Profitability Analysis Of Compass Group And Associated British Food In Essay.

Details of the Companies

This report is depicting about the two food manufacturing company listed in London stock exchange i.e. Compass Group and Associated British food. In this report, the profitability of both the companies has been checked. This report is prepared to analyze the profitability condition of both the companies and suggest them to the best company to invest their money. This report would help the investors as well as financial analyst too by providing them a depth detail of both the companies.

Both the companies are offering their services in food industry. Brief details of both the companies are as follows:

This company is one of the largest food companies in world. It caters in more than 70 countries worldwide. Mainly this company offers food and beverages to many corporate and big brands such as Taco bell, Pizza hut, KFC, Burger king etc. the annual turnover of the company has exceeded £4.8 billion (Compass, 2017). Currently company is running its operations in UK, Poland, Romania, Ireland and many more countries. Market cap of the company is 24.99bn. Currently the share price of the company is euro 1520.

This company focuses over the food manufacturing. This operated as a retail company, ingredients and diversified food. It is offering its services in 5 segments i.e. Grocery, Agriculture, sugar, retail and ingredients. It manufactures sources and distributes the food products to the industrial and retail sector. This company manufactures and distributes the hot beverages, grocery products, vegetable oils, herbs and spices, cereals, meat products etc to wholesalers, retailers and foodservice (Associated British Food, 2017). Currently company is operating its business in many countries including UK. Market capital of the company is Euro 20.98 bn. currently the share price of the company is euro 2562.04.

It is a class of all the financial metrics which are used by the companies to assess the business’s ability to create earnings compared to its costs and other expenses which occurred during a period of time. There are many techniques to calculate the profitability of an organization. Some of them are as follows:

It refers to the use of all the debts to acquire extra assets for the organization. It is also known as trading on equity. The lower the financial leverage of a company, the more profitable condition of the company would be (Hargovan and Harris, 2011).

It is a measurement of profitability which calculates the profitability with each penny of shareholder’s equity. The more the return on equity of a company would be, the more profitable condition of a company would be.  

Techniques to Calculate Profitability

Interest coverage ratio is used by an organization to identify that how easily a company could pay all the interest expenses on outstanding debt. The more the interest coverage ratio of a company would be, the more profitable condition of a company would be (Hirschey, 2008).

It is a relationship determined by the financial information of a company to analyze the comparison from competitive companies.

This ratio is calculated to identify the net profit in comparison of total turnover. The more the net margin of a company would be, the more the company would be in a competitive stage (Healy and Palepu, 2012).   

This ratio is calculated to identify the total assets in comparison of total turnover of an organization. The more the asset turnover of a company would be, the more the financial strength of the company would be.

It is a indicator of profitability condition and competitive strength of a company. The total profit of the company is analyzed with a comparison of total assets. The more the return on asset of a company would be, the more the financial strength of the company would be (Hillier, Grinblatt & Titman, 2011).

Investment ratios are calculated by financial analysts to take the investment decisions in a company.

It is a share of company’s profit allocated to the outstanding share of common stock. It serves the result to the investors that how much they would get in return if they would invest in the equity shares of the company.

This ratio is calculated to identify the net profit in comparison of total turnover. The more the investor would get attract to invest in the company (Needles  and Crosson, 2007).  

It is measured by the investors and financial analyst to identify the return which an investor gets in return of his invested amount. It is basically determined to find out that how good an organization is at turning the invested amount and capital into profits.

These ratios of the organization depicts about the organization that the profitability condition of the company has been great. The company has experienced a great % of all the ratios under profitability analysis.

Financial leverage ratio of the company depicts that company is required more debts to acquire the assets. This explains that company don’t have sufficient fund to raise the assets and that’s why company has raised the funds through debts.ows that company is offering a good return to its investors and it could only be possible if company is making a good profit. In 2014, company has enhanced a great % and from 2014, company successfully managed it (Brigham and Ehrhardt, 2016).  

Financial Ratios of Compass Group

The above table depicts that the return on invested capital has been increased on a great level. From 2014, company is offering a great return to its investors. It shows that company is making great profits.

Interest coverage ratio of the organization has also explains that the company is enjoying great profits from last 3 years. The % has been enhanced in 2014 and from that time, company has managed to maintain this return.  

(Amount in £ '000)

This table depict about the financial ratios of the Compass Group Plc. It has been found through this table that company is enjoying a great % of financial ratios from last several years (Davis and Davis, 2011).

Company has paid a high rate of tax in 2013 and then company has decreased the rate of tax. This directly impacted over the profitability of the company.  

Net margin ratio of the company has been enhanced in 2014 and then company has managed to maintain this return. This return shows that company is earning a great return from the market.

Asset turnover ratio of the company is quite ideal. Company has a good ratio of its total asset in comparison of total turnover. This would help the company to meet all the problems easily without any external help.

Company is paying a high rate of return to the investors from last 3 years. It is depicting that company is making a great return in comparison of total assets company is having.

 This table depicts that if an investor would invest in this company then how much investor would get in return.   

The earning per share of Compass Group Plc was better in 2014 then 2013 and again in 2015 company has decreased the EPS and then in 2016, company has again paid a good % of EPS to the investors (Webley and Werner, 2008).

Net margin ratio of the company has been enhanced in 2014 and then company has managed to maintain this return. This return shows that company is paying a great return to the investors.

These ratios of the organization depicts about the organization that the profitability condition of the company has been great. The company has experienced a great % of all the ratios under profitability analysis (Jensen, 2005).

Financial leverage ratio of the company depicts that company is required less debts to acquire the assets. This explains that company have sufficient fund to raise the assets and that’s why company need not to raise the funds through debts.

Financial Ratios of Associated British Food

The above table depicts that the return on equity of the company is continuously increasing. But in 2015, the % has been declined. Still, company is offering a good return to its investors and it could only be possible if company is making a good profit. In 2013, company has loosed the total % of ROE but again company has managed to increase the % (Rao,  2011).  

Interest coverage ratio of the organization has also explains that the company is enjoying great profits from last several years. In 2015, company has loosed some share but again company has managed to enhance the %.

This table depict about the financial ratios of the Associated British Food. It has been found through this table that company is enjoying a great % of financial ratios from last several years.

Company has paid a high rate of tax in 2013 and then company has decreased the rate of tax but again in 2013, company has paid 26.92% of tax. This directly impacted over the profitability of the company.  

Net margin ratio of the company has been enhanced in 2014 and 2016. In 2015, due to some factors company has loosed the margin. This return still shows a great return of margin (Morningstar, 2017).

Asset turnover ratio of the company is quite ideal. Company has a good ratio of its total asset in comparison of total turnover. This would help the company to meet all the problems easily without any external help.

Company is paying a high rate of return to the investors in 2014 and 2016. It is depicting that company is making a great return in comparison of total assets company is having (FT, 2017).

 This table depicts that if an investor would invest in this company then how much investor would get in return.   

The earning per share of the company is enhancing continuously from 2013. This shows that company is paying a great amount to its investor in exchange of the total invested capital of shares (Morningstar. 2017).

Net margin ratio of the company has been enhanced in 2014 and 2016. This return shows that company is paying a great return to the investors.

The above table depicts that the return on invested capital has been increased on a great level in 2014 and 2016. Still, company is offering a great return to its investors in 2013 and 2015. It shows that company is making great profits (FT, 2017).

Investment Ratios

Through the above calculations it could be said that both the companies are doing very well in the market. The below chart is depicting about the current situation of both the companies. It has been recommended to the investors through this study that compass group plc is better in some situation and associated British food Plc in other. Both the companies are offering a great deal to the customers. But it has been found that if investors look for the profitability of the companies, then they must invest their amount in Compass group plc. And if investors look for the financial ratios of the company then Associated group and compass group both are offering a great deal to the investors.

And if investment ratios of both the companies have been taking care of then investors are suggested to invest in Associated British Food Plc. It would be more profitable for the investors to invest in this company. The risk in the company is quite higher than compass, because of the fluctuation in last years, still the return of the company is quite impressive. So investors are recommended to invest in Associated British Food Plc.

Conclusion:

It has been concluded through this study that both the companies are offering great deal to the investors. Associated as well as Compass group are doing very well in the market. In 2013 and 2015, associated has been faced some issues but still it is offering a great return in the market and compass has been enhanced the profitability in 2014 and managed to maintain it.

References:

Brigham, E.F. and Ehrhardt, M.C. 2016. Financial Management: Theory & Practice. 15^th ed. Boston: Cengage Learning.

Davis, C.E. and Davis, E. 2011. Managerial Accounting.  NY: John Wiley & Sons.

2017. 2017. Retrieved as on 15 Mar 2017 from https://markets.ft.com/data/equities/tearsheet/summary?s=CPG:LSE
2018. 2017. Retrieved as on 15 Mar 2017 from https://markets.ft.com/data/equities/tearsheet/summary?s=ABF:LSE

Hargovan, A. and Harris, J. 2011. Together alone: Corporate group structures and their legal status revisited. Australian Business Law Review, 39(2), pp.85-94.

Healy, P.M. and Palepu, K.G. 2012. Business Analysis Valuation: Using Financial Statements. Cengage Learning.

Hillier, D., Grinblatt, M., & Titman, S. 2011. Financial markets and corporate strategy. McGraw Hill.

Hirschey, M. 2008. Fundamentals of Managerial Economics. 9^th ed. Mason: Cengage Learning.

Jensen, M.C. 2005. Agency costs of overvalued equity. Financial management, 34(1), pp.5-19.

Morningstar. 2017. Retrieved as on 15 Mar 2017 from https://performance.morningstar.com/stock/performance-return.action?t=ABF&region=gbr&culture=en-US&ownerCountry=USA

Morningstar. 2017. Retrieved as on 15 Mar 2017 from https://performance.morningstar.com/stock/performance-return.action?t=CMPGF&region=usa&culture=en-US

Needles, B and Crosson, S. 2007. Managerial Accounting. Boston: Cengage Learning

Rao, P.M.  2011. Financial Statement Analysis and Reporting. Eastern Economic Edition, PHI Learning Private Limited, New Delhi.

Webley, S. and Werner, A. 2008. Corporate codes of ethics: Necessary but not sufficient. Business Ethics: A European Review, 17(4), pp.405-415.