1

Performance Measurement – Nichols Plc

Olanbiwonnu Sayo Abdulai {P2706397}

 2

Task One

a) Liquidity Ratios

1. Current Ratio

FY2020

Current ratio= Current Assets/Current Liabilities

£83,029,000/£21,669,000

=3.83

FY2021

Current ratio= Current Assets/Current Liabilities

£103,247,000/ 33,033,000

= 3.13

2. Net Working Capital Ratio

FY2020

Net Working Capital Ratio = (Current assets - Current liabilities and Expenses) ÷ (Total assets)

Expenses: Distribution expenses £ 7,979,000 + Administrative expenses £ 35,077,000 + Finance

expense £ 190,000= £ 43,246,000

Current liabilities + Expenses: £21,669,000 + £ 43,246,000= £ 64,915,000

Net Working Capital Ratio: (£83,029,000-£ 64,915,000)/£145,952,000

= £18,114,000÷£145,952,000

= 0.12

FY2021

Net Working Capital Ratio = (Current assets - Current liabilities and Expenses) ÷ (Total assets)
 3

Expenses: Distribution expenses £ 9,129,000 + Administrative expenses £ 73,601,000 + Finance

expense £ 158,000= £ 82,888,000

Current liabilities + Expenses: £33,033,000+ £ 82,888,000= £ 115,921,000

Net Working Capital Ratio: (£103,247,000-£ 115,921,000)/£ 131,168,000

= -£12,674,000÷£131,168,000

= -0.10

b) Profitability Ratios

1. Return on Net Worth

FY2020

Return on Net Worth = Profit after Tax (Net Income) / Shareholders’ Equity × 100

Profit After Tax= £ 4,854,000

Shareholder’s Equity= £ 119,876,000

Return on Net Worth= (£ 4,854,000÷£ 119,876,000) × 100%

= 0.04049×100%

= 4.05%

FY2021

Return on Net Worth = Profit after Tax (Net Income) / Shareholders’ Equity × 100

Profit After Tax= -£ 22,168,000

Shareholder’s Equity= £ 93,026,000

Return on Net Worth= (-£ 22,168,000÷£ 93,026,000) × 100%

= -0.23828×100%

= -23.83%

2. Earnings Per Share

 4

Earnings per share = Net Profit ÷ Total No. of shares outstanding

FY2020

Earnings per Share= Profit After Tax/Number of Ordinary Shares

EPS=PAT÷NOOS

=9440÷3697

= 2.55

FY2021

Earnings per Share= Profit After Tax/Number of Ordinary Shares

EPS=PAT÷NOOS

=17038÷3697

=4.608

c) Investor Ratios

1. Price Earnings Ratio (P/E Ratio)

FY2020

Price Earnings Ratio (P/E Ratio) =Share Price/Earnings Per Share

Earnings per Share= Profit After Tax/Number of Ordinary Shares

EPS=PAT÷NOOS

=9440÷3697

= 2.55

Share price Earnings per share= £12.90÷2.55

=5.058

FY2021

Price Earnings Ratio (P/E Ratio) =Share Price/Earnings Per Share

 5

Earnings per Share= Profit After Tax/Number of Ordinary Shares

EPS=PAT÷NOOS

=17038÷3697

=4.608

Share price Earnings per share= £ 14.08÷ 4.608

=3.055

2. Dividend Cover

FY2020

Dividend cover = (Net Income -Dividends declared or Paid)/Dividend declared or paid

= (£4,854,000-£10,338,000)/£10,338,000

=-£ 0.53

FY2021

Dividend cover = (Net Income -Dividends declared or Paid)/Dividend declared or paid

(-£ 22,168,000- £6,868,000)/£ 6,868,000

=-£ 4.23

d) Asset Utilization Ratios

1. Fixed Asset Turnover Ratio

Fixed Asset Turnover Ratio = Net Sales / (Fixed Assets –Depreciation)

FY2020

Fixed Asset Turnover Ratio= £118,657,000/ (£ 62,923,000-£ 4,258,000)

=2.02

FY2021
 6

Fixed Asset Turnover Ratio= £ 144,328,000/ (£27,921,000-£ 4,309,000)

=6.11

2. Inventory Turnover Ratio

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

FY2020

Average Inventory: (Opening Inventory + Closing Inventory)/2

= (£ 5,921,000+£ 8,361,000)/2

=£7,141,000

Inventory turnover ratio= £ 69,021,000/£7,141,000

=9.67

FY2021

Average Inventory: (Opening Inventory + Closing Inventory)/2

= (£ 5,921,000+£ 9,706,000)/2

= £7,813,500

Inventory turnover ratio= £ 79,153,000/£7,813,500

= 10.13

Task Two

Liquidity ratios

According to the calculations, the current ratios have decreased from 3.83 to 3.13,

indicating that if the trend continues in the coming years, Nichols Plc will fail to meet all of its

short-term obligations, including debt payments, if the current Ratio falls below 1. However, the

net working capital ratio is less than 1 for the 2020 and 2021 fiscal years and has decreased from

0.12 to 0.10. This indicates a negative cash flow; thus, Nichols Plc’s current assets are less than
 7

the current liabilities. This means that the company's available assets are insufficient to pay its

creditors, such as suppliers and lending institutions. As a result, suppliers, employees, and

shareholders should be concerned about the changes because they indicate that the company is

gradually running out of business.

Profitability ratios

The net worth of Nichols Plc has decreased from 4.06% in 2020 to -23.85% in the fiscal

year 2021. The return on net worth for the 2020 and 2021 fiscal years is less than 10%,

indicating a poor performance for the company. The decline in return on net worth demonstrates

that the company is not doing well and may cease operations soon. Earnings per share have also

decreased to -60.04% from 13.14 per share in one year, indicating that shareholders will not be

earning any income from that business, and given that the data shows the same is trending

downward, both shareholders, employees, and management should reconsider their stance.

Gearing ratios

The calculations show that the debt amount increases as the company's operations

increase while the value of the shareholders' wealth decreases, implying that the debt-to-equity

Ratio rose from 0.22 to 0.41 from 2020 to 2021. This indicates that a significant portion of the

company's operations and growth are financed through incremental borrowing yearly, implying a

potential debt accumulation soon. The debt-to-capital Ratio rose from 0.20 to 0.28. As a result,

management and shareholders should consider various investment strategies to reduce this Ratio.

This is because the company needs to pay back to the shareholders. Because the same company

is paying taxes and continuing to pay recurrent expenditures, continuous operations would take a

lot of work. This Ratio primarily affects the company's investors and lenders.

Investor ratios
 8

Dividend cover ratios should be greater than one, and any ratio less than 1.5 indicates

future poor performance. Since the company has been operating with less than 1.5 for over three

years, business shareholders should be concerned about the market performance of the shares.

Nichols Plc's price-to-earnings Ratio and dividends cover Ratio are less than 1.5, indicating that

shareholders should consider diversifying. This Ratio has the most significant impact on

shareholders because it indicates that their shares are no longer earning dividends as required.

After all, the ratios are harmful due to a decline in share prices over the last few years.

Asset utilization ratio

Increased asset utilization, as measured by the above ratios, i.e., asset turnover ratio

increasing from 2.02 in 2020 to 6.11 in 2021, indicates that the company is effectively utilizing

its assets in generating revenues. This Ratio indicates that the company generates a significant

income per dollar of assets. However, the inventory turnover ratio has increased from 9.67 to

10.13, indicating that the company replaces its inventory more frequently and at a higher rate.

Even though the inventory turnover ratio change is so small, this shows that the company's sales

are strong, reducing the chances of overstocking. This Ratio affects the interests of the

company's preferred shareholders, common shareholders, creditors and suppliers.

Task Three

Liquidity Ratios

The company can improve its liquidity ratio by paying off liabilities, such as settling a

larger percentage of its debts owed to suppliers and lending institutions. Nichols should use this

strategy to help reduce debt accumulation, which leads to the deterioration of current ratios.

Furthermore, the company should focus on reducing expenses by controlling administrative

costs. This includes the amount of money paid to the organization's directors and top
 9

management. By lowering costs in this manner, the company will spend less and retain more

revenue for the company's operations by lowering the amount of money spent as wages to the

directors and managers. The company can also issue more stock with the current market price to

increase liquidity.

Profitability ratios

Nichols Plc should increase investment in growing and diverse portfolios to improve

profitability ratio performance. The company can increase its revenue by acquiring shares in

other publicly traded companies that are doing well financially. Nichols Plc should also work on

ways to gain a competitive advantage over market competitors through cost and product quality

improvement. The company should also improve productivity and efficiency in the

manufacturing process.

Gearing ratios

Nichols Plc should concentrate on slowing the growth of its gearing ratios, which appear

to be increasing each fiscal year. To accomplish this, the company should pay off its debts as

soon as possible to avoid long-term interest charges. The company should also avoid additional

obligations and instead consider selling shares to the public to generate revenue and increase

shareholder equity, which can help them pay off their debts. Reducing operational costs should

also allow the company to keep more money for debt repayment. Nichols Plc should also

consider increasing revenue collection from debtors to generate more funds, which they can use

to settle their company debts since statements indicate a lot of uncollected debt.

Investor ratios

Nichols Plc should increase product sales volume to generate more revenue for

shareholders. The company should cut costs while increasing output. Furthermore, the company
 10

should consider reducing the number of preferential shareholders by calling them up and paying

them back for the shares they own. By doing so, the company will repurchase more shares,

reducing the number of shareholders while increasing shareholder wealth.

Asset utilization ratios

Nichols Plc should improve the quality of its service and products to improve the

performance of its asset utilization ratios. Increasing product quality will allow for more efficient

use of company assets, resulting in increased revenue generation. The company should also

prioritize increasing output while decreasing costs. The company should improve product pricing

to compete for a larger market share.

Task Four

Packaging strategy

Profitability ratios will be most affected by this statement. A change in packaging style

will either increase or decrease product sales.

Responsible sourcing

This has the most impact on investor ratios. Responsible sourcing of materials results in

using high-quality raw materials for production. This increases sales and, as a result, revenue for

the company.

Sugar reduction

Sugar reduction has the most significant effect on liquidity ratios. Reduced sugar creates

a healthier product for the customer, which increases the likelihood of increased sales, cash flow,

and revenue earnings.

Added nutrients
 11

The addition of nutrients will have a significant impact on liquidity ratios because it will

increase sales and company revenues. This will benefit the company's cash flow. After all, the

product quality will attract more customers.

UK packaged

The asset utilization ratios are most affected by this. UK packaging allows using 100%

recyclable materials, reducing waste and maximizing asset utilization.

Task Five

Loss of system availability

This risk would affect profitability ratios. This is because IT system failure will result in

an ineffective supply chain, resulting in a reduction in production and decreased sales.

Threat of cyber-attack

This risk would impact asset utilization ratios, particularly inventory turnover ratios. The

cyber-attack on the company's IT system would disrupt the supply chain, lowering sales.

Single source of supply of Vimto concentrate

This risk would have an impact on liquidity ratios. This is because overdependence on a

single supplier is prone to failures, which would negatively impact production and result in a

negative cash flow, preventing the company from running its operations effectively.

Health & safety incident

This risk would have the most significant impact on asset utilization ratios. This is

because when employees are ill or injured, there need to be more people to operate the

company's equipment, resulting in low asset utilization.

Failure to successfully evolve brand and product portfolio in line with changing consumer

needs
 12

This risk influences investor ratios. Due to this failure, the company will experience low

sales because it will fail to meet customer expectations based on emerging needs. Thus the

company will make less profit to pay out high dividends to shareholders.

Adverse publicity concerning the soft drinks industry, the group or brands, leading to

reputational damage or adverse consumer or trade perceptions

Profitability ratios are affected by this risk. This is because when a company's reputation

is harmed, the company's sales are more likely to fall, resulting in lower earnings per share due

to lower revenues.

Product quality issues

This risk has an impact on profitability ratios. When there are concerns about the

product's quality, sales are likely to suffer because customers may avoid purchasing the product,

resulting in lower sales and less or no profits for the company.

Loss of a major customer account or key partner

This risk has a greater impact on gearing ratios. Withdrawal of a partner, for example, the

exit of the largest shareholder, may push the company into more debt as it seeks more funds to

run its businesses, resulting in rising ratios.

Increasing focus on climate change, environmental and social issues resulting in new

government legislation

Profitability ratios will be affected by this risk. Environmental and climate change

concerns are likely to impact the company's profitability, requiring the company to focus on

waste reduction by introducing recyclable plastic packaging, which may not correspond to

customer preference, thus reducing sales.

Introduction of new government legislation

 13

The new legislation will have an impact on profitability ratios. This is because new laws

may increase the cost of production, lowering the company's profits and thus affecting its

revenues.

Failure to protect the group’s intellectual property rights

This risk may have an impact on the asset utilization ratio. This is because failure may

result in the creation of a negative brand image, resulting in low demand and sales, resulting in

low inventory turnover as a large amount of stock accumulates.

 14

References

Nichols, J. (2022, March 1). 2021 Annual Report. https//www.Nicholsplc.co.uk

Nichols, J. (2021, March 1). 2020 Annual Report. https//www.Nicholsplc.co.uk