Financial Analysis

Financial Analysis

1.0 Company- An Overview

Tate & Lyle PLC is a UK based company which supplies the food and beverages ingredients to the industrial markets at global level. However, it started the business of sugar refining in the 1970s but it divested its sugar business in 2012. It specialises in turning raw materials such as corn, tapioca, and oats into ingredients that add taste, texture, and nutrients to food and beverages.

It is listed on the London Stock Exchange in the FTSE 250 index. This report evaluates the financial position of Tate and Lyle for last five years with the comparison of Ingredion in the same industry (Annual Report, 2018).

At the same time, it also provides recommendation to the company to improve future profitability and estimates the impact on relevant ratios. In addition, it also provides the analysis of the market verdict on the future prospectus of the company.

2.0 Financial Performance and Financial Position

2.1 Profitability Ratio

Profitability ratio is used to determine the effectiveness of the company to generate the adequate profits for the shareholders that enables to attract the investors for further investment. The following table shows the profitability ratios of Tate & Lyle PLC with comparison of competitor and industry performance:

2.1.1 Net profit

In relation to T&L, this ratio showed high fluctuations as it declined from 9.91% in 2014 to 1.28% in 2015 but after this, it showed the increasing trend to 9.78% in 2018. It shows the increasing ability of the firm to generate the adequate profits distributed to the shareholders (Gitman et al., 2015).

At the same time, it is higher than the competitor Ingredion showing the better ability of T&L in generating the adequate profits for the shareholders. It also shows that T&L is also capable of attracting the shareholders or investors so that they could invest for generating adequate returns.

2.1.2 Operating Profit

The pattern of operating profit is also same as the net profit because there was a decline in operating profit from year 2014 to year 2015 but it increased to 10.70% in 2018. The decline in profits for year 2015 was due to extended shutdown of the Singapore plant and prolonged and severe winter in the US that caused reduction in inventory levels and ability to fulfill customer orders.

At the same time, the competitor Ingredion performed better in terms of operations profits because of reducing the operational costs and earned 23.42% operating profit in year 2018.

2.1.3 Return on Equity

This ratio refers to the returns on investment made by the equity shareholders. From the ratio, it can be stated that there are fluctuations in return in equity from year 2014 to 2018 but it overall declined from 26% in year 2014 to 19.39% in year 2018.

It may be due to more investment by the company in expansion projects and disclosure of the operations in Singapore that affected the overall returns for the equity shareholders (Baker et al.,2017).

At the same time, in comparison of Ingredion, the ROA of T&L is higher than the competitor showing the ability of the firm to provide better returns to the equity shareholders on their investment.

2.2 Solvency/Liquidity Ratios

This ratio is related to the capability of the firm to meet its current obligations and run the routine operations efficiently. The table below shows the liquidity ratios for company and its competitor:

2.2.1 Current and quick ratios

Current ratio shows the ability of the firm to meet its current obligations. At the same time, quick ratio shows the liquidity position of the firm to meet its current obligations in contingency.

From the calculated ratios, it can be said that there is an increasing trend in both current ratio and quick ratio for T&L from year 2014 to year 2018. It shows the improving ability of the firm to meet its current obligations. Even company has ideal current ratio of 2:1 and quick ratio of 1:1 showing the better liquidity position.

However, Ingredion shows lower current ratio and higher quick ratio but not significantly indicating similar liquid position of T&L as compared to its competitors in the industry.

2.3 Efficiency Ratios

This ratio shows the efficiency of the management to use the available resources and assets to generate revenues. The below table shows the efficiency ratios of T&L with comparison of its competitor:

2.3.1 Asset Turnover

From the ratio, it can be determined that asset turnover ratio slightly declined from year 2014 to year 2018 with some fluctuations during this period. The reason behind this decline is the change in long term borrowings and fixed assets.

This ratio is slightly higher than competitor namely Ingredion reflecting the similar efficiency of the management of both firms to convert the assets into revenues (Vishny and Zingales, 2017). However, T&L is performing somehow better than Ingredion to generate revenues from its assets.

2.3.2 Accounts Receivable days

This ratio shows the days in which the company recollects the due payments from the customers.

From the ratio analysis, it can be determined that trade receivable ratio has increased from 35 days to approx 40 days during this period so the firm has adopted lenient policy in recollecting the receivables from the customers. However, it can adversely affect the cash position of the company due to delaying collection of the receivables.

At the same time, trade receivable ratio for Ingredion is 58 days in 2018 showing the inefficiency of the firm to recollect the receivables from the customers on time as compared to T&L.

2.3.3 Accounts Payable days

This ratio tells about the daya in which the suppliers are paid by the company. This ratio increased from 0.27 days to 1.35 days from year 2014 to 2018 means T&L makes payment to its suppliers and creditors on time without getting late. However, this approach in paying to the suppliers may cause issue of lacking cash or liquidity for the company.

On the other hand, this ratio for Ingredion is approx 37 days in 2018 showing the firm has a sufficient credit term with the suppliers and wants to have sufficient cash position as compared to T&L.  In relation to this, Ingredion’s management can be more efficient because it has sufficient days to make payment to suppliers to manage the cash.

2.4 Capital Structure ratios

Capital structure ratios refer to the financing options used by the firm to finance its operations. It also shows how the management of the company manages the debt and equity aspects in its capital structure to reduce the cost of capital. The below table shows the capital structure ratios of T&L with comparison of its competitor:

2.4.1 Debt to Equity

This ratio depicts about the portion of debt as compared to equity in the capital structure. For T&L, debt-equity ratio increased from 0.416 in year 2014 to 0.405 in year 2018 showing slight decline and increase in equity portion in its capital structure.

However, the firm uses high equity portion in its capital structure as compared to debt portion that enhances its creditworthiness sin the contingency to get the money through loan (Lawrence, 2016).

However, Ingredion has debt equity ratio of 0.814 showing higher debt in the capital structure as compared to T&L to take the tax advantages of dent financing.

2.4.2 Interest Coverage Ratio

This ratio shows the capability of the firm to pay interests on the long term debt by using the earnings. Interest coverage ratio of T&L has increased from 7.38 in year 2014 to 7.79 in year 2018 showing the improving ability of the firm to repay its interests through sufficient earnings.

However, this ratio is higher than that of Ingredion showing the competitive position of T&L in paying interest through earnings in better way (Burtonshaw-Gunn, 2017). It also shows that the firm is capable of paying its long term debt interest easily with the sufficient earnings.

3.0 Recommendation

Based on ratio analysis, it can be analyzed that the firm needs to improve net profitability. For this, the company might take initiative for reducing the operational costs. For this, the firm needs to make good contracts with the suppliers to reduce the costs of supplies.

It will help the firm to negotiate with the suppliers to reduce the cost of supplies and enhance he net profit for the firm. The better relationship with the suppliers can also be helpful for the firm to reduce the cost of the supplies that can be advantageous to reduce operational costs and enhance the profitability.

In addition, it can also be helpful for the firm to negotiate the labour costs that could be effective to reduce overall operational costs of the firm and increase the net profits.

The focus of the firm should be on the reduction in the costs of the operational activities that will be crucial to improve the profitability (Burtonshaw-Gunn, 2017).

The integration of the advanced technologies will also reduce the cost of operations through improved efficiency and effectiveness that will also bring the improvement in the profits.

But it can be assumed that the inflation rate of the country will not change significantly because it may impact on the price of the supplies. At the same time, it can also be effective to have better control on the productivity to increase the economies of scale to reduce the cost of production.

The use of large economies of scale can be helpful for the company to reduce the cost of operations and retain the higher profits (Rosentraub et al., 2016). Overall reduction in operational costs will have a significant impact on different ratios including operational margin, net margin and related ratios.

It is because the reduction in operational costs will improve the profitability ratios.

4.0 “Market verdict” on company’s future prospects

The Price-to-Earnings Ratio (P/E Ratio) is the ratio that tells about the value of the firm that measures its current share price in relation to per share earnings (EPS). It is beneficial for the investors to consider P/E ratio while making investment decision (Härdle et al., 2017).

It also shows how much investors are willing to pay for each dollar of earnings in a given stock. It is determined that PE ratio of Tate & Lyle is 13.7 showing favorable with the market at large.

The P/E for the S&P 500 is 17.7X. In addition, the current PE level of the company is slightly below its midpoint 13.9 over the last five years. It is moderately below the highest level for this stock means it can be effective investment option.

If this ratio is compared with the ratio for the same sector standing at 18.4 indicating the undervaluation of the stock of T&L currently as compared to its competitors. This company has a forward PE ratio of just 14.4 showing the better future perspective for the investment (Kireeva, 2016).

The investors seek the stocks that trade below their intrinsic value and their stocks are undervalued. It creates an opportunity for the investors to make profits.

At the same time, price to book ratio is used to compare the stock performance of the firm by dividing price per share by book value per share (BVPS). A lower P/B ratio represents the stock is undervalued.

For T&L, price to book ratio is 1.84 that is quite low and shows the undervaluation of the stock of the company. It means it can be beneficial for the investors to invest in this company’s stock due to possible future opportunities for better returns.

These interpretations of the ratios can be supported by the opinions of Zacks Investment Research that reflects that the profit and earnings ratio of the company is looking forward as T&L can be a suitable stock for value investors (Zacks Investment Research, 2019).

At the same time, analysis done by yahoo finance also suggests that T&L shows a better future for the investment due to having sufficient cash flows and better investments (Wall, 2018).

References

Annual Report (2018). Tate & Lyle. [Online] available at https://www.tateandlyle.com/sites/default/files/2018-06/Annual%20Report%202018%20-%20interactive%20FINAL_1.pdf (Accessed: 14 March 2019)

Baker, J.J., Baker, R.W. and Dworkin, N.R., (2017) Health care finance. Jones & Bartlett Learning.

Burtonshaw-Gunn, S.A., (2017) Risk and financial management in construction. Routledge.

Gitman, L.J., Juchau, R. and Flanagan, J., (2015) Principles of managerial finance. Pearson Higher Education AU.

Härdle, W.K., Chen, C.Y.H. and Overbeck, L. eds., (2017) Applied quantitative finance (Vol. 2). Springer.

Kireeva, E. V. (2016) Effective management of personal finance. Современные тенденции развития науки и технологий, (5-7), 5-7.

Lawrence, J.G., (2016) Principles of managerial finance.

Rosentraub, M.S., Winfree, J.A. and Mills, B.M., (2016) Sports finance and management: Real estate, entertainment, and the remaking of the business. CRC Press.

Vishny, R. and Zingales, L., (2017) “Corporate Finance”, Journal of Political Economy125(6), pp.1805-1812.

Wall, S. (2018) Why Tate & Lyle plc (LON:TATE) Could Have A Place In Your Portfolio.  [Online] available at https://finance.yahoo.com/news/why-tate-lyle-plc-lon-080215411.html (Accessed: 14 March 2019)

Zacks Investment Research 2019. Is Tate & Lyle (TATYY) A Suitable Stock For Value Investors? [Online] available at https://www.investing.com/analysis/is-tate–lyle-tatyy-a-suitable-stock-for-value-investors-200395065  (Accessed: 14 March 2019)

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