Finance analysis of Whitbread Financial Ratios - Assignment Example

?WHITBREAD FINANCIAL RATIOS WHITBREAD FINANCIAL RATIOS (Your (Your (Year) Introduction Company analysis is a vital step in the process of determining the performance of the company in order to make an investment decision on whether to invest in the company or not. There are various methods that can be used to carry out a company analysis for investment decision making purposes. Ratio analysis is one of the methods used to carry out a company financial analysis to determine the performance of the company in question in relation to other companies in the industry in which such a company operates and also in relation to its own operations over time. The past performance of the company as shown by the ratio analysis as well as other methods that can be used in the company financial analysis can be used as an indicator of the company’s future performance in terms of the company’s liquidity, profitability, working capital management, asset management, efficiency of the company’s management, cash management as well as investor valuation ratios in order to help in planning and assessment of the company’s strategies as well as for use by investors to make a decision on whether to invest in the company or not. This report seeks to carry out a financial analysis of Whitbread Plc a company that operates a number of hotels, coffee shops and restaurant in the United Kingdom and other parts of the world. The financial analysis shall be in the form of ratio analysis where the report shall carry out calculations of the company’s profitability ratios, efficiency ratios, liquidity ratios, financial structure ratios, working capital management ratios, asset management ratios and investor’s share market measures ratio. Before analyzing such ratios, the report shall describe the company’s operating context within the industrial sector in which the company operates, the report shall then analyze the company’s background, its business and size, then the report shall calculate at least two years’ key financial performance ratios using the company’s annual reports to determine the company’s performance over time and in relation to other companies in the industry, the report shall then evaluate the company’s performance against one of its competitors which is called Restaurants Group Plc and finally offer a recommendation on the company’s performance over the two year period between year 2010 and year 2011 and also in relation to the competitor Restaurants Group Plc. Description of the industry The United Kingdom Restaurant industry has been very vibrant over the last three years despite the recession that greatly affected the global markets within the period between year 2008 and year 2010 and the debt crisis in the Euro Zone in year 2011. Based on Oxford Writers, restaurants are a very vital part of the culture of the people of the United Kingdom (Oxford Writers 2012). The industry is comprised of hotel operators, restaurants, pubs and pub restaurants among other services that go hand in hand with the food business. The industry is mostly affected by the seasonal food business due to the fact that the agricultural produce in most of the agricultural areas in the United Kingdom is seasonal in nature. In addition to this, the guests in these restaurants are also seasonal. For instance more people eat out during summer that during winter therefore indicating that hotel business will boom in summer and decline in winter. On the other hand, holidays such as Christmas, Easter etc also increase the number of customers in restaurants therefore increasing profitability. As at 27th April 2012, Whitbread Plc was the largest company in the restaurants industry by market capitalization with a market capitalization of ?3.39 billion followed by Greene King Plc with a market capitalization of ?1.1 billion, followed by Mitchells & Butlers Plc with a market capitalization of ?1.08 billion, followed by Domino’s Pizza UK & Ireland Plc with a market capitalization of ?704.13 million and Restaurant Group with a market capitalization of ?568.6 million (Yahoo finance 2012d). Whitbread plc and Restaurants Group Plc have the same operational context in the United Kingdom Restaurants industry because they both run a chain of restaurants and hotels as well as coffee shops and pub restaurants. Background of the companies Whitbread Plc was founded in the year 1742 as a small restaurant in the United Kingdom; the company grew to become one of the largest of hotels, restaurants and coffee shops in the United Kingdom and other parts of the world. The company operates a chain of 590 hotels with a total of more than 43,200 rooms; the hotels are located in the United Kingdom and also operate under the brand name premier inn, the company operates 5 hotels with over 1,070 rooms in other parts of the world like India, Dubai, Ireland etc. In addition to the hotels, the company owns 379 restaurants which operate under the brand names Beefeater Grill, Table-Table, Brewers Fayre and Taybarns. All these brands are intellectual properties of the company. In the United Kingdom, the company operates over 1200 coffee shops and in other parts of the world it owns over 650 coffee shops whose brand name is Costa Coffee. Finally the company operates coffee vending machines that are used in the wholesale business of vending coffee in the form of roasters and facing espresso and also wholesale business of coffee beans in the United Kingdom and internationally (Yahoo finance 2012a). The company’s principle office of business is located in Dunstable in the United Kingdom and it is one of the largest companies in the Restaurants industry under the services sector of the London stock exchange with a market capitalization of ?3.39 billion as at 27th April 2012 (Yahoo finance 2012b). Restaurants Group Plc on the other hand is a company whose main line of business is to operate restaurants, cafes and pub restaurants in the United Kingdom especially England. The company operates a chain of 389 restaurants and pub restaurants under the brand names Frankie & Benny’s, Chiquito and Garfunkels which are mostly located in airports. The company’s headquarters are located in London, United Kingdom (Yahoo finance 2012c). The company is one of the largest companies in the Restaurants industry under the services sector of the London Stock Exchange with a market capitalization of ?568.6 million as at 27th April 2012 (Yahoo finance 2012d). Financial ratios (Whitbread plc 2012) Profitability ratios As shown in the profitability ratios in the table above, the company’s profitability has been increasing between year 2010 and year 2011where the company recorded a return on capital employed of 10.27% in year 2010 which then increased to 12.29% which was occasioned by the company’s increase in revenues from ?1.435 billion in year 2010 to ?1.6 billion in year 2011 as a result of the company’s expansion of its hotels business by opening 22 new hotels in India, Dubai and Ireland resulting to a boost in the profitability and revenues. The company also launched its new website in the year 2010 with an aim of providing comprehensive and up to date information about the company’s business and portfolio of hotels, restaurants and coffee shops. During the year 2011, the cost of exceptional items decreased to ?0 from ?14 million recorded in the year 2010, the company’s interest income increased to ?1.4 million from ?900,000 recorded in the year 2010. These among other factors led to the increase in the return on capital employed as shown in the table above (Atrill and McLaney 2008). The company’s gross profit margin increased from 85.12% in year 2010 to 85.18% in year 2011 occasioned by the increase in revenues mentioned above which were as a result of the company’s launch of its website and the opening of 22 new hotels in vibrant emerging markets and tourist destinations such as Dubai, India and Ireland (Whitbread 2012). The company’s operating profit margin increased from 17.64% in year 2010 to 19.37% in year 2011 as a result of the increased revenues occasioned by the new website and the expansion into new and vibrant emerging markets as mentioned above. The company’s net income margin increased from 11.15% in year 2010 to 13.88% in year 2011 as a result of increased revenues and also as result of decreased share of loss from joint ventures which decreased from ?3.1 million in year 2010 to ?2.8 million in year 2011, increased share of profit from associate from ?0.7 million in year 2010 to ?0.8 million in year 2011, decrease in finance cost from ?43.9 million in year 2010 to ?38.1 million in year 2011 and finally as a result of increased finance revenue from ?1.1 million in year 2010 to ?1.4 million in year 2011 (Whitbread 2012). The company’s return on equity increased from 14.44% in year 2010 to 17.88% in year 2011 as a result of the above mentioned factors that led to the increase in profit (Whitbread 2012). Restaurants group Plc recorded a higher return on capital employed and returns on equity in both year 2010 where the return on capital employed was equal to 30.13% and return on equity was 27.73% and year 2011where the return on capital employed is equal to 23.57% and return on equity is equal to 21.79%. This performance was attributable to the relatively small size of restaurants group plc compared to Whitbread Plc. Restaurants group plc recorded a lower gross profit margin, Operating profit margin and net profit margin in both years 2010 and 2011 as shown in the table above indicating that Whitbread was more profitable in terms of gross profit margin, net profit margin and operating profit margin while Restaurant group plc was more profitable in terms return on equity and return on capital employed. Efficiency ratios Whitbread’s fixed assets turnover ratio in year 2010 is equal to 0.58 which then increased to 0.61 in year 2011 indicating that the company’s performance in utilizing its fixed assets to generate sales increased across the two years between the year 2010 and 2011. This performance was below that recorded by the company’s peer Restaurants group plc which recorded a fixed assets turnover of 0.61 in year 2010 which remained the same in year 2011. This indicates that Restaurants group plc utilized its fixed assets better than Whitbread plc to generate sales revenues in year 2010 (Atrill and McLaney 2008). The company recorded a stock turnover ratio of 12.56 in year 2010 which increased to 12.89 in year 2011 indicating that the company’s management’s efficiency in converting stocks into sales was increasing year on year. In addition to this, the company’s management’s efficiency in managing its inventory is more efficient than that of Restaurants group plc whose stock turnover in 2010 was equal to 2.85 which then increased to 2.94 in year 2011 meaning that Whitbread plc was more efficient in managing stocks that Restaurant Group Plc. The company’s receivable days decreased from 23.88 days in year 2010 to 19.24 days in year 2011 indicating that the company’s efficiency in collecting its dues from its customers is increasing year on year. However Restaurants group plc’s receivable days increased from 4.37 days in year 2010 to 5.53 days in year 2011 indicating that the company’s efficiency in collecting its dues from its customers is decreasing year on year but it is higher than that of Whitbread Plc. Whitbread plc’s payable days decreased from 489.46 days in year 2010 to 431.35 days in year 2011 indicating that the company is utilizing its cash available to pay its suppliers to generate interest income before actually paying such suppliers because its payable days are higher than its receivable days. On the other hand, the payable days of Restaurant group plc decreased from 78.53 days in year 2010 to 78.15 days in year 2011 indicating that the company is taking a shorter period of time to pay its suppliers than Whitbread Plc. The above efficiency ratios indicates that the Restaurant group is more efficient in managing its working capital and fixed assets than Whitbread Plc in both years 2010 and year 2011 (Atrill and McLaney 2008). Liquidity ratios The company’s current ratio decreased from 0.46 in year 2010 to 0.43 in year 2011 indicating that the company’s liquidity was decreasing an aspect that is further indicated by liquidity ratio which decreased from 0.41 in year 2010 to 0.37 in year 2011. This means that the company has 0.37 units of liquid assets available to cover each unit of current liabilities in year 2011. As shown in the table above, the company is more liquid than Restaurants group plc which recorded a current ratio of 0.28 in year 2010 and 0.37 in year 2011 and a liquidity ratio of 0.24 in year 2010 and 0.33 in year 2011 (Atrill and McLaney 2008). Financial structure ratios The company’s asset cover increased from 1.98 in year 2010 to 2.36 in year 2011 which indicates that the company’s net assets are 2.36 times the company’s debt which indicates that the company’s capital stability is stable and such stability is increasing year on year. This company’s asset cover is lower than that of restaurants group plc which recorded an assets cover of 2.91 in year 2010 which increased to 3.03 in year 2011. As shown in the table above, the company was more geared in the year 2010 than in the year 2011 and also the company was more geared than the restaurants group plc which recorded a gearing ratio of 34.32% in year 2010 against Whitbread’s 50.58% in year 2010 and 32.96% against Whitbread’s 42.36% in year 2011. Stock market measures The company’s earnings per share decreased from ?1.92 in year 2010 to ?1.65 in year 2011which was as a result of the decrease in company’s price in the London Stock Exchange. However, the company’s earnings per share was higher than that of the restaurants group plc which recorded earnings per share of 0.20 in year 2010 and 0.17 in year 2011. The company also recorded a lower price earnings ratio than that of the restaurants group plc as shown in the table above. Recommendation The company’s profitability as shown by the profitability ratios was increasing year on year as shown in the table above, however the profitability recorded was below that of its peer The Restaurants Group plc in terms of return on equity and return on capital employed but was higher than the Restaurants Group plc in terms of Operating profit margin, net profit margin and gross profit margin as shown in the table above. The management’s efficiency in the management of its inventory, working capital and fixed assets was increasing year on year but it was below that of its peer the restaurant group plc indicating that the company’s peer was more efficient in managing its working capital and fixed assets than Whitbread Plc. The Company’s liquidity was decreasing but it was higher than that of its peer the Restaurant Group also as shown in the table above. This indicates that the company’s performance in terms of profitability, liquidity, efficiency in working capital management, efficiency in fixed assets management, and investor valuation has been increasing across the two years between year 2010 and 2011 although the company’s performance was below its peer the restaurant group plc in most of the above mentioned performance parameters. List of references Atrill, P, & McLaney, E, 2008, ‘Accounting and finance for non-specialists’, (Upper Saddle River, New Jersey: Prentice Hall Financial Times Fame database, 2012, ‘Detailed information on UK and Irish Companies: Whitbread Group Plc Ratios, (online), Available from http://fame2.bvdep.com/version-2012213/Report.serv?_CID=76&context=11F97FOR6DMRWF0&SeqNr=0 [Accessed on 26th April 2012] Oxford Writers, 2012, ‘UK Restaurant Industry’, Available from http://www.oxbridgewriters.com/essays/business/uk-restaurant-industry.php [Accessed on 27th April 2012] Whitbread, 2012, ‘Whitbread Plc Annual Report and Accounts 2010/2011, (online), Available from http://www.whitbread.co.uk/content/dam/whitbread/siteimages/investors/Whitbread-annual-report-2010-11.pdf [Accessed on 27th April 2012] Yahoo finance, 2012a, ‘Whitbread (WTB.L): Business Summary, (online)’, Available from http://finance.yahoo.com/q/pr?s=WTB.L [Accessed on 26th April 2012] Yahoo finance, 2012b, ‘Whitbread (WTB.L): Key statistics, (online)’, Available from http://finance.yahoo.com/q/ks?s=WTB.L+Key+Statistics [Accessed on 26th April 2012] Yahoo finance, 2012c, ‘Restaurant Group Plc (RTN.L): Business Summary’, Available from http://finance.yahoo.com/q/pr?s=rtn.l [Accessed on 27th April 2012] Yahoo finance, 2012d, ‘Restaurant Group Plc (RTN.L): Industry: Restaurants’, Available from http://finance.yahoo.com/q/in?s=RTN.L+Industry [Accessed on 27th April 2012] Appendices Appendix 1; ratio analysis workings for Whitbread Plc Appendix 2; ratio analysis workings for Restaurant Group Plc Read More