit organizations worldwide. Gartner Group suggests that over 50% of large US firms have adopted the BSC. More than half of major companies in the US, Europe, and Asia are using the BSC, with use growing in those areas as well as in the Middle East and Africa. A recent global study by Bain & Co listed balanced scorecard fifth on its top ten most widely used management tools around the world, a list that includes closely-related strategic planning at number one. BSC has also been selected by the editors of Harvard Business Review as one of the most influential business ideas of the past 75 years.
One of the most powerful elements in the BSC methodology is the use of strategy mapping to visualize and communicate how value is created by the organization. A strategy map is a simple graphic that shows a logical, cause-and-effect connection between strategic objectives (shown as ovals on the map). Generally speaking, improving performance in the objectives found in the Organizational Capacity perspective (the bottom row) enables the organization to improve its Internal Process perspective (the next row up), which, in turn, enables the organization to create desirable results in the Customer and Financial perspectives (the top two rows). For each objective on the strategy map, at least one measure or Key Performance Indicator (KPI) will be identified and tracked over time. KPI’s indicate progress toward a desirable outcome.
Strategic KPIs monitor the implementation and effectiveness of an organization’s strategies, determine the gap between actual and targeted performance and determine organization effectiveness and operational efficiency. The company’s primary goal is to deliver long-term sustainable and profitable growth. In a year of slowing economic growth and considerable uncertainty in the Eurozone, 2012 was another decent year for Wolseley. Underpinning this were three main factors: better customer service by their business units, continued like-for-like revenue growth trends particularly in the USA and Canada, and their ongoing focus on operational efficiency which has delivered further improvements in the trading margin of 40 basis points, despite challenging markets.
Ratio Analysis
Ratios are another analytical method that is used to find areas of strength and weakness by relating multiple line items. Furthermore, there is no universally accepted set of ratios that will provide a complete picture of a company’s prospects, and the selection of ratios should be based on clear objectives and a firm understanding of the ratios (Subramanyam & Wild, 2009). Ratios will be discussed under 5 categories as suggested by Fraser & Ormiston (2013); profitability, liquidity, leverage, activity, and market ratios.
Liquidity
Maintaining long-term profitability is the key to attracting financial capital, but it is necessary to survive the short-term by meeting the financial obligation on a timely manner. Liquidity ratios measures whether a company is liquid to pay its financial obligation. Liquidity ratios include current assets such as inventory which overestimates the liquidity status, and a more contemporary method such as the cash flow analysis is more appropriate to make a more incisive interpretation.
Solvency
Market ratios are affected by inflation and earnings manipulations resulting in showing distorted figures. Furthermore, due to the market inefficiency and the ratio depending on market value, ratios will not show the true value of the company. Tate’s EPS has a steady but slow increasing trend over the years, implying that it is strengthening its share value, T&L show a slope due reason discussed earlier but, has a higher amount compared Tate due to the size of company.
Working Capital Management
Known as asset utilization ratios, measures the efficiency of a company to convert assets, liability, and capital accounts into cash or sales. Inventory and asset turnover shows how many time inventory was sold and replaced over a period, and revenue generated relative to its assets respectively. Based on the illustrations, Tate has a higher inventory turnover due it being in the wholesale industry, while T&L has to manage inventory of manufactured goods. Tate also has higher asset turnover overall but with slightly decreasing trend since 2015, showing signs of inefficient use of assets, while T&L is increasing from 2016. Turnover ratios only show how well a company is earning profits but not how well it generated it and therefore, it lacks qualitative information.
Profitability
ROA measures how efficiently a company is generating profits from its assets. Tate has shown steady growth while T&L show similar slope which could to similar reasons. Profitability ratios such ROA do not show the cause of increase making it hard to determine what caused to increase profitability. The effects of inflation make comparison with past difficult and requires careful attention. Therefore, a better system should be used that shows the cause of the increase.
Growth Ratio
NPM measures the percentage of revenue when all cost of sales is deducted. It measures how much a company retains as earnings for every £1 of goods sold. Based on the above figure, T&L has a higher margin due to the scope of the business, which is the manufacturing of food ingredients and having a global presence while Tate is present in UK and India. However, Tate has a steady growth, while T&L’s steep slope in 2015 could be due to the accident that occurred in Singapore and US which caused supply chain issues […].
Key Performance Indicators
There is certain limitation inherent when using relative or absolute figures, where it does not account the effects of inflation, structural changes, and not having a strategic direction that considers more than just financial measures when analysing. Therefore, using the company’s internal Key Performance Indicators (KPI) is considered a more effective and strategic method. KPI measures the critical success factors determined by the company, where meeting those goals can achieve the strategic objective of the company […]. KPI’s are a product of the balanced scorecard method that includes four perspectives, namely financial, customer, internal process, and learning and growth […]. It considers non-tangible factors which are important in value creation, making it a more strategic tool. It measures against future goals compared to the past, which makes more realistic and relevant, and overcomes limitations of using past data.
[DRAW HISTOGRAM ON TATE’S PERFORMANCE]
The above figure shows Tate’s KPI, where customer satisfaction maintains a steady position and operating profit with an increasing trend since 2013. Sales change has grown 5%, showing a strong growth. However, net cash has shown a decreasing trend, where the slope in 2016 is due to the £61.9m paid in dividend and £45m spent on the acquisition of Budgens and Londis. There are certain limitation KPI’s itself where the measures and goals are set internally, where easily achievable goals are set due to bias and attracting investors through false achievements.
Discussion — Advantages and Limitations of Analysis Techniques
Ratios provide useful insights into the underlying conditions of the company. It provides insights into the company’s liquidity, profitability, and asset utilization, and ascertain its trend over the years. However, as shown in every ratio category, different ratios have different shortcomings such as showing only relative figures, not accounting effects of inflation, depending on past data which is not a good predictor of the future, contingent upon the quality of data, and not showing the cause of increase or decrease. Furthermore, ratios used in isolation will have bad interpretation such as Tate and Lyle leverage ratio showing high percentage may seem appealing but, with the D/E ratio it shows it does not use debts hence, it shows signs of not taking risk. Therefore, ratios not being able to relate each other also another disadvantage that requires a tool that overcome these limitations identified. As analysed earlier comparative and ratio analysis are effective tools to analyse a company. During the course of the evaluation, several shortcomings that were related to each tool were identified. Common shortcoming such as the use of past data, quality of data, providing only quantitative information, relaying purely on company accounting data, not having a strategic value, and getting affected by market condition are were identified. The following section will focus on several contemporary tools that can overcome the limitations identified throughout the course of this report.
Conclusion
In conclusion, there are many tools used for financial analysis, and as evaluated earlier, these tools are effective for pinpointing areas of weaknesses. Limitations inherent in the data used makes these tools ineffective, indicating the necessity to conduct accounting and prospective analysis. Analysis done on the companies showed certain areas of weakness and strength, but revealed the necessity to conduct more analysis in order to make more accurate interpretation. Contemporary tools identified overcomes the shortcomings identified throughout the report. It was evident that a single tool cannot be used to derive information for decision making, and the need for multiple tools to evaluate multiple areas of a company has shown to be more dynamic.