Compass Group Financial Management Case Solution
Â The profitability ratios, EPS growth and the return ratios for the company are shown in the table below:
|Profitability Ratios||2012||2013||2014||2015||2016||Company Average||Industry Benchmarks (current)|
|Profit Margin Ratio||3.58%||2.44%||5.07%||4.94%||5.06%||4.22%||5.50%|
|Basic Earning Power||0.093||0.088||0.140||0.144||0.134||11.97%||–|
|Return on Asset||6.55%||4.70%||9.95%||9.93%||9.41%||8.11%||7.05%|
|Return on Equity||18.72%||15.42%||47.04%||44.86%||39.60%||33.13%||12.58%|
If we look at the income statement of Compass Group for the last five years then we can see that the revenues of the company, operating income of the company, the profitability and the gross profits are all increasing in each of the years. This suggests that the company is financially well managed and even the EBITDA of the company shows a dramatic growth of the company.
The interest expense of the company is also increasing and this is because, the level of debt is high on the balance sheet of the company therefore, and the amount of the interest expense isincreasing for the company. The average income tax rate is 17% as calculated in the excel spreadsheet and the weighted average number of shares of the company show that the equity is being raised by the company and investments are being made by the shareholders of the company.
Secondly we have computed two key liquidity ratios and this has been done to analyze the financial position of Compass Group by using a range of different financial ratios so that we can see a good overall performance of the company. If we analyze the liquidity ratios of the company, then we can see that the current ratio of Compass Group shows an increasing and decreasing trend over the last 5 years. The current ratio in 2016 is 0.745 times as compared to the benchmark ratio of 1.34 times. This shows that the company does not have many liquid assets and it cannot immediately pay all of its short-term obligations if they become due. This is alarming for the management of the company.
The quick ratio for the company shows a similar trend as the inventory has been quite static and it is also much lower as compared to the industry average figure of 1.21 times. These ratios show that the liquidity position of the company is weak. The ratios are shown below:
|Liquidity Ratios||2013||2013||2014||2015||2016||Company Average||Industry Benchmarks (current)|
Asset Management RatiosÂ Â Â Â Â Â Â Â Â Â Â
After this, if we analyze the asset management ratios of the company then we can see that the inventory turnover ratio is low as compared to industry average in 2016. This is not alarming since the level of inventory is low at Compass Group, so this is not of any concern. The fixed asset turnover ratio shows a positive trend which means that the management of Compass Group is efficiently utilizing its fixed assets and the similar case is with the total asset turnover ratio as the ratio is still high in 2016 at 1.860. These ratios are shown in the table below:
|Asset Management Ratios||2012||2013||2014||2015||2016||Company Average||Industry Benchmarks (current)|
|Days Sales Outstanding||2.310||36.610||37.125||32.578||36.007||28.926||–|
|Inventory Turnover Ratio||19.369||20.589||–||–||16.548||18.835||45.21|
|Days Sales Inventory||18.845||17.728||–||–||22.058||19.543||–|
|FA Turnover Ratio||25.928||24.590||23.399||23.024||20.572||23.502||–|
|Total Asset Turnover Ratio||1.832||1.923||1.962||2.011||1.860||1.918||1.39|
Debt Management Ratios
Lastly, if we analyze the debt ratio and the interest coverage ratios then we can see that the level of debt is high on the balance sheet of the company as stated previously. The level of debt in 2016 is 32.56% which is lower than the average of the industry. Moreover, the time interest earned ratio for the company is more triple times lowerthan the benchmark average of 82.74 times. This shows that the company is highly levered and it is not managing its debt efficiently. Furthermore, the company might face issues to repay its outstanding debt and pay interest on the outstanding balance of the debt of the company. These ratios are shown in the table below:
|Debt Management Ratios||2012||2013||2014||2015||2016||Company Average||Industry Benchmarks (current)|
|Time interest earned||11.117||11.457||15.025||12.485||14.232||12.863||82.74|
The trend of the total assets, equity and the total debt of the company show that the company is financially not much strong and it has a weak capital structure. The company faces the risks to pay off its liabilities and other obligations as they fall due.
Impact of Political Competitive Environment on Business
The group has always remained focused and the core strategy of the company emphasizes on providing the support and the food and catering services to its clients in Australia and in UK. Looking at the current political competitive environment of Australia, the short term economic conditions of the country are going to have an impact on the revenue growth of the company which is organic revenue growth in true terms(HABC, 2017). However, over the years the group is likely to enjoy the structural growth as a result of the cyclic upswing and growth in the outsourcing.
The political competitive environment of Australia is a low risk and safe environment of the business and it attracts the businesses. Therefore, this is going to have a positive impact on the businesses and the financial performance of the Compass Group. Australia is also well placed to take advantage of the growing opportunities around the world and it has strong trade, economic and the political links therefore, this would contribute to the rapid growth of the group(HABC, 2017)…………………………
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