Introduction
Thornton is a large chocolate company based in the united kingdom with various subsidiaries that produce similar products. The group produces a variety of confectionery for the UK market, and they are pursuing growth strategies, and they are implementing short term and long term goals. The company’s main mission is to stay ahead of the competitors in the confectionery market. The company’s main objective include to
- Re-establish as an undisputed leading chocolate plant in the UK.
- To increase the market share to 50%.
- To increase business activities to cover all seasons of the year.
- To improve profit percentage.
- To enter into the international market.
To attain these goals, the company has:
- It has invested in a brand that is relevant and more premium in the market.
- It was developed and invested in innovative product development.
- Modernized their storage environment.
- We are attracting and retaining the best human resource.
This can be easily from the trend in the growth of sales, profits and profitability. In the last five years, sales have grown although there was a downward trend in the year 2006 where sales fell to 5.9%. However, in the year 2007, it picked to 5.3 % and eventually resting at 11.9% in the year 2008. The profitability of the company, however, was positive in the last three years. This is a clear indication that the management of the company is on the right track in ensuring the company grows.
Strategy and forward-looking
The industry is likely to face challenges in the coming years, and these challenges could be no less daunting for Thornton plc. Chocolate products around the world are experiencing reducing in demand due to obesity instances and ageing populations. However, along with the challenges, there are also tremendous opportunities. In a recent interview, Thornton’s plc chairman argued that reduction in price was not an issue because a consumer doesn’t want to save a couple of thousand dollars and then learn that they miss the goodies of chocolate.
According to the chairman, Thornton’s has been growing across all channels providing a steady growth for the last seven consecutive quarters. This growth is attributed to the forward-looking by the management of the company. The company’s strategy has been modernizing the store’s environment, recruiting the best human resources, ensuring that the product is available to all customers by introducing various value chains. Some customers are reached by online shops while there is a 24/7 shopping and delivering of our products tour customers to any location. This strategy has made us increase ourselves. As the world is moving towards international collaboration, the company has identified international markets to export to our products.
Accounting Method
The method used in accounting for subsidiaries should not be changed from the purchase method of accounting. This method is like the historical cost method where assets are recorded at the purchase price, and the changing of accounting policies of the subsidiaries to suit the policies of the group is to ensure the cost of translation is reduced.
Interpretation Analysis
Investors Ratios
The earnings per share decreased from 22.4 in 2007 to 12.8 in the year 2008. In the year 2007, it is above the industrial average, while in the year 2008 it is below. It shows how the shareholder’s wealth is increased. On average, the shareholders are getting a good return for their investment. The decline should be investigated, and necessary steps are taken to reduce the expenses or increase sales to increase the returns.
Dividend cover shows that the earnings cover for dividends times 1.1 for the year 2007 and times 1.3 for the year 2008. This is both below the industrial average of 4.5. This means that the dividend payout ratio is higher for the company as compared to the industry. The management may be retaining less percentage of the profits. The dividends yield for the company is 3.9% and 5.9% for the years 2007 and 2008, respectively, while the industry average is 1.73%. This attracts new investors who are interested in high and quick returns for investment.
Management performance
Return on invested capital analysis shows that this return improved during the year 2008. It was 13.1% in the year 2007 and 16.7% in the year 2008, and this return is higher than the industrial average. The company posted very high performance as far as ROCE is concerned during the year 2008. This performance is due to high NOPAT during the year because of fewer operating expenses on account of asset impairment and restructuring charges, coupled with higher NOA turnover. Despite falling efficiency to convert current assets to cash, the operating margin have gone up significantly, but at the same time, ROE has increased dramatically. This is because of increasing revenue as well as investments in acquiring new businesses without injecting more cash. The Thornton’s plc ROE during 2008 was highest at 17.32 per cent in the two years. This increase is primarily due to high due to increased sales, and it is greater than the industry average of 13%.
Short Term Liquidity
The liquidity position of Thornton’s PLC Company has been analyzed in the Appendix, where a number of ratios have been calculated for the years 2007 and 2008 for this analysis. The current ratio has improved from the year 2007 to the year 2008 is from 0.77 to times 0.86. This increase is due to a rise in investment in inventory and trade receivables. Creditors consider current assets as a buffer for current liabilities, and hence they prefer a higher ratio. A current ratio of 0.49:1 is considered optimal for the industry. In this respect, the ratio was higher in 2007, and this is also supposed to show the overall performance of the company, which is considered to be good according to this ratio. The acid test ratio of the company also depicts the same picture. Overall short term liquidity, as shown by the current and acid ratio, improves slightly during 2008. The ratio indicates how able the firm is in meeting its financial obligations from the most liquid assets. It shows that the firms have weak liquidity as compared to the industry average, which is times 0.36. It should be their Technical default; then, the company will not be liquidated as liquid assets are enough. Inventory was converted in 70.7 days for the year 2007 and had increased to 75.3 days during the year 2008. It shows that company decreased its performance in terms of converting its inventory into sales resulting in higher sales figure during the year 2007. Overall conversion period shows decrease and management efficiency has decreased. This ratio is then the industrial average meaning that the company is performing poorly in the industry.
The receivable collection period shows that it is poor than the industry average, which is 3.2 days for 2007 and 2008, while the company has 10.53 days and 12.7days respectively. The rate at which they convert debtors/receivables into cash is less than the industry average. As shown by the account receivable turnover. It means that the efficiency with which the company is utilizing its debtors to generate cash is low than the industry. Company’s day purchase in account payable shows a steady decrease. It shows that the company is paying its trade debtor at a faster pace during 2008 as compared to 2007. During the year 2008, this ratio decrease to 33.26 days from a high of 34.1 days during 2007. Overall conversion period stood at 33.26 days during 2008, which is a very remarkable performance over the previous year although lower than the industrial average. It shows that the company is converting its inventory into receivables and receivable into cash quite efficiently. This operational efficiency of the company is evident as cash provided by operations to currents ratio is very impressive at times 0.86 during 2008, a major improvement.
Capital Structure and Solvency
The capital structure of the company shows how much of the company assets are financed by the company through debt and how much from equity. The ratios show that the company is decreasing its reliance on creditor financing from 19.2% from 2007 to 15.11% during 2008, which is lower than the industrial average. At the same time company is building equity finance during the same years. This increase in equity finance came mostly from an increase in retained earnings of the company. The decrease in total liabilities seems to be due to an equal decrease in the current liabilities of the company. The interest coverage ratio has also improved from times 4.8 to times 5.5, which is lower than the industry average of times 12. The profitability of the firm can only be able to pay for interest at only 4.8 times and 5.5 times for the years 2007 and 2008, respectively.
Cash ratios
The cash flow ratios show how generated cash flows can be used in valuing the company on a cash basis that free cash flows or how much cash was generated to cover expenses of the company. Cash flow yield decreased from times 2.8 to 1.9 times for the years 2007 and 2008, respectively. While the cash flows to assets also decreased from 13.8% to 10.5% for the years 2007 and 2008, respectively. In general, there is a downward trend in the cash flow generated. This may be associated with a change in the cost of sales and expenses.
Non-performance information
The company has given liable information in relation to other activities, and it shows that they are accountable to social activities for corporate sustainability, thus not just reporting outcome information. Thornton plc is also applying strategies in ensuring that the level of emissions emitted to the environment is reduced. Thornton plc has started to encourage its customers to start walking or using bikes to their destinations where possible. Fuel used through transport constitutes a great proportion of emissions. By so doing, the level of emissions that will be emitted to the environment will be greatly reduced because the fuel used by vehicles constitute some proportion of emissions.
Its customers have also been encouraged to insulate their walls and ceilings because this saves some home heating bills, and it also reduces carbon dioxide emissions. Carbon dioxide emissions are reduced walls and ceilings are insulated. The impact of the company on the environment, employment policies, and financial performance of the company, as well as social performance, is provided in the reports.
Questions to the finance director
These are the questions that will be asked to John wall in relation to the analysis of the financial statement of the company.
- Mr Wall, in your finance directors report, you have indicated that there is an increase in the shareholder’s earnings from 8 to 9.1, which is an increase of 13%, but from my ratios, I find that there was an increase from 7.8 to 8.9. Which items were considered when calculating the basic earnings per share which I consider that I also calculated the basic earnings per share?
- What type of information was introduced to the market, which leads to the decrease in the price-earnings ratio? From the analysis, the price earning ratio has decreased from 22.4 to 12.8, which is a show that the price per share of the company fell drastically. I expect the finance director to highlight economic factors which lead to the decline of share prices. I will expect him to explain the effect of the subprime crisis, which has become a global financial crisis. The crisis has lead to the downward trend of the market prices of goods and services. I will also expect him to talk about the rising cost of fuel prices in the international market, which made life to be difficult, and this pushed speculative investors to sell their shares, thus causing the downward trend in the value of shares.
- What is the company doing to improve management performance in relation to the use of assets to generate profit and revenue? I will expect the finance director to talk about the unutilized assets and how hi is intending to utilize them. If they are an asset that is unutilized appearing in the books of account and it can be foreseeable that this cannot be used in future, he should explain how he intends to convince the management to dispose of them off.
- What is the company doing to improve the cash flows, which seems to be on the downward trend? I will expect the manager to explain to me how he intends to improve on the cash collection period from receivables so that it can be the same par with the industry average. I will also expect him to explain the credit management policies that would be implemented by the company.
- Why is the dividend payout ratio large as compared to the industry average, and what does the management intend to do to put the company in the same position as the industry average? The finance director will explain on which grounds they retain the little number of earnings as they pay huge sums in the form of dividends.
References
Godfrey, J., Hodgson, A., Holmes, S. and Tarca, A., (2006), Accounting Theory, 6th edition, Milton: John Wiley and Sons.
Henderson, S., Peirson, G. and Herbohn, K., (2008), Issues in Financial Accounting, 13th edition, Frenchs Forest: Pearson Education Australia.