Financial Tools for

Business BM7105
2017
Johnson Matthey plc
 Table of Contents

Contents
Introduction _________________________________________________________________ 1
Company’s Background _______________________________________________________ 2
Analytical objectives __________________________________________________________ 3
Value driver analysis __________________________________________________________ 5
Strategic pre-evaluation _______________________________________________________ 6
Analytical issues _____________________________________________________________ 9
Financial statement ratios _____________________________________________________ 11
Conclusion_________________________________________________________________ 15
Reference list ______________________________________________________________ 16
Appendices ________________________________________________________________ 19
Pg. 01 Introduction

Introduction

This report provides information obtained through the analysis of Johnson

Matthey Plc, regarding the financial performance and financial position of the

company in 2016. This report will pay particular attention to the financial analysis

of the company, and will analysis major ratios while offering some explanation

for observed changes. To begin with this report will highlight the analytical

objectives of Johnson Matthey Plc along with value driver analysis. Afterwards,

this paper will present a strategic pre-evaluation of the company. Next, this report

will discuss the company’s analytical issues, to drive a financial statement

analysis. Ultimately, this paper will discuss and interpret these ratios and their

meaning for Johnson Matthey Plc.

Pg. 02 Company’s Background

Company’s Background
Johnson Matthey is a British multinational company established in 1817. Widely
recognized as the market leader in sustainable technologies, Johnson Matthey
is also a specialist chemicals company (Reuters, 2017). Additionally, the
organization counts overall 13 000 employees in 2017(D&B Hoovers, 2017).
According to Companies House (2017), the company’s nature of business is the
production of precious metals, manufacturing other parts and accessories for
motor vehicles in addition to engineering design activities for industrial process
and production. Moreover, BASF Catalysts LLc, Umicore SA and HERAEUS
HOLDING (Gesellschaft mit beschränkter Haftung), are considered as the three
major competitors the company is facing internationally (D&B Hoovers, 2017).
Considering the rich activities the organization is operating in, being listed in the
London Stock Exchange (LSE) is understandable. Moreover, Johnson Matthey
Plc become in 2002 part of the Financial Times Stock Exchange 100 Index
(FTSE 100 index), showing the considerable market capitalization the company
has (D&B Hoovers, 2017). In 2016, Johnson Matthey Plc. reached a revenue of
£10,713.9 million, along with 325.7 million net income (Johnson Matthey, 2016).
In addition, the Chief executive Robert MACLEOD states that the company’s
overview performance in 2015/2016 was satisfactory considering the
macroeconomic environment the company has faced (Johnson Matthey, 2016).
Consequently, through the financial analysis of Johnson Matthey Plc., this report
will present the financial performance and position of the company to able an
examination and discussion around this statement.
Pg. 03 Analytical objectives

Analytical objectives
This report will focus on examining shareholders as one of the principal
stakeholders’ groups concerned by the company’s situation. According to
Walker (2000), shareholders should be kept aware of the organization
performance in order to facilitate decision making. In addition, Ryan (2008)
attests that the presumed objectives of the shareholders behind the accounts
analysis is to maximize their value by either buying/selling or holding shares.
To be more specific, shareholders need to make informed decisions for
instance the way to vote on corporate matters, by evaluating their equity
investments. These evaluation measurements can be calculated though the
use of figures on the company financial statements. Equity evaluation is
based on the financial statements for investors and market analysts. Multiple
measures are used for the purpose of these evaluations, considering that the
use of one indicator is not sufficient to assess the company’s financial
position. According to Easton, Sommers, and Penman (2001), “There are a
number of tools shareholders can use to make equity evaluations, and it is
important for them to analyze their stocks using a variety of measurements.
Available evaluation metrics include profitability ratios, liquidity ratios, debt
ratios, efficiency ratios and price ratios”. The first ratio to take into
consideration for the shareholders’ interest is the profitability ratio. Moreover,
profitability ratios are group of financial metrics that show the company’s
situation and how well those the company generates profits. Chaudhuri
(n.d.), states that “profitability ratios are of great importance to investors since
they measure how effectively management is generating profits from
corporate assets and from owner's investments”. Return on equity (ROE)
measures the rate of return on investment (ROI), this ratio shows the
Pg. 04 Analytical objectives

percentage of shareholders’ equity returned as net income. This ratio acts as

a metric for profitability with the aid of displaying the quantity of earnings the
organization generate with the shareholder’s funding. Operating profit
margin is an important metric for evaluating the efficiency of a company's
financial management. Additionally, another liquidity ratios are made to help
shareholders choose the company’s ability to cope with its cash flow and
short term debts. Moreover, the most commonly used liquidity ratio is the
current ratio that reflects the company’s current assets divided by the
liabilities. This ratio is used in order to allow shareholders understand the
company’s efficiency while using its short-term assets to cover short term
liabilities. According to Capon, Farley, and Hoenig (1990), “Higher current
ratios are a good indication the company manages its short-term liabilities
well”. Furthermore, current ratio can be important for shareholders by giving
them a grasp of the way the company generates cash at the time they need
it. Another ratio to consider in this analysis are debt ratios in order to know
the whether the organization debt situation. In the same path, the debt to
equity ratios measures the financial leverage the company has.
Efficiency ratios. efficiency ratios help display how properly businesses control assets and
liabilities. The stock turnover ratio exhibits the range of times an agency ells and replaces its
stock in a given length. The consequences from this ratio ought to be used in assessment
to industry averages. Low ratio values imply low sales and excessive inventory. excessive
ratio values generally indicate robust income. price ratios attention in particular on an
organization’s inventory rate and its perceived cost within the marketplace. The
charge/earnings, or P/E, ratio is an assessment metric comparing current percentage charge
of an enterprise's stock with its in line with proportion income. Higher P/E values imply
traders anticipate endured destiny boom in profits. The P/E ratio is most useful whilst
compared to historical P/E values of the same company, those of groups within the same
errprise or to the marketplace in genera The dividend yield ratio shows the amount in
dividends an agency will pay out yearly in terms of its share price. Basically, the dividend
yield ratio is a measurement for the amount of cash flow received for each dollar invested in
an equity.
Pg. 05 Value driver analysis

Value driver analysis

According to Johnson Matthey (2017), the company has myriad manufacturing

sites and technology centers around the world. Therefore, the company is
established a manufacturing company, which value driver are “the exploitation
of both real and intangible assets, transforming bought- in goods and services”
(Ryan,2008). As mentioned in the company’s background, Johnson Matthey
nature of business is the production of precious metals, manufacturing other
parts and accessories for motor vehicles in addition to engineering design
activities for industrial process and production. According to Johnson Matthey is
focusing first on manufacturing chemicals as the then creating of sustainable
technologies in value creation for the company. Determining the value drivers of
the company will able this analysis to select financial ration relevant for
shareholders’ information.
Pg. 06 Strategic pre-evaluation

Strategic pre-evaluation
In the present world, companies cannot sustain in isolation. Multiple factors may
have an effect on the enterprise activities. The particular interrelation among a
commercial enterprises and the variables that have an effect on its survival are
the political, economic, social, technological, legal, ecological, demographic and
ethical aspects building the macroeconomic environment of Johnson Matthey
Plc. (Anjum, 2015). Johnson Matthey (2016), specified that the company focuses
on the micro environmental factors essential for its survival, which are the 3 Cs’
of its strategic plan collaboration, customer focus and creativity. Tim Stevenson,
Johnson Matthey said “The macroeconomic environment this year has created
difficult trading conditions for some of our businesses” (Johnson Matthey,2016).
According to the company’s annual report, the market in which the company is
operating is now representing a high risk for the company (Johnson
Matthey,2016). In fact, the group’s business is exposed to risks from the
countries the company operates in. In order to understand the factors that
possibly may effect on the company, an assessment of the macroeconomic
environment will be done through the PEST analysis. To begin with the political
context, there are multiple aspect in regards to this context that has to be taken
into consideration in this study that has a direct influence on the company’s
performance in 2016. In the business year 2015/2016, emissions regulations
have been issued such as the Asia Pacific region regulations K-REACH and
China-REACH. “Many countries have passed anti-pollution laws and fixed have
fixed penalties. After it burnt its fingers in the Utah refinery for violation of the
Clean Water Act, Johnson Matthey company has decided to act responsibly by
venturing into new markets only after a thorough study of the environmental laws
of those countries” (Anjum,2015) .According to Brabant (2017), “The European
Pg. 07 Strategic pre-evaluation

Regulation on Registration, Evaluation, Authorisation and Restriction of

Chemicals (REACH; Regulation (EC) No 1907/2006) (1) is a framework for the
assessment of chemicals which aims to improve the European Union (EU)
market in terms of innovation and competitiveness while also protecting human
health and the environment. REACH requires chemical manufacturers and
importers to register a technical dossier of information on substances which are
used, produced or imported into the EU in quantities of one or more tonnes per
year. The definition of ‘chemicals’ as used under this legislation includes metals
and metal compounds, therefore the REACH regulation affects the platinum
group metal (pgm) sector of the metals industry”. Also, regulations in relation to
US chemical management framework via the Toxic Substances Control Act
modernization may have in impact on the company’s performance. Therefore,
disrespecting this regulation might conduct into an imposition or sanction from
governments as well as institutions. In regards to the economical aspect, factors
like the market economic weakness will have a commensurable impact on
Johnson Matthey Plc. In fact, the chemical industry is sensitive to the global
financial situation, with the growth of China and the price changes in precious
metals market, price volatility might represent an issue for the organization.
According to Bank of England (2016), “volatility and risk premia have risen,
possibly reflecting concerns about the outlook for emerging market economies
(EMEs) and potential spillovers to advanced economies. For example, UK equity
prices have fallen by 7% since the November Report. Additionally, exchange
rates movements are representing a threat for the company as an international
corporation along with the Brexit and its effects on the importation and
exportation rates. Hodges (2016), gave a particular warning about the global
demand slowing down in chemical industry (Appendix 1). In June 2016, the
industry demand has fall into 79.2% from an average of 82.1% for the period
Pg. 08 Strategic pre-evaluation

between 2009-2016. As Johnson Matthey Plc Chairman said, the market

environment in 2016 remains uncertain and challenging. Regarding the social
effect, the society is becoming more environmentally aware of the need of
sustainability. Therefore, the company accouter some pressure for ONGs and
customer associations in order to respect the environments and follow
regulation. Moreover, Johnson Mattehy Plc. has been ahead in integrating some
changes in education by increasing awareness of Science , technology,
engineering and mathematics subjects commonly called STEM subjects. Tyson
(2007), states that “STEM skilled staff have been appointed at its facilities in
various countries in which such skilled labor is deficient along
with increasing awareness of STEM subjects in schools”. Investing in such
social initiative will first rise the interest of student on these subject and may
facilitate recruitment process for the company afterwards. Concerning the
technology context, Johnson Matthey Plc is very advanced in this area. In fact,
the company is putting technology in the middle of its strategies. The
organization is continually willing to innovate in reducing its emissions for
example by discovering new technologies allowing them to do so. According to
Johnson Matthey (2016), the company uses bio based materials, which has cut
down the use of nonrenewable resources like oil and gas. Therefore, the
company is trying to low carbon ways to produce low cost electricity.
Pg. 09 Analytical issues

Analytical issues
In order to assess the analytical issues of Johnson Matthey Plc, the most
relevant tool to be used is the SWOT analysis. The company’s strengths rely on
its research and developments oriented product management. Investments in
research and development (R&D) are key elements of Johnson Matthey’s
strategy for growth, enabling the group to differentiate itself using its world class
technology. The company is employing over 1600 employees in its R&D
departments which represents over 13% of its total work force (Appendix 2).
Moreover, the company increased its gross investment in R&D by 11% to £188
million (Johnson Matthey,2017). Additionally, another strength of the company
is its great focus on sustainability while conducting its operation functions.
According to Johnson Matthey (2017), “Growing business through sustainability
is not only about our operations and products. We are also committed to best
practice in governance, to creating a positive working environment for
employees and to being a responsible partner for our customers, suppliers,
communities and other stakeholders.”. The company is encouraging
sustainability by investing in technology as well as developing product
concerned with protecting the environment (Johnson Matthey,2017). The third
strength for the company is linked with its acquisition of subsidiaries in both New
Zealand and Australia which diversifies and enriches its portfolio. Additionally,
the company’s workforce is one of its strengths, the company is hiring overall 13
000 employees in 2017(D&B Hoovers, 2017). The company counts an expert
workforce build in different segments of the firm (Appendix 4). In regards to the
company’s weaknesses, are represented first by the unfunded employee post-
retirement benefits that may put pressure on the group’s liquidity position. In
addition, the company’s reputation has been impacted due to the civil penalty
Pg. 10 Analytical issues

allegation against it. However, some opportunities alike the Axion business
technologies that boosts the company in terms on issuing new developed
technologies. On the same path, the acquisition of Formox by the company will
able the company to strengthen its present technologies. Furthermore, the
company will be able to acquire new opportunities by focusing on improving its
product portfolio. Nonetheless, alike any other organization, John Matthey may
unfortunately encounter some threats. The first and major threat are the
environmental regulations to which the company has to cope with within a limited
amount of time in order avoid in major impact on its financial statement. Similarly,
risks in conducting business outside the UK may represent a threat for the firms
in terms of regulations, taxes and exchange rate issues.
Pg. 11 Financial statement ratios

Financial statement ratios

In this section of the report, PERL ratios are determined by the London Stock
Exchange (2017).

Glakas (2017), states that there are15 major ratios shareholders should be
aware of in their decision making. These ratios are divided into 5 sections Price
ratio, Profitability ratio, Efficiency ratio, Liquidity ratio and Debt ratio. Through the
analysis of the Johnson Matthey Plc annual report these are the ratios that have
been found.

A. Profitability ratios

Since the profit is the key driver of stock price, understanding ratio in relation to
it will show shareholders how well the Johnson Matthey is doing to covert its
business operation into profits.

1. Return on Assets (ROA)

Return on Assets is a financial ratio that indicates the percentage of profit that a
company earns in relation to its total assets. The calculation of this ratio is
determined as follow:

ROA = Net Income after tax / Total assets

ROA=5.3%

In 2016, Johnson Matthey Plc has reached 5.3% in its return on assets ratio.
Therefore, this mean that for each dollar of assets the company has generated
$0.53.
Pg. 12 Financial statement ratios

2. Return on equity ratio (ROE)

Return on equity (ROE) measures the rate of return on investment (ROI), this
ratio shows the percentage of shareholders’ equity returned as net income. This
ratio acts as a metric for profitability with the aid of displaying the quantity of
earnings the organization generate with the shareholder’s funding. The
calculation of this ratio is determined as follow:

Return on Equity = Net Income / Average Stockholder Equity

ROE=11.98%

In 2016, Johnson Matthey Plc has reached a ROE if 11.98% demonstrating the
company is going rewarding its shareholders on their investment at
approximatively $0.12 generated profit per year.

B. Liquidity ratios

Liquidity ratios indicated how the company is covering its short term debt by its
short term liquidity. Liquidity is important to a company. When times are hard, a
company without enough liquidity to pay its short-term debts could be forced to
make unfavorable decisions in order to raise money.

1. Current ratio

The current ratio is a commonly used liquidity ratio that measures a company's
ability to pay its current liabilities with its current assets.

Current Ratio = Current Assets / Current Liabilities

CR= 4057.20/ 795.50= 5.10

Since the ratio is more than 1, that means that the Johnson Matthey Plc has
more short term assets than short term debts.
Pg. 13 Financial statement ratios

2. Quick Ratio

Quick ratio measures the amount of the most liquid current assets there are to
cover current liabilities. The quick ratio is more conservative than the current
ratio because it excludes inventory and other current assets, which are more
difficult to turn into cash.

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

QR=(4057.20-653.70)/795.50=4.28

In 2016, the company’s quick ratio shows a result of 4.28 still higher than one
but indicates the importance of inventories as a company’s assets.

C. Price Ratios

Price ratios are used to get an idea of whether a stock's price is reasonable or
not.

1. Dividend Yield

According to Little (2016), “Dividend yield is a financial ratio that shows how
much a company pays out in dividends every year in relation to its share price.
Dividend yield is shown as a percentage and it's calculated by dividing the dollar
value of dividends paid in a certain year per share of stock held by the dollar
value of one share of stock”.

Dividend Yield = Dividend per Share / Price per Share

The dividend yield for the year of 2016 is not showing on records. Therefore, an
analysis of the 5 year average representing 2.36%. Shareholders willing to invest
either in companies with steady dividend even if DY is low or to invest in stocks
with high dividend yield should make a choice based on this ratio.
Pg. 14 Financial statement ratios

2. Dividend payout ratio

The dividend payout ratio measures the percentage of net income that is
distributed to shareholders in the form of dividends during the year. Through the
analysis of this ratio, investors can state whether they are interested in knowing
if company is paying out a reasonable portion of net income to investors.

Dividend Payout Ratio= Total dividends/ Net income

DPR= 60.23

Therefore, the DPR represented in 2016 for Johnson Matthey Plc. determines
the shareholders are perceiving a great portion of the net income.
Pg. 15 Conclusion

Conclusion
As a conclusion, this report has first highlighted the analytical objectives of

Johnson Matthey Plc along with value driver analysis. Afterwards, this paper has

presented strategic pre-evaluation of the company. Next, this report discussed

the company’s analytical issues, to drive a financial statement analysis.

Ultimately, this paper discussed and interpreted these ratios and their meaning

for Johnson Matthey Plc.

Pg. 16 Reference list

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Pg. 17 Reference list

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Pg. 19 Appendices

Appendices
Appendix 1: Global chemical capacity utilization (Hodges,2016)

Appendix 2: Research and development workforce (Johnson Metthey, 2017)

Pg. 20 Appendices

Appendix 3: Gross research and development expenditure (Johnson Metthey,

2017)

Appendix 4: Total Employees by Division in 2012/2013 (Johnson Metthey,

2013)