Executive Summary
The paper is designed to develop a credit report of Premier Foods Plc. The aim of the paper is to analyze the financial health and performance of the company to allocate the credit rating and line to the company based on its performance in the market. For this purpose, the paper firstly calculated the financial ratios of the company based on the financial information from the annual reports of premier foods. Based on the ratios of the company, the trends are derived. Other than premier foods, the ratios of its competitors are also derived to assess the trend from 2009 to 2014/2015.
The ratios of Premier foods and its competitors are compared to understand the performance of the company in line with the industry trends. The ratios have found that the company is out of the trend and it is mainly based on the creditors as the major investments in the company have been developed based on the debt and loans. On the other side, the industry is relying on the investments of shareholders. It means that the company is more risky in the market.
Despite of the financial performance, the business events are also discussed that helps in understanding the competitive intensity and the factors affecting the business of premier foods. From the events, it has found that the company is large and well known and also involved in sustainability. The economic crisis, increasing competition, low inflation, and low prices are some of the major factors that can create risks for the company.
Based on the financial analysis and business events, B rating is assigned to the company and £50,000 is allocated as the credit line or limit for premier foods based on the debt conditions, profitability and interest coverage of the company.
Ratio Calculation and Trend Analysis
Ratios calculation and analysis is the most common and significant method of financial analysis of the company. It is actually considered as the analysis of financial statement that is the technique to examine the financial performance of the organization. To analyze the financial performance of Premium foods, the ratios are calculated in four types include:
Liquidity
Cash Flow Adequacy
Leverage Ratios
Profitability
Liquidity
Liquidity ratios are used to assess the ability of the company to pay off its both long term as well as short term liabilities. There are two ratios mainly used to analyze the liquidity include current ratio and quick ratio. Here are calculations of current and quick ratios for premium foods:
Current ratio
Current Ratio = Current Assets/Current Liabilities
Current Ratio = 237/267
Current Ratio = 0.89
The calculation above is the current ratio for 2014/2015 year; however, the graph below shows the trend of ratios from 2009 to 2015. The calculations of the ratios can be found in the Appendix C.
The trend of current ratio shows that the ratio has been fluctuated over the period of time; however, on the whole the growth can be seen. In 2009, the ratio was 0.59 that is increased to 0.89 in 2014/2015. In 2011 and 2014, the ratio has declined. In 2014/2015, the company has added some additional investments in non- current assets that include retirement benefit assets, loans to associates and investment in associates; however, current assets were declined. The actual reason for decline is the decrease in current assets, mainly in trade and other receivables and cash and cash equivalent (Premier Food Plc, 2015). Though, the current liabilities have also declined in the same year, however, the decrease in current assets might be high that was resulted in the decrease in current ratio.
Quick
Quick Ratio = Current Assets – Inventories /Current Liabilities
Quick Ratio = 237 - 68/267
Quick Ratio = 0.63
The above quick ratio calculation is based on the financial statement of the year 2014/2015; however, the graph above shows the trend of quick ratio.
The graph shows that the quick ratio of premier food has been fluctuated; however, on the whole, it has increased from 2009 to 2014/2015. From 0.37, it has reached to 0.63, though; it has declined from 0.81 in 2013 to 0.63 in 2014. Again, the reason is the decline in the current assets as there has no change in inventories in 2013 and 2014. It means that quick ratio has also been declined due to the change in current assets and current liabilities as well.
Liquidity Ratio of Peers
It is very important to compare the ratios of the company with its peer or competitors to understand that either the company is moving with the industry trends or not. There are two major competitors of Premier Food Plc that include Associated British Food and Nestle UK Ltd (Hoover, n.d.). The calculation of the ratios of competitors can be seen in the Appendix D. The graphs below show the liquidity ratios of both the competitors:
The current ratio of Associated British Foods Plc has been similar over the period of time that is above 1.2. However, it has increased from 1.23 in 2009 to 1.35 in 2014. It means that the ability of the company to pay debt has been increased.
Like current ratio, quick ratio has also been maintained at 0.6, where, the growth can be seen from 0.61 in 2009 to 0.63 in 2014.
The current ratio of Nestle LTD has been declined from 1.11 in 2009 to 1.03 in 2014. In 2011, 2012 and 2013, the current ratio went below 1 that has increased in 2014. The quick ratio of the company has increased from 0.53 in 2009 to 0.69 in 2014.
The growth in both liquidity ratios means that the ability of the company has been increased to pay its debt.
Cash Flow Adequacy
Cash flow Adequacy ratio shows the ability of the company to generate enough money from the operations to pay for its investments as well as left with enough to repay loans and shareholders. The Cash Flows can be seen in the Appendix E. The graph below shows the cash flow adequacy of Premier food:
It can be seen in the graph that there is a huge fluctuation in the cash flow adequacy. The major reason for the fluctuation is the difference in the cash generated from operations that have hugely varied over the period of time as found in the annual reports of the company. It has mentioned in the notes that operating cash flow has declined because of the decrease in inventories, loss of property and equipment and the operating loss in the year 2014 (Premier Food Plc, 2015). In 2010 and 2013, the cash flow adequacy was very high.
Cash Flow Adequacy of Peers
The graph below shows the cash flow adequacy of Associated British Food Plc:
It can be seen in the graph that the cash flow adequacy of the company has been increased over the period of time and reached to 2.032 in 2014 from 1.47 in 2010. It means that the company has generated enough cash from operations to pay for the investments as well as to pay to the shareholders and debt.
The graph below shows the cash flow adequacy of Nestle LTD:
The cash flow adequacy of Nestle LTD has increased with little growth from 2010 to 2014. Only in 2011, it has declined where, on the whole it as increased to 2.692 in 2014 from 2.524 in 2009.
Leverage
The leverage ratio shows the debt efficiency and level of the company. Although, borrowings and debts are significant for the companies, however, sometimes, it causes vulnerable problems for the business. The leverage ratios are as follows:
Debt-to Equity
Debt to Equity = Total Debt/Total Equity
Debt to Equity = £1,373.20/ £540.20
Debt to Equity = 2.05
Debt to equity ratio of premier foods has been varied over the period of time. The graph below shows that the ratio is very high in 2013. According to the annual report of 2013, the company has lost equity of £245.9 million (Premier Food Plc, 2013). The loss in equity is the major reason for the huge increase in debt to equity. The high debt to equity ratio means the company is at risks as it is more relying on the creditors as compare to investors.
Total Debt to Total Assets
Debt to Assets = Total Debt/Total Assets
Debt to Assets = £1,373.20/ £1,913.40
Debt to Assets = 0.72
The debt to assets ratio in the graph above shows that the ratio has been little fluctuated; however, it has been maintained below 1. The ratio was 0.71 in 2009 that has increased to 0.72 in 2014. It means that almost 70% of the assets of the company are based on debt. Less than 1 debt to equity is considered as less risky, however, more than 0.5 means that the majority of the assets are hold based on the debt and the investors own small part of the assets.
Total Long term Debt to Total Assets
Long term Debt to Assets = Long term Debt/Total Assets
Long term Debt to Assets = £1,105.60/£1,913.40
Long term Debt to Assets = 0.58
The total long term debt to total assets ratio has been increased from 2009 to 2014, however, it has decreased from 2013 to 2014. It means that the long terms borrowings of the company have increased in 2013 and 70% of the assets were based on the long term debt.
Leverage of Competitors
The graphs below show the leverage ratios of the competitors of Premier foods:
Debt to equity ratio of ABF has been decreased from 0.17 in 2009 to 0.09 in 2014. It means that the investments from the shareholders have increased and the debt of the company has decreased that is considered as good for the financial health of the company.
Total debt to total assets ratio has also reduced from 2009 to 2014 and reached to 1.63 from 1.9. It shows that ABF has more debt as compare to its assets. On the other side, the long term debt to assets ratio has decreased from 0.09 in 2009 to 0.06 in 2014. It means that the company is less relying on its long term debt.
Debt to equity ratio of Nestle has not been changed from 2009 to 2014 and maintained at 0.18; however, it has decreased in 2010 and 2014. The overall trend shows that 18% of the total assets are debt, while the remaining assets are owned by shareholders. It means that the company is more relying on the shareholders’ investment.
Total debt to total assets of the company has been decreased from 2.27 in 2009 to 1.9 in 2014. On the whole the debts are more than the assets owned by the company. Despite of this, the trend of long term debt to assets shows that the company is not relying on the long term debt as it has maintained below 0.1, It means that the company has very few long term loans.
Interest Coverage
The interest coverage ratio shows the ability of the company to pay its interest expense from the income of the company. Below is the calculation of interest coverage for 2014/2015, where, the graph below shows the trend of the interest coverage from 2009 to 2014.
Interest Coverage = Income before income tax and interest/ Interest Expanse
Interest Coverage = -£135.60/£82.5
Interest Coverage = -1.644
The calculation and graph shows that the company has not been able to pay its interest expense from the income. The loss in the income is the major cause of its negative interest ratio. In 2009, 2012 and 2013, the company has made some profitable income to pay its interest expense; however, on the whole, the company is not able to pay its interest expenses.
Interest coverage of Peers
The interest coverage of Associated British Foods can be found in the graph of its leverage ratios and it can be seen that the interest coverage has been increased from 6.69 in 2009 to 15.17 in 2014.
The graph above shows the interest coverage of Nestle and it can be seen that the interest coverage has declined from 2011 to 2014. On the whole, the trend is maintained above 20.
Profitability
The profitability ratios help in measuring the financial performance of the company that show how much company make profit from its income. The graph below shows the profitability ratios of Premier foods:
Gross Profit Margin
Gross Profit Margin = Gross Margin/ Revenue * 100
Gross Profit Margin = (333.4/964.3) * 100
Gross Profit Margin = 34.6%
Above is the calculation of gross profit margin for the year 2014/2015. The graph above shows the trend, where, it can be seen that the gross profit margin of the company has been increased from 30% in 2009 to 34.6% in 2014. The increase in gross profit margin is the cause of decrease in the cost.
Operating Profit Margin
Operating Profit Margin = Operating Margin/ Revenue * 100
Operating Profit Margin = (-44.1/964.3) * 100
Operating Profit Margin = -4.6%
The above is the calculation of operating margin for 2014/2015. The calculation and graph both show that the operating margin has been fluctuated and declined to -4.6% in 2014 from 6.8% in 2009. The annual report of 2014 has stated that the decrease in oil prices and other costs have resulted in the demand of low prices in the market that directly impacts on the profitability of the company (Premier Food Plc, 2015).
Net Profit Margin
Net Profit Margin = Net Income/revenue * 100
Net Profit Margin = (£-16.9/964.3) * 100
Net Profit Margin = -1.8%
The net profit margin of the company has been declined during the period of 2014 from 2009. The trend in the graph above shows that the net profit margin of the company has been in negative value, where, it has increased during 2009 and 2012. It means that the company has been facing loss.
Profitability of the Competitors
The graphs below show the profitability trends of the competitors of premier food.
The gross profit margin of ABF has been increased from 23.4% in 2009 to 24.3% in 2014; however, it has declined in 2010 and 2011. The operating margin has also been increased from 2009 to 2014, where, the decline can be seen in the year 2011 and 2012. The net profit margin of the company has increased from 3.88% in 2009 to 5.89% in 2014.
The gross profit margin of Nestle has been decreased over the period of time, where, it has increased from 2013 to 2014. The operating margin of the company has also increased from 2009 to 2014; however, the decline can be seen from 2013 to 2014. The net profit margin of the company has increased from 10.37% in 2009 to 15.74% in 2014.
Comparison of Premier foods with its competitors
The interest coverage in comparison has found that premier foods is unable to generate the income to pay its interest expenses, however, on the other side, the ability of its competitors has been increasing. The high dependency on the debt might be the major cause of low interest coverage. As the competitors are less depending on debt and borrowing, therefore, their interest coverage is very high.
The premier foods have been involved in loss rather than developing profitable income, where, the profitability of its competitors has been increasing. Although, the gross profit is high as compare to ABF, however, the operating profit and net profit is lower than ABF where, the high debt might again be the major reason of low profitability and net income.
On the whole, the major different in the industry trend and the company trend is the debt, where, the company is relying on debt and the industry is relying on shareholders’ equity.
Business Related Events
The business related events and news from different sources will help to understand the impacts of different external and internal factors on the strategy, competitive advantage and performance of the company.
Economy
The annual report of 2014 has stated that the economic crisis in Europe and mainly in Britain has resulted in the changing market conditions. The consumers now search for alternative options available in the market. The economic conditions of UK have changed the overall market structure of retail industry. Discounts, online shopping and price decreases are the major impacts of economic crisis on the business in UK (Premier Food Plc, 2015).
The inflation in UK has declined that have impacted on the prices of the products in the country. The consumers have variety of options to buy the products and the companies have reducing their prices in retail war in low inflation market. The current inflation rate is 0.3% in UK. Furthermore, the oil prices in the world have also been declining that is impacting on the input cost of the manufacturing (Cadman, Bernard & Pearson, 2016).
Company
In November 2015, the company has initiated the production of new baking products to launch in the market. The products are claimed to be exclusive in the market. The major aim of the new exclusive baking product line is to offer the home banking products to the consumers with the name of Paul Hollywood. The aim of the new products launch is to increase the turnover rate and the company is expecting the increase in its sales in the future (Bradshaw, 2015).
According to the annual report, the company is more involved in environmental sustainability and offering healthy product line to the consumers. Rather than simply developing itself as the profit oriented company, it is involved in increasing awareness among the consumers and informing them about the better choices for their health (Premier Food Plc, 2015). Although, the company has been facing the losses, however, the environmental friendly nature will help it in long term success and survival.
Management
The management of the company is knowledgeable and experienced that have a vast knowledge, understanding and information of the food industry. The expert management is very important for the efficiency of the companies. The training of the management on site is included in the core activities of the company. The management of the company takes health and safety issues and concerns as serious. The senior management of the company reviews the financial performance and activities of the company on monthly, quarterly and weekly basis. The senior management is also responsible for managing risks on daily basis.
Porter’s five forces
The Porter’s five forces in the external environment help in determining the attractiveness of the company in the marketplace with the help of assessing the competitive pressures and intensity.
Threats from rivals
There are number of food companies exist in the UK market and the competition is increasing very rapidly. Some of the major rivals include Nestle, Associated British Foods, Kraft & Heinz Food, Kellogg, Danone, Kerry Group Plc etc. The threats from the rivals are medium because the name of the company is well recognized however; the prices and discounts from the competitors can cause the issues for premier foods.
Threats from new entrance
As the inflation rate is very low and the manufacturing cost is decreasing because of the reduction in oil prices and the barriers for the new entrance have reduced. Whilst, the threats of new entrance for the company is low as the company is large, popular and well known among the customers with ensuring the quality in the products. It means the new entrance would require having large investment to reach to the standard of Premier Foods.
Bargaining power of buyers
The network of Premier foods is very extensive and geographically diverse that is a chain between the large distributers and wholesalers to small retailers and distributors. Based on the network, it can be said that the buyers have medium bargaining power. As the company itself stated in the annual report that the eating trends among the consumers are changing and the low prices are attracting them to buy the food products from the range of choice available.
Bargaining power of suppliers
The threats from suppliers are low to premier foods as the company is one of the leading in the market and the suppliers are willing to work with it. However, the quality and health and safety aspects of the company might increase the threats from the suppliers as the suppliers can impact the quality of the manufacturing. Recently, the company has written to the suppliers to give money as an investment payment or otherwise face the loss of business with premier food company (Trotmann, 2014). It shows that the threats from suppliers are low but the suppliers are facing threats from the company.
Threats of Substitute
As the company offers good, healthy and quality products, therefore, the threats from the substitutes are low. The low quality products in the market will not be successful in attracting the range of customers over the healthy food products of Premier food. Additionally, the company has launched new exclusive products that are another reason for low threats from the substitutes.
SWOT analysis
The SWOT analysis of Premier food is as follows:
Strengths
Though, the company is well known and popular, there are various strengths of the company that helps it in the growth and success. These strengths include:
Largest food Brand
The premier foods is one of the largest food manufacturing brands in UK (Premier Food Plc, 2015) that is the major strength of the company to help in its long term survival and growth.
Stable brand
The stability of the company is also included in the strengths of premier foods. The brand is stable and firm and the consumers are well recognized in the UK as well as international market.
Locations across the country 13
The growing locations of the company across the country are also strength of the company and currently, it owns 13 locations throughout UK.
Quality and Safety
The company is highly conscious and engaged in offering healthy, quality and safe food to the consumers. The quality is considered as one of the major aspects to achieve competitive advantage and differentiate the company from the competitors. The company engaged in social corporate responsibility (Premier Food Plc, 2010).
Strategic Business Units
The company has three strategic business units that are as follows (Premier Food Plc, 2015):
Grocery
Sweet treats
International
The business units help in enhancing the revenue as well as the diversity of the business also improves that helps in its long term survival.
Popular brands
Last but not the least; the brand is popular and well known around UK. It is accounted in the list of top food manufacturing brands of UK.
Weaknesses
Like many strengths, the company has many weaknesses that might impacts on its growth and performance. These weaknesses are as follows:
Debt
The company is more relying on the debt and loans that may change business into risk. The shareholders are less investing in the company as the company is not generating profitable income. The high debt can cause the damage to the company as the company is relying heavily on the loans.
Inconsistent profit
Although, the company is well known and largest, however, it is unable to generate the profit from the sales of the company. The profitability is inconsistent and the company is facing losses from last many years. The net sales of the company has also decreased in 2013 (can be seen in Appendix B). Though, the profit has started rising, however, the future profit cannot be forecasted.
Opportunities
The external environment offers many opportunities to the company that can help it in improving the business performance over the period of time. Some of the major opportunities are as follows:
New product line:
The new product line is an opportunity for the company as it will help to attract more customers and to enhance the revenue of the company. Further, the new product line will also help the company is achieving the competitive advantage with the help of differentiation.
Awareness of quality
The awareness of quality and health & safety will increase the consciousness among the consumers that will attract them to buy the products of premier foods and its sales and revenue will increase automatically. Therefore, the awareness and information to the consumers is also an opportunity for the company.
Low prices of oil
The decrease in the prices of oil is an advantage for the business as the cost of manufacturing will automatically reduced with the reduction in oil prices.
Threats
There are many threats to the company from the external environment as the factors discussed above:
Economic Crisis
The economic recession and crisis could impact the business of premier foods as it has already mentioned above that the economic crisis has resulted in the huge competition in the market and the price war has started.
Changing market conditions
The market conditions are changing and the market is becoming more competitive. The online shopping trends are also changing the market conditions and the competition for the company might further increase in future.
Prices under pressure
The prices are under pressure these days in UK. The low inflation and high competition is persuading the companies to reduce the prices. It may impacts on the sales and revenue of the company.
Suggestions of a Credit Rating and Credit Line
Credit rating is the ability of the firm to accomplish the commitments of its previous agreements and dealings. The credit rating can be done based on the financial performance analysis, ratio analysis and the information available. The credit line is also a term used in the credits that means the limit of the financial institutions and creditors to allow the companies or the organizations to use the credit for the extended period of time.
Assign Credit rating
Based on the debt to equity ratio, profitability ratios and the liquidity ratios, Premier foods are assigned B in the credit ratings. The credit rating agencies have also assigned the rating of B to Premier foods (Moody’s, 2015). Although, the debt to equity ratio is very high, however, the overall trade payables have declined from 2009 to 2014 (can be seen in the Appendix A). Furthermore, based on the stability and recognition of the company, it has an ability to negotiate with the creditors for the obligations.
Additionally, the profitability of the company has been declined; however, the new product line is expected to result in high sales and revenue and increase in turnover. The company is well known, well established, leading and largest brand in UK; therefore, the company is not rated as negative.
Allocate Credit line
Other than the credit rating, £50,000 credit line is allocated to Premier food. The credit limit must not exceed from £50,000, as the company already have very high debt and borrowings and it needs to reduce the debts to become able to pay the interest expenses. Based on the interest coverage ratio, it can be said that the company is unable to generate the income to pay its interest expenses that means more high credit can cause more decline in interest that can harm both the company and the financial institutions.
Furthermore, the economic conditions are also included in the threats that cause the risk for the company having high credit limit. During the economic down turn, the company can face huge challenges and issues to pay its loans and borrowings.
List of References
Bradshaw, J. (2015). Premier Foods teams up with Bake Off's Paul Hollywood as sales rise. Available from http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11985559/Premier-Foods-teams-up-with-Bake-Offs-Paul-Hollywood-as-sales-rise.html [Accessed 8 March 2016]
Cadman. E., Bernard, S. & Pearson, T. (2016). UK Economy at a Glance. Available from https://ig.ft.com/sites/numbers/economies/uk [Accessed 8 March 2016]
Hoover. (n.d.). Top Competitors of Premier Food Plc. Available from http://www.hoovers.com/company-information/cs/competition.PREMIER_FOODS_PLC.6e78096997227e3a.html [Accessed 8 March 2016]
Moody’s. (2015). Moody's changes the outlook on Premier Foods' B2 CFR to negative from stable. Available from https://www.moodys.com/research/Moodys-changes-the-outlook-on-Premier-Foods-B2-CFR-to--PR_328403 [Accessed 8 March 2016]
Premier Food Plc. (2010). Annual report. Available from http://www.premierfoods.co.uk/getattachment/0c3c4c98-a8c7-4da1-a772-dab88e557d37/2010-Annual-Report.aspx [Accessed 8 March 2016]
Premier Food Plc. (2013). Annual report. Available from http://www.premierfoods.co.uk/getattachment/d37e1ff3-8e14-495d-86fb-e324f2c206cf/2012-Annual-Report-Corporate-Report.aspx [Accessed 8 March 2016]
Premier Food Plc. (2015). Annual report. Available from http://www.premierfoods.co.uk/getattachment/a1c845a6-07b9-4a93-a40f-e368c36e7a03/Premier-Foods-Annual-Report-2014-15.aspx [Accessed on 7 March 2016]
Trotmann, A. (2014). Premier Foods tells suppliers: Give us money or face losing our business. Available from http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11274575/Premier-Foods-tells-suppliers-Give-us-money-or-face-losing-our-business.html[Accessed 8 March 2016]
Appendix
A: Balance Sheet
B: Income Sheet
C: Ratios of Premier Food
D: Ratios of Competitors
E: Cash Flow
