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Interpreting Financial Accounting Information Coursework Investment Appraisal of T & S Stores Plc Greggs Plc

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Introduction

Module M07118 Interpreting Financial Accounting Information Coursework Investment Appraisal of T & S Stores Plc Greggs Plc Contents Contents 2 1. Introduction 3 2. Profitability and Performance 3 2.1 Return on Capital Employed 3 2.2 Operating Profit Margin 3 2.3 Gross Profit Margin 4 2.4 Expenses / Sales Ratio 4 2.5 Total Asset Turnover 5 3. Liquidity and Stability 6 3.1 Current Ratio and Quick Ratio 6 4. Efficiency and Effectiveness 7 4.1 Stock Holding Period 7 4.2 Debtor Collection Period 7 4.3 Creditor Payment Period 7 5. Capital Structure and Long Term Solvency 8 5.1 Gearing 8 5.2 Interest Cover 8 6. Investor Ratio 9 6.1 Return on Equity 9 6.2 Earnings per Share 9 6.3 Price / Earnings Ratio 10 6.4 Dividend Cover 11 6.5 Dividend Yield 11 7. Future Prospects 12 8. Conclusion 14 9. Bibliography 16 Annual Reports 16 Industrial Averages 16 Text 16 Websites 16 Appendix 16 Table of Figures Graph 1: Gross Profit Margin 4 Graph 2: Expenses / Sales Ratio 5 Graph 3: Total Asset Turnover 5 Graph 4: Liquidity Ratio 6 Graph 5: Stock Holding Period 7 Graph 6: Gearing 8 Graph 7: Return on Equity 9 Graph 8: Earnings per Share 10 Graph 9: Price / Earnings Ratio 10 Graph 10: Dividend Cover 11 Graph 11: Dividend Yield 11 Graph 12: Turnover History and Projected Sales 13 Graph 13: Profit before Tax History and Projected Profits 13 Graph 14: Turnover / Profit History and Projected Trends 14 Table 1: Return on Capital Employed 3 Table 2: Operating Profit Margin 3 Table 3: Debtor Collection Period 7 Table 4: Creditor Payment Period 7 Table 5: Interest Cover 9 1. Introduction This report aims to provide detailed analysis on T & S Stores Plc and Greggs Plc, and to provide recommendations on which company to invest in. It will compare the recent years trading results compared to the previous year and also a comparison between the two companies. ...read more.

Middle

This could be detrimental to a business as it measures its credit worthiness. However from the annual reports of both companies, it mentions that the terms have been agreed with suppliers, therefore reflecting the good relationship made with suppliers. 5. Capital Structure and Long Term Solvency 5.1 Gearing This measures the extent to which the company is financed by debt compared to equity capital. The more highly geared the company the greater the financial risk as the amount borrowed will eventually have to be repaid and interest is charged. Graph 6: Gearing Remarkably Greggs is completely financed by equity capital with the exception of a Government grant. T & S however is highly geared company with long-term debt actually more than equity capital. With comparison to industry averages, the amount of gearing in T & S is normal and falling inline with the industry. Being highly geared may not be a bad finance, as interest is an allowable expense before calculating tax. T & S has chosen this finance option rather than issuing more shares to expand the business, as it may be a cheaper option to pay interest than to pay dividends. 5.2 Interest Cover This ratio is calculated to show the number of times interest is covered by profits. It indicates a company's ability to meet interest payments with profits. Table 5: Interest Cover T & S Stores Plc Greggs Plc Industry Averages 2001 2000 2001 2000 2001 2000 4.8 3.9 156.6 85.1 3.4 3.41 The results here reflect the gearing of T & S and Greggs. As Greggs have no gearing, it has very little interest payments and is therefore able to meet interest payments many times over. T & S shows that it is able to meet interest payments comfortably and is above the industry average, which reflects that T & S have been making sensible finance decisions. 6. Investor Ratio 6.1 Return on Equity This shows the return to ordinary shareholders, after paying the business expenses. ...read more.

Conclusion

The investor will receive 3195 ordinary shares of T & S at the market price of �3.13. If dividends were to be paid out at this years 12p per ordinary share, the investor will earn �383.40. Or for an investor wanting quick capital gains, an increase of 5p on the market price will increase the investment to �10,160.10. Therefore for a long-term or short-term investor, Greggs Plc is not a good investment at this time. However, if Greggs Plc issue more shares such as a three for one share offer, and effectively reducing the market share price, then Greggs could be a wise investment. The reason for not choosing T & S, despite that it may be a good investment as shown above. Is that at the time of this report, Tesco Plc has made an offer to buy T & S. The sale is detailed on T & S Stores Plc website, and states an approx. 2.5 Tesco ordinary share for one T & S Stores Plc ordinary share. Upon this news, the market price of remaining T & S ordinary shares has risen to �4.30 the equivalent to approx. 2.5 ordinary shares in Tesco. However, even if Tesco were not purchasing T & S, we would still not recommend the investment in T & S. The reason for this is that T & S will run into financial difficulties in the future, as reflected in its liquidity and high gearing. The liquidity of T & S suggests that it cannot meet its short-term liabilities with current assets. If the stock is taken away for current assets, the quick ratio shows 0.14:1. This means that T & S has only 14p of immediate funds to pay back �1 of current debt. It will not be wise for T & S to take out further loans, as it cannot use long-term loans to fund short-term liabilities, and as T & S is already a highly geared business. The investors money would be better invested in other companies, at this time. 9. ...read more.

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