NICHOLS PLC

FINCANCIAL ANALYSIS FOR THE PERIOD 2020 AND 2021

Introduction
Nichols Plc, an international soft drinks company with presence in more than 73 countries with
products in the still and carbonate categories (Annual Report, 2021). Nichols Plc is known for
one of its major business units, Vimto Out of Home, which produces the popular drink, Vimto,
among other quality drink brands across post mix, frozen and coffee for hospitality and leisure
businesses (Vimto out of Home, 2022). With equity value of £93m, Nichols’ group revenues for
2021 was £144.3m, a 21.6% increase from the previous year, although a little lower than 2019’s £147m.

This report evaluates Nichols’ financial ratios and how they speak to the performance of the company in
relation to liquidity, profitability, efficiency, leverage and investment.

Performance Evaluation of the Company across Category of Ratios

Liquidity Ratios: these are financial ratios that measure a company’s ability to pay its long-term
and short-term obligations. The current ratio calculates how well a company can pay-off its
short-term debt with its current assets (Nadya & Isrochmani, 2017). Nichols’ current ratios for
2020 and 2021 are 3.83 and 3.13 respectively.
Cash ratio calculates the ability of a company to pay off its short-term debt with cash and cash
equivalents. Nichols’ cash ratios for 2020 and 2021 are 2.18 and 1.72 respectively.

Profitability Ratios measure a company’s ability to generate profits from its business
(Schönbohm, 2013). Return on Equity ratio measures the percentage of profit on the
investments the shareholders have in the business. Mabwe & Robert (2010) argue that return
on equity is the most important indicator of a bank’s profitability. The return on equity for
Nichols Plc for 2020 and 2021 are 0.04 and -0.21 PP 115.
The Profit margin is the comparison of profits after tax to the revenue of a company
(Schönbohm, 2013). Nichols’ profit margin for 2020 and 2021 are 0.04 and -0.15 respectively.

Asset Utilisation Ratios or Efficiency Ratios measures how well a company uses its assets to
achieve its profit-making objective. Asset turnover ratio measures the efficiency of a company
in generating revenue from its assets (Corporate Finance Institute, 2022). The asset turnover
ratio of Nichols Plc for 2020 and 2021 are 0.79 and 1.04 respectively.
Inventory Turnover ratio measures the number of times a company sells its stocks (Schönbohm,
2013). Nichols’ inventory turnover for 2020 and 2021 are 9.67 and 10.13 respectively

Gearing ratios help a company determine the proportion of debt to equity they use.
The debt-to-equity ratio determines how much of a company’s equity is required to pay off its
debt. Nichols’ net gearing ratio for 2021 is 41% and is 21.8% for 2020.
The debt ratio measures the proportion of the total debt to the total assets of a company
(Basaria & Andam, 2020). Nichols’ debt ratio for 2020 is 17.9% whilst that for 2021 is 29.1%.

Investor Ratios help to tell investors how profitable their investments in a company are.
Earnings per share is the ratio of net income to a company’s weighted average shares
outstanding. Nichols declared basic earnings per share of 13.14p in 2020 and loss per share of
60.04p in 2021.
Thomas (2016) says that price to earnings ratio tells investors how much a company is worth.
Nichols’ share price as of 31 December 2020 was £1,350 and as of 31 December 2021 was
£1,492.5p (Google Finance 2022). Nichols’ price to earnings ratio in 2020 was 52.82. In 2021,
Nichols declared a loss. This gave us a negative price to earnings ratio of 24.86.

Commentary on the performance of Nichols Plc

In 2020, Nichols have 383% of the value of its current liabilities in current assets. This is looking
good for Nichols as they can settle their current liabilities about 4 times using their current
assets. This ability, however dropped in 2021 as the managers of Nichols then were able to
settle the current liabilities 3.13 times with the current assets.
Nichols’ cash ratio for 2020 is 2.18. This tells us that they are able to use cash and cash
equivalents to repay their short-term debt. This reduced to 1.72 in 2021.
Although, these metrics are looking good, the decline may reduce the confidence of creditors
and other facilitators of short-term debt in the ability of Nichols to repay their current debt.

Taking exceptional items into consideration, Nichols’ return on equity ratio was about 4% in
2020 and about -21% in 2021. This decline in the group performance from the previous year
may seem quite undesirable. Some of this poor performance was attributable to the non-cash
impairment of goodwill and intangible assets of its business units – Feel Good. They also
reviewed their leadership structure which cost £0.7m.
The larger part of the exceptional item in the administrative cost of Nichols was the write-off of
£36.2m of goodwill in two of its business units – Still and Carbonate. According to Nichols, it
was necessary to write-off the amounts because the effect of Covid-19 bit hard on their ability
to achieve their planned returns.
For the same reasons, there was a reduction in the profit margin from 0.04 in 2020 to a
negative 0.15 in 2015

Those charged with Nichols’ governance were particularly more efficient with the use of the
company’s assets. With an asset turnover ratio increase from 0.79 to 1.04 and inventory
turnover increase from 9.67 times to 10.13 times, the company’s assets have been better
utilised and the inventory has been turned into revenue more times. This could be because the
effect of Covid-19 pandemic eased in 2021 or that better decisions were made by the managers
of the business.

Nichols amassed more debt in 2021, as the debt-to-equity and debt-to-total assets ratios
increased in 2021. The major cause of this decline was the Goodwill impairment registered as
administrative expense. It is important to note that this does not reflect the operational
performance of Nichols Plc and should not be taken into consideration when making
comparison as they are exceptional items, and they may cause excess disparity when used to
make financial decisions.
Davit (2016) argues that the return on equity ratio is the most important of the key ratios in
business because it shows the rate at which the wealth of business owners is increasing.
Nichols’ earnings per share saw a heavy decline in 2021. There was a relative decline in the
price-to-earnings ratio from 52.82 to 32.34. This deduction followed the write-offs in the
goodwill of its business units and change in leadership structure.

Suggestions to Improve Performance

One way to keep liquidity in check is for Nichols to manage their debtors properly. They could
offer discounts so that customers and partners could pay up for goods more quickly. This helps
to release cash.
Profitability is mostly dependent on how much revenue can be generated and how much costs
can be saved. Nichols could input more cost-cutting techniques into their management. Cost
can be saved by sourcing for more suppliers to increase their bargaining power, especially for
their Vimto Concentrate. Nichols can drive revenue by advertising more and increasing positive
publicity to gain more customers.
Efficiency speaks to how well a company uses its resources to achieve its objectives. In addition
to improving revenue, Nichols could mitigate loss of system availability, fight against cyber-
attacks and carry out other activities that may cause a lag in production or cause delays in
getting materials across to them or goods to their customers.
Nichols could improve their gearing ratios by reducing their operational costs which will
thereby increase their net profits (provided a conservative dividend payout policy).
The share price can improve by the overall performance of the company and the positive
perception of the company by the market, which is usually determined by outside forces like
the news, government legislation, inflation and interest rates.

Ratios and Impact Analysis

Packaging Strategy
Packaging is an integral part of the production. Packaging directly impacts materials usage
which is a functional part of the cost of sales. The first impact of the cost of materials is on the
gross margin which is given as:
(Thomas, 2016)
A higher cost of materials means a lower gross margin and vice-versa.

UK Packaged
The second statement is also on packaging and has the same impact on the financial statement
– increase/decrease in the cost of sales gross margin

OoH
The effect of the Management of Nichols will impact investor ratios as it is envisioned to reduce
carbon emission. The world will become a healthier place with less waste, and this creates a
sense of responsibility in the mind of the investors, therefore,
Responsibly Sourced raw materials imply better quality of output. The gross margin ratio takes
the first impact as a result of changing cost of sourcing the materials and increased revenue
from higher quality drinks.
Risk and Impact Analysis
Loss of System Availability has an adverse effect on the distribution of goods to retailers and
customers and therefore negatively impact sales as it will take longer for products to reach the
customers. This risk has the most effect on efficiency ratios.
Threat of cyber-attack will also negatively impact efficiency. This is because there will be a limit
to the availability of the Nichols’ products to its customers.
Single Source of Supply of Vimto Concentrate. The unavailability of the Vimto compound will
halt business operations therefore causing Nichols to lose time and money to inactivity. The
profitability ratios will receive the most impact.
Health and Safety Incidents will cost Nichols more expense and will have a negative effect on
their profitability ratios.
Product quality issues will bring about a reduction in the demand for the products and will
adversely affect the profitability ratios. A reputational damage will bring about a negative effect
on the investor ratios.
Failure to meet customer needs means inability to sell. This impacts the Nichols’ profitability
ratios.
Adverse publicity in relation to the soft drinks industry will lead to reputational damage and
adversely affect the company’s share price and ultimately, investor ratios.
The loss of a major customer account or key partner will have an effect on the amount of goods
sold and consequently impact the profitability ratios.
New government legislation that impacts the cost of production will consequentially affect the
gross margin the most.
Failure to protect the group’s intellectual property rights will impact the perception of the
brand and have the most effect on the investor ratios.
Climate change, environmental and social issues resulting in new government legislation issued
on revenue items like packaging will adversely affect Nichols’ profitability ratios.

Conclusion
Nichols’ performance overall was quite impressive, ignoring the major write-off of its goodwill
in one of its business units in the year. Nichols Plc compares favourably year-on-year (yoy) and
with other players in the hospitality industry (Annual Report, 2021). The positive yoy
performance may be owing to Covid-19 since the revenue figures dropped significantly in 2020
from 2019 and recovered in 2021.
References

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Assets, Dividend Yield, and Market Capitalization on Stock Return (Evidence from Listed
Manufacturing Companies in Indonesia Stock Exchange), Scientific Journal of PPI-UKM,
Social Sciences and Economics, Vol. 7 (2020) No. 1
Corporate Finance Institute 2022, Asset Turnover How Effective Assets Are at Generating
Revenue, Corporate Finance Institute, viewed 11 November 2022,
<https://corporatefinanceinstitute.com/resources/accounting/asset-turnover/>
Davit K, 2016, Ratios and indicators that determine return on equity, Instituto Politécnico de
Bragança
Google Finance 2022, NICL GBX Nichols Plc, Google Finance, viewed 11 November 2022
<https://www.google.com/finance/quote/NICL:LON?window=5Y>
Mabwe Kumbirai & Robert Webb, 2010, ‘financial Ratio Analysis of Commercial Bank
Performance in South Africa’, African Review of Economics and Finance, Vol. 2, No. 1,
Dec 2010
Nadya M & Isrochmani M, 2017, ‘The Effect of Financial Ratios on Firm Value in the Food and
Beverage Sector of the IDX’, Journal of Business and Management, vol. 6, No.2, 2017:
214-226
Out of Home, 2022, Vimto out of Home, viewed 5 December 2022
<https://vimtooutofhome.co.uk/about-us/>
Schönbohm A, 2013, Performance Measurement and Management with Financial Ratios: the
BASF SE case, Institute of Management Berlin, Berlin, Working Paper, No. 72
Appendix

Ratio Formula 2020 2021

valu value
e
Current Ratio Current Assets 3.83 3.13
Current Liabilities

Cash Ratio Cash∧Cash Equivalents 2.18 1.72

Current Liabilities

Return on Equity Net Profit 0.04 -0.21

'
Average Shareholder s Equiy

Profit Margin Net Profit 0.04 -0.15

Revenue

Asset Turnover Net Revenue 0.79 1.04

Average Total Assets

Inventory Turnover Cost of Sales 9.67 10.13

Average Inventory

Debt to Equity Total Debt 0.41 0.22

Total Equity

Debt Ratio Total Debt 0.18 0.29

Total Assets

Earnings per Share Net Profit

(basic) Number of shares outstanding

Price to Earnings Share Price

Ratio Earnings per Share

Gross Margin Gross Profit

Revenue