Financial Analysis Of Ocado Group Plc: An Overview Essay.

Describe about the Financial Analysis of Ocado Group Plc?

Annual Reports are the window to the performance of the company. It provides an overall summary of the company’s performance throughout the year. It is use by the shareholders, bankers, creditors, debtors, potential employees and many other users. Many financial and other decisions are taken by keeping the annual report as a base as it is considered the most reliable source of information not just concerning the financial health but also about any potential threats or opportunities (Albrecht et. al, 2011). It is, for this reason, the annual report has to be well drafted and prepared in compliance with the required statutory and legal provisions.

A good understanding of the financial statements is the key to investment research and analysis. Through financial reporting, companies disclose and provide relevant information that might impact the users of the financial statements in making significant decisions (Kaplan, 2011). Though there are different types of reporting followed by various companies, the most important ones are:

• The Income Statement
• The Statement of Financial Position &
• The Statement of Cash Flows

The Income Statement gives a glimpse of the revenues earned and expenses incurred; the net difference between these two is either profit earned or loss incurred for the period under review. The Statement of Financial Position is displayed where the company is standing on a specified date. The Statement of Cash flows shows how much cash is coming is and going out in comparison to the prior year and the changes in the same (Brealey et. al, 2011).  Hence, the above parameters provide a good projection of the company as it deals with the financial scenario. Finance is the life blood of the business, and an accurate analysis of it provide a good report for evaluation (William, 2010).

Ocado is an online grocery shopping platform with a clear objective of delivering customer value and shareholder growth. It does not have outlets or stores and only operates from its two warehouses. Since the world is rapidly moving towards digitalization and online shopping, Ocado is all set to tap the growing opportunities in this segment, given the fact that grocery falls among the necessities for any individual. It had been voted as the best online supermarket in 2010. Ocado is known as the world’s biggest online supermarket that caters to grocery products and runs a business on an independent basis. The listing is in the London Stock Exchange (FTSE 250). It has a high reputation in the UK owing to its delivery service. The unique service is power by research, as well as technology (Ocado, 2014). The team is well developed that enables the company to provide solutions that are innovative in nature and caters to the needs of the customers. Owing to a wonderful show, the company has won innumerable awards for its dedicated services and the range is the biggest in the supermarket.  The Smart Platform of Ocado has enhanced the company’s reach, as well as availability.

In the further section, an in-depth analysis will be on the five major criteria. It will help to reflect the future course of business also the current position.

Ocado Group Plc

The markets in UK have experienced a significant change during the year 2014 as the number of customers shopping online has increased, and Ocado is also being widely accepted. The number of active customers on the website has risen to 453,000. With the launch of the nonfood business, the new kitchenware offers greater choice to the customers due to the increase in the product range (Ocado, 2014). This reflects that it has catered to the needs of the customers. It has retained old customers and made efforts for the new ones.

Due to all these factors, Ocado has turned from an initial loss-making business to a profit making company; a snapshot from the website is as below:

(Ocado, 2014)

The Gross Sales has grown by 20.4% and the revenues have increased by 19.79%

EBITDA is up by 56.3%, and Profit before tax is up by £7.5m this clearly indicates that the company had a strong show due to which it has reaped good yields (Ocado, 2014).

Ratio Analysis: In this segment, the analysis is done by latest annual report. The comparison is done for the periods 2013 and 2014. All the figures for the purpose of evaluation have been taken from the latest annual report.

• Profitability Ratios: Through the Profitability ratios, components of income are compared with sales. These ratios projects the scenario what constitutes the income of the company. (Choi & Meek, 2011).
  
  
• Gross Profit Ratio: Is the ratio of Gross Margin or Gross Profit to Sales. It ascertains how much of the sales portion is left after Cost of Goods Sold (Choi & Meek, 2011). The Gross Profit ratio for 2014 is approximately 33% and the same for the previous year was 25%. There is a marginal increase in the ratio due to an increase in Gross Profit by 26.42% i.e. by £65.4 million (£312.9 - £247.5) which is represented by an increase in Revenue by 19.80% i.e. by £156.8 million.
  
  
• Operating Profit Ratio: Is the ratio of Operating profit to sales. This ratio stress on the portion of Gross Profit that remains after deduction of operating expenses. This ratio is connected with the operating expenses and better control of operating expenses provides a better performance. (Houston & Brigham, 2009). There is an increase in the ratio from -0.34% in 2013 to 72% in 2014. During the period ending November 2013, the company reported an Operating Loss of £2.7 million whereas, during the current year, the company reported an Operating Profit of £16.3 million and, as a result, we observed an increase in the ratio.
  
  
• Net Profit Ratio: It can be described as the ratio of Net profit to Sales. This ratio reflects the sales that are left behind after all expenses are met (Houston & Brigham, 2009). Here, we take Net Profit after Tax. The ratio has increased from -1.58% in 2013 to 77% in 2014.
  
  
• Return on Assets Ratio: This ratio reflects how profitable a company is about its Total Assets. It is stated as Net Profit after Tax divided after Total Assets (Nzuve, 2011). This ratio has also improved with an increase from -5.88% in 2013 to 3.25% in 2014. The negative ratio in 2013 implies there is a net loss in 2013. Thus, the company has performed far better in 2014 as compared to 2013 (Ocado, 2014).
  
  
• Return on Capital Employed: Return on Capital Employed (ROCE) is defined as Earnings before Interest and Tax / Capital Employed. ROCE evaluates the profitability of the company in respect of capital employed. A higher return indicates a more efficient use of capital. An ideal ROCE will be higher than its Cost of Capital else, it will reflect that company is not making effective use of its capital and not generating shareholder value (Nzuve, 2011). There is an improvement in this ratio from 57% in 2013 to 4.57% in 2014. This implies that company has been able to employ the capital more efficiently than in 2013.
  
  
• Return on Equity: This ratio is of significant concern to the equity shareholders. It is stated as Net Profit after Tax divided by the Shareholder’s Equity. This ratio strikes how much profit the company with the funds that has been procured by the shareholders (Needles & powers, 2013) generates. This ratio too has improved with a negative ratio of -6.18% in 2013 to a much better 38% in 2014.

To summarize, all the profitability ratios have shown a sign of improvement regarding Profitability as compared to its performance in the previous year i.e. period ending November 2013.

There has been an overall increase in the asset base due to the acquisition of property, plant and equipment and also intangible assets and investment in joint ventures.  The Non-current liabilities have increased due to the rise in finance lease obligations.

As a result of this and also due to the increase in retained earnings and share issue, the closing equity has increased.

We analyze a few ratios here to understand the performance and financial standing.

• Liquidity Ratios: It evaluates the ability of the company to generate cash so that immediate liabilities can be met with ease and flexibility.
  
  
• Current Ratio: It reflects the ability of the company to satisfy its current liabilities with its current assets. The ideal Current ratio is 2:1e. for repayment of current liability of £1; the company must have Current Assets worth £2. This ratio has deteriorated from 1.13:1 in 2013 to 0.88:1 which is far less than ideal ratio of 2:1. The company needs to improve its Current ratio to ensure that it does not face a liquidity crisis.
  
  
• Quick Ratio: It can be defined as the ratio of Quick Assets to Current Liabilities. The ratio stresses on the ability of the company to satisfy its current liabilities with its liquid assets. Quick Assets refer to Current assets fewer Inventories and Prepaid Expenses (Guerard, 2013). The quick ratio is better placed than current ration and hence a strong indicator as it excludes less liquid assets. The ideal Quick ratio for any company is 1:1. The ratio is not as impressive for the company as it slips down from 0.98:1 in 2013 to 0.71 in 2014. In 2013, the ratio was very close to the ideal ratio of 1:1. However, the liquidity position had dipped in 2014.
  
  
• Efficiency Ratios: Efficiency ratios are even termed as Turnover ratios or Activity Ratios and evaluate how efficiently the organization has employed the assets.
  
  
• Debtor’s Turnover Ratio: This ratio projects how many times Sundry debtors (Accounts Receivable) turn over during the year. It is defined as Net Credit Sales / Average Sundry Debtors (Libby et. al, 2011). When the debtor’s turnover is high, greater will be the efficiency of credit management. There is an improvement in the ratio in 2014 with the ratio of 52 times in 2013 and 22.02 times in 2014 which implies an improvement in Debtor’s management.
  
  
• Creditor’s turnover ratio: This ratio sheds light on the credit limit enjoyed the company on its credit purchases of goods. It is defined as Net Credit Purchases / Average Sundry Creditors (Libby et. al, 2011). This ratio has slightly improved as compared to last year. The ratio increased from 4.08 times in 2013 to 4.55 times in 2014 which implies that company has been able to make payments to its creditors much faster as compared to last year.
  
  
• Inventory turnover ratio: The Inventory Turnover or Stock Turnover evaluates how quickly the inventory is moving and generating cash. It is defined as Cost of Goods Sold / Average Inventory (Northington, 2011). There is a marginal improvement in this ratio as compared to last year. The ratio increased from 79 times in 2013 to 23.04 times in 2014 which implies a better inventory management.

The Statement of Comprehensive income reflects the profitability of the company, but it does not show whether the profits are available in a liquid form to utilize for other activities or not. The statement of cash flows reveals this that shows how the company has received profits (Parrino et. al, 2012).  The Consolidated Statement of Cash Flows is the statement that shows how cash and cash equivalents are used for the activities related to the Statement of Comprehensive income and the statement of financial position and breaks down the analysis to operating, financing and investing activities (Davies & Crawford, 2012). Having a healthy cash flow is a good sign for a business but it does not guarantee that the business will be successful.

While analyzing the cash flow, the first step is to check the solvency and liquidity of the company. Cash is required for daily operations and so a company should have the financial ability to pay off its bills when due (Merchant, 2012). Ocado has a positive cash flow which indicates that the company does not have liquidity problems.

Next the analysis has to be done on where the cash is coming from and how it is being utilized. This analysis has to be further broken down into specific items that affect the cash flows.

Analysis of Consolidated Statement of Comprehensive Income

Concerning Ocado, the Net cash generated from operating activities is £74.3m. In comparison to the prior year, it has increased by 23% that is a good sign. Ocado has seen the growth in business which is reflected by the profits and the increase in cash flow (Wagenhofer, 2014).

This segment of cash flows from operating activities reflects the company’s ability to generate cash from internal sources, and so it is considered the base or foundation for a company. This positive cash flow indicates the ability of the Ocado to meet its ongoing funding requirements and also contribute the surplus towards payment of dividends and other long-term projects.

The next segment is the cash flows from investing activities which give the amounts spent towards the purchase of tangible and intangible assets and the interest amounts received.

Ocado has spent lesser towards acquisition of property, plant and equipments in comparison to the prior year but has spent more towards the acquisition of intangible assets. Out of the total additions to assets, 20% relates to the capitalization of the internally generated assets. This shows how Ocado has pumped cash generated from the operating activities into the long-term assets building and restructuring.

The Cash Flows from financing activities includes the proceeds from the sale of assets, proceeds from the new issue, repayment of finance leases and obligations, settlement of forward foreign exchange contracts, so on and so forth (Horngren, 2013).  There in a dip in the overall Net cash flow from financing activities in comparison to the prior year and this is due to the absence of the sale of assets and additional amounts paid towards repayment of leases and obligations. Though the Net cash flow is negative, it is a good sign that Ocado has not disposed of its assets and continued to generate profit from the assets (Ocado, 2014).

Though Cash Flow is being mostly ignored by investors, it is a fact that companies go bankrupt because of their inability to pay debts and not because of lack of profitability (Spiceland et.al, 2011). There are cases where even a profitable business can have negative cash flows. The Cash Flow statement provides a fine distinction between earnings and cash. It is based on the adage, “it takes money to make money” (Christensen, 2011).

Ocado’s cash flows have been good in qualitative and quantitative terms, and it has a potential for growth.

There has been an issue of ordinary shares and disposal of treasury shares. The losses on foreign exchange contracts and interest rate swaps are also adjusted. This reflects that the company has managed the equity part with a precision that facilitates progress (Ocado, 2014).

On an overall comparison, the retained earnings have increased which is a good sign and the total equity has also increased which reflects the growth of the company.

The Council of Financial Reporting updated the UK Corporate Governance Code of UK in the year 2014. This code applies to reporting that is done in between the period on or after 1 October 2014 and is not applicable to the company that has its reporting period ended 30 November 2014. To ensure transparency, as well as disclosures the board adopted some of the provisions. Ocado has complied with all the principles, as well as provisions of the 2012 code. The areas that are not complied are well explained in the statement of corporate governance and even the Director Remuneration Report (Ocado, 2014).  The company has adhered with all the provisions of 2012 code; the company strives to explain how the practices are in tune with the principle considering the provisions and provide a contribution to corporate governance.

Ratio Analysis

The company’s statement of corporate is well drafted and well framed as it stresses on all major areas like the structure and the function of the board, the soundness of the Board, link with the shareholder’s of the company, AGM,  the result set by nomination committee as well as audit committee. Moreover, the remuneration committee report is provided in the Director’s Remuneration Report. The risk of the company and the internal control framework is established in how we manage our Risks. All these sections are described in the statement of corporate governance that stresses on the fact that how well is the transparency of the company (Ocado, 2014).

The Board is entirely responsible for the attainment of long-term success. From the corporate governance statement, it is seen that the board strives to attain success for the company by adhering to all the rules and ensuring the activities are performed in a transparent manner. The details of the current directors those who are on the board are provided in the Report. The committee is framed in accordance to the rules of the corporate governance.  The mandatory committee is present and also some committees are present that are not mandatory in nature. The composition of the board is done by the 2012 code (Ocado, 2014).

Conclusion

Financial Statements analysis is an art; there is no exhaustive list of checks to be undertaken to have the analysis foolproof. Also, numbers cannot be analyzed in a vacuum, there are other interrelated external and internal factors that are having a close link with the numbers on the financial statements and all these factors have to be considered for a sound analysis (Graham & Smart, 2012). The business of Ocado have flourished and this is due to the strong progress made by it. Sales and revenue has increased in the current scenario highlighting the fact that the company was able to capture the market and performed in full swing. Moreover, from the above discussion on the five main criteria, it can be said that business has solidity and has performed than the past years indicating good growth and signaling a good proceeding (Wagenhofer, 2014). The five criteria that are chosen above are the major ones and on those parameters, it can be commented whether the company is operating with perfection. In all the above cases, it is seen that Ocado has shown considerable improvement over a span of 5 years and has made commendable progress.

References:

Albrecht, W., Stice, E. and Stice, J 2011, financial accounting, Mason, OH: Thomson/South-Western.

Brealey, R., Myers, S. and Allen, F. 2011, Principles of corporate finance, New York: McGraw-Hill/Irwin.

Christensen, J 2011, ‘Good analytical research’, European Accounting Review, vol. 20, no.1, pp. 41-51

Choi, R.D. and Meek, G.K 2011, International accounting, Pearson.

Davies, T. and Crawford, I 2012, Financial accounting. Harlow, England: Pearson.

Guerard, J. 2013, Introduction to financial forecasting in investment analysis, New York, NY: Springer.

Graham, J. and Smart, S 2012, Introduction to corporate finance, Australia: South-Western Cengage Learning.

Houston, Joel F & Brigham, Eugene F 2009, Fundamentals of Financial Management, Cincinnati, Ohio.

Horngren, C 2013 Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group.

Libby, R., Libby, P. and Short, D 2011, Financial accounting,  New York: McGraw-Hill/Irwin.

Kaplan, R.S 2011, ‘Accounting scholarship that advances professional knowledge and practice’, The Accounting Review, vol. 86, no.2, pp. 367–383.

Merchant, K. A 2012, ‘Making Management Accounting Research More Useful’, Pacific Accounting  Review, vol. 24, no. 3, pp. 1-34.     

Needles, Belverd E. & Powers, Marian 2013, Principles of Financial Accounting, Francisco: Mc Graw-Hill Brook co.

Northington, S. 2011,  Finance. New York, NY: Ferguson's.

Nzuve. S, 2011, Some Thoughts of How to Allocate Indirect Costs in a Corporate Environment, Social Science Research network, School of Business, University of Nairobi.

Ocado, 2014, Five year Summary, Shareholder information, viewed 30 December 2015, <https://results14.ocadogroup.com/shareholder-information/five-year-summary>.

Ocado, 2014, Ocado Annual report, viewed 30 December 2015, <https://www.ocadogroup.com/~/media/Files/O/Ocado-Group/annual-reports/ocado-annual-report-2014.pdf>.

Parrino, R., Kidwell, D. and Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley.

Spiceland, J., Thomas, W. and Herrmann, D 2011, Financial accounting, New York: McGraw-Hill/Irwin University Press

William, Lasher 2010, Practical Financial Management, South-Western College.

Wagenhofer, A 2014, The role of revenue recognition in performance reporting, OxfordUniversity Press