Financial Analysis of Farsons and Heineken's

This report analyzes the financial performance and position of Farsons and Heineken's through ratio analysis and horizontal/vertical analysis of their financial statements. It examines profitability, leverage, liquidity, efficiency, and shareholders ratios. The report also includes a comparison of the profit and loss statement and balance sheet of Farsons using horizontal and vertical analysis.

FINANCIAL ANALYSIS
MANAGEMENT &
ENTERPRISE - FAME

INTRODUCTION
Financial performance of a company is a very useful indicator of the performance of the
company and in determining whether it is earning adequate profits or not and assists the
management of the company in formulating decisions regarding the activities and performance
of the company (Mathuva, 2015). Farsons and Heineken’s are two major beer brands and being a
financial advisor of the beer manufacturer, these two are very important clients. In the current
report, the financial position and performance of the two companies and this will be followed by
analysis of the working capital analysis of both the companies and lastly, the report will also
analyse the cash flow statements of both the companies critically comparing and contrasting each
aspect. All the major findings will be summed up accordingly in the report in the form of
conclusion.
MAIN BODY
Evaluation of Financial performance and position of both the companies
Financial Analysis involves analysis and interpretation of the various aspects related to
the financial performance in a business and can be done through different tools. Ratio Analysis is
one such tools that helps in obtaining relations between different financial measurement
instruments and then assist in concluding appropriate interpretations by comparing the actual
ratios with that of the standard ratio (Petruzzo and et.al., 2015). Additionally, the Horizontal and
vertical analysis of the companies can also be used in order to analyse the income statement of
companies and interpret and compare them accordingly.
Financial Analysis of Farsons and Heineken’s:
There are six different categories of ratios that have been analysed in the above
statements of both the companies and these can be interpreted and understood in following
manner:
Profitability Ratio
 Operating Profit Margin: This ratio indicates that operating profit that a company earns
i.e. profit after deduction of all the variable costs such as wages, raw material etc., and
this profit is used to ascertain the firm’s efficiency in keeping control over the cost and
other expenses that are incurred while conducting operating activities of a business
(Talonpoika and et.al, 2016). The higher operating profit margin is, more better is the
performance of the company in an individual accounting period. In the ratio analysis

done above it can be clearly interpreted that the while the operating margin ratio of
Farsons is increasing over the years from approximately 12% in the year 2015 to 15% in
the year 2018, the operating profit of the Heineken has been declining in the past years
from 14% in 2015 to 11% in 2018. This can be used to conclude that the performance of
Farsons is much better than that of Heineken. Net Profit Margin: The net profit margin is used to interpret the profitability of the
business and is calculated by division of net profit of the company with the revenue
earned by that company in a single financial year. When the net profit of a company is
high it can be interpreted that the company is more efficient or capable in converting its
sales in the net profit earned by the company (Elnahas, Hassan and Ismail, 2017). From
the ratio analysis done above it can be clearly interpreted that while the net profit ratio of
Farsons has increased over the years from 10% in 2015 to 14% in 2018, that of Heineken
has reduced form 10% in 2015 to 7% in 2018 thus depicting that while the performance
and total earing of Farsons is improving over the years, the performance of Heineken has
only declined in the past 4 years. Return on Assets: ROA is that ratio that helps in measuring and evaluating the
effectiveness of the earnings or returns that a company is able to generate on the amount
of assets that are being employed in the company. ROA helps in determining the extent
or limit upto which a company was able to convert its investment in the assets into net
profit or revenue or returns. When the ROA of a company is positive and increasing it
depicts that a company is able to generate higher profits from the amount that has been
invested in the assets of the company and vice-e-versa in case it is negative or decreasing.
In the current analysis made above it can be concluded that while the ROA of Farsons has
been increasing in the past four years from 5% to approximately 8%, the ROA of the
Heineken has been declining although with a smaller rate from 5.7% i.e. approximately
6% in year 2015 to 5.04% in year 2018. It can hence be concluded that the capability of
generating returns on the assets employed in the company is regularly declining in case of
Heineken as compared to that of Farsons. Return on Equity: The return on equity ratio helps in measuring the capability of a
company in earing profits on the investment made in the form of equity of the company
i.e. on the amount invested by the shareholders of the company (Loomes, Hull and

Mandy, 2017). The higher the ROE of a company, more is the capability of a company in
earning profits and thus giving higher returns to the shareholders and opposite in case of
decreasing ROE. In the current analysis, it can be derived that the ROE of Farsons has
risen from 8% in 2015 to 12% in 2018 and the ROE of Heineken has declined from 15%
to 13% in the respective years. Therefore, it can be inferred that the capability of Farsons’
company in giving more returns to the shareholders of the company is higher as
compared to that of Heineken Company.
Leverage Ratio Debt Equity Ratio: This ratio helps in depicting the ratio of the investment or capital that
a company is employing form the debt sources i.e. from the creditors of the company as
compared to that of investors in the company i.e. debtors. When the debt equity ratio of a
company is high it can be interpreted that the company is using more debt financing
options rather than equity financing options. In the present scenario of Farsons and
Heineken’s it can be clearly interpreted that the debt to equity ratio of Farsons has
increased from 0.22 to 0.34 and that Heineken has also increased from 0.78 to 0.81 in
past four years from year 2015 to 2018. It can therefore be adequately interpreted that the
increase in debt equity ratio shows a negative sign for both the company and it has been
at a higher rate in the Farson’s Company as compared to the one made in Heineken
Company. Debt Assets Ratio: This ratio is used to reflect the ratio of the total liabilities of a
Company as compared to the total assets of a company (Sugimoto and et.al., 2015).
When the debt asset ratio of a company is 1, it depicts that the amount of liabilities in a
company is exactly equal to the investment in assets and when the ratio is more than one
it can be interpreted that the liabilities of a company is more than the investment or the
assets that a company holds and vice-e-versa if the ratio is less than one. The debt asset
ratio of Farsons has increased in the past four years from 0.15 to 0.20 and the Heineken’s
ratio has also increased from 0.26 to 0.30 which shows a negative aspect of both the
companies. However, it can be interpreted that the position of Farsons is poorer than that
of Heineken’s.
Liquidity Ratio

 Current Ratio: The current ratio of a company helps in determining the liquidity position
of the company and it compares the current assets owned by the company as compared to
the current liabilities of a company. The ideal current ratio that a company can maintain
is 2:1 which symbolises that the number of current assets owned by the company is twice
in order to meet the current liabilities of the company. I the current case, it can be clearly
interpreted that while the current ratio of Farsons is approximately similar to the ideal
ratio and moves in a positive range of 2:1 in 2015 to 1.1:1 in 2018, that of Heineken’s is
not on an ideal mode and ranges from 0.76:1 in 2015 to 0.86 in 2018. Therefore it can be
stated that the liquidity position of Farsons is at a much better stake than that of
Heineken’s which does not show a good position. Quick Ratio: Quick Ratio is used to determine or indicate the capacity of a firm to meet
its short term obligations by using the highly or most liquid assets of the company. It is
obtained by achieving the ratio of the quick assets of a company i.e. all the current assets
excluding the inventories and prepaid expenses of the company are compared with the
current liabilities of the company (Bay, Chan and Walczyk, 2015). The ideal quick ratio
is 1:1 i.e. the quick assets are similar to the current liabilities of a company. Currently, the
quick ratio of Farsons is ranging from 2.3:1 in 2015 to 0.70:1 in2018 and that of
Heinekens is raging from 0.60:1 to 0.68:1 and it can be concluded that the quick ratio of
Farsons is closer to the ideal ratio and therefore the position of Farsons is much better
than that of Heineken’s.
Efficiency Ratio Receivable Turnover ratio: This ratio is used to indicate the net receivables of company
as compared to the net sales made by the company and this is done by evaluation of the
average collection period of the company analysing that how quickly the debtors of the
company pay back the amount due i.e. within the stipulated time period. When the
receivable ratio is high, it shows that company is dealing more in cash and less in credit
(Brandelet and et.al., 2017). Currently the receivable turnover ratio of Farsons is higher
than that of the Heineken’s company thus showing that the company is in a much better
position since it is able to collect money from its debtors in much quicker time period as
compared to that of the Heineken’s

 Payable Turnover Ratio: Payable Turnover ratio is completely opposite to the receivable
turnover ratio i.e. it helps in identification of the time period within which the payment
has to be made to the creditors of the company i.e. the average payment period and
depicts the number of purchases made on credit as compared to the revenue generated.
When the ratio is high, it depicts that the payment duration within which the amount is to
be repaid to the creditors is shorter and payments are being made promptly. In the current
ratio analysis, it can be clearly seen that while Farsons payable ratio has increased over
the years, that of Heineken’s has declined heavily. This shows that the repayment time of
Farsons has shortened thus depicting better financial position of the Farsons Company as
compared to the one of Heineken which is continuously deteriorating. Asset Turnover Ratio: This ratio helps in determining the efficient use of assets in order
to generate increased amount of revenue in the company and when the asset turnover
ratio is higher, the company is assumed to be in a more favourable position as compared
to the one in which the ratio falls (Behkami and et.al., 2017). In the current scenario, the
asset turnover ratio of Farsons has declined but is still higher than that of Heineken and
therefore even though initially in the year 2015 the ratio of Heineken was higher than that
of Farsons depicting a better position, yet currently the position of Farsons is better and
much stronger. Inventory Days Ratio: The inventory turnover ratio of the company depicts the
consumption of inventory and the number of days for which they are stored. When this
ratio is high, it can be interpreted that the inventory is faster moving and if the ratio is
lower, it indicates the inventory is slow moving. Presently, the inventory days ratio of
Farsons as well as of Heinekens is increasing thus depicting a greater movement of
inventory in both the companies.
Shareholders Ratio Shareholders Equity Ratio: The shareholders equity ratio helps in determining the
proportion of assets or capital of the company that have been raised in the manner of
equity shares. Both the companies have maintained a stable ratio in the past years but the
ratio of Heineken’s is higher than that of Farsons showing that they have raised a higher
amount of capital in the form of equity shareholders.

Profit and Loss Statement and Balance Sheet of Farsons prepared using Horizontal and
Vertical Analysis
Profit and Loss Statement prepared using Vertical Analysis:
It can be clearly interpreted that the overall position of the company has improved in the
past four years while comparing the items in income statement with the percent of net sales.
Profit and Loss statement prepared using Horizontal analysis:
The Horizontal analysis of the profit and loss statement helps in concluding that the net
profits of the company has declined over past 4 years thus concluding that both the analysis done
of Farsons show different results.
Balance Sheet of Farsons using Horizontal analysis:
This concludes that in the past years the performance of the company has not improved
where the liabilities has increased and equity has become almost negative.
Balance Sheet of Farsons using Vertical Analysis:
It can be concluded that the total assets of the company, after being used as a base for
every category in the balance sheet, show that the on an average the performance of Farsons
company has been much better than that of the Heineken’s company.
Evaluation of the working capital
Working capital can be defined as the net variance or difference amount between the current
assets of the company and current liabilities of the company (Antoni, Castiglione and Garibaldi,
2017). Current assets involve cash and cash equivalents of a company and inventory or stock
levels of a company and current liabilities of the company involve bills payable, outstanding
expenditures etc. in a company.
Working Capital of Farsons: The working capital for every company is an a extremely
important tool in determining the position of the company and its ability to successfully meet the
requirements in the current day i.e. it determines the liquidity position of a company that can
assist it in resolving and meeting the current liabilities of the company. In the case of Farsons,
the working capital analysis of the company will help them in gaining information about the
liquidity position of the company and point out whether the company will be able to meet the
current liabilities or not or is there any need to develop funds for this particular purpose (Bastos
and Schoffelen, 2016). It will also assist in analysing whether the company should develop
strategies that will introduce more cash in the company or if the current investment strategies are

adequate enough. All these decisions help in operating the business of the company and meeting
various requirements in a simplified manner.
Working Capital of Heineken’s: In the Heineken Company, the analysis of working capital will
help in evaluating the current capacity of the firm and it can be evidently concluded that the
company can use accounts payable report so that the account payable time of the company can
get divided into bucket time of 30 days (Biswas and et.al., 2015). This will help the company in
increasing the availability of cash for meeting the shorter time period requirements of the
company.
Evaluation of Cash Flow
Cash Flow Margin ratio can be defined as a tool to measure the cash generated from operating
activities and this is compared to the revenue that is generated in that particular time period.
Cash Flow Coverage Ratio can be defined as the capacity or ability of the firm in payment of
principal or interest amount within the due date or time allotted (Farrés and et.al., 2015).
Interpretation for Farsons: Fromm the above cash flow statement, it can be clearly interpreted
that the cash flow margin of Farsons has increased from year 2017 when it was 0.17 to year 2018
when it was 0.34 and this can help in concluding g that the convergence of the sales made by the
company into the cash flow in the company has improved thus improving their performance
(Filbeck, Zhao and Knoll, 2017). It can also be concluded that the cash flow coverage ratio of
Farsons has increased from 0.25 in year 2017 to 0.34 in year 2018 and thus this improvement in
the ratio can be used to state that the capability of firms in repaying their liabilities amount has
been improved.
Apart from this, the current liabilities convergence ratio has also improved for the
company in 2018 when it is compared to the year 2017 since it was 0.63 in 2017 and now in
2018 it was 0.70. Therefore overall interpretation of the above statement helps in concluding that
the collectively, the performance of Farsons has improved over the time gap of one year i.e. from
2017 to 2018.
Interpretation for Heineken’s: It can be concluded from the above cash flow statement that the
cash flow margin ratio has decreased of Heineken form 0.22 in the year 2017 to 0.20 in the year
2018 and therefore it can be stated that the firms capacity of converting sales into cash has
reduced.

The cash flow coverage ratio of the firm has also increased from 0.18 in 2017 to 0.20 in 2018
and the current liabilities coverage ratio has increased for the company in 0.47 in 2017 to 0.53 in
2018 and it can be concluded that there is insufficient cash amount in the company in order to
meet the current liabilities.
CONCLUSION
The above report summarized the comparison of the detailed verticle, horizontal and ratio
analysis of the financial statement for the span of the three year. After that the report has analysis
the working captital of both the company with the help of the financial statement of the three
year 2016-18. After that the report goes on to summarized the critical analysis of the annual cash
flow statement of both the companies over the last two years. The report also summarized the
interpretation of all the data and the ratio and also explain the different way through which the
ration and data analysis can be used in the decision making of the organization.

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APPENDIX 1
Ratio Analysis of Farsons
3

Ratio Analysis of Heineken’s
4

APPENDIX 2
Vertical and Horizontal analysis
5

Farsons:
6

Horizontal analysis of Heineken N.V
7

Vertical Analysis of Heineken N.V.
Horizontal analysis of FARSON
8

9

Vertical analysis of FARSON
10

APPENDIX 3
Cash Flow Statement
11

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