Booker Group financial analysis

I have selected two companies; Booker Group Plc and Tate & Lyle Plc for analysis and evaluation in relation to traditional methods and contemporary methods. A brief description of the two companies’ profile is provided below; Booker Plc: Booker group is a food wholesaler company based in the United Kingdom. It was founded in 1835 by George and Richard Booker. The group’s subsidiaries include; Booker wholesale, Macro Booker direct, Classic drinks, Ritter Caurivaud, Chef Direct, Premier, Family Shopper, Budgens, Londis and Booker India. The company has 13,000 employees and serves more than 1. The percentages of change in the financial items over a period of time are used (Suthan, 2007). In comparing the financial performance of two or more companies, horizontal analysis is quite useful as items in the financial data are easily analysed and compared for reliable conclusions.

An analysis of the income statements of the two companies is provided below; Booker Group Plc (Appendix. Table 7) The net profit of Booker has been increasing steadily since 2013, as well as the PBT and the gross profit. A major change in the above parameters was observed in 2014 where the change was approximately 40%. The vertical analysis of Booker and Tate for both the balance sheet and income statements will be conducted to demonstrate the applicability of the vertical analysis method. In the vertical analysis of the income statement, the sales/revenue will be used as the base figure, while the vertical analysis of the balance sheets of both companies will use assets as the base figure. In both companies, majority of expenses in the income statement are accounted by COS and selling and administration expenses.

It is thus important for this analysis to note the changes in these figures. Keeping the values of these two major cost drivers down can be the difference between making a loss of a profit. Other assets such as plant, long term investments, intangible assets and long term receivables comprise the non-current assets since they cannot be converted into cash within a given financial year. Non-current assets generally depreciate during the time and therefore mean more risks to the business. Both companies have closely similar percentages of both current and non-current assets. Booker current assets averaged at 45. 16% while that of Tate averaged at 43. Ratios are particularly useful to the users of the financial data outside the company since they rely more on financial information to assess the performance of a company.

Insiders may not find ratios quite useful as they have access to more detailed information regarding the company’s performance. Ratios are particularly useful to outsiders when used for trend analysis or industry/company comparisons. There are several possible ratios that can be used to analyse the performance of an entity but this paper will only capture the critical ones. Conducting a ratio analysis allows us to compare the specific items in each company’s financial statements over the three year period. Booker managed their COGS better, and that’s the reason they recorded better profitability. Efficiency Ratio (Appendix, Fig 12-18): Also known as the working capital management ratios indicate how well a company is utilizing their assets to generate revenue/income.

A company that quickly converts assets into cash is deemed better performing. From the above table, Booker was more efficient in its operations and quickly converted assets into income compared to Tate. Investment Ratio (Appendix, Fig 3-5): This ratio is important to potential investors as it show the period they are likely to take before they can recover their investment in shares. Based on the analysis of the three rations for BK and T&L both companies can register a robust growth in the coming years to maximise returns (Appendix charts, fig 1&2). Merits of Common Size Analysis Useful in comparisons: Common size analysis allows for a clear comparison of the financial condition of a company by examining most of the items in the financials as they are well presented in percentages or tabular forms (Appendix Tables 1,2,3,4,7&8).

Multiple company comparisons: Allows for comparison of multiple companies as the items in the financials can be easily related for trends and comparison. Allows for industry comparison: Using of common size analysis, it is possible to compare an enterprises’ performance with that of the industry which gives a reliable corporate evaluation and ranking among its peers. Easy to understand: Common size analysis helps to understand with ease all capital sources and the sources of other funds and how the funds are being utilized to improve the performance of the company. Weak spots can be easily located: The ratios of the current year can be compared with those of previous years to identify the weak spots. Once identified, corrective measures can be taken to remedy them.

Useful for forecasting: Through use of ratios, trend analysis can be carried out to forecast the future direction of a company’s financials. Useful tool for comparisons: By use of ratios, the profitability and solvency of several firms within the same industry can be compared. Different years’ performances are also easily compared (Refer to the ratio analysis charts; Fig 3-18, which shows how ratios have been used to compare the performance of Booker and T&L) Demerits of Ratio Analysis Differences in accounting policies: The comparison ability of ratios is slim in cases where firms use different accounting policies. Actions can then be taken to identify the route course of those weaknesses. It is therefore a straightforward and a reliable model in assessing a company’s financial strength.

Analysis of Return to equity: The technique is useful in helping investors pin point the source of the changes in equity returns. Helpful in analysis the accuracy of financial data: It gives a more accurate assessment of the significance of the changes in a company’s ROE by focusing on available means that a company has to increase ROE figures. Through financial gearing a company can gauge its performance and put plans in place for improvement. There are other factors that indicate the competitive position of a company other than ratios, and profits and contemporary methods serve to mitigate the deficiency with traditional methods in evaluation of a company’s financials. Vertical and horizontal analysis allows the comparison of companies of two different sizes.

The changes in the numbers provide analysts with information regarding the company’s operational effectiveness. The total impact of operational activities is easily demonstrated for the period under review. However, the usefulness of these analysis tools declines when dealing with companies with fluctuating amounts of income reported periodically (Suthan, 2007). As opposed to traditional methods such as rations, vertical and horizontal analysis tools, EVA is more focused on cost of capital because capital invested in a business comes with other associated costs. It is the ultimate goal of every management to create value for its shareholders and EVA measures this by adjusting the results of a business with the cost of capital and the risks involved. It quantifies the value generated by every investment and comes with crucial requirements in business in addition to expressing performance.

This include giving a different view on management decisions such as considering cost of capital and also change of the approach towards value addition to the shareholders investments. EVA is important in the clarification of the idea of maximizing shareholders value over and above the COC in creating wealth for the shareholders. It measures how sensitive the stock is to the market risks. The CAPM model is based on the premise that investors assume a systematic risk that they need to be compensated for an amount higher than market risk-free rate in the form of risk premium. Investors will require a higher return for taking the risk of investing in a security. Efficient Market Hypothesis: The EMH theory holds the proposition that an asset’s current price fully reflects about future economic fundamentals affecting the asset’s value.

The theory was first postulated by Roberts (1959) who made the distinction between weak and strong form of EMH. They do not tell the analyst why the results are as they are or the specific areas the firm must improve in order to meet its strategic goals (Adedeji, 2014). It is therefore essential to complement traditional approaches with the contemporary methods adapted to suit specific situations of competition. It is necessary to implement modern methods for a better view of a firm’s performance measure. The short comings of traditional methods with the raising incidences of window dressing, common size analyses fails to report real positions of assets, sales and other financial items. It makes the results of common size analysis less reliable and incomplete.

Financial Statements as Sole Predictors of Financial Distress: The Need for New Financial Ratios. SSRN Electronic Journal. doi: 10. 2139/ssrn. 1797852 Blum, J. annualreports. com/Company/booker-group-plc Joy Thomas , S. Rabiyathulbasariya, J. Measuring Financial Performance through Ratio Analysis \"A General Study on The Ratio Analysis Tool to Trigger out Financial Performance\". International Journal Of Accounting And Financial Management Research, 7(6), 37-44. doi: 10. 2139/ssrn. 1588981 Tate & Lyle PLC - AnnualReports. com. Retrieved from http://www. 9   Operating Expenses             Administrative and general Expenses (64. 8)   Other Operating Expenses - - - - - Operating Income or Loss 94. 1   Finance Income - - 0. 4 Earnings Before Interest And Taxes 94. 5   Finance Cost (2. 4   Available for sale financial assets - - - - - -   Derivative financial instruments - - - - - -   Intangible Asset 437.

6   Trade and other receivables - - - - - -   Retirement benefit surplus - - - - - -   Investment In Associates - - - - - -   Investment In Joint Venture 0. 6   Other Investment - 144. 9 - - - -   Deferred Tax Assets 13. 4   Total non-current asset 522. 9   Deferred Tax Liabilities               Total non-current liability 80. 8                   Total Liability 567. 9                 Equity                 Share capital 15. 8   Share premium 49. 6   Merger reserve 260. 0 Effect of changes in foreign exchange 1. 0 Cash and cash equivalents at end of year 587 628 477 599 543 Table 5 TATE & LYLE CASH FLOW STATEMENT BOOKER GROUP PLC CASH FLOW STATEMENT               2013 2014 2015 2016 2017                 Net cash provided by (used in) operating activities 85. 5 Net cash provided by (used in) investment activities (34. 2) Net cash provided by (used in) financing activities (37. 0) Increase (decrease) in cash and cash equivalents 13. 00%   Other financial assets 0. 00%   Cash And Cash Equivalents 6.

19%   Total current asset 39. 50%               Non-Current Assets             Property Plant and Equipment 6. 06%   Available for sale financial assets 0. 00%               Liabilities             Current Liabilities             Trade Payables 38. 72%   Other Payables 5. 00%   Loans And Borrowings 0. 00%   Tax Liabilities 1. 20%               Non-Current Liabilities             Loans and Borrowings 0. 50%   Other reserves 12. 00%   Share option reserve 0. 91%   Retained earnings 7. 83%                 Total Equity 48. 16%                 TOTAL LIABILITIES & EQUITY 100. 00% Non-Current Assets             Property Plant and Equipment 34. 29%   Available for sale financial assets 0. 08%   Derivative financial instruments 1. 54%   Goodwill & Intangible Asset 12. 47%   Trade and other receivables 0. 18%   Tax Liabilities 1. 57%               Non-Current Liabilities             Loans and Borrowings 29. 80%   Other Liabilities 0. 36%   Derivative financial instrument 0. 34%   Retirement benefit deficit 9. 78%   Non controlling interest 0. 00%   Total Equity 37. 07%   TOTAL LIABILITIES & EQUITY 100. 00% Table 16 Vertical Analysis Balance Sheet for T&L BOOKER GROUP PLC Common Size Cash Flow Statement (as a % of operating Cash flow)     2013 2014 2015 2016 2017               Net cash provided by (used in) operating activities 100% 100% 100% 100% 100% Net cash provided by (used in) investment activities -41% -7% -18% -40% -6% Net cash provided by (used in) financing activities -43% -36% -84% -71% -75% Increase (decrease) in cash and cash equivalents 16% 57% -2% -11% 19% Cash and cash equivalents at beginning of year 74% 61% 111% 84% 72% Cash and cash equivalents at end of year 90% 119% 109% 73% 91% Table 17 Vertical Analysis Cash Flow Statement for BK TATE & LYLE Common Size Cash Flow Statement (as a % of operating Cash flow)     2013 2014 2015 2016 2017               Net cash provided by (used in) operating activities 100% 100% 100% 100% 100% Net cash provided by (used in) investment activities -33% -7% -92% 46% -38% Net cash provided by (used in) financing activities -94% -69% -103% -88% -91% Increase (decrease) in cash and cash equivalents -27% 24% -95% 57% -30% Cash and cash equivalents at beginning of year 261% 205% 351% 254% 201% Effect of changes in foreign exchange 0% -9% 11% 7% 11% Cash and cash equivalents at end of year 234% 220% 266% 319% 182% Table 18 Vertical Analysis Cash Flow Statement for T&L Ratios BOOKER   TATE & LYLE   2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 Liquidity Ratios                     Current Ratio 0.