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Diageo & Alcohol Companies

Analysing companies' finances and value from their financial statements using ratios and formulae
ADrunkenMarcus
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Diageo & Alcohol Companies

#269952

Postby ADrunkenMarcus » December 8th, 2019, 12:18 pm

I calculate the return on capital employed and operating margin for my shareholdings to keep track of the trend over time and the absolute performance they achieve. I use the unadjusted earnings from their annual reports and calculate it manually. I wonder if I am doing it wrong for Diageo.

If we look at EBITDA margin data provided by Sharepad, it shows the margin in the 30s%. However, my manual calculations show a lower number and an average of 20.6% since 2000.

For 2018, for example, I have operating profit of 3691 / 18432 sales and so 20.02% operating margin.

However, I think the calculation other sources use for alcoholic drinks companies is operating profit of 3691 / 12163 (sales - excise duties) which gets us a 30.34% operating margin for the same year.

Should I be better advised to calculate the operating margin on the basis of revenues after excise duty has been deducted?

I guess the key is that I calculate the operating margin for alcoholic drinks companies the same way so that I can compare them (Diageo is the only one I hold currently). The reason I have always calculated manually the data for my shareholdings is that I take it directly from the financial statements in the annual reports so that I know I am comparing them all on a like for like basis.

Thoughts?

Best wishes

Mark.

Dod101
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Re: Diageo & Alcohol Companies

#269955

Postby Dod101 » December 8th, 2019, 12:42 pm

On the subject of drinks companies I suppose an obvious question is whether all alcohol attracts the same duty. My impression is that it does not and if that is the case then the duty will be a higher or lower percentage of the sales depending on the mix of products so you are not comparing like with like.

I would use the net figure anyway because it is only from that that the profit is derived not the duty.

If you try to compare the operating margin for drinks companies against say tobacco you have at least the same problem again.

I admire you for your investigative curiosity but I should think the figures are almost bound to be a hit and miss, as I am sure there will be ways for companies to manipulate these figures.

Dod

TheMotorcycleBoy
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Re: Diageo & Alcohol Companies

#269962

Postby TheMotorcycleBoy » December 8th, 2019, 1:28 pm

Not sure whether this is particularly helpful for you, Mark. But here's part of my spreadsheet on DGE:



Looks like my OM calculation matches up with yours.

Matt

monabri
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Re: Diageo & Alcohol Companies

#269968

Postby monabri » December 8th, 2019, 2:56 pm

From Wiki

https://en.m.wikipedia.org/wiki/Excise

"An excise is considered an indirect tax, meaning that the producer or seller who pays the levy to the government is expected to try to recover their loss by raising the price paid by the eventual buyer of the goods."

So, it appears to me as though it is an imposed cost and it's up to the company to increase sales to make up for this cost. I would therefore use the figures that give the 20% margin. Wouldn't it be unfair to tax the company on the increased sales though..would it not be two lots of tax?

ADrunkenMarcus
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Re: Diageo & Alcohol Companies

#269989

Postby ADrunkenMarcus » December 8th, 2019, 5:50 pm

Thanks for your replies Dod, Matt and Monabri.

Matt, thanks for sharing your spreadsheet. We share an interest in the detail of the financial data and it's useful to see the metrics you have recorded. Are your figures done the same way, sourced from the annual reports?

This discussion has raised a lot of good points which got me thinking. Most data sources such as Sharepad clearly use the net revenue figure (excluding excise duties) but at least they do it for all alcoholic beverage companies so any comparisons are on the same basis in the same sector. I guess whichever one I go for, I will make a note that the inclusion or exclusion of excise duties makes a big difference - however I note that even on a conservative basis Diageo's operating profit margin of 20% points to a very strong business.

Best wishes

Mark.

TheMotorcycleBoy
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Re: Diageo & Alcohol Companies

#269994

Postby TheMotorcycleBoy » December 8th, 2019, 6:54 pm

ADrunkenMarcus wrote:Thanks for your replies Dod, Matt and Monabri.

Matt, thanks for sharing your spreadsheet. We share an interest in the detail of the financial data and it's useful to see the metrics you have recorded. Are your figures done the same way, sourced from the annual reports?

No problems. Yes, I grab the ARs and siphon the figures off them into a spreadsheet which is based on a template that I've fine-tuned over the past year and half. The DGE one I shared is one year short, i.e. I usually try to populate them with 6 years worth of figures (i.e. having 5 intervals). Each year is page on the sheet, then the next pages are 1) the section I shared - i.e. the summary of the KPIs and growth rates, and 2) the next few pages are outputs from various valuation models. The final page is general note i.e. other forms of research, comments about the board, any new investment by the firm.

For some firms I'm thinking of buying imminently (especially US ones) I also look at any quarterlies, and/or HYs to see if there's any trends to extrapolate etc.

In case you are interested, here's the rest of the KPIs page for DGE (I only shared the profitability section earlier on in order since it was the most germane to your OP):



however I note that even on a conservative basis Diageo's operating profit margin of 20% points to a very strong business

Yes. I really like Diageo. They have such a great set of brands which I see more and more of developing/emerging market countries inhabitants getting to like over the next few years!! An investment in DGE just seems like a no-brainer to me really.

I'm just wondering how much cheaper they may get right after the election, i.e. if sterling rises some more.

Matt

ADrunkenMarcus
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Re: Diageo & Alcohol Companies

#270722

Postby ADrunkenMarcus » December 13th, 2019, 2:13 am

Thanks for sharing, that's very comprehensive!

TheMotorcycleBoy wrote:
ADrunkenMarcus wrote:however I note that even on a conservative basis Diageo's operating profit margin of 20% points to a very strong business

Yes. I really like Diageo. They have such a great set of brands which I see more and more of developing/emerging market countries inhabitants getting to like over the next few years!! An investment in DGE just seems like a no-brainer to me really.

I'm just wondering how much cheaper they may get right after the election, i.e. if sterling rises some more.


The Pound has risen to $1.35 per £1 and Euro1.20 per £1 so we'll soon see.

I inherited some shares in Diageo back in 1998, when I was too young to own them in my name. Their record over those twenty years or so has been very good: capital gains 9.4% CAGR; dividend growth 6.7% CAGR, now yielding 12.4% on cost and it's paid far more than the 'book cost' per share; and the total return at a recent peak of over £36 a share came to over 700%.

Best wishes

Mark.

TheMotorcycleBoy
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Re: Diageo & Alcohol Companies

#271134

Postby TheMotorcycleBoy » December 14th, 2019, 5:46 pm

ADrunkenMarcus wrote:The Pound has risen to $1.35 per £1 and Euro1.20 per £1 so we'll soon see.

Then fell quite markedly and to settle at about $1.33. Now closed at 3051p from Friday. Probably low points of around 3032-3043 throughout the day.

Wondering whether £ will slowly sink again over the next couple of weeks, when reality of Brexit returns. Now could be as good a time any to top up?

Matt

ADrunkenMarcus
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Re: Diageo & Alcohol Companies

#271171

Postby ADrunkenMarcus » December 14th, 2019, 11:00 pm

TheMotorcycleBoy wrote:Then fell quite markedly and to settle at about $1.33. Now closed at 3051p from Friday. Probably low points of around 3032-3043 throughout the day.

Wondering whether £ will slowly sink again over the next couple of weeks, when reality of Brexit returns. Now could be as good a time any to top up?


The free cash flow yield on a forward basis (2020-21 or Diageo's next financial year, as they run June to June) is therefore forecast at 4.3 percent, comfortably covering a forecast dividend yield of 2.5 percent. Dividend growth is forecast at 6% or so for 2020, 2021 and 2022. You could do a lot worse!

I am keen to top up MasterCard to a meaningful size, which will be good to do if the Pound stays reasonably stronger against the Dollar. I won't have the funds to do so until April.

Best wishes

Mark.


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