This assignment aims to appraise a chosen high-street retailer based on its Annual Report. Having a pension fund to invest in a chosen UK company and knowing that the British economy is in recession, a business report has been asked to be prepared and a ratio analysis in one out of four given retailers to be used. The assignment is divided in four parts. The first two chapters have to do with defining, calculating (using ratio formulae) and describing the ratios. In the third chapter are necessary three to five areas to be described where a further investigation is needed, as well as to explain what kind of information is required. In the fourth chapter, internet sources are used to analyze company's operating performance and financial position, including problems the company has faced, like the risk of bankruptcy and the performance of the other competitors. The last chapter is a conclusion of the findings in chapters 2nd, 3rd, 4rth and clarifies whether the chosen company is over-valued or not and if it is possible to go into administration during the next twelve months.
2. Ratio Analysis
2.1 Liquidity ratio
2.1.1 Current ratio
Used especially by lenders in order to see if the company has the appropriate liquidity to pay its liabilities. The minimum proportion of current assets and current liabilities is 1:1 and the ideal 2:1. The disadvantage of this ratio is that companies with big number of inventories seem to have good liquidity but inventories cannot be transformed so easily in money in a short-term period (Bragg, 2002).
2.1.2 Quick ratio
Excludes inventories and is better to use this, because conclusions about company's liquidity can be better drown (Bragg, 2002).
2.1.3 Cash ratio
Used to find out if the company can cope with its current liabilities in a very short-term period. Lenders can see if the corporation can pay off every current liability. The result of this ratio depends on the policy the company follows, how often the customers should pay the bills. If the pay-off period is short, the cash ratio is good, but as pay-off period increases, cash ratio decreases (Bragg, 2002).
2.2 Turnover ratio
2.2.1 Average collection period
Shows the time needed in order to transform the demands from clients into money. The smaller this ratio is, the better (Thanos et al., 2002).
2.2.2 Average payment period
Illustrates how often the company pays its bills. The bigger the ratio is, the better (Thanos et al., 2002). It is obvious that a company should have small average collection period and big average payment period in order to avoid bankruptcy.
2.2.3 Inventory turnover
Provides information about the average time of a product which stays in the company until it is sold. Additionally, it measures the liquidity of inventories, as well as, it helps to organize better the purchases of a company (Thanos et al., 2002).
2.3 Gearing ratio
2.3.1 Debt ratio
Illustrates the percentage of assets which had been financed from external sources. The demands of creditors on company's assets are also apparent. The smaller this ratio is the better for the creditors. If the ratio is high, then the shareholder's equity is too small so the creditor's damage will be enormous in case of bankruptcy (Thanos et al., 2002).
2.3.2 Debt to equity ratio
Lenders are concerned about this ratio because it demonstrates if their money is safe or not. A high proportion of debt on equity means that their loans are at great risk. Lenders should also consider the proportion of short-term and long-term debt because as the short-term debt grows, the probability of bankruptcy increases. Investors also worry about if the company funds its activities with debt or with company's earnings (Bragg, 2002). High debt is not always bad, and according to Walsh (1996), ''debt increases both profit and risk. It is the job of management to maintain the proper balance between the two''.
2.3 Efficiency ratio
2.3.1 Cost of sales to sales
Informs about the relationship between the cost of production and the income from the units sold. Demonstrates if a company functions ordinary, when the available resources are correctly used (Thanos et al., 2002).
2.3.2 Return on equity (ROE)
Measures the return delivered to shareholders. If a company has a good ROE means that is growing and going well so the investors buy its stocks without hesitations, consequently is easier for company to get the necessary funds (Walsh, 1996).
2.3.3 Return on sales
Shows how much is the margin of profit. It is the true percentage of profit which the company has from its activities. A company must get the best profit available from each unit sold. For the aforementioned reason, corporations want this ratio to be big. (Thanos et al., 2002).
2.3.4 Return on total assets (ROTA)
It is similar with ROE, though it is almost impossible for a company to have bad ROE and achieve high ROTA. This ratio explains how well the company uses its assets in order to produce profits (Walsh, 1996).
2.4 Profitability ratio
2.4.1 Earnings per share
By using this ratio, shareholders can predict changes in earnings per share held. The difficulty with this ratio is that if the management wants to have high earnings per share ratio, prevents them from investing in assets with long-term profit and takes false decisions in order to maximize the company's value (Bragg, 2002).
2.4.2 Price to earnings (PE)
Presents the association between share price and the earnings of a share. The company has no effect on this ratio. In a long-term period this ratio depends on ROE ratio. The advantage of a big PE is that even more investors are willing to buy the particular stock so it is easier to get the necessary funds. Another benefit is that if the company has high PE, minimizes the danger of a takeover (Walsh, 1996). Furthermore, it is easy to be recognised if a stock is overvalued so that the stock can be sold and vice versa (Thanos et al., 2002).
2.4.3 Dividend yield
Informs about how much percent of the increase in market price gets in investors pockets. Indicates the return earned by investors from dividends (Bragg, 2002).
2.4.4 Dividend payout
Indicates how much money a common stockholder gets from the company's earnings for each stock owned. If the ratio >1, the company gives more dividends than can afford. If the ratio is too low, the company gives a small amount of its earnings to dividends. If the manager uses the non-distributed earnings correctly, the value of company's stock must increase. Otherwise, the shareholders need to check if management uses the money properly. In order to use this ratio, the accounting accruals should be taken into consideration, because revenues can be recorded now but they can be collected afterwards. In this way, the money in the company is less than the earnings (Bragg, 2002).
3. Performance
3.1 Liquidity ratio analysis
The company has improved almost all of its ratios in 2010. More specific, the current ratio increased 5.3% and the proportion is almost 1:1 which indicates that the company has good liquidity and the creditors should feel quite secure. Of course, is far from rule of thumb 2:1 (Bragg, 2002). The quick ratio is quite low due to high inventories. An improvement of 11% in 2010 has been made even if an increase has occurred in inventories. In 2010, the company almost doubled the cash ratio and that because the company had approximately 9 times more clients compared to 2009.
3.2 Turnover ratio analysis
The proportion of the average collection period is also optimistic. The company chooses to pay slowly. From 2009 to 2010, Majestic's average collection period increased by 8.19% and the average payment period declined by 2.39%. Perhaps the company has changed its policy, due to economic recession, in order to achieve better prices from the suppliers and considering not losing customers. The average payment period is almost 5 times bigger so there will be no problem because of the high sales. An improvement in inventory turnover by 8.58% is assessed meaning that in 2010, Majestic organized better the purchases of inventories and sold its products quicker comparing to 2009 (Thanos et al., 2002).
3.3 Gearing ratio analysis
A large proportion of investments have been done by internal financing. Even though a decrease in debt, an investment to assets shows that Majestic is a healthy corporation. Furthermore, there is a decrease by 6.9% in debt ratio due to an investment to assets. Moreover, the proportion of equity and debt improves by 12.5% meaning that company is more independent and gets the necessary funds on its own. It is obvious that neither the company nor the creditors are going to lose their money (Walsh, 1996).
3.4 Efficiency ratio analysis
The return on total assets was doubled because the company makes better use of the assets and ROE jumps 200% up. This happens thanks to the dramatic increase on incomes, something that was expected because of the great connection between these two ratios. This also indicates that Majestic is a growing company with great potentials. The sales increased by 75% within a year. The only ratio that remained stable was the cost of sales/sales ratio because it is difficult for a company to change the cost of production within a year (Walsh, 1996). The company had a development in profitability in comparison to 2009.
3.5 Profitability ratio analysis
Earnings per share increased by 31.4%, the company's profit increased by 117% and price to earnings ratio (PE) increased by 25.2%. The dividend yield declined by 33.3% because the price of stock increased compared to dividends. The dividend payout ratio also declined. This happened because even if Majestic increased earnings per share by 31.4%, it boosted dividends per share only by 5.1%. Sales enlarged 15.6% and the clients increased from 54,000 to 472,000. Additionally, an improvement in internet sales by 0.9% took place. The change from 12 bottles to 6 bottles was very valuable and intelligent. The price per bottle increased and the customers rose respectively. Consumers prefer to buy six bottles and to spend an average £8.79 per bottle against £7.60 per bottle for those buying a dozen, which means that the total value declined. It seems that the engagement with customers is very effective until now.
4. Areas with further investigation
There are some issues about Majestic that require further investigation in order to have a better view of company's financial condition. Firstly, an increase of 144.62% in provisions (see balance sheet). On one hand this is reasonable due to economic recession; on the other hand the increase is huge. Conversely, the company had 418,000 new customers in 2010 so this is quite explicable. It must be checked how this account will evolve through time. The increase of 71.73% in interests is another thing which must be investigated because the increase is also enormous within one year.
It must be also searched why Majestic decided to decline payout ratio in 2010 although it had an increase in profit before taxes 117%. Even though it gave 0.5p additionally in dividends per share, compared to earnings per share, is still a small increase. The effectiveness of ''wine course'' is to be measured in order to have a better idea about the profitability of this activity. Lastly, the reason forced Majestic to change the policy of average collection and payment period. Some evaluations have been done above but more detailed information is needed. The effectiveness of this decision must be calculated too.
5. Published commentary
Majestic Wine plc is the largest wine retailers in United Kingdom (Daily Mail, 2009). The Majestic's management planned to expand the chain and to transform it to a profit-making business (Birmingham Post, 2008).
In the fiscal year ending of March 2009 the company presented £12.7 million pre-tax profit, down 22% on a year ago whereas the dividend was held at 9.8p (London Evening Standard, 2009). The stock was down 4.5% valuing the business at about £111million due to tax hikes, poor weather and rising transport costs, according to company's director (Daily Mail, 2009). On the contrary, the fall in the pound against the euro, occurred in 2009, has made wines from euro-zone expensive, giving domestic products a compelling value on exports resulting in an increase of 9% in profits and 5% in dividends (London Evening Standard, 2010). Moreover, the firm's sales were accelerating, with same-store revenue growth increasing from 5.4% in the first half to 6% in the same year (Daily Mail, 2009).
In present year, business was boosted by new stores and the minimum order was halved (The Mirror, 2010). After a period of recession and consumers' response, they decided to reduce the minimum purchase from twelve bottles to six bottles. Moreover, it was an attempt to approach citizens, who live in towns, to get better access to the outlets rather than driving in order to carry a dozen of bottles (The Daily Record, 2010). After Christmas period of 2010, reports showed an 11.7 % rise in sales. There are four factors that influenced the wine market. First of all, the supermarkets are difficult to compete because they keep industry under pressure. Secondly, the tax policy burdened profits' margins of 20% the current year and pressed the independent retailers to raise prices in comparison with supermarkets which could more easily to afford the cost of taxes on the products (London Evening Standard, 2009). The main threat, from supermarkets' competition for wine retailers like Majestic, is predatory pricing and significant range extension (The Daily Mail, 2008).
Majestic's competitors after facing the impact of tax hikes and supermarket competition have recently experienced serious financial difficulties "The Local", "Wine Rack" and "Haddows", some of the key competitors, are disappearing from the High Street, while "First Quench" collapsed into administration last month. In the same way, "Oddbins" posted pre-tax loss in the year to 2008 although its recovery plan reflected the likely shape of the whole industry (London Evening Standard, 2009).
6. Conclusion-Recommendations
Taking into account the above analysis and the condition of local and global economy the performance of Majestic Wine plc is extremely high. The company has good liquidity and is almost certain that can deal with its obligations. The corporation also reduced its debt compared to its assets and equity. The above indicates that it can make the necessary investments by itself. The efficiency of the company has grown due to high profits in 2010. The profitability of Majestic is more than obvious and according to financial review, the profits of 2010 increased 117% compared to previous years.
The pension fund is a long-term investor and targets to have profits from dividends and not from the difference between buying and selling price of the stock. Furthermore, PE ratio in 2006 was 22.00, in 2007 was 23.00 and in 2010 was only 13.9; it is a good option to buy at current prices (Thanos et al., 2002). Moreover, it is known that in a well-functioned market the price of a stock in long-term is determined from the next year's dividends, considering the opportunity cost of capital (Brealey et al., 2008). Because Majestic is both, healthy and profitable company, is highly recommended Majestic's stocks to be bought.
7. References
Anonymous 2009, 'Majestic Wine gets profits headache as Champagne sales dry up in recession', Daily Mail, 15 June, viewed 30 October 2010, <http://www.dailymail.co.uk/>.
Anonymous 2008, 'Majestic Wine recovers from budget hangover', Birmingham Post, 16 June, viewed 30 October 2010, <http://www.birminghampost.net/>.
Anonymous 2009, 'Majestic down as drinkers head for the supermarkets', London Evening Standard, 15 June, viewed 30 October 2010, <http://www.thisislondon.co.uk/>.
Anonymous 2009, 'Majestic Wine enjoys sales boost as more people choose to drink at home', Daily Mail, 16 November, viewed 30 October 2010, <http://www.dailymail.co.uk/>
Bragg, S.M., 2002, Business ratios and formulas: a comprehensive guide, John Wiley and sons, New Jersey.
Brealey, R.A., Myers S.C., & Allen F., 2008, Principles of corporate finance, 9th edition, McGraw-Hill/Irwin, New York.
English, S 2008, 'Majestic Wine loses its fizz in slump', Daily Mail, 13 November, viewed 30 October 2010, <http://www.dailymail.co.uk/>.
Goodway, N 2010, 'Majestic Wine's move to six-bottle cases pays off', London Evening Standard, 14 June, viewed 30 October 2010, <http://www.thisislondon.co.uk/>.
Snowvalley 2009, Majestic Wine PLC Annual Report and Accounts 2009, available at:
<http://maj-cms.snowvalley.com/upload/pdfs/investors/results2009.pdf>, accessed 25 October 2010.
London Stock Exchange, 2010, Mjw Majestic Wine plc ord 7.5p, viewed 25 October 2010, <http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB00B021F836GBGBXAMSM>.
Manning, C 2010, 'Wine firm's Majestic profits', Mirror, 15 June, viewed 30 October 2010, <http://www.mirror.co.uk/>.
McLeod, K 2010, 'Britons turn to pizza and wine in bid to beat the recession', Daily Record, 7 January, viewed 30 October 2010, < http://www.dailyrecord.co.uk/>.
Thanos, G., Kiohos, & P., Papanikolaou, G., 2002, Chrimatodotisi ton epihiriseon, Sinhroni ekdotiki, Athens (in Greek).
Tobin, L 2009, 'Majestic bubbly but it's still tough for wine trade', London Evening Standard, 16 November, viewed 30 October 2010, < http://www.thisislondon.co.uk/>.
Walsh, C., 1996, Key management ratios: how to analyse, compare, and control the figures that drive company value, Pitman Pub, Glasgow.
