Profitability Analysis

KRAFT PROFITABILITY ANALYSIS

The following profitability analysis consists of a thorough analysis of all of the profitability ratios of KHC. The analysis was based on financial statements from 5 years today and compared to the industry index of the S&P 500 Food and Beverage. KHC was also compared to three competitors inside their industry.

Competitors

Unilever is one of the most important companies in the food and beverage industry. The British-based company has direct competition with products that can substitute Kraft´s product.

General Mills, is one of the most popular brands in the industry in the United States and in the world. With famous brands such as Lucky Charms, it has a strong business model and strong management team that can threaten Kraft´s success.

Nestle, is a multinational brand with products all around the world. It also has products that serve as a substitute for Kraft products such as coffee.

MARGINS

Over the past five years, the gross profit margin for both Kraft Heinz Company (KHC) and its key competitor, General Mills Inc., has remained pretty much the same, fluctuating only slightly within the range of 30% to 35% depending on the year. This consistent performance reflects the strong profitability of these businesses and shows how well they've managed to maintain a stable and healthy margin year after year. It's a sign of reliable financial health and effective management. Now, when we look at some other players in the field like Unilever and Nestle, we see a different picture. Their gross profit margins are in the range of 40% to 49%, which is notably higher than those of General Mills and KHC. This suggests that Unilever and Nestle are pulling in more profit for every dollar they make in revenue, making them stand out in terms of financial performance. In comparison to the broader industry, where the gross profit margin typically falls between 17% and 19% over the same five-year period, KHC, General Mills, Nestle, and Unilever all seem to be outperforming most of their industry peers. However, Unilever and Nestle are the ones leading the pack when it comes to profitability.

The operating profit margin (OPM) is a pretty big deal in the financial world. It tells us how much a company is making from its day-to-day operations, like paying employees, covering rent, and keeping the lights on. It's important to note that OPM doesn't include the costs of interest or taxes because those are connected to debt and the government, not the nitty-gritty of running the business. Now, looking at Kraft Heinz Company (KHC), they've managed to maintain a healthy OPM over the past few years, even though it's had its ups and downs. When we compare KHC to its main competitor, General Mills, and the industry average, KHC's OPM stands out as quite high. Even though both KHC and General Mills have seen a drop in their OPM over the last five years, KHC has consistently stayed 4-7% ahead of General Mills. Two other major players, Nestle and Unilever, show OPMs in a similar range to KHC. Their OPMs usually fall between 16% and 19%, depending on the year, making them look a lot like KHC in this regard. What's interesting is that all of these companies have left the industry average OPM far behind. The industry typically sits around 3-4%, a far point from 19-25% for KHC, 17-19% for General Mills, and 16-19% for Unilever and Nestle. This shows just how much more profit these companies are squeezing out of their day-to-day operations, which is a clear sign of solid management. An important point for KHC is that it's doing better in terms of OPM than all three of its competitors. This is a positive sign, indicating that KHC is one of the top dogs in the industry when it comes to raking in the profits from their everyday operations.

Kraft Heinz Company (KHC) has had a tough time when it comes to its Net Profit Margin, especially when we look at how it stacks up against its competitors and others in the industry. Things took a turn for the worse in 2018 when KHC faced a crisis. This crisis was due to the company not meeting the expected profit for 2018 which resulted in the stock losing a 19% value from January to June. While they did manage to bounce back in the following years, they still haven't caught up to their competitors. When you compare KHC to Nestle, General Mills, and Unilever, these companies are making more than three times the profit margin that KHC is. This basically means that they've been much better at making money, and it suggests that KHC's management team has had some challenges in maintaining their profits after covering their expenses.

RETURN ON ASSETS

In 2018, Kraft Heinz Company (KHC) hit a rough patch with its sales not meeting the 2017 expectations which made their stock drop by 19% in 2018. This hurt Their return on assets (ROA) for the year 2018, a key financial measure, dropped to nearly negative 10%. Things got better in the years that followed, but when we compare KHC to one of its main rivals, General Mills, KHC's ROA is still just about half of what General Mills has achieved. And when you look at other competitors like Nestle and Unilever, their ROA is also in line with General Mills.

What this tells us is that General Mills, Unilever, and Nestle are doing a better job at turning their assets into profit. Meanwhile, KHC's ROA is looking weak. It's not only below the industry average but is also only half as good as what its three main competitors are achieving in terms of return on their assets. So, KHC has some work to do in order to catch up in this important financial metric.

Return on Equity

Kraft Heinz Company (KHC) has been making progress with its return on equity (ROE) over the last five years. In 2018, things were rocky with a negative ROE due to the value of the stock dropping 19% the return on equity investors received dropped to -20%, but it improved gradually and now stands at 6.4%. However, when you stack KHC against its main competitor, General Mills, it's clear that KHC's ROE is not that great. General Mills has been consistently solid, with an ROE in the range of 23-25% during the same time frame. In simple terms, investors are getting better returns on their investments in General Mills. And it doesn't stop there. When you look at other competitors like Nestle and Unilever, the difference in ROE is even more pronounced. This poses a challenge for KHC because it means that investors might be more inclined to put their money into companies with higher and more stable ROE, like their competitors. Even within the broader industry, where ROE has been on the rise like at KHC, KHC's ROE still lags behind. This indicates that KHC's performance in terms of ROE is below the industry average. For investors, this is a signal that they could potentially get better returns in other companies within the same industry.

ROE COMPONENTS DUPONT ANALYSIS

Kraft Heinz Company (KHC) is facing a challenge with its asset turnover. Their ratio falls in the range of 0.2-0.3x, which means they're not really becoming more profitable, and they're not making the most out of their assets to generate earnings. When you stack KHC up against the industry, the difference is even more noticeable. The industry's asset turnover ratio is much higher at 0.78x, which is quite a bit more than what KHC is achieving. And when you compare KHC to competitors like Nestle and Unilever, it's clear that KHC is not doing as well in terms of making the most out of its assets. In a nutshell, KHC's asset turnover falls behind not only the industry standard but also lags behind its competitors, showing that there's room for improvement in how they use their assets to boost profitability.

Kraft Heinz Company (KHC) has a decent equity multiplier, which is a good sign for investors. However, when we look at KHC compared to its industry rivals, all three of its competitors have even higher equity multipliers. This means that investors are getting more bang for their buck in terms of common stock investments with these competitors. For KHC, this isn't great news because it implies that investors might be more tempted to put their money into the competition. In simpler terms, the lower equity multiplier at KHC could discourage potential investors, leading them to consider other companies that offer better returns on their investments.

Kraft Heinz (KHC) faced a profit crisis in 2018 which tanked their stock, although it gradually improved. However, it lags far behind competitors like Nestle and General Mills, which have more than three times KHC's profit margin, indicating management challenges in maintaining profitability.

RETURN ON NET OPERATING ASSETS (RNOA)

Kraft Heinz Company (KHC) is doing well with its Return on Net Operating Assets (RNOA), typically landing in the 2-3% range. This might seem good when we look at the whole industry because, in comparison, the industry has a negative RNOA.

But here's the catch: when we compare KHC to its main competitors, it's not looking as great. KHC's RNOA falls significantly behind the top three competitors. RNOA essentially tells us how good a company is at turning its assets related to daily operations into profit. So, the difference between KHC and its competitors could mean that KHC is investing a lot in its operational assets but not getting as much profit in return, or that it needs to find ways to use those assets more effectively to boost profitability.

Notes:

RNOA is calculated based on the last four years because the average NOA is calculated from the end of last year.

NOPAT

Note: The industry NOPAT was calculated with a fixed tax rate of 20%, because it was not found in SQ Capital.

Kraft Heinz Company (KHC) has had a tough time over the last five years, with a significant crisis hitting them in 2020, largely due to the pandemic's effects. When we look at how they're doing compared to their competitors like Unilever and Nestle, it's clear that KHC is making less in terms of Net Operating Profit After Tax (NOPAT), which basically means they've been less profitable in comparison.

NET NOA DENOMINATOR

The operating liabilities has increased in recent years, Kraft Heinz Company (KHC) remains at a disadvantage compared to competitors such as General Mills, which maintains significantly lower levels of operating liabilities.

Operating assets at Kraft Heinz Company (KHC) have exhibited a declining trend in recent years. Investors typically favor more stable and consistent operating asset levels, a characteristic that General Mills provides.

Net Operating Asset

The graph shows the Net Operating Assets (NOA). For Kraft Heinz Company (KHC), its NOA has been decreasing because it has taken on more liabilities and reduced its operating assets. This drop in NOA happens because we calculate it by subtracting the operating liabilities from the operating assets.

CONCLUSION

Following a comprehensive analysis of profitability ratios within the food and beverage industry, it is apparent that Kraft Heinz Company (KHC) does not exhibit the same level of financial stability as some of its key competitors, including Nestle, General Mills, and Unilever. This is evidenced by KHC's comparatively weaker performance in essential profitability metrics such as Return on Net Operating Assets (RNOA) and Return on Equity (ROE), indicating lower profitability and earnings in comparison.

Additionally, the equity multiplier, which provides insights into the potential returns for investors, while not unfavorable within KHC's industry, significantly trails behind rival companies, highlighting a noteworthy discrepancy.

Furthermore, KHC faces the challenge of achieving a lower return on its assets, which may suggest a lack of management strategy. This problem is due to the company incurring higher operating expenses relative to its revenue. Ultimately, this shortfall in asset profitability can be attributed to management decisions.

In summary, Kraft Heinz Company (KHC) can be characterized as an average performer within its industry, occasionally achieving above-average results. However, when placed in direct competition with its primary competitors, it becomes evident that KHC faces challenges in securing a top-tier position in terms of profitability within the industry of Food and Beverages.

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