Accounting for Decision Markers

MS7SL80O
Assignment 1

Financial Performance Analysis of Reckitt Benckiser Group PLC

Module Tutor: Chathura Liyanage

Name : Pamodi Badrika Munasinghe

UWL ID : 21462395
Word Count: 1607

John Keells Group - Confidential

 Table of Content

1. Introduction…………………………………………………………………………………………………..……………...2
2. Ratio Analysis………………………………………………………………………………………………..……………….2
2.1 Liquidity Ratios…………………………………………………………………………………………..…………….2
2.1.1 Current Ratio………………………………………………………………………….………………….…2
2.1.2 Quick Ratio…………………………………………………………………………………………………...3
2.1.3 Gearing Ratio………………………………………………………………………………………………..3
2.2 Assets Efficiency Ratios…………………………….…..………………………………………………………….3
2.2.1 Inventory Turnover……………………………………………………………………………………….4
2.2.2 Non-current Asset Turnover………………………………………………………………………….4
2.3 Profitability Ratios…………………………………………………………………………………………………….4
2.3.1 Return On Capital Employed…………………………………………………………………………4
2.3.2 Gross Profit Margin……………………………………………………………………………………….5
2.4 Investor Ratios………………………………………………………………………………………………………….6
2.4.1 P/E Ratio……………………………………………………………………………………………………….6
2.4.2 Earning Per Share………………………………………………………………………………………….6
2.5 Top 4 Competitors Performance in 2019…………………………………………………………….6
3. Financial Performance Analysis………….…………………………………………………………………………..7
3.1 Five Years Financial Performance Summery……………………………………………………………..8
4. Analysis of Corporate Growth Strategies…………………………………………….………………….………9
5. Financial Ratio Limitations………………………………………………………………………………….………..10
6. References……………………………………………………………………………………………………………………11
7. Appendices…………………………………………………………………………………………………………………..12

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1. Introduction
Reckitt Benckiser Group PLC is a UK listed company that manufacture and markets the health and
hygiene home products. The company achieved a net revenue of 12,846 million, with growth of
0.8% on like-for-like basis (Reckitt Benckiser Group PLC, 2020). 61% revenue contribution is from
Health to RB net revenue. Health portfolio include the relief, protection, hygiene, wellness and
nutrition and Hygiene portfolio brings innovation solutions to households. Adjusted earning per
diluted share is £ 349.0 pence. This report that analyses the financial performance of a Reckitt
Benckiser Group PLC and the business and growth strategy that the corporate group has been
pursuing in recent years.

2. Ratio Analysis
2.1 Liquidity Ratio
Liquidity Ratios measure the extent to which an organization is capable of converting assets
into cash and cash equivalents.
2.1.1 Current Ratio
Current ratio measures whether the company have ability to pay off its short term liabilities
with company’s current assets (Howarth, 2004).

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The current ratio has deteriorated from year to year, with the overall current ratio of assets to
liabilities falling from 0.57 to 0.56. Forward foreign exchange contracts reduce from 121 to 30m.
Inventories, trade and other receivables, cash and cash equivalents increased from 2015 to 2019.

2.1.2 Quick Ratio

The quick ratio measures the company ability to cover its short term liabilities with its liquid
assets.

From 2015 to 2017 the quick ratio was increased by 0.1. Quick ratio was same in year 2015 and
2019.
2.1.3 Gearing Ratio

The gearing ratio is derived either by dividing the company’s debt by its equity (Howson, 2013).
How the organization is financed. A high number suggests that the company relies on long-term
debt to fund its activities rather than relying on funds provided by shareholders.

2.2 Asset Efficiency Ratio

Efficiency ratios measure the ability of a business to use its assets and liabilities to generate
sales.

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2.2.1 Inventory Turnover

Inventory turnover is the number of times a company sells and replaces its stock of goods in a
period. As such, inventory turnover reflects how well a company manages costs associated with
its sales efforts.

Inventory turnover days increased from 72 days (2015) to 93 days (2019). Infant nutrition in
health sector had slow growth in Greater China due to lower birth rates, expanding local
competition and steeper regulatory. As a result inventory turnover days increased.

2.2.2 Non Current Asset Turnover

This measure the ability of the organization to generate sales from its capital employed. High
non-current asset turnover on 2015. Hence non-current asset turnover increased by 0.9 in 2019.

Non-current asset turnover = Revenue

Non-current assets

2.3 Profitability Ratio

Profitability ratio measures the company ability to generate revenue with respect to its assets.

2.3.1 Return on Capital Employed (ROCE)

Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's
profitability and capital efficiency. It measures the management’s efficiency in generating profits
from its resource available (Kaplan Publishing, 2019).Profit before interest and Tax (PBIT)
measures the profit that generate through its operation also known as operating profit.

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At the end of 2019, the Group had total equity of £9,407m (2018: £14,771m), a decrease of 36%.
The Group has non-current assets of £27,106m (20181 : £33,002m), of which £24,261m (2018:
30,278m) is goodwill and other intangible assets, lower this year primarily due to the impairment
of goodwill in relation to the MJN acquisition of £5,037m. Property, plant and equipment is
£2,140m (2018 : £2,162m) and includes £289m (20181 £304m) of right of use assets as a result
of the adoption of IFRS 16.

2.3.2 Gross Profit Margin

Gross profit margin measures the company’s distribution and manufacturing efficiency during
the production process. Investors use this profitability ratio to determine the most profitable
company.

Gross Profit Margin = Gross Profit

Sales

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In 2019, revenue was £12.8 billion and it was 44% increase in revenue compared to 2015. That
resulted as the market expansion and pricing strategies. Gross profit margin Gross profit margin
increased by 2% from 2015 to 2016. Thus the net income increased by £2.0b in 2019.

2.4 Investor Ratio

Investor ratios are the financial ratios that the investors use in order to evaluate the company's
ability to generate the return for their investment. In general, investors usually want to know
which one is a good company to invest their money in, in accordance with their risk appetites.

2.4.1 P/E Ratio

Profit/ Earnings ratio measures the how confident the market is in the business.

2.4.2 Earing per Share (EPS)

Earnings Per Share (EPS) measures how confident the market is in the business. Basic earnings per share
is calculated by dividing the net income attributable to owners of the parent from continuing
operations and discontinued operations by the weighted average number of ordinary shares in
issue during the year.

2.5 Top 4 Competitors Performance in 2019

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3. Financial Performance Analysis
Sales reported as £12,846 in 2019 and it is 61% increase in sales from 2015 to 2019. Total net
revenue growth was 2% in the 2019.Hygiene Home business attained volume and price growing
in 2019. There is 7% sales increase in net revenue from Greater China in 2019. Hence the revenue
and Cost of Sales percentage increase is 2% in 2019.As a result there is neutral result in gross
profit margin compared to 2018.In ENA comprises Europe, Russia/CIS, Israel, North America,
Australia and New Zealand. DvM consists with North Africa, Middle East and Turkey, Africa, South
Asia, North Asia, Latin America, Japan, Korea and ASEAN. In order to reduce the operating cost
the company has followed the strategic. In 2019, distribution cost reduced from 6% from 2018
to 2019.

The Group retaining focus on capital employed to create long term value for the shareholders.
The Group’s ROCE in 2019, excluding the impairment of goodwill and other intangible assets, was
10.3%, a decrease against 10.7% (restated for IFRS 16) for 2018. The decrease was principally due
to a 1.9% reduction in adjusted operating profit at constant exchange rates and a slight increase
in the adjusted tax rate.

Current ratio has reduced by 0.9 in 2019.Bank loans and overdrafts was £42 million in 2015 and
it has reduced from £40 million to £16 million on year on year basis. Commercial paper issued in
US dollar and Euros and current liabilities increased by £1385 million in 2019. Trade receivables
reduced from £1902 in 2018 to £1716 million in 2018. Inventories increased by £36 in 2019. Trade
and other payables increased from £4811 in 2018 to £4820 in 2019.

Net finance expense was £153m (2018: £338m). The decrease reflects the repayment of term
loans and bonds, £35m finance income on tax balances (2018: £29m expense) and other
significant items that went in the Group’s favor in the year. These include a settlement of
litigation in Latin America, a gain due to a fair value credit relating to a downward revaluation of
a put option held by joint venture partner and a higher hedged return from temporary
intercompany deposits with group treasury. Adjusted finance expense excludes £35m of finance
income on tax balances reclassed into income tax expense (2018: £29m expense). 14,771m), a
decrease of 36%. The Group has non-current assets of £27,106m (20181 : £33,002m), of which

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£24,261m (2018: 30,278m) is goodwill and other intangible assets, lower this year primarily due
to the impairment of goodwill because of MJN acquisition of £5,037.

3.1 Five Years Financial Performance Summery

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4. Analysis of corporate growth strategies

Driven by the strong underlying tailwinds of global trends, growth opportunities can be realized
through increased product penetration, market share gains, expansion into new places (“white
space expansion”) or new spaces (“market adjacencies”). Penetration is about capturing new
consumers entering the category. We optimize market share by servicing our existing consumers
faster, better, and more efficiently. White space growth takes brands and products into new
territories: through our existing network, via e-commerce and using our cross-border
organization. Adjacencies use our brand strength to penetrate other parts of the demand space
a brand plays in. RB’s new joint venture with Founders Factory creates a powerful engine for
bringing innovative solutions to our consumers.

Many of our markets benefit from global macro trends, including urbanization and the growth of
the middle classes. We offer consumers purpose-led products that meet their needs and advance
positive social impacts. We focus mainly on higher-margin, under-penetrated markets that
provide a combination of attractive margins and volume growth. Our strategic investment in
Your.MD is another example of RB partnering with others to help unlock self-care. Your.MD is an
online marketplace for trusted health service providers and products. It provides personalized
advice to consumers via an Artificial Intelligence-based assistant. RB’s investment will accelerate
its speed-to-market and improve access to pre-primary care for consumers globally.

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5. Financial Ratio Limitations

Financial ratio analysis is based on the historic data which is not revealing of what might happen
in the future. Financial ratio analysis is based on financial information which included in the
financial statements. Reckitt Benckiser Group PLC have to take into account non-financial
indicators. Traditional ratio analysis is based on year-end figures which might necessarily be
representative of balances during the year. Issues in the change in policy for valuing property,
plant and equipment can impair the comparability both from year to year or between other
companies in the sector. Further, financial ratio analysis fails to capture the changes in both
internal environmental factors and external environmental factors of the organization. As a result
of that, top management should not completely rely on implications and highlights of financial
performance analysis and it is highly recommended to use professional judgment and
professional skepticism in arriving to conclusion and recommendations.

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References
Howarth, A., 2004. Andrew Howarth. [Online]
Available at:
https://www.cimaglobal.com/Documents/Student%20docs/2010%20syllabus%20docs/F3/performance
%20analysis.pdf
[Accessed 15 February 2021].

Howson, J., 2013. Paper F2 Financial Management. [Online]

Available at:
http://secure.cimaglobal.com/Documents/Student%20docs/2010%20syllabus%20docs/F2/F2_Ratios_M
arch2013_study%20notes.pdf
[Accessed 22 March 2021].

Kaplan Publishing, 2019. CIMA Subject F3 Financial Strategy Study Text. Berkshire: Kaplan Publishing .

Reckitt Benckiser Group PLC, 2020. Rejuvenating RB, Berkshire: emperor.works.

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Appendices

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