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Corporate Social Responsibility - Research Paper Example

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This research paper "Corporate Social Responsibility" mentions that while absolute numbers of operating profit are important because they determine how much money the company makes, a relative measure of operating profit margin is important because it shows the ability of a company to control its overheads…
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Corporate Social Responsibility
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Profitability According to figures reported in exhibit operating profit of Deutsche Brauerei has been increasing constantly for the last four years from 4,541,000 in 1997 to 6,106 in 2000. At the same time, operating profit margin has been decreasing from 7.3% in 1997 to 6.6% in 2000. While absolute numbers of operating profit are important because they determine how much money the company makes from its operations, relative measure of operating profit margin is even more important because it shows the ability of a company to control its overheads (Hine and Thilmany, 1998). Thus the decrease in operating profit margin indicates that operating expenses of Deutsche Brauerei rise faster than its sales, which can be clearly seen from exhibit 1: 48.4% increase in sales against 49.5% increase in operating expenses. In turn this means Deutsche Brauerei now has less flexibility in determining prices, and therefore less safety in tough economic times. The ratio of income taxes to earnings before taxes has also increased to 39.5% in 1999 and 39% in 2000 from 33.8% in 1997 and 34.5% in 1998. From exhibit 1 we can see that taxable income increase steadily over years (which can be explained by unstable economic situation in Ukraine), while earnings before taxes grow slower. Consequently return on sales, which shows the operational efficiency of the company dividing earnings before tax by total sales, has decreased from 4% in 1998 (before default) to 2.8% in 1999 leveling the breakdown to 3.2% in 2000. Still shareholders' equity continues to increase shifting the return on equity ratio up to 10.3% in 2000 - the highest measure for four years; the business looks good from this perspective. Return on net assets which is equal to net income divided by fixed assets and net working capital also shows signs of healthy performance increasing to 8.4% in 2000 6.9% in previous year. The return on assets ratio have returned to its value in 1998 - 4.7% - indicating that a company puts its assets to good use when restoring profitability after economic breakdown in former USSR region. As can be seen from the exhibit 1, sales in Germany have been increasing slowly over the last four years, while the main stake was made on the Ukrainian market. Therefore changes in profitability of DB are greatly affected by local economic climate, which was very unstable these years. Although experiencing difficulties in generating profit, DB has made a successful recover from economic difficulties of the year 1998. Leverage Leverage ratios determine the company's long-term solvency. "Financial leverage is the name given to the impact on returns of a change in the extent to which the firm's assets are financed with borrowed money." (Scott, 1998) For instance debt/equity ratio shows how much money the company can safely borrow over long-terms and it is measured with dividing the total debt with total equity. The debt/equity ratio for DB has fallen from 72.3% in 1997 to 66% in 2000. The company has borrowed funds in 1997 making investments into Ukrainian market, which is the reason of such high debt/equity ratio in 1997. It is decreasing along with debt/total capital ratio (long-term debt/ long term-debt + shareholder's equity), which was 39.8% in 2000 comparing to 41.9% in 1997. This is a good sign of increasing long-term solvency. EBIT/interest ratio, which shows how many times the company can cover its obligations was rather stable during the last three years (4.7 in 1999, 2000, 4.8 in 1998) increasing significantly from 3.8 in 1997. The company has significantly decreased its debt in 1998, which was reflected in the increased solvency in the last three years. Asset Utilization The efficiency of the business is measured by asset usage ratios. Asset utilization ratios are especially important for internal monitoring concerning performance over multiple periods, serving as warning signals or benchmarks from which meaningful conclusions may be reached on operational issues (Blok and Hirt, 2005). Asset turnover is one of the most important asset utilization ratios. It measures the ratio of sales to assets of the company. Constantly increasing through out 1997-2000 sales/assets ratio is now at a 1.48 mark. This means that DB manages its assets increasing efficiency. A great increase in sales growth rate was in 1999 (22.2%), however this figure is certainly affected by inflation of hryvna after Russian crisis, so this ratio cannot be seen as reliable. The assets growth rate is rather stable with the exception of 1998 when it was -0.9% because of the decrease in net property plant and equipment. In 1997 and 1999 it was 6% and 4.5% in 2000. Receivables growth rate was significant in 1999 and 2000 (49.5% and 21% correspondingly) mainly due to the Ukrainian branch. Receivables in Germany were stable. Days in receivables measure that shows the average number of days it takes to collect accounts receivable was once again affected by the Ukrainian department while being stable in Germany. Days in receivables has changed dramatically from 36.3 in 1998 to 85 and 87.1 in 1999-2000, affecting days in receivables for the whole company to increase to 54.3 in 2000. Payables to sales measure shows to what extent the company uses its suppliers' money to fund its sales. This ratio has decreased from 5.8% to 5.2% over the four years, indicating that DB uses less funds of suppliers. Overall asset utilization by DB has been satisfactory in the last four years. Rapid growth of Ukrainian department influenced the increase in days in receivables. Still, it only means that a company will have to spend more time to collect receivables, which the greater the investment in receivables. Liquidity Liquidity analysis helps to uncover weaknesses in company's financial performance on a short term. Two most commonly used ratios to increase liquidity are quick and current ratio. While current ratio indicates the company's ability to meet short-term obligations with all of its assets, quick ratio is stricter as it takes into account only cash, accounts receivable and notes receivable. Current ratio has fallen dangerously to 1.03 in 1998 but now it has increased up to 1.34, which means DB can now invest into less liquid assets (i.e. which cannot be quickly converted into cash). Once again quick ratio has almost the same picture: it has recovered to the initial position of 0.88 in 2000, same as in 1997, experiencing a rapid fall in 1998. The liquidity of a company is within the normal limits. Should the crisis occur, DB will be able to meet its obligations rather quickly. Ukrainian Branch: Performance From the analyzed ratios one can easily see that Deutsche Brauerei puts great efforts into its Ukrainian department. While its position in Germany is rather solid and stable, Ukrainian department grows rapidly, but unstable economic environment affects its performance. The most successful distributors are Kiev (3.5% operating profit/sales) and Odessa (3% operating profit/sales). The least profitable region is Donetsk, and Kharkiv and Dnipropetrovsk take the moderate position. Current ratio is dangerously low in all cities except Kiev (1.6). All the other distributors are better to make sure their inventory can be quickly converted into cash. Sales/assets ratio indicate that assets are best used in Kiev and Odessa. Debt/equity ratio is low in all cities, which lowers the risks when taking low liquidity into account. Overall, Kharkiv requires further help from Germany, as it is a perspective region with high sales/assets effectiveness. The most underperforming distributors were from Dnipropetrovsk and Donetsk. Summary Investments into Ukrainian market along with Russian economic crisis in 1998 has delivered a serious blow to Deutsche Brauerei lowering its profitability and liquidity. In financing the company has shifted from long-termed banking to short-term. Still the company has almost recovered from the breakdown, mainly due to the successful performance of Ukrainian branch. Stagnancy on the German market along with unstable situation on the Ukrainian market have led DB to low operating profit margin. This situation can be improved by cutting costs operational strategy for the company. Future Forecasts and Recommendations Future forecasts for Deutsche Brauerei look rather optimistic, promising an increase in operating profit up to 7.0% in 2001-2002 and increase in net sales up to 105,682,000 in 2001 and 118,971,000 in 2002. Meanwhile the break-even chart prepared by Pinchuk shows that a company need to have about 80 millions in sales. Still there some things that should be improved. Deutsche Braueri had better figures of operating profit margin in 1997-1998, which may be regained only if management will implement a severe cost-cutting strategy. The second issue deals with debt policy and transition to short-term loans from long-term ones. Indeed, the company requires funds to invest into Ukrainian market. Nevertheless, the projected data shows a significant decrease in solvency and liquidity at the same time. The company's debt/equity ratio indicates the increase to 77% and 82.7% in 2001 and 2002 correspondingly, and current ratio decreases at first to 1.27 in 2001 and 1.25 in 2002.The quick ratio also decreases to 0.84. This means that the risk of inability to meet obligation increases. "Owner equity serves as a source of security for acquiring debt capital... Finally, solvency gives an indication of the risk bearing ability or capacity of the business." (Jolly and Vontalge, 1994) Ultimately, the company puts great efforts into Ukrainian market which has a rather stable both economic and political situation currently, and closes opportunities of favorable loans for itself, because of the low liquidity and profitability. To avoid this situation the company should increase equity that is it should invest the funds borrowed as quickly as possible. The proposition of Oleg Pinchuk in this situation is a first priority task. Return on Investments technique proposed by Pinchuk promises the return on investments of 120-130%. Return on investments is a simple and powerful technique allowing to find out how many times the returns will exceed the investments. "if an investment does not have have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken." (Investopedia, 2006) Therefore the increase of 123% and 132% in 2001 and 2002 correspondingly seem to be a rather promising perspective. Still investment appraisal techniques are best used together. Another simple technique is the payback period method. It gives a manager the notion of when exactly or how quickly will project cover the funds invested. For example if a project costs 100$ and it will return 20$ annually, then the payback period will be 100/20=5 years. Therefore to count the payback period of additional investment into East of the Ukraine we need to know how much it would return annually. I would recommend to get this information as quickly as possible - then the company will have the information on return of investments and the payback period of the project. Corporate Social Responsibility in Germany Corporate social responsibility (CSR) is a term referred to companies obligations not only in financial or economic field but also in social and environmental aspects. CSR is "a company's obligation to be sensitive to the needs of all of its stakeholders in its business operations." (Wikipedia, 2006) That is, when talking about corporate social responsibility we can think of three aspects: financial, social, and environmental. Placed in the context of the given case study we will take only two of them into account, excluding environmental out of the scope. The most important financial issue of CSR policy of Deutsche Brauerei in Germany is caring about its employees. Providing them with proper incentives, pensions, working conditions that comply with issues of and safety. Paying dividends to shareholders, and providing them with accurate financial information about the performance of the company is also an important part of CSR policy. The second aspect is social. As Deutsche Brauerei is an alcohol manufacturing company it must make sure to promote responsible drinking behaviors and to do what is possible to reduce the misuse of alcohol in society. Finally, the last but not the least responsibility is to control the quality of the own product minimizing its damage to human health. References Block, S.B. and Hirt, A.G. (2005). Foundations of Financial Management. 11th ed. McGraw-Hill/Irwin. Hine, S. and Thilmany, D. (1998). Financial Ratios: What They Say About Your Business. Department of Agricultural and resource Economics, Fort Collins. Investopedia. (2006). Return on Investment. Retrieved May 2, 2006 from http://www.investopedia.com/terms/r/returnoninvestment.asp Jolly, R.W. and Vontalge, A. (1994). Financial Troubleshooting. Retrieved May 2, 2006 from http://www.extension.iastate.edu/agdm/wholefarm/pdf/c3-53.pdf Scott, C. (1998). Insights into Operating and Financial Leverage. Retrieved May 2, 2006 from http://www.westga.edu/bquest/1998/leverage.html Wikipedia. (2006). Corporate Social Responsibility. Retrieved May 2, 2006 from http://en.wikipedia.org/wiki/Corporate_social_responsibility Read More
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