Ratio Analysis and Interpretation of Financial Statements



Cadbury Schweppes

About the company

Cadbury Schweppes is principally engaged in the manufacture and distribution for sale of beverages, confectionery and related foods through wholesale and retail outlets in almost 200 countries throughout the world.

Rationale behind Ratio Analysis

In order to asses any company, financial statement analysis in general and ratio analysis in particular are the first step in the process. These ratios are calculated and compared to some benchmark figures which can be forecasted results, historical ratios, direct competitors performance and industry averages. Financial ratio analysis forms the relationship between different parts of the financial statements; two key financial statements of any company is income statement and balance sheet. Income statement measures the performance of the company during the particular period while balance sheet shows the financial position of the company at a particular point. Majority of the ratios can be calculated by deriving out data from these two financial statements. This ratio serve as a guide for the various decision makers (in our case, board of directors) when analyzing different dimensions of the business. The purpose of these ratios is to point out areas which need to be considering while making any decision. The ratio analysis can be categorized into five dimensions; profitability, efficiency, solvency, liquidity and investment. As the title, of each category suggests, ratios falling under each of these categories measure respective aspect of the business.

Financial Ratio Analysis

Profitability

The purpose of profitability relates to a firm's ability to produce a reasonable profit so that the shareholders and investors will keep providing capital to it for its operations. A firm's profitability is connected to its liquidity for the reason that earnings eventually produce cash flow. For these rationales, profitability ratios are imperative to both potential investors and shareholders.

Gross Profit Margin

Goss profit (GP) margin is a profitability ratio defined by gross profit over sales.

GP Margin =

For our calculation, we have taken Gross profit and Sales revenue from the income statements of the company.

2009

2008

Gross Profit

936

919

Sales

5298

4960

Gross Profit Margin

18.6%

18.8%

Interpretation

During the last two years, Cadbury has shown some decline in operating profit margin. In year 2008, the operating profit margin was 18.8%, which declined to, 18.6% in 2009. It shows a decline of 4.6%. During the year, the sales have increased by 6.8% while cost of sales has increased by 7.1%. Since the cost of sales has increased by a greater proportion than sales turnover, this resulted in decline of gross margin for the company. The increased cost of sales is attributed to the rising cost of material prevalent worldwide and affecting all the companies.

Operating Profit Margin

Operating Net Profit Margin is a measurement of company's financial ability to absorb its fixed cost which includes interest on debt. It is determined after deducting the variable cost from the gross margin. It is calculated by dividing the operating profit (EBIT) by sales revenue.

Operating Profit Margin =

Both figures are available on the company's financial s statement.

2009

2008

EBIT

983

930

Sales

5298

4960

Operating Profit Margin

17.7%

18.5%

Interpretation

During the year, the EBIT of the company has increased ...