Evaluation of Corporate Performance

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Essay Sample Evaluation of Corporate Performance

Diageo plc is a company that deals with production and distribution of alcoholic beverages. This paper seeks to explain the background information of the company, perform a comprehensive financial statement review and ratio analysis for the last financial year ending 2017. In addition, a pro forma income statement and balance is provided assuming there is a 10% increase in both sales and cost of goods sold. The final section evaluates management performance through economic value added.

            Diageo plc is a British multinational alcoholic beverages company that was incorporated in 1886. The company has its headquarters located in London, England. Diageo has been the world largest distiller over many decades though China’s Kweichow Moutai overtook it in 2017 (Diageo, 2017). The company operates in both beer and spirits markets with its geographic market segments including North American, European, Russia, African, South American and Asian countries. The company’s’ brands consist of Johnnie Walker, Smirnoff, Captain Morgan, Tanqueray baileys and Guinness. The principal products supplied by the company range from whisky from Scotland and America, Gin, Vodka, Rum, Beer products such as malt and lite, Cream Liqueur, Whisky from Canada, Brandy, Cachacha, Tequila, Raki, Adult Beverages and Ready to Drink (RTD) brands such as Alvaro and Guarana (Diageo, 2017)

            Diageo company has established production plants in various locations across the world. The production facilities are grouped into maltings factories, distilleries plants, breweries sites, packaging factories among other processing sites (Diageo, 2017). The beer key brewing plant is built in Dublin at St. James’s Gate (Diageo, 2017). This factory serves Europe markets and American countries. Diageo has established brewing plant in Eastern, Western and Central African countries including Kenya, Nigeria among others. Production of Guinness is done in Ireland from where it is exported to the global markets. The Ready to Drink brands are manufactured across different countries in different continents such as England and Canada. Spirit production is also distributed among the countries in the global market with Scotland leading in production of scot whiskeys (Diageo, 2017).

            Diageo plc was formed from a merge of Guinness and Grand Metropolitan in 1997. After the merger, Anthony Greener served as the first executive chairperson. The company shares were first traded in London Stock Exchange in 1997 and they were later listed in New York stock exchange. Diageo plc continues to cement its market share through acquisition of competitor brands such as the acquisition of Indian Spirit Company and United Spirits in 2012. The firm also acquired tequila brand Don Julio through an exchange plan where it relinquished ownership of Bushmills Irish whiskey in 2014 (Diageo, 2015). The Board of Directors supported by its different committees governs the company. The board is mandated with setting strategic plans and targets, providing leadership, overseeing the management and reporting to the shareholders. The UK Corporate Governance Code that outline the agreeable business practices in the country governs the organization. The company is further guided by Companies Act of 2006 and the rules stipulated by London Stock Exchange (LSE)

Review of Financial Statements

            Analysis and review of financial statements provide a solid background to predict the possibility remaining in operation in future. The financial statements that are important in this review include the balance sheet, the profit and loss account, changes in equity, statement of cash movements and notes supporting the statements. The company financial year runs from 1^st July to 30^th June.

            The statement of financial position is reviewed to establish the financial condition of the business as at specific time. The review will reveal the ability of the company to manage its assets, liabilities and equity. As at 30^th June 2017, the company had assets worth £ 28,848,000. Non-current assets had an estimated figure of £ 20,196,000 and current asset £ 8,652,000. Non-current liabilities amounted to £10,160,000; current liabilities had an estimated value £6,660,000; while total equity was equal to £ 12,028,000 (Diageo, 2017). The non- current ratio forms the largest portion of the company assets. This is positive position meaning that the company can easily finance its expanding strategies. The company does not have many long-term obligations. This attracts investors as they are assured good returns for their investment. The company follows the applicable guiding principles in recording and classifying intangible assets such as goodwill. Goodwill impairments are reviewed on timely basis to ensure there is no overstatement. The fixed assets are valued net of total depreciation. The company also has a strong financial background supported by equity investment. This is a major source of money to support and sustain business operations in the long- run. The high equity balance is an indicator that the company can sustain its growth strategies.

            Analysis of the income statement report helps to identify the overall performance of the company, quantifying the amount of loss or profit made by the company in a specific financial year. The income statement is analyzed in terms of revenue. This describes the amount of sales made in the year. Form the financial statement, the company had revenue of £12,050,000 for the financial year ending 30^th June 2017. This indicates good marketing and selling skills that lead to high volume sales from £10,485,000 in 2016. Analysis of expenses highlight if the company is incurring expenses to improve the quality of service and product delivery or the money is being wasted. In 2017, the total expenses amounted to £8,491,000 from £7,644,000 in 2016 (Diageo 2017). This was associated with the increased cost of ingredients. Analysis of income tax helps to determine the impact of government policy on the profitability of the business. In 2017, the company paid income tax amounting to £732 million from £496 million in 2016. The high income tax reduces the amount profit distributable to the shareholders. The last item evaluated in the profit and loss account is the net profit/loss for the period. Net profit represents residual profit made by the company after deducting all direct and indirect expenses used to generate the sales revenue. In 2017, the company made a net profit £2,717,000, which was an increase from £2,244,000 in 2016. This is therefore a viable business to invest. Net loss, on the other hand, would mean the direct and indirect expenses were higher than the generated revenues. When the net profit for the period is divided by outstanding shares during the year, 4.24 earning per share (EPS) is obtained. This is a higher EPS compared to 3.58 in 2016. This confirms that the company is doing well and an investor would not lose by investing in the shares of this firm.

Pro Forma Income Statement for the Year 2018 Assuming 10% Increase In Sales and Cost of Sale

Pro Forma Statement of Financial Position

Ratio Analysis for 2017 Fiscal Year

Liquidity Ratio

            Liquidity ratio measure the probability that a company settling its short and medium-term obligations. They include current ratio found by

. For Diageo plc

Current ratio=    =1.17. This means the company has enough assets to pay its short and medium term debts when they mature.

            Quick ratio is another liquidity ratio. It measures the probability of the company to pay its short- term obligations using the cash and cash equivalent asset. It is calculated by diving current asset less inventories with current liability.

For Diageo plc, Quick ratio =   = 0.52.

This ratio shows that the company is relying heavily on inventories to meet its short-term obligations.

The two ratio indicate that the organization has sufficient cash to meet short-term obligations

Financial Leverage Ratios             The ratios seek to analyze the percentage of debt financing in a company. Evaluation of debt held by a company is critical in determinin………………………..

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