Kellogg’s company was started in 1906 by Will Keith Kellogg. The company started with only 44 employees in Battle Creek, Michigan. Today the company manufactures in 18 countries and sells their products over 180 countries. Kellogg’s was the first company to introduce cereals. With great innovations and marketing Kellogg’s still remains the leader in the cereal producing and convenience food producing company. The company maintains a levels where its gives great importance to health, nutrition and quality.
The company expanded very quickly as the business started therefore the growth had given rise to a very good global business for the company. The main strength of the company is it has very skilled people in it, as it is known for its baking; they have the best baking being done in their premises. It is a well known company (brand) and with its introduction of new products it has an edge over the revivals. The company pays attention to towards matters relating to environment and charity event. The main weakness of the company is that due to their diversification the company has to consider the demands of each country. And the gearing of the company is high, but as it has the ability to repay them. They have many substitutes present in the market therefore to maintain a level the need to focus on the demands of the consumers.
The Kellogg’s is well known for providing healthy and easy to have breakfast in no time. Its products consists of cereals, cookies, crackers, toaster pastries, cereal bars, fruit-flavored snacks, frozen waffles, veggie foods and a lot more. Since 1959 Kellogg’s has been trading in the New York Stock exchange under the ticker symbol of K. Audit is carried out by a team of very skilled members which include John T. Dillon (chairman of the committee), Donald R. Knauss, Rogelio M. Rebolledo, Robert A. Steele and John L. Zabriskie.
Retailers can affect the demand of the products of the company. As retailers are introducing private label brands into the market it has become a threat to Kellogg’s demand. The company has to keep in mind the quality of their product and reduce their prices to attract back the lost customers. Therefore economic uncertainty and the prices can affect the demand of the company’s products. As the technology advances, Kellogg’s adopts it to enhance its system. They have the best information system but at time bests can default even. Therefore Kellogg’s has a very competitive market and to achieve its goals it has to have a low price and a better quality product than its competitors.
The sales of the company as compared to last year have decreased on international level but on internal level there is an increase of 3%. While in 2008 both international and internal sakes were higher than that of the previous year (2007). The decrease in the net sales could be due to the changes in foreign currencies and extra shipping cost in the year 2008. Although the company has decreased its international sales but its internal sales is within a profitable region. Operating profit in internal has shown an increase of about 10% which exceed its long term annual growth target. The diluted EPS has also shown an increase of 13% while the EPS has grown to an increase of 6%. The company had an attractive dividend yield. Therefore it can be said that Kellogg’s growth has been profitable and has provided good returns to its shareholders. One of the reasons of lower gross margin was the acquisition taken place in the company. Inflation has also played a role in the rise of the prices of the commodities, fuels and etc. Due to the decline in the gross profit margin the cost reduction and increased prices have tried to offset its effect.
Operating activities- Accounts receivables
End of End of Percent 2008 2009 Change
(Values are in million $)
Sales/Service Revenue 12,822 12,575 -2%
Gross Accounts Receivable 876 951 8.5%
Allowance for Bad Debt 10 9 -10%
Net Accounts Receivable 1,100 1,093 -0.6 %( Foster, 24)
As the sales revenue of the company has decreased by 2% the allowance for the bad debts have also decreased to 10%. The gross accounts receivables shows an increase in of 8.5% while the net accounts receivables shows a decrease of about 0.6%, that is because of the decrease in the other receivables of the company. The company has shown positive results as there is a decrease in bad debts allowance when the sales are decreased and even when the company’s other receivables are less in year 2009 the company has a decrease in net receivable which is almost negligible.
Operating activities- Inventory
End of End of Percent
2008 2009 Change
(Values in million $)
Cost of Goods Sold 7,455 7,184 -4%
Merchandise Inventory 897 910 1.4%
The cost of goods sold has decreased as the sales have decreased but the inventory has increased it can be due to the increase in the prices of the commodities and the inflation.
Operating cash flows
The net cash provided by the operating activities show an increasing trend over the years of time from 2009. Even after the payments of interest and principal amount the company has a positive cash flow which it can use in other activities even. There was an increase in the cash flows in 2009 and 2007 while in 2008 there was a decrease but as it has a good opening balance the decrease was off settled by the opening balance, hence giving positive cash flows in all three years (Foster, 85).
Both current and non-current assets show that company has grown and acquired further property, which would help it to increase the production. The cash and cash equivalents have also increased. But as the sales have decreased the accounts receivables have also decreased in 2009 compared to 2008, therefore it has an effect on the total assets. There is a decrease in the investing activities; this decrease is due to no acquisition made in the year 2009. Only property has been bought in 2009, while 2008 the company made few acquisitions and bought property even which shows a better trend in the growth of the company. The dividend per share has been increasing throughout the three years with the increase in the income therefore its payout ratio has also increased which clearly tells that company has being growing. The growth has led to increase in the profitability as the income of years has also increased with the increase in cash and cash equivalents.
As the company is publically listed a part of it is financed through equity. The other part financed through long and short term debts. The company has a high gearing due to the long term loans. The equity to debt ratio has increased from 2008 by 6% in 2009. This is due to the increase in the long term debts. Increasing the gearing could have several consequences on the company; it can have problems in further rising finance through debt method due to its credit rating. It could give a disadvantage in competing with different companies. But the company’s timely payments of interest and principal of short term and long term debts makes the company to have a good credit rating which is why it can gear up a little more and still be on the safe side. As said above even high gearing increases financial risk but these risks are controllable as the company makes its payment on time. Even after a high gearing Kellogg’s produces good profits which are then distributed to the share holders in the form of dividends. Comparatively the company has been profitable; its return on equity ratio has also increased during the years. Therefore with a controlled amount of risk the company is producing good results which are a great help in the growth of the company (Foster, 42).
Both current and non-current assets of the company have increased from the previous year 2008. This is due to the purchase and acquisition of property to expand its business. Most of the expansion is financed through debt method therefore there is increase in the liabilities even. The cost associated with the exit and disposals in 2009 were $65 million and $ 27 million in the year 2008. The gross profit margin decreased by 2% in 2008 while in 2009 it increased. The operating margin has been consistent throughout these three years with negligible changes. The company has a goodwill which has also increased compared to 2008 in 2009; this could be due to the acquisitions and purchases made.
Company has pension plans for its employees and to motivate its employees company provides them with shareholding as incentives. The main customer of Kellogg’s is Wal-Mart which is well known to provide you with the best quality products at lower prices.
Learning from financial statement analysis
The financial statement analysis of the Kellogg’s company clearly shows its profitability in the year. Due to better allocation of resources and timely fulfillment of demand Kellogg’s has been the leading brand. Even though with high gearing company manages to pay its shareholders with a respective amount of dividend per year. The payout ratio has increased which shows that the company has been going smoothly in its production and has earned good revenues. Cash flows of the company have been positive throughout the last three years which means the company has inflows even after paying its liabilities. And these retained earnings are used to issue shares to the existing shareholders as well as to the employees as an incentive for their good performance. With acquisitions and purchases Kellogg’s is expanding its business rapidly which is a good sign for the company’s growth and profitability.
Work Cited Page:
Foster, G., Financial Statement Analysis, 2nd Edition, Prentice Hall International, 1986