Financial Analysis of Farsons and Heineken: A Comparative Study

This report provides a comprehensive financial analysis of Farsons and Heineken, including ratio analysis, profitability, liquidity, and efficiency ratios. It highlights the importance of analyzing working capital before making a decision. The analysis reveals that Farsons has shown consistent growth in profitability, while Heineken has faced challenges in maintaining profitability due to increasing costs. The report concludes that Farsons is a more suitable option for manufacturing activities.

Financial
Analysis
Management &
Enterprise

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................4
1. Ratio analysis of the financial statements of Farsons and Heineken.....................................4
2. The importance of analyzing the working capital of both companies prior to making a
decision........................................................................................................................................9
3. Critical analysis of the annual cash flow statements of Farsons company and Heineken
company.....................................................................................................................................11
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Financial analysis is a effective process, it assist in evaluating businesses, budgets,
projects and various financial related activities to identify their suitability and performances. It is
a process of analyzing and reviewing business's financial statements. By this we can determine
the company's financial strength and weaknesses by developing strategic relationship with the
financial statements, balance sheet and profit and loss account. Farsons is beverage company is
known as Simond Farsons Cisk plc. The business of Farsons includes production, sales, brewing
and distribution of soft drinks and beer. Heineken is a lager beer company and it includes 5%
alcohol. Heineken is sold their beer in green bottle. This report will include the detailed vertical,
horizontal and ratio analysis of the financial statements of both the companies. This report will
also highlight the importance of analyzing working capital of the Farsons and Heineken
company before making a decision. This report will also state the critical analysis of the annual
cash flow statement of Heineken and Farsons over the last two years.

MAIN BODY
1. Ratio analysis of the financial statements of Farsons and Heineken
Ratio analysis of the financial statements of Farsons

Ratio analysis of the financial statements of Heineken
By this analysis, we are evaluating the ratio analysis of Farsons and Heineken, so that we
can identifying the best manufacture company from Farsons and Heineken and which company
will beneficial for our organization.
Profitability ratio used by the company to analysis their profit earning ability. The
profitability ratio show that how business will use their assets to generate income (Li., 2017). If
the profitability ratio is high, than it is best for the company. Various profitability ratio includes

operating profit ratio, net profit ratio, return on assets, return on equity etc. According to the
Ratio analysis of financial statement of Farsons and Heineken, the operating profit ratio of the
Farsons of the last four years was, In 2018 = 15.436934, in 2017 = 14.5848228, in 2016 =
13.5130361 and in 2015= 12.2402343. So that, we can say that the operating ratio of the Farsons
company is increasing from year to year. But the operating profit ratio of the Heineken company
is decreasing from 2015 to 2018 such as In the 2015 the operating profit ratio was 14.99195, in
2016 = 13.2502, in 2017 = 12.9706 and in the 2018=11.7004. i.e. the operating profit ratio of the
Farsons company has increased by 3% and the operating profit ratio of the Heineken company
has decreased by 4%. The main reason for decreasing operating profit ratio is, if company has
decrease in sales or increase in expenses (Bello., 2018). The operating profit ratio increases when
the company increases its sales that turn higher profit margin and lower expenses. So, it is
beneficial for our company to opt Farsons company for manufacturing activities.
The net profit ratio is a main profitability ratio. The higher profitability ratio means
company has enough profit margin. It means company is able to handle its costs. It also describe
the financial health of company. The lower net profit ratio means that company has profit which
are not sufficient according to the industry norms. The net profit ratio of the Farsons company, in
2015 = 10.1116, in 2016 = 13.21627, in 2017 = 13.7677 and in 2018 = 14.4893 , so that the net
profit ratio has increased by 4% from last four years. The net profit ratio of the Heineken
company, in 2015 = 10.438, in 2016 = 8.363, in 2017 = 8.3310, in 2018 = 7.813. it has decreased
by 3%. If the net profit ratio of the company increased, it means that company has a ability to
increase it revenue and decrease its expenses. The Farsons company has 14.49 percent net profit
ratio, that means they makes 14.49% of profit for each sales (Choi and et.al., 2016). The lower
decreasing net profit ratio means company are unable to generate effective profit from its
revenue.
Return on assets define the percentage of how company's assets are able to generate
revenue for company. It shows the capabilities of a company's assets to enhance the business
revenue. The calculation of Return on assets is = net income divided by average assets. It also
describe the company's capital intensity. A good return on assets means, the return on assets over
5 %. The Return on assets of the Farsons company, in 2015 = 5.35, in 2016 = 7.209, in 2017 =
7.0225 and in the 2018 = 7.944, that means the return on assets has increased by 3% from the last

4 years. The return on assets of the Heineken company in 2015 = 5.71, in 2016 = 4.377, in 2017
= 5.358 and in 2018 = 5.048, that means the return on assets has decreased by 1%. The
increasing return on assets percentage means that company invested its debt capital in a very
effective manner (Ogiela and Ogiela., 2015). The higher return on assets is better for a company
and it shows the ability of a company to earn more money from less investment. It also means
that company is making more income from the utilization of its assets. The decreasing return on
assets means that company is unable to generate enough income from the investments or assets.
Return on Equity described the profitability of the company in relation to the company's
equity. The return on equity is calculated Net income divided by average equity. Return on
equity means a company effectively generate their earning growth by using investments. The
return on equity of the Farsons company in 2015 = 8.19, in 2016 = 10.70, in 2017 = 10.425 and
in 2018 = 12.516, that means that in the Farsons company the return on equity has increased by
5%. The return on equity of the Heineken company, in 2015 = 15.866, in 2016 = 12.99, in 2017
= 15.51 and in 2018 = 13.938, which means that return on equity has reduced by 2% over the last
four years. The increasing return on equity means that company is enhancing its capability to
generate profit without using more capital. It means that company has high equity capital over
the debt. As per the analysis of profitability ratio, we can say that Farsons company is a better
option for our organization for manufacture the products.
Liquidity ratio determines the company's ability to meet its short term obligations. It will
influence the company's credit rating and credibility. It will also affect the quick ratio, acid test
ratio, current ratio of the company. It identifying the company has enough resources to mitigate
its obligations and variations. It will also define the debtor's capability to meet their current debt
obligations. Liquidity in the company means that company is able to quickly transform its assets
into cash. In the Farsons company, the debt to equity ratio in 2015 = 0.224, in 2016 = 0.217, in
2018 = 0.256 and in 2018 = 0.343 that show a increasing trend and has increased by 0.119. The
debt equity ratio of the In the Heineken company, in 2015 = 0.787, in 2016 = 0.827, in 2017 =
0.837 and in 2018 = 0.812. The increasing debt equity ratio means company is increasing its
power to meet their debt obligation in a very easy way. High debt equity ratio means company
has high 'return on equity' (Wang and Wang., 2018).

Debt to assets ratio is describe the financial leverage of company. It defines the
percentage of total assets of a company that were financed by its creditors. It means that the
liabilities of a company is divided by the company's total assets. The Farsons company's debt to
assets ratio in 2015 = 0.1511, in 2016 = 0.1464, in 2017 = 0.1726 and in the 2018 = 0.2029, it
shows the increasing trend over the last four years. In the Heineken company, the debt to assets
ratio in 2015 = 0.265 , in 2016 = 0.278 , in 2017= 0.296 and in 2018 = 0.300, these also shows a
increasing trend. The high debt to assets ratio means that the debt in the company can be funded
by its assets. In that situation, if the interest rate of loan becomes high than company may go in
trouble and its risks becomes high. It means that lower debt to equity ratio is beneficial and safer
the company. Debt to assets ratio helps the organization to identifying their financial risks.
Current ratio is a liquidity ratio of a company, it define the company's ability to fulfil its
short term obligations. Current ratio means current assets divided by current liabilities. A good
current ratio for a successful business are basically between 1.5% to 3%. it also identifying the
company financial strengths (Pogrebova, Konnikov and Kurbanbaeva., 2017). The current ratio
of the Farsons company has decreased by 1.645 over the last four years and the current ratio of
the Heineken company has increased by 0.106. The decreased current ratio means that company
reduces its ability to generate cash. The Quick ratio of the Farsons company has reduced by
1.634 and the quick ratio of the Heineken company has increased by 0.078. If the company has
higher Quick ratio, that means company is more financially secure, are able to converting
receivables into quick cash and able to meet its financial obligations.
Efficiency ratio describes a company's ability to generate income by using company's
assets. If the efficiency ratio is low, than it is beneficial for a company. The high efficiency ratio
means company has decreasing revenue and increasing costs. Efficiency ratio includes receivable
turnover, payable turnover, asset turnover and inventory days. High receivable turnover means
that collection of receivable of company is efficient. It also indicate that company has high
quality customer base and able to quickly pay their debts. The receivable turnover of the Farsons
company has reduced by 3.48 and also the Heineken company has reduced by 0.21. The payable
turnover of the Farsons company has increased by 9.66 and the payable turnover of the Heineken
company is decreased by 56.06. The high payable turnover means that company is able to pay
their suppliers in a very quick way (Wei., 2018). The asset turnover of the Farsons company has

reduced by 57.09 and the asset turnover ratio of the Heineken company has also reduced by
142.8. the high assets turnover is beneficial for a company. Shareholders ratio used by the
company to identify the shareholder's return for a company. In the Heineken company, the
shareholder ratio has reduced by 0.265 and in the Farsons company, the shareholder ratio has
increased by 0.208 that means that shareholder's of the company give their return in the
company.
SO, as per the analysis, we can find that Farsons company is more suitable for our
organization because it can produce our products in a more effective way.
From the above analysis we can also recommended about Farsons company and
Heineken company are that - In the last three years from 2016 to 2018 in the Farsons company
there is an increasing sales trend (Zeghal and El Aoun., 2016). The cost of sales are also
decreasing which are directly impacting on the profitability of the company and enhance profits
of the company. In the other hand, Heineken is also enhancing its sales percentage but the cost of
sales are increasing, which are directly giving their impact on the profitability of the company
and reduce the profit of the company. As per the current report of 2018 Heineken is generated
better results as compared to Farsons company. Because in the current year, the growth and
expansion of the Heineken is generating high profit as compared to Farsons company. Because,
the cost of the sales are high in Heineken company as compared to Farsons company.
2. The importance of analyzing the working capital of both companies prior to making a decision
Every organization requires adequate working capital to run their business flawlessly.
The sufficient working capital helps the company to conduct their operations and manufacturing
activities without any difficulties and issues. Sufficient working capital enhance the company's
solvency and liquidity position. In the Heineken and Farsons company, Working capital is very
necessary for daily business operations. It assist in routine payment of cash, purchase material
for manufacturing activities and handle unexpected costs.
Working capital means current assets less current Liabilities, current liabilities excludes
short term debt. It is very important to analyzing the working capital before making any decision
in the business. Working capital is a financial metric which represents the company liquidity
availability. Besides, Working capital is calculated from current assets and current liabilities.

Working capital is very necessary for the company to analyse the daily necessity. Outcomes of
working capital is the most essential role play in the success of any business enterprise. Over
75% of companies that are running at loss or struggling financially would be profitable and
liquid (Batkovskiy and et.al., 2015). As compare to Farsons & Heineken the high highest
working capital is of Farsons. Farsons WC is higher than Heineken in every year from 2015-
2018. For manufacturing Farsons is the best choice for beer manufacturing as working capital of
this company seems profitable for the investment.
Year 2018 2017 2016 2015
WC of Farsons 3984 38514 37979 41446
WC of Heineken -1380 -2210 -2260 -2602
Importance of working capital and benefits in decision making
Expansion of investment portfolio
Planning of business expansion or in funds releasing, working capital management
practices is very necessary and important in decision making process. Such as for Beer
manufacturing company it is required to compare the both business working capital and than
decide which one is good (Graham, Harvey and Puri, 2015). From last four year data 2015-2018
WC of Heineken has been run in minus which is very bad for the company success. As compare
with both the company Farsons is the best option for beer manufacturing
Increased Profitability
Working capital is important to consider while company wants to start-up or investing in
some other area. Increasing profitability is one of the main objectives of engaging in working
capital management. Also, one of the ways increasing profitability through adequate working
capital management is in saving of financial cost. Result from WC enable to create large market
and business opportunity and task (Noe and et.al., 2017). Organizations can also reduce their
expenses through working capital by reducing the current assets or liabilities.
Ensure the availability of sufficient resources

This is the another significant component that enables capital management a business
which able to ensure the availability of the resources all the times within the organizations.
Status of the company
Working capital is the most important aspect that helps to know weather company able to
manage their finances or not. As per the consideration of Heineken it has been seen that from the
last four years company Working capital has been decreased such as in 2018 (-1380), in 2017 (-
2210), In 2016 (-2260) and in 2015 (-2602). So it clearly analysed that company will soon going
to dissolve.
Improves overall efficiency of a company
By the help of excellent working capital company productivity has been increasing.
Financial manages tools and techniques systematically manage in proper way that shows in
which area company lacking behind and which area of the company required more attention.
Overall, all such methods or tools enable to manage the systematic company position and earn
enough profitability for the business.
3. Critical analysis of the annual cash flow statements of Farsons company and Heineken
company
Farsons company

The cash flow generated from operating activities of the company have increased from
2017 to 2018 by 60%, that show a effective development for the company. Also the profit of the
company is 48% this directly increased the operations of the company. The cash flow from
investing activities are reduced by 8.5% , the main reason for this is that the disposal of property
plant and equipment that enhance investing activities in the company. In the year 2017, the cash
flow generated from financing activity are decreased, that generate positive balance of 4091 and
in the 2018, it generate negative balance. The company's net cash flow is generating a diverse
balance but it is good that it is less than the last year.
Heineken company-

The cash flow generated from operating activities that increased from the year 2017 to
2018 by 13% in the company. The working capital of the company has also increased from 69 to
713 i.e. Increased by 900%. the main reason for these increment because the profit has decreased
in the previous year (Chen., 2019). The cash flow generated from investing activities for
Heineken has been decreased in the both year and in the 2018 amount has been reduced. The
main reason of that there is an enhance in the free cash flow by 2031 in 2017 to 2246 in 2018.
Cash flow from investing activities have enhanced from the year 2017 to 2018 from 966 to 967.
The expense of the repayments of borrowings are 50% in the year 2018 and the borrowings
which have decreased by approximately 50%. so that, overall increase in the cash flow from the
last year, in the year 2017 the net cash flow was -(49) and in the year 2018 the Heineken's net
cash flow is positive 1066 which shows an increase by approximate 2000%.

CONCLUSION
On the basis of above report it has been identified that financial analysis management &
enterprises are the best analytical tools to measure the company status and profitability growth.
Present study has been measured companies ratio analysis and working capital to determine
which company is suitable for beer manufacturing. Study also critically analyzed that which of
the annual cash flow statement is best out of two. So overall, study emphasized the importance of
finances in decision making process.

REFERENCES
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