2.2 Operating Profit Margin
This will measure the any changes in the mark-up and indicate the company’s control on expenses. Or in effect how the companies turn their sales into profits.
Table 2: Operating Profit Margin
* Workings and formulae in appendix
At first glance, Greggs seem to have an operating profit margin (OPM) just less than double that of T & S. However both companies are still achieving higher than industrial averages.
2.3 Gross Profit Margin
This ratio reflects the mark-up made by the company.
Graph 1: Gross Profit Margin
Graph 3 shows the huge difference of the mark-up between the two companies. However this those not indicate whether this is good or bad, as each company will differ depending on the type of business. The graph does show that T & S has fallen behind the industry average in 2001, which reflects how competitive the retail supermarket market has become. Greggs having maintained their Gross Profit Margin due to being the biggest and leading company in its sector.
2.4 Expenses / Sales Ratio
This ratio shows the amount of expenses generated against the amount of sales achieved.
Graph 2: Expenses / Sales Ratio
Graph 1.4 represents the expense/sales ratio of both companies, divided into the two different types of expenses. Greggs seem to have an abnormally high distribution/sales ratio compared to T & S. The managing director’s report of Greggs does state that it has been refurbishing many of its existing stores into new designs and optimising services, which could be the cause of the increase of expenses.
2.5 Total Asset Turnover
This measures how well the assets of the business are being used to generate sales.
Graph 3: Total Asset Turnover
Graph 3 shows that T & S has been using its assets more effectively to generate sales compared with Greggs. However, both companies are still achieving a result greater than the industrial averages.
3. Liquidity and Stability
3.1 Current Ratio and Quick Ratio
The current ratio relates the current assets of a company to its current liabilities. This shows how well the company can meet its short-term creditors using current assets.
The quick ratio takes in to account that stock is the least liquid item in current assets, and therefore takes the longest to turn into cash at short notice. The quick ratio reflects this by taking stock out of the current ratio.
Graph 4: Liquidity Ratio
Graph 4 has shown that Greggs is a healthy company as it could meet its current liabilities at short notice using only its current assets, even when stock has been taken out of the ratio. But examining the balance sheet of Greggs shows that there is a big amount of cash at bank and in hand. This could be seen as not using assets effectively to generate sales, which is reflected in the total asset turnover (above). Greggs could be keeping a reserve in the bank in order to further expand the business or to refurbish the existing stores as mentioned in its objectives.
T & S’s liquidity ratio indicates that the company cannot meet its short-term liabilities even in the current ratio. This reflects the typical nature of its business, as it has huge amount of cash tied up in stocks and has a lengthy stock turnover period. This is can possibly be explained by poor purchasing decisions within the company, or by not being able to negotiate better prices with suppliers compared with bigger purchasing power of Tesco and Sainsbury.
4. Efficiency and Effectiveness
4.1 Stock Holding Period
This ratio shows the length of time it takes for stock to be turned into sales. This is vital to any business as it affects the cash flow, if cash is tied up in stock.
Graph 5: Stock Holding Period
T & S has a very high stock holding period, ideally the lower the ratio the better. However, whether the result shown is good or bad depends on the nature of the business. Greggs produces fresh food every day, and their goods are more perishable than a tin or packet of food.
4.2 Debtor Collection Period
Both T & S and Greggs are retailers and sells directly to the public, and therefore would have very little sales made on credit (credit card purchases). Therefore both companies have no problems in collection of debts.
Table 3: Debtor Collection Period
4.3 Creditor Payment Period
This shows the average length of time for the company to pay its suppliers.
Table 4: Creditor Payment Period
Both companies show a high creditor payment period of almost double the industry average. 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
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.
Graph 7: Return on Equity
T & S has a much higher return for ordinary shareholders, which is a benefit of being highly geared. Greggs have a good return for shareholders that grew slightly despite the industry average falling.
6.2 Earnings per Share
This ratio measures the profit available to shareholders per ordinary share.
Graph 8: Earnings per Share
T & S has a low earnings per share because it has a high number of ordinary shares issued at 5p each, compared to Greggs which has ordinary shares issued at 20p each. Although Greggs did not use loans to finance it business, it has made the most out of employing equity capital.
6.3 Price / Earnings Ratio
This ratio measures the markets evaluation of a share. The greater the future expectation of increased profitability, the greater the PE ratio.
Graph 9: Price / Earnings Ratio
It can be clearly seen here that the future expectation of Greggs will be greater than T & S, it may be because T & S is in a much more competitive market than Greggs. Whereas Greggs is the market leader in its sector, T & S is seen to be competing with big companies such as Tesco and Sainsbury.
6.4 Dividend Cover
Like the interest cover ratio, this ratio measures the company ability to cover ordinary dividends with profit. It gives a future indication of the company being able to maintain the level of dividends and to retain money for the expansion of the business.
Graph 10: Dividend Cover
Both company paid dividends in both years, and were well covered by the profits earned from operations. Being able to cover dividend payments leaves money to be reinvested in to the company for further expansion.
6.5 Dividend Yield
This shows the real rate of return for a share, based on the current value in the market and the amount of dividend paid per ordinary share.
Graph 11: Dividend Yield
Although Greggs dividend yield is falling, this is due to the strong market price of its share. It has risen 27% within the year, and dividends have not been increased proportionately. Although having a strong market share of £30.90 compared to its nominal value of 20p, shows the strength of the company and hence demands for its shares. Greggs shareholders will have a problem that their shares are not as marketable, and as potential shareholders prefer to have more shares from their investments.
T & S on the other hand, has a dividend yield which is growing, but that is due to the market price of the share falling by 27p and only a 1p increase of dividend.
7. Future Prospects
Both T & S and Greggs are looking forward towards a bright future of growth for its business.
T & S Stores Plc indicates it will continue to improve its stores by seeking new range of products and services offered to the customer. It will achieve this by investing in existing One Stop stores, opening of at least a further 100 stores, improving the supply chain, and reduction in borrowings.
This prediction and objectives made by Mr K.P. Threlfall (Chairman) seems reasonable, and obtainable.
Greggs Plc has similar objectives to T & S, which are to open new stores in England and also to pilot a store in Europe. It will continue to improve and modernise existing stores, and spend on research and development of new products.
This prediction and objectives made by Mr Ian Gregg (Chairman) seems reasonable, and obtainable.
To project how well T & S and Greggs will perform, their financial history can be used to forecast sales or turnover.
Graph 12: Turnover History and Projected Sales
This graph shows the turnover of Greggs over the last 10 years, and a projected turnover up to 2010. Greggs has maintained a steady increase of sales and the rate of growth for the future seem very reasonable. T & S turnover for the previous five years are shown, and on the graph, it looks as though T & S has achieved phenomenal growth. The projected line shows the future growth of T & S, but it may be unlikely that T & S will be able to maintain the rate of growth as the market becomes more competitive.
Graph 13: Profit before Tax History and Projected Profits
If the history of the profits is compared with the turnover, the profits of T & S does not grow inline with the turnover. Which confirms that Greggs has a higher operating profit margin than T & S, and the trend will continue to be the same.
Graph 14: Turnover / Profit History and Projected Trends
This graph shows clearly the difference between the turnover and the amount turned into profit.
8. Conclusion
Both companies seem to be trading well at the moment and have clear indication of goals and objectives to be achieved.
However, in advising which company to choose to invest in, we would recommend not to choose either company.
The reason for not choosing Greggs, is that the current market price for an ordinary share is £30.90 which is too high. The argument is that the investor will not get many shares for his investments compared to investing in a company with a lower share value. Although the share price reflects the value and strength of the Greggs, who is in no doubt a well run, and profitable business. It would not be such a good investment for an investor wanting to buy shares at this time.
For example, if an investor had £10,000 to invest in Greggs. The investor will only get 324 ordinary shares in Greggs. If dividends were to be paid out of 65p per ordinary share, the investor will earn £210.60. Or for an investor wanting quick capital gains, an increase of 5p on the market price will increase the investment to £10,027.80.
Compared to:
If an investor had £10,000 to invest in T & S. 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. Bibliography
Annual Reports
Greggs Plc Annual Report and Accounts 2001
T & S Stores Plc Annual Report and Accounts 2001
Industrial Averages
Bread/ Cakes Manufacture/ Retail Industry, From FAME (Financial Analysis Made Easy)
Text
PENDLEBURY M and GROVES R (2001) Company Accounts, Analysis, Interpretation and Understanding. Thomson Learning.
HOLMES, G and SUGDEN, A (1999) Interpreting Company Reports and Accounts. Prentice Hall.
Websites
Appendix