Cadbury Plc is a confectionary company which is now own by American company Kraft .

Last year Kraft made a hostile bid for Cadbury and now the combine entity is the world
largest confectionary. In the following course work we are looking at the details of Cadbury
financial statement. Our aim is to present details about the performance of the company for
last two years. We will try to recommend ways for improvement and make the company
more attractive to new investor. We also look into the impact of the financial crises on the
company.

CADBURY KEY RATIOS

Gross Profit Margin 46.276 % 46.693 %

Net Profit Margin 12.78 % 10.86 %

Return On Capital Employed (ROCE) 6.63 % 7.26 %

Gross Profit Margin (GPM) – gross profit margin tell us the profit made by business on
cost of sale or goods sold. Gross profit is the profit which a business makes before taking into
account any administrative cost, selling cost etc. so generally the gross profit margin is higher
than the net profit margin.

GPM help us to understand how much percentage of money a business saves from the sales.
Higher percentage of GPM means that we have more money to cover other expenses. Other
expenses can be operating expenses, administrative expenses, selling cost etc.

There seem to be a slight decline in GPM which was 46.693% in 2008 and 46.276% in 2009.
Selling price and cost of raw materials are the two main factors which affect GMP. Slight
decrease in GPM does not show a good performance for the business. This is not a major
concern.

Net Profit Margin – the net profit margin is the net profit made by the company per 1 pound
of turnover. It takes into account the cost of sale administration cost, the selling and
distribution costs and all other costs. The net profit is the profit on which the company is
taxed on.
There is an increase of around 2% in net profit margin. This shows the company is very good
in managing cost and the administration is quite efficient. Especially since there is slight
decrease in GPM and still there is an increase in NPM show that the administration has been
reducing operating cost other extra cost which gives a very good impression about the
management and the company.

Return of Capital Employed (ROCE) – this is the rate of return a business is making on the
total capital invested in the business. ( capital here include shareholder’s funds + debt).

There is a slight decrease in ROCE which was 7.26% in 2008 and was 6.63% in 2009. This
means shareholders have to invest more for earning the same amount as last year. This is not
a good sign as ROCE is of major concern to the shareholders. This might result in less
investment.

ACTIVITY RATIOS 2009 2008

Net Asset Turnover 1.04 Times 0.97 Times

Debtors Days 60 Days 72 Days

Stock Turnover 86 Days 101 Days

Supplier Credit Period 179 Days 197

Days

Net Asset Turnover- this ratio compares the turn over with the assets that a business has
used to produce that turn over. It indicates how efficiently any particular company is using its
assets. The more the net assets turnover goes up the better the sign for investors as it shows
that the company is being efficient in using its assets.

There is a slight increase in net assets turnover in 2009. It goes up from .97 to 1.07. This
shows that the company is making 1.04 times the sale for every 1 pound invested.

Debtors Days- Debtors Days show the time require for a company to get its money from its
debtors. Most of the companies make a large portion of the sales on credit. This means that if
the debtors days is increasing, show the quality of company’s clients are decreasing. Usually
it depends on the type of the business. For example debtors days for a car company would be
considerable higher then confectionary company. But for the same industries it’s a good
parameter to see the quality of customer.

There is slight decrease in debtor’s days in 2009. This will have a positive impact for
company as it shows that the company can use the money earlier. This will improve the net
assets turnover and ROCE. This will attract more investor.

Stock turnover- it shows the time period in which a company stocks (inventories) is
converted into revenue. When a company produces a product, it needs to sell it. The amount
of time taken by the company for selling the product from inventory is call stock turnover
ratio. The lower the ratio the better it is for the company as it shows that the company product
is in demand and management is efficient in managing a proper supply chain. This also gives
a benefit as when the stock is kept too long is like a sitting investment doing nothing.

There is a 15 days decrease in stock turnover in 2009. This is a considerable decrease and
show management efficiency in carrying out its work. This is very attractive to the investor.

Supplier Credit Period- this show the time taken by the company to pay its creditor. This
also depends on the nature of business. Example a construction company would have a higher
supplier credit period than a restaurant. More the company take time to pay the creditor the
better it is for the company. This improves the ROCE and other ratio. This also shows that
the creditor trusts the company. However there is a down side as longer time taken may also
show that the company is unable to pay its creditor.

There is a decrease of 18 days in supplier credit period in 2009. This show that Cadbury is
unable to stretch its money. However it might be possible that the Cadbury wants to have a
better relationship with supplier.

LIQUIDITY AND FINANCIAL 2009 2008

Current Ratio 0.87 : 1 0.77 : 1

Quick (Acid Test) Ratio 0.56 : 1 0.55 : 1

Gearing Ratio 1.59 : 1 1.22 :1

Current Ratio- the current ratio shows the capital condition of the company. it shows wether
the company is able to pay its short term obligation or not. The ideal ratio for this is 2:1 it
means the company has twice the assets compare to its liability. Investor shows show
confident in company with 2:1 ratio.

The current ratio has increase to 0.87:1 compare to 0.77:1 in 2008. This means there is slight
improvement however the company still needs to improve its current ratio to a respectable
label of more than 1 for the investor to show some confident.

but the difference is that in quick ratio the inventories are not included in current assets. The
quick ratio shows the liquidity of the company the better the liquidity the better the company.
The ideal ratio is 1:1.

In case of Cadbury it has a ratio of 0.56:1 in 2009 compare to 0.55:1 in 2008. This show
slight improvement however it’s not up to the mark. This slight increase does not affect the
investor’s disappointment.

Gearing Ratio- companies borrow a lot of money for investment gearing ratio is a financial
ratio that compares shareholder equity (capital) to borrow funds. It’s a way to measure
company’s financial leverage. This is demonstrated by the degree by which of firm finances
are funded by owners funds compare to creditor funds. A higher gearing ratio shows more
risk involved for the creditor.

In case of Cadbury the gearing ratio was 1.59:1 in 2009 compare to 1.22:1 in 2008. This
increase in gearing ratio does not show a lot of confidence in Cadbury for any creditor.
Simply put Cadbury does not seem to be a choice for lending money.

INVESTORS RATIOS 2009 2008

Return On Shareholder’s Funds 30.806 % 35.936 %

Dividend Per Share 16.6 Pence 18.2 Pence

Earnings Per Share 20.1 Pence 22.8 Pence

Dividend Cover 1.21 : 1 1.25 : 1

Price : Earnings 39.8 : 1 26.3 : 1

Dividend Yield 2.075 % 3.033 %

Return on shareholder’s fund – it show the percentage return a shareholder can get honest
investment. this is very important for investor as the higher the return better for the investor.

In 2009 the return was 30.8% compare to 35.9% in 2008. This decrease of 5% in shareholder
returns is not favourable for Cadbury for attracting investors.

Dividend Per share- this is the amount of dividend that a shareholder will receive for each
share he owns.

Dividend of 16.6 pence for the year 2009 was lower than the dividend of 18.2 pence in 2008.

Earnings per Share - this show the allegation of company’s profit for each share of common
stock. It also gives you an idea of how much a company is earning in a financial period for
every share. EPS is directly affected by the earning of the company.

In case of Cadbury EPS of 20.1 pence in 2009 is lower than that of 22.8 pence in 2008. The
sharp decrease in EPS is a direct result of high spending of 89 million pound on non- trading
items in 2009 whereas this was only 1 million pound in 2008. There is a increase in financial
cost of about 122 million pound (it was 50 million in 2008 and 172 million in 2009). Profit
before tax is same in both the year however in 2009 the tax was 30 million but it shot up to
103 million in 2009.

Dividend Cover – this show how easily a company can pay dividend to its shareholder from
its profit a higher dividend cover means the company would be able to pay dividend easily.
Higher dividend cover install higher confident to investor in a company.

A Cadbury dividend cover ratio was 1.21:1 in year 2009 which is lower compare to 1.25 in
the year 2008. This is not a good sign for Cadbury and its investor as it show that it decrease
in profit for paying dividend. The profit from the continuing operation was 275 million
pounds in year 2009 which is lower compare to 370 million pound in year 2008.
Price Earning Ratio – price earning ratio can be define as the amount of money an investor
has to invest in order to get a 1 pound return.

In case of Cadbury investor has to invest 26.3 pound to get a profit of 1 pound in 2008 where
as in 2009 they needed to invest 39.8 pound for the same. The reason for this was the increase
of share price of Cadbury from 6 pound in 2008 to 8 pound in 2009. The increase in share
price is good for Cadbury however EPS should also increase in the same proportion.

Dividend Yield - dividend yield show the amount which the company pay out in dividend
compare to its share price. The higher the dividend yield the more attractive the company is
for the investor.

In 2009 Cadbury had dividend yield of 2.5% whereas it was 3.033% in the year 2008. This
decrease does not make Cadbury a very attractive proposition for investment.

Financial crisis and impact on Cadbury:

The recent financial crisis started when the US housing market bubble burst in 2007. Since
every major bank had invested in mortgaged backed security this toxic debt was transported
entire world. Suddenly every bank was worried about their liquidity and inter-bank lending
was stopped. This created a severe lack of liquidity in the system which effected every one
including the customer and as well as investors.

Cadbury is one of the largest confectionary in the world which means there product mainly
consist of high sugar content stuff like chocolates. Due the financial crisis there was a lack in
disposable income for consumer. A lot people lost their jobs. Expenditure declined sharply.
This had a huge effect on Cadbury which as it meant that people were spending less in self-
indulgence which directly affects the sales of Cadbury products. This is clearly evident by the
fact that before the crisis Cadbury showed an average growth of 6% in revenue where as in
2009 it went down. Sales and net profit actually increased in 2009 slightly which means that
that there was a tiny increase in profitability.

Due to problems of liquidity in system long term burrowing declined. Banks didn’t want to
lend which means companies like Cadbury faced problems in securing loans or other forms
of credit which affected them negatively.
Financial crisis also had very serious effect on the share market. Every share market around
the world plummeted; investors’ confidence was low which meant people didn’t want to
invest.

The change in tax rates from 7.5% to 27.3% in 2009 had an adverse effect on Cadbury’s
earnings as it had to pay 103 million pound tax compared to 30 million pound it paid in 2008.

There is one crucial factor which shows that investors had faith in Cadbury as the share prices
of Cadbury was up to 800 pence from 600 pence. It might be possible that the jump in share
price was due to offer given by Kraft. However it does show that Cadbury did have
something to offer as Kraft is world’s largest confectionary. During the crisis as well cadbury
did make some good money for its investor. That is why Kraft had the confidence to offer a
200 pence margin on each share.

Financial strategy:

In financial crisis brings a lot of problems for Cadbury. In terms of importance liquidity risk
is the major concern. Apart from that other major concern is exchange rate risk, interest rate
risk and poor sales figures. We should take on each problem one by one:-

Liquidity risk: Its hard secure finances during crisis. It’s even more important to use existing
asset to the fullest. Now the current asset of Cadbury amounts 8,129 million pounds. Cadbury
can sell some of its fixed asset in order to release the capital. This might give it some cash in
hand and help improve liquidity. Cadbury can also use derivatives like option where it’s a
right but not obligation to buy or sell specific commodity at a certain price (Arnold, 2008).
This would help Cadbury reduce risk as it can get fixed rate for its raw materials and avoid
fluctuations in the market.

Interest rate risk: Interest rate risk is another which is faced by Cadbury. As being a big
company it’s considerably uses loans, bonds and overdraft for credit. To mitigate interest rate
risk Cadbury can use Call option and future contracts. Fixed interest rate will considerably
reduce risk.

Exchange rate risk: Since Cadbury is MNC with operation different countries around the
world. This means that it has work with a lot of currency. Cross Currency Swaps can be used
by Cadbury. The exchange rate is volatile. Using Currency swap will help Cadbury to avoid
exchange rate risk.
Cadbury can invest more in product development, advertisement, and diversification in order
to increase demand and to maintain its position in developing economies.

Recommendations and conclusion:

In the light of current global financial crisis it is difficult most of the companies to generate
profit for its investor. However Cadbury did make a substantial profit for its investors. The
Share prices were up by 200 pence from 600 pence to 800 pence in last couple of years. Even
the sales are up. Net profit is up. The fact that Cadbury has very strong presence in upcoming
markets it seems like Cadbury does have a good future for its investors.

Cadbury’s performance may not be very strong compare to its performance before the crisis
however taking into account the effects of crisis Cadbury does seem like decent investment
opportunity as its return on shareholder funds was 30% high, earning per share is 20 pence
which might be slightly less compare the year before but it’s still considerably impressive if
take into account the crisis.

The fact that Cadbury had strong business values and brand name will allow Cadbury to
penetrate developing economy a lot more.

WORKING NOTE :-

PROFITABILITY 2009 2008

1. Gross Profit Margin 46.276 % 46.693 %

Gross Profit/ Sales * 100 2765/5975 * 100 2514/5384 * 100

2. Net Profit Margin 12.78 % 10.86 %

Net Profit/ Sales * 100 764/5975 * 100 585/5384 * 100

3. Return On Capital Employed (ROCE) 6.63 % 7.26 %

 EBIT/Long-Term Capital * 100 378/5695 * 100 400/5507 * 100

ACTIVITY RATIOS

1. Net Asset Turnover 1.04 Times 0.97 Times

Sales/ CA-CL 5975/8129-2434 5384/8895-3388

2. Debtors Days 60 Days 72 Days

Debtors/Credit Sales * 365 978/5975 * 365 1067/5384 * 365

3. Stock Turnover 86 Days 101 Days

Stock/COGS * 365 757.5/3210 * 365 794/2870 * 365

4. Supplier Credit Period 179 Days 197

Days
Creditors/COGS * 365 1577/3210 * 365 1551/2870 * 365

LIQUIDITY AND FINANCIAL

1. Current Ratio 0.87 : 1 0.77 : 1

CA/CL 2125/2434 2635/3388

2. Quick (Acid Test) Ratio 0.56 : 1 0.55 : 1

CA-Stock/CL 2125-748/2434 2635-767/3388

3. Gearing Ratio 1.59 : 1 1.22 :1

Long Borrowing/Share Holder Fund 1414/888 1255/1024

INVESTORS RATIOS

1. Return On Shareholder’s Funds 30.806 % 35.936 %

EATPD/ Share Holder Fund*100 273561/888,000 367992/1024000

2. Dividend Per Share 16.6 Pence 18.2 Pence

Total Dividend/No. Of Share 226/1361 295/1614
3. Earnings Per Share(EPS) 20.1 Pence 22.8 Pence
EATPD/ No. Of Share Given Given

4. Dividend Cover 1.21 : 1 1.25 : 1

EPS/Dividend Per Share 20.1/16.6 22.8/18.2

5. Price : Earnings 39.8 : 1 26.3 : 1

Current Share Price/EPS 8/0.201 6/.0228

6. Dividend Yield 2.075 % 3.033 %

Dividend Per Share/Share Price* 100 0.166/8 * 100 0.182/6*100