The objective of this analysts report is to whether or not to invest £1 million in the company “Diageo plc”. This report is divided into five parts. First, the company profile is introduced. Second, the performance overview of Diageo will be summarized. Third, the financial ratios analysis is presented. Then, I have analysed industry competitors comparing with Diageo. Final, after considering key relevance factors, the conclusion of the investment will be revealed.
“DIAGEO” Company Profile
Diageo plc is the world’s leading premium drinks business with an outstanding collection of beverage alcohol brands across spirits, wines and beer categories. These brands include Johnnie Walker, Guinness, Smirnoff, J&B, Baileys, Tanqueray, Captain Morgan, Crown Royal, Gordon’s, Beaulieu Vineyard and Sterling Vineyards wines. Diageo is still a relatively young company because they have only existed in their current form since 1997, however, the brands business have a rich heritage. Diageo is trading in 180 markets with offices in 80 countries. They also have manufacturing facilities across the globe including Great Britain, Ireland, United States, Canada, Spain, Italy, Africa, Latin America, Australia, India and the Caribbean (Diageo annual report, 2010).
“DIAGEO” Performance Overview
In 2010, Diageo performed a good movement. To begin with, Net sales were increased by 5% from £9311 million to £9780 million. Next, an operating profit was raised 6% from £2418 million to £2574 million. Moreover, a basic earnings per share was going up from 64.6p to 65.5, which is 1% equivalent. A recommend full year dividend per share increased by 5.5% from 36.10p to 38.10p (Diageo annual report, 2010).
In this part, the ratio was calculated and compared with the previous period. We will see whether there has been an improvement or deterioration in performance. Profitability
Ratio/Year| 2010| 2009| 2008|
1. Gross Profit Margin| 58.10%| 58.20%| 59.78%|
2. Operating Profit Margin| 26.32%| 25.97%| 27.34%|
3. Profit Before Tax Margin| 22.89%| 20.41%| 25.69%|
4. Return on Capital Employed| 16.60%| 17.23%| 19.60%|
Table 1: Diageo Profitability Ratios
1. Gross profit margin is a measurement of profitability in producing and selling goods before any other expenses are taken into account. According to the table, Diageo’s gross profit margin was slightly decreased by 1.58% from 2008 to 2009 and 0.10% from 2009 to 2010. The decline in this ratio indicate that gross profit was lower relative to sales revenue in 2009 than it had been in 2008 and in 2010 than in 2009 (Atrill & McLaney, 2008). 2. Operating profit margin can be used to evaluate the profit from trading operation before the interest payable expense is taken into account (Atrill & McLaney, 2008). From Table 1, the operating profit margin declined from 27.34% in 2008 to 25.97% in 2009. However, there was an increase in 2010 to 26.32% 3. Profit before tax margin, as you can see in the table, the percentage is in the same way as the operating profit margin. There was a decrease from 25.69% in 2008 to 20.41% in 2009 and a small increase to 22.89% in 2010. 4. Return on capital employed (ROCE) indicates the efficiency and profitability of a company's capital investments (http://www.investopedia.com/). We can see in the table that the ROCE of the company is falling. Efficiency
Ratio/Year| 2010| 2009| 2008|
1. Inventory Turnover Ratio| 3.95| 3.99| 3.96|
2. Sales Revenue per employee (£)| 556,447| 510,961| 440,813| Table 2: Diageo Efficiency Ratio
1. Inventory Turnover Ratio is showing how many times a company's inventory is sold and replaced over a period. It can be seen from Table 2 that Diageo’s inventory turnover is rather high and had a tiny change during the last 3 years. A high ratio implies either strong sales or ineffective buying (http://www.investopedia.com). 2. Sales...