1 Introduction
As noted by Davies and Crawford (2011), firms with good financial records are attractive to both current and potential investors. However, one critical factor considered by the potential investors before investing in a company is its creditworthiness. A company may record high revenues, but its creditworthiness can be doubt. For the company to be creditworthy, it must significantly reduce its debt funding through the maximization of the internal sources of finance and equity (Delen, Kuzey and Uyar 2013). Additionally, the company’s management must ensure that the capital structure of the company maximizes the shareholder wealth. This report aims at assessing the creditworthiness of the Premier Foods Plc. The Premier Foods is a public limited company which listed on the London Stock Exchange (LSE). The company was founded in the year 1976, and its headquarters is in Hertfordshire in the UK (Premier Foods Plc, 2015). The company’s key products are food related items. In the year 2014-2015, the company recorded a total revenue of 767.40 million pounds with a net income of 131 million pounds (Premier Foods Plc 2015). Currently the company employees over 3,675 employees (Premier Foods Plc 2015). The report is structured into seven key sections in which the first section introduces the report and its structure. The calculation of gearing and liquidity ratios of the Premier Foods Plc are discussed in detail in the second section. The third section compares the company’s financial ratios with those of the competitors and the industry norms. The fourth section explains the major events that have influenced the company’s operations while the fifth section provides the credit rating of the Premier Foods Plc. The sixth section provides the recommendations on how the Premier Foods Plc can increase its credit rating. A comprehensive summary of the report is provided in the last section.
2 Calculation of the Premier Foods Plc’s Financial Ratios
The aim of the report is to assess the creditworthiness of the Premier Food's Plc. Therefore, the most appropriate financial ratios that are taken into consideration when assessing the creditworthiness of a company are the liquidity and the leverage ratios. This section presents the calculations of the Premier Foods Plc's liquidity and the leverage ratios.
2.1 Liquidity Ratios
The ability of the company to pay off its current liabilities using the existing assets is measured using the liquidity ratio metrics (Drury 2013). The company’s margin of safety is higher when the value of the liquidity ratios is higher than 1. The three common liquidity ratios are the current ratio, the quick ratio and the cash ratio (Drury 2013). Table 1 provides a summary of the review of Premier Foods Plc between the years 2009-2015 as calculated from Appendix 1.
Source: Author
2.2 Leverage Ratios
The gearing/leverage ratios are vital in measuring the amount of capital coming in into the business (Kaplan and Atkinson 2015). The company's capital structure might be in the form of equity or debt. However, investors are keen on the leverage ratios of a company to ensure that it can meet both its short-term and long-term liabilities (Merchant 2010). Table 2 provides the summary of the Premier Foods Plc's gearing/leverage ratios between the years 2009-2015. The computations of these ratios are presented in Appendix 1.
Source: Author
3 Analysis of the Ratios and Comparison with Industry Norms and Competitors
3.1 Liquidity Ratios Analysis
Premier Foods Plc’s liquidity ratios are summarized using Graph 1:
Graph 1: Premier Foods Plc’s liquidity ratios
Source: Author
3.1.1 Current Ratio
Based on Table 1 and Graph 1, the Premier Foods Plc's current ratios were 0.67, 0.71, 0.78, 0.79, 0.94 and 0.89 for the period 2009-2015 respectively. The current industry ratio should be more 1 or above to indicate the firm's ability to pay off its current liabilities (Scott 2014). However, for the entire period under consideration, the Premier Food’s Plc did not manage to record a current ratio of 1 and above and this signifies that the company’s current liabilities are more than the current assets (Scott 2014). Additionally, the firm’s current ratios for the entire period are below the industry norm.
3.1.2 Quick Ratio
The quick ratio offers a more detailed measure of the company's ability to pay off its current obligations using the current assets. The computation involves subtracting stock from the current Liabilities and then divided by the current assets to arrive at the ratio. According to Graph 1 and Table 1, the Premier Foods Plc's quick ratios for the period 2009-2015 are 0.43, 0.46, 0.50, 0.63, 0.81 and 0.63 respectively. Based on the industry norms, the company's quick ratio should be 1 or above (Woodford 2010). However, the Premier Foods Plc did not manage to meet the industry's threshold. It, therefore, shows that the company's current liabilities over weigh the current assets. Therefore, the company currently struggles to meet its current obligations because the current assets are insufficient.
3.1.3 Cash Ratio
The cash ratio is vital in measuring the level of the company’s cash and cash equivalents with the total current liabilities. According to Zimmerman and Yahya-Zadeh (2011), the industry's cash ratio should be at least 1 for the company to pay comfortably off its current obligations using the current assets. Based on Graph 1 and Table 1, the Premier Food Plc performed poorly for the year 2009-2013 in which the quick ratio was 0.02, 0.001, 0.06, 0.08 and 0.29 respectively. However, there were improvements in the cash and equivalent cash management in the period 2014-2015 in which the company recorded a cash ratio of 1.67 which was above the industry average.
3.2 Gearing/1levearge Ratio Analysis
The Premier Foods Plc gearing/leverage ratios are summarized in Graph 2.
Graph 2: The Premier Foods Plc gearing/leverage ratios
Source: Author
3.2.1 Gearing Ratio
According to Zimmerman and Yahya-Zadeh (2011), the gearing ratio is vital in comparing the debt (borrowed funds) to the owners' equity. Investors are keen on the creditworthiness of a company. The gearing ratio is, therefore, essential when determining on whether to invest in a company or not. Unlike the liquidity ratios, the gearing ratio focuses on the ability of the firm to pay off its long-term liabilities. Based on Table 2 and Graph 2, the Premier Foods Plc gearing ratios for the periods 2009-2015 were above 1. According to industry norms, healthy gearing ratio must be 0.5 or 50% and below (Scott 2014). However, the Premier Foods failed to meet the required industry average during the entire period under consideration. The implication, therefore, is that the company is having or likely to experience difficulties in meeting its long-term obligations.
3.2.2 Interest Cover Ratio
The interest cover ratio is a leverage ratio that measures the ability of the firm to pay off its interest on the outstanding borrowed amount or debt. The industry average for the interest cover ratio is 2 and above (Scott 2014). Therefore, a ratio below 2 shows that the company is not in a good position to pay off its interest on the outstanding debt. Referring to Table 2 and Graph 2, the Premier Food Plc's interest cover ratio failed to meet the industry threshold over the period 2009-2015. The highest interest cover ratio recorded by the company was 1.67 in the years 2014-2015. The lower interest cover implies that the Premier Foods Plc has the challenge to meet its short-term obligations. The company might be struggling to pay its interest on the short-term debt.
3.2.3 Debt Ratio
Just like the gearing ratio, the debt ratio is a financial metric used in measuring the level of debt in the firm’s capital structure. Based on the industry average, the debt ratio of a company should be lower than 0.5 or 50 finance (Merchant 2010). However, if the debt ratio is above 0.5 or 50%, it implies that the company is financed more using debt, and this shows that the credit worthiness of a company is poor. According to Graph 2 and Table 2, the Premier Foods Plc's debt ratios were 0.37, 0.36, 0.40, 0.42, 0.48 and 0.72 for the periods 2009-2015 respectively. It therefore, implies that the company met the industry average during the period except in the years 2014-2015 when the debt ratio was above 0.5. The lower debt ratios is an indication that the Premier Foods is credit worth and can easily acquire long-term funding from both potential investors and the financial lending institutions.
3.2.4 Equity Ratio
The level of the company’s leverage can be best indicated by the equity ratios which measure the portion of the assets funded by the stakeholders and those funded by the creditors. Based on the industry average, the recommended equity ratio is at most 1.5 (Merchant 2010). A higher equity ratio than the industry average implies that the creditors majorly fund the company's assets, and this damages the company's reputation regarding credit worthiness. According to Table 2 and Graph 2, the Premier Food Plc equity ratios for the period 2009-2013 are 0.29, 0.28, 0.20, 0.17 and 0.01. Between the periods 2009-2013, the company's equity ratio was below the industry average showing that it is credit worth. However, in the period 2014-2015, the company’s equity ratio rose to 5.8 implying that more funds from the creditors were injected to fund the company’s assets. Overreliance on debt finance impacts negatively on the credit worthiness of the company.
3.2.5 Debt to Equity Ratio
Just like the equity ratio, the equity to debt ratio industry average is 1.5 or lower. The debt to equity ratio as well measures the proportion of the firm’s capital funded by the shareholders and the creditors (Merchant 2010). Based on Graph 2 and Table 2, the Premier Food Plc’s equity to debt ratios for the period 2009-2015 are 1.3, 1.3, 2.0, 2.48, 5.8 and 2.54. Between 2009 and 2010, Premier Food's ratio was below the industry average, but the ratios rose above the industry average of the preceding years. The company however to enjoy credit worthiness, it must ensure all the leverage ratios are below the industry average.
4.0 Credit Rating of Premier Foods Plc.
4.1 Credit Risk of the Company
According to Merchant (2010), the credit risk is the possibility of the company to fail to meet its debt obligations either in the short term or the long-run. Based on the analysis of the liquidity and leverage ratios of the Premier Foods Plc for the period 2009-015, the company's credit worthiness is in doubt in the short-run. For instance, the current and the quick ratios are averagely below 1. According to the industry average, a company should at least have liquidity ratio of 1 or above. The low liquidity ratios over the period 2009-2015 is a clear indication that the Premier Foods Plc has difficulties in meeting its short-term debt obligations. The company’s current liabilities are more than the total current assets. Additionally, the cash and cash equivalents are less than the company’s total current liabilities. Therefore, financial institutions may not prefer to fund the company in the short-term because it may not be in a position to repay the debt on a timely manner. With this regard, the Premier Foods Plc is not credit worthy in the short-term.
However, based on the gearing ratios, the Premier Foods was credit worth over the period 2009-2013 because the debt ratios were below 50% or 0.5. However, in the periods 2014-2015 the company’s credit worthiness is in doubt since the debt ratio, gearing ratio and the debt to equity ratios were above 50% which is beyond the acceptable industry norms. Additionally, the interest cover ratios have been below 2 which is the industry average over the period except in the year 2013. It therefore implies that the company has difficulties in paying off the interest on debt. Therefore, both in the short-run and in the long run, the Premier Foods’ credit risk is high and this shows that the creditworthiness of the company is in doubt.
4.2 Credit Limit
Since the Premier Food Plc does is not credit worthy both in the short-term and in the long-run. Therefore, the maximum credit the company can get from any financial institution will not exceed the company’s total assets which currently stands at £1,913,400. However, the credit rating of the Premier Foods will discourage many financial institutions from providing it with funds both in the short-run and in the long run. The chances that the company will default payments is very high. Therefore, in case any financial institution decides to fund the company, the credit limit will be £1,913,400 which is the total amount of assets held by the company currently. In situations that the company will default, the lending financial institutions may consider auctioning Premier’s assets to recover its funds.
5 The Major Events that have affected the Company’s Operations
5.1 SWOT Analysis
In comparison with other retail competitors in the UK, Premier Foods has its strengths, weaknesses, opportunities and threats. Proper utilization of the SWOT analysis strategy can play a significant role in helping the Premier Foods Plc to achieve a competitive advantage in the market (Helms and Nixon 2010). The Premier Foods Plc’s strengths, weaknesses, opportunities and threats are summarized in Table 3 when compared to its competitors such as Avondale Foods Ltd, Axgro Foods Ltd, and Bay Tree Food Ltd.
The Porter’s Five Forces is a strategic model that helps a company to understand the bargaining power of its buyers and suppliers, the threats of substitutes and the new entrants as well as the rivalry among the existing firms in the industry (Hollensen 2015). The Premier Foods Plc need to understand the power of its suppliers, customers and the threats of the potential entrants and substitutes. Additionally, the Premier Food must analyze the rivalry among the existing industries. Figure one proves the Porter’s Five Forces Model.
Figure 1: Porte’s Five Sources
Source: Hemmatfar, Salehi and Bayat (2010)
5.2.1 Bargaining Power of Suppliers (Low)
The bargaining power of suppliers is low since many readily available suppliers offer raw materials required for food production. Therefore, the Premier Foods does not experience higher supplier power, and this is advantageous in its operations. Therefore, the company has managed to set stable prices for its products.
5.2.2 Bargaining Power of Buyers (Low)
The Buyers bargaining power of the buyers is low. The Premier Food's brands are the most common in the UK, and they can be found in each household. Therefore, the company does not experience high bargaining power from the consumers (Premier Foods Plc 2015). The low buyers’ bargaining power has helped the company to record sustainable sales.
5.2.3 The Threat of Potential Entrants (High)
There is a higher threat from the new potential entrants into the Foods Industry in the UK. The increasing potential entrants are likely to influence the food prices and this, in the long run, may hinder increased sales (Premier Foods Plc 2015). The food industry in the UK is attractive, and many potential firms are entering into the market. The higher threat of the potential entrants is likely to influence product pricing.
5.2.3 The Threat of Substitutes (Medium)
The threat from the substitute goods is medium. Examples of substitutes in the market include fresh vegetables, variant beans, sources, coffee, soya, chocolate, cocoa and vinegar among others (Premier Foods Plc 2015). Therefore, the Premier Foods experiences a medium threat from the substitute products.
5.2.4 The Rivalry among the Existing Firms (High)
The rivalry from within the industry from the existing firms is high. For instance, there is stiff competition from the Associated British Foods and the Bay Tree Food Ltd. Therefore, before any major decision is made at the Premier Foods, the company has to watch keenly tactics employed by its principal competitors to ensure that it formulates sustainable strategies.
5.3 Macroeconomic Analysis
The macroeconomic analysis covers areas such as politics, economy, social, technology, environment and legal aspects. The Premier Food's operations are impacted in various ways by the macroeconomic factors. Politically, the UK's political environment has been stable for some years, and this has impacted positively on the operations of the Premier Foods Plc. The UK government as well has recognized the contribution of the food industry to the UK economy.
Socially, the UK citizens are developing a strong preference for strong brands, and this has impacted positively in the operations of the Premier Foods Plc (Premier Foods Plc 2015). For instance, the Premier Foods has strong brands such as Mr. Kipling, Oxo, Sharwoods and the Cadbury cakes that are likable among the consumers. Additionally, such strong brands provide value for money. Similarly, the UK consumers are embracing easy accessibility, quality, customer feedback and discounted prices. The Premier Foods Plc has taken advantage of the social and cultural changes to maximize its market share.
Technologically, there are rapid explosion innovations in the food industry. For instance, to remain competitive, the company has been forced to invest heavily in the new technology to match up with the market demand. Further, the company spends over 4% of its revenue for research and development to ensure that the company innovates new products to match the customer's change in tastes and preferences (Premier Foods Plc 2015).
Environmentally, the strong focus on the corporate social responsibility and environmental conservation have forced the Premier Food Plc to invest more in greener production technology. Additionally, the government regulations on environmental protection ensure that food companies do not engage in multi-practices that violate the set environmental regulations. Therefore, the Premier Foods has to invest more in greener technology to comply with the government and the societal needs.
6 Recommendations
For Premier Foods to be more attractive to investors and competitive in the UK market, it has to adopt the following recommendations. From the investor's perspective, the Premier Foods should work on improving its credit rating. For instance, the company must reduce its level of debt to less 50% in the capital structure. The firm can put more emphasis on injecting more equity capital as opposed to the debt funding. Additionally, the company should consider increasing its current assets to be able to pay off its current liabilities. Similarly, injecting more equity as opposed to debt funding will help the company to pay comfortably off its long-term liabilities. From the industry's perspective, the Premier Foods shoulder consider exploring and innovating new brands to meet the customer’s changing tastes and preferences. For instance, the company needs to increase its exposure to Aldi and Lidl brands that are quickly growing in the UK market. To counter competition, the company as well need to venture and invest more into marketing activities to acquire a larger market share.
7. Conclusion
The Premier Foods Plc is a food manufacturing company in the UK, and its key brands are Mr. Kipling, Oxo, Sharwoods and the Cadbury cakes among others. The company’s credit rating is poor in the short-term funding because its liquidity ratios are below the industry average. However, based on the leverage ratios, the company is credit worth and can acquire long-term financing. Therefore, the company needs to boost its current assets level to increase its credit rating in the short-term funding. Also, the company needs to invest more in research and development to introduce new products that match the changing demand to remain competitive in the market.
8 Reference List
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
DRURY, C.M., 2013. Management and cost accounting. Springer.
Helms, M.M. and Nixon, J., 2010. Exploring SWOT analysis where are we now? A review of academic research from the last decade. Journal of strategy and management, 3(3), pp.215-251.
Hemmatfar, M., Salehi, M. and Bayat, M., 2010. Competitive advantages and strategic information systems. International Journal of Business and Management, 5(7), p.158.
Hollensen, S., 2015. Marketing Management: A relationship approach. Pearson Education.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Merchant, K.A., 2010. Paradigms in accounting research: A view from North America. Management Accounting Research, 21(2), pp.116-120.
Premier Foods Plc 2015. Annual Reports and Accounts 2009, 2010, 2011, 2012, 2013 and 2014-2015. Hertfordshire UK: Premier Foods Plc.
Scott, W.R., 2014. Financial accounting theory. Pearson Education Canada.
Woodford, M., 2010. Financial intermediation and macroeconomic analysis. The Journal of Economic' Perspective, 24(4), pp.21-44.
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.
9 Appendices
9.1 Liquidity Ratios
9.1.1 Current Ratio
9.1.2 Quick Ratio
9.1.3 Cash Ratio
9.2 Leverage Ratios
9.2.1 Gearing Ratio
9.2.2 Interest Cover Ratio
9.2.3 Debt Ratio
9.2.4 Equity Ratio
9.25 Debt-Equity Ratio
9.3 Premier Foods Plc Income Statement and the Statement of Financial Position 2009-2015
2014-2015 – Consolidated Income Statement
2014-2015 – Consolidated Statement of Financial Position
