Executive Summary

The aim of this study is to present a detailed analysis of Tate and Lyle companys
performance over the last two years from an investors perspective. The analysis will be
done for the years 2012 and 2013 with the help of certain ratios that will assess its
profitability, debt to equity, liquidity and the overall performance of the company.

The financial performance of Tate and Lyle has not been promising in 2013 although the
revenue increased by 5.4%. Increased costs due to inefficient cost structure or inefficient
operations wiped the increased revenue and company reported a decrease in net profit
which fell by almost 2%. Further, the decrease in liability were off set by a larger decrease
in assets which further impacted the current ratio, quick ratio, return on assets etc. Tate
and Lyle has significant debts outstanding which may put additional pressure on the
company as it has to honour its debt payments irrespective of the financial performance.

In a nutshell, Tate and Lyle has performed compared to its competitors in industry on
certain parameters, however, its performance could have been better. It has continued to
manage the expectations of its shareholders by distributing increasing dividends on an
annual basis to its shareholders which is not normal particularly in food industry where
smaller dividends are paid.

Company brief

Tate and Lyle Plc is a multinational business based in the United Kingdom. It is listed on
the London Stock Exchange and it is also a FTSE 250 Index company. The company
came into existence in mid 1921 when two competitive sugar refineries Henry Tate & Sons
and Abram Lyle & Sons merged. The owners of two refineries were bitter rivals however
close proximity of their refineries were sighted as one of the key reasons for merger post
their deaths.

Tate and Lyle has two primary business units - Speciality Food Ingredients and Bulk
Ingredients. These two revenue generating segments are supported by innovation and
commercial development unit which drives long term growth and research within the group
(https://www.tateandlyle.com). The diagram below describes the structure of business
segments for Tate and Lyle.
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In 2010, the company sold its European arm of sugar business to American giant for 1.2
billion resulting in cash surplus (Article published on FT.com). This sale resulted in a fresh
boom in share price after it had stagnated for many years. Further, outpouring some of the
key business functions including IT, Finance and Payroll to Poland resulted in substantial
cost savings and better business administration which further boosted the confidence
among investors resulting in share price growth.

Year 2013 brought some remarkable victories and significant increase in share prices for
Tate and Lyle with two major events. The company became a pioneer in manufacturing
high quality oats glucan without the use of chemicals, which had wide health benefits.
Also, it acquired majority shares in a Chinese food systems business that has given the
company a significant edge over its competitors in producing high quality cost efficient
products.


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Figure 1, source: Tate and Lyle PLC Annual Report and Accounts 2013; pg 37
Investors Ratio Analysis

An analysis of the ratios important from investors point of view is carried out in this
section. The detailed calculations are presented in the appendix at the end of the report
and graphical representation of the ratios is presented here for reading convenience.

I. Revenue Ratios

The profitability ratios describes how much profit the company earned for every pound
spent. It explains the margin a company has on its sale and it is a good indicator to assess
its competitiveness in the market. The diagram below shows Tate and Lyles revenue over
the last five years and its net profit and operating margin in 2013:

-
Net Profit Margin
As per Albrecht, Steve, Stice and et al., Net profit margin provides clues to the company's
pricing policies, cost structure and production efficiency (2005, pp: 23). A lower margin
signals a small safety margin, which means reduction in sales may wipe out profits and
lead to net loss. Tate and Lyles net income fell by 10.28% despite a 5.44% gross revenue
increase (from 3,088 million in 2012 to 3,258 million in 2013). The reduced net profit
was a result of significant increase in operating costs which almost wiped out companys
profits.

This resulted in a decrease in net profit margin to 8.35% in 2013 from 9.88% in 2012. Also,
compared to the industry net profit margin of 9.3%, Tate and Lyles margin is less which
may be due to inefficient cost structure, production process or distribution channels. The
company should work towards optimum utilisation of its resources to increase net profit
margin and cash flow.

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Gross Margin -
Net prot margin 8.35
Operating margin 10.26

-
Operating Margin
Operating profit margin measures what proportion of a company's revenue is left over,
after deducting direct costs and overhead and before taxes and other indirect costs such
as interest (Zane, Kane and Marcus, 2004, pp: 459). Tate and Lyles operating profit
margin decreased by 17.33% (from 404 million in 2012 to 334 million in 2013). As the
sales revenue and operations of the company grew, ideally the fixed costs and overheads
should have resulted in a smaller fraction of the total costs resulting in an operating profit
margin increase. However, the opposite occurred for the company. Compared to the
industry average of 13.24%, Tate and Lyles operating profit margin of 10.26% is
significantly low signalling a higher burden of fixed and other costs on sale which is not
healthy for the organisation.

II. Protability Ratios

Profitability ratios are, a class of financial metrics that are used to assess a business's
ability to generate earnings as compared to its expenses and other relevant costs incurred
during a specific period of time (Gary, 2000, pp: 47). Generally, a firms ratios are
compared with that of competitors ratio or its own previous periods ratios to analyse how
well the firm is performing. The diagram below shows Tate and Lyles net income over the
last five years and percentage of return on assets, equity and investment in year 2013.

-
Return on Assets (ROA)
Return on Assets gives an idea as to how efficient management is at using its assets to
generate earnings (Douglas, 1998, pp: 81). The net income in 2013 fell by 10.82% for Tate
and Lyle which resulted in a 1.34% decrease in the ROA to become 9.16% in 2013. The
decrease in ROA can be attributed to decrease in operating income by 10.28% and the net
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Return on assets -
Return on equity 26.29
Return on investment 11.61
assets also decreased by 4.09% in 2013. Further, compared to the average industry return
of 13.84%, Tate and Lyles return is lower at 9.16% which indicates that compared to its
competitors the company is not able to better utilise its assets to generate more cash,
despite being larger than many competitors and multinational operations.

-
Return on Equity (ROE)
This ratio is widely used by investor community. It measures the earning performance of a
company. As per Houston, Joel and Eugene, it measures a firm's efficiency at generating
profits from every unit of shareholders' equity (2009, pp: 90). Tate and Lyles ROE is
26.29% in 2013, almost 4% lower from 2012 at 30.76%. Generally a ROE figure of
between 15% and 20% is considered promising for investing in a company. And therefore,
Tate and Lyles ROE of 26% is above average and signals a good investment opportunity
for investors.

However, compared to 2013, the ROE in 2012 stood significantly higher at 30% (debt is
not considered for calculating this ratio). A closer analysis of the balance sheet revealed
that in 2012 debt element was higher which was reduced in 2013. This reduced debt
played a role in reporting higher ROE figure for 2012 which was subsequently reduced as
the debt was partially paid and equity was increased. Hence, considering Tate and Lyles
ROE in isolation may not reflect the true picture and should be interpreted on the basis of
its debt-equity proportion.

-
Return on Investment (ROI)
ROI is one of the most common yardstick for investors to assess the company. According
to Kaplan, Robert and Bruns, the purpose of the ROI metric is to measure, per period,
rates of return on money invested in an organisation to decide whether or not to undertake
an investment or if funds are already invested to assess its performance (1987, pp: 129).
The ROI for Tate and Lyle increased from 10.96% in 2012 to 11.61% in 2013 mainly due to
availability of funds for distribution as dividend. The increase in revenue and improved
operational efficiency resulted in higher payout to shareholders which is a positive sign for
the business. Generally, ROI for the industry stands closer to 5% as many food
manufacturers pay less dividends. Hence, almost the double rate of dividend payment
should attract investors towards Tate and Lyle. It is important to note here that increase in
ROI due to higher margins may affect the sales as this industry is highly competitive.
Hence, firms generally rely on better ROA to strengthen profitability.
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III. Growth Ratios

As the name suggests, the growth ratio indicates the rate at which a firm is growing. The
most common and important ratios are Dividend per share and Earning per share .

-
Dividend per Share (DPS)
Dividends per share are the amount of dividends that a publicly-traded company pays per
share of common stock, over their reporting period, that they have issued (Mocciaro,
Picone & Min, 2012, pp: 91). It is interesting to note here that some firms do not pay
dividends instead reinvest the profits in the business to grow it further. Year on year growth
of approximately 5.22% in dividends for Tate and Lyle is a promising trend as only few
firms in food processing industry pay dividends.

Also, a steady increase in dividend over years reflects continuous growth in the company.
A reduction in amount of dividend per share may signal firms poor financial performance
and many investorss may sell their shares out of fear for losing their money. Additionally,
DPS for the last five years when annualised is in-line with the industry average for Tate
and Lyle. The diagram below shows Tate and Lyles DPS over the last five years.

-
Earnings per Share (EPS) and Price-Earning Ratio (P/E)
EPS is the pound value of earnings per each outstanding share of a company's common
stock (Weygandt, Kieso, & Kell, 1996, pp: 801). The EPS for Tate and Lyle fell by 15.92%
in the year 2013 compared to that of in 2012 (from 0.64 EPS in 2012 to 0.54 EPS in
2013). The fall correspondents to decrease in net income by 10.82% and issuance of
additional equity shares in 2013.
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On the other hand, the P/E ratio indicates the level of premium investors are willing to pay
for a stock. The P/E ratio also includes the future growth expectations. As a result, a low
P/E suggests that the investors are not willing to pay a premium for the stock whereas a
high P/E ratio suggests payment of premium for shares which may be based on future
potential earnings. The P/E ratio of 11% in 2013 was a result of almost 20% increase in P/
E for 2012 i.e. 9%. This could be potentially due to the fact that Tate and Lyle signed a joint
venture deal with a Chinese company which could potentially mean lower cost of
production and higher profits in future.

In a nutshell, lower EPS in one year should not be analysed in isolation and other factors
such as DPS and P/E ratio should also be considered before taking investment decisions.
The growth ratios for Tate and Lyle looks healthy and investor friendly.

IV. Liquidity Ratios

Liquidity ratio represents a firms ability to honour it short term debts obligations. From an
investors perspective higher the value of liquidity ratio, better the safety margin of that
Generally, the higher the value of the ratio, the larger the margin of safety that the firm to
pay off its short term debts (Kaplan, Robert and Bruns, 1987). The key liquidity ratios
include current ratio and quick ratio. The diagram below represents the current and quick
ratio for Tate and Lyle over five years with values calculated for 2013:
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-
Current ratio
The current ratio is an indication of a firm's market liquidity and ability to meet creditor's
demands (Albrecht, Steve, Stice and et al., 2005, pp: 29). Although the acceptable value
of this ratio differs from sector to sector, normally values between 1.5 and 2.5 are
considered healthy. Value less than 1 may signal firms inability to meet its short term debt
obligations whereas values above 3 indicates inefficient use of firms current assets of
short term financing facilities.

The current ratio for Tate and Lyle for 2013 is 2.41 times which is higher than 2012s figure
of 2.25 times. Although the absolute value of total assets is declining steadily over the
years, it does not raise alarm as the liabilities are reducing faster that increase in the
assets. Tate and Lyles current ratio is better than that of its industry counterparts which
stands at 1.89 times. This can be partially due to efficient management of its assets and
repayment of its debts in recent financial year. However, the company should be careful as
any further increase in the value of its current ratio may signal inefficient use of financing
facilities.

-
Quick ratio
As per Houston, Joel and Eugene, Quick ratio measures the ability of a company to use
its near cash or quick assets to extinguish or retire its current liabilities immediately (2009,
pp: 97). A ratio of less than 1 suggest that firm can not meet its short term debt obligations.
Tate and Lyles quick ratio is 1.78 lower than 1.98 which was the ratio for 2012. Although
the quick ratio has decreased in a years time, it is still healthy and particularly when
compared to industry average of 1.25, Tate and Lyle has an encouraging quick ratio.

However, quick ratio should not be the sole basis for making investment decisions as it
does not give a full picture about firms health. For example, if debtors are due after 180
days but operational expenses and creditors are due for immediate payment, quick ratio
may suggest that firm is in good health whereas in reality it may be running of cash. To
summarise, Tate and Lyles quick ratio seems healthy and balanced.




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V. Debt to Equity Ratio

Debt to Equity ratio refers to measure of a company's financial leverage calculated by
dividing its total liabilities by stockholders' equity representing the proportion of equity and
debt used by a company to finance its assets (Zane, Kane and Marcus, 2004, pp: 468). It
is a benchmark to assess what quantum of debt a firm has undertaken versus equity
issuance. Generally, debt to equity ratio between 0.5 and 2.0 is considered healthy. Tate
and Lyles ratio is 0.83 which is significantly lower from 2012s figure of 0.93 times. The
improvement is primarily due to repayment of partial debt and issuance of new shares in
the year 2013.

Also, compared to food processing industrys average ratio of 2.68, Tate and Lyles ratio is
much better. This signals that the company has wisely managed its financial requirements.
Firms with high debt to equity ratio are considered vulnerable to changes in business
cycles as it has to meet its debt obligations irrespective of the sales levels. Whereas a
larger proportion of equity adds confidence to investors for it is considered as a measure
of financial strength.

Activity Based Costing (ABC)

ABC is a costing methodology that identifies activities in an organisation and assigns the
cost of each activity with resources to all products and services according to the actual
consumption by each (Weston, 1990, pp: 295). An ABC system establishes a relationship
between difference parameters such as products, costs and activities. And based on this
relationship allocates indirect costs which can not be generally identified to a particular
cost centre to products more logically than conventional costing methods (Hicks, 1998).

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Key components of ABC

The key component of this method of costing is identification of critical activities or cost
drivers. According to Weygandt, Kieso, & Kell, ABC involves matching costs with activities
(called cost drivers) that cause those costs (1996, pp: 835).

The underlying principles of ABC are:
-
Activities are the result of product manufacturing/ service offering
-
Activities are responsible for consuming resources and not products
-
Activities drive costs
-
Activities are not classified based on production volume. Instead of assigning costs to
traditional cost centres such as finance, administration, marketing and manufacturing,
ABC assigns costs both direct and indirect to various organisational activities such as
setting up a machine, resolving customer complaints, order processing etc.

The importance of ABC has grown in past few years due to
-
Significant increase in production costs and overheads
-
Production costs can no longer be bifurcated based on machine hours or direct labour
hours
-
Product ranges have grown and there are more diverse range than ever before
-
Customers demands have grown diversely and manufacturing wide range of one
product is common
-
There are no standard batch manufacturing system i.e. some products are bulk
produced, while many others are manufactured in small quantities

Conventional Costing

The traditional approach to allocating costs comprises of three steps which includes
accumulating costs within a unit, apportioning the non -production cost to production units
and allocating the updated costs to final products/ services or the end customers
(Mocciaro, Picone & Min, 2012).The costs allocated to various processes using traditional
costing may many a times provide distorted picture for the decision making and it may not
reflect the true cost level. For example, the traditional costing system allocates the idle
capacity of the machinery to products, as a result the costing of those products increased
due to resources that they did not use.

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Analysing ABC and traditional costing techniques

Normally, manufacturing firms adopt traditional costing to assign production costs to the
units produced. Traditional costing uses one volume scale such as machine hours or direct
labour hours for assigning the costs to each unit. The downside of this approach is that
non manufacturing costs such as administrative and marketing costs are also allocated on
the basis of production overheads which may give a distorted picture as not all the
products would require same level of administrative or marketing activities (Weston, 1990).
In the current era, traditional systems are considered outdated for both manufacturing as
well as non manufacturing industries as sophisticated tools are available for better cost
allocation.

On the other hand, ABC follows a more systematic and logic process to assign
manufacturing costs to products. As per Kaplan, Robert and Bruns, Unlike traditional
costing that simply assigns costs based on the machine work hours, the ABC assigns
costs first to the activities and processes that cause the overhead (1987, pp: 219). These
overheads are assigned only to those products that require performance of these
activities. To summarise, following are the key differences between the two types of
costing methods:

!
The traditional costing gives importance to the production structure instead of processes
whereas ABC assigns costs based on processes than on structure
!
The changing manufacturing sector and heavy use of advanced technology has made
use of traditional costing redundant and most large organisations and businesses adopt
ABC for appropriately assigning costs
!
Compared to traditional costing, the ABC assigns costs more accurately and logically
!
In traditional costing all types of products will be allocated same costs whether such
costs were needed for manufacturing the product or not. However, for ABC, only the
activities that were required for manufacturing the products will be assigned to the
product.

Impact of ABC costing

Implementing ABC is costly and complex. However, due to its advantages many big
organisations from both manufacturing as well as service industry are resorting to ABC as
it accurately allocates costs and provides a true profitability picture of products.
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ABC can provide various benefits to firms and aid in strategic management decision
making process. As per Houston, Joel and Eugene, the basic role of ABC is to provide
management with detailed information for decision making so that management can better
streamline processes, eliminate waste, and reduce costs (2009, pp: 151). For ABC to be
successful, in-depth information about various products, their costs and profits should be
used for reducing wastes, un-necessitated costs and improving firms overall performance.

One of the key reasons for using ABC is increased use of technology which results in
significant indirect costs, which if allocated traditionally will result in distorted picture.

Further, inappropriate costing technique can result in substantial losses to organisations
due to inaccurate costing and product pricing, underestimating costs, non detection of
processes that are not productive etc.

Although, the initial cost involved in implementing ABC may stop many firms to adopt it, in
the long run it is better for understanding more accurate financial performance of the firm.
Further, due to its popularity, many computer softwares are being developed and marketed
which significantly reduce the cost of adoption. ABC enables organisations to focus on
profitable products and eliminate any non value adding activities and processes.
Furthermore, it plays a critical role in determining the pricing for each product accurately
which is important for deciding the minimum order size.

Adoption of ABC for Tate and Lyle

Tate and Lyle is divided into two key segments and many sub segments which focusses on
a specific product and offering. At the moment, it is using traditional method of costing for
allocating costs among various products which may provide a distorted picture. Hence, the
firm should adopt ABC for better understanding the performance of each product. Since it
is a public limited company, it has higher responsibility for giving accurate results and
accounts to its shareholders. At the same time, it will help the company to eliminate any
waste, non productive activities or loss making products. It will give a benchmark for
company to assess the accurate performance of its products, therefore switching to ABC
method of costing would be beneficial for company and it will also increase the confidence
of its shareholders as ABC is a logical and more accurate costing technique.
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Conclusion

As per the analysis of Tate and Lyles financial performance and statements for the last
two years 2012 and 2013, it is clear that the firm has a mixed performance over the last
two years. Its revenue increased, however, its net income decreased which was primarily
attributed to the inefficient cost structure and operational inefficiency. The firms debt
reduced during the year whereas, the company issued new common stock to public. This
resulted in increased confidence from shareholders as firms reliance on debt reduced and
in times of financial difficulties, the company has lesser obligations to pay its debts. Also,
the company managed the expectations of its shareholders well with continuous
distribution of dividends which was higher compared to its competitors in the industry.

Also, the study about ABC and conventional costing techniques revealed that the former
technique of costing is better for allocating costs accurately and identifying non productive
activities in the production process. The costs can be logically divided between various
products based on the number of units, batch activities, product activities etc.

Organisations can assign indirect costs more accurately by adopting ABC method. Unlike
traditional costing, ABC enables firms to identify activities required for manufacturing a
product and apportion costs proportionate to the activities used. More importantly the
activity based analysis provides the basis for correcting the distortions which are inherently
present in the traditional costing techniques.

Adoption of ABC by Tate and Lyle could provide a better picture of each products
performance. Also, it could determine and apportion indirect costs more sophisticatedly
and systematically. ABC can provide deeper insights to the cost structure which may make
the firm competitive and provide an edge over competition. Therefore, Tate and Lyle
should switch to ABC as it can better assess performance of various products and
activities.

References
Albrecht, W. Steve, James D. Stice, Earl Kay Stice, and Monte Swain. Financial
Accounting. Thomson South-Western, 2005.

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Bodie, Zane; Alex Kane and Alan J. Marcus (2004). Essentials of Investments, 5th ed.
McGraw-Hill Irwin. p. 459. ISBN 0-07-251077-3.

Cokins, Gary. "Overcoming the Obstacles to Implementing Activity-Based Costing." Bank
Accounting and Finance. Fall 2000.

Hicks, Douglas T. Activity-Based Costing: Making it Work for Small and Mid-Sized
Companies. 1998.

Houston, Joel F.; Brigham, Eugene F. (2009). Fundamentals of Financial Management.
[Cincinnati, Ohio]: South-Western College Pub. p. 90. ISBN 0-324-59771-1.

Kaplan, Robert S. and Bruns, W. Accounting and Management: A Field Study Perspective
(Harvard Business School Press, 1987) ISBN 0-87584-186-4

Lobo, Yane R.O., and Paulo C. Lima. "A New Approach to Product Development Costing."
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Mocciaro Li Destri A., Picone P. M. & Min A. (2012), Bringing Strategy Back into Financial
Systems of Performance Measurement: Integrating EVA and PBC, Business System
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Sapp, Richard, David Crawford and Steven Rebishcke "Article title?" Journal of Bank Cost
and Management Accounting (Volume 3, Number 2), 1990.

Tate and Lyle PLC Annual Report and Accounts 2013, retrieved from http://
www.tateandlyle.com/InvestorRelations/Documents/Annual%20Reports/Annual%20Report
%202013.pdf

Weygandt, J. J., Kieso, D. E., & Kell, W. G. (1996). Accounting Principles (4th ed.). New
York, Chichester, Brisbane, Toronto, Singapore: John Wiley & Sons, Inc. p. 801-802.

Weston, J. (1990). Essentials of Managerial Finance. Hinsdale: Dryden Press. p. 295.
ISBN 0-03-030733-3.

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http://www.tateandlyle.com/

http://markets.ft.com/research/Markets/Tearsheets/Financials?s=TATE:LSE


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Appendix









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Page of 18 20
Figures in millions
Particulars 2013 2012
Revenue 3256 3088
Net Income 272 305
Net Prot Maargin 8.35% 9.88%
Operating Prot 334 404
Operating Prot Margin 10.26% 13.08%
Total Assets 2787 2906
ROA 9.16% 10.5%
Average Equity 1034.5 991.5
ROE 26.29% 30.76%
Total Debt 896 946
Total Equity 1036 1033
Debt to Equity 0.83 0.93









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Particulars 2013 2012
Current Assets 1363 1389
Current Liabilities 590 691
Current Ratio 2.41 2.25
Quick Assets 1050 1136
Quick Ratio 1.78 1.98

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