BMG704 International Finance Assignment Sample 

BMG704 International Finance Assignment Sample

ANALYSIS ON MULTINATIONAL ENTERPRISES

 

INTRODUCTION

Unilever Plc is one of a well known (FMCG) fast moving consumer goods company in the world. The company is head quartered in London, UK. The company has its presence in more than 190 countries. The company was started in the year 1929 and has grown tremendously. The company has posted a turnover of € 50.724 Billion in the FY 2020 and a profit of € 6.073 Billion.

The company has more than 400 brands under its umbrella. The company has its presence in most of the products such as food, toothpaste, tea and coffee products, beauty care, personal care, home care products, ice creams etc. The company invests a huge amount in its research development and it is one of the company which keeps on innovating. The company ensures that it keeps up with the requirement of the people and the trend. The company has its R&D facility in China, India, the Netherlands, the United Kingdom, and the United States. The company has made these locations as R&D strategically. The China and India are the growing economies and it has a huge growing population in the world. Thus this provide a space for the company to design its products and helps to ensure higher revenue and profit.

RECENT DEVELOPMENTS IN INTERNATIONAL FINANCIAL ENVIRONMENT

Unilever is one of the company which has got its present in almost all the countries in the world. They manufacture and sell lot of products under different brands in different countries. The size, flavor, colour etc makes the company’s product line to be unique and it ensures that the company’s customer needs are met. The international exposure not only provides opportunities but also some limitations.

The two major developments that have an impact on the company’s performance are

  1. i) Hyperinflation
  2. ii) Foreign Exchange fluctuation

Hyperinflation is the state of an economy in which the inflation of the country has gone so high that the prices are out of control. The prices of the goods will increase on an hourly basis and the home currency will lose its value to that of the other standard currency. In such a scenario, Unilever will find it difficult to measure and consolidate the company’s performance which is in hyperinflation state with that of the mother country. Moreover the hyperinflation country will be isolated from all other countries in trading to ensure that the country is provided with enough space for it to fix the issue and come back. This will be a huge hindrance for the Unilever.

There are huge number of currency in the world. Each country will follow their own currency. Unilever being one of the MNC, the company has to trade with different currencies in different parts of the world. The increasing market turbulence, political instability, varied covid situation etc will lead to more fluctuation in the currency. This is a huge challenge for the company. The company has to manage translation exposure, transaction exposure and economic exposure.

KEY ELEMENTS IN INTERNATIONAL FINANCIAL ENVIRONMENT

SOURCE OF FINANCE

The company’s major source of finance in the initial stages was Shareholder’s Capital. Hoever, currently the company is earning a good profits and it is able to retain the same to a greater extent for its growth. Thus the company’s current major source is the ploughed back money or the retained earnings. It is also visible from the increased reserve and surplus.

The company also has other source of finance such as long term financial liabilities and other short term liabilities. The financial liabilities include Bank loan and overdrafts, Bonds and other loans, lease liabilities, Derivatives, and other financial liabilities. The company is using these mechanisms to fund its finance needs.

DIVIDEND POLICY

The company has been paying its dividend regularly to its investors since 1987. From the FY 2010, the company has been paying dividend once in a quarter. The recent quarterly dividend stands at  € 0.5 approximately. The company is working to ensure that the investors both the ones who are looking for the growth as well as dividend are kept satisfied. This will ensure that the investors who are looking for regular returns also buy the stock for the dividend return. The company thus ensures that after retaining enough money for the growth, balance are given away to the investors as dividends.

FINANCIAL PERFORMANCE

The Ratio Analysis is one of the analysis in finance which helps an analyst to compare the company’s current year performance with the previous year. The ratio analysis also can be used to compare the company’s performance with its competitors. This analysis can be used to find the gaps in the operation and fix the same at the earliest.

In this assignment, the four types of ratio analysis has been carried out to understand the company’s performance with that of the previous year / years. The types of ratio analyzed are

  1. i) Profitability
  2. ii) Liquidity

            iii) Efficiency and

  1. iv) Investment

PROFITABILITY RATIO

The profitability ratio that has been studied in the assignment are the

  1. i) Operating Profit Margin
  2. ii) Net Profit Margin

Operating Profit Margin: The operating profit margin is the ratio of the operating profit to the sales. The operating profit is computed by subtracting all operating expenses from the turnover.

            Operating Profit Margin = (Operating Profit / Revenue) * 100

Net Profit Margin: The net profit margin is the ratio of the net profit to the sale of the company. The net profit is the amount remaining after deducting all expenses from the turnover.

            Net Profit Margin = (Net Profit / Revenue) * 100

The below table is the one which shows the computation of the profitability ratios for Unilever Plc for the FY 2018, FY 2019 and FY 2020.

Year 2018 2019 2020
Turnover (€ Mln) 50982 51980 50724
Operating Profit (€ Mln) 12639 8708 8303
Net Profit (€ Mln) 9788 6026 6073
Operating Profit Margin 24.79% 16.75% 16.37%
Net Profit Margin 19.20% 11.59% 11.97%

It is observed that the operating margin for the company has declined from 2018 level of 24.79% to 16.37% in the year 2020 level. This clearly indicates that there is an increase in the operating cost of the company and it is not able to pass on the cost to the customers.

An analysis of the Net Profit margin also indicates that the company’s net profit margin has come down from 19.20% in the FY 2018 to 11.59% in the FY 2019. In the FY 2020, there is slight recovery and the Net Profit margin is standing at 11.97%. This also shows that the company’s other costs are increasing and the company is finding it hard to control the costs or pass on the cost to the customers.

Liquidity Ratio:

The Liquidity ratio are the ones which helps the company to know its capability to pay off the monetary obligation in time. The company’s ability to meet the obligation is categorized into two. One is the short term liquidity ratio and the other one is the long term liquidity ratio. In this analysis, the short term liquidity ratio such as Current Ratio and the Acid Test Ratio has been considered.

Liquidity Ratio 2019 2020
Current Assets (€ Mln) 16430 16157
Current Liabilities (€ Mln) 20978 20592
Inventory (€ Mln) 4164 4462
Current Ratio        0.78        0.78
Quick Ratio        0.58        0.57

The Current Ratio is the ratio of current assets to the current liabilities. This helps the management to know about the quantum of current assets available to meet the current liabilities. The Current Ratio is expected to be greater than or equal to 1. If the ratio is equal to 1 it indicates that the company has current assets which will be equal to current liabilities. In such a scenario, the short term solvency is found to be good for the company.

Current Ratio = Current Assets / Current Liabilities.

The Quick Ratio is the ration of current assets without inventory to that of current liabilities. It is being computed to see that in case of any obligation without using the inventory to what extent is the company in a position to pay off the obligation. The inventory is ignored in this computation for the reason that it might take a significant time to convert inventory to cash.

Quick Ratio = (Current Assets – Inventory) / Current Liabilities

The above table is the computation of Current Ratio and the Quick Ratio for Unilever Plc for the FY 2019 and FY 2020.

The current ratio for the FY 2019 and 20 stands at 0.78. This means that the current assets what the company has is only to the extent of 78% of the current liabilities. On a further analysis, it is found that the company’s quick ratio is found to be 0.58 for the FY 2019 and 0.57 for the FY 2020. This is also very low when compared to the standard ratio. This indicates that there is a probability for the company failing to meet the current obligations. However, there are companies in certain industry which may have low current ratio and quick ratio but still they meet their obligation through other means.

Efficiency Ratio:

A company has several ratios to see its performance. There are certain ratios which are built to measure the company’s efficiency. In this analysis, the efficiency ratio that has been taken for the study are

  1. i) Debtor Days
  2. ii) Asset Turnover Ratio

Debtor Days:

Debtor Days is the average number of days taken by the company to collect the money from their customers. If the debtor days is increasing, then it means that the company is losing its efficiency in collecting its debt. In other words, the customers are taking long tenure to repay the due amount.

Debtor Days  = (Average Debtors / Sales) * 365

Asset Turnover Ratio:

The Asset Turnover Ratio helps to understand the ratio of sales to the assets. This helps the company to know how much times the sales has happened when compared to the assets. Higher the asset turnover ratio, it is good for the company.

Asset Turnover Ratio = (Sales / Total Assets)

The below is the table which shows the computation of the Debtors and Asset Turnover ratio for the FY 2019 and FY 2020.

 Efficiency Ratio 2019 2020
Debtors (€ Mln) 6695 4939
Average Debtors (€ Mln) 6588.5 5817
Turnover (€ Mln) 51980 50724
Debtor Days (in Days)      46.26      41.86
Total Assets (€ Mln) 64806 67659
Average Assets (€ Mln) 62958.5 66232.5
Asset Turnover Ratio        0.83        0.77

On analyzing, it is found that the debtor days has come down from 46.26 days in FY 2019 to 41.86 days in FY 2020. This means that the company is able to collect its outstanding much earlier when compared to the previous year. It is an increase in the efficiency of the company.

The Asset Turnover Ratio of the company for the FY 2019 stands at 0.83 vs 0.77 for the FY 2020. It means that the company is able to generate sales to an extent of 77% of the assets. This is much lower when compared to the FY 2019. There is a decrease in the efficiency of the business. The company is not using its assets effectively.

Investment Ratio:

The Investment Ratios are the ones which helps the investor to understand the rate of return earning by the company for the amount invested or for any other parameter. The investors will use this return to compare with the bench mark returns and they will take appropriate actions.

The investment ratio that has been considered in the study are

  1. i) Return on Equity
  2. ii) Return on Assets

Return on Equity:

Net Profit is the amount that has been earned by the company with the money given by the shareholders. Thus the Return on Equity is computed by dividing the Net Profit or the Earnings with the Shareholder’s value. This will provide the rate of return.

Return on Equity = (Net Profit / Total Shareholder’s Equity) * 100

Return on Assets:

The Net profit is divided by the Total assets and the % is obtained. This is called as Return on Assets.

Return on Assets = (Net Profit / Total Assets) * 100

The below table provides the Return on Equity and Return on Assets that has been computed for Unilever for the FY 2019 and 2020.

Investment Ratio 2019 2020
Net Earnings (€ Mln) 6026 6073
Shareholder’s Equity (€ Mln) 13886 17655
Total Assets (€ Mln) 64806 67659
Return on Equity 43.4% 34.4%
Return on Assets 9.3% 9.0%

The Return on Equity has come down from 43.4% to 34.4% in the FY 2020. This decline is not good for the investors. It means that the company is not able to earn sufficient returns for the investor’s money or capital.

The Return on Assets stands at 9.3% in the FY 2019 and 9% in the FY 2020. This is a cause of concern.

CONCLUSION

The above analysis is detail analysis about the Unilever Plc. The company has been performing for a long period of time with good growth. The sector that it is present helps the company to grow as the disposable income of the people increases.

REFERENCE

Abosede, I. A., & Dada, O. A. (2021). Manufacturing Firms’ Profitability and Management of Credit: A Study of Unilever Nigeria, PLC and Nigeria Breweries PLC. International Journal of Advanced Studies in Business Strategies and Management, 9(1), 50-61.

Bhattacharya, C. B., & Polman, P. (2017). Sustainability lessons from the front lines. MIT Sloan Management Review, 58(2), 71.

Dmitrievna, K. K. (2021). Transformation of Business Sustainability Strategies of FMCG Companies in the 21st Century on the Examples of Unilever and L’Oréal.

Jinadu, A. G., & Opeyemi, M. F. Impact of capital structure on dividend pay-out ratio in unilever nigerian plc.

Lakada, M. N., Lapian, S. J., & Tumiwa, J. R. (2017). ANALYZING THE FINANCIAL STATEMENT USING HORIZONTAL–VERTICAL ANALYSIS TO EVALUATING THE COMPANY FINANCIAL PERFORMANCE PERIOD 2012-2016 (Case Study at PT. Unilever IndonesiaTbk). Jurnal EMBA: Jurnal Riset Ekonomi, Manajemen, Bisnis dan Akuntansi, 5(3).

Narayanan, S., & Das, J. R. (2021). Can the marketing innovation of purpose branding make brands meaningful and relevant?. International Journal of Innovation Science.

Patjoshi, P. K., & Nandini, G. (2019). Comparative Study on Financial Performance of Hindustan Unilever and Nestle India. Journal of Xidian University, 14(4), 3075-3080.

Zou, S. (2021, August). Analysis on the Recovery of MNEs from the Financial Crisis: A Case Study of Unilever. In 1st International Symposium on Innovative Management and Economics (ISIME 2021) (pp. 121-128). Atlantis Press.

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