Financial Analysis of Diageo plc: A Comprehensive Case Study

This case study examines the financial performance of Diageo plc, a British multinational alcoholic beverage company. It begins with an introduction to financial planning and the company's background, including its market position and key competitors. The main findings highlight Diageo's acquisitions and investments. The main body of the study evaluates the company's financial performance using profitability, efficiency, and liquidity ratios, comparing Diageo's performance with Pernod Richard. The analysis includes calculations and interpretations of gross margin, accounts receivable turnover, current ratio, and debt-to-equity ratio. Furthermore, the case study extends to investment appraisal and strategic decisions related to target companies and acquisitions, including the rationale behind choosing a target company, the synergistic gains, proposed value of the deal, implications on firm performance, and challenges associated with the acquisition. The analysis provides insights into Diageo's financial health and strategic decisions in the competitive alcoholic beverage market.

Case Study

Table of Contents
INTRODUCTION ...............................................................................................................................3
COMPANY BACKGROUND.............................................................................................................3
MAIN FINDINGS................................................................................................................................3
MAIN BODY.......................................................................................................................................3
1. Evaluating financial performance................................................................................................3
2. Investment Appraisal...................................................................................................................8
3. Target Company.........................................................................................................................10
Rationale for choosing target company.........................................................................................10
Synergistic gain behind acquisition ..............................................................................................10
Proposed value of deal associated with acquisition.......................................................................11
Implications of acquisition on firm performance...........................................................................11
Challenges associated with acquisition..............................................................................................11
CONCLUSION..................................................................................................................................12
REFERENCES...................................................................................................................................13
APPENDIX........................................................................................................................................15

INTRODUCTION
Financial planning is a process related with formulation of strategies and plans for the betterment of
business in attaining its set defined business goals and objectives smoothly. Financial plan also
known as Budget which defines the limit of amount to be spent for carrying on a particular
operations or activities. With the help of financial plan, a company can design its capital structure
and project about future revenue. The present report is on Diageo plc, one of the British
multinational alcoholic beverage company. It will be based on importance of financial information
in business decision making. Also, it will focus on different types of accounting techniques used for
ascertaining quantitative information.
COMPANY BACKGROUND
Diageo plc is a British multinational company dealing in alcoholic beverages. It is having its
headquarters in London, England and other continents as well. Was worlds largest distiller unless
overtaken by China's Kweichow Moutai. It is having a revenue of £1,216.3 Crore with 29,917 as
number of employees (Diageo Plc Wikipedia, 2019). This company sells its products and goods in
more than 180 countries with offices in 80 countries.
MAIN FINDINGS
The main competitors of Diageo plc includes Pernod Richard, Bacardi, Fortune Brands etc. It was
formed in 1997 from the merger of Guinness and Grand Metropolitan. In the year 2012 November,
Diageo acquired 53.4% stake in the Indian spirits company named as United Spirits for £1.28
billion. In December 2015, Diageo had announced $10 million investment in the Danish whisky
brand name Stauning so as to facilitate expansion of production function.
MAIN BODY
1. Evaluating financial performance.
1. Profitability Ratio - It determines whether the company is performing well or a per the
strategies formulated for achieving its set defined aims. It is a measure which depicts the
ability of a company in generating profits or revenue out of operations being undertaken by
it.
 Gross Margin Ratio - This ratio helps in determining the amount of gross profit it has
generated from the sales made during the year (Petria, Capraru and Ihnatov, 2015).

Diageo Plc
Particulars 2014 (in £m) 2015 (in £m) 2016 (in £m) 2017 (in £m) 2018 (in £m)
Gross Margin
Ratio
Gross Margin 6229 6203 6234 7370 7529
Net Sales 10258 10813 10485 12050 12163
Gross Margin
Ratio = Gross
Margin/ Net
Sales
60.72% 57.37% 59.46% 61.16% 61.90%
Pernod Richard
Particulars 2014 (in €m) 2015 (in €m) 2016 (in €m) 2017 (in €m) 2018 (in €m)
Gross Margin
Ratio
Gross Margin 4988 5295 5371 5602 5603
Net Sales 8557 8557 8682 9009 8986
Gross Margin
Ratio = Gross
Margin/ Net
Sales
58.29% 61.88% 61.86% 62.18% 62.35%
Interpretation – From the above table it can be stated that in case Diageo plc the ratio is
declining from 60.72% to 59.46% in two years. After 2016, it has increased from 59.46% to 61.90%
which depicts that company is performing well in generating profits out of sales. In case of Pernod
Richard's, there has been increase in gross profit ratio from 58.29% to 62.35% which is a good sign
defining that company is performing much better than Diageo plc in achieving market share and
profits.
2. Efficiency Ratio – With the help of this ratio, a company can easily analyse how effectively
its is using its business assets and liabilities on internal basis for generating profits ion the
current period.
 Accounts Receivable Turnover – It defines how effectively the credit policy of company
is implemented for carrying on business transactions on credit basis.
Diageo Plc
Particulars 2014 (in £m) 2015 (in £m) 2016 (in £m) 2017 (in £m) 2018 (in £m)
Accounts
receivable
turnover
Revenue 10258 10813 10485 12050 12163
Average 2244 1968.5 2043.5 2142 2141

Accounts
Receivable
Accounts
Receivable
Turnover =
Revenue /
(Average
Accounts
Receivable)
4.57 5.49 5.13 5.63 5.68
Pernod Richard
Particulars 2014 (in €m) 2015(in €m) 2016 (in €m) 2017 (in €m) 2018(in €m)
Accounts
receivable
turnover
Revenue 8557 8557 8682 9009 8986
Average
Accounts
Receivable
1105 1101.5 1110 1101 1128
Accounts
Receivable
Turnover =
Revenue /
(Average
Accounts
Receivable)
7.74 7.77 7.82 8.18 7.97
Interpretation – Companies which are capable of converting its credit customers into cash
are considered more liquid and sound. Also, it is better for company to focus on reducing its
accounts receivable period as it will help company in carrying out its business activities more
smoothly. Diageo Plc has to face problem related to cash requirements of business as there is
increase in its accounts receivable turnover which is not good as the company has to face problem
in terms of liquidity and cash flow process will also gets affected as it will not be able to convert its
receivables into cash in time (Wang, Wang and He, 2016). Whereas, Pernod in year 2014 is having
its receivable turnover of 7.74 which has reached to 8.18 in 2017 and has came to 7.97 I he very
next year. It can be said that Pernod is required to make efforts for making strict credit policies for
its credit business transaction so that its cash and liquidity needs are not hampered.
3. Liquidity Ratio – Such ratio defines how quickly the ability of company is in converting its
current business assets into cash or liquid source so that it can make payment of all the
amount due on time (Ahmed, 2015). It depicts ability of company in meeting its short term
liabilities as and when fall due.

 Current Ratio – It measures whether the firm is having enough cash resources for meeting
its short term liabilities and debt amount on proper time by making comparison of its own
current assets and current liabilities of a accounting period.
Diageo Plc
Particulars 2014 (in £m) 2015 (in £m) 2016 (in £m) 2017 (in £m) 2018 (in £m)
Current Ratio
Current Assets 7469 7670 8852 8652 8691
Current
Liabilities 4851 5290 6187 6187 6187
Current Ratio =
Current
Assets/Current
Liabilities
1.54 1.45 1.43 1.40 1.40
Pernod Richard
Particulars 2014 (in €m) 2015 (in €m) 2016 (in €m) 2017 (in €m) 2018 (in €m)
Current Ratio
Current Assets 6646 7419 7282 7521 7822
Current
Liabilities 3905 5138 4955 4256 3743
Current Ratio =
Current
Assets/Current
Liabilities
1.70 1.44 1.47 1.77 2.09
Interpretation – It can be interpreted that in situation of Diageo plc the ratio is declining
from 1.54 to 1.40 among last 5 years which is not consider good from the perspective of business
point of view. Such decline can result in incapability of firm in making payment of its short term
obligation when it will due fall which will affects its creditworthiness as well. In case of Pernod
Richard, there has been an increase in such ratio after a fluctuating trend. 2.09 ratio defines that
company is sound enough with having enough liquidity and solvency position for meeting all the
short term liabilities and due if arises in future.
4. Financial gearing – It provides detail about the proportion of funds which the company has
borrowed in respect of its equity. It measures the degree to which all the business operations
and activities are financed with the help of shareholder funds and also amount provided by
creditors (Small, Dollie and Yasseen, 2019).
 Debt to equity Ratio – It states about the proportion of equity contributed by the
shareholders of the company along with the debt amount used for the purpose of financing
the assets of company.

Diageo Plc
Particulars 2014 (in £m) 2015 (in £m) 2016 (in £m) 2017 (in £m) 2018 (in £m)
Debt to
equity Ratio
Total
Liabilities 16141 18033 19961 18535 19767
Total Equity 6823 7771 8530 10313 9948
Debt equity
Ratio = Total
Liabilities
/Total Equity
2.37 2.32 2.34 1.80 1.99
Pernod Richard
Particulars 2014 (in €m) 2015 (in €m) 2016 (in €m) 2017(in €m) 2018 (in €m)
Debt to
equity Ratio
Total
Liabilities 15995 17277 17261 16382 14761
Total Equity 11621 13121 13337 13706 14797
Debt equity
Ratio = Total
Liabilities
/Total Equity
1.38 1.32 1.29 1.20 1.00
Interpretation – The above table for Diageo plc can be explained that with the increase in
such ratio, company in the coming future will not be able to generate or make enough profits in
form of cash for meeting its debt obligations and liabilities as due. This will not considered good as
it will impact the image of company making its share as well as market value down. On the other
hand, Pernod is having a decreasing trend in its ratio status which is also not considered good as it
depicts that company is not capable enough to take advantages or benefits of increased profits
which financial leverage is making to it.
Limitations of financial ratios for using as a financial analysis tool covers following points:
1. Analysis of financial ratio is useful only in case when a comparison is required to be done
among companies of same industry. Companies having multiple business provides
composite view of its business which provides information about poor business performance
as well. Thus, it doesn't provides a proper base for comparison.
2. Many companies uses different accounting frameworks for preparation of financial reports
which has to be converted in same base before making comparison (Selvakumar, 2019).
3. Ratio analysis provides detail about relationship of past information whereas end users are
more concerned with current information.

2. Investment Appraisal
It is a process which encompasses different techniques which can be used for identifying
whether the project will be beneficial or attractive if investment is done in it. It helps in assessing
what will be the return from such investment, viability as associated with it. Investment Appraisal
Techniques comprises:
1. Net Present Value – It is defined as difference between present value of cash inflows
and cash outflows for definite time period. With the help of net present value tool, one
can assess the profitability and viability aspects of the project. Also, it takes into
consideration timings of earnings of investment. A positive value defines that
investment in project will generate high return in comparison with cost incurred. And
negative depicts that project should not be undertaken because of high amount of cost
against return.
Merits Demerits
 It recognises time value of money as
associated with the project.
 It takes into account total benefits
which are arising as a result of
project over its time period
(Jagadeesan, 2017).
 Such method of selecting a
particular project is instrumental in
terms of achieving the financial
objective and aims i.e.,
maximization of shareholders
wealth.
 Cost of capital is considered as the
basis for calculating rate of return
which is a complex process as it varies
from year to year.
 It focuses on making comparison of net
present value irrespective of
involvement of initial investment and
will not provide dependable results for
decision making process.
 This method of investment appraisal is
difficult to understand and also comes
up with hard calculation process as
compared to other investment appraisal
techniques.

Example -
Year project A (£) project B(£) Disc. @ 5.88%
Discounted
Cash flows of
project A (£)
Discounted
Cash flows of
project B (£)
1 950000 870000 0.944 897242.16 821684.93
2 950000 1300000 0.892 847414.21 1159619.44
3 950000 250000 0.842 800353.42 210619.32
4 950000 790000 0.796 755906.14 628595.63
5 950000 1350000 0.752 713927.22 1014528.16
Total discounted cash flow 4014843.16 3835047.48
less: initial investment 3200000.00 3700000.00
Net present value 814843.16 135047.48
Interpretation – From the above table, it can be interpreted that Project A is giving more
return and profit as compared to Project B. By investing in Project A, it will be viable and profitable
for the company as it is yielding high return of £814843.16 in comparison of B project i.e.
£135047.48 Thus, it can be said that within a period of 5 years, project A provides return of £
814843.16 by making initial investment of £3200000 whereas with initial outlay of £3700000 in
Project B, the attractiveness of investment is very less. Therefore, choosing project A will be more
viable and beneficial for the firm.
2. Internal Rate of Return – It helps in determining how much profitable is the project from
the perspective of making potential investment in it. It is the percentage discounting rate
which is used for bringing the cost of project and future cash inflows equal.
Merits Demerits
 This method considers the total cash
inflows as well as cash outflows of
the project.
 It is very easy method from point of
view of interpretation and
understanding.
 Another benefit is that it takes into
account time value of money.
 Calculation is very complex as it is
based on trial and error method.
 Sometimes provides different as well as
multiple number of rates which can
provides great confusion related to
decision (Combs, Samy and Cengiz,
2017).
 Unless project life is not estimated
accurately, no assessment can be made
of cash flows correctly.
Example -

Year Cash inflows
of Project A
Cash inflows of
Project B
Initial Investment -3200000 -3700000
1 950000 870000
2 950000 1300000
3 950000 250000
4 950000 790000
5 950000 1350000
IRR 14.80% 7.18%
Interpretation – By using Internal Rate of Return tool, all the projects which are yielding
excess internal rate of return as compared to the firms cost of capital will be chosen. In above table
project a is yielding high internal return against project b. Therefore, Project A will be selected.
3. Target Company
The target company for Diageo plc is Sipsmith London. Sipsmith is conducting business of
distilled beverage which was founded in 2009 (Sipsmith. Wikipedia, 2019). It is a micro distillery
which is located in London, UK which is the first copper pot distillery dealing in mainly two
products viz. Gin and Vodka.
Rationale for choosing target company
Sipsmith London is a small business firm which can be acquired easily by Diageo plc. No
high amount has to be incurred for acquisition of such target company as it is operating at small
level. Thus, such acquisition will be relatively more cheaper and profitable than any other company.
With the help of present cash reserves, profit amount available with Diageo plc such process of
acquiring Sipsmith can be completed. Also, with the help of bank loan at low interest rate target
company can be acquired successfully. The main objective behind making choosing such company
is that it is one of the four gin distilleries which is located within London's limits which is having
the capacity of 300 litres.
Synergistic gain behind acquisition
By seeking acquisition of Sipsmith company, Diageo plc has been able to increase its overall
business as well as capacity in terms of productivity, profitability aspects. Also, from such
acquisition Diageo plc has been able to capture one of the only four Gin distilleries as located
within the limits of London city. It thus provides Diageo with benefits in form of large market share
and control over one of the Gin as located in London which was not available with it earlier
(Myšková and Hájek, 2017). It has also facilitated acquirer company with new business chain and a
chance to enter into new market segment via acquisition of Sipsmith company. By coming up

together, both the company can now able to acquired large market share as well as customer base
too which is not possible earlier for both one. In terms of synergistic gain, it has increases the
organisational capability with much better improved economies of scale thus providing more
profitability and productivity to Diageo plc.
Proposed value of deal associated with acquisition
For acquiring Sipsmith company, Diageo plc has spent a sum of £150 million. These
takeover deal can be supported by the company's present profit and revenue balance amount, cash
and capital reserves, retained earnings. Also, with the help of low interest rate borrowing of bank
loan can be taken for supporting financial activity of such takeover process. As per the financial
analysis of Diageo plc, it is having gross margin of £ 7529 million in the year 2018 which is earned
from the sales or revenue made of £12163 million in the same accounting year.
Implications of acquisition on firm performance
After doing takeover of SipsmitH, Diageo plc has been able to acquire one of the only four
Gin distilleries which is located in the Limits of London City. Thus, it has resulted in lowering the
cost of business operations as associated with production of alcoholic beverages. Also, from such
acquisition or takeover Diageo plc has been able to procure a copper pot based distillery which is
having the capacity of 300 litres i.e. equal to 66 imp gal; or 79 US gal (Sipsmith. Wikipedia, 2019).
By coming together, Diageo plc has been able to reduce its business operational cost which it has to
pay for distillery functions. Thus, it results in increasing in profit margin along with better
production.
Challenges associated with acquisition
Challenges can be in form of the low profit which can be related to acquisition of Sipsmith.
It can have impact in the initial one or two years, which can be overcome by Diageo plc by
ensuring sufficient funds as well as financial capacity of business so as to cover all the debt or
obligation repayment of this particular period (Kim and Kang, 2016). Also, management and capital
structure changes has to be made in the firm of which plans, strategies and proper direction is
needed by the company which can be provided in guidance of key managerial personnel.

CONCLUSION
From the above report it can be concluded that financial information is core aspect of every
business decision making process. It is very much important for a company to provide true, reliable
and accurate information about financial as well as accounting transaction as undertaken. With the
help of correct information, investment related decision can be made with the help of use of
different investment appraisal techniques such as Net present value, payback period, internal rate or
return etc. These tools helps in identifying the viability and attractiveness of such investment thus
making it more profitable.

REFERENCES
Books and Journals
Ahmed, I. E., 2015. Liquidity, profitability and the dividends payout policy. World Review of
Business Research. 5(2). pp.73-85.
Alshatti, A. S., 2015. The effect of the liquidity management on profitability in the Jordanian
commercial banks. International Journal of Business and Management. 10(1). p.62.
Combs, A., Samy, M. and Cengiz, H., 2017. An Analysis of how Financial Ratios of Companies in
Turkey Are Affected by National Standards, and IFRS. International Business Research.
Jagadeesan, S., 2017. A study on financial performance of tamilnadu newsprint and papers limited
tnpl Kagithapuram Karur district in tamilnadu.
Kim, K. B. and Kang, S. Y., 2016. Gearing to Make a Financial and Strategic Decisions:
Scandinavian Airlines System Group Case. 관광진흥연구. 4(1). pp.33-44.
Myšková, R. and Hájek, P., 2017. Comprehensive assessment of firm financial performance using
financial ratios and linguistic analysis of annual reports. Journal of International Studies.
volume 10. issue: 4.
Pando, V., San - José, L. A. and Sicilia, J., 2019. Profitability ratio maximization in an inventory
model with stock-dependent demand rate and non-linear holding cost. Applied Mathematical
Modelling. 66. pp.643-661.
Petria, N., Capraru, B. and Ihnatov, I., 2015. Determinants of banks’ profitability: evidence from EU
27 banking systems. Procedia Economics and Finance. 20. pp.518-524.
Reddy, W. E. J. E. N. D. R. A. and Wong, W., 2017. Impact of Interest Rate Movements on A-REITs
Performance Before, During And After The Global Financial Crises. In 23rd Annual Pacific
Rim REal Estate Society Conference(pp. 1-10).
Selvakumar, A. X., 2019. FINANCIAL PERFORMANCE OF URBAN COOPERATIVE BANKS
IN THANJAVUR DISTRICT A STUDY. Paripex-Indian Journal Of Research. 8(1).
Small, R., Dollie, Z. and Yasseen, Y., 2019. Independent review–understanding ratio
analysis. Professional Accountant. 2019(35). pp.12-13.
Wang, W. W., Wang, L. B. and He, Y. L., 2016. Parameter effect of a phase change thermal energy
storage unit with one shell and one finned tube on its energy efficiency ratio and heat storage
rate. Applied Thermal Engineering. 93. pp.50-60.
Online

Diageo Plc Wikipedia. 2019. [Online]. Available through: <https://en.wikipedia.org/wiki/Diageo>.
Pernod Richards annual report. 2019. [Online]. Available through:
<http://financials.morningstar.com/income-statement/is.html?t=PDRDF&region=usa&culture=en-
US>.
Sipsmith. Wikipedia. 2019. [Online]. Available through: <https://en.wikipedia.org/wiki/Sipsmith>.

APPENDIX
1. Discount Rate table