Company Analysis of the Financial Performance of Whitebread Plc - Report Example

Company Analysis of the Financial Performance of White bread Plc Whitbread Plc is one of the premier organizations engaged in the hospitality business across the world. The company owns a number of businesses such as hotels, restaurants, coffee shops, bars, pubs and so on. These businesses are conducted under the name of several well-known brands like the Premier Inn, the Beefeater Grill, the Brewers Fayre, Table Table, Taybarns and Costa Coffee. The company provides employment to around 40,000 people all over the world. The organization in based in the United Kingdom and constitutes one of the major hospitality brands of the region. It serves over 11 million customers on a monthly basis in UK. Whitbread Plc recorded commendable financial results in the year 20110-11. The company’s total revenues grew by 11.5 per cent from £ 1435 in 2009-10 to £ 1599.6 in 2010-11. The profit before tax recorded a handsome increase of 20.1 per cent from £ 239.1 in 200-10 to 287.1 in 2010-11. The firm also recorded a 17 per cent escalation in its full year dividend. The corresponding dividend increased from 38 in 2009-10 to 44.50 in 2010-11. Thus, overall the Whitbread Group consisting of the Bars, Hotels, restaurants and the Coffee Chains reported a good growth in its business operations during the financial year 2010-11. Profitability Ratios Profitability Ratios of a company exhibit the firm’s capacity to generate earnings in comparison with its expenditure incurred during a period of time. Usually, an increase in the profitability ratios of a company over a time period indicates a good financial performance of the firm. (Thakuram, 2007, p.48). The Profit Margin: The Profit Margin is defined as the Net Income/Revenues or Net Profits/Sales. This is usually expressed as a percentage and indicates how much the firm retains as earnings out of every dollar of sales The Profit Margin of Whitbread Plc has been calculated for 2009-10 and 2010-11, as follows: Years Profit before Tax (million) Sales (mn) Profit Margin = Net Profit/Sales (%) 2010-11 £ 287.1 £ 1599.6 17.9% 2009-10 £ 239.1 £ 1434.6 16.7% (Annual Report of Whitbread Plc, 2009-10, 2010-11) Therefore, the Profit Margin of Whitbread Plc has increased from 16.7% in 2009-10 to 17.9% in 2010-11. This shows that the financial performance of the company has improved from the previous year. Return on Assets (ROA): The Return on Assets is calculated by Net Income/Total Assets. This is also expressed as a percentage and gives an idea about the profitability of the company in relation to its total assets. The ROA of Whitbread Plc has been calculated for 2009-10 and 2010-11, as follows: (Annual Report of Whitbread Plc, 2009-10, 2010-11) The figures indicate that Whitbread Plc’s ROA has increased from 0.0009% in 2009-10 to 0.0010% in 2010-11. This shows that the pro0fitablity of the firm has increased from the last year. Efficiency Ratios Efficiency Ratios are utilized to evaluate how efficiently a company is able to make use of its internal assets and liabilities. An improvement of efficiency ratios usually lead to increased profitability for the company. (Leach, 2011, p.75-78) Sales to Inventory Ratio: This is calculated by Annual Net Sales/ Inventory. It provides an idea about the inventory-to-sales ratio of the company, which can be compared over a period of time. The Sales to Inventory Ratio of Whitbread Plc has been calculated for 2009-10 and 2010-11, as follows: (Annual Report of Whitbread Plc, 2009-10, 2010-11) Therefore, the Sales to Inventory Ratio of Whitbread Plc, has decreased from 0.55 % in 2009-10 to 0.54% in 2010-11. Assets to Sales Ratio: This ratio is given by Total Assets/Net Sales. It provides an indication of how the firm is utilizing its assets to generate sales. The Assets to Sales Ratio of Whitbread Plc has been calculated for 2009-10 and 2010-11, as follows: (Annual Report of Whitbread Plc, 2009-10, 2010-11) Thus, the Assets to Sales Ratio of Whitbread Plc had reduced from 0.018% in 2009-10 to 0.017% in 2010-11. The decline in both the Efficiency Ratios point to the decreased efficiency of Whitbread Plc in 2010-11, when compared to the previous year. This indicates that the firm is using its assets and inventories less efficiently than before to generate sales revenue. Liquidity Ratios The Liquidity Ratios evaluate the company’s ability to repay its short term debt liabilities. A higher value of these ratios indicates a sound financial base of the firm and therefore an increased capacity to pay off short term debts. (Webster, 2003, p.32-37) Current Ratio: This is actually the ratio between Current Assets/Current Liabilities. This ratio gives an idea about the company’s ability to repay its short-term liabilities with the help of its short term assets. The Current Ratio of Whitbread Plc has been calculated for 2009-10 and 2010-11, as follows: (Annual Report of Whitbread Plc, 2009-10, 2010-11) Therefore, the Current Ratio of Whitbread Plc has decreased from 0.013 % in 2009-10 to 0.012 % in 2010-11. This indicates that the company is in a weaker position to pay off its short term debts as compared to its financial position in the previous year. Quick Ratio: This is measured by (Current Assets – Inventories)/Current Liabilities. This shows the company’s ability to repay its short term debts with the help of its current assets excluding its liabilities. The Quick Ratio of Whitbread Plc has been calculated for 2009-10 and 2010-11, as follows: Years Current Assets (million) Inventories (millions) Current Liabilities (million) Quick Ratio (%) 2010-11 £ 227 £ 29.6 £ 181.9 0.0108 % 2009-10 £ 250.4 £ 25.9 £ 190.1 0.0118 % (Annual Report of Whitbread Plc, 2009-10, 2010-11) Thus, the Quick Ratio of Whitbread Plc had decreased from 0.0118 % in 2009-10 to 0.0108 % in 2010-11. This reflects that the company’s ability to repay its short term debts from its current assets (excluding inventories) has decreased from the last year. Financial Structure Ratios The Financial Structure Ratios provide an idea about the financial or the capital structure of an organization. The capital structure shows how a firm uses its different sources of funds to finance its operations and growth. (Hawawini & Viallet, 2010, p.109) Debt to Equity Ratio: This is calculated by Total Liabilities/Shareholder’s Equity. This ratio indicates the proportion of equity and debt used by the company to finance its assets. The Debt to Equity Ratio of Whitbread Plc has been calculated for 2009-10 and 2010-11, as follows: (Annual Report of Whitbread Plc, 2009-10, 2010-11) Therefore, Whitbread Plc’s Debt to Equity Ratio has decreased from 0.013 % in 2009-10 to 0.012 % in 2010-11. This indicates that firm is presently using a lesser proportion of its equity and debt to finance its assets. Debt to Capital Ratio: This is given by Debt / (Shareholder’s Equity+ Debt). This provides a measurement of the company’s present financial leverage position. The Debt to Capital Ratio of Whitbread Plc has been calculated for 2009-10 and 2010-11, as follows: (Annual Report of Whitbread Plc, 2009-10, 2010-11) Thus, the Debt to Capital ratio of Whitbread Plc has decreased from 0.0058 % in 2009-2010 to 0.0055 % in 2010-11. This indicated that the company’s present financial leverage position had declined compared to that of the previous year. Stock Market Ratios The Ratios related to the Stock Market give an idea about the company’s position on the bourses. Price to Earnings ratio: This is calculated by (Market Value per share)/ (Earnings per Share). This ratio values the company’s current share price in comparison to its earnings per share. The Price to Earnings Ratio of Whitbread Plc has been calculated for 2009-10 and 2010-11, as follows: (Annual Report of Whitbread Plc, 2009-10, 2010-11) Thus, Whitbread Plc’s Price to Earnings Ratio has reduced from 15.22 in 2009-10 to 14.71 in 2010-11. Book To Market Ratio: This is measured by (Book Value of a Firm)/(Market Value of a Firm). This gives an idea about the present valuation of the company by comparing between the two values. The Book to Market Ratio of Whitbread Plc has been calculated for 2009-10 and 2010-11, as follows: (Annual Report of Whitbread Plc, 2009-10, 2010-11) Therefore, the Book to Market Value of Whitbread Plc has increased from 0.10 in 2009-10 to 0.12 in 2010-11. This indicates that the market valuation of the company in the stock markets has increased. Thus, it is more lucrative for the public to invest in the shares of the Whitbread Plc. Thus, the financial analysis of Whitbread Plc yields mixed results. The profitability of the company in 2010-11 has increased from the year 2009-10. This indicates that the firm is currently generating more earnings compared to its expenses. However, Whitbread’s efficiency ratios have decreased marginally from the previous year, which shows that the firm is using its internal assets less efficiently that the last year. Similarly, the liquidity ratios of the company have also reduced from the previous year indicating that the firm is presently in a weaker position to repay its short term liabilities than it was in 2009-10. Reflecting a similar trend, the financial structure ratios are lower than those of the last year, showing that the financial leverage condition of the firm has decreased over the year. Finally, the stock market ratios reflect a mixed position of the company. While the price to earnings ratio has decreased from the last year, the Book to Market ratio has showed an increase. Therefore, the financial analysis of Whitbread Plc reveals that the company has fared well in some aspects and not done so well in certain others. It should look to improve its, efficiency, liquidity position and financial structure in the coming future. References 1. Annual Report and Accounts 2009-10, Whitbread Plc, available at http://www.whitbread.co.uk/whitbread/investors/resultsreports/annualinterimreports.html (accessed on January 27, 2012) 2. Annual Report and Accounts 2010-11, Whitbread Plc, available at http://www.whitbread.co.uk/whitbread/investors/resultsreports/annualinterimreports.html (accessed on January 27, 2012) 3. Hawawini, G & Viallet, C (2010), Finance for Executives: Managing for Value Creation, USA, Cengage Learning 4. Leach, C.J et al (2011), Entepreneurial Finance, USA, Cengage Learning 5. Thukaram, R.M.E (2007), Management Accounting, New Delhi, New Age International 6. Webster,W.H (2003), Accounting for Managers, USA, Mc-Graw Hill Professional 7. Whitebread Plc, (2012), Hoovers, available at http://www.hoovers.com/company/Whitbread_PLC/sfcxji-1-1njea5.html (accessed on January 27, 2012) Read More