Diageo: Investment Analysis for Post-COVID Financial Recovery Case Study

Evaluating E-commerce Project ROI Using ARR, PBP, and NPV Methods

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Introduction: Diageo: Investment Analysis for Post-COVID Financial Recovery

Diageo is a major company that has alcoholic beverage providers across the UK. It has a headquarter in London with 132 sites across the globe. The company has been providing the major distribution of Scottish whisky and other spirits. It has been listed under the London Stock Exchange with a current stock price of 3671.93 GBX. The company has a current number of employees 27000 000 and has a recent revenue of 15452 million pounds in the financial year 2022. The company has a net earning valuation amounting to 3249 million pounds, which indicated a 22% of growth from the previous year's net earnings (diageo.com, 2023). In this reference, the report is going to provide the investment proportion for improving the financial gap that occurred due to the 19 situation . The report is going to provide the investment proposal and provide the expected return by using investment appraisal methodology. It has been also going to help the investment decision-making aspects by providing the potential investment option for the company based on the expected higher return with the lower financial risk aspects. It has been also going to compile the impact of financial risk-return and the importance of evaluating the financial situation of the company. This report is going to involve potential investment appraisals methodologies such as net present valuation, accounting rate of return, and payback period measurement tools. However, it has been referred that this report will be going to provide the factors of financial and business performances analysis proportion aspects to get better earnings situation in future.

Motivation for the proposed investment

Diageo has faced a lot of financial issues during the time of the pandemic attack, and it has declined in its market positioning. In this preference, it has been mentioned that in the time of COVID-19, the company’s business operations, including the supply chain, were negatively affected. This situation has occurred due to the sudden lockdown situation across the globe. For the sake of the safety of the people, the government has taken certain measures from entire business operations and systems. In that situation, every industry faced huge losses and this situation also affected the customer relationship with the organisation. Due to that part, the alcohol industry also affected negatively, and market shares have been dropped. Diageo's financial situation has been impacted due to the COVID-19 situation. In this reference, it has been addressed to follow the digital transformation of the business operations to improve the existing business connections and provide the chance to improve the financial state of the company for future reference. This issue has affected the company's cash proportion revenue allocation and revenue proportion of the company. Hence, it has been mentioned that it’s important to resolve this financial glitch regarding the 19 effect. These preferences have been addressed to implement an “alcohol e-commerce” project within the business operations. This project implementation has been going to help the company to fix the financial gaps and helps to build and create new business relationships with the other operations and also with the consumers. In this aspect, this implementation of the new investment project is going to change the valuation of the income statement and is going to positively affect the financial reporting aspect in the future.

Conduction of investment appraisal

ARR

In this aspect, it has been referred to that project investment return determination can be calculated by using the easiest method of investment appraisal. The accounting rate of return proportion has been demonstrated by using the initial investment valuation divided by the annual cash flow evaluation proportion. In this aspect, it has been considered the initial investment proportion amount of 260,000 pounds and selected 80,000 pounds for 5 years as cash flows (Zativita and Chumaidiyah, 2019). It has been reported that the company is going to have an annual cash flow valuation of 4,00,000 pounds after 5 years. Hence, the project determination might provide 30.71% of the investment return valuation proportion after the 5 years of the investment. In this evaluation, it has been referred to that Diageo’s rate of return mentioned as 18% and its expected accounting rate of return proportion indicated 30.71%. This situation has been noted that companies can invest in this project as this project is going to provide the investor with a better accounting rate of return. As its standard rate of return valuation is lower than ARR valuation, it has been impacted positively on the financial proportion evaluation aspects (Alves et al. 2019). Hence, companies can invest in this referred digital transformation project for the initial stage of business process development aspects.

Table 1: ARR

PBP

The payback period of the company can be also calculated by taking into consideration the valuation of the initial investment proportion along with the annual cash flow valuation after the investment of 5 years. In this determination, it has been mentioned that Diageo is going to consider the cash flow valuation of 80,000 pounds for 5 years and an initial investment proportion of 2,60,000 pounds. In this aspect, it has been indicated that the company can achieve the investment return proportion by 3.75 level (Thunström et al. 2020). This level has been denoted that if Diageo is going to invest in this project, it will be going to get back the money within the 3 years and 8 months of the investment determination by considering the 80,000 pounds of cash flows along with the 2,60,000 pounds’ initial investment determination for 5 years.

Table 2: PBP

NPV

The net present valuation has been evaluated by taking into consideration the initial valuation and annual cash flow determination along with the discounting factors determination. In this evaluation, it has been mentioned that the proposed project has an initial valuation of 2,60,000 pounds with a 4,00,000 pounds annual cash flow valuation. It has been mentioned that there is consideration of 7.75% of the discounting factor for calculating the net present valuation after 5 years. Hence, it has been referred to that there is a total valuation of the present determination of the proposed project mentioned as 61532.58 pounds for the 5 years of investment determination. This situation has been addressed so that the company can invest in this project as it is going to provide a positive return and this evaluation is higher than the present cash flow valuation of year 4. This project also has lower financial risk, hence, it has been referred to invest and implement digitalization within the business operations (Fernández, 2019). It is not going to provide a way out to make a higher profit proportion, it has been going to guide the investor to make potential investments for future reference.

Table 3: NPV

Recommendation regarding investment appraisal methods

The entire evaluation of investment within the project has been indicated to invest to get the higher return valuation. This investment determination has been also suggested due to it having a lower time frame segmentation than the company’s standard rate of return proportion valuation. Hence, due to having a better scope of getting a higher return with a lower proportion of investment, it has been indicated to have a better project determination aspect in future aspects. This segmentation has been going to positively affect the company's financial reporting determination in future aspects.

Identification of 8 other factors and SWOT evaluation of the company

In the investment aspect, 8 other non-financial aspects have allowed the company to make the investment decision properly. These factors are investment 1) time horizon, 2) market trends, 3) risk tolerance, 4) investment objective, 5) asset allocation, 6) fees and charges, 7) tax implications, and 8) fundamentals of the investment proportion (Hansen et al. 2019). The SWOT analysis of the company has been going to highlight the business operational situation along with the financial segmentation situation by considering the 8 factors of investment proportion influences for the company.

Table 4: SWOT analysis

Evaluation of financial performance

Sensitivity analysis of risk

Table 5: Sensitivity analysis

Discussion regarding risk and return effect on the organisation

For analysing a company's financial performances and preparation of evaluation reports based on that financial condition, it has been required to consider various key factors. In this aspect, it has been required to have a lower financial risk within the business performance (Baihaqqy and Sari, 2020). The lower financial risk provides the company better financial stability for the future proportional aspect and it has also increased the market position as compared to the other peer companies. On the other hand, higher financial risk declined financial condition and state. It has also caused a lower net earnings proportion and affected the financial health of the company. If the company gets a higher amount of money back from any of the investment situations and investment valuations, it leads towards the positive situation aspects (Wang, 2021). It has been mentioned that the company is required to have a better return determination to utilise better financial development prospects. In these aspects, Potential impacts of financial performance evaluation provide the points regarding financial development aspects such as profit generation capacity, revenue generation capacity, and analysis of the risk factor (Fitria et al. 2019). This analysis of risk factors has been demonstrated by determining the level of debt allocation available within the organisation.

In this preference, it has been referred that Diageo is required to analyse and create a comparable discussion of the current financial state with the future available financial situation determination. However, it is important to identify the various emergency financial conditions that are mostly going to influence the financial situation of the company towards positive and negative aspects. Based on that concept, it has been required to justify the total expenses proportion valuation and to compare the valuation with the previous available financial details of the company (Alshamy, 2019). This segmentation has been going to help to create a compact analysis regarding the company's profit-earning capacity. However, if a company has increased revenue due to having a higher market position and having controlled expenses, this situation leads towards better profit-earning segmentation in future aspects. This overall proportion also refers to the company being required to implement some strategies to control the debt and expenses to avoid financial risk situations in the future.

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References

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Baihaqqy, M.R.I. and Sari, M., 2020. The Correlation between Education Level and Understanding of Financial Literacy and Its Effect on Investment Decisions in Capital Markets.Journal of Education and e-Learning Research,7(3), pp.303-313.

Fernández, P., 2019.Valuation of brands and intellectual capital. SSRN.

Fitria, Y., Rahadi, R.A., Afgani, K.F., Putranto, N.A.R., Murtaqi, I. and Faturohman, T., 2019. The influence of demographic, financial literacy and information factors on investment decision among Millenial generations in Bandung.European Journal of Business and Management Research,4(6).

Hansen, L.P., Roberds, W. and Sargent, T.J., 2019. Time series implications of present value budget balance and of martingale models of consumption and taxes. InRational expectations econometrics(pp. 121-161). CRC Press.

Thunström, L., Newbold, S.C., Finnoff, D., Ashworth, M. and Shogren, J.F., 2020. The benefits and costs of using social distancing to flatten the curve for COVID-19.Journal of Benefit-Cost Analysis,11(2), pp.179-195.

Wang, Z., 2021, December. Evaluating the Accuracy of Net Present Value and Initial Rate of Return Investment Rules. In2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021)(pp. 1319-1322). Atlantis Press.

Zativita, F.I. and Chumaidiyah, E., 2019, May. Feasibility analysis of Rumah Tempe Zanada establishment in Bandung using net present value, internal rate of return, and payback period. InIOP Conference Series: Materials Science and Engineering(Vol. 505, No. 1, p. 012007). IOP Publishing.