Corporate Reporting Case Study Diageo plc

corporeal Reporting Case Study Diageo plc1. Information about the comp allDiageo, formed in 1997, from the merger of Guinness PLC and Grand Metropolitan PLC, is a multinational company, trading in over 180 marts across the world, listed on both the London Stock Exchange (DGE) and the New York Stock Exchange (DEO). It is the worlds leading subvention drinks line of business.The company containes 24,270 employees worldwide with offices in around 80 countries. Company takes up about 30% global markets, and holds worlds top 20 blemishs include Smirnoff, Johnnie Walker, Captain Morgan, Baileys, JB, Jos Cuervo, Tanqueray, Guinness, pileus Royal, Beaulieu Vineyard and Sterling Vineyards wines, and Bushmills Irish whiskey.Key numbers for fiscal year ending June, 2009Sales $15,378.0MOne year exploitation (4.7%) simoleons income $2,849.0MIncome growth (10.6%) theme Answers (2009) Diageo Information from answers2. Competitive purlieu1 Industry Competition OverviewThe world drink market is broadly exploited in the mature markets. Among the competitors, the most prospered atomic number 18 Pernod Ricard Group, Majestic Wine PLC, Bacardi Company Limited, Brown-Forman Corpo dimensionn, hatful Brands, Inc. Diageo PLC holds 30 per cent of the total drink market.2 Globalisation and Mergers AcquisitionsThere is a rapid growth in international c be and increasing globalisation of Liquor industry. The main competitions focus on the emerging market and expanding the global market shares by mergers and acquisitions. Pernod Ricard and Fortune Brands jointly buyout the worlds second largest spirits company Doumic in UK. In order to precedence over its competitors, the company speeds up mergers and acquisitions internationally.3 Legislation and Economic EnvironmentThe EU will enact legislation to uniform the standards for wine production. Regulation is also rapidly developing in emerging markets, which may compounds some difficulties in taking up the emerging market.Economi c crisis had a deep impact on the pattern of alcohol manufacturing competition, which had a varied impact on Diageos brand execution of instrument and parts of the brands gross revenue fell significantly.Evaluation of Financial StatementsThe Corporations fiscal frame is evaluated by ratio analysis, horizontal analysis and vertical analysis, which is measured by using FinSAS, according to the Income Statements and Balance Sheets, compared with an another(prenominal) biggest drink manufacture-Majestic Wine PLC.1. Ratio AnalysisThe value of the firm is determined by its profitability and growth. In ratio analysis, I compare the ratios of the Diageo PLC for six years and compare the group with another firm in the same industry. The objective of ratio analysis regarding to the firms financial position is to evaluate the effective of the groups policies in operating management, investment management, financial strategy and dividend policy.1) Overall Profitability AssessmentThe hard roe is a comprehensive indicator of firms performance. The hard roe of Diageo shows a significant amplification from 2007 to 2009, from 33.94% to 43.78%, much higher than its competitor in UK. On average over long periods, large popularly traded firms in the U.S. reelect ROE in the range of 11 to 13 percent. The ROE of Diageo is stable at a relatively high direct around 30% to 50%. That indicates the managers are suitable performed in employing the funds invested by the firms shareholders to vex returns. Diageos strategies of focusing on profit improvement, such as acquisitions, restructuring initiatives and targeting at emerging markets, gains positive results.2) operational Management AssessmentThe Gross Profit Ratio and EBIT bank show the profitability of companys operating activities.The figures above show that the Gross Profit Ratio and EBIT Margin of Diageo are much higher than Majestic Wine plc, indicating a seriously competition in the economic situation. Both ratios of D iageo decreased slightly to 1.59% and 1.28% form 2008 to 2009 callable to the impact of economic downturn, especially in Spain and Ireland. However, both ratios maintained at a relatively high level, validating the companys stated intention in its yearbook report of focusing on profitability. Diageo has grown profits in the mature markets and made great advances in emerging markets by volume, by net sales, and by operating profit.3) Financial Management AssessmentThe level of Diageos financial leverage is s slightly higher than Majestics and increased significantly from 2006 to 2009. Financial leverage increases the Groups ROE as long as the cost of the liabilities is less(prenominal) than the return from investing these funds. What we should pay attention to is that while a firms shareholders can potentially benefit from financial leverage, it can also increase their find.4) Investment Ratio AssessmentThe DPS of Diageo increased steadily from 2005 to 2009, which reflects a stabl e dividend policy. Reported EPS growth increases by 10% in the recession period. The profits come from two restructuring initiatives in the year, which generate 160 million of cost reductions in all, and from the Exchange rate movements which increase net sales by 1,095 million.5) Liquidity Ratio AssessmentThe above ratios attempt to measure the firms ability to repay its current liabilities, i.e. short-term solvency. The Current Ratio of Diageo is significantly big than Majestics, about 1.35 on average. Diageos inventory situation form 2005 to 2009 was uncomfortable when measured in terms of quick ratio, which is too low (less than 1) for manufactory industry. Diageo paid less attention to improve the inventory management.6) Financial Strength AssessmentA companys financial leverage is also influenced by its debt financing policy. The Diageos Debt Ratio and D/E Ratio are higher than its competitors, and its D/E Ratio increased significantly from 2006 to 2009. From the tables above , we can find out that Diageo relies on debt to some extent. It is optimal for firms to custom debt in their metropolis social organization for its low costs. However, too much reliance on debt financing is potentially costly to the firms shareholders. Further much, Diageo will face financial distress if it defaults on the interest and principal payments.2. Horizontal AnalysisSales were increasing significantly from 2005 to 2009, especially in 2009, reflecting the contribution from brands outstanding performance in Asia peaceable and Europe, which offsets the impact by the weakness in North America. The operational progress and foreign exchange benefits stated by annual report also increase its net sales.The increase of Cost of proficient Sales is more than Sales increase for the accounting period, which means that it costs more to sell the product than we in reality made.The growth of Operating Expense exceeds the growth of Gross Profit by 18.53%.This means that our sales exc eeded the expenses, and the company gains the m angiotensin-converting enzymey.Income Tax Expense exception, other items on the income literary argument are increase, which indicates a decline in profitability of the company.The increase of Net Income results in the change for EPS on LSE and DEO.3. Vertical AnalysisThe proportion of COGS increased from 2005 to 2009 by 2.28%, which shows the direct effect on the companys Gross Profit. The decrease of the proportion of Operating Income and the increase of proportion of Interest Expense results in the slightly decline of Net Income.2) not bad(p) Structure analysisThe total long-term liabilities of Diageo PLC take more than half parts of its capital structure both in 2008 and 2009. Its capital structure is far more risky than the Majestic Wine PLC which contains large proportion of equity and current liabilities. Under the risk-based capital structure, low liquidity enhances the Diageos financial risk. On the other hand, the non-curre nt assets, which gain high level of return, take up a large proportion, so the profitability of the company has also been improved.ConclusionDiageos strategy is to generate consistent top line growth while enhancing its operating margins and return on invested capital. The company seeks out selective acquisitions to support brands growth which strengthen its market position in both United Kingdom and abroad.In the future, according to the companys strategy, Diageo looks for the opportunities in emerging markets, such as Brazil, Russia, India and China.Annual report reveals that the Companys credit risk comes from financial instruments and business activities. Diageo minimizes its financial credit risk through and through the application of risk management policies approved and monitored by the board. Trade and other receivables exposures are managed topically in the operating units where they arise and credit limits are set as deemed appropriate for the customer. There is no concent ration of credit risk with respect to trade and other receivables as the group has a large number of customers which are internationally dispersed1.Although the corporate gains stable profitability, it has several financial management limitations. Its capital structure contains too many long-term debts and inefficient inventory management may add the liquidity risk.SECTION BCorporate GovernanceThe goal of Corporate Governance is to solve the agency problem and create sustainable shareholders wealth. The corporate cheek practices of Diageo PLC mainly include internal control by board of directors and stipend policy.Key to committees21. Audit2. Executive (comprising senior management)3. Nomination4. RemunerationComes from the figures above and corporate governance report, the board has an appropriate structure and directorship.The size of board is appropriate, in which case, the decision making and internal control are effective and can make sure all the directors are participating in the significant affairs.Good balance between executive and non-executive directors. There are fewer executive directors and more non-executive directors. Putting the outside directors into the committees can prevent manager conspiracy booty the shareholders profits.The Board directions are constructed clearly according to their functions, which plays a positive effect to the board 1) Define the functions of board of directors. 2) The directors can access to company information more easily. 3) In favor of non-executive directors of the companys affairs involvement.The company has experienced experts serving on their board. The executive directors have a plenty of experience in the drink business, back up by a wide range of financial and technical experience of the non-executive directors.2) IndependenceThe Non-Executive Directors play an important part in corporate accountability and governance through their membership of sub-committees Audit Committee, Executive Committee, Nom ination Committee and Remuneration Committee, which improves the boards independence.The non-executive directors have a particular responsibility for ensuring that the business strategies proposed are fully discussed and critically reviewed. This enables the directors to promote the success of the company for the benefit of its shareholders as a whole,32. Remuneration Committee1) The composition of Remuneration CommitteeThe Remuneration Committee consists of Diageos non-executive directors, all of whom are independent. In that case, the committee members have no financial interests about themselves conflicting with shareholders, which reinforce the committees independence.2) Responsibilities for the corporate governanceThe responsibilities of the Committee include4Making recommendations to the board on remuneration policy as applied to the executive directors and the executive committee.Setting, reviewing and approving individual remuneration arrangements for the chairman, executive directors and executive committee members including terms and conditions of employment.Determining arrangements in relation to termination of employment of each executive director and other designated senior executives andMaking recommendations to the board concerning the introduction of any new share motivator throws which require approval by shareholders.Types of Main Executive Compensation5Base Salary The Committee takes base salary into the consideration of the value created by individual, performance and the international market data.Annual Bonus Incentives year on year delivery of short term performance goals. Cash bonuses were earned by other senior managers for achieving relevant performance targets for the financial year.Share Options Incentives tether-year earnings growth above a minimum threshold. Provides focus on increasing Diageos share hurt over the medium to longer term, however, may increase the manipulating of accounting profits.Performance share awards Provi des focus on delivering superior returns to shareholders.Pension Provides competitive post-retirement benefits.Long termination Incentive Plan (LTIP) These awards vest three years after grant and are subject to satisfying the appropriate performance criteria over the relevant three year performance period. This policy can prevent manager focusing on manipulating short-term earning.Ownership StructureDiageo Plc is incorporated as a public limited company in England and Wales. It is listed on the London Stock Exchange, as DGE, and on the New York Stock Exchange, as DEO.The Ownership Structure of Diageo PLC is classified into Block-Holders Ownership. Capital Group Companies, Inc. are the only(prenominal) major shareholders, with 123 million ordinary shares (4.01% of the issued ordinary share capital) and no different voting rights. No other major shareholders are listed in Diageos Annual Report.Audit Independence1. The size up report opinion6The financial statements give the objecti ve and fair description of the Groups affairs at 30 June 2009 and its profit for the year then ended.The statements have been prepared accordance with IFRS.The statements have been prepared accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.2. AssuranceThe independent hearer provides a positive assurance. It gives the audit opinions that the financial statements meet the requirement of IFRS, Companies Act and IAS Regulation. The mentioned above can improve the independence of external auditing.3. Non-audit services7The group has a policy on the use of the external attender for non-audit services, which is reviewed annually, most recently in June 2009.These pre-approved non-audit service categories may be summarized as followsAccounting advice, employee benefit plan audits, and audit. or other attestation services, not otherwise prohibiteddue diligence and other support in respect of acquisitions, disposals, training and other business in itiatives andCertain specified tax services, including tax compliance, tax planning and related implementation advice in relation to acquisitions, disposals and other reorganizations.All the non-audit services are down the stairs the supervision of audit committee which avoids the interest conflict while audit and non-audit services are provided by external group audit simultaneously.Audit Committee1. The main features and characteristicsComposition Exclusively Independent Non-Executive Directors.Assurance Financial reporting is evaluated by the Audit Committee.Background of committee members The corporate requires at least one committee member is a financial expert.The term of office The term of office of members should not be too long, generally 3 years.2. The role in enhancing the credibility of the published informationThe audit committee takes the following responsibilitiesMonitor internal control and risk management throughout the Group.Review the objectivity of the slowdown and annual financial statements including a review of the significant financial reporting judgments contained in them, before submission to the full board.Monitor the effectiveness of the global audit and risk function.Critically review the groups policies and practices concerning business conduct and ethics.Monitor the companys relationship with the external auditor, including its independence and managements response to any major external audit recommendations. check to the mentioned above, audit committee can monitor the key financial and operational risky areas, review the fairness and effectiveness of internal control system, and oversight of external audit and internal audit on the implementation of the recommendations of internal control through the internal audit functions.3. The role in enhancing the independence of the external auditor8In reviewing the independence of the external auditor, the audit committee considered a number of factors. These include the standing, exp erience and tenure of the external audit director the nature and level of services provided by the external auditor and confirmation from the external auditor.The audit committee established the policy to reinforce the independence of external auditors.The provision of any service must be approved by the audit committee.The fees generated from non-audit services are under the supervision of audit committee.Consulting work cannot be performed for audit clients. freewill Disclosures1. The evaluation of voluntary disclosure9Environmental disclosureThe Companys Environmental Statement provides a detailed description of environmental policy regarding to the improvement in environmental performance, energy and greenhouse gases, Water management, Brands, packaging and innovation, Supply chain, Research and transfer of technology, Hazardous substances, and Emergency response.Social disclosureDiageo PLC makes a real contribution to creating a positive role for alcohol in society, minimizing the harm from misuse and promoting the social benefits of responsible drinking.The companys investing in employee development increases the capability of its workforce, creates value and spreads wealth through the community. The company sets some policies about safety at work, employees health, employees capability and development.Ethical disclosureThe liquor has a negative impact on peoples health, and the Diageo not only focuses on the markets expanding but also give a positive guidance to the public.2. Three main potential impactsThe Company contributes to the wider community through their involvement in corporate citizenship, volunteering and charitable activities, which gain positive impact on corporate reputation.One of the most significant impacts of its business on local economies is to provide employment.The occupational health and safety of employees is a high priority, which enhances the motivation and performance of employees.