Diageo is one of the worlds largest alcohol drink producer. The company has been performing with profitability for many years. However, with new strategic movement of competitors which heighten market competition, thus affecting Diageo’s profitability. Investors need to analyse the company’s financial position through the use of ratios analysis, company’s source of finance analysis, stock analysis as well as analysis of company’s performance against competitors. The report combined resources from company financial reports as well as various financial databases as a foundation to an analysis. Finally, the company’s financial position would be concluded along with recommendations on Diageo’s investment attractiveness to investors.
Introduction
Diageo is the world’s leading premium drinks business with both high quality and standard collection of alcohol beverage brands including spirits, wine and beer categories. Their markets include North America, Europe, Latin America and the Caribbean, Africa, Middle East and Asia pacific. North America is company’s most profitable and most developed market; however, currently the company is focusing on the expansion to Asia Pacific region which has significant potential for business growth opportunities.
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Diageo has experienced a stable business growth in the past 5 years; however, in order for investors to make an investment decisions, financial analysis is required. Therefore, this report will explore and analyse Diageo’s financial status through the use of ratio analysis, company’s stock trend watch, source of fund structure, competitive comparison as well as investment recommendations from an analysis in order to provide financial insights for investors interested in investing in Diageo.
BUSINESS DESCRIPTION:
Diageo is the world’s leading premium drinks business with a collection of international brands. Diageo was the eighteenth largest publicly quoted company in the United Kingdom in terms of market capitalisation on 26 August 2009, with a market capitalisation of approximately £25 billion.
2. Literature Review:
Diageo manages its brands in terms of global priority brands, local priority brands and category brands. Acting as the main focus for the business, global priority brands are Diageo’s primary growth drivers across markets. Local priority brands have leading positions in the markets in which they are distributed. They drive growth on a significant scale but with a narrower geographical reach than the global priority brands. Category brands comprise the smaller scale brands in Diageo’s collection. Diageo is the world’s leading premium drinks business and operates on an international scale. It is one of a small number of premium drinks companies that operate across spirits, beer and wine. Diageo is the leading premium spirits business in the world by volume, by net sales and by operating profit and it manages eight of the world’s top 20 spirits brands as defined by Impact Databank. Diageo’s beer brands include the only global stout brand, Guinness, and together these beer brands account for approximately 22% of net sales while Diageo’s wine brands represent approximately 6% of Diageo’s net sales.
Diageo’s size provides for scale efficiencies in production, selling and marketing. This enables cost efficiencies and the dissemination of best practices in business operations across markets and brands, allowing Diageo to serve its customers and consumers better. Diageo owns production Facilities including malting, distilleries, breweries, packaging plants, maturation warehouses, cooperages, vineyards, wineries and distribution warehouses. Production also occurs at plants owned and operated by third parties and joint ventures at a number of locations internationally.
.STRATEGIC PLANNING:
At Diageo, our business strategy is to deliver sustainable organic growth through the stewardship of our outstanding range of premium drink brands. This is supported by strong financial discipline and cash management, and where appropriate will be supplemented by selective acquisitions
We manage our business in terms of global priority brands, local priority brands and category brands, however the main focus for organic growth is our global priority brands which contributed 58% of total volume in the year ended 30 June 2009. They are: Johnnie Walker, Smirnoff, Baileys, Captain Morgan, José Cuervo, J&B, Tanqueray and Guinness. This collection of outstanding brands offers us diversity and strength, and our consumers’ high quality brand experiences.
Over the years, we have built a great mix of strengths and resources which we manage to target growth in both the good times and more challenging times. This range of capabilities enables us to be agile in response to global and local market conditions, and supports our scale and diversity, which in turn provides the company with resilience and growth opportunities.
A core theme is our passion towards consumers and customers. It should come as no surprise then that we continually seek to understand what our consumers and shoppers want. This insight informs our customer relationships and helps people celebrate with our brands every day, everywhere.
Our brands have broad consumer appeal across geographies and we look to reach an ever-increasing number of consumers by focusing on effective and efficient routes to market. We use world-class marketing capabilities to combine the benefits of global scale with local insight, and we act with flair and agility to delight consumers with both our trusted brand favourites and the introduction of new and exciting innovations. We strive to execute everything we do to the highest possible standard, and continue to invest in the skills of our leaders – developing leaders today, for tomorrow.
We understand that our leadership as a company is benchmarked by more than just financial success. How we treat our people, the culture we promote internally, how we live our values, and the way in which we positively impact those communities where we operate are also important measures. We seek to be at the forefront of industry efforts to promote responsible drinking and work with other stakeholders to combat alcohol misuse. Our approach is based on three principles: combating alcohol misuse; setting world-class standards for responsible marketing and innovation; and promoting a shared understanding of what responsible drinking means in order to reduce alcohol-related harm.
(b). SWOT ANALYSIS
Diageo plc – SWOT Analysis examines the company’s key business structure and operations, history and products, and provides summary analysis of its key revenue lines and strategy.
Diageo produces and distributes a large collection of leading branded premium spirits, beer and wine. The company primarily operates in Europe, and North America. It is headquartered in London, the UK and employs 24,270 people. The company recorded revenues of £12,283 million (approximately $19,848.5 million) during the financial year ended June 2009 (FY2009), an increase of 15.4% over FY2008. The operating profit of the company was £2,443 million (approximately $3,947.7 million) during FY2009, an increase of 9.7% over FY2008. The net profit was £1,621 million (approximately $2,619.4 million) in FY2009, an increase of 6.6% over FY2008
(c).PEST ANAYLYSIS:
PEST analysis is a scan of the external macro-environment in which an organisation exists. It is a useful tool for understanding the political, economic, socio-cultural and technological environment that an organisation operates in. It can be used for evaluating market growth or decline, and as such the position, potential and direction for a business
POLITICAL FACTORS
These include government regulations such as employment laws, environmental regulations and tax policy. Other political factors are trade restrictions and political stability.
ECONOMIC FACTORS
These affect the cost of capital and purchasing power of an organisation. Economic factors include economic growth, interest rates, inflation and currency exchange rates.
SOCIAL FACTOR
These impact on the consumer’s need and the potential market size for an organisation’s goods and services. Social factors include population growth, age demographics and attitudes towards health.
Technological factors: These influence barriers to entry, make or buy decisions and investment in innovation, such as automation, investment incentives and the rate of technological change.
3. Competitive Analysis
Diageo is one of the leading beverage and alcohol companies in the world, owns several international brands in this industry. Many of its competitors in the market include, for example, SABMiller, Scottish and Newcastle, Whitbread Group and Inben UK Limited. The following part will discuss turnover, profit before taxation, return on shareholders’
Funds, return on capital employed and solvency ratio of Diageo and main competitors.
Company Name
Items
Median
Sabmiler PLC
Diageo PLC
Scottish & Newcastle PLC(2006)
Whitbread Group PLC
Turnover
(th GBP)
1,361,503
9,493,000
7,481,000
3,328,000
1,524,300
Profit (Loss) before taxation
(th GBP)
118,289
1,430,000
2,095,000
222,000
529,900
Shareholders Funds
(th GBP)
834,200
7,345,000
3,972,000
3,352,000
3,231,400
Return on shareholders funds (%)
9.69
19.47
52.74
6.62
16.40
Return on capital Employed (%)
5.84
11.91
21.47
4.15
12.30
Solvency Ratio (%)
36.67
50.15
28.46
48.53
68.74
4.Conclusion & Recommendations:
Diageo is a world leading alcohol beverages company with strong financial position. The company has strong and stable financial performance throughout the years with ROCE increased from 22.72% in 2006 to 25.18% indicating an increase in company’s profitability, while ROSF of 52.74% indicates 53 pence return to shareholders’ fund. The company’s Gross Profit was also strong with the ratio of 59.86%. Though the Net Profit was moderately stood at 18.94%, this still does not reduce the attractiveness of the company since from the five years trend, the company was able to manage the consistent growth of profits. Therefore, it is recommended that the company is worthwhile for investors to invest in since the return on shareholders’ fund is considered very high.
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Diageo also has quite attractive investment ratios which provide shareholders with consistently high dividend payment as a result from high profit generation and stable business operations. Diageo EPS was stable at the return of 59p with the dividend payout ratio has an increasing trend , which attracts investors to invest more, throughout the years until it reached 31.7% in 2009.
The company liquidity ratios slightly fluctuate and the figure indicates that Diageo’s ability to turn short-term assets into cash is not effective enough. The company might have some problems to pay off its current creditors without selling stocks. However, the company is having an efficient operating cycle since through the Debtors turnover period and Creditors turnover period comparison, it has enough inventories for selling and effective cash cycle through its ability to collect the earning first and to pay for its creditors later.
Diageo also almost has an ideal amount of company gearing since operating profits are stable and high, despite the high debt ratio; Diageo is able to pay interests rising from the borrowing. The only concern to the company is that the long-term borrowing needs monitoring since without tight control on borrowings proportion, the company might not be able to sustain its increasing growth over the years.
Recently, Diageo has also made a strategic movement on buying half of Ketel One, the super premium vodka company to help enhance its business line in order to compete with its biggest global competitor, Pernod Ricard, who recently bought Absolut Vodka, the brand that competing directly with Diageo Smirnoff brand. The company also plans its expansion globally to the world largest potential market, China and Africa, in order to increase global presence as well as to generate sustainable growth and higher profit to the group operations.
Diageo PLC is a high potential company to invest. The company has healthy financial position and consistently high return to shareholders with acceptable business risk. Therefore, the company is highly recommended to any investors wishing to gain long-term profitability from investment.
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