Compass Group Public Limited Company - Essay Example

Financial ments Analysis: Compass Group plc By (Student name) Course: Tutor: University: Department: Date: 25 May 2014 Introduction to the Company Compass Group Plc was formerly known as Factory Canteen Ltd in England when it was started in 1941. With the establishment of business in the USA in 1994 by acquiring Canteen Corporation, the company came to be known as Compass Group Plc (CompassGroup, 2012). Compass is the leading foodservice company in the world with operations in about fifty countries. The company employs vending machines as their vehicle for delivery of their range of food and beverages and also acts as corporate caterers representing the world’s leading brands such as Burger King, KFC, Taco Bell, Pizza Hut, T.G.I.-Fridays and Harry Ramsden supplying food to alternative outlets such as schools, airports, military bases, and correctional and healthcare facilities. The company’s own profitable brands are Caffe Ritazz, Cafe Select, Upper Crust, Not Just Donuts, Franks, Sushi Q Restaurants. With an annual turnover of nearly $ 7.9 billion as of 1999, the company has emerged as one of the FTSE 100. The company was formed with the acquisition of Grand Metropolitan’ London catering division and its IPO on London Stock Exchange that followed in 1988. Competitors are Gardner Merchant in UK, Sodexho of France and Aramark of the U.S. When the Gardner and Sodexho merged and became a formidable challenge, Compass retaliated by purchasing Accor’s Eurest International and Accor received 22.5 % share in the equity of Compass. With this, Compass once again emerged as the world’s largest foodservice company (FundingUniverse, 1999). Compass’ major percentage (90) of revenue comes from outside the UK and it claims to be living up to the image of international business now spread over 50 countries. North American region contributes 47 % of the revenue, Europe and Japan contributes 34 % and emerging markets contribute 19 % thus aggregating to a total revenue of 17,557 m GBP in 2013. North American region has been the core growth engine for the company in terms of revenue as well as profitability ever since the business was established in the region in 1994. The company is the 11th largest employer in the private sector in the USA and it serves as many as six million meals per day. It had 506, 699 employees as of 30 September 2013. In terms of corporate responsibility, the company has achieved a reduction of carbon emissions from 7.3 % in 2012 to 6 % in 2013. Total GHG emissions were 119,874 Tonnes in 2013 as against 123, 630 Tonnes in 2012. The company aims at a reduction of 20 % against 2008 baseline by 2017. Other corporate responsibility commitments are: wellbeing of consumers in terms of healthy eating, supply chain assurance and ethical outsourcing, water consumption, recycling of waste, food safety, occupational health and safety, employee retention, diversity, business ethics, and employee engagement. Revenue has grown by 3.9 % in the year ended 30 September 2013. Underlying operating profit went up by 7.8 % on a constant currency basis. Outsourced food service market is estimated at 200 billion GBP which has been the growth driver for the company. Total revenue for the year 2013 is 17,557 m GBP as against 16,905 m GBP for 2012. Operating profit increased from 598 m GBP in 2012 to 657 m GBP in 2013 (CompassPlc, 2013). Using Relevant Ratios Comment on the Profitability, Liquidity, Efficiency, Gearing and Investment Potential Following are the figures drawn from the financial statements of Compass Group for the years 2011, 2012 and 2013 in millions of GBP exclusive of shares. Consolidated Income Statement (figures in millions GBP) Particulars 2013 2012 2011 Total revenue 17557 16905 15833 Operating Expenses Cost of goods sold 5289 5232 5013 Selling, admin, genl exps 8344 7968 7387 Depreciation/amortization 324 302 266 Other income 439 283 64 Other operating expenses 2370 2249 2093 Total operating expenses 16756 16026 14817 Operating income 801 879 1016 Other (15) (17) (1) Net income before taxes 721 789 958 Provision for income taxes 287 178 264 Net income after taxes 434 611 694 Consolidated Balance Sheet Particulars 2013 2012 2011 ASSETS Current Assets Cash and Short term investments 1006 728 1110 Total Receivables, net 2006 2046 1968 Total Inventory 255 261 270 Prepaid Expenses 98 99 98 Other current assets, total 7 2 29 Total Current Assets 3372 3136 3475 Property, plant & equipment, net 714 652 655 Goodwill 3,620 4,037 4060 Other Intangibles 886 804 719 Long term Investments 125 128 120 Notes receivables, long term 83 90 77 Deferred Tax Assets 265 296 240 Other long term assets 63 87 64 Total Non-current Assets 5756 6094 5935 Total Assets 9128 9230 9410 LIABILITIES Accounts Payable 1356 1316 1292 Accrued Expenses 990 952 942 Notes payables/short term debt 20 58 45 Current portion of Long term debts /capital leases 84 19 666 Other current liabilities, total 1062 1138 1045 Total current liabilities 3512 3483 3990 Total Long term debt 2161 1708 1247 Deferred income tax 38 40 35 Minority Interest 9 10 8 Other liabilities 626 758 635 Total Non-current liabilities 2834 2516 1925 Total Liabilities 6346 5999 5915 Shareholders’ Equity 2782 3231 3495 Total Liabilities & Shareholders’ Equity 9128 9230 9410 Total Common Shares outstanding 1804 1855 1898 Growth: There has been a steady growth in revenue as £ 15,833 million, £16,905 million, and £ 17,557 million for the years 2011, 2012 and 2013 respectively. Profitability: Despite growth in revenues, the company has experienced fall in the income from £ 611 m in 2012 to £ 434 m in 2013. The fall in profitability is attributed to the increase in selling, general and administrative expenses from 47.13 % to 47.53 %. Net profit margin is 2.47 % and operating margin is 4.57 % for the year 2013. Ratios: Return on assets ratio is 4.73 %, Return on equity ratio is 14.17 % and Return on investment ratio is 7.65 % for the year 2013. Current Ratio is 0.9601 and Quick ratio is 0.8875. Total debt/total equity ratio is 0.8142 and Total debt/total capital is 0.448. Discuss The Type Of Finance Used By The Company, Whether It Has Expanded Or Contracted In The Past Two Years. The company’s total short and long term borrowings for the years 2012 and 2013 are £ 1785 m and £ 2265 respectively. The borrowings consist of bank overdrafts, bank loans, loan notes and bonds and financial leases. As per the figures reported, the total outside finance has only expanded and not contacted. Noncurrent borrowings have increased from £ 1688 m in 2012 to £ 2146 in 2013. Current borrowings have also increased from £ 69 m in 2012 to £ 98 m in 2013. Finance lease (non current) has reduced from £ 20 m in 2012 to £ 15 m in 2013. Current financial lease also has reduced from £ 8 m in 2012 to £ 6 m in 2013. The segmental reporting indicates that bank overdrafts represent uncleared transactions. The company has more of loan notes and bonds than bank loans as long term finance. £ 1,100 m worth fixed and fixed interest private placements at interest rates between 3.09 % and 6.72 %. The carrying value of these loan notes is £ 1111 m. The following are the details as extracted from the Annual Report (CompassPlc, 2013) “US$ private placement $105m Oct 2013 6.45% US$ private placement $15m Nov 2013 5.67% US$ private placement $162m Oct 2015 6.72% Sterling private placement £35m Oct 2016 7.55% US$ private placement $250m Oct 2018 3.31% US$ private placement $200m Sep 2020 3.09% US$ private placement $398m Oct 2021 3.98% US$ private placement $352m Oct 2023 4.12% US$ private placement $300m Sep 2025 3.81%” (CompassPlc, 2013, p. 106) The company has also derivative financial instruments for interest and foreign currency fluctuations management. Thus, the company has a total of £ 70 m under current assets and noncurrent assets. The company has not used the equity route to finance its operations in the last two years. Suggest Any Factors Financial and Non Financial That May Affect the Company’s Future Performance. The company’s major operations are outside the UK. Hence, company has to be on the constant vigil against foreign exchange fluctuations that might affect its profitability. The major risks reported as being faced by the company both financial and non financial are discussed below. Health and safety: Being the number one operational priority, the company seeks to avoid the accidents in the workplace. In order to improve health and safety, KPIs have been incorporated in the bonus plans for every team with effect from 1 October 2012. Food Safety: The Company has an enormous responsibility of ensuring safety of millions of people it is feeding throughout the world every day. As such, the company has to set highest standards for food hygiene and food safety. Environment: The Company must adhere to its comprehensive policy of achieving reductions in emissions by 2017 as planned. Client retention: Quality and value are the strategies followed by the company for the long term retention of its customers coming from various sectors and different geographical locations. Changes in client demand: Client demand and consumer preferences are ever changing and hence the company needs to innovate on products to suit the prevailing life styles of the consumers. Bidding risk: As the business of the company is contract oriented, it has to go through the bidding procedures periodically and at every time, it faces its competitors who would try to outbid the company. Hence, it cannot afford to rely on quality and relationship with the customer alone but also must ensure that its bids are competitive enough to outbid its competitors. Human Resource: The success of the company depends upon the recruitment of right people at the right place with appropriate skills and through employee retention and motivation. Economic downturns: Although half of its operations are less susceptible to economic downturns, businesses in the sports and leisure sectors are vulnerable to economic downturns. Food cost inflation: The Company uses the tool of cost indexation in the contracts for managing food price inflation by reserving a contractual right to review prices with its customers. Labour cost inflation: The Company has employed tools to optimise labour productivity and labour flexibility (CompassPlc, 2013). Apart from the above anticipated risks, the company has to be on the guard against mergers and acquisition activities of its competitors which may swallow a sizeable portion of its existing businesses overnight. The company therefore needs to be alert to this threat perception. The group should also think in terms of injecting additional equity to replace its long term debt so as to be more competitive in the market. References CompassGroup. (2012). History, The Beginning. Retrieved May 25, 2014, from Compass-usa-com: http://compass-usa.com/pages/history.aspx CompassPlc. (2013). Annual Report . Compass Plc Group. Funding Universe. (1999). Compass Group PLC History . Retrieved May 26, 2014, from Funding Universe.Com: http://www.fundinguniverse.com/company-histories/compass-group-plc-history/ Read More