4.3 Profitability analysis
4.3.3 Common size analysis and indexing
Source: own computation based on Philip Morris Annual Reports
Source: own computations
In the year 2005, the costs were unfortunately divided differently in the income statement and it was impossible to allocate them to the same categories like in the following years.
Therefore, I only counted sum of all expenses and sum of all incomes for the first year.
For better and more descriptive interpretation, I have also prepared trend analysis. When possible, year 2005 is the base (equals to 100), otherwise the base is year 2006. All the following years are compared to the base year and expressed in percents.
Source: own computations
The basic problem was decreasing revenue year by year. Since 2005 to 2008 it went down by 16%, while the costs went down by only less than 3%. But in 2009 the revenues reached almost identical level to the year 2005. The negative point is that the costs increased by almost 8%. The explanation for this can be that the rivalry in the tobacco industry is really Table 8: Indexing - Trend analysis - Analytical Income Statement
Indexing – trend analysis 2009 2008 2007 2006 2005
Revenues 99.15 83.99 87.95 85.08 100
COGS 130.12 117.37 114.87 100 n/a
Distribution expenses 72.83 70.83 83.38 100 n/a
Administrative expenses 104.41 81.56 89.59 100 n/a
Other operating expenses 267.02 306.38 144.68 100 n/a
Sum of all expenses 107.72 97.62 97.73 92.85 100
Other income 101.69 145.76 172.88 100 n/a
Other operating income 318.07 390.36 175.9 100 n/a
Sum of all incomes 177.05 224.04 135.52 77.6 100
EBIT 84.46 61.38 69.18 67.99 100
Tax on operating earnings 64.96 49.59 61.83 63.75 100
NOPAT 91.9 65.88 71.98 69.61 100
Table 7: Common size analysis - Analytical Income Statement
Common size analysis 2009 2008 2007 2006 2005
Revenues 100.00% 100.00% 100.00% 100.00% 100.00%
COGS -54.73% -58.28% -54.47% -49.02% n/a
Distribution expenses -10.57% -12.14% -13.65% -16.92% n/a
Administrative expenses -7.90% -7.28% -7.64% -8.81% n/a
Other operating expenses -2.15% -2.91% -1.31% -0.94% n/a
Sum of all expenses -75.35% -80.61% -77.07% -75.69% -69.36%
Other income 0.51% 0.87% 0.98% 0.59% n/a
Other operating income 2.26% 3.27% 1.41% 0.83% n/a
Sum of all incomes 2.77% 4.14% 2.39% 1.42% 1.55%
EBIT 27.43% 23.53% 25.33% 25.73% 32.20%
Tax on operating earnings 5.83% 5.25% 6.25% 6.66% 8.89%
NOPAT 21.60% 18.28% 19.07% 19.07% 23.30%
tough and the companies are in so called price war. Furthermore, according to ACNielsen survey, Philip Morris was gradually loosing few percents of the market share in its main markets – Czech and Slovak, every year until 2007.54
We can also see quite drastic decrease in NOPAT versus revenues. Either if we consider percentual expression to revenues, where it fell down by 5% during the years 2005 and 2008, or in indexing, where it fell more than one third from 100 to mere 66. However, in the last year the NOPAT compared to revenues rose by more than 3%. When compared to the base year there is decline for only around 8%.
On the other hand, tax on operating income went down firstly to one half in 2008 and then went a slightly up reaching around two thirds of the level of the base year in 2009, but it is due to the falling EBIT and decreasing income corporate tax rate too.
When we will analyse the costs more in depth, we will find out, that COGS are getting relatively bigger portion of revenues, peaking in 2008, while distribution and administrative costs mildly lowered. Moreover, sum of all expenses versus revenues is percentually rising, got 6% more since 2005. While the revenues in 2009 returned to the almost identical level compared to the base year, the costs rose by almost 8%. Sum of all incomes rose as well, but with comparison of the expenses, it is just a tiny part.
There is a rise in other operating income, but hand in hand with it goes rise in other operating expense. Both income and expenses consist mainly of exchange rate gain, respectively loss.
So after all they more or less offset each other.
I will continue with common size analysis of the analytical balance sheet. I have prepared only the operations' side, because the financing side contains only equity, insignificant amount of deferred tax and short-term borrowings within the PMI Group.
Invested capital equals to 100%.
54 PM Annual Reports
Source: own computations
Again, for better illustration, I have also prepared the trend analysis.
The very varying percentual portions of invested capital can be easily explained by huge changes in invested capital over the years.
When we look at the common size analysis, we can see that the operating working capital reached very different portion of invested capital over the years. Starting at almost 17% and rising to more than 77% and declining to 12,5% in 2009.
We can see that inventories count for the biggest portion of invested capital. But the problematic point was that they were in uptrend. However, it changed in the last year, when they went down dramatically. Compared to the base year, they peaked in 2007 reaching 187%
and went down to only nearly 63% in 2009.
From the current operating liabilities, the biggest portion counts for other tax liabilities. This is not surprising as the Company has to pay huge excise taxes and value added tax due to the nature of its business. Another important part of the liabilities is trade and other financial liabilities, which counts for significant part. The rest is just few percentage points.
Common size analysis 2009 2008 2007 2006 2005
Inventories 112.68% 87.84% 100.86% 115.07% 170.69%
Trade and other receivables 50.08% 20.91% 60.94% 29.06% 25.49%
Current income tax prepaid 1.67% 0.05% 0.00% 1.72% 2.05%
Cash and cash equivalents 0.42% 0.57% 0.23% 6.19% 3.29%
Operating current assets 164.86% 109.37% 162.03% 152.04% 201.52%
Trade and other financial liabilities 26.09% 6.83% 9.63% 14.17% 28.35%
Non-financial liabilities 5.62% 1.73% 1.37% n/a n/a
Current income tax liability 0.39% 0.79% 1.60% n/a n/a
Other tax liabilities 120.14% 28.55% 71.83% 89.71% 156.26%
Provisions for current liabilities 0.13% 0.26% 0.00% 0.69% 0.09%
Operating current liabilities 152.37% 38.16% 84.42% 104.58% 184.69%
Operating working capital 12.49% 71.21% 77.61% 47.47% 16.83%
Property, plant and equipment 83.72% 27.13% 21.86% 51.86% 81.68%
Intangible assets 3.63% 1.60% 0.16% 0.51% 0.87%
Deferred tax assets 0.16% 0.06% 0.11% 0.16% 0.25%
PP&E classified as held-for-sale 0.00% 0.00% 0.27% 0.00% 0.37%
Invested capital 100.00% 100.00% 100.00% 100.00% 100.00%
Trade and other receivables increased, especially in 2007. Since 2005 they went up by more than 86%, meaning that the Company might have some difficulties in collecting receivables.
Another good point is that the Company lowered dramatically their cash in hand. The idle cash is not tied up unnecessarily. Compared to the base years it decline to only 12% in 2009.
On the other side trade and other financial liabilities did not change that much, they stayed at the similar range over the years. They went down by a bit more than 12% since 2005.
Both operating current assets and operating current liabilities reached a similar level in 2009, even though their way over the years was drastically different.
PP&E stayed as well at the similar level over the years. Intangible assets rose for around 300% since 2005, but in absolute number they count for a tiny part of invested capital.
When we look at the invested capital, we can see that firstly it increased during until year 2008, while in 2009 it decreased and returned to a very similar level with 2005.
Source: own computations
Table 10: Indexing - Trend analysis - Analytical Balance Sheet
Indexing – trend analysis 2009 2008 2007 2006 2005
Inventories 62.7 133.63 187.27 102.47 100
Trade and other receivables 186.6 213.03 757.73 173.33 100
Current income tax prepaid 77.27 6.06 0 127.27 100
Cash and cash equivalents 12.26 45.28 21.7 285.85 100
Operating current assets 77.69 140.93 254.81 114.68 100
Trade and other financial liabilities 87.4 62.54 107.67 76.01 100
Non-financial liabilities 122.86 103.57 100 n/a n/a
Current income tax liability 7.36 40.49 100 n/a n/a
Other tax liabilities 73.02 47.45 145.68 87.26 100
Provisions for current liabilities 133.33 733.33 n/a 100 n/a
Operating current liabilities 78.35 53.66 144.86 86.06 100
Operating working capital 70.48 1098.89 1461.62 428.78 100
Property, plant and equipment 97.34 86.24 84.8 96.5 100
Intangible assets 396.43 478.57 57.14 89.29 100
Deferred tax assets 62.5 62.5 137.5 100 100
PP&E classified as held-for-sale n/a n/a 233.33 n/a 100
Invested capital 94.97 259.67 316.92 152 100