65% of assets to 42.03%. While deferred taxes have increased, the company has seen its post-retirement benefits liabilities reduced. With respect to the structure of Diageo's assets, non-current assets have been reduced slightly. Non-tangible assets (primarily intellectual property) did not change significantly in value. Diageo was able to reduce its inventories slightly in 2010, in addition to reducing its receivables. These moves allowed Diageo to improve its working capital management -- a greater percentage of its assets are held in cash and equivalents.
Overall, the balance sheet shows that the company is growing steadily. Diageo's total assets have increased 21.6% over the past two years, with increases coming in many key categories. Of note is one category that has not grown, receivables, illustrating that Diageo has been able to tightly control its receivable levels over the past two years. The company's equity declined in 2009, but grew again in 2010. Diageo has effectively doubled its cash holdings in the past two years as well, showing a commitment to improving its financial strength and showing restraint with respect to increases in spending.
The statement of cash flows does not typically receive "common-size" treatment. Diageo was able to increase its cash flow from operations by 41.9% in 2010, a dramatic improvement over prior years. This performance belies that relative stability in evidence on the income statement. Cash generated from operations increased 19.5% and the company received substantially more interest in 2010. Diageo saw its cash outflow from investing activities reduced by 7.2% on the year, although the amount was not significant in terms of its entire cash flow situation. A 24.3% increase in cash outflow from financing activities was noted. Diageo increased its dividend, as noted in the Chairman's Statement, sending an additional £44 million to shareholders in 2010 over 2009 levels. The company increased its loans, so while borrowing as a function of capital structure was reduced, total borrowings increased. In addition, Diageo halted its share repurchase scheme that saw the company repurchase £1.088 billion in shares in 2008 and a further £354 million in shares in 2009.
The statement of changes in owner's equity also does not typically receive the "common-size" treatment for analysis. Diageo's equity improved significantly in 2010, following a decline in 2009. The company has generally held the book value of its equity steady through share repurchases, but this program halted in 2010 and that was the most significant factor in the sharp increase in book value of the firm's equity (23.5%). The other factors contributing to changes in the value of owner's equity have remained relatively stable over the course of the past four years, including comprehensive income and dividends paid. While these have changed, those changes have not significantly impacted on the book value of the owner's equity to the degree that the share repurchase program did.
The financial statements at Diageo do not reveal any significant shifts in strategy over the past three years, nor do they reveal any weaknesses in the company. A large company with a high level of geographic diversification would be expected to weather the economic storm that hit Diageo's large markets in the UK, the U.S. And Ireland, and that is precisely what has happened. In essence, there are no surprises in the Diageo financial reports. The company is performing as a mature company with a high degree of diversification would be expected to perform.
Part 3:
A financial ratio analysis can be conducted with respect to the firm's key ratios -- liquidity/solvency, profitability and efficiency being the most important. These ratios are best analyzed in the context of the company's own historic performance, to highlight areas of improvement and areas of weakness. It is also important to understand where these levels are with respect to the industry -- even an improving ratio may be at an unhealthy ratio or vice versa. Diageo's industry in alcohol beverages is a difficult one to benchmark. A substantial percentage of Diageo's sales comes from beer, a highly fragmented industry in which none of Diageo's spirits competitors operate. Among spirits operators, only Pernod Ricard has the type of diversification that Diageo has. It is the most similar competitor, although its wine business (Jacob's Creek) is more significant than any of Diageo's wine businesses. Other competitors such as Bacardi and Brown Forman (Jack Daniel's) are oriented towards one or two star products. On MSN Moneycentral, Diageo's...
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