Finance for Decision Making

This document provides an overview of ratio analysis for evaluating the financial performance of Associated British Food. It discusses profitability ratio, liquidity ratio, asset efficiency ratio, and solvency ratio. It also covers investment appraisal using NPV and IRR techniques, as well as investment analysis for a potential expansion through acquisition. The document includes limitations of ratio analysis and investment appraisal. The subject is Finance for Decision Making.

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Finance for Decision Making
Contents
Introduction......................................................................................................................................3
Overview of Ratio Analysis.............................................................................................................3
Profitability Ratio........................................................................................................................4
Return on Capital Employed...................................................................................................4
Liquidity Ratio.............................................................................................................................4
Current Ratio...........................................................................................................................5
Asset Efficiency Ratio.................................................................................................................5
Receivable Turnover Ratio......................................................................................................6
Solvency Ratio.............................................................................................................................6
Debt to Equity Ratio................................................................................................................7
Ratio Limitation...........................................................................................................................7
Investment Appraisal.......................................................................................................................8
Net Present Value........................................................................................................................8
Limitation................................................................................................................................8
Internal Rate of Return................................................................................................................8
Limitations...............................................................................................................................9
Investment Analysis.....................................................................................................................9
Sensitivity Analysis...................................................................................................................11
Potential Merger and Acquisition..................................................................................................11
Acquisition Rationale................................................................................................................12
Proposed Deal Value and Finance.............................................................................................13
Synergetic Gains........................................................................................................................13
Risk Assessment and Implication..............................................................................................14
Conclusion.....................................................................................................................................14

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References......................................................................................................................................15

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Introduction
Associated British Food Plc. is a British multinational food processing and retailing organization
that operates its business in diversified food products and Retail Company worldwide. The
company operates its business functions in five segments that are sugar, retail, agriculture,
grocery and ingredients. The company is headquartered in London and its ingredient division is
world’s second largest producer of both sugar and bakery yeast. The public limited company was
founded in 1935 by Willard Garfield Weston, since then the company has been profitable in the
environment. In the previous year, ABF earned revenue of $ 15574 million with 137000 numbers
of employees working with them. The retail division of the company naming Primark has more
than 345 stores in different markets. The company sell its produce to Belgium, Ireland, Austria,
UK, Netherlands, Italy, Portugal, France, Spain, Germany and the US. Around 54.5% shares of
the company are held by Wittington investments (MorningStar 2019).
Further, the purpose of below mentioned report is to enlighten the reader about the company
Associated British Food using the annual reports, data and other information about the company
starting from the year 2014 to 2018 with further elaboration in three sections. The paper is going
to explore the limitation, applicability and the financial ratios to determine the actual financial
performance of the company by applying one financial ratio from each category. Further, the
investment appraisal of £30,000,000 to £40,000,000 with a discounting rate of 15% and ten years
life will be conducted using NPV and IRR techniques which is further followed by the sensitivity
analysis to elaborate the implication and limitations of the analysis. The third aspect presented in
the paper is the expansion of the company through potential acquisition, along with this
synergistic gain and financing have been evaluated in the paper to critically analyse the
expansion decision made along with the implications. Lastly, conclusion is drawn based on these
sections and further provides a viewpoint on the financial steadiness of Associated British Food.
Overview of Ratio Analysis
With the help of information so received from the financial statement, income statement ad cash
flow statement, the ratio analysis can be performed for further evaluation of the business
performance. Ratio analysis refers to a critical quantitative tool that helps in gaining information

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about the liquidity, efficiency, financial gearing and the profitability of company by comparing
the information contained from the financial statements. This tool indicates the financial trends
of the company in both positive and negative ways (Uechi, et. al., 2015). Below mentioned is the
elaboration of each of four ratios to discover the areas where the company needs to improve and
help the investor to understand if there is any need of future change.
Profitability Ratio
Profitability ratio of a company helps the investor to analyse the effectiveness of the business to
produce profits in the environment. With the help of ROCE (return on capital employed) and net
profit margin ratio, a business can compare its profitability against their spending and suggest on
overall functions. The below mentioned is the analysis of ROCE for better information about
profitability of the company.
Return on Capital Employed
2014 2015 2016 2017 2018
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Profitability Ratio
Return on equity
Net margin
Axis Title
The ROCE of the company explains that ABF is aiming to provide higher degree of returns to
the customers in the market. However, as compared to the return provided in the year 2014, the
ROCE has depleted in 2018. In 2018, the return on capital employed depleted because of
increase in equity of the company. Along with this, the net profits of the company also depleted
from 2017 to 2018 (Williams, and Dobelman 2017).
Liquidity Ratio
Liquidity ratio provides information to the managers about the short term position of the
company. This ratio provides information about the current assets and liability affecting the

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liquidity of an organization. It is important for the organizations to attain optimum level of
liquidity for the company to meet unseen liability in the environment. Below mentioned is the
analysis of current ratio of the company (Zainudin, and Hashim 2016):
Current Ratio
2014 2015 2016 2017 2018
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Liquidity Ratio
Quick Ratio
Current ratio
Axis Title
The current ratio of the company ABF shows steady growth which is a good sign for the
company because high the current ratio and better the chances of setting of the short term
liabilities in the market. From past two years, the current ratio of the company has been stable
that means that the company is successfully making use of its currents assets to pay off its debts
as type of ratio reduces the overall debt burden of the company. Generally the ratio between one
to two is healthy for any organization (Afonso, Baxa, and Slavík 2018). Below mentioned is the
formula of calculating current ratio:
Current Ratio = Current Assets/ Current Liabilities
A current ratio of 1.63 states that the company has 1.63 more assets from its current liabilities
present with them which means that the business is sound to pay off its current debts (Valaskova,
et. al., 2018).
Asset Efficiency Ratio
Asset efficiency ratio is a ratio that evaluates the ability of an organization to generate the sales
from the assets by comparing net sales with the average total assets. This ratio evaluates the
efficiency of the assets to generate sales for them. There are two ratios calculated in the asset

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efficiency ratios that are receivable turnover and creditor’s turnover ratio (Greco, Figueira, and
Ehrgott 2016). Furthermore, elaboration of receivable turnover ratio is discussed below:
Receivable Turnover Ratio
The formula of account receivable turnover ratio is:
Receivable Turnover Ratio= Net Credit Sales/ Average Account Receivable
2014 2015 2016 2017 2018
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Asset Efficiency Ratio
Creditor Turnover Ratio
Receivable Turnover Ratio
Axis Title
The receivable turnover ratio depicts the ability of the business to efficiently collect the
receivables. Higher ratio in this case is more favourable as higher ratio represents more chances
of the company to collect its receivables in a year. Further, the ratio in this case is 14.5 which
state that the company collected its receivables 14.5 times in a year due to which the liquidity of
the company is good (Rani, Yadav, and Jain 2015).
Solvency Ratio
The solvency ratio measures the ability of a business to sustain operations by comparing the debt
to equity level and debt to asset levels of the company. Like liquidity ratio, this type of ratio also
identifies the ability of firm to pay off its debts but in long term. This type of ratio measures the
long term ability of a company pays its debts and maintains sustainability (Myšková, and Hájek
2017). Further, more explanation of debt to equity ratio is discussed below:

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Debt to Equity Ratio
2014 2015 2016 2017 2018
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Solvency Ratio
Debt to assets
Debt to Equity Ratio
Axis Title
The formula of this ratio is mentioned below:
Debt to Equity Ratio= Long Term Debts/ Equity
This ratio shows the unfavourable growth of the company in the target market as the graph states
that the ratio is depleting which is not a good sign for the company. The debt to equity ratio of
0.33 explains that the company has 67% of long term liability over 33% of equity present in the
company. This company is leveraging high amount of debts which cannot be properly paid by
the equity of the company. The company needs to improve in this case as this ratio is fluctuating
between 0.33 to 0.38 and it is not growing (Camilleri, and Camilleri 2017).
Ratio Limitation
 The ratio analysis is formed using historical result which does not mean that this type of
progress will continue in near future also.
 There is presence of disparity as income statement data is evaluated on current cost while
balance sheet information is stated in historical cost (Richardson, Lanis, and Taylor
2015).
 Inflation over time can change the results of the business.
 It is difficult to interpret the results of the company as some ratios many times might
appear excellent but there might be a different and odd reason behind it (Enekwe 2015).

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Investment Appraisal
Investment appraisals are conducted to measure the practicability of the project and evaluate that
what benefits this investment will give to the company. Further, the net present value and
internal rate of rate are two ways that determine the profitability of the project.
Net Present Value
NPV is concept that was laid by Hirshleifer in the year 1958 based on the investment
consumption model. The discounted cash flow helps in analysing the capital investment
ventures. NPV helps in evaluating the potential outflow from a project by calculating the
difference between the present value of the cash inflow and outflow of the project (Petković
2015). In simple words, this calculation evaluates the amount of money that an investment will
generate after the cost adjustment and considering the time value of money. This concept tells
that money never be same as the value of pound keeps on growing due to interest and
opportunity cost. Thus, this methods helps in attaining the profitability from a project for a
certain amount of time say 10 years (Patrick, and French 2016).
Limitation
Net Present Value is a great tool to calculate the profitability of an investment decision of the
organization; however this tool is not always accurate. As this equation depends on so many
different factors that it can never be completely accurate. The interest rate on which the
calculation has been made might not be same for next 10 years. Also, the realist market have
limitation of funds and restriction to the capital resulting to which the application of NPV tool is
constrained. Nobody knows that the company will earn the expected profits in the market or not.
The only sure thing is the amount that the business has to pay for the project (Gallo 2016).
Internal Rate of Return
Internal Rate of Return (IRR) refers to a minimum discount rate that the management of an
organization utilize to identify the return that the future project will provide to the business. This
analysis helps the management in understanding that which project would be more profitable for
them in near future. The IRR for a project equates the net present value of future cash flow from
the project to zero. The biggest advantage of IRR tool is that it takes into account the risk, returns

Finance for Decision Making
and time related to the certain project. This process helps the organization to make a wise choice
(Bell 2017).
Limitations
IRR does not work with the investments which are further considered as non-conventional cash
flow. The limitation of this type of method is that it does not consider important factors like
project duration, size of the project or future costs in account. This process only compares the
existing cost of the project, excluding all these factors. Thus, it is not wise for the management to
make investment decision without considering the size of the project. So, it can be said that
dependent or contingent projects along with mutually exclusive projects are ignored by the
management while calculating IRR (Gabriel Filho, et. al., 2016).
Investment Analysis
With the initial investment of £30,000,000 million by the company Associated British Food at a
discounted rate of 15% over the period of 10 years, this money will be segregated to new product
line. The company is aiming to invest in the production new product for the company that would
be ‘herbal tea’. Based on the industry analysis, the average industry price of tea in the industry is
£ 20 pound, a volume of 350,000 tea bags, variable price of £ 2450000 total and fixed cost of £
750000 pound.
Below mentioned is the excel screenshot of £ 30,000,000 investment at discounted rate of 12%:

Finance for Decision Making
The NPV of the company ABF at 15% discount rate shows profitability to the company. The
IRR through this type of activity shows 19.36 % of return for the company. Thus, it should be
stated that with this type of investment the company can earn profitability with time (Bornholt
2017).

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Sensitivity Analysis
Investment 30,000,000.00-£
Sales 7,000,000.00£
Varibale cost 2,450,000.00£
Fixed cost 750,000.00£
Pre tax prpfit 3,800,000.00£
Taxes 1,400,000.00£
Profit after taxes 2,400,000.00£
Key variables Pessimistic Expected Optimistic Pessimistic Expected Optimistic
Optimistic
Investment 33,000,000.00£ 30,000,000.00£ 27,000,000.00£ 2.15 2.6 2.86
Sales 6,300,000.00£ 7,000,000.00£ 7,700,000.00£ 2.34 2.6 2.98
Varibale cost 2,205,000.00£ 2,450,000.00£ 2,695,000.00£ 2.22 2.6 2.775
% of sales 0.35£ 0.35£ 0.35£
Fixed cost 675,000.00£ 750,000.00£ 825,000.00£ 2.43 2.6 3.05
Sensitivity Analysis
Sensitivity Analysis
Range NPV
Sensitivity analysis evaluates the ways in which different values of an independent variable
affects the dependent variable of the production under the given set of assumptions. This
technique is used in specific boundations that depend upon one or more input variable like effect
that change the interest rate (independent variable) has on price of bond (dependent variable).
Looking at the sensitivity analysis of the company Associated British Food, it should be noted
that the company is in a condition where change in variables will not affect the efficiency of the
company (Maravas, and Pantouvakis 2018). The sensitivity analysis states that this process of
investment is more optimistic than pessimistic. The ratio significantly represent the expectation
of change is likely to occur less in this investment process. Low degree of sensitivity in the
investment project represents that the company attains a great opportunity of attaining
profitability with low degree of risk in the environment (Iooss, and Lemaître 2015).
Potential Merger and Acquisition
Merger and acquisitions refers to a consolidation of two companies. Basically there is difference
in both the terms as merger is the combination of two companies in forms one whereas, in the
process of acquisition, one company takes over another company. Merger and acquisition is one

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of the major aspects of corporate finance where two separate companies get together in a legal
manner. The objective behind forming this type of alliance is to maximize the wealth, make use
of each other’s resources and attain differential opportunities present in the environment (Greve,
and Man Zhang 2017). There are four ways through which merger and acquisition takes that are
mentioned below:
 By purchasing assets
 By exchanging shares for assets
 By purchasing common shares
 By exchanging shares for shares
Acquisition Rationale
From the past few years, it can be seen that the profit margin of the company is neither speeding
up or down which is not a good sign for the company. This aspect states that the company is not
doing any activity that is profitability in the market. Thus, it was the right time for ABF to invest
in a project that can increase their profit margin in the environment (Brueller, Carmeli, and
Markman 2018). Further, relating to financial performance of the company in relation to the
merger and acquisition strategy, it should be noted that the herbal tea segment is a new and
attractive product present in the industry that gain the attention of consumer in the market. The
company Clipper is moving profitably in the industry on small scale.
The company Clipper is also focusing to expand its business functions in such a way that it
helps them to increase and target greater market segment. Both the companies are present in the
same industry, so merger and acquisition strategy applied on both the company will satisfy their
business requirement. As this strategy will help ABF to expand its scope of business with right
product line and it will help the company Clipper to target greater market base and attain
customers to ABF as well (Yılmaz, and Tanyeri 2016).

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Proposed Deal Value and Finance
Gearing Ratio Preferred Profitability Ratio Preferred Liquidity Ratio Preferred
ABF 0.486 yes 0.109 yes 1.63
Clipper 0.755 0.362 0.85 yes
Company's Ratio and Preferred Ratio
Gearing Ratio
Preferred
Profitability Ratio
Preferred
Liquidity Ratio
Preferred
0.000 0.500 1.000 1.500 2.000 2.500 3.000
Ratio Comparison
ABF
Clipper
In order to appropriately pay to the company Clipper Tea, ABF should pay cash so as to avoid
complication in stock management and to control the amount that is being offered. In response to
the M&A strategy, ABF is going to pay the sum that is equal to the fixed assets and goodwill of
the company. The company is going to pay a sum of £ 85,444 million. After taking into
consideration both the intangible assets as well as book value of the business, the company needs
to approximately £ 90 million in the form of cash. With the above mentioned analysis, it can be
clearly determined that business of ABF is greater than Clipper and it is financially healthier as
well. The liquidity of ABF of good while its profitability is not up to the mark. So, this type of
strategic alliance will help the company to increase its sales in the market (Wessanen 2019).
Synergetic Gains
Synergy emerges when the assets of two companies are merged with each other in an
organization with the purpose to increase profits and decrease costs as well. The acquisition of
Clipper herbal tea company is followed with multiple gains that are mentioned below:
 Availability of Resources: As after the process of merger and acquisition, the companies
get to make use of each other’s resource, so this type of process provides flexibility to the
company and increase the productivity as well. A sound combination of workforce along

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with fixed goods will subsequently increase effectiveness of business (Fich, Nguyen and
Officer 2018).
 Increment in Productivity: By using the additional resources, the company gains the
advantage to make the activities sustainable in the fluctuating market. Sustainability
increase the productivity of the company.
 Managerial Synergy: replacement of ineffective management is developed improve the
synergy between both the companies. Thus, it is expected the overall relationship of the
business improve performance of the company in various ways (Xu 2017).
Risk Assessment and Implication
 Intensive Competition: conducting the process of merger and acquisition in the same
industry can lead to negative reputation for both the company and create jealously and
dissatisfaction among the employees of both the companies. This can further lead to the
possibility of investigation and dramatic delay in takeover as well.
 High Payment: Bidding on the company usually make them pay more in order to take
over the same as the process of merger and acquisition is a costly means to grow. With
the possibility to paying more than required can negatively affect the investment project
of the company.
 Cultural Issues: it is not important that the two merging firms would have same internal
culture at the organization. All the organization present in the environment share different
beliefs and values, thus merger and acquisition process can lead to dissatisfaction in the
company. This type of process can lead to clashes among the employees and increasing
unproductivity in the company as well (Brueller, Carmeli, and Markman 2018).
Conclusion
Thus, in the limelight of above mentioned events, the fact should be noted that the paper
represented information about the company Associated British Food. The paper represented the
financial performance of the company with respect to various ratios. Merger and Acquisition
strategies are initiated in the paper along with the company Clipper to invest in the project and
earn profitability as well. After analysing the investment project, it should be noted that it is
profitable for the company to invest in the herbal tea brand of Clipper Company as the NPV and

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IRR says that the project will provide them optimum profitability for the upcoming ten years.
The paper represents all the information about the assessment.
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