Finance assignment analysing the financial performance of Unilever for 2020 and 2021
Task: Select an engineering/manufacturingcompany currently listed in FTSE 100 for your finance assignment. Critically evaluate thefinancial performance by using suitable financial indicators such as profitability ratios, company’s dividend policy, Company’s Capital Structure and Working Capital. Identify a firm that could be (hypothetically) a target company for acquisition.Address therationale for choosing the target company. Identify under which cash inflow circumstances the initial investment described above can start having positive returns within 5 years from the time of the investment. Assume interest/discount rate environment at 3%.The potential implications of such acquisition on firm performance.Challenges, risk assessment and financing of the acquisition.
The finance assignmentis primarily based on Unilever. Unilever is a multinational company that manufactures and sells consumer goods. In this finance assignment, the financial performance of Unilever will be analyzed based on the profitability ratios. The profitability ratios that have been analyzed are net profit margin, return on assets, return on equity, and operating profit margin. In doing so, the performance of the company for 2020 and 2021 has been considered. In addition to that, the dividend policy of the company has been analyzed as well. The company has been paying dividends to its investors for a long time. Hence, it has created a rapport for the company. Furthermore, the capital structure and working capital of the company will be evaluated. The capital structure is the source of the finances used by the company, and the working capital is the amount of money that the company can use in the short term towards its operations. Finally, a potential acquisition for the company will be suggested. In doing so, there will be a number of things will be discussed in the finance assignment. Firstly, the reason behind the acquisition of the company will be explored. Secondly, the cash flow situation of the company will be managed. Thirdly, the impact on the financial performance of the company will be assessed. Finally, the challenges and the risk that can cultivate due to the acquisition will be evaluated as well in the finance assignment.
1) Financial performance of Unilever discussed in the finance assignment
Net Profit Margin
The net profit margin is a financial ratio that reflects a firm's profitability and is a measure of a company's earnings compared to its revenue, reflecting how much a company keeps in earnings for every dollar of sales. (Bustani, Kurniaty&Widyanti, 2021). As per the finance assignmentdata, the net profit margin for Unilever for the years 2021, 2020, and 2019 was 12.6%, 12.0%, and 11.6%, respectively. The net profit margin for Unilever has increased from 11.6% in 2019 to 12.6% in 2021 (Unilever Annual report, 2021). This indicates that Unilever is becoming more profitable. The company's net profit margin is still below its historical average of 13.4%, but it is slowly moving in the right direction. As per the finance assignmentanalysis Unilever's main competitors, such as Procter & Gamble and Nestle, have net profit margins of 16.4% and 14.4%, respectively. This shows that Unilever still has some room for improvement in terms of profitability. Investors will be closely watching Unilever's net profit margin in the coming years to see if the company can continue to improve its profitability.
Return On Assets (ROA)
ROA measures a company's profitability in relation to its total assets. ROA indicates how effective management is in generating earnings from its assets (Husna & Satria, 2019). It is found from the finance assignmentthat ROA is calculated by dividing a company's net income by its total assets. ROA is a good measure of a company's overall profitability, as it shows how much income the company generates for each dollar of assets. A higher ROA indicates a more profitable company, as it generates more income for each dollar of assets. The ROA for Unilever for the years 2021, 2020, and 2019 was 18.8%, 9.0%, and 9.3%, respectively (Unilever Annual report, 2020). The ROA for Unilever increased significantly in 2021 as compared to the previous two years. The ROA for Unilever in 2021 was almost double the ROA in 2020. As per the finance assignmentanalysis the ROA in 2019 was also higher than the ROA in 2020. There are several possible explanations for the significant increase in ROA for Unilever in 2021. One possibility is that Unilever was able to increase its sales significantly in 2021. Another possibility is that Unilever was able to reduce its costs significantly in 2021. As per the finance assignmentit is also possible that the ROA for Unilever in 2020 was artificially low due to one-time factors such as write-offs or restructuring charges. If this is the case, then the ROA for Unilever in 2021 may not be sustainable in the long term.
Return on Equity (ROE) discussed in the finance assignment
Return on equity (ROE) is a financial performance indicator computed by dividing net income by shareholders' equity. (Efendi, Putri &Dungga, 2019). ROE is considered to be a measure of how well a company is using its capital to generate profits. As per the finance assignmentROE is a good measure of a company's profitability relative to its shareholders' equity. A higher ROE indicates a more profitable company, as it generates more income for each dollar of shareholders' equity. The net ROE for Unilever for the years 2021, 2020, and 2019 was 33.5%, 34.4%, and 43.4%, respectively (Unilever Annual report, 2021). The net ROE for Unilever for the year 2019 was significantly higher than for the years 2020 and 2021. This is likely due to the fact that Unilever's net income increased significantly in 2019, while it remained relatively flat in 2020 and 2021. As per the finance assignmentfindings the net income in 2019 was boosted by one-time items, such as the sale of the company's spreads business. Looking at the trend over time, it appears that Unilever's net ROE has been slowly declining. This is likely due to the company's increasing debt levels, which has led to a higher interest expense. Additionally, Unilever's margins have been under pressure in recent years, which has also contributed to the decline in net ROE.
Operating Profit Margin
Return on equity (ROE) is a financial performance indicator computed by dividing net income by shareholders' equity. The operational margin is a financial statistic that calculates the percentage of a company's revenue that remains after paying for operating expenditures (Measuring Financial Stress - Center for Commercial Agriculture, 2019). As per the finance assignmentthe operational margin is used to calculate a company's profitability and to compare other firms in the same industry. As per the finance assignmentdata Unilever's operating margin for 2021 was 16.6%, which means that for every dollar of revenue that Unilever generated, the company kept 16.6 cents after paying for its operating expenses. Unilever's operating margin for 2020 was 16.4%, and for 2019 it was 16.8%. Unilever's operating margin has been relatively stable over the past three years (Unilever Annual report, 2020). The company's margin has fluctuated by less than 0.5 percentage points over that time period. This stability is likely due to the fact that Unilever is a large and well-established company with a diversified product portfolio. It is found from the finance assignmentthat while Unilever's operating margin is relatively stable, it is worth noting that the company's margin is lower than the average operating margin for the food and beverage industry. This indicates that there is room for improvement. One way that Unilever could improve its margin is by increasing its prices. Another way to improve the margin would be to reduce the company's operating expenses.
Gross Profit Margin analysed in the finance assignment
The gross profit margin (GPM) is a financial ratio that calculates the percentage of revenue that a company keeps after accounting for the cost of goods sold (COGS) (Nariswari&Nugraha, 2020). As per the finance assignmentdata Unilever's GPM for 2021, 2020, and 2019 was 45.3%, 42.6%, and 44.8%, respectively. Unilever's GPM improved in 2021 compared to 2020 but was still below the company's 2019 GPM. The main drivers of this improvement were higher revenue and lower COGS. Unilever's revenue increased by 3.7% in 2021, while its COGS decreased by 2.4%. Unilever's GPM declined in 2020 compared to 2019, due to higher COGS. Unilever's COGS increased by 4.6% in 2020, while its revenue only increased by 2.1%. As per the finance assignmentthe main driver of this increase in COGS was higher commodity prices. Looking forward, Unilever's GPM is expected to improve in 2021 and beyond as the company benefits from cost-saving initiatives and higher revenue growth.
2) Unilever’s Dividend Policy
As per the finance assignmentfindings when Unilever was founded, the corporation immediately began to pay dividends. Unilever NV distributed a 48-cent interim dividend as its first payment in December 1929. Unilever's dividend policy is to pay out a minimum of 40% of its earnings as dividends. The company has a long history of paying dividends and has increased its dividend payout in each of the last ten years (Unilever’s History, 2022). Unilever's dividend policy has been to maintain a strong balance sheet and pay a regular dividend that is adjusted for currency fluctuations. The board of directors decides Unilever's dividend policy which is to pay a variable dividend each year based on the company's profitability and cash flow. The dividend is usually paid in two instalments, with the first being paid in May and the second in November. ever has a long-term commitment to growing its dividend per share by at least 10% per year. As per the finance assignmentthe Dividend Distribution Policy of Unilever ensures that any excess operating cash flow over the company's short and long-term requirements is distributed to shareholders as dividends (LIWANG, Sumual&Turambi, 2020). Because it thinks that shareholder value should always be increased, the company intends to offer its shareholders an alluring, long-lasting, and growing dividend. The Board of Directors will evaluate the pertinent conditions, suggest whether a dividend should be issued, and, if so, what rate it should be declared at. The company's current year profit after taxes is used to pay the suggested dividend. It is analysed in the finance assignmentthat subject to any legal limitations, the Board of Directors may, in a variety of situations, including but not limited to loss after tax in any given fiscal year, consider using retained earnings for dividend recommendation.
Internal variables, current and projected underlying financial performance, cash flow and liquidity situation, capital expenditure and investment plans, acquisitions, and disposals, restructuring activities, interim dividend, and future funding requirements will typically have an impact on the actual dividend payout each year. As per the finance assignmentthe macroeconomic climate, consumer trends, regulatory standards, and shareholder expectations are examples of external variables. Therefore, any funds withheld will be applied to achieving the company’s long-term growth goals, as determined by the board of directors (Verdickt, Annaert&Deloof, 2019). This could comprise without being limited to issuing bonus shares, seizing the chance for inorganic expansion through mergers and acquisitions, and any other elements the board of directors deems proper and equitable, and ensuring conformity with local regulations. Timing and Method of Dividend Pay-out On or before the date noted in the declaration; the corporation must distribute to all shareholders the declared and duly approved dividend (Dividend policy, 2022). It is analysed from the finance assignmentthat the company offers a seductive combination of dividend growth (5.3% on average over the past five years) and dividend yield (3.65% through March 2021). They announced a dividend of 37.22p per common share, or €0.4268 in Q3 2022, to be paid on December 9. They distributed a dividend of 36.33p, or €0.4268, per common share in the second quarter of 2022. The dividend EPS payout ratio is set at 80% as of March 1 2021. The payout ratio for underlying EPS is 69%, and the payout ratio for dividend-free cash flow is 59% (Dividend history, 2022).
3) Unilever’s Capital structure and Working capital
Capital structure discussed in the finance assignment
Among the numerous industries that Unilever works in include food, drink, cleaning supplies, and personal care items. The company considered in the finance assignmenthas a wide variety of products in each industry, and this is what has made the company successful. The company is known to have a strict capital structure and working capital policy. The company has a strong equity base, and this helps the company to maintain a strong financial position. The company has a debt-to-equity ratio of 2.71. as per the finance assignmentUnilever’s capital structure is composed of both debt and equity. As of June 30, 2022, Unilever’s debt totalled $66.01 billion, and its equity totalled $24.33 billion. Both the long-term debt and the shareholder's equity have increased from the previous year, which stood out to be $65.48 billion and $23.36 billion, respectively. Debt to equity fell from 2.80 to 2.71. For the six-month period that ended in June 2022, Unilever had no short-term debt or capital lease obligations totalling $0 million. It is found from the finance assignmentthat as of the end of the quarter in June 2022, Unilever had no long-term debt or capital lease commitments. Unilever had $21,291 million in total shareholders' equity at the end of the quarter in June 2022. Unilever had zero debt to equity for the six-month period that ended in June 2022. The highest debt-to-equity ratio for Unilever over the previous 13 years was 3.71, and the lowest was 0.36. Additionally, the median was 0.97 (Unilever’s capital structure, 2022). Bonds are the main kind of debt held by Unilever. Unilever's primary source of money comes from the world's debt capital markets. As per the finance assignmentUnilever PLC and Unilever United States, Inc. jointly guarantee each loan issue programme. Unilever had terminated revolving 364-day bilateral credit arrangements totalling $7,215 million and €750 million as of June 30, 2022. To reduce the risk of refinancing in any given year, Unilever works to maintain a smooth maturity profile for its long-term debt.
Unilever has a negative working capital position because its current liabilities outweigh its current assets. Unilever experienced a working capital change of $-1,180 Mil during the six-month period that ended in June 2022 (Unilever’s Working Capital, 2022). As per the finance assignmentUnilever experienced a working capital change of $-53 Mil during the fiscal year that ended in December 2021. The most recent quarter's net working capital for Unilever was -$3.441 billion. For the fiscal years ending in January 2018 through 2021, Unilever's average net working capital was -$5.651 billion. It is found from the finance assignmentdata that for the fiscal years ending in January 2018 and 2021, Unilever's median net working capital was -$5.762 billion. When comparing the previous five years, the highest monthly value for Unilever's net working capital was -$2.779 billion in January 2018. In December 2020, Unilever's net working capital fell to a five-year low of -$7.928 billion. Unilever's net working capital increased in 2018 (-$2.779 billion, -50.7%), 2019 (-$5.762 billion, -5.8%), and 2021 (-$5.674 billion, -28.4%), whereas it decreased in 2018 (-$6.114 billion, +120.0%) and 2020 (-$7.928 billion, +37.6%) (Unilever Annual report, 2021). As per the finance assignmentwith a current ratio of 0.80, the company's current assets aren't sufficient to cover its current liabilities and outstanding debts.
4) Potential acquisition
A) Rationale for choosing the company
As per the finance assignmentanalysis Bakkavor Group, UK, might be acquired by Unilever. Unilever and Bakkavor have several similarities, including Our profound awareness of consumers' evolving demands enables us to produce new goods for our clients worldwide. As part of their food waste goal to reduce food waste by half by 2030, they are dispersing surplus and waste pineapple and mango to Hawksbill for use in their coloured rum distilling process. It is found from the finance assignmentthat they are brimming with ideas and eager for additional people to join companies who share their love for excellence. They have partnered with Hawksbill Rum, a company that understands their commitment to making a beneficial impact on our environment. Because they are worldwide leaders in the healthy food market, they offer unique goods for our clients in the UK, US, and China, such as pizzas, salads, soups, dinners, dips, and sweets (Bakkavor, 2021). They are a worldwide company that operates in several of the world's major food marketplaces. They have lofty goals. So, whether situated in the United States, the United Kingdom, or China, their in-depth understanding of consumer, commercial, and food patterns, coupled with their lengthy development goals, means that the breadth, scale, and magnitude of a career with us are enormous. As per the finance assignmentfindings, Bakkavor Group plc (the "Company") and its affiliates (the "Group" or "Bakkavor"), the world's largest producer of freshly prepared foods, today announced its full-year financial accounts for the twelve-month period ending 2021. Like-for-like revenue increased by 1.2% in 2019 and 6.2 per cent of the total in 2020, to £1,885.6 million (Bakkavor Group plc full year results, 2021). They have been building their company and displaying great outcomes since the beginning. Basic profits per share increased by 3.9 pence to 9.8 pence. The total dividend payout ratio for 2021 is up 10% from 2019, with a projected final payout of 3.96 pounds per ordinary share (Egor, 2018). Acquiring a business might be the best option because it is growing and has a large consumer base. As per the finance assignmentanalysis customers' commitment to Bakkavor mixed with Unilever's firm will be a huge success. They all respect one another decently in order to attain their aims. They have mutual trust, and respect for one another's contributions and uniqueness. They recognize that they can all contribute to the cause and work together to attain their objectives. They are hundreds of co-workers from dozens of nations all around the world, all fighting for the same cause. They work well together. They look out for and encourage one another.
B)Cash flow circumstances
When determining how dangerous a firm is, we constantly consider its usage of debt, as debt overflow can lead to catastrophe (Simply Wall St, 2022). As per the finance assignmentBakkavor Group plc does, however, have debt. Debt is a tool that may allow enterprises to thrive, but if a company is unable to repay its lenders, it is under its control. A more typical (but still costly) occurrence occurs when a firm is forced to issue shares at rock-bottom prices, persistently diluting investors, in order to shore up its financial statement (Murphy, 2022). If a corporation is unable to pay its creditors, it may declare bankruptcy in the worst-case situation. As per the finance assignmentthe first step in evaluating how much debt a firm utilizes is to look at its revenue and debt at the same time. Of fact, many businesses use debt to fuel development with no serious ramifications. The most significant investment risk is not price fluctuation, but whether Unilever may suffer a diminishment of cash.' However, its EBIT rate of growth offers a totally different narrative, indicating some resilience. Bakkavor Group's capacity to manage its overall obligations, as well as its conversion of EBIT to operating cash flow, needed to inspire trust in its capability to take on further debt. That isn't inherently a negative thing because leverage may increase return on equity. Nevertheless, it is something to be mindful of. After examining the above-mentioned data factors, they might believe Bakkavor Group's debt is somewhat hazardous. As per the finance assignmentthe financial statement is the natural place to begin when analyzing debt levels. However, any corporation may eventually contain hazards that lurk outside of the financial sheet. For example, they have found two red flags for Bakkavor Group that they should be aware of. A net negative debt indicates that the firm has more cash and cash equivalents than financial commitments, implying that it is more comfortable financially. Net debt may help identify whether a firm is too stretched or has an excessive amount of debt in comparison to its cash savings. Following the aforementioned circumstance, the discount rate would be 3%. The NPV is calculated to be 177.429 million. As per the finance assignmentanalysis, the cash earned over the next five years is estimated to be between £30 and £75 million. It cannot be expected that substantial cash growth in the next five years can occur. The discounted cash flows have increased from £28 million to £47 million. It can be concluded that the data for the last five years is not very satisfying.
C) Implications of the acquisition on the performance of the company
Acquiring a firm and converting it into a fully owned subsidiary may result in the merged company failing to meet the targeted cost savings objectives from benefits and scale advantages. A theoretically accretive deal may turn dilutive. On many occasions, merging two firms proved to be a considerably more challenging process, in fact than it seemed in theory (Picardo, 2022). It is analysed from the finance assignmentthat Unilever is attempting to control its industry. A merger of two behemoths, on the other hand, would result in a possible dominance, and such a purchase would face intensive examination from anti-competition whistle-blowers and federal bodies. If Unilever is overly optimistic about Bakkavor's prospects and wants to avoid a competing bid for Bakkavor, it may pay a very large premium for Bakkavor. Once Unilever has bought Bakkavor, the best possibility that Unilever had envisaged may have yet to come to fruition. For example, a food product being created by Bakkavor might have unexpected toxicities, severely limiting its market potential. Unilever's administration (and customers) may therefore be left to lament the fact that it overpaid for Bakkavor. Such overpayments can have a significant effect on future profitability (Kumar & Sharma, 2019). As per the finance assignmentif Unilever invests both money and equity, Bakkavor's investors own the purchaser and hence have a personal stake in its long-term profitability. Corporations will purchase or merge with another company for a number of reasons, such as extending the scope of their service divisions or battling off competitors. Mergers have clearly longer-term effects for the acquiring company or the dominant corporation in a combination than for the purchaser in an acquisition or the corporation engulfed in a merger.
D) Challenges and risk assessment
An investment project provides Bakkavor's shareholders with the option to cash out at a considerable discount, specifically if the purchase seems to be all. Three innovative approaches to firm-to-firm transaction data They present evidence that suppliers (to both placebo buyers and multinational corporations) have high short-run marginal cost profiles that decrease with time (Alfaro-Urena et al., 2022). Second, they compare the intermediate consequences of MNC demand shocks to those of three categories of placebo purchasers (big domestic enterprises, governments, and local exporters), emphasizing the distinctive nature of corporates as purchasers. As per the finance assignmentthey might compare the adjustment patterns of first-time sellers to MNCs with those of suppliers to these placebo buyers. Furthermore, they show the very first suppliers to MNCs not only obtain new clients but also higher performing buyers (e.g., longer and with larger supplier relationships).
Overestimation Unilever may confront one of these challenges. As per the finance assignmentalthough they are understandably a potent motive for many transactions, they are regularly inflated, sometimes by millions of pounds. In the most fundamental sense, efficiencies arise when one thing is added to another. This often denotes extra revenue or cost reductions as a result of the transaction. Temperance is the greatest way to avoid exaggeration of synergies (Patel, 2022). If Unilever feels there is still a timeliness that makes the acquisition appealing, it may be prudent to pursue it. For example, if Unilever looks to be able to save a million pounds, divide that sum by two. It is found in the finance assignmentthat for the term of the deal, this mergers and acquisitions dilemma is irrevocable. Overpaying for companies is without a doubt the most common problem in acquisitions and mergers. This small but major shift in thinking might save a small fortune and help you get out of your surplus predicament.
Another common issue that affects encounters is that sellers only notify Unilever when they have to spend more money and never when they are investing too much. As per the finance assignmentthis is due, in part, to the reality that the concerns on this list degrade organizational value, making overspending necessary. To reduce expenditures, consider a reasonable value for that enterprise as a limit instead of a target. Unilever may borrow to fund this. Financing of the acquisition: Debt-financed acquisition is the one it can use when opposed to equity; indebtedness can provide reduced capital financing (Lachmann, Stefani &Wöhrmann, 2022). As per the finance assignmentcompanies that want less capital and need it fast choose bank loans over equity investment. Despite the capacity to purchase another company with cash, relatively few do so due to financial restrictions.
Underpinning the finance assignmentresearch above, it is certain that Unilever's profitability position has been improving. The increase in the profitability ratios is an indication that the company will be able to secure better investments from its investors as well as it will have a better cash position. Therefore, the acquisition of the company will be very profitable since it will enable the company to venture into a potentially unexploited area, thereby creating a competitive advantage on its own. Acquiring Bakkavor will be profitable because the cash will be generated very fast, thereby allowing the company to recover the investment amount very fast. However, as per the finance assignmentfindings the company should be mindful of the financing situations of the acquisition. Since it has decided to make an investment that is 10% of the share capital, therefore, in the case of payment via shares could be a better and more secure endeavour.
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