Comparison Of Two Companies (Financially) Essay, Research Paper
Comparison of two companies (financially)Interpretation of Accounts for Tasker Lynch plc. 1/Terms of ReferenceAs the company s accountant I have been asked by the board of directors to appraise the financial company of my choice. The appraisal was requested by the chairman who would like to invest a sum of money on behalf of the employees of Tasker Lynch plc. This report has been prepared to analyse the financial performance of The Booker Group, the company I am looking into, with regards to its worthiness for investment by Tasker Lynch plc, and The Nurdin & Peacock Group, to incorporate the companies profitability, efficiency and liquidity for the historical period 1993-1995 and to provide a comparison between the two. Bookers financial structure will then be examined and the advantages and disadvantages of the company, as a recipient of investment funds will be discussed. 2/ ProcedureTo obtain the correct analysis, a detailed breakdown of the figures given was necessary, comparing various ratios over the three year period, to see the progress (or otherwise), of the companies involved. To do this, the companies profit and loss accounts and balance sheets were used. The financial information relating to the Booker Group has been extracted from the audited accounts for the three financial years end 30th December 1995. The financial information relating to the Nurdin and Peacock Group has been extracted from: for 1995, the audited accounts for the fifty two weeks ended 29th December1995 and for 1994 and 1993 the comparative figures shown in the audited accounts for the fifty two weeks ended 29th December and 30th December 1994 respectively. (See Appendices1)3/Introductiona) Background to BookerBooker is a UK based international food group active in three main business areas:Food Distribution – cash and carry and delivered wholesale services; international cash and carry operations; food, non-food items and services to the catering industry and a contract distribution business. Agribusiness – in the UK division, salmon farming, horticultural plant breeding, sugar-related businesses; and in the US, specialist poultry breeding businesses. Fish and Prepared Foods – companies specialising in many aspects of the business of fish and seafood and the low cost production of value added fresh and frozen convenience foods. Booker s food distribution businesses include Booker Belmont Wholesale (”BBW”), one of the UK s leading wholesalers and a major national food distribution organisation. BBW provides cash and carry and delivered wholesale services to retailers and caterers through 158 cash and carry depots and 10 distribution centres across the UK. b)Background to Nurdin and PeacockNurdin & Peacock is a UK listed company and is one of the leading operators of wholesale cash and carry warehouses in the UK with 55 depots under the “Trade and Business Warehouse”Nurdin and Peacock owns an own-brand portfolio comprising more than 1,300 lines including the Happy Shopper and Happy Chef brands, and the Independent Cellars own label drinks range. Nurdin & Peacock supports 2,200 independent retailers who trade under the Happy Shopper fascia. c) Context for Booker plcInternal areas+ Emphasises customer service. + Emphasises efficiency and investment in major projects to improve profitability. + Has moved to centralised distribution. External areas+ Are facing increasing competition in preferred food markets. + Success is linked to continuing success of it s independent retailing and catering customers. + Strong success in wholesaling has been offset by BSE (Bovine Spongiform Encephalitis)+ Food wholesaling is relatively static but with a very competitive UK market. + In the United States, the broiler industry is currently facing formidable problems as a consequence of exceptionally high grain prices. + Well known to the trade as Pullman Foods d) Context for Nurdin and Peacock plcInternal factors+ New management team in force. + Believes in strong investment in new systems. + Has moved to more central distribution and lower costs. + Employees profit sharing scheme. + Policy to reduce costs in the core cash and carry business. External areas+ Are facing increasing competition in preferred food markets+ The tendency for people to eat ready prepared meals and sandwiches, is leading to increased trade. + Strong success in wholesaling has been offset by BSE (Bovine Spongiform Encephalitis)+ Food wholesaling is relatively static but with a very competitive UK market. + Well known brand name, Happy Shopper 4/FindingsTABLE 1. RATIOS USED IN THIS REPORTFOR THE BOOKER GROUP. 199219931994 m m mCURRENTCURRENT ASSETS837.8907962.7DIVIDED BY CURRENT LIABILITIES790.8943.6949.1TOTAL1.060.961.01ACID TESTCURRENT ASSETS837.8907962.7MINUS SK383.3426.4426.4TOTAL454.5480.6536.3DIVIDED BY CURRENT LIABILITIES790.8943.6949.1TOTAL0.570.50.57SK CARRIEDSK PER ANNUM383.3426.4426.4DIVIDED COST OF SALES3,332.203,500.103,889.10COST OF SALES PER WEEK640.8673.1747.9NO. OF WEEKS5.986.345.7CREDIT GIVENDEBTORS353.6386.4409.3DIVIDED BY TURNOVER3,588.703,722.304,222.90WEEKLY TURNOVER690.13715.83812.1NO. OF WEEKS CREDIT GIVEN5.125.45.04CREDIT TAKENCREDITORS668.5767.7834.5DIVIDED BY COST OF SALES3332.23,500.13,889.10WEEKLY COST OF SALES64.0867.3174.79NO. OF WEEKS CREDIT TAKEN10.4311.4111.16RETURN ON CAPITAL EMPLOYEDNET PROFIT59.745.851.3DIVIDED BY CAPITAL EMPLOYED173.9181.8178.5TOTAL0.340.250.28TIMES BY 100TOTAL34.30%25.20%28.74%PERCENTAGE OF GROSS PROFITGROSS PROFIT256.5222.2333.8DIVIDED BY TURNOVER3,588.703,722.304,222.90TIMES BY 100TOTAL7.15%5.97%7.90%ADMINISTRATIONADMINISTRATION COSTS847743988DIVIDED BY SALES3,332.203,500.103,889.10TIMES BY 100TOTAL2.54%2.12%2.54%DIVIDEND COVERNET PROFIT AFTER TAX59.745.851.3DIVIDED BY DIVIDENDS46.449.552.1TOTAL1.290.930.98BORROWING:NET WORTHTOTAL BORROWING123.143.9141.7DIVIDED BY SHAREHOLDERS FUND173.9181.8178.5TIMES BY 10070.79%24.14%79.38%RATIOS USED IN THIS REPORTFOR THE NURDIN & PEACOCK GROUP. 199219931994 ,000 ,000 ,000CURRENTCURRENT ASSETS155,562212,930226,730DIVIDED BY CURRENT LIABILITIES159,672262,997244,370TOTAL0.980.810.93ACID TESTCURRENT ASSETS155,562212,930226,730MINUS SK132,745194,613186,956TOTAL22,81718,31739,774DIVIDED BY CURRENT LIABILITIES159,672262,997244,370TOTAL0.140.070.16SK CARRIEDSK PER ANNUM132,745194,613186,956DIVIDED BY COST OF SALES1,355,6491,506,6981,622,216COST OF SALES PER WEEK26,070.1728,974.9631,196.46NO. OF WEEKS5.096.726CREDIT GIVENDEBTORS12,99215,17117,863DIVIDED BY TURNOVER1,403,3191,540,3401,659,212WEEKLY TURNOVER269,8729,621,9231,907.92NO. OF WEEKS CREDIT GIVEN0.480.510.56CREDIT TAKENCREDITORS155,562212,930226,730DIVIDED BY COST OF SALES1,355,6491,506,6981,622,216WEEKLY COST OF SALES26,070.1728,974.9631,196.46NO. OF WEEKS CREDIT TAKEN5.977.357.27RETURN ON CAPITAL EMPLOYEDNET PROFIT21,87711,37215,699DIVIDED BY CAPITAL EMPLOYED159,683148,661154,378TIMES BY 100TOTAL13.70%7.60%10%PERCENTAGE OF GROSS PROFITGROSS PROFIT47,67033,64236,996DIVIDED BY TURNOVER1,403,3191,517,6391,646,816TIMES BY 100TOTAL3.37%2.22%2.25%ADMINISTRATIONADMINISTRATION COSTS18,31815,71915,531DIVIDED BY SALES1,355,6491,506,6981,622,216TIMES BY 100TOTAL1.35%1.04%0.96%DIVIDEND COVERNET PROFIT AFTER TAX21,87711,37213,848DIVIDED BY DIVIDENDS8,2058,7929,298TOTAL2.671.31.49BORROWING:NET WORTHTOTAL BORROWING8,6956,7066,078
DIVIDED BY SHAREHOLDERS FUND159,683148,661154,378TIMES BY 100TOTAL5.4454.51%3.90%Table 2. Summary of ratios199319941995LIQUIDITYCURRENTBooker Plc1.060.961.01Nurdin & Peacock Plc0.980.810.93ACID TESTBooker Plc0.570.50.57Nurdin & Peacock Plc0.140.070.16SK CARRIEDNo of WeeksBooker Plc5.986.345.7Nurdin & Peacock Plc5.096.726CREDIT GIVENNo of WeeksBooker Plc5.125.45.04Nurdin & Peacock Plc0.480.510.56CREDIT TAKENNo of WeeksBooker Plc10.4311.4111.16Nurdin & Peacock Plc5.977.357.27PROFITABILITYR.O.C.EBooker Plc34.30%25.20%28.74%Nurdin & Peacock Plc13.70%7.60%10%PERCENTAGE OF GROSS PROFITBooker Plc7.15%5.97%7.90%Nurdin & Peacock Plc3.37%2.22%2.25%ADMINISTRATION COSTS Booker Plc2.54%2.12%2.54%Nurdin & Peacock Plc1.35%1.04%0.96%BORROWING:NET WORTHBooker Plc70.79%24.14%79.38%Nurdin & Peacock Plc5.44%4.51%3.96%CAPITAL USEDDIVIDEND COVERBooker Plc10.4311.4111.16Nurdin & Peacock Plc2.671.31.49Note: It is assumed that the stock quoted in the balance sheet represents average stock. Liquidity Ratiosa) CurrentThis is the standard test of liquidity, and it is generally considered that the liquidity ratio should be between 1.5 and 2, below 1.5 a company can find difficulty in meeting immediate bills, (wages etc.), over 2 and the company has excess funds. Both companies fall below 1.5, although Bookers is slightly higher. This may well be due to both companies being food distributors, who are able to operate on a lower ratio, as less credit is given and taken in the food industry, where most stock has a limited shelf life. b) Acid TestThe acid test ratio is helpful in judging the solvency of the company. The accepted ratios for this test are between 0.9 and 1.0. Nurdin and Peacock is barely liquid, with a ratio of 0.07-0.16, so that one serious bad debt could put the company in trouble. c) Stock CarriedBoth companies number of weeks stock, are remaining constant and are in the region of six weeks, indicating good stock control by both companiesd) Credit givenTable 1. shows that Bookers, have good control in collecting moneys owing to them. Possibly indicating that the company is collecting payments by the end of the month, following the month of delivery. Whilst this is slightly in excess of the normal credit payment of thirty days, some companies must allow generous credit terms to win customers. Nurdin and Peacock, being mainly cash and carry, operates with very little credit given. e) Credit takenBookers appear to be settling their trade debts each year within the same period, which would indicate that the company is not under any pressure from it’s debtors. Nurdin and Peacock plc, on the other hand have been extending the number of weeks credit given, which confirms the findings of the acid test. (See findings b) )Profitability ratiosa) Return on Capital EmployedIt is impossible to assess profits or profit growth without relating them to the amount of capital employed in making the profits. The most important profitability ratio is therefore the Return on Capital Employed, which states the profit as a percentage of capital employed. The directors of Booker, account for the drop from 34.3% in 1993 to 25.2% in 1994, as being due to increased investment on capital projects (e.g. new distribution depot) and the benefits of these expenditures are reflected in the increase in the R.O.C.E. in 1995. Return on capital employed is considerably lower for Nurdin and Peacock at 10% in 1995. b) Gross ProfitBookers gross profit decreased in 1994, for reasons stated previously, (R.O.C.E.) the benefits of which are reflected once again in the increase in gross profit in 1995. Nurdin and Peacocks gross profit, shows a steady fall over the historical 3 year period, due to the increased pressure of competitors. c) Administration CostsThe administration costs percentage for Booker is the same in 1995 as in 1993, but Nurdin and Peacock, shows a slight fall, showing that both companies have a tight control on their administration costs. d) Borrowing:Net worthThis ratio can indicate the degree of risk to investors in ordinary shares in a company. Generally speaking, the higher the ratio, the greater the possibility of risk to ordinary shareholders, both in respect of future dividends and from threat of liquidation. In view of the overall analysis of both companies, Bookers does not have an excessive borrowing ratio and it is manageable at present. The drop in 1994 may well be due to the company disposing of peripheral businesses, to concentrate on the core. Nurdin and Peacock, although operating with an excessively low ratio, have been losing market share and are unable to expand and therefore have no need to borrow. Price to earnings ratioGenerally, the higher the P/E ratio, the more confidence investors have in the company, but their confidence may not necessarily be justified. The average P/E ratio for British companies is between 7 and 15. As per The Daily Telegraph on 30th October 1996, Bookers had a P/E ratio of 17.8, with Nurdin and Peacock having a ratio of 16.6. Capital used ratioDividend coverDividend cover shows what proportion of profit on ordinary activities for the year, for distribution to shareholders, has been paid (or proposed) and what proportion is retained in the business to finance future growth. Nurdin and Peacocks dividend cover has fallen sharply between one year and the next. Although profits have fallen, the directors of Nurdin and Peacock, perhaps indicating that they wished to pay at least the same amount of dividends as in the previous year, have attempted to keep the shareholder s expectations satisfied. Bookers dividend cover has fallen slightly but given the strong position of the company, this reflects the desire of the directors to adequately, but not excessively reward shareholders. 5/ConclusionsLiquidityOn analysis Bookers, is operating at present with adequate liquidity and the steady R.O.C.E ratio indicates that they are not facing future problems which may threaten this. Nurdin and Peacock however are operating on a much lower percentage. ProfitabilityBookers profits in 1995 show a rise, as the benefits of development expenditure work through and is expected to show a further increase in the coming year. Nurdin and Peacock s profit is falling as they face increasing competition. EfficiencyThe Booker company appears to be efficiently run at present, however Nurdin and Peacocks efficiency is falling. 6/RecommendationsAs the company accountant, the recommendation to the Chairman of Tasker Lynch plc, is that he consider that the acquisition of shares in the Booker Group, would be in the best interests of the company and the employees as a whole. Financial advice on the matter has been taken from Bellamy Brothers, the companies financial advisors and they concur with the assessment below. It is found that Booker plc:a) Has a better return on capital. b) Is more profitable. c) Whilst Nurdin and Peacock appear to show a better return on dividends, they are struggling to meet these payments, whilst Bookers expenditure on developments will show increasing benefits. d) Nurdin and Peacock being a smaller company in all respects (turnover etc.) are facing increasing problems from competition. It should be stated however that Tasker Lynch plc would be relying to some extent, on the gamble that the investment two years previously will continue to boost the profit of the company in the coming years. 7/Limitations of the reportRatio analysis on its own, is insufficient for interpreting company accounts, other details need to be looked at. Conclusions drawn from the ratios in this report have therefore been done with care. Reasons for this may include:-+ On their own ratios would not provide enough information to enable managers to gauge performance or make control decisions. + Care must be taken with definitions of ratios used. For example, should capital employed include or exclude intangible assets. + If ratios are compared over a period of historical cost, they will not be properly comparable where inflation in prices has occurred. + Ratios calculated on historical cost may not provide a guide to the future. + The use of ratios, are however useful if a companies figures can be compared to a similar firm in the same industry. + It would have been useful to calculate a distribution ratio but this was not present in the accounts available. Note: There are various other ratios which may also be used as an aid in the interpretation of Bookers and Nurdin and Peacocks accounts.