Diageo Plc
1. How has Diageo managed its capital structure? Do you agree it is conservative?
Diageo was born as the result of merging Grand Metropolitan plc and Guinness plc. Since the beginning the newly formed company maintained conservative financial policies inherited from the two parent companies; and in general from the British financial management style. There are many indications that confirm that Diageo has managed its capital structure using a conservative approach. Firstly, it is worth mentioning that the company has maintained levels of debt way below its capacity to repay, maintaining the EBIT/interest ratio above optimum levels
Secondly, we can see that the credit rating of the company is A+, practically an average of what the parent companies had before they merged. This rating is a clear indication that the company has a low probability of default since credit agencies use a combination of indicators, ranging from the capital structure to the stability of the revenues, to calculate the score. Furthermore, we can see that 47% of the debt that Diageo has is in short term papers, as a result the interests paid are low thus putting less pressure on the company. There is one negative aspect that we can mention about relying on short term debt, and it’s that the company must negotiate its commercial paper yearly to guarantee the money supply, but this has not been an issue because of Diageo’s ability in maintaining the credit rating high thanks to maintaining an interest coverage ratio between 5 and 8 times.
Finally, if we compare Diageo to similar firms it may appear that the company is not that conservative because ratios like the interest coverage and the EBITDA / Total Debt are among the lowest of the companies that Diageo compares itself to. But if we take into consideration that the company is mainly in the fast moving consumer goods segments, where the after sales support is not as important as in other industries, and that the company has created strong
Diageo was born as the result of merging Grand Metropolitan plc and Guinness plc. Since the beginning the newly formed company maintained conservative financial policies inherited from the two parent companies; and in general from the British financial management style. There are many indications that confirm that Diageo has managed its capital structure using a conservative approach. Firstly, it is worth mentioning that the company has maintained levels of debt way below its capacity to repay, maintaining the EBIT/interest ratio above optimum levels
Secondly, we can see that the credit rating of the company is A+, practically an average of what the parent companies had before they merged. This rating is a clear indication that the company has a low probability of default since credit agencies use a combination of indicators, ranging from the capital structure to the stability of the revenues, to calculate the score. Furthermore, we can see that 47% of the debt that Diageo has is in short term papers, as a result the interests paid are low thus putting less pressure on the company. There is one negative aspect that we can mention about relying on short term debt, and it’s that the company must negotiate its commercial paper yearly to guarantee the money supply, but this has not been an issue because of Diageo’s ability in maintaining the credit rating high thanks to maintaining an interest coverage ratio between 5 and 8 times.
Finally, if we compare Diageo to similar firms it may appear that the company is not that conservative because ratios like the interest coverage and the EBITDA / Total Debt are among the lowest of the companies that Diageo compares itself to. But if we take into consideration that the company is mainly in the fast moving consumer goods segments, where the after sales support is not as important as in other industries, and that the company has created strong