Compass Group Plc is a market leader in the foodservice industry. It maintains the potential for achieving strong, sustainable, leadership positions with profitable growth. It operates in 55 different countries with more than 388000 employees. They are capable of delivering the same superior standards of service globally daily and personally.
During the financial year of 2008, the company registered a gross profit of £ 655 mn. It is estimated that in the financial year 2009, the company will earn gross revenue of £ 729 million from its expanded business operations. Thus when compared with the previous year there will be an improvement in the financial performance of the company in terms of gross revenue.
Net Revenue: In the financial year 2008, the company registered net revenue of £ 450 million. It is estimated that the revenue of the company should be for an amount of £ 501 million. The financial performance of the Company for the year 2009 reveals that the average annual growth rate of the company should be continued in the financial year 2009 also.
Goodwill: it is estimated that the goodwill of the company should be increased through the strategic alliances of the company with other prominent firms in the industry. It is estimated that during 2009, the goodwill of the company should be increased to £3850 million from the prevailing rate of £3290 million. It will contribute to the financial strength of the company in the year 2009. In the case of other intangible assets such as patents and trademark, it is trademarks that there will be an increase of £ 69 million and it also contributes to the improved position of total assets in fiscal 2009.
Ratio analysis relating to the Compass Group Plc
Profitability ratio Analysis
Analysis of the stability ratio of the company reveals that there the profitability of the company is constant in nature. When compared with the previous year it is derived that the gross profit ratio and net profit ratio of the company are in a constant position of 5.725% and 3.93% respectively. Even though the revenue of the company should be increased in the year 2009, it will be in a constant position. It results from the increase in the operating costs which should be incurred by the company in order to attain the increased revenue of the company. That means an increase in the operating revenue of the company requires a corresponding increase in the operating costs also. As a result of this, the profitability ratio of the company is remaining constant compared to previous years. To ensure better improvement in the profitability ratio, the company is required to maintain its operating costs much-reduced level.
Asset management Ratio analysis
“Short-term Solvency Ratios attempt to measure the ability of a firm to meet its short-term financial obligations. In other words, these ratios seek to determine the ability of a firm to avoid financial distress in the shortshort run two most important Short-term Solvency Ratios are the Current Ratio and the Quick Ratio.” (Lane 2007).
Short term solvency position of the Compass Plc
The current ratio of the company in the financial year 2009, when calculated from forecasted figures is 0.66 times. In the year 2008, it is 0.8 times. The quick ratio of the company for 2009 is 0.594 times and in previous year it was 0.733. The industry average current ratio is 4.2 times and quick ratio is 2.1 times. Analysis of asset management ratio of the company revealed that the short term solvency position of the company is very week and it is far below the industry average. It revealed a poor liquidity position when compared to industry average. Current ratio is an effective tool for measuring the short term solvency of the company’s assets. It is an indicator of the extend to which the claims of short term creditors, are covered by assets that are expected to be converted to cash fairly quickly. Thus as per the current ratio analysis of the company, it have poor short term solvency position in relating to its short term debts. For avoiding the short term solvency, the company is required to ensure adequate current assets in its fiancé. Adequate cash and other short term fiancé source have to be ensured by the company. Liquidity position is important for maintaining uninterrupted business operations during the financial year.
Inventory Turnover = Sales / Inventory
“The result represents the turnover or inventory or how many times inventory was used and then again replaced. This number is representative for a one year time period. If the value of the inventory-turnover ratio is low, then it indicates that the management team doesn’t do its job properly in managing inventories.” (Inventory turnover ratio: evaluating the level of industry 2008). The inventory management ratio of the company for the year 2009 will be 49.78% and in 2008 it is 53.708 %. The inventory turn over ratio of the company revealed a better inventory management system in the company. The inventory levels shall be in better position.
Evaluating fixed assets
The fixed asset ratio is the indicator of the effectiveness of the company to use its fixed asset for creating maximum financial return during a particular period. Inflation in the economy should badly affect the value of the fixed assets. Fixed asset turn over ratio indicates the productivity of the company by explaining the return from the fixed asset. The changes in the fixed asset ratio are an indicator of the efficiency improvement of the firm over the years in using its fixed assets. (Fixed asset turn over 2009).
The fixed asset ratio of the company calculated from forecasted figures of the financial year 2009 reveals that, it will be 2.41 times. In the previous year it was 2.52. The industry average fixed asset ratio is 3 times. Thus compared to industry the efficiency of the company in utilising its fixed asset is lower level. The decreasing trend in the fixed asset turn over ratio as per the estimation in the year 2009 is not prospective and thus company have to take steps to maintain the efficiency level in improved manner. Efficiency improvement activities have to be followed by the company.
Total asset turn over ratio of the company for the year 2009 will be 1.64 times. In the previous year it is 1.868 times. The industry average ratio is 8 times. Total asset management ratio of the company shows decreasing trend over the years. The company is required to take adequate steps to improve the total asset management in order to maintain its efficiency level.
The debt management ratio of the company for the year 2009 will be 67.27%. In the previous year it was 74.94. %. The industry average debt management ratio is 40%. When compared to industry average, the debt management ratio of the company is very high and it indicates a high risky position to the external fiancé suppliers. The shareholders should be benefited from trading on equity. The company has required minimising the risk relating to external fund holders by taking optimum fund ratios.
Basic Earning Power: The BEP ratio of the company for the year 2009 should be 8. 14%. In the previous year, 8.99%. The industry average is 16%. The basic earning power of the company when compared to industry average is not in a favourable position. Thus company have to take steps to improve its operational efficiency through appropriate techniques.
Comment On Company’s financial strategy
During the financial year 2009, the Company requires short term borrowings of £ 524 million and long term borrowings for £ 987 million for meeting its short term as well as long term financial requirements. The Company can adopt loans from banks and financial institutions as the source for its short term finance. For long term finance it is better to follow debenture issue as it provides advantages to the shareholders of the company.
The financial position of the company in the year 2009 will be constant in nature. The total revenue of the company should be improved in 2009 when compared to previous year. Increased operating costs neutralise the increase in the revenue and thus when taking the return on investment, it is evidenced that the financial position of the company should be in constant position as like in previous years.
2008: revenue = £11440 mn. Gross profit =£655 mn. Net profit = £ 450mn.
2009: revenue = £12744, gross profit = £ 729, net profit =£ 501
Gross Profit ratio: Gross profit / sales * 100
2008 = 655/ 11440 * 100 = 5.725 %
2009 = 729 / 12744 * 100 = 5.72%
Net Profit ratio = Net profit/ sales * 100
2008 = 450 / 11440 * 100 = 3.93 %
2009 = 501/ 12744 * 100 = 3.93%.
Current ratio = current assets / current liabilities
Current assets: 2008 = 2389, 2009= 2465.7
Current liabilities: 2008 = 2968, 2009 = 3718
Current ratio 2008 = 2389 / 2968 = 0.8
2009 = 2465.7/ 3718 = 0.66
Industry average= 4.2 times
Quick ratio = (current assets- Inventories) / current liabilities
Inventories: 2008 = 213, 2009 = 256
Quick Ratio 2008 = 2176/ 2968 = 0.733
2009 = 2209.7/ 3718 = 0.594
Industry average= 2.1 times
Asset management ratios:
Inventory turn over ratio = Sales / inventories
Revenue: 2008 = 11440, 2009= 12744
Inventory turn over ratio: 2008 = 53.705 times
2009 = 49.78 times
Evaluating fixed assets:
Fixed assets turn over ratio = Sales / net fixed assets
2008 = 11440 / 4532 =2.52
2009 = 12744 / 5283 = 2.41
Industry average = 3.0 times.
Total assets turn over ratio = Sales / Total assets
2008 = 11440/ 6291 = 1.818
2009= 12744 / 7748.7 = 1.64
Industry average 1.8 times.
Debt management ratio:
Debt ratio = Total debt / total assets
2008 = 4715 / 6291 = 74.94%
2009 = 5213 / 7748.7 = 67.27%
Industry average = 40.0%.
Basic earning power (BEP) ratio = EBIT / Total assets
2008 = 566 / 6291 = 8.99%
2009 = 631 / 7748.7 = 8.14%
Industry average = 17.2%.
- A note on the preparation of pro forma financial statements.
- Accounting policies 2009, Compass Group: Annual Report 2008.
- Business plan: projected financial management 2008, Pearson: Entrepreneurship. Web.
- Consolidated income practice 2008, Compass Group: Annual Report 2008.
- Fixed asset turn over 2009, Business dictionary.com.
- Inventory turnover ratio: evaluating the level of industry 2008, Stock Market Investors.
- Lane, Mark, A 2007, Short term solvency or liquidity rates, Business Finance Online.
- Part five: forecast financial statements, The Department of Internal Affairs. Web.