Background Information on the Company
PZ Cussons Plc. is a UK based consumer product group. The principal activities of the group are the manufacture and distribution of soaps, detergents, toiletries, beauty products, pharmaceuticals, edible oils, fats, electrical goods, and nutritional products.
The company’s products can therefore be categorized into personal care, home care, baby care, beauty products, food and nutrition, and electrical goods. They have supply chain and distribution networks in Africa, Asia, and Europe. Their mission is to enhance the lives of customers with quality, value, and innovation. Their vision is to be a growing and dynamic company who are passionate about their leading brands and drive innovation in everything they do.
The company has four major strategies which are operating in selected categories where their brands have a strategic advantage and offering growth opportunities which are profitable; operating in selected geographies either through their own infrastructure or through partnership; operating a flexible and evolving supply chain designed to service their categories and working with people who share their unique CAN DO value. The company’s major competitors are Mcbride Plc. , Kao UK Ltd, Creightons Plc. , and Swallowfield Plc. Marketline, 2012).
Interpretation of Financial Statements Using Ratio Analysis Profitability Ratios
These ratios measure the ability of a company to generate earnings in relation to its sales, assets, and equity
(Ready Ratios, 2012). 2012 2011
Return on Capital Employed 49.6 = 8.16% 107.3 =16.43% (PBIT/Total Assets-Current liabilities) 930.5 – 322.4 938.5 – 285.6
Return on Equity (ROE) 34.4 = 7.51% 70.4 = 14.85% (Profit after tax/Shareholders’ funds) 458.3 474
Operating Profit Margin 49.6 = 5.77% 107.3 = 13.1% (PBIT/Sales) 858.9 820.7
Gross Profit Margin 309.2 = 40% 325.2 = 39.6% (Gross Profit/Sales) 858.9 820.7
Overheads/Sales 134 + 125.4 = 30% 135 + 83.3 = 26.6% 858.9 820.7
Sales Growth 858.9- 820.7 = 4.65% (Yr 2 Sales- Yr 1 Sales/ Yr 1 Sales) 820.7
The ROE is low 7. 51%, down from 14. 85% in 2011 which shows that a much lower profit has been made on the shareholders’ investments.
This is largely due to the decrease in profits for the year. The reduction in profit has also impacted the ROCE which is down to 8. 16% from 16. 43% in 2011. There is a marginal increase in the gross margin. This is a result of an increase in the cost of sales which could have been affected by the rise in costs of raw materials as pointed out in the Chairman’s statement and offset by a small 4. 65% increase in sales. The operating profit to sales has reduced drastically, as a result of a high increase in overheads and the revenue increase.
The increase in overheads was due to exceptional items related to administrative expenses. From the annual report, it can be seen that there was a supply chain optimization project initiated to tackle rising material costs, wage inflation in emerging markets, and to reduce overheads of manufacturing activities. This project is an exceptional item included in the operating profit. Other exceptional items included are the acquisition of Fudge by the company and an impairment of the Australian home care brand due to worsening trade conditions.
It could be said these are one-off items that impacted overheads and resulted in a reduced operating profit for the year but the group will need to improve its margins and control overheads to enhance its profitability.
These ratios measure the ability of a company to meet its short term obligations as they fall due
(Ready Ratios, 2012). 2012 2011
Current Ratio 393. 3 = 1. 22 417. 4 = 1. 46
(Current Assets/Current Liabilities) 322. 285. 6
Current Ratio excluding current debt 393. 3 = 1. 70 417. 4 = 1. 65 322. 4 – 90. 8 285. 6- 32. 5
Acid Test/ Quick Ratio 393. 3 – 173. 6 = 0. 68 417. 4 – 151. 7 = 0. 93
(CA – Inventories/ CL) 322. 4 285. 6
Acid test excluding current debt 393. 3 – 173. 6 = 0. 95 417. 4 – 151. = 1. 05 322. 4 – 90. 8 285. 6 – 32. 5
The current ratio has fallen from 1. 46 to 1. 22 likewise the acid test ratio which has fallen from 0. 93 to 0. 68. There is an increased inventory level which may justify the statement in the financial review that “there were high working capital levels especially in Nigeria”. Another aspect to consider is the cash balance which was significantly lower by 34. 6 % to the previous year. It is useful to consider the business context. From the same review, it could be noted that some capital expenditure took place which affected the cash level, the major one being the acquisition of Fudge which was mentioned above, and an investment in a joint venture. Another key cash outlay was their contribution to the closed UK salary scheme during the de-risking exercise. The ratios are also impacted by the inclusion of borrowings in current liabilities which means the debt is repayable in the current year. If the ratios are recalculated by excluding the current debt, the current ratio would be more acceptable 1. 70, a marginal increase from 2011.
The acid test ratio excluding the borrowings is 0. 95, a marginal decrease from 1. 05. This is because, for the acid test, current liabilities (excluding debt) have increased more than current assets (excluding inventory). Given the explanations stated, these ratios are probably good results but a trend analysis may shed more light on the ratios.
Activity/ Efficiency Ratios
These ratios analyze how well the company’s assets and liabilities are utilized
(Collier, 2012). 2012 2011
Debtors Collection Period 114. = 49 days 122. 5 = 54 days
(Trade Receivables/Sales) (858. 9/365) (820. 7/365)
Payment Period 104 = 69 days 117. 8 = 87 days
(Trade Payables/Cost of Sales) (549. 7/365) (495. 5/365)
Asset Turnover 858. 9 = 92. 3 % 820. 7 = 87. 4%
(Sales/Total Assets) 930. 5 938. 5
Inventory Turnover 549. 7 = 3. 16 x 495. 5 = 3. 26 x
(Cost of Sales/Inventories) 173. 6 151. 7 365/3. 16 = 116 days 365/3. 26 = 112 days
It may appear that the company is doing a good job at managing its receivables and payables with a decrease in both the collection and payment periods but knowledge of the credit limit and terms might have helped in analyzing the situation as well as comparison with the industry average.
Asset turnover has risen from 87. 4% to 92. 3% indicating that the company has been able to generate more sales with its asset base. This is as a result of an increase in sales revenue and a lower level of current assets, especially the decrease in cash level. Inventory turnover has declined from 112 days of inventory holding to 116 days. Both ratios are quite high which implies that inventory is been kept in the stores for a long time between its purchase and its sale. The company would need to be able to manage its inventories more efficiently.
It measures the level of debt/borrowings in relation to shareholders’ equity
(Collier, 2012). 2012 2011
Gearing 0 = 0 15 = 3%
(Long term debt/equity + debt) 458. 3 + 90 474 + 15
Gearing (including current debt) 0 + 90. 8 = 16. 54% 15 + 32. 5 = 9. 87% 458. 3 + 0 + 90. 474 + 15 + 32. 5
Interest Cover 49. 6 = 13. 78 x 107. 3 = 41. 26 x
(PBIT/Interest Payable) 3. 6 2. 6
The gearing is 0 for 2012 indicating that the debt is repayable within the current year. By including the current debt, the gearing ratio shows an increase from 9. 87% in 2011 to 16. 54% in 2012. This is a more realistic debt level as the Statement of Cash Flows in the annual report reveals a $ 9. 4m borrowing in 2012. The interest cover has declined from 41. 26 times to 13. 78 in 2012. This is due to the decrease in operating profits but nevertheless the interest cover is still healthy.
Shareholder Return Ratios
These ratios measure the return to shareholders on their investment in the business
(Collier, 2012). 2012 2011
Dividend per share (DPS) 6. 717p 6. 06p
Market value per Share $ 3. 23 $ 3. 4
(Both disclosed in the annual report) Dividend payout ratio 28. 8 = 83. 72% 26 = 36. 93%
(Dividends paid/Profit after tax) 34. 4 70. 4
Dividend yield $ 0. 06717 = 2. 08% $ 0. 0606 = 1. 66%
(DPS/Market value per share) $ 3. 23 $ 3. 64
Earnings per share (EPS) (Disclosed in income statement) 8. 03p 16. 48p
Price/earnings ratio $ 3. 23 = 40. 22 x $ 3. 64 = 22. 09 x
(Market value per share/EPS) $ 0. 0803 $ 0. 1648
The earnings per share have greatly reduced from 16. 48 to 8. 03 due to the decrease in profits, as there has been no change in shareholder capital. The dividend paid has increased slightly, despite the fact that profits were low and this consumed a high portion of the after-tax profits as shown by the dividend payout ratio. This would suggest the company has a high shareholder value.
The dividend yield is an effective interest rate that fluctuates in relation to the share price. The yield has increased slightly due to the marginal increase in dividends paid and the reduction in the market value of the shares. The price/earnings ratio has seen a dramatic increase from 22. 09 to 40. 22 which is largely due to the decrease in the EPS. It however reflects that investors may have a high expectation for future growth. Ratio analysis is more useful when the ratios are interpreted as a trend over time or by comparison to industry averages, to competitor ratios, or to predetermined targets.
As such, two years is too short to draw meaningful conclusions about the performance of the group (Collier, 2012). Below is a five-year summary from which the trend can be understood more clearly.
PZ Cussons Five-Year Summary of Performance
In $ m
Sales growth (year on year)
Earnings per share
Dividends per share
Note: The EPS and DPS were disclosed in the financial statement. Whilst the operating margin and sales growth are based on the information in the table which was also gotten from the company’s financials, the calculation of current and gearing ratios is below:
010 2009 2008
Current ratio 403. 7/219. 1 354. 9/182. 6 327. 4/145. 4
Gearing 30/(458. 8 + 30) 44. 9/(389. 9+ 44. 9) 59. 9/(348. 7 + 59. 9)
The figures show an increase in sales over the years with a sharp decrease from the year 2009 to 2010, though a good operating margin was generated. This could imply that a low-cost base was being maintained.
There has been a steady improvement in profits with a substantial reduction in 2012 though there was a lower margin in 2009 which would suggest that profits as a return on sales was quite low. The EPS has increased year on year with a drastic decrease in 2012 due to lower profits. The DPS has increased marginally year on year which reflects a high shareholder value. The current ratio has declined over the years. It could be that there have been high inventory levels. It is vital to note that a working capital ratio that is too high may imply that the company is not utilizing its assets effectively as could have been the case in 2008.
The company should seek to manage its working capital more efficiently. The gearing ratio has been on the decrease to a point of no long term debt in 2012. This may appear to be a good thing but it is worth noting that long term borrowings are needed to fund current assets. Research Matrix The matrix below shows a summary of the journal articles read in relation to this work. It identifies some themes found in the literature. The themes are ranked on a scale of importance with 1 being less important and 5 being extremely important to the analysis of my work.
Authors of Journal Articles
Scale of Importance
Roman (2011); Sundkvist, Hedmanand Almstrom (2012)
Muradoglu, Bakke and Kvernes (2005)
Cette, Durant and Vilette (2011)
Profitability : ROCE
Koonce and Lipe (2010)
Bierman and Hass (2009)
Banos-Caballero, Garcia-Terueland Martinez-Solano (2012)
De Wet and Du Toit (2007)
Profitability : ROE
Dossi and Patelli (2010)
Explanation and Analysis of Research Matrix According to Sundkvist, Hedman, and Almstrom (2012), the profitability of a company are driven by controllable factors which are the internal resources of the firm such as raw materials and uncontrollable factors such as government regulations.
One way of increasing profitability is to reduce costs. In doing this, the costs have to be broken down and cost drivers identified (Roman, 2011; Sundkvist, Hedman and Almstrom, 2012). This theme is important as cost reduction is a crucial way to maintain profitability. In the case of PZ Cussons, the supply chain optimization project was initialized to cut down on manufacturing overheads. Muradoglu, Bakke, and Kvernes (2005), argue that the gearing ratio is vital in appraising bankruptcy risk, and investors like a low gearing ratio as there is a lower risk that they lose money on their investments. This theme is very important as a very high gearing increases the financial risk of a company.
Cette, Durant, and Villetelle (2011) stress the limitation of ROCE in that when a firm’s future outlook is good and this in turns leads to an increase in assets and there is no change in profit, then the ratio goes down implying the firm is less profitable irrespective of better prospects. This is extremely important as it highlights issues that should be taken into account when interpreting this ratio. Koonce and Lipe (2010) argue that the earnings trend of a company affects the investors’ acumen about the future prospects of that company as such a positive earnings trend enhances the price-earnings ratio. This theme is very important as it helps in our understanding of the price-earnings ratio. According to Bierman and Hass (2009), EPS growth can be ascertained by the use of share/stock repurchase and the variations in the rates used in profit retention. He argues for the use of earnings growth models.
This theme is of little importance to my analysis as there was no share repurchase in the current year of PZ Cussons and growth models were not used in my work. Based on the research carried out by Banos-Caballero, Garcia-Teruel, and Martinez-Solano (2012), they claim that high investment in working capital has the ability to improve the performance of a firm in profit-terms up to an optimal point at which higher working capital levels would have a negative effect on performance and this point is reached when the cost of holding working capital exceeds the benefits. This theme is important as it seeks to explain working capital management. De Wet and Du Toit (2007) emphasize the pitfalls of return on equity measure.
As such the earnings figure can be subject to manipulation legally due to changes in accounting policy. This is extremely important as it cautions us in our interpretation of the ROE. Lifland (2011) argues that effective working capital management is characterized by an increase in asset turnover and a decrease in receivables and inventories. He also highlights the fact that companies may have to seek external finance to meet working capital requirements. This is very important as it seeks to give insight on the interpretation of working capital ratios In determining financial performance, it is also useful to consider non-financial measures such as employee and customer satisfaction as well as measuring business processes.
Though these are supplementary measures, they cannot be substituted for financial measures (Dossi and Patelli, 2010). It is good to draw attention to this but it is of less importance to my work as I only consider the financial ratios. It is crucial to bear in mind that there are limitations inherent in the use of ratio analysis, some of which were pointed above. Another factor is that they are based on historical records. The values could be affected by inflation so it is useful to modify the profits to reflect holding gains and losses which result from variation in the value of assets and liabilities (Cette, Durant and Villetelle, 2011). Despite all this, ratios remain a significant tool in analyzing financial statements (Collier, 2012).
Based on my analysis, PZ Cussons seems to perform quite well; the business environment and the challenges in the different divisions might account for the lower performance this year. However, it is vital to note that this analysis was based on annual reports which are produced in part for public relations. As such companies seek to promote their interests therein. To fully understand the company performance, and evaluation of the industry information and competitor performance would be required.
Banos-Caballero, S. , Garcia-Teruel, P. and Martinez-Solano, P. (2012)
“How does working capital management affect the profitability of Spanish SMEs? ” Small Business Economics, vol. 39, no. 2, pp. 517-529. Bierman Jr , Harold and Hass, J.E. (2009)
“Explaining Earnings Per Share Growth”, Journal of Portfolio Management, vol. 35, no. 4, pp. 166-169. Cette, G., Durant, D., and Villetelle, J. (2011)
“Asset Price Changes and Macroeconomic Measurement of Profitability”, Review of Income & Wealth, vol. 57, no. 2, pp. 364-378. Collier, P. M. (2012)
Accounting for Managers Interpreting Accounting Information for Decision Making 4th edn. Sussex: John Wiley & Sons. De Wet, J. H. V. H. and Du Toit, E. (2007)
“Return on equity: A popular, but a flawed measure of corporate financial performance”, South African Journal of Business Management, vol. 38, no. 1, pp. 59-69. Dossi, A. and Patelli, L. 2010)
“You Learn From What You Measure: Financial and Non-financial Performance Measures in Multinational Companies”, Long range planning, vol. 43, no. 4, pp. 498-526. Koonce, L. and Lipe, M. G. (2010)
“Earnings Trend and Performance Relative to Benchmarks: How Consistency Influences Their Joint Use”, Journal of Accounting Research, vol. 48, no. 4, pp. 859-884. Lifland, S. A. (2011)
“The Corporate Soap-Opera “As the Cash Turns”: Management of Working Capital and Potential External Financing Needs”, Review of Business, vol. 32, no. 1, pp. 35-46. Marketline (2012)
‘Company Profile PZ Cussons Plc’. Marketline Report [Online]. Available at www. marketline. com (Accessed: 7 November 2012). Muradoglu, G., Bakke, M. and Kvernes, G. L. (2005)
“An investment strategy based on gearing ratio”, Applied Economics Letters, vol. 12, no. 13, pp. 801-804. PZ Cussons (2012)
Annual Reports and Accounts. Available at http://www. pzcussons. com/pzc/ir/reports (Accessed: 6 November 2012). Ready Ratios (2012)
Reference. Available at http://www. readyratios. com/reference (Accessed : 5 December 2012). Roman, F. J. (2011)
A Case Study on Cost Estimation and Profitability Analysis at Continental Airlines, American Accounting Association. Sundkvist, R., Hedman, R. and Almstrom, P. (2012)
“A model for linking shop floor improvements to manufacturing cost and profitability”, International