Measuring and Managing the Value of Companies - Statistics Project Example

Equity Research Report on Whitbread Plc. Table of Contents i. Summary and recommendation 3 ii. Content 3 a. Business overview 3 WhitBread’s StrategicAnalysis 4 b. Accounting Analysis 6 c. Financial performance of Whitbread Plc. 8 d. Intrinsic value of equity of Whitbread Plc 15 Conclusion 17 Appendix 1: Yearly financial analysis 19 Appendix 2: Profitability Ratio 20 Appendix 3: Liquidity ratio 21 Appendix 4: Free Cash flow 22 Appendix 5: Abnormal Operating Profit 23 i. Summary and recommendation The equity research report of Whitbread Plc. highlights its financial performance by emphasizing on ratio analysis and equity valuation method. The accounting standard followed by the company is analysed in order to identify the issues that are not taken into account by the accountant while preparing the financial statements. Thus, it can be summarized that preparation of financial statement does not comply with few rules of International Financial Reporting Standard. The report also elaborates a comparison between performance of Whitbread Plc and its most competent rival Compass Group Plc. The ratio analysis highlights the fact that the liquidity position of Compass Group Plc is better than that of Whitbread Plc. However, it is deduced that the profitability condition of Whitbread Plc is better than the former. From the ratio analysis and equity valuation method, it can be concluded that Whitbread Plc is a profitable company for the investors since it has increased its net income over the four years period from 2010-2013. It is recommended that Whitbread Plc should increase its asset base by improve the cash and equivalent by decreasing its operating expense. The increase in asset base will assist the company to become one of the strongest players in the industry. ii. Content a. Business overview Whitbread Plc is a coffee shop, multinational hotel and restaurant company, which are headquartered in Dunstable, United Kingdom (UK). It is regarded as the largest division in Premier Inn. Premier is known to be the largest hotel brand in UK, which encompasses about 650 hotels comprising over 50,000 rooms (Whitbread Plc., 2011). It is as the leading hospitality company in UK. The company employs around 43,000 individuals who devote their hard work for its success (Whitbread Plc., 2011). They are motivated to provide their best services to customers every day. The number of customers visiting their coffee shop, hotels and restaurants is 22 million every month (Whitbread Plc., 2011). WhitBread’s Strategic Analysis The strategic analysis of Whitbread Plc. can be explained by the following topic: Financial statement The financial statement of Whitbread Plc highlights transactions that have taken place throughout the year. It not only depicts profit or loss of company, but also gives opinion to investors about condition of the company financials. The framework for financial reporting that is applied during preparation of financial statement is International Financial Reporting Standard (IFRS), which is adopted by the European Union. The report is prepared for management of the company and also for investors. The managers have given their views regarding performance of the company and have depicted the fact that Whitbread has prepared its financial statement in accordance to Companies Act 2006 and followed the rules and regulation of IFRS (Whitbread Plc., 2011). The auditors have audited these statements and have given their views regarding performance and presentation of the company. The following opinions are given by the auditors: 1) The financial statement has given a true view of condition of the group till 27 February 2014 and has also indicated profit clearly at end of the period of one year. 2) The financial statements have been prepared in accordance to IFRS adopted by European Unions. 3) The financial statements have been prepared in accordance with Companies Act 2006 and Article 4 of IAS regulation (Whitbread Plc., 2011). The risk of the company is also assessed by auditors and their opinions are as follows: 1) The current and deferred tax accounting should be handled carefully so as to assess the tax position. 2) The revenue should be recognised so that there is no confusion with the franchise revenues and others. 3) The accounting for pension benefit should be imported. 4) The risk of the management has overridden internal control of the company (Whitbread Plc., 2011; Narayananswamy, 2008). Above mentioned are risks assessed in order to engage the management in improving condition of the company. Apart from the financial part, non-financial performance is also evaluated by auditors in order to get overall view of the company conditions. In order to comprehend actual position of the risk, auditors have challenged calculations of the management pertaining to the current and deferred taxation liabilities. The auditors also asked for reasons for the assumptions made by the management in determining estimates of the above mentioned elements (Whitbread Plc., 2011; Narayananswamy, 2008). Business Application Context Credit Analysis: The credits are analysed by the company by carrying out credit control checks. These checks are carried out on creditors who have significant contract with the company. The contracts are also audited and monitored to ensure validity. Regular reviews are done in order to check potency of the contract claims when they are received. The review is carried out to lessen financial liability of the company (Whitbread Plc., 2011; Narayananswamy, 2008). Security analysis: Whitbread Plc uses derivative transactions to manage the interest and the risk to currency loss that is linked with an underlying activity of business. The derivative is used to finance those activities. The financial instruments used as derivatives are stated by the company as its fair value of the initial instrument and subsequent value is depicted in the balance sheet. The hedging of the cash flow helps in mitigating its exposure to variation in values. Mergers and acquisitions: The merger or acquisition is planned by a company for personal interest of gain. The investments in mergers or acquisitions are recognised as the cost, which is fair value of the acquisition charges linked with the investment. After initial recognition of the investment, associates are used in the equity methods (Albrecht, 2011; Whitbread Plc., 2011). b. Accounting Analysis Principle Accounting Policies: The accounting policies adopted by Whitbread Plc are consistent with International Financial Reporting Standards (IFRSs). IFRS is adopted by the European Union and complies with the provisions of Companies Act, 2006. The consolidated financial statements are prepared in pounds sterling and all the values are rounded to nearest hundred thousand. Accounting flexibility: The accounting standards followed by Whitbread Plc are based on a single source of direction for measuring fair value under IFRS. “IFRS 13 does not change when an entity is required to use fair value” (Whitbread Plc., 2012). Instead, it provides assistance for measuring the fair value under IFRS. The application of IFRS 13 does not have any impact on fair value of the consolidated financial statements of the company (Whitbread Plc., 2011). The company has also adopted the following standards for interpreting its financial statement and assessing them: 1. Follows IAS 1 for presenting the items of other comprehensive income 2. Follows IFRS 7 for offsetting the financial assets and liabilities 3. Follows annual improvement process of IASB (2009—2011) (Whitbread Plc., 2011). Evaluating accounting strategy: Whitbread employs a number of standards other than IFRS. This allows managers to communicate information pertaining to finance strategically as well as to hide certain information since different standards portray separate rules and regulations regarding presentation of the financial statement (Whitbread Plc., 2012). Evaluate Quality of Disclosure: The following issues are ignored by Whitbread Plc while preparing the financial statement so as to make a quality disclosure: The financial statements are prepared after considering the accounting policies followed by peers in the industry. The incentives of managers should be disclosed in the statement so as to incorporate more transparency for benefitting investors and auditors. The changes in policies are to be mentioned in the annual report so that the rationale working behind is known by all. It is important to portray whether the transactions made are structured or not in order to reach the accounting objectives. The disclosure should contain information pertaining to each and every segment of the company (Whitbread Plc., 2012).. The exchange rate effect is very important for the company since monetary assets and liabilities are denoted in foreign currencies. The monetary assets are converted into sterling at exchange rates, which are quoted in the balance sheet. The non–monetary items are, however, measured as historical cost in foreign currency. It is also converted by employing exchange rates at a particular date of transaction (Whitbread Plc., 2012). c. Financial performance of Whitbread Plc. Introduction of Competitor Compass Group Plc is a British multinational company known for the world’s leading support and food provider services. There are millions of people worldwide who depend on the performance and operation of the company since it provides them with all the necessity items of daily life. The company employs around 5, 00,000 employees worldwide and have huge customer case wherever they operates (Compass Group Plc., 2014). It is one of the strongest competitors of Whitbread Plc in the global since it serves the same utilities to the people as Whitbread Plc (Palepu, Healy, Bernard and Peek, 2010). Yearly financial analysis The financial performance of Whitbread Plc is evaluated below by employing different methods like yearly analysis of the transactions, ratio analysis and more. The following table elaborates the financial position of the company after considering the values for 2013 and 2013 (Refer to Appendix 1 for calculation) (Compass Group Plc., 2011; Compass Group Plc., 2012): Particulars % change Inventories 15.09433962 Trade and other payables 21.90201729 Provisions 25.24271845 Revenue 13.01970443 Gross Profit 1.926581619 Operating Profit 1.832460733 The inventory of the company is observed to increase over the years from 2013 to 2014. It may imply that the company is not successful in selling goods in 2014 than in 2013 and thus the goods are held in inventory. It may also imply that the company has concentrated in producing more products so as to balance the demand of the customers. However, the change in revenue in 2014 implies that there is increase in sales of the company which is a good indication for a healthy business. The company payables has increased over the years which refers to the fact that the company has harmed its working capital since it has paid a lot of accounts payables in 2014 compared to 2013. Ratio Analysis Ratio analysis is carried out to examine the profitability and liquidity position of Whitbread. The value of the ratios is then compared with that of Compass Group Plc in order to examine the position of the company in comparison to its peers (Koller and Wessels, 2010; Harrison, 2008; Ingram, 2007; Warren , 2009) Profitability Ratio The profitability ratio of both the companies is given in the table below (Refer to Appendix 2 for calculation) (Whitbread Plc., 2011; Whitbread Plc., 2012): Compass Group Plc. 2010 2011 2012 2013 Profit margin 6.310478297 6.050653698 4.667258208 6.174175543 Operating margin 6.980923417 6.726457399 5.016267377 4.511021245 Whitbread Plc 2010 2011 2012 2013 Profit margin 11.14982578 13.8836773 14.87695749 14.48275862 Operating margin 17.63066202 19.32457786 19.29530201 18.81773399 The profitability ratios are analysed through graphical representation is as follows: Figure 1: Profit Margin of Compass Group Plc. (Source: Author’s creation) From the above figure it is noticed that the profit margin of Compass Group Plc has increased over the years from 2010-2013. Though it has encountered significant decrease in profit margin 2012 but the company has recovered its position in 2013. Thus, it can be inferred that the company has improved its profitability position to a great extent. Figure 2: Profit margin of Whitbread (Source: Author’s creation) The profit margin of Whitbread Plc has increased over the years from 20101-2013 it implies that the company has improved its sales. It can be inferred that Whitbread is in a profitable position. Now, comparing the ratios of both the companies it is evident that Whitbread Plc. earns higher profit than Compass Group Plc. Figure 3: Operating margin of Compass Group Plc. (Source: Author’s creation) The figure above depicts the fact that Compass Group Plc has decreased its operating expense over the years from 2010 to 2013. It highlights the most important fact that the company has decreased its operating expense and have increased the sales. Figure 4: Operating profit margin of Whitbread Plc (Source: Author’s creation) From the above figure is can be inferred that Whitbread Plc has encountered increase in operating expense over the period from 2010 to 2012. However, in 2013 the company managed to decrease its operating expense which highlights the fact that it has improved its sales and thus the sales is observed to increase over the same period of time. Comparing the operating profit margin of both the companies it can be inferred that the operating profit margin of Whitbread Plc is higher than that of Compass Group Plc. Therefore, it can be concluded that the profitability position of Whitbread Plc. is better than that of Compass Group Plc. Liquidity Ratio The liquidity ratio of both the companies is provided in the table below (Refer to Appendix 3 for calculation): Whitbread Plc 2010 2011 2012 2013 Current Ratio 0.422960725 0.458100559 0.402173913 0.357894737 2010 2011 2012 2013 Quick Ratio 1.000210428 1.000227797 1.000199888 1.000177792 Compass Group Plc   2010 2011 2012 2013 Current Ratio 0.849644952 0.870927318 0.899082569 0.960136674   2010 2011 2012 2013 Quick Ratio 0.619799499 0.900229358 0.814793578 0.87642369 The liquidity ratio of the companies is explained through the graphical representation which is as follows: Figure 5: Current ratio of Whitbread Plc. (Source: Author’s creation) From the above figure it can be inferred that the liquidity position of Whitbread Plc. has decreased over the four years from 2010 to 2013. The current ratio of a stable company is expected to be more than 1 bit in this case the ratio is smaller than the expected value. Thus, it can be inferred that the liability of company is more than that of its asset base. Figure 6: Current ratio of Compass Group (Source: Author’s creation) The current ratio of Compass Group Plc is observed to increase over the years from 2010 to 2013. It implies the fact that the company has increased its asset base but could not achieve the expected level which 1. Though the ratio over the years is below 1 but the company has concentrated in increasing the asset base which is a sign of improvement for the company. Comparing the liquidity of the company, it can be inferred that Compass Group Plc is a better liquidity position than Whitbread Plc. Figure 7: Quick ratio of Whitbread (Source: Author’s creation) From the above figure it is evident that the quick ratio of Whitbread Plc has decreased over the years from 2010 to 2013 which reflects the fact that the cash and cash equivalents have decreased along with the liability of the company. The liquidity position of Whitbread is thus observed to have shattered over the years. Figure 8: Quick ratio of Compass Group (Source: Author’s creation) From the above figure it is evident that Compass Group Plc. has tried to maintain its liquidity position over the period of time. Though the quick ratio is below the expected level but the company has tried to improve its cash base during the period and checked upon the liability. This indicates that Compass Group Plc has improved its liquidity position over the years as a whole. d. Intrinsic value of equity of Whitbread Plc The value of the equity of a company can be calculated applying two methods: Free cash flow of equity and abnormal operating profit. The formula used to calculate equity of a company by employing free cash flow is as follows: Here, FCF = Free cash flow for the years WACC = Weighted Average Cost of Capital In this case, in order to calculate the value of the equity of Whitbread Plc. three years are considered from 2011 to 2013. The free cash flow is first calculated and then the value of the equity is obtained. Here, WACC is assumed to be 10%. Therefore, the value of the equity is (Refer to Appendix 4 for calculation of value of equity): = 552/ (1+0.10)3 = £ 412 million. The value of equity of Whitbread can be calculated by abnormal operating profit. It can be calculated by employing the following formula: Here, NOA = Net Operating Asset RNOA = Return on Operating Asset WACC = 10% (assumed) Therefore the value of equity of the company employing the formula of abnormal operating profit is as follows (Refer to Appendix 5 for calculation): = 1562 + 54104 = £ 55666 Thus, it can be concluded that despite the unstable liquidity condition, Whitbread Plc has succeeded in maintaining an appropriate value of equity at the end of 2013. Conclusion From the above discussion and financial analysis it can be concluded that Whitbread Plc. is a worthy company to invest by investors. The recommendation is made after obtaining the ratio analysis and equity valuation result. The ratio analysis highlights the fact that the profitability of the company is notable enough for attracting more investors who can expect higher dividend from its investment in the equity shares. Nevertheless, it is worth mentioning that the liquidity condition of the company is very weak and thus it should concentrate in increasing its asset base so as to balance the liability. The equity valuation method also elaborates the fact the company has considerable value of equity which can support higher dividend. However, the presentation of financial statement of the company does not comply with rules and regulation of IFRS as indicated by the auditors of Whitbread Plc. If this characteristics of financial statement is ignored the overall performance of the company is noteworthy. Reference List Albrecht, W., 2011. Financial accounting. New York: South-Western Cengage Learning. Compass Group Plc., 2011. Annual Report 2011. [pdf] Compass Group Plc. Available at: < http://www.compass-group.com/documents/Compass_Annual_Report_2011.pdf > [Accessed 20 May 2014]. Compass Group Plc., 2012. Annual Report 2012. [pdf] Compass Group Plc. Available at: [Accessed 20 May 2014]. Compass Group Plc., 2014. Who We Are. [online] Available at: < http://www.compass-group.com/Who-we-are-group.htm > [Accessed 20 May 2014]. Harrison, W., 2008. Financial accounting. London: Pearson Prentice Hall. Ingram, R., 2007. Financial accounting. New York: South-Western Cengage Learning Koller, T. and Wessels, D., 2010. Valuation: Measuring and managing the value of companies. New York: John Wiley & Sons, Inc. Narayananswamy, R., 2008. Financial accounting. Delhi: PHI Learning Private Limited. Palepu, K., Healy, P., Bernard, V. and Peek, E., 2010. Business analysis and valuation: using financial statements – Text and cases. New York: Thomson Learning. Warren , C., 2009. Financial accounting. New York: South-Western Cengage Learning. Whitbread Plc., 2011. Annual Report 2011. [pdf] Whitbread Plc. Available at: < https://www.whitbread.co.uk/content/dam/whitbread/pdfs/investors/reports-and-presentations/annual-reports/2011/20052011-annual-report-accounts-20102011/Whitbread-annual-report-2010-11.pdf > [Accessed 20 May 2014]. Whitbread Plc., 2012. Annual Report 2012. [pdf] Whitbread Plc. Available at: < http://www.whitbread.co.uk/content/dam/whitbread/download_centre/reports_and_results/latest/report_2011_12/annual-report-2011-12.pdf > [Accessed 20 May 2014]. Appendix 1: Yearly financial analysis Appendix 2: Profitability Ratio Appendix 3: Liquidity ratio Appendix 4: Free Cash flow Appendix 5: Abnormal Operating Profit Read More