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CRH - V.

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Successful Financial Performance


Analysis & Interpretation

Overview
This study looks at:
◗ Users of financial information
◗ Financial reporting standards
◗ Financial ratios in relation to CRH accounts for 2004

INTRODUCTION
A MODEL OF FINANCIAL
CRH, the International Building Materials Group, has a
strategic vision, which is clear and consistent. It is to "be
PERFORMANCE
an international leader in building materials delivering
Despite significant challenges in its operating environment,
superior performance and growth".
CRH continues to perform well. 2004 was a landmark year
for CRH. Sales were up 16% over the previous trading
CRH plc, headquartered in Ireland, has operations in 24
period. Operating Profit was up 19%. Profit before Tax was
countries, employing more than 60,000 people at over
up 18%, exceeding one billion euro for the first time.
2,100 locations.

Shareholders in CRH have reason to be pleased as well. Its


CRH is divided into four regionally focused Divisions:
total dividend, or share of profit distributed to shareholders,
Europe Materials, Europe Products & Distribution,
increased by 17.4% over the previous trading period. CRH
Americas Materials and Americas Products &
Earnings per Share were also up by 20%.
Distribution. Within these divisions, experienced
operational management are given a high degree of
In July 2005, CRH announced further development
individual responsibility. They operate with local
initiatives comprising acquisitions and investments totalling
autonomy within CRH guidelines and controls.
€231m.
CRH is listed on the Irish and London Stock Exchanges
CRH maintains a relentless emphasis on performance
and on the NASDAQ.
and looks to continuing progress in the years ahead. This
requires strong management with constant monitoring of
all aspects of the business.

MONITORING THE BUSINESS


Businesses can fail because of cash shortages or low
profitability. Cash can dry up because of a fall in sales,
high costs or poor cash flow management. The business
may also have too much cash tied up in assets. As a
result, a business should closely monitor its finances to
ensure it has enough cash to meet its costs. This gives the
business control, which is a vital management activity.
Some relevant control methods include Cash Control,
Credit Control and Stock Control.

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Ratio Analysis is where accounts can be interpreted for the benefit WHAT ARE THE IMPORTANT
of interested parties. It can help with the control methods and can
also be used for decision-making by management. Comparisons
FINANCIAL STATEMENTS USED
can be made from year to year, and future plans can be formulated BY A BUSINESS?
based on this information.
◗ Profit & Loss Account - shows gross profit and net profit
CRH has consistently delivered superior long-term growth in total ◗ Balance Sheet - shows assets (items of value that the
shareholder return, averaging over 19% per annum since the Group company/business owns), liabilities (debts the company/business
was formed in 1970. owes) and share capital (money invested by owners/shareholders)
of a business at a point in time

The accounts used for calculations in this study are for CRH plc
WHO ARE THE USERS OF
consolidated (including the accounts of all subsidiary companies).
FINANCIAL INFORMATION? Simplified versions for 2004 are shown.

◗ Entrepreneurs and managers can measure performance


FINANCIAL REPORTING
compared to previous years and the performance of rival firms.
For example, CRH managers can determine if the business is STANDARDS
meeting its objectives and use this information in planning,
decision-making and controlling. Companies must present accounts in a certain way, as set out in the
◗ Owners/Shareholders/Potential Investors will want to know Financial Reporting Standards published by the Accounting
how successful the management is in operating the business Standards Board. How much detail given will depend on the size
and using resources. In the case of CRH, they will look at the and type of company. There are public companies, such as CRH,
amount of profit generated, expected dividends and the risk and private companies of differing sizes. Present guidelines state
attached to their investment. They will want to know if the what is considered to be a small, medium or large company.
company is a good investment.
Criteria SMALL MEDIUM LARGE
◗ Banks are interested in the business’ ability to generate profits
to pay interest or to repay existing loans and overdrafts. They Gross Assets €1.9m €1.9m - €7.6m > €7.6m
will also assess the value of assets being used as security for Turnover €3.8m €3.8m - €15.2m > €15.2m
loans. This can determine whether further finance will be made
Average no. < 50 50 - 250 > 250
available. of employees
◗ Suppliers/Trade Creditors can assess a business’ ability to
[Republic of Ireland, periods commencing on or after 1 July 2004]
pay debts in full and on time, and decide whether to give the
business credit.
Criteria SMALL MEDIUM LARGE
◗ Employees will want to determine job security, prospects for
promotion and the ability of the firm to meet wage demands in Gross Assets Stg£2.8m Stg£2.8m - > Stg£11.4m
Stg£11.4m
the future. For example, CRH employees may want to know if
the workforce may be expanded in the future. Turnover Stg£5.6m Stg£5.6m - >Stg£22.8m
Stg£22.8m
◗ Customers may want to look at CRH’s reliability as a supplier
and its future in providing an after-sales service. Average no. < 50 50 - 250 > 250
of employees
◗ Competitors will use the information to determine the strengths
and weaknesses of CRH and its future potential. In general [Northern Ireland, periods ending on or after 26 May 2004 (size) /26 July 2004 (audit exemption)]
businesses may be interested in financial information as they may
intend to merge with or take over the business in the future. Financial Reporting Standards and previously Statements of Standard
◗ Government will want to know how grants were spent and Accounting Practice set down acceptable formats for presentation
that CRH is following all legal requirements. (i.e. Cash Flow Statements and Published Accounts) and methods of
◗ The Revenue Commissioners will look at how much profit accounting (i.e. Stock Valuation and Depreciation). This leads to
CRH is making as this will affect the amount of tax being paid. accounts that show a ‘true & fair view’ of company finances. It also
◗ The General Public will look at any monies invested in the aids comparisons and analysis from year to year, and also between
local community, the employment potential in the area and the companies in the same industry or sector. CRH publishes its financial
effects of the company on the local environment. results, including its Profit and Loss Account, Balance Sheet, Cash
Flow Statements on its website www.crh.ie

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WHAT DO THESE DIVIDEND POLICY/INVESTMENT RATIOS


ACCOUNTS TELL US? Shareholders • Potential Investors

1. Dividend per Share (DPS)


Different parties are interested in different figures and ratios. The
major parties are listed under each heading below. Total Ordinary Dividend (Paid & Proposed)
Number of Ordinary Shares Issued
PROFITABILITY
Shareholders • Potential Investors • Management • Banks • Debenture Holders This measures (in cent) the dividend paid on each ordinary share.
1. Gross Profit Margin To maintain investor confidence this needs to be kept constant. For
CRH this was 33.2 cent for 2004.
Gross Profit
X 100 2. Dividend Yield
Sales

Dividend per Share


Sales are sometimes called Turnover in the Profit and Loss Account. X 100
Market Price per Share
The CRH Group’s Gross Profit Margin in 2004 was 31.5%.

2. Net Profit Margin This is the dividend paid expressed as a percentage of the market
price. This can then be compared with rates of return from other
Profit before Interest & Tax (PBIT) risk-free investments. For CRH this was 1.7% for 2004, based on
X 100
Sales the Market Price of €19.70 of 31 December 2004.

The CRH Group’s Net Profit Margin in 2004 was 9.42%. 3. Dividend Cover
3. Return on Shareholders Funds Profit (after Tax & Preference Dividend)
Total Ordinary Dividend (Paid & Proposed)
Profit (after Tax & Preference Dividend)
X 100
Ordinary Shares + Reserves This compares the dividends with the profits available. For CRH
this was 4.3 times for 2004.
This shows the company’s return to the ordinary shareholders’
investment. A return of at least 10% together with a satisfactory
4. ‘Real Return’
dividend will be necessary to ensure that shareholders hold on to
their shares. The return for the Group in 2004 was 14.4%. Dividend Yield x Dividend Cover
4. Return on Capital Employed This shows what is called the real rate of return and can more readily
be compared with the return from risk-free investments. For CRH
Profit (before Interest & Tax) this was 7.3% for 2004.
X 100
Ordinary Shares + Reserves + Long Term Liabilities
5. Price Dividend Ratio
This shows the profit generated by the company considering the
total capital invested. A constant return of 10% or above would be Market Price per Share
considered a healthy trend. The return for the CRH Group in 2004 Dividend per Share
was 12%.
This measures how long it would take one ordinary share to recoup
LIQUIDITY (recover) its value at present dividend payout rate. For CRH this
Shareholders • Potential Investors • Management • Banks • Customers was 59 years for 2004.
Debenture Holders • Competitors
6. Earnings per Share (EPS)
1. Current Ratio
Profit (after Tax & Preference Dividend)
Current Assets : Current Liabilities Number of Ordinary Shares Issued

Current Liabilities are known as Creditors’ amounts falling due within This measures the earnings, in cent, of each ordinary share. For
one year. This shows the company’s ability to pay its short-term debts. CRH this was 143.8 cent for 2004.
The value of this ratio for CRH in 2004 was 1.96:1.
7. Price Earnings Ratio (P/E)
2. Quick Ratio (Acid Test/Liquid Ratio)
Market Price per Share
Current Assets - Stock : Current Liabilities Earnings per Share

Here stock is excluded as it is the least liquid or not as easily turned into This measures how long it would take one ordinary share to recoup
cash as the other Current Assets. A ratio of 1:1 is considered acceptable. (recover) its market price if the current performance is maintained.
The value of this ratio for CRH in 2004 was 1.4:1. For CRH this was 13.7 years for 2004.

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GEARING Group P&L Account 31 Dec 2004 31 Dec 2003


Shareholders • Potential Investors • Management • Banks €m €m
Debenture Holders
Group Turnover 12280 10774
1. Debt Equity Ratio (Gearing) Cost of Sales (8412) (7461)
Gross Profit 3868 3313
Debt Capital : Equity Capital Profit before Interest & Tax 1157 982
Interest 140 118
For CRH in 2004 this was 0.815:1.
Profit before Tax 1017 864
2. Debt/Total Capital Percentage Profit after Tax 770 646
Profit after Tax & Preference Dividends 762 640
Debt Capital
X 100 Ordinary Dividends (Paid & Proposed) 176 148
Total Capital

While every effort has been made to ensure the accuracy of information contained in this case study, no liability shall attach to either The Irish Times Ltd. or Woodgrange Technologies Ltd. for any errors or omissions in this case study.
Debt Capital consists of Debentures, Loans and Preference Average No. of Ordinary Shares 530m 526m
Shares if any. More than 50% is highly geared, less than 50% is Market Price per share as at 31 Dec €19.70 €16.28
lowly geared and 50% is neutrally geared. For CRH this was
44.9% for 2004. Group Balance Sheet 31 Dec 2004 31 Dec 2003
€m €m
3. Interest Cover
Intangible Assets 1444 1475
Profit (before Interest & Tax) Fixed Assets 6022 5494
Interest
7466 6969
This measures the company’s ability to pay the interest it owes on loans. Current Assets
For CRH this was 8.26 times for 2004.
Stocks 1250 1118
Debtors 1830 1681
Cash 1322 1298
THE LIMITATION OF ACCOUNTS 4402 4097
– WHAT DO THEY NOT REVEAL? Creditors (Amounts falling 2248 2193
due within one year)
Net Current Assets 2154 1904
While Ratio Analysis can be of great use to a business, there are
some limitations. For example: Total Assets less Current Liabilities 9620 8873
◗ Figures to calculate ratios are taken from past performances
and do not tell how a business will do in the future.
Creditors (Amounts falling due 4320 4023
after more than one year) etc.
◗ Not all data may be available, so a business can prepare only
limited ratios. Shareholders Funds 5300 4850
◗ Performance according to Ratio Analysis may be shown to 9620 8873
improve/deteriorate yet this may be outside the control of
management e.g. exchange rate fluctuations, interest rate
changes or taxation.
◗ Different companies in the same industry may use different ACTIVITy
accounting methods or may not have exactly the same product
range, so direct comparisons can be difficult.
Compare and contrast CRH 2003 figures with 2004 figures
◗ Ratio Analysis cannot measure staff morale, staff/management under the following headings:
relations or any other aspect that cannot be measured in direct
monetary terms.
◗ Profitability ◗ Liquidity ◗ Dividend Policy ◗ Gearing
for two different stakeholders: shareholder and bank.
◗ New competition does not show up initially in Ratio Analysis.
◗ If a business changes its accounting procedure direct
comparisons may not be made using old and new methods.

CONCLUSION Find out more


All of the information generated by the interpretation of CRH’s
accounts show that it is in a very strong position in its sector. CRH
◗ Click on the website www.crh.ie

management would be very pleased with the performance.


Shareholders would be very pleased with the return they are
achieving. This would also be encouraging to Potential Investors.
Banks and Debenture holders would have no fears as there are
sufficient funds available to repay loans provided.

Comparisons with the excellent 2003 figures show that CRH is


continuing to face a very positive future for all parties involved!

4/4 CRH
Successful financial performance Business 2000
2005/06
ninth edition