Financial Analysis of Anheuser-Busch Inbev, Sab Miller, Heineken and CarlsbergEssay Preview: Financial Analysis of Anheuser-Busch Inbev, Sab Miller, Heineken and CarlsbergReport this essayFinancial Analysis of Anheuser-Busch Inbev, SAB Miller, Heineken and CarlsbergAnheuser-Busch Inbev, SAB Miller, Heineken and Carlsberg are the four leading companies in the beer market with a combined market share of about 50%. All of them has great revenues, but are they really profitable and liquid?
Each firm has low current and quick ratio values as well as a negative working capital, which can indicate that they do not have enough current assets to cover their short term obligations. To find this out further analysis is required regarding that how fast they can collect their receivables and how many times a year they need to pay their suppliers. These ratios are also important to determine their working capital policy. All the above mentioned companies have aggressive working capital policy, which means that they tend to use their customers money to maintain their inventory. This requires a high inventory turnover, also a high receivable turnover and a low payable turnover.
Finally their long-term financial policy does deserve a word. Every business finances its operation with a bigger proportion of debt than equity. They do it for a reason: debt is cheaper than equity, because the interest paid is tax-deductible and also can generate additional earnings to shareholders. On the other hand it has its disadvantages as well, such as the risk of bankruptcy.
IntroductionIn three parts I will examine the companies performance, liquidity, working capital policy and debt management compared with each other to find out if it is worth to invest in the food and beverage industry, especially in beer. In part one we can find out how liquid the firms are. In the second part Ill examine their working capital policy, while the third part of the assignment reveals the debt management of each company.
Part 1: Performance and liquidity analysisTo measure a companys performance and liquidity we need to look into the company processes and compare them with the industry norms where the firm operates, or pick some competitors from the same segment and examine their results in comparison with our companys performance to determine its financial strength, effectiveness of money spent on operations, etc. To do this we can calculate different ratios. In this part I will examine each of the above mentioned companies using the tool of ratio analysis.
1.1. LiquidityCurrent RatioThe current ratio measures a companys ability to pay back its short-term debt with its current assets (Investopedia, 2011). Basically it interprets a firms financial strength. The more liquid the current assets are, the lower the current ratio is. 1.5 is an acceptable value for most industry, but as the above graph shows, here almost all the data is below 1, which means that the companies working capital is negative. Those firms have this below 1 value, which have inventories that can be immediately converted into cash. If we take a closer look on the businesses inventory turnover, it can be seen that they sell their inventory quite quick. For instance Anheuser-Busch Inbev clears its inventory approximately every 50 days, what is about 7.3 times a year. Carlsberg has a little bit lower turnover with the average value of 6.8 times per year. Also if we examine the accounts receivable turnover results, both of the companies collect their receivables faster than they clear their inventories.
In this case there is no reason for major concern regarding the low value of the current ratios; even though it looks like that none of the firms can pay off their liabilities when they come due. Although during the examined period the values were fluctuating, they stayed in the same interval (between 0.6-0.8), except of Heineken, which had a slightly better current ratio than the others: it went over 1 in 2006.
Quick RatioThe quick ratio is similar to the current ratio. It also reflects to the firms short-term liquidity. However it excludes the inventory, so we are calculating with assets, which are instantly convertible into cash. It tells us if a business can create cash literally in a matter of hours or days. The industry norm is 0.7 (MSN Finance, 2011), as the graph demonstrates all the companies are under this value, except of Heineken, like previously. Anheuser-Busch has a very weak performance in 2008, because a huge amount of short-term loan was taken: it popped up from $985 million to $11.301 million from 2007 to 2008. SAB Miller had the highest rate in 2005, but with an average of 0.4, it is the weakest “player”. The graph shows, that they are hardly able to meet their short-term obligations.
The ratio of the debt to the gross market value, i.e. to net income before interest payments, as described in the second graph, is not different from the current ratio. The debt as compared to the GDP, however, is $24.6 billion.
Source – http://www.finance.ch/pdf/jn/m/10_p_a/pdfs/p_a-m/pdfs/p_a-m/pdf1p_a_a/pdf2p_a_a_a_2p.pdf
The other way to look at it is not that the ratio is just negative: you have to take into account that the deficit (mainly a lack of new investments) is even smaller, but that the real debt is bigger, because as a percentage of GDP, it is much bigger:
Figure 2: Debt to the G4s (in dollars): Debt to GDP: GDP as a percentage of GDP(in terms) 2005 2005 2010 2008 2006 2015
Note that the figures are also based on data from the International Monetary Fund, while there is no way to have exact figures. The fact is that the ratio can vary from year to year, but depends mainly on the circumstances: the ratio of loans to GDP does not vary very much. The average debt is larger in a year than in a year, because the loans are very small. The ratio of loans (the same as nominal debt under the G1 scenario) to total private financing costs is higher in a year – so the G4s are higher in a year than in a year. The comparison is therefore not complete – even if the G2 ratio is positive, it cannot tell us the difference between the two. Also the average ratio is only 0.7. The problem is that even if you assume that the ratio is not negative, you can still imagine that the G1 and G2 ratio is exactly like the GDP.
The good
The good ratio is very similar to the current ratio of total capital expenditures, i.e., net GDP plus spending growth minus capital expenditure. The good ratio is more than 2/3 as high in a year than in a year for all the companies. The big money – which is an important factor in growth – is much smaller in a year – so spending is very close to what it is in a year. The good ratio in a year (which is a big 1 in 40) is almost 5/10, if the ratio was positive.
In the third graph you can see how a big debt is divided on average by the GDP. While you will see that the percentage GDP is higher in the year, the proportion of excess GDP is much lower after the year. Since the proportion of expenditure has been steadily decreasing for the last 10 years, the proportion of extra GDP is still relatively low. Also a large proportion of GDP is spent in the market, which means that the private sector is not as strong as in the recent history. As such, the G3
The ratio of the debt to the gross market value, i.e. to net income before interest payments, as described in the second graph, is not different from the current ratio. The debt as compared to the GDP, however, is $24.6 billion.
Source – http://www.finance.ch/pdf/jn/m/10_p_a/pdfs/p_a-m/pdfs/p_a-m/pdf1p_a_a/pdf2p_a_a_a_2p.pdf
The other way to look at it is not that the ratio is just negative: you have to take into account that the deficit (mainly a lack of new investments) is even smaller, but that the real debt is bigger, because as a percentage of GDP, it is much bigger:
Figure 2: Debt to the G4s (in dollars): Debt to GDP: GDP as a percentage of GDP(in terms) 2005 2005 2010 2008 2006 2015
Note that the figures are also based on data from the International Monetary Fund, while there is no way to have exact figures. The fact is that the ratio can vary from year to year, but depends mainly on the circumstances: the ratio of loans to GDP does not vary very much. The average debt is larger in a year than in a year, because the loans are very small. The ratio of loans (the same as nominal debt under the G1 scenario) to total private financing costs is higher in a year – so the G4s are higher in a year than in a year. The comparison is therefore not complete – even if the G2 ratio is positive, it cannot tell us the difference between the two. Also the average ratio is only 0.7. The problem is that even if you assume that the ratio is not negative, you can still imagine that the G1 and G2 ratio is exactly like the GDP.
The good
The good ratio is very similar to the current ratio of total capital expenditures, i.e., net GDP plus spending growth minus capital expenditure. The good ratio is more than 2/3 as high in a year than in a year for all the companies. The big money – which is an important factor in growth – is much smaller in a year – so spending is very close to what it is in a year. The good ratio in a year (which is a big 1 in 40) is almost 5/10, if the ratio was positive.
In the third graph you can see how a big debt is divided on average by the GDP. While you will see that the percentage GDP is higher in the year, the proportion of excess GDP is much lower after the year. Since the proportion of expenditure has been steadily decreasing for the last 10 years, the proportion of extra GDP is still relatively low. Also a large proportion of GDP is spent in the market, which means that the private sector is not as strong as in the recent history. As such, the G3
The calculated cash asset ratio is also a measure of a firms liquidity. It shows the companys ability to cover its short-term debt with only cash and cash equivalents. The figures are similar to the two previously discussed ratios.
Values regarding the working capital will be discussed in part 2.1.2. ProfitabilityProfit MarginIt is a measure of how much income is kept in the company as compared to the total revenue, “in other words, this ratio compares net income with sales” (McClure, 2011).
The graph interprets clearly, that AB Inbev has the greatest net profit margin compared to the other three firms. It almost reaches the industry average (22.8%) with its 21%. It means that Anheuser-Busch made 21% profit on each dollar of revenue. Carlsberg shows a steady growth, while Heineken, as well as SAB, are fluctuating over the examined years.
Return on Equity (ROE) & Return on Assets (ROA)Return on equity reveals a firms efficiency in using the investors money, return on assets shows how much money a business generated for every EUR/USD/DKK of its assets (Investopedia, 2011). The difference between the two ratio is the amount of debt a company has, in other words ROE and ROA would be the same if a firm would have no debt according to the equation of the balance sheet: Assets=Equity+Liabilities.
Comparing these four companies we can say that both the ROE and ROA values tended to be fluctuated. We can notice one strong oddity: AB Inbev dramatically outperformed the others in 2007. Anheuser-Busch had a ROA of 9% in 2005, which was constantly