Abstract
This paper is an analysis of Greggs’ financial data of 2010 consisting two years, 2009 and 2010. The analysis compares the two years using profitability, liquidity, financial gearing, and efficiency ratios. Some graphs will be used for comparability purposes. The results are interpreted in comparison to ideal situations and recommendations made from the findings.
Introduction
Greggs 2010 audited financial reports are used in this analysis to provide the inside performance for the two years 2009 and 2010. In the process of studying the financial performances of this company, ratios are calculated and analyzed. Based on the analysis that was performed, recommendations have been made on the best company to invest in.
Performance analysis
Profitability
The profitability ratios used in this analysis include gross profit margin, operating profit margin, net profit margin, the return on assets (ROA) ratio, and the return on equity (ROE) ratio. The excel file and appendix below shows the calculations. However, their summary is as follows:
Gross Profit margin represents the profit made from buying and selling goods and services, before any other expenses are taken into account. Gross profit margin has increased from 61.67% up to 61.85% in 2010. This shows that the company profitability margin is improved for the period as selling prices increased more than cost of purchases/manufacturing(Carey and Essayyad, 2001). The following graph shows the comparability of these ratios:
Another ratio considered is Operating Profit margin that is the profit before Interest and Tax (PBIT), but after deducting Expenses or Overheads over sales (David, 2003). The operating profit can be especially useful when analyzing a company as it excludes items such as interest expenses and taxes that are largely based on the macro structure of the company. Gregg’s Operating profit margin has increased from 7.36% up to 7.91% in 2010, indicating either high revenues and low overheads in relation to Sales, or low Cost of Sales and low overheads in relation to Sales. It means that the company generated adequate sales revenue to cover fixed costs and improved on profitability (Eugene and Michael, 2009). However, net profit margin, which considers net profit after taxes, decreased from 5.76% to 3.73% meaning the tax rate has increased together with interest. The other ratio is a return on assets which measures the return of the business to all of the providers of Capital. The company’s ROA has reduced from 13.57% to 8.69% in one year, indicating poor profitability in relation to the assets in the business. The decline implies that return on investment has become less risky as high risk would attract high return. Last profitability ratio is return on equity (ROE) which measures the company’s return to its ordinary shareholders. The once again, ROE poor performance as ROE for Greggs, it went down from 23.097% to 14.03% in 2010.
Efficiency Ratios
The ratios used in this case are accounts receivable turnover, accounts payable turnover, inventory turnover days, fixed and total asset turnovers (Schweser, 2008). These figures are shown in the appendix but summarized below:
To gin with is average Inventory Period that is calculated on the Average of the Opening and Closing Inventories. It increased from 54.8 days to 55.73 days. This is a poor performance because stockholding costs will increase meaning more stocks were being held unnecessary. The other is average collection period, which are Trade Debtors / Receivables. The company’s collection period reduced from 12 days down to 11.8 days. This means the company policy on collection of sales has been improved. The Average Settlement Period for trade payables showed a decline from 3.2 days to 3.1 days (Weetman, 2006). This is not a good credit policy, as they take long to collect from credit sales. However, care must be taken not to lose supplier goodwill, or even sacrifice good pricing for longer credit.
The other two efficient ratios are total and fixed asset turnover ratios. They show the number of times the company’s assets are being used to generate its Sales Revenue, how efficiently or how well a company employs its assets to generate sales and income (Woelfel, 1994). For the company, total assets turnover has declined from 2.4 times in 2009, to 2.3 times in 2010 while fixed assets turnover increased from 3.1 times in 2009 to 3.9 times in 2010. This scenario can send mixed signals to potential investors as it shows the usage of the fixed assets improved but total assets usage was poor. From this, it can be deduced that the entity has not been able to generate adequate sales from the investment to maintain the same level of profitability.
Liquidity
Current Ratio – this is Principal Liquidity ratio which shows the number of times the current liabilities are covered by the current assets and, therefore, the company’s ability to meet its current financial obligations as they become due. The higher the ratio, the more “liquid” the company is (Taparia, 2004). However, if too high, then assets may not be used productively. The other ratio used here is quick ratio, which is similar to the current ratio, but taking Inventory out, as often Inventory cannot be converted into cash very quickly. The ideal current ratio should be 2:1 while quick ratio 1:1, however this can change depending on the industry ratios. The ratios for the company were blow 1 times as shown below.
It is in order to infer that Greggs has poor liquidity ratios and it cannot be able to meet their current obligations if compared with ideal rates at times of agency. The other ratio is the Cash generated from operations to current liabilities ratio takes into account cash from operations and Current Liabilities. This ratio declined from 2009 to 2010 that is from 0.89 to 0.8, which is worrying and requires urgent action. This reveals to investors that should the company be wound up, then current liabilities will settle using fixed assets. This tells investors that the current liabilities are used to acquire long-term assets (Brag, 2002). While this may not seem a very good idea to a wise investor, it may in fact be a cheaper way of financing the company’s activities, as debt is usually cheaper than equity (Vasigh, Fleming, and Mackay, 2010).
Solvency ratios
These ratios show a company’s vulnerability to risk, they show the degree of protection provided for the business’s debt and equity. The following table shows the ratios:
Debt to equity ratio quantifies the relationship between the capital invested by owners and investors and the funds provided by creditors. The higher the ratio, the greater the risk to current or future creditor and a lower ratio means client’s company is more financially stable and is probably in a better position to borrow now and in the future (Collier, 2003). An extremely low ratio may indicate that a client is too conservative and is not letting go the business in realizing its potential. From the computations, it is clear that debt to equity ratio has declined from 20.6% in 2009 to 17.5% in 2010. This implies a decrease in risk to current or future creditor and that the company is more financially stable. The Debt-to-total assets ratio has also decreased from 41.2% to 31.8%, indicating more borrowing by the business, in relation to its total assets. This means that a higher proportion of debt was used in 2009 compared to 2010 funds the assets of the company.
Conclusion
Comprehensive analyses of financial statements of companies, which do not fall into a single industry, tend to be more complex than those that fall in one industry. The analysis carried out shows that profitability of the Greggs has generally decreased in two-year period as indicated by the profit margin ratios. They have a poor liquidity position, which decreased as both the current, and quick ratios are low and deteriorating. Debt to equity ratio shows that the company has improved its ability to use debt and reduce risk.
Reference List
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