Good Financial Analysis- Greggs PLC Research Paper Example
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About the report
The main purpose of this report is to conduct an in-depth financial analysis of Greggs PLC so as to evaluate the stock for evaluating any hidden trade opportunity. For this purpose, we will be conducting the horizontal analysis of the financial statements and will also frame pro-forma financial statements of the company. In the very last section, we will carry out a comprehensive ratio analysis of the financial statements of the company for past two fiscal years.
We are sure that by the end of this report, we will be able to arrive at a concrete conclusion, i.e. if Greggs PLC will be a profitable investment opportunity for us on the basis of historical financial performance of the company
About the company- Greggs PLC
Founded in the year 1939, Greggs PLC is the largest bakery chain in the United Kingdom with 1671 outlets. The company is headquartered in Newcastle upon Tyne and specializes in savoury products such as Pastries, Sandwiches, Doughnuts, etc. Headed by CEO, Kennedy McMeikan, the company was turned into largest bakery of the nation following multiple acquisitions, with Bakers Oven the primary one.
At present, the company trades on London Stock Exchange under the ticker sign of ‘GRG’.
Financial Statement Review
Under this section, in order to provide a detailed financial statement analysis, we will conduct horizontal analysis of the company, followed by an extensive discussion over the same as how the financial position of the company changed from 2012 to 2013
Income Statement Review
Referring to the horizontal income statement below, we can witness that the financial performance of the company during 2013 was not very much appreciable. Although the revenue figures surged by 3.67%, but higher cost of revenue eroded the profit margins of the company. In other words, with revenue increasing by 3.67%, higher cost of sales and operating expenses that surged by 7.69% and 6.58%, resulted in operating profit tumbling down by -37.74% and bottom line profits by -41.46%..
Thus, with such financial credentials for 2013, we can assert that the company indeed needs to take this situation seriously.
Balance Sheet Review
The impact of poor financial performance during 2013 was clearly visible on the balance sheet of the company. During 2013, there was a little improvement in the cash position of the company that surged by 15.79% only while the total current assets soared only by 1.56%. As for the total asset base, the company could only improve the same by 1.83%.
On the other side, the trend in the liabilities and equity was not very encouraging too. While there was no change in additional paid-up capital received by the company, because of 4.27% increase the retained earnings, they managed to pull the stockholder equity by 3.96%. As for liabilities, while the current liabilities surged by 2.53%, the total liabilities was decreased by -3.92%.
Pro-forma Financial Statement
Pro-forma Income Statement
Sales and Cost of Sales are expected to increase by 10% in2014.
Other items are held in proportion to the revenue figures of 2013.
Pro-forma Balance Sheet
Assets are assumed to increase at 5% during 2014.
Other balance sheet items are held in proportion to the total assets figures of 2013.
Till now, we have witnessed that the company had a miserable financial performance during 2013. However, the ratio calculations will provide us a deep insight into the various sections relating to liquidity, profitability, solvency, efficiency and market ratios. Thus, in this section, we will be discussing multiple ratios of Greggs PLC for the last two fiscal years.
i)Current Ratio: Current Assets/ Current Liabilities
2012: 63956/79415= 0.80
ii)Acid Ratio: Cash+ Receivables/ Current Liabilities
2012: (19381+26917)/79415= 0.58
2013: (21572+25012)/80716= 0.58
Referring to the calculations, we find that over the period of one year, the liquidity position of the company is fairly stable. As for the current ratio, the multiple stood constant at 0.80 as 1.69% increase in the current assets was offset by similar percentage increase in the current liabilities of the company. We even tested the liquidity of the company using the stringent measure of acid ratio and found the same results as the multiple stood constant at 0.58 during the year.
Overall, the liquidity roots of the company were intact during the year and we believe the ratio multiples falls on below average benchmark as the company don’t even have current assets equal to that of current liabilities.
i)Return on Capital Employed: Operating Income/(Total Assets- Current Liabilities)
2012: 52740/(328357-79415)= 21.2%
2013: 33358/(333853-80716)= 13.2%
ii)Net Profit Margin: Net Income/ Revenue
2012: 40567/734502= 5.52%
2013: 24189/762379= 3.17%
iv) Return on Equity: Net Income/ Total Equity
2012: 40567/226790= 17.88%
2013: 24189/236177= 10.24%
As noted from the calculations in the appendix, the profitability margins of the company during 2013 were hit hard. As already discussed in the income statement review, because of lower sales growth and higher expenses, the company could not hold on its profit margins. During 2013, the net margins of the company went down from 5.52% to 3.17%. In addition, we even checked the return being earned by the company on the capital employed and once again, we were left disappointed as the multiple declined from 21.2% to 13.2%. This indicates that the management was not even able to improve the returns on the invested capital.
Even the shareholders of the company will not be happy to see the decline in the ROE multiple that went declined from 17.88% to 10.24% only. It is noteworthy that although the total equity increased by 4.13%, but this could also not increase the ROE multiple because of significant fall in the net income figures.
Overall, we can assert that during a year, the profitability position of the company has gone weak sending concerning signals for the company.
i)Debtor Payment Period: 365*Receivables/ Revenue
2012: 365*26917/734502= 13 Days
2013: 365*25012/762379= 12 Days
ii)Credit Payment Period: 365* Trade Payables/ Cost of Sales
2012: 365*71955/285748= 92 Days
2013: 365*72203/307598= 85 Days
iii)Stock Holding Period: 365*Inventory/ Cost of Sales
2012: 365*17658/285748= 22 Days
2013: 365*15405/307598= 18 Days
iv)Cash Conversion Cycle: Stock Holding Period+ Debtor Payment Period- Credit Payment Period
2012: 22+13-92= -57 Days
2013: 18+12-85= -55 Days
After witnessing some undesirable trends in the liquidity and profitability positions of the company, we finally calculated the efficiency/asset management ratios of the company and found some impressive improvement.
Our calculations revealed that while the debt collection period reduced marginally from 13 to 12 days, the company also shortened its credit payment period from 92 days to 85 days. This was essential considering the poor profitability performance during 2013 and in the event of late payments to the creditors, the company could see some unfavorable lending terms from the suppliers.
Another encouraging factor here was the lower inventory turnover period that declined from 22 days to 18 days. This indicates that it now takes less time for the company to sell their inventory and hence capital is also freed up quickly from the inventory levels.
Overall, the efficiency of the management related to use of the asset base was appreciable and the same trend should be continued in the future.
i)PE Ratio: Market Price/ EPS
2012: 420.43/0.40= 10.51
2013: 420.22/24= 17.50
ii)Dividend Yield: Market Price/ Dividend per Share
2012: 420.43/20= 21.01%
2013: 420.22/20= 21.01%
These ratios provide direct indication relating to investment opportunity in the company’s stock. As for Greggs PLC, we calculated the PE Ratio and found that during 2013, the multiple increased from 10.51 to 17.50 indicating that the investors are expecting higher returns from the company. In addition, we also calculated the dividend yield and found that the ratio was constant at 21.1% during the year.
-Financial Leverage Ratios
Since the company does not have any long-term liabilities outstanding, we cannot comment on the leverage position of the company.
At the conclusion of this report, on the basis of the above conducted analysis, we will not suggest the investors to go for Greggs PLC’s stock as of now. The year 2013 was indeed a poor financial year for the company with marginal improvement in the revenue. Even the company has declared that the customer footfall in their stores is decreasing year-year and this has hit their profitability significantly as the net margins are plunging downwards only.
Although improvements in the efficiency ratios were visible but this only proves that the management is trying hard to efficiently manage its assets to generate revenue. However, until the company is not earning profit or even if the trends are not in favor of the company, we cannot take such a big risk.
(2013). Annual Report 2013. Greggs.
Balance Sheet- Greggs PLC. (n.d.). Retrieved February 8, 2015, from Morningstar: http://financials.morningstar.com/balance-sheet/bs.html?t=GRG®ion=gbr&culture=en-US
Income Statement- Greggs PLC. (n.d.). Retrieved February 8, 2015, from Morningstar: http://financials.morningstar.com/income-statement/is.html?t=GRG®ion=gbr&culture=en-US
Investment Valuation Ratios. (n.d.). Retrieved February 8, 2015, from Investopedia: http://www.investopedia.com/university/ratios/investment-valuation/
Kaplan. (2011). Ratio Analysis. In K. Inc, Financial Reporting and Analysis (pp. 130-148). USA: Kaplan Inc.
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