Merrydown plc

Analysis of 2001/2002 report


Executive Summary

Merrydown plc targets the premium price range shoppers, projecting an image of quality. It produces superior ciders and non-alcoholic soft drinks, such as Shloer grape juice, which are aimed at an adult market.

Recently the cider market has suffered a decline in interest from the general public, making it more difficult for Merrydown to maintain it's previously substantial market share. Theoretically the brand should be suffering to a greater extent than it is in the market. Despite the struggle of similar companies, it has maintained competitive advantage by new and innovative promotional strategies, as well as vigorous cost control and new packaging sizes.

Shloer on the other hand, has received dramatic increases in the purchases by their existing customers, and a cash injection for promotional activities has succeeded in attracting new customers to their product.

This year there has been a restructuring within the departments of the company, Management and Production have been ordained into separate buildings. Marketing is now nearer to the M25, which allows easier access to the offices by road.

Merrydown plc belongs to a larger group, whose systems of internal controls are responsible to a board of directors. In the year of 2000/2001 the board consisted of 3 Executive and 3 non-Executive Directors appointed by a nominations committee.

At present the Merrydown plc maintains a strong position in the market place due to its intelligent business strategies such as the sale of a warehouse at a gain of £0.04 million and an investment of a new shrink wrapping machine which allows added flexibility to satisfy specific sales requirements.

Terms of Reference

This report discusses the currant performance, financial position and likely prospects of the company based on the annual report and the published financial statements for the financial year of 2000 / 2001 ending 31st March.

Further information has been obtained from the Merrydown plc web-site and from the financial times web-site.

Reference books used in this report include; Accounting and Finance for Non-specialists, second edition by Peter Atrill and Eddie McLaney also; Accounting for Non-accounting Students by J.R.Dyson.

Company History

Jack Ward, Ian Howie and John Kelland-Knight who each contributed £100 to set up the company founded Merrydown in 1946. The Merrydown name was taken from Jack Ward's cottage in the East Sussex countryside between Eastbourne and Tunbridge Wells.

Pressed in a traditional 300-year-old oak cider press, Merrydown produced its first batch of Vintage Cider fermented from 450 gallons of apple juice. 9 years later this volume had risen by 900 times the original amount. 30 years after that, Merrydown reported it had finally reached over a million pounds in profit.

In the 1975 budget, taxes on alcoholic fruit wines were increased, so in order to avoid paying the 103% duty, Merrydown who was producing many fruit wines such as; elderberry, redcurrant, white grape, gooseberry and cherry, had to reduce the alcohol content to under 15% proof (8.5% alcohol by volume). This was also Merrydown's first slightly sparkling Vintage Cider.

The products Merrydown plc produce, are popular throughout the United Kingdom, distributed in public houses, supermarkets and off licences. As well as the British market, Merrydown's products are also exported and are well received abroad. In 1970, the Queen awarded Ian Howie the MBE for service to British exports.

Recently there has been a restructuring of the business within the Management and Production departments of the company, these are now in different buildings. Marketing has been moved now nearer to the M25, which allows easier access to the offices by road. The next step for the company is expanding through the acquisition of companies following a similar market and business practices. The aim of this enterprise is to enhance the shareholder value.


At present the Merrydown group is a profitable one and has improved this profitability from the previous year. The companies retained profit for 2001 was only 86.71% of that from the year before, despite there being more profit available before taxation. The reason for this being, that in the year of 2001 the company was more generous with the amount of dividends paid to their shareholders.

The underlying profitability of the company can be analysed further be calculating various profitability ratios. The Return on Capital Employed for the year of 2001 is relatively low at only 6.90%. This expresses the profit of the business as a percentage of the capital invested for that year. On the other hand this figure has risen from that of last year when the Return on Capital Employed was 1.22% lower, at 5.68%. Thus this shows that the amount of return upon the money put into the business is slowly increasing.

The capital turnover ratio has increased between the years of 2000 and 2001, which may explain partly why the Return on capital employed has increased, also perhaps due to a slight increase in the net profit ratio. The net profit ratio is the groups profit expressed as a percentage of that year's turnover (sales), Companies aim for a high percentage as it measures their ability to control indirect costs. In order to achieve this aim, one way would be to increase sales and reduce their overheads. For the group in 2000 and 2001 the net profit ratio was 4.72% and 5.94% respectively.

Increasing the overall sales of the group would also reduce the Gross profit ratio, which was 40.96% and 40.90% for 2000 and 2001 respectively, which although decreased slightly by point zero six percent is relatively stable at an acceptable rate

The group figures for the Gross profit and the Net profit ratios show a significant difference between them despite being stable between the two years. The substantial discrepancy could be an occurrence of excessive overheads or taxes within the group perhaps due to the nature of their product.

The above figures are a good indication of the future performance of the group, if the current business practices ensue. However to ensure this steady improvement in the underlying profit of the organisation, it would be a good idea to carefully monitor the administrative and overhead costs, keeping them to a minimum.

Liquidity and Working Capital

The group has suffered a decrease in the cash inflow from operating activities, of £320 000 from £1 247 000 to £927 000, however there has been no refinancing of the group which would explain this.

The turnover of stock within the group has risen over the period between 2000 and 2001, this can be accounted for by the sizeable effort on the part of Merrydown, to promote both Shloer and the Merrydown cider brand. This is above what is expected of the cider market due to struggling sales of other companies.

Both the group and the company have succeeded in reducing the time in which it takes them to pay their suppliers. The company showed a more dramatic decrease in the creditor payment period than the group. Comparing the drop of 3 days from 54 to 51 for the group to the decrease of 17 from 65 to 48 days in the company, there is an substantial difference. Although there is no formal company policy for the repayment of suppliers, it could be that the Merrydown plc used the group's performance as a general guideline, and upon noticing that in the year 2000 they had a longer repayment period, further increased their effort to reduce this.

Reducing the Creditor payment days will increase the goodwill that exists between them and the suppliers, increasing the likelihood that if for some reason they couldn't pay the suppliers for a longer than average period, the suppliers would be more lenient considering past performance.

The amount of time it takes for the debtors to turn into cash however, is a lot longer than that of the group recompense their debts. Though this in itself has also decreased further improving the speed at which cash flows through the business.

The current ratio when applied to Merrydown, provides figures for both the company and the group which are slightly above the ideal range of between 1.5 and 2, the difference though is at most 0.27. This analysis shows that there is inefficient use of financial resources. A high ratio of current assets to current liabilities implies that the business may be over compensating their reserves to cover risks of short-term liabilities as and when they fall due.

One strategy for Merrydown to reduce their current ratio to the ideal rate would be to sell off any unnecessary assets whilst still remaining enough to cover their current liabilities.


In the year 2001 neither the group nor the company had any long term loans or liabilities compared with £81 000 from the previous year. Thus the only comparison that can be sensibly be made her is between the group and the company for 2000. This comparison implies that since the company's figure is lower that that of the group, although both being substantially low, the company receives its funding for assets proportionally more from shareholders than the group does.

The higher the figure, the more the capital comes from various loans and the bigger the risk. Both figures being very low at 0.640% for the group and 0.631% for the company, there is little risk and minimal interest paid.


Merrydown plc is currently profitable, however the decrease in retained profit for the year is accounted for by increased generosity of dividends to shareholders. At £199 000 in dividends this is a substantial difference from the figure for 2000 at £133 000. Especially considering there is only a small difference between the two year's profit before tax, just £5 000.

Further evidence of an increase in generosity of the dividends by expressing them as a percentage of the profit before taxation. An increase of nearly 11 percent from 22.47% to 33.33% shows the companies confidence in it's continuing success.

This increase in dividends is likely to raise the share price of the company because the more dividends paid, then the impression of the company is increased within the public mind. This is likely to be a natural growth as the share price of 2000 rose by 7 pence in that year.

The overall earnings per share as illustrated by the dividend yield, has also risen, further increasing the publics confidence in the companies profitability. In 2001 each shareholder received 2.92 pence per share they held compared to just 1.57 pence the year before.

The Price earnings ratio has changed from 18.47 to 12.33 which implies that the market believes or has done in the past, that Merrydown plc is becoming a more valued investment as market share prices are based upon future expectations of performance. However non-quantitative data should be considered when assessing the growth potential of this investment


Recently the cider market has suffered a decline in interest from the general public, this has led to difficulties for Merrydown to maintain a market advantage. Theoretically the brand should be suffering in this decline. However, it has maintained its substantial market share and a positive cash flow throughout the company.

In the year 2001 the business was proportionally more generous in the issue of dividends to its shareholders than the year before. The share price has increased and is likely to go on doing so as there is a noted increase in the value of Merrydown as an investment.

The company reports a high liquidity and hence the ability to pay debts, this is to continue if the company sells off any unnecessary assets. The amount Creditor days which has reduced, also illustrates a reliable side of the company and a possible increase in goodwill from the suppliers.

The ratios analysed within this report must be taken under advisement, as it is commonly known that comparisons can be imprecise, as non-quantitative data is not analysed in ratio form. Hence the are other factors to be considered before using ratios taken by themselves as an indicator for decision making advantages and disadvantages.

In the future it would be interesting to make comparisons between Merrydown plc and its competitors in similar market areas to see how the problems of the cider industry are affecting similar companies, however this was outside the realms of this report.

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