Case Study Molson Coors
Brewing CompanyStudent: Duc Manh Nguyen
Rohit Mangla
Instructor: Dr. Michael Favere-Marchesi
Main objectives
Classified Income statements
Earning persistence
Operational performance ratios
Concepts – aMajor classifications on
IS Revenue, Net revenue (minus excise taxes)
Gross profit ( by subtracting COGS)
Operating expenses
Non-operating expenses/income
Income before tax(EBT)
Income after net-tax items( extraordinary income, income from discontinued operations)
EPS, Diluted EPS
Concept - bClassified IS under US
GAAPTo make IS easier for users to
read and analyze the expenses and incomes It provides categories for expenses
by functionIt uses sub-total in calculating
income, expensesIt is more detailed than the single-
step IS
Concept cPersistent Income
It excludes the infrequent or unusual, extraordinary items in income statement.
Analyst normally adjust for better forecast future cash flow
It is necessary to understand how the current income is generated.
Concept dComprehensive Income
Comprehensive income = Change in owner’s equity due to operating income + Change in owner’s equity due to gain from non owners sources.
(Source of non – owners equity : marketable securities intended for sale, transactions in foreign currency (gain/loss), pension plans (overfunded/ underfunded)
Process eNet Sales vs Sales
Net Sales = Total sales – return of defected products – discounts (payment schemes) – allowance ( misplaced/damaged in transit goods)
Sales/Gross Sales – any kind of sale in a given period of time with out any deductions of any sort.
It gives more clear picture about the sales done by the company.
Process eNet Sales vs Sales
Various programs run by Molson Coors which result in reduction of sales
Price Promotion, Rebate and coupons.
Slotting or listing fees paid to customers
(these programs are considered as reduction in sales by MCBC)
It is also a good measure check the trend in defects/returns etc.
Process f, part ISpecial items on IS
The items that are not indicative of their core operations, they are still classified as operating expense and are not necessarily non-recurring. Infrequent or unusual items Impairment or asset abandonment-related losses Restructuring charges and other atypical
employee-related costs. or Fees on termination of significant operating
agreements and gains (losses) on disposal of investments.
Process f, part IISpecial items on IS
Separate line item Readers can easily compare core-operating and
“special” expense part. Easier to analyze the pure operating income
Classify as Operating Expense Red flag: Indicates instability of the business.
Process gOther income(expense),
netOther income (expense), net
is expense or gain from financing or investment activities like interest expense for the debt, interest income. It should not be included in operating activities
Process hStatement of comprehensive
income
Comprehensive income = $ 760.2 Million
Net Income (Operating Income) = $ 572.5 Million
24.6 % of the comprehensive income comes from unrealized activities.
ii. They are the income that must bypass the net income in the income statement because they have not realized.
They are foreign currency translation adjustments, unrealized gain/losses on derivatives instruments, pension and other postretirement benefit adjustment, the changes in equity due to non-owner sources.
Analysis INon-persistent items on
ISSpecial items: it contains restructuring
cost, impairment asset or asset abandonment…Therefore, they could occur again but very likely fluctuate.
Income from discontinued operations: non recurring item
Other income(expense), net: They could occur again but very likely fluctuate.
Analysis jIncome taxes
Effective tax rate = tax expense/ taxable income = 84/ 654.5 = 12.8% (year 2013)
The persist tax rate could be 12.8% Because the increase in 2012 effective tax is
only due to the increased statutory corporate income tax rate in Serbia from 10% to 15%, leads to the change between book value and tax basis of intangible assets purchased through acquisitions, leads to increasing DTL and increases valuation allowance to 6%.
Analysis kEstimation of persistent
income
Analysis L i. non operating items
on IS Other income (expense), net
Interest expense
Interest income
Other income (expense), net
Income from discontinued operations
Net loss (income) attribute to non-controlling interest
Analysis L ii. Total after-tax non-operating
item
Analysis Liii. Net operating profit after
tax
Analysis Liii. Net operating profit after
tax
NOPAT accounts for the fact that this company has a large amount of tax saving due to an essential part of debt in Liabilities. It is a better measure of income from leveraged firms.
Analysis mi. nonoperating items in
BSNon-operating assets: cash. It does not
contribute to the future generation of operating cash flow for firms. It would be excluded in the valuation of firm based on a discounted future earning cash flows model.
Non-operating liabilities: Long-term debt (which already included capital lease) considered to be financial liabilities. This is basically the leverage part of the firm, it should not be included when calculating net operating assets.
Analysis mii. Net operating assets
Analysis mii. Net operating assets
Net operating assets figure is useful for comparison to the net operating profit of a business .
In short, the net operating assets concept is intended to reveal the relationship between core earnings and core net assets, ignoring all financial engineering. This is an excellent basis of comparison when examining the financial structures of the businesses in an industry.
Analysis nReturn on net operating
asset
Analysis oOperating profit margin and Net operating asset turnover
Analysis o
Operating profit margin evaluates how effective a firm is operating.
Net operating asset turnover measures the efficiency of how a company is using its operating assets to generate operating income.
These ratios could be compared within the company over time or with other company in the industry, the higher the better.
Analysis pRNOA= Persistent net operating income / net operating Assets
Analysis pRNOA= Persistent net operating income / net operating
Assets
The new RNOA shows a more reliable results as it increases slightly from 2012 to 2013.
The old RNOA decreases nearly 1% over the period. That is due to the inclusion of Special items, which was considered to be non recurring item in the new RNOA calculation.
As stated in the footnote 1: “Although we believe these items are not indicative of our core operations, the items classified as special items are not necessarily non-recurring”. Therefore, the classification of this item as operating expenses is also not necessarily unbiased. As we are predicting the future profitability, we should use a stricter rule to calculate operating expenses.