INTRODUCTION
Thomas Cook Group Plc. has been chosen for this financial report bearing in mind that it is one the largest and most popular travel companies in the world. It was started in 1841 by thirty two (32) year old cabinet-maker named Thomas Cook. He was a former Baptist preacher, and as a religious man he believed that most social problems at that time were related to alcohol. Thomas Cook felt that the less alcohol people drank, the more enlightened and educated they became. (Thomas Cook Group,2010) During the seventeenth century, the railways and locomotion were the biggest modes of transportation and Thomas Cook had an idea of engaging in their use and benefits to begin a major social reform. What started out as an excursion of twelve miles that cost one shilling at that time grew into a fully-fledged travel company that handled holidays and tours to Wales, Ireland, Scotland, Europe, North America and the rest of the world. The company is currently known as Thomas Cook Group Plc, with hundreds of subsidiaries and thousands of stores worldwide.
This financial report would be mainly based on official data obtained from the Thomas Cook UK & Ireland website and, also a financial analysis and company information obtained from FAME which is a source of information for companies in the UK and Ireland. It covers a three year period (2007 - 2009) of the financial statements of Thomas Cook UK & Ireland and would involve an in-depth analysis using different ratios analysis in an attempt to determine
The current long term solvency of the company
The financial performance over this period
The effect of the current world economy on the company
Its predicted future performance
A final analysis and conclusion of the company's performance
BACKGROUND
This financial report covers Thomas Cook UK & Ireland which is a subsidiary of the Thomas Cook Group. Thomas Cook UK & Ireland was first listed on the London Stock Exchange in December 2007.
In May 2010, the company experienced a slump in its sales of holiday packages to Greece which fell by 24% due to the country's riots and economic downturn. (Blitz, 2010). Greece is a popular destination for UK holiday makers and these events affected the company's profits. Also the closure of the European air space in April 2010 as a result of the Icelandic volcanic ash left the company with 188,000 cancelled bookings or holidays and was left with 177,000 stranded customers whom were already on holidays and had to return.
On October 8th 2010, it was announced that Thomas Cook UK & Ireland was merging its high street travel shops with those of The Co-op Group in order to create the largest high street travel agency chain in the UK of about 1200 retail outlets. (Jacobs, 2010). This merger would be non-cash based and it would involve Thomas Cook owning 70% while Co-op would own 30%. This was necessary because of the decline in the numbers of holiday package and tour sales in the UK. In order to stay afloat, both companies decided to synergise their back office operations, shared Information Technology and head quarters.
As a part of this deal there will be expected job cuts and closing down of some outlets. The merger is expected to save the combined company an estimated total of 35 million pounds within the next one year. The merger does not involve in their web site thomacook.com, which is the Thomas Cook UK & Ireland offering online.
THOMAS COOK: COMPARISON OF ABSOLUTE TABLE
S/N
STATISTICS
30/09/2009
12 Months in GBP
30/09/2008
11 Months in GBP
31/10/2007
12 Months in GBP
1.
REVENUE/SALES
2,095,203
1,949,508
1,063,762
2.
COST OF SALES
-1,931,346
-1,816,749
-1,036,382
3.
OPERATING PROFIT
-4,764
-38,891
-155,781
4.
PROFIT(LOSS) AFTER TAX
8,108
-3,319
-76,945
5.
FIXED ASSETS
661,644
309,870
127,487
Table1.0
It would be observed from the above table, Table 1.0 that there has been a steady growth in the company's revenue over the three year period. The revenue had more than doubled in two years from 1,063,762 to 2,095,203. An increase in the cost the cost of sales has no negative impact on the operating profit because Thomas Cook was making losses until 2009 where it declared a profit after tax of 8,108. This shows a steady reduction in losses until an eventual profit. The worldwide recession has also affected the company's expected profit since there had been a drop in the number of holiday sales over the years. The effect of the recession has reduced over the years. There has been a great increase in fixed assets which has grown more than five times since 2007.
INTERPRETATION OF RATIOS IN TABLE 2.0
RETURN ON CAPITAL EMPLOYED (%)
This simply tells the investor(s) the level of percentage gain or loss based on the purchase price of an asset which is used to evaluate the performance of an investment.
Thomas Cook has had gradual decline on return on investment. This could be due to the global economic crises. Since it is mainly a travel and leisure company; the decline in returns from 32.5 in 2007 to -1.69 in 2009 is normal given the current world economic situation since the crisis affected many companies worldwide.
PROFIT MARGIN (%)
The profit margin says how much an investment makes for every unit of currency, in this case pound. A profitable investment is expected to provide an increased profit margin over time.
From 2007 to 2008 Thomas Cook was running at a loss and at a very negative profit margin. In 2009 though, the company's profit margin became positive 0.68%. This shows steady company growth
FIXED ASSETS TURNOVER
This calculates the total revenue for every currency unit of assets. A company's target is to have a low fixed asset turnover ratio which in turn affects the profit margin.
In 2009, it would be noticed that Thomas Cook has had a lower fixed asset turnover ratio of 3.17 as compared to 2008 figure of 6.86 and 2007 figure of 8.34. This is consistent with the increased profit margin for the years mentioned.
STOCK TURNOVER
Stock Turnover is a measure of how a company can readily obtain income or revenue from its stock. It is a major component of fixed asset turnover for companies that do not have a large fixed asset but posses a large stock.
Thomas has had a reduced turnover of 477.38 in 2009 as compared to 572.16 in 2008. There is no supplied data for 2007. Since it is a servicing and, not a manufacturing company; having a high stock turnover would not have much effect on the profit margin.
DEBTORS TURNOVER
This ratio shows the rate at which an organisation or company collects its debts. It shows the efficiency of its debt management.
Debt turnover ratio by Thomas Cook over the three year period has not be consistent. It went down in 2008 from72.39 the previous year, 2007 to 44.57. As at 2009 it was 78.12 which shows an improvement.
CURRENT RATIO
This is a very popular and important ratio analysis in a company's financial statement. It indicates short term solvency in that company with a current ration closer to 1 or less, has low liquidity. It indicates a company's ability to settle short term liabilities. Although a company with a high liquid current assets may have s small currency ratio.
The current ratio dropped in 2009 from 0.37 in 2008 to 0.54. This may be that Thomas made more investments during that year period. A low current ratio is acceptable since cash is constantly being used by the company as a service based company.
QUICK RATIO
This is a measure of a company's ability to produce cash within a very short period, maybe in hours or days. It is an indication of short term financial stability. It is similar to Current Ratio but without the inventory.
Thomas Cook has a quick ratio of less than 1 for the three years in perspective. It shows that the company is having liquidity problems and would have to take measures to stay afloat. Its situation in 2009 having 0.37 is a lot worse than in 2008 with a value of 0.53.
SOLVENCY RATIO (%)
This is a measure of a company's ability to meet its long term liabilities. It gives a forecast of an organisation's ability to meet its long term debt obligations. A positive and high solvency ratio shows a strong financial standing.
Thomas Cook has had negative values for two years running, -56.51in 2009 and -44.10 in 2008. There is no supplied value for 2007. This shows that the company has been struggling manage its finances
GEARING RATION
This is a very important ratio to both a company and its investors It shows a company's capacity to maintain a steady and uniform dividend policy during different economic situations.
There are no values supplied for the three years taken into consideration in this report.
TURNOVER PER EMPLOYEE (UNIT)
This ratio gives a measure of level of labour productivity and efficiency within an organisation. A high turnover per employee is good where as a low turnover per employee might indicate overstaffing and an organisation struggling to pay its wages and salaries.
Thomas Cook has a high turnover per employee for both years running. But this ratio does not take into consideration that some high level members of staff wage structure that may not be required.
RETURN ON SHAREHOLDERS FUNDS (%)
This indicates how profitable a company has been to its investors and the value of its shares to its shareholders. Investors require a company with a positive and improved percentage.
Thomas did not supply any values for three years running, i.e. 2007 to 2009. It also has to be taken into consideration that historical data does not necessarily predict future developments
INTEREST COVERAGE RATIO
This ratio shows the ability of an organisation to meet its interest obligations. It also gives an indication of its credit rating. A high interest coverage ratio indicates that the company has a strong financial base and can still take up more bank loans if necessary.
Thomas Cook had a negative value of -2.262 for 2009 as against a value of 1.274 in 2008 and 5.697 in 2007. Obviously it would be difficult to take out new loans and refinancing of old loans may be a better option
RECOMMENDATIONS
The financial situation of Thomas Cook has been far from good. The company's financial result has a negative Interest Coverage ratio of -2.262 for 2009 which does make it appeal to banks as a venture to lend money to. It thus has a low credit rating and would be seen as a high risk business. There are no values for Gearing ratios and return on share holders' funds. This also makes it uncertain as per the future results as a n investor has no idea on how much his returns would be.
The current merger with Co-op should be seen as light at the end of the tunnel since it is a merger out of synergy with the premise that there would be a savings of 35 million pounds within a year. The company directors should proceed with caution and also employ feasible damage limitation procedures in order to remain solvent during the current global recession
CONCLUSION
It should be taken into cognizance that the global economic meltdown did affect companies worldwide .Thomas Cook being a travel company that mainly deals with sales of holidays and tours packages, it would be observed from the above financial report that it was badly affected by the world recession. Generally people were bothered about reducing mounting debts, looking for jobs / keeping jobs and trying to pay debts and mortgages in order to avoid foreclosures of homes and loss of businesses. Sales in holiday bookings dropped and most companies took measures to reduce losses.
There has been a turnaround in the worldwide recession and this can be seen in the financial statement of Thomas Cook. For the first time in three years, there has been a profit after tax (Appendix, Table 1). There has also been an increase in revenue and reduction in operating losses. Based on the current trend, there is expected growth in the future.
