Essay Sample on ABF: A Multinational Food Retail & Ingredient Company

Introduction

ABF is a multinational food retail and ingredient company based in the UK operating five business segments, namely agriculture, grocery, sugar, retail, and ingredients. ABF usually purchase food products from farmers and then add value to those products through processing while enhancing the quality of the products it markets. Primarily, the ABF is in the business of manufacturing and marketing consumer products through its business segments. The grocery part of the business deals with products such as cereals, beverages, sweeteners, sugars, vegetable oils, and baked products. Agriculture department manufactures and sells animal feeds, while the ingredient part concentrates making products such as lipids, enzymes, bakery ingredients, and yeasts among many others.

Competition and Position in the Industry

Food processing and the retailing sector is one of the competitive sectors in the UK due to the presence of the foreigner firms operating in the country. Besides, the top food processors in the country account for about 70% of the total market with online modern grocery stores reporting a tremendous growth rate over the past years (Gain.fas.usda.gov. 2019).

Consumer goods industry in the UK where ABF operates is a competitive industry due to the change in the consumer behaviour and lifestyle, challenging economic situation, online shopping, and the ways retailers deal with their customers. In the UK, ABF competes with other giant consumer goods manufacturers and retailers such as Sainbury's, Festival Foods, Monde Nissin, and Weis Markets among others. In the industry, ABF is one of the leading firms, and it has continuously retained its top market position for quite some years. According to Owler (2019), ABF dominates the market and the industry in terms of the total revenue, which stands at $19.5B, followed by Bimbo with revenue of $14B. In terms of the size of the employees, ABF is one of the leading firms with the highest number of workers, which currently are approximately 133000 while Bimbo has about 138000 employees current. The rest of the firms in the industry are quite small in size and revenue compared with ABF.

Ratio Analysis

Profitability Ratios

i). Net profit margin

= net profit / net revenue

In 2018, ABF reported a net income of PS1022M and net revenue of PS15574M (Abf.co.uk. 2019).

Net profit margin = PS1022/PS15574

= 6.56%

The net profit margin for the company in 2018 is 6.56%. Net profit margin demonstrates the proportion of the total revenue that is converted to net income (Tracy, 2012). in this case, ABF was able to convert only 6.56% of the total revenue to net profit while the rest consists of the costs of sales and the operating expenses. It can be seen that ABF net profit margin is low meaning that total costs and expenses consumes a significant proportion of the revenue which is due to the management failure to manage its costs efficiently. ABF management should try to cut down costs to improve profitability.

ii). Return on assets

ROA = net income/total assets

ABF reported a net income of PS1022M and total assets amounting to PS13692M (Abf.co.uk. 2019).

ROA = PS1022/PS13692

= 7.5%

Return on assets is a profitability ratio demonstrating proportion of the net income to total revenue. In this case, ABF net income is equivalent to 7.5% of the total assets reported in 2018. The net income is too low compared with the amount of assets reported in 2018 implying inefficiency by the management to use the available resources to generate more income to the business.

iii). Return on equity

ROE = net income/shareholders' equity

The firm reported a net income of PS1022M and total equity of PS9296M in 2018 (Abf.co.uk. 2019).

ROE = PS1022/PS9296

= 10.99%

ABF return on owners' investment is 10.99% meaning that, in 2018 every pound invested in the shareholders' equity return PS0.1099. A low ROE illustrates that the management is not effective enough to generate enough revenue from shareholders' equity (Bragg, 2018).

Liquidity Ratios

i). Current ratio

= current assets/current liabilities

The total current assets and total current liabilities reported by ABF in 2018 is PS5285M and PS3248M respectively (Abf.co.uk. 2019).

= PS5285/PS3248

= 1.6 times

Current ratio is a liquidity ratio showing the proportion between the current assets and current liabilities. In essence, current ratio demonstrates whether a firm is liquid in the short-term to take care of the short-term debts as and when they fall due. A liquid firm should report a current ratio of one and above. In this case, ABF current ratio is 1.6 times meaning that the company reported more current assets that the current liabilities. As such, ABF is liquid enough to settle its short-term dues at any given time.

ii). Quick ratio

Quick ratio = (total current assets - inventories-taxes)/total current liabilities

In 2018, ABF quick assets are PS3098M and total current liabilities arePS3248M (Abf.co.uk. 2019).

Quick ratio = PS3044/PS3248

= 0.93 times

It appears that ABF quick assets in 2018 are slightly lower than the total current liabilities. As a result, the company quick ratio is 0.93. It means that ABF total quick assets cannot cover all of its total current assets.

iii). Time interest earned ratio

Time interest earned ratio = earnings before interest and taxes (EBIT) /interest expense Williams and Dobelman, 2017)

Time interest earned ratio is a ratio of the earnings before interest and taxes to interest expense. ABF reported interest expense and EBIT of PS50M and PS1310M in 2018 respectively (Abf.co.uk. 2019).

Time interest earned ratio = PS1310/PS50

= 26.2 times

Interest coverage ratio for ABF in 2018 is 26.2 times. It demonstrates that EBIT reported by the firm in 2018 is 26.2 times more than the interest expense from borrowed finances. The calculation shows that ABF is in a position to pay finance costs as and when they fall due which is a sign of a financially health business. At this point, the business is not risky to lenders and investors as it shows a stable liquidity position.

Activity Ratios

i). Assets turnover ratio

Assets turnover ratio = net sales / average total assets

ABF net sales for 2018 are PS15574m while the average total assets are PS13251M (average assets for 2017 and 2018) (Abf.co.uk. 2019).

Assets turnover ratio = PS15574/PS13251

= 1.2

The above calculation shows that ABF assets turnover ratio is 1.2. The implication is that for every pound in the total assets, the company was able to generate PS1.2. The ratio illustrates that the management is efficient in generating revenue using its assets.

ii).Accounts receivables turnover

It is assumed that net revenue reported by the firm in 2018 is the credit sales for the purposes of calculating accounts receivables turnover.

Accounts receivables turnover = net credit sales/average account receivables

Net credit sales in 2018 = PS15574M (Abf.co.uk. 2019)

Average account receivables in 2018 = (PS1436M + PS1342M)/2 = PS1389M (Abf.co.uk. 2019)

= PS15574/PS1389

= 11.21

Account receivables turnover for is 11.21. It implies that the company collected dues from debtors 11 times in entire 2018 or approximately one a month. It takes a month for ABF to collect credit sales which is recommendable credit duration. Essentially, ABF management is effective in collecting credit sales or account receivables.

Recommendations

Investment decisions should be carefully analyzed to ensure that choices arrived at will help an investor to achieve the intended purpose. Investment analysis is paramount because investors attain detailed information on where to invest and what to expect in the future.

The above analysis examines ABF Inc, which is the choice Ndidi as an investment choice. The report uses industry report and the ratio analysis to examine ABF suitability for Ndidi to invest. According to the investigation, Ndidi should buy ABF stock based on the following findings;

a). Competition and position in the industry - ABF is a competitive business both locally and internationally. The company is one of the leading firms in the industry by revenue within UK and thus it has an opportunity to perform even better in the future as it expands its territories even further.

b). Profitability - ABF was profitable in 2018, which guaranteed investors returns in form of the dividends. The company remains competitive, and it will remain profitable in the future to yield more returns for investors. The fact gives Ndidi a reason to invest in ABF.

c). Liquidity - the analysis shows that the company is financially stable, making it less risky for investors. The company has enough short-term assets to take care of the short-term debts as well as enough earnings to pay off finance costs. Given this fact, the company is not a risk of curtailing it operations due to external obligations. When a business is illiquid, its going concern is at stake, and it's not worth to invest.

d). Operational efficiency - operational efficiency demonstrates management efficiency in generating revenue for the company using the available resources. Assets turnover ratio shows that the company is efficient in generating more revenue for the company. Increase in the total revenue impacts the net income positively. On the other hand, account receivables turnover showcase that ABF management is efficient in collecting credit sales, which improves the profitability of the business.

Reference list

Abf.co.uk. (2019). [online] Available at: https://www.abf.co.uk/documents/pdfs/2018/abf_ar18_web.pdf [Accessed 21 Aug. 2019].

Bragg, S.M., 2018. The Interpretation of Financial Statements. AccountingTools, Incorporated.

Gain.fas.usda.gov. (2019). [online] Available at: https://gain.fas.usda.gov/Recent%20GAIN%20Publications/Retail%20Foods_London_United%20Kingdom_6-15-2018.pdf [Accessed 21 Aug. 2019].

Tracy, A., 2012. Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet. RatioAnalysis. Net

Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific Book Chapters, pp.109-169.