Saturday, June 09, 2007

Financial analysis of Cookson Group plc

1. Company Overview:

Cookson Group plc is a FTSE250 company material science company operating on a worldwide basis in ceramics, electronics and precious metals.

The modern version of the company was founded by Roland Cookson which was originally founded in 18th century in Tyneside, England. Since 1949, Cookson group have grown to be a global research oriented company in its business field.

According to the company website, Cookson group’s Ceramics division is the world leader in the supply of advanced flow control refractory products and systems to the global steel industry and a leading supplier of specialist ceramics products for the glass and foundry industries. It is also a regional leader in the US, UK and Australia in the supply and installation of monolithic refractory linings. The Electronics division is a leading supplier of advanced surface treatment and plating chemicals and assembly materials to the automotive, construction and electronics markets. The Precious Metals division is a leading supplier of fabricated precious metals (primarily gold, silver and platinum) to the jewellery industry in the US, the UK, France and Spain. Products include alloy materials, semi-finished jewellery components and finished jewellery.

2. Financial Overview:

Company’s latest filed accounts are for 2006. Figures are taken from the group’s consolidated accounts. 2006 was only the second year that the Group accounts have been prepared in accordance with International Financial Reporting Standards (IFRS). Therefore, only 2 years of comparable financial data are available for credit analysis. For the 12 months ended in 2006, sales revenue was £1590 million, 9% up from £1457m in 2005. Profit before tax was £113.3m a 30% increase from profit before tax of 2005 of £101.1m. The trading profit went up from £124.9 million to £150.3 million. The earnings per share rose by 27% to 46.6p from 36.8p. Earning per share, together with group’s strong cash flow generation has enabled the board to recommend the shareholders a final dividend of 7.0 pence for 2006. This final dividend, together with interim dividend paid in October 2006, makes a total of 10.0 pence per ordinary share for the year. The group has also managed to reduce its net debt to £181 million, a reduction of £112 million from 2005.

In addition to the above information, few recent changes have taken place in the Group. Two Assembly Materials factories of Cookson Group plc will be closed and will be relocated to Mexico due to a cost cutting operation. In the chemistry sector in Europe, facilities are being consolidated by closing factories in Spain and Italy and production in Germany and Netherlands will be expanded to support the growth. The buy-out of former 49% J V Partners in chemistry sector’s China business has been completed, which will also support the growth in the important market. The non-core Florida based PVC cements business was sold in December 2006.

3. Analysis of financial position and performance:

Liquidity Ratios:
The liquidity ratios mainly comprise of two ratios, the quick ratio and current ratio. The liquidity ratios look at business risk. The stronger a company from a financial point of view, the less risky it is. (Weygandt, 2007)

The quick ratio (also known as Acid Test) compares cash minus inventories to the financial liabilities they expect to incur within a year’s time. The quick ratio for the company in 2006 is 1.04:1. The quick ratio in 2005 was 1.32:1. As we can see, the quick ratio for 2006 is very close 1.

The current ratio compares current liabilities to cash in hand now plus other inflows including accounts receivable. The current ratio of 2006 is 1.45:1; in 2005 the current ratio was 1.86:1. The current ratio for 2006 is lower than the ratio of 2005; it is below the arguably standard for current ratio which is 2.

Profitability ratios:

The profitability ratios measure the income or overall success of a company for a given period of time. Profit/loss affects the company’s ability to obtain debt and equity financing. (Weygandt, 2007)

Return on equity (ROE) shows how much profit a company earned in comparison to the total amount of shareholder equity and reserve found on the balance sheet. ROE for the group for 2006 was 13.68; in 2005 the return on equity was negative.

Return on capital employed (ROCE) is used to measure the returns that a company is generating from its capital employed. It is used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital. Return on capital employed for the group in 2006 was 15.91 and for 2005, it was 10.01.

The gross profit margin measures the percent of revenue left after paying all direct production expenses. In 2006, the Gross profit margin for the group was 27.89%; in 2005 it was 27.80%.

The net profit margin is a measure of percentage of each pound of sales that results in net income. The net profit margin was 6.83 in 2006 and 4.80 in 2005.

The profitability on both gross profit and net profit has improved.

The asset turnover ratio measures how efficiently a company uses its assets to generate sales. The asset turnover ratio for the company was 1.27 in 2006 and was 1.13. This means, in 2005, Cookson Group plc generated £1.13 for every £1 it invested which went up to £1.27 per pound invested in 2006.

Capital Structure:

Gearing or leverage is a very important ratio which illustrates the long-term funding provided internally by shareholders to that contributed externally by lenders. Gearing ratio provides some indication of the company’s ability to withstand loses without hampering the interests of creditors. Gearing ratio for 2006 was 84% and for 2005, it was 137.5%. A ratio of 84% means that creditors provided 84% of Group’s total assets. The standard gearing ratio for a company should be around 50% to be deemed as financially healthy. Although Group is improving, it’s still behind the standard.

Interest coverage provides an indication of the company’s ability to meet interest payment as they come due. Interest coverage for the company in 2006 was 5.01 and in 2005, it was 3.50. This means for the as of 2006, group’s interest is covered for 5 payments.


Appendix

Current Assets-Inventories

Quick ratio = ------------------------------

Current liabilities

607.5-171.2

2006 -------------

418.5

=1.04

630.4-179.6

2005 -----------------

339.1

= 1.32

Current Assets

Current ratio =---------------------

Current Liabilities

607.5

2006 ----------

418.5

=1.45

630.4

2005 --------------

339.1

= 1.86

Profit after tax

Return on Equity = ------------------------------x100

Share capital+ reserves

66.4

2006 ---------- x100

484.2

=13.68%

(7.6)

2005 ------------- x100

461.7

= (1.64)

Profit before income and tax

Return on capital employed: ----------------------------------x100

Equity+ Long term debt

113.5+28.3

2006 --------------- x100

484.2 + 407

=15.91

78.5+31.3

2005 ----------------- x100

461.7+634.9

=10.01

Sales-Cost of sales

Gross Profit Margin:---------------------x100

Sales

1661.4-1198.2

2006 ------------------ x100

1661.4

=27.89%

1634.6-1180.2

2005 ---------------- x100

1634.6

=27.80%

Net profit

Net Profit Margin: --------------x100

Sales

113.5

2006 ----------- x100

1661.4

=6.83

78.5

2005 ------------- x100

1634.6

=4.80

Sales

Asset Turnover: ------------

Assets

1661.4

2006 ------------

1309.7

=1.27

1634.6

2005 -----------

1435.7

=1.13

Long term debt

Gearing ratio:----------------------x100

Equity

407

2006 --------------x100

484.2

=84%

634.9

2005 --------------x100

461.7

=137.5%

Profit before income and tax

Interest Cover: ---------------------------------

Interest expense

113.5+28.3

2006 -----------

28.3

=5.01

78.5+31.3

2005 -------------

31.3

=3.50


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