Financials of Company for Investment: Brambles Report

Subject: Finance
Pages: 5
Words: 1480
Reading time:
6 min

Executive Summary

Brambles Limited is a leading logistics company whose headquarters is in Sydney, Australia. Brambles grew from a small company established by Walter Bramble around 1890 to a multinational operating in six different continents. This report assesses Brambles as a potential company for investment.

The major tool for analysis is financial ratios over three years between 2009 and 2011. These are the most recent financial results.

The report finds Brambles to be a suitable company for investment only for risk friendly investors. The high debt ratios make it unattractive to investors who prefer lower risk profiles despite its impressive profit ratios.

Introduction

Brambles Limited is a leading logistics company whose headquarters is in Sydney, Australia. Brambles grew from a small company established by Walter Bramble around 1890 to a multinational operating in six different continents. Brambles Ltd is currently listed in the Australian stock exchange. The company has three major business divisions. These are IFCO, CHEP and Recall.

IFCO is the newest division. The company formed IFCO to respond to the increasing environmental concerns. IFCO serves “green” businesses by providing transport and logistics solutions. These solutions are based on reusable plastics, which reduce negative environmental impact. IFCO is very popular in America. This division is a market leader in its segment. Given the continuing adoption of green business practises, IFCO also has great potential for growth (Invest Smart 2012, p. 2).

Recall offers business support through information management. This division offers specialized data storage, retrieval and destruction services. These services are essential for businesses in this information age. Recall’s customers are companies operating in environments with high information traffic. They include banks and hospitals. Recall also has a promising future and high growth potential.

CHEP is the oldest division at Brambles. It forms the foundation for the other divisions. CHEP is engaged in provision of logistics solutions. The division provides pallets for manufacturers, retailers and distributors interested in moving goods with minimum destruction. CHEP also provides containers and transport solutions. Globalization fuelled CHEP’s growth. Companies that outsource their production or export their final products are CHEP’s major customers.

Tom Gorman is the CEO of Brambles Limited. He has led the company for the past four years since 2008. The executive and non-executive team are composed of experienced leaders too. These leaders are responsible for the preparation of the financial statements. This report focuses on figures obtained from the most recent financials.

Financial Analysis

This report is based on financial analysis performed on Brambles’ historical financial statements between 2009-2011. The analysis incorporates several measures of a company’s financial health. The analysis includes liquidity, leverage, profitability and activity ratios. Each ratio measures a particular aspect of the company’s financial performance. We compute and interpret these ratios. The appendix contains a full list of the ratios computation.

Profitability Ratios

Profitability ratios aid investors in determining how well the potential investment will pay returns. In this case, three ratios are computed: Return on Capital Employed (ROCE), Profit Margin and Asset Turnover.

RATIO RESULT
2011 2010 2009
Return on Capital Employed (ROCE) 14% 19% 17%
Profit Margin 17% 17% 18%
Asset Turnover 0.79 1.09 0.97

The Return on Capital Employed is obtained by dividing the Sales revenue by the Equity and Long Term Liabilities. Equity and Long-term Liabilities are used as the proxy for capital employed. This ratio indicates how well the company managed the resources at its disposal during the year. Brambles posted the best returns in 2010 of 19%. This was an improvement from 17% in 2009. However, there was a drop to 14% in 2011. This shows that the company increased its assets disproportionately to its profit.

Brambles Ltd seems to maintain an almost constant net profit margin. This is between 17% and 18%. This is a good indicator that the company manages its operating expenses properly and consistently (Invest Smart 2012, p.3). The asset turnover indicates how much the company makes using its capital employed. Capital employed is used since it gives a true picture of the resources available to the company during the year. Brambles’ asset turnover improved from 0.97 to 1.09 in 2010. However, like the ROCE, asset turnover decreased to 0.79 in 2011. The reason for this is still the disproportionate increase in company assets compared to profit. The decrease of 0.3 is not too large as to be alarming. However, investors should watch this trend to see that it does not continue.

Liquidity Ratios

Liquidity ratios give an indication of a company’s ability to meet all its obligations in a timely manner as they arise (Barrow 2011, p. 66). In the case of Brambles, we computed three ratios. The combination of these ratios gives an indication of the company’s liquidity position.

RATIO RESULT
2011 2010 2009
Current Ratio 0.69 0.76 0.85
Quick Ratio 0.66 0.73 0.82
Inventory Turnover Period 5.1 Days 3.4 Days 3.7 days

The current and quick ratio indicate Brambles’ ability to meet its current liabilities out of its current assets. Unfortunately, it seems Brambles operates on a lot of short-term credit. The payables constitute a large amount in the current liabilities. The current ratio has been worsening since 2009. It has decreased from 0.85, to 0.76 and finally 0.69. This trend is alarming. It raises the question of whether Brambles is overtrading.

The Quick ratio removes the distortion effect of inventory on the current ratio. Brambles posted an even poorer trend in the quick ratio than the current ratio. This is another cause of alarm. Finally, the inventory turnover period indicates how long items stay in inventory before the company manages to sell them. Companies consider shorter inventory turnover days better than longer turnover days. In this case, Brambles Inventory days increased to an all time high of 5.1 days in 2011 (Brambles Limited 2012, p. 10). This could indicate difficulty in moving inventory.

Investors should however not put too much emphasis on the inventory ratio since Brambles is not primarily a trading company. Most clients rent the pallets and containers instead of buying them.

Leverage Ratios

Leverage ratios indicate the financial risk a company is exposing itself to by using debt financing.

RATIO RESULT
2011 2010 2009
Debt Ratio 68% 67% 62%
Debt: Equity Ratio 217% 201% 257
Capital Gearing Ratio 58% 57% 66%

All the computed leverage ratios indicate that Brambles is a highly levered company. It depends on debt to finance most of its operations. The company decreased its leverage in 2010, probably by paying off a long term loan. However, leverage by all the measures increased slightly in 2011. An investor who is averse to financial risk should not invest in brambles.

Leverage benefits equity holders. They get increased returns from the use of debt. However, it also puts them at a high risk of loss if the company defaults on its loans.

Conclusion

This report has assesses Brambles Limited in terms of its major ratios. The profitability ratios paint a positive picture of the company. The company is definitely profitable. The current divisions also show promising growth potential. Therefore, investors can safely assume that this trend of profitability will continue. The liquidity ratios are slightly low. On average, Brambles can meet only 60% of its current liabilities on demand. The explanation for this is the high trade payables and lag between delivery and payment. The leverage ratios are a cause of alarm. They are exceptionally high, indicating that Brambles is a high-risk company. The EPS and Dividends contained in the appendix both show improvement in 2011.

Investors can invest in Brambles and expect good returns in future. However, due to the high leverage, risk averse investors should avoid investing in Brambles.

Appendix

PROFITABILITY ANALYSIS 2011 2010 2009
($ M ) ($M) ($M)
1 Return on Capital Employed (ROCE)
Profit Before Interest and Tax (PBIT) 809.2 724.5 718.2
Capital Employed (Total Assets- Current Liabilities) 5,879.80 3775 4105.7
ROCE 14% 19% 17%
2 Profit Margin
PBIT 809.2 724.5 718.2
Sales Revenue 4,672.2 4146.8 4018.6
Profit Margin 17% 17% 18%
3 Asset Turnover
Sales Revenue 4,672.2 4146.8 4018.6
Capital Employed 5879.8 3775 4105.7
Asset turnover 0.79462 1.0984 0.9787
LIQUIDITY ANALYSIS
4 Current Ratio
Current Assets 1,313.5 868.2 852.1
Current Liabilities 1,888.2 1,135.3 992.8
Current Ratio 0.69564 0.7647 0.8582
5 Quick Ratio
Current Assets less inventory 1,257.0 834.7 817
Current liabilities 1,888.2 1,135.3 992.8
Quick ratio 0.66571 0.7352 0.8229
6 Inventory Turnover Period
Average inventory 56.5 33.5 35.1
Cost of Sales (Operating Expenses) 4004.4 3525.1 3402.1
Inventory turnover 5.14996 3.4687 3.7657
LEVERAGE ANALYSIS
7 Debt Ratio
Assets 7,768.0 4,910.3 5098.5
Debts 5316.6 3277.7 3669.2
Debt Ratio 68% 67% 72%
8 Debt : Equity
Total Debt 5316.6 3277.7 3669.2
Total Equity 2,451.4 1,632.6 1429.3
D:E 217% 201% 257%
9 Capital Gearing
Prior Charge Capital 3,428.4 2,142.4 2746.4
Prior Charge Capital plus equity 5,879.8 3,775.0 4,175.7
Capital gearing 58% 57% 66%
Others
10 EPS (Cents) 32.9 31.8 32.6
11 Dividends (Cents) 26 25 30

References

Barrow, C 2011, Practical Financial Management: Key Financial Statements Tools of Financial Analysis Business Planning and Budgeting, New York, Kogan Page.

Brambles Limited, 2012, Investors, Web.

Invest Smart, 2012, Brambles Limited, Web.