Cranswick plc is a leading and innovative British producer and supplier of premium, fresh and added value food products which has a history of more than 40 years. In the early 70's, Cranswick was established by a group of farmers to produce quality pig feed. The company subsequently diversified into food production. In 1985, it was first listed on the London Stock Exchange. Cranswick has developed through a combination of acquisitions and subsequent organic growth to provide quality food that is sustainably and ethically produced from the farm to the factory to the fork. With a range of brands across its business, Cranswick's products involve fresh pork, gourment sausages, bacon and gammon, continental foods, handmade pastry and so on. Nowadays, Cranswick operates fifteen production facilities and has a workforce of over 9000 people. It has a broad retail customer base selling its products into each of the top four UK multiple grocers as well as the growing premium grocery and discounter channels. Apart from its core market UK, the company has a rapidly developing export business serving the European, US and South East Asian markets. (Cranswick, 2017a, 2017b)
This report aims to assist the accounting department of Cranswick plc to improve its activities in terms of internal and external activities along with the control and relation with shareholders. It will examine the Annual Report & Accounts of Cranswick by assessing the coherence of the information provided on the reports with the overall messages presented on executive's letters and announcements. This information includes short and long-term financial health, risks and uncertainties, sustainability of the company etc. In order to achieve this purpose, both financial figures and non-financial indicators provided by the report will be evaluated and corresponding recommendations to directors of the company will be given.
1. Readability of the Reports and Quality of the information
Generally, the annual report is of strong readability and information presented is of high quality. Consisting of four parts: Strategic Report, Corporate Governance, Financial Statements and Shareholder information, the report has an explicit structure and substantial content which provide the necessary information for Shareholders to assess the Company's performance, business model and strategy. Besides, Useful annotations combined with memorable and concise diagrams assist in making the report more understandable. With clear headlines and sub-headlines and eye-catching financial figures listed especially on content pages and financial pages, the report is easy to read for both professionals and non-expert readers. However, there is still room for improvement regarding main text and notes due to a Fog index of 17.99. This indicates that the text contains a large number of polysyllabic words and the sentences are relatively long which to some degree may diminish the readability of the report.
In this report, various regulatory bodies like the chairman, CEO, finance director, chairs of Audit Nomination and Remuneration committees have delivered reviews or reports according to their different responsibilities. In addition, it applies the principles and good practice of regulations. Apart from the Financial Statements which are prepared in accordance with IAS/IFRSs as adopted by the European Union, Governance Report together with the Audit Committee Report, the Nomination Committee Report and the Remuneration Committee Report comply with the requirements of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 the principles of the 2014 UK Corporate Governance Code and the Listing Rules of the Financial Conduct Authority. These all guarantee the quality of the annual report, making sure that the information provided is relevant and reliable.
2. Communication with Shareholders
Shareholders are important users of the annual report who keep the business afloat. The annual report disclosures shareholders' interests and information of how the board and committees engage in bringing long-term interests to them. Besides regulated parts, it also touches upon the company's development strategy and investment plans in the future. For example, it will continue to make value adding acquisitions and to invest heavily in operating facilities. Though the information available for shareholders are qualified, some negative parts are neglect. As regular and transparent communication can help shareholders feel connected to the company, the company is supposed to disclosure more details of its business in its annual report. In addition, use multiple formats for communication so that the company reaches every last shareholder through his/her preferred method of communication. It could consider sending out a monthly or quarterly email newsletter that informs shareholders of initiatives that the company is working on, and the direction the company would like to go in the future.(Payton, 2017)
3. Fixed Assets and Current Assets
Cranswick owns approximately 610.9 million GBP assets, among which 375.1 million are non-current assets and 235.8 million are currents. About 57 percent of non-current assets are property, plant and equipment, and 42 percent are intangible assets. As an innovative company which plans to make value adding acquisitions and to invest heavily in operating facilities, the intangible assets, property, plant and equipment are of great significance and are expected to grow steadily. Current assets of the company consist of inventories, trade and other receivables, financial assets, cash and short-term deposits and so forth, with trade and other receivables accounting for almost two thirds of the current assets. Therefore, if a 15% error occurs in the estimation of trade and other receivables, it will lead to significant impact on profit. Biological assets also need to be paid attention to because its different usages determine its natures. Pigs in the form of breeding sows and chickens in the form of breeder stocks are classified as non-current assets, while their progeny for processing are classified as current assets. In the last years, all the categories of current assets experienced a huge increase except cash and short-term deposits which decreased evidently. It is worth mentioning that a large working capital outflow can be observed, reflecting the impact of acquisitions and the increasing scale of the business. Actually, major projects, in excess of £1 million, are approved by the main Board. Using the current assets and current liabilities figures (£235,832,000 and £157,201,000 respectively), the current ratio was calculated to be 1.5, indicating that Cranswick might have employed too much capital on operation and expansion which could bring risks to the company to payback its short-term liabilities.
The company's liabilities comprise trade and other payables, financial liabilities, provisions and income tax payable. Among which trade and other payables take majority proportion. Non-current liabilities are mainly made up of other payables, financial liabilities, deferred tax liabilities, defined benefit pension scheme deficit and provisions, with financial liabilities constituting half of the non-current liabilities. The Group has reduced its borrowings significantly in recent years and at 31 March 2017 net debt was just 2.6 per cent of Shareholders' funds (2016: zero). The Group's financial liabilities due on an obligation in a year amount to about £150 million. Beyond that, it has a bank loan of £16 million which will mature between two years and five years. As too much borrowings will increase the costs of capital and make the company exposed to higher credit risk, a continuous concern of the proper management of liabilities is required for the executives of the company.
5. Ratio Calculations and Comparison of Last Years
In the annual report, several ratios are mentioned by the company to illustrate its performance. It can be seen from Table 1 that ratios performed by the company are slightly different from those provided by Fame. This might because that one ratio could have different ways of calculation. As the annual report does not show details how these ratios are calculated, it is made harder to check the accuracy of the statistics. Fortunately, in this consulting report, Cranswick's performance is depicted from diverse aspects and a ratio comparison of last years is conducted. From Table 2 we can easily find that the gross profit margin and operating profit margin as well as earnings per share show an up ward trend generally. This suggests that Cranswick is promising in generating more and more profits which leads to higher dividends distributed to shareholders. The past three years also witnessed the growth of return on shareholders fund(ROSF) and return on capital employed(ROCE) which implies that the company has a progress of deploying funds more effectively.(Atrill and McLaney, 2011) Despite not significantly, both current ratio and quick ratio experienced an increase, thus a better liquidity position is expected. Besides, the gearing ratio plunged from 14.65% in 2013 to 3.73% in 2016 because the company has considered reducing its debt ratio recent years. From 2013 to 2016, the solvency ratio increased prominently, from 64.09% to 72.15%, then declined to 68.90 in 2017. Overall, Cranswick has a good capital structure, not only having the capacity to meet its long-term financial commitments but also owning the ability to pay short-term liabilities. However, the company had better pay closer attention to the efficiency of its operation. On one hand, a larger inventory turnover means a lower speed of the company to sell its goods. On the other hand, constantly growing receivable days and slightly decreasing payable days indicates that it takes the company longer time to collect the debtors from customers but it has to pay the creditor to its suppliers with less time. On the whole, Cranswick's financial situation is relatively healthy, it still needs to be concerned with its liquidity position and efficiency of using its assets.
6. Non-financial Performance Indicators
Because the exclusive use of financial performance indicators to monitor performance may lead to Short-termism and can not convey the whole picture of the company.(Kaplan and Norton, 1996; Skrinjar et al, 2008) Some non-financial performance indicators (NFPIs) are utilised to reflect the long-term viability and health of the organisation.(Seal et al, 2015). First of all, management of human resources. Cranswick aspires for its people to be the best and is committed to inspiring and developing a multi-skilled and motivated workforce. In 2016 the company trained 240 middle and senior level managers on bespoke management courses which enabled them to understand their own management style. Moreover, accidents per 100 employees in 2017 was 16 per cent lower than in 2016, 5.6% and 6.7% respectively, resulting in a 37 per cent reduction in employee claims. Secondly, product and service quality. The increasing numbers of supply chain audits carried out every year by the Cranswick to ensure the safety, traceability and quality of raw materials used shows the company's significant effort to improve its supply chain integrity. At the same time, the falling numbers of complaints per million units reflect Cranswick's long-term commitment to quality. What's more, the climbing numbers of Grade A ratings awarded by the British Retail Consortium (BRC) illustrate the production of high-quality products, which are safely produced in technically and legally compliant facilities. Thirdly, Innovation is also a key differentiator for Cranswick. During the last year, 844 new products were launched, representing 11.5% of total revenue. This meaningful proportion stems from Cranswick's ability to create and launch new products to meet the constantly changing demands from our customers and consumers. Last but not least, sustainability is a factor that Cranswick keeps an eye on. Recognising that reductions in energy intensity bring significant financial and environmental benefits, the company has computed various indicators like relative carbon footprint, energy intensity, waste to landfill and water intensity. It has continued to invest in energy infrastructure and the efficiency of production processes, as well as nurturing energy awareness with colleagues.
Since non-financial information supports better forecasting, drives investment decisions and measurably impact share price (Low and Siesfeld, 1998), some other indicators which are of great significance to stakeholders should not be ignored either. For example, the concept of customer value is always drawing attention from both industry executives and marketing academics as a barometer of long-term business performance (Reichheld, 1993; Slater, 1997; Woodruff, 1997; Oh, 2000). Therefore, brand awareness is by no means unimportant for Cranswick, a leading and innovative British supplier of premium, fresh and added value food. It could try to provide indicators like high loyalty, name awareness, perceived quality and other attributes such as patents or trademarks to make readers understand more about the company. (Kaplan Financial, 2012)
7. Risk Management and Internal Control
Risk management and internal control system of Cranswick are relatively robust and effective. The Group has embedded formal risk management processes in place to support the identification and management of risks across the business. The Board has overall responsibility for the establishment and oversight of the Group's Risk Management Framework and Internal Control procedures. Audit Committee independently assures that the risk management processes and key internal control procedures are operating effectively. Group Risk Committee provides oversight and advice to the Audit Committee and Board in relation to current and future risk exposures and risk mitigation strategies. (Cranswick, 2017b)
Cranswick's assessment of principle risks is comprehensive. The principal risks and uncertainties facing the Group are identified and classified into four categories of risk areas, strategic, commercial, financial and operational. According to different risks, strategic pillars like quality products, operational efficiency, sales growth and sustainability are provided, followed by corresponding mitigation actions. Furthermore, these risks are graded into five risk ratings, from grade 1 to grade 5, higher grades represent higher risks. This assists the company in prioritising risks so that it could devote an appropriate amount of attention to different risks as required. In addition, the risk trends are explored as well. After mitigation, net risks investigated by the company are all below grade 5. From the results of the sensitivity analysis, it can be found that over the three year period, the Group would be able to withstand the impact of the most severe combination of the risks modelled by making adjustments to its strategic plan and capital expenditure programme.
8. Issues Related to the International Activities
With a growth of 38.4 per cent on export revenue last year, Cranswick has made continuous progress in developing export trade Recent years. The functional currency of the Group is Sterling, however, weaker Sterling makes exports more competitive. Helped by stronger prices in Europe and China as well as the fall in value of Sterling, Cranswick's exports to both traditional EU markets and Far East markets were lifted. There was a 49.3% increase in Far East export revenue during 2016, China pork imports were even more than double 2015 figure. In spite of opportunities, foreign currency movements in the meantime bring about risks in the company's trading with Europe in Euros and the sales to USA and China denominated in US Dollars. So the Group needs to deploy effective currency hedging arrangements to mitigate risks associated with foreign currency fluctuations.
Apart from a sustained reduction in the value of Sterling, Brexit could also impact upon the company, for example, availability of labour and an overall downturn in consumer demand. The impact of these issues cannot be quantified until the exact terms and conditions for the United Kingdom to leave the European Union have been agreed. Hence, it is necessary that the Group keep on monitoring and managing its business risks in these areas. It is worth mentioning, the company now applies EU Market Abuse Regulations. It is expected that the Group's policy will continue to comply with the Regulations following the UK's exit from the EU, and the Board continues to keep this matter under review. (Cranswick, 2017b)
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