Page 5: Ratio anaylsis (Profitability analysis)
Financial statements can be analysed by shareholders, the financial press, and others to check how well a company is performing.
Ratios are determined from a company's financial information and used for comparison purposes, e.g. operating profit to sales. This can be set out in the form: Operating Profit : Revenue. Alternatively, it can be set out as a percentage.
This is very helpful because it shows how much profit is made for each £1 of sales made. An improvement in Operating Profit margin would see this figure rising over time - showing that Cadbury Schweppes' customers are prepared to pay more for their purchases and/or that the company has made savings by improving the way it makes or ships its products. The operating profit margin of Cadbury Schweppes can be compared from year to year e.g. comparing 2005, 2006 etc, with 2004. Cadbury Schweppes' profit margin can also be compared with that of other companies.
If you refer back to the Profit and Loss Account, you can see the operating profit margin shown in the chart. This figure is crucial to Cadbury Schweppes as it relates to the second performance goal.
Here is another ratio you will find in your current course. This ratio shows whether the company owes more money to its suppliers and bankers than the assets it holds in the form of stocks, debtors and cash. If this number is less than 1, then the company's short-term or liquid assets are greater then its short-term liabilities.
If you refer back to the Balance Sheet, you can see that the current ratio for Cadbury Schweppes is as shown in this diagram.
This ratio is used in different ways for small and large companies. Businessmen and women considering whether to trade with a new small company would prefer to see this figure at 1.5 or above - as an indication that the company is solvent and will be able to pay its debts. For large established companies with good credit ratings, a lower ratio indicates an efficient use of capital.
Cash flow statement
In addition to the Balance Sheet and Income Statement, Cadbury Schweppes values the information provided in its Cash Flow Statement. This statement simply sets out the incomings and outgoings of cash in a business during a particular period of time e.g. one year. It shows how the main categories of cash flow have changed the cash balance in particular periods.
In 2004, Cadbury Schweppes achieved free cash flow generation of £265 million. Cash flow is very important to the company because cash enables the business to pay its bills, pay dividends to its shareholders and, in addition, to make acquisitions.
In recent times Cadbury Schweppes has focused on acquiring new businesses, increasing sales and innovation, cutting costs, and integrating existing businesses to achieve its aims of:
- higher sales growth
- improved operating profit margins
- higher levels of free cash flow.
Through efficient financial management Cadbury Schweppes is able to continually invest in making sure that customers are supplied with the brandsthat they enjoy.