Essay: Analysing the performance indicators

Introduction

This assignment will be based on analysing the performance indicators, and ratios, to determine the progress of Young’s brewery. Conclusions will be drawn from the ratios and performance indicators, as to whether investing in the company is a favourable decision.

A brief History of Young’s Brewery

“Young and Co.’s Brewery, P.L.C. is a public limited company that was founded in the year. 1890” . it is one of the oldest brewery companies.”

Public Limited Company is one that has PLC at the end of its name; there is no limit to its membership, but a minimum of one. They can trade their shares on the stock exchange or any other stock market.” (Wood and Sangster, 2008) .

“In 2004, Young announced a review of its brewing operation in Wandworth. After a 21/2 year review, Young’s decided to sell the Ram brewery site and enter into a joint venture with the Bedford brewers Charleswells, creating a new force in the industry, Wells and Young’s brewing company Ltd.”

“As at 26 September 2009, it had 123 managed pubs and 99 tenanted ones, principally located in London and the South East. It also has a 40% shareholding and interest in a brewing and distribution joint venture, Wells & Young’s Brewing Company Limited”.

“In the year 2007 Young’s pubs continue as a separate independent retail company. Much of the £69 million raised by Young’s through the sale has been earmarked for expansion as well as a major refurbishment programme across the company’s pub estate ensuring that Young’s pub will continue to delight their customer with stylish pub, great service and a fabulous range of traditionally brewed cask ales.”

1. Young’s principal activities during the year were the management and operation of their estate, as well sales of foods and drinks. (Young’s report pg 12)

2)

i) Young’s company have 8 directors. 4 of which are, executive and the thers are non-executive. ( Young’s report pg11& 66)

The executive directors are named as follows:

Stephen Goodyear – Chief Executive

Patrick Dardis _ Retail Director

Peter Whitehead _ Finance Director

Torquil Sligo- Young _ human and information resources director

The non executive directors are named as follows

Christopher Sandland – Chairman

Nicholas Bryan _ non executive senior independent director Roger Lambert _ Audit committee

David Page _ Audit committee

ii) “An executive director is one which is like full time employed; he has the right to make management decisions that helps to achieve the set objectives of an organisation on a day to day basis.”

On the other hand, “non executive director is employed part time, they help in decision making of as to what the executive director’s should be paid. They can also make management decisions but not on a day to day basis of running the business.” They also make use of their skills in judging scenarios relating to performance and standard of conduct in an organisation.

In my opinion, a company needs both executive and non executive director because both of them have a specified role to play in the decision making of a company towards achieving positive results in an organisation.

3. Years turnovers differences changes

2009 – 2008 126091- 122124 3967 3967/122124*100=+3.2%

2008- 2007 122124- 114602 7522 7522/114602*100=+6.5%

2007- 2006 114602-123873 -9271 9271/123873*100= -7.5%

2006- 2005 123873- 119532 4341 4341/119532*100= +3.6%

The above calculation, analyses the changes in turnover over five years. In reference to this, between years 2005 – 2006 the turnover improved by 3.6% to £123873m.

In year 2006-2007, revenue was down -7.5% to £114602m, showing a decrease in their turnover. This decrease could have been caused by some factors analysed by the Director of Young’s company. In year 2007 ban on smoking came into force, which prevented smokers from being accommodated at the company’s pub, hence the decrease in turnover. (young’s report pg 13)

Again, the company picks up by 6.5% to 122124, is due to the ban on smoking which helped to increase turnover, as the company was able to make a positive changes between years 2007-2008 by investing into selling more food and drinks to attract customer. ( young report pg 13).

In year 2008-2009, young and company’s turnover, continues to increase by +3.2% to £126091m which is not bad overall, since, there has been an increase which shows an improvement after constructive steps had been taken by the board of directors.

4.

2009	2008	2007	2006	2005
4213/126091*100	11620/122124*100	8725/114602* 100	7502/123873*100	9319/119532*100
3.34%	9.51%	7.61%	6.06%	7.80%

Profit before tax, has been considered because of the following reasons:

• It makes one focus on all expenses incurred except tax.
• Tax is usually on an accrual basis, that is, companies make provision for it, which results in excess or too little provision made . This does not allow the true state of their profit to be known.

Looking at the profit calculated above, the profit was reduced by 1.74% between 2005 and 2006, even though the revenue increased but due to the higher exceptional items paid in the year 2006. In 2007 the profit went up slightly from 6.06% to 7.61%, which was excellent, considering the fact that the revenue was low during the year from 123,873000 to 114,602000. In 2008, the profit went up to 9.51% due to the increase in the revenue as the company had to invest more into food and drink business. As well as the discount of 2,889000 received on exceptional and site proceeds.

In 2009, the profit deteriorated to 3.34% with revenue figure of 126,091,000; was relatively high compared to the previous years. (pg 58)

5.i) The most highly paid director is ( Stephen Goodyear) with a total pay of £576131,excluding pension costs and gains made on exercise of share options, but includes the basic salary and fees, profit sharing, benefits and bonuses.(young’s report p.33)

ii) Change from the previous year.

Year 2009 – Year 2008 change

576131 minus 426947 = 149184

% change 149184/ 426947 * 100 = 34.94%

iii) Changes in employee earnings

Year 2009 minus year 2008

37328 minus 35334 = 1994

% change = 1994/35334 * 100 = 5.64%

The change in the total employee earning is quite low compared to that of the Stephen Goodyear, director. As a director he receives more pay (basic salary and fees) compared to that of the employees. Also, bonuses that were accrued in the year 2008 were added on to his pay. (p.33).

The profit sharing scheme also contributes to the changes, as it was allocated on the basis of member’s entitlement. (p.34)

6.

i) “According to the chief executive report, interest paid on borrowing during the year was £3.6m”. (p.9)

ii) In comparison to last year’s which was £5.3m, interest charged has decreased by 3.2%.

iii) The reason for the decrease in interest charged this year, is as a result of reduced borrowing in the year 2009. (p.35)

Another reason is due to “reduced floating and interest cost, and also £50m of their debt has reached maturity between March 2018 – March 2023.” (pg 9 & 45)

7)

i ) Young’s brewery paid £6062m for both group and company in the year 2009 and £5147m for both group and company in the year 2008. (pg 39 &22)

ii) Dividend is 12.62p per share. (p.58)

In comparison to previous years, dividend has been increasing every year. (p.58).

Looking at the ordinary share paid the previous year 2008, there has been an increase compared to the previous year. In my opinion, I think dividend paid to shareholders is too much, taking into account the profit for the year, there is a decrease, compared to the previous years. Retained earnings for this year has also reduced compared to last year. Considering the present economic situation, most companies are reducing the dividend paid to their shareholders (e.g. Marks and Spencer) in order to improve their working capital. However, in the previous year, profit was higher by 9.51%. Putting all these into consideration, increasing dividend paid to shareholders is not a fair decision as this will have a negative impact on their total equity.

8. EPS – “Earnings per share, is the total Earnings in other word profit made by the company, divided by the number of ordinary shares issued. EPS is frequently used by shareholders and directors to demonstrate the growth in the company’s performance over time” (Elliot and Elliot, 2008 pg 616). This is used to determine how well the business is improving by the shareholders and directors at a given period of time. In order words, if EPS is high, then that means the business is very efficient.

On the other hand, dividend per share shows how much per share in form of dividend are received by shareholders. (Hall,D.et al.2005) In order to determine how much dividend is paid to shareholders, it is then calculated as: dividend (ordinary shares)/ number of shares issued.

The Earnings per share is 2.55p.

	2009	2008	2007	2006	2005
Basic Earnings	2.55p-16.04= -13.49	16.04p-10.35=5.69	10.35p-9.85=0.5	9.85p-13.50= -3.65	13.50p
% change	-13.49/16.04 100 =-84.10%	5.69/10.35*100 = 54.98%	0.5/9.85*100 =5.08%	-3.65/13.50*100=-27.04%	–

The table above shows the changes in the earnings per share and these changes are all affected by the profit after tax. As a result of a decrease, from £10,702 in 2008 to 2,074 in 2009 (page 40).

9. “Tangible assets are asset that have a physical existence. E.g. land, buildings, fixtures and fittings, investments.” Therefore Young’s tangible assets and the value after they have been depreciated are as follows:

Asset Value after Depreciation (000)

Land &buildings 223,638

Fixture, fittings and Equipment 33,270

Plant, machinery and vehicles none

Total (000) 256,908

There is no value on Plant, machinery and vehicle because it has been disposed .(young’s report,p.41)

10. Using the current ratio: current asset/current liability

2009 (000) 2008 (000)

Group 8049/20505= 0.39:1 9246/30543=0.30:1

Company 8132/23004=0.35:1 9311/32528=0.28:1

As seen the current ratio for both group and company is less than one indicating a low liquidity ratio, which means that Young Company liabilities are still satisfactory.

To compare the value of inventory with turnover, the utilisation ratio involved is: “Turnover/Inventory (Elliot & Elliot 2008, page672)

Therefore inventory turnover = (young’s report page 58 &49)

Year 2009 year 2008

126091/1702 = 74 times per year 122124/1511 = 81 times per year.

Looking at the inventory turnover, it has deteriorated compared to last year. This is as a result of increased sales volume or changes in their inventory valuation system.

An acid test or quick ratio can also be used to determine their solvency. According to (Elliot and Elliot,2008) it shows the capability of the company in turning their current assets into cash.

Acid test ratio = current assets – inventory/current liabilities

Therefore acid test ratio for =

year 2009 year 2008

8049 – 1702/20505 = 0.31 9246 – 1511/30543 = 0.01

This indicates an increase, compared to the previous year, but it is satisfactory.

11. i) Young’s company issued two types of shares

• Ordinary shares
• Non -voting shares

ii) A Ordinary Shares: The holders of A ordinary shares, shares have the right to receive notice of general meetings and to attend, speak and vote at them (note25; page 52).

Non voting shares: “the holders of this type of shares do not have the right to vote or speak or attend and receive notices of general meetings”. ( young’s report p.52) that is they can only vote when some particular situation arises as their shares are limited.

12) i) Young’s shares are listed on the London’s stock exchange (young’s report p.24)

ii) List of different share indices on London stock exchange.

FTSE 100, FTSE 250, FTSE 350, FTSE All- share FTSE AIM 100, FTSE TechMARK 100, FTSE Techmark med science, FTSE small cap, FTSE Eurotop 300, FTSE MIB.

Young appears on FTSE AIM UK 50, FTSE AIM All- share, FTSE All- share

FTSE 100 : “ according to London stock exchange, it means the share index for the top 100 UK firms are listed.

FTSE 250 : “according to London stock exchange, it means the share listing for the biggest 250 UK firms following the 100 listed above.

FTSE AIM UK 50 is the share listing for leading 50 UK companies on the alternative investment market.

FTSE All shares : according to London stock exchange it means the all the largest UK companies have their shares listed here.

The shareholder with the highest holding of shares is James Young with a 14.50% voting right in the company. (Young’s report, p.16)

He has a positive influence in the growth of the business, as he has invested in buying the company’s shares which is a good way of establishing the company.13)

In relation to all the above analysis and performance indicators, the following conclusion can be drawn:

• There has been an increase in their turnover which is perfect compared to year 2007. According to the director’s report, the increase was affected by investment in other areas after; the smoking ban came into force in year 2007.
• Despite the increase turnover, the profit was still reduced in the year 2009 as their expenses, were really high that year and other government regulations were in force as well. Although they were not making profits they still had to pay their bills like electricity, business taxes etc.
• Operating profit before exceptional items has decreased as well.
• The profit before tax has reduced as well by -6.3% compared to the previous year.
• Adjusted profit is fine, basic earnings per share has deteriorated by -84% compared to the previous year, as a result of the reduced profit. Although the weighted number of ordinary shares increased from 47365212 to 47951096 (p.40)

Adjusted basic earnings per share is fine,

• Dividend per share should not be increased, considering the present economy situation. Most companies tend to reduce the number of shares issued.
• Interest paid on borrowing was reduced this year, as a result of less borrowing. The company have been investing in other areas to finance activities, e.g sale of brewery, sale of property, plant and machine, rather than borrowing, they have used cash generated to finance their activities. Their net debt as reduced from £65.3m to £50.

“ Young & Co’s Brewery has put steady sales in the face of the…requirements". In the past financial year Young’s has purchased four pubs, including the…deal. With regard to the number of pubs Young’s might be able swallow, Mr Goodyear said…opportunity were right". But he added that Young’s was unlikely to stray beyond its key.”

This shows that are not just borrowing and spending, they have been investing as well. They have been generating cash from operating operations, and investing activities.

• The company and group’s liquidity ratio is satisfactory at present, which means that they are still able to pay their short term debt, as suppliers, shareholders or banks will consider their liquidity ratio either for future investment purposes.
• The company’s acid test ratio calculated above is satisfactory at present, although there is an increase, but that they can still afford to meet their short term liabilities.
• The company’s interest cover shows that their operating profit covers their finance costs, as a result of less borrowing, and higher investment.
• Looking at their gearing ratio, it has increased by 11.5%, although there is an increase compared to the previous years, but it is not too bad in spite of everything. the company might have decided to increase their gearing in order for shareholders to receive dividend when they make more profit .

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Overall, I do recommend buying shares in Wells and Young’s company, as this will only lead to favourable investment.