Part 3: Financial Analysis of The Acquisition of Kellanova

To assess this acquisition, we will utilise profit margin, gross profit margin, and gearing ratios in this part.

To start of with the profitability ratios, the GPM (Gross Profit Margin) measures how much money a company keeps from its sales after deducting the direct costs of producing its goods, such as materials and labor. It shows how efficiently a business turns revenue into gross profit and is calculated as:

The PM (Profit Margin) goes a step further by showing how much profit remains after all expenses are paid, including operating costs, taxes, interest, and overhead. It is calculated as:

While GPM focuses on production efficiency, PM reflects overall profitability, making both ratios essential for understanding a company’s financial performance. On the other hand, the gearing ratio measures the extent to which a company is financed through debt compared to equity, showing how dependent the business is on borrowed money. It is typically calculated by dividing long-term debt by total capital employed, then expressing it as a percentage. In simple terms, it represents what percentage of the total capital a business has relies on debt. Gearing ratio can be shown as:

A high gearing ratio indicates that the company relies heavily on debt, which can increase financial risk, especially if interest rates rise or profits fall. A low gearing ratio suggests the business is funded more through shareholders’ equity and is therefore in a more stable and less risky financial position. Investors and lenders use the gearing ratio to assess a company’s long-term financial health and its ability to meet repayment obligations.

The figures above represents the profitability ratios and the gearing ratio for Kellanova. As seen from them, The Profit Margin rose from 11.5% in 2023 to 14.7% in 2024, before decreasing to 13.9% in Q1 2025. This improvement indicates enhanced operational efficiency and cost control, likely due to better pricing strategies, automation, or streamlined supply chain operations. 

Similarly, the Gross Profit Margin also showed notable improvement. In 2023, the gross profit margin was 32.6%, rising to 35.6% in 2024, and stabilizing at 34.3% in Q1 2025. These figures suggest Kellanova is operating with strong cost-efficiency, which aligns with Mars Inc’s need for scalable and resilient businesses that can maintain margins even in competitive markets. However, the downward trend in both profitability ratios in the first quarter of 2025 pose some risks to Mars. However, since this is only a small period it would be illogical to assume that this trend is solely caused by Kellanova, it might be influenced by some external factors. However, the mostly consistent and healthy profit margins suggest that Kellanova is not only generating revenue effectively but is also good at controlling direct and operational costs. 

While Kellanova’s profitability is a strength, its Gearing Ratio is not as strong. The gearing ratio measures the proportion of non-current liabilities to capital employed (which includes both debt and equity). In 2023, the gearing ratio was 68.1%, decreasing slightly to 64.6% in 2024, and further to 63.8% in Q1 2025. These values indicate that Kellanova has a high dependence on external financing, making it more vulnerable to interest rate increases or downturns in cash flow.  Kellanova is a highly geared company. However, the slight downward trend in the gearing ratio shows an effort to reduce financial risk over time.

If Mars Inc proceeds with the acquisition, it may need to restructure Kellanova’s capital or inject equity to reduce leverage and increase financial flexibility. From a strategic perspective, this high gearing ratio introduces risk but also signals that investors have confidence in Kellanova and feel comfortable lending capital. Due to the lack of publicly available data, the ratios of Mars Inc can’t be compared and this is a significant limitation of this analysis. Overall, while Kellanova’s strong profitability makes it an attractive acquisition target, its high gearing ratio means Mars Inc must carefully balance the growth potential with the financial risks involved.