Discussion and Analysis

A report has been prepared on the financial analysis of the two companies listed on the London stock exchange. The report highlights as to how the annual report of the companies meets the expectations of the corporate stakeholders (Boccia & Leonardi, 2016). The year of analysis chosen in the report is 2018. An in-depth ratio analysis has been done using 10 critical and significant ratios of the company, which shows the financial status, and performance of the company from the viewpoints of various parties like those of management, investors and lenders. A year-to-year comparison also helps in knowing if the company has progressed or declined in terms of progress. The last section of the report discusses the financial and non-financial factors that have affected the performance of the companies. The limitation of the report is that it covers the financial and non-financial analysis of the company from the perspective of the annual report, it does not focuses on many other areas of interest like those of internal control, processes, market stability, etc. (Choy, 2018).

The two companies, which has been considered for analysis is Greene King plc and Young & Co’s Brewery PLC. Green King PLC is one of the largest pub retailer and brewer in United Kingdom. It is based out of  Bury St Edmunds, Suffolk, England and the company owns a number of hotels, pubs and restaurants with the total number over 3100. It is listed on London Stock Exchange and is a major constituent of FTSE 250 Index. It was formed back in 1799 and grown multiple times by the way of mergers and acquisitions. It runs various apprentice and hospitality programme in order to address the skill and the experience gap of those who are unemployed and has more than 9000 registrations until date (Alexander, 2016). Some of the programmes are Greene King Apprenticeship Programme and Get into Hospitality Programme. On the other hand, Young & Co.’s Brewery Plc is another pub chain company again operating in United Kingdom with 220 pubs. It was established in 1831 and in the company 40% stake is being held by Young & Co and Charles Wells own 60% stake. This company again has had a number of major acquisitions, which puts it third on the list of premium ale brewery in the UK (Chron, 2017).  

The ratio analysis has been done for the two companies for the last 2 years to evaluate the performance as well as the financial status of the companies in question. The same has been enlisted below:

(Amt in £m)
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1. Liquidity Ratios
Result		0.51	0.74

Performance Factors

2. Debt Management Ratios
Gearing Ratio = (Total Debt/Total owners’ equity) or ((Total assets- total owners’ equity)/total owners’ equity)	2018	2017
Total Debts	2032	2075
Total owners’ equity	2057	1944
Result	0.99	1.07

3. Efficiency Ratios
Receivables Turnover Ratio = Sales/Accounts Receivable	2018	2017
Sales	2176.7	2216.5
Accounts Receivable	87.60	93.40
Result	24.85	23.73
Days Receivable = 365/Receivable turnover	2018	2017
No. of days	365	365
Receivable turnover	24.85	23.73
Result	14.69	15.38
Inventory Turnover =  COGS/Inventory	2018	2017
COGS	743	769.7
Inventory	47.70	45.00
Result	15.58	17.10
Payables Turnover Ratio = COGS/Accounts Payables	2018	2017
COGS	743	769.7
Accounts Payables	421.80	431.20
Result	1.76	1.79
Days Payables = 365/Payables turnover	2018	2017
No. of days	365	365
Payables Turnover	1.76	1.79
Result	207.21	204.48

4. Profitability ratios
Gross Profit ratio = Gross Profit / Sales	2018	2017
Net Profit ratio = Net Profit / Sales	2018	2017
Return on capital employed = Net income/total capital	2018	2017
Operating profit before exceptional and non-underlying items	373.1	411.5
Earnings per share = Net earnings for equity shareholders / No. of Equity shares	2018	2017

From the above ratio analysis of Green King PLC, we can see that the company has current ratio of 0.65 times in 2018 which has dropped from 0.84 in 2017 (Linden & Freeman, 2017). The quick ratio or the liquid ratio has also dropped from 0.74 times to 0.51 times in 2018. Both these ratios are the measure of the company’s capability to pay off the short term debts and current liabilities on short notice and the ideal ratio as per industry trend is 2 times and 1 times respectively (Goldmann, 2016). However, in the given case, the same is exceptionally low and therefore it shows the inability of the company to pay off the current debts and trade creditors on time. Therefore, the company needs to improve on the same. For Young & Co’s Brewery PLC, the situation is even worse as the current ratio and the liquid ratio is 0.38 times (2017: 0.24) and 0.332 times (2017: 0.20) respectively in 2018. Thus, in case of need, the company may be required to erode or liquidate its fixed assets in order to pay off these liabilities.

In terms of the debt management ratios, the gearing ratio stands at 0.99 times and 1.07 times for 2018 and 2017 respectively for Green King PLC and for Young & Co’s Brewery PLC, it has been 0.26 and 0.23 respectively for 2018 and 2017 (Trieu, 2017). The ratio shows the proportion of debt and equity in the entire capital, the ideal industry trend being 2:1 times in favour of debt. For both the companies, it can be said to be under control but the situation of Young & Co’s Brewery PLC is better than Green King PLC as the former has the cushion of using more of debt capital in future and reducing weighted average the cost of capital.

In terms of the efficiency ratios, we can see that for Green King Plc, the receivable days has reduced from 15.38 to 14.69 days, which is a positive indicator and reflects that the efficiency of collection has increased (Heminway, 2017). However, the inventory turnover has decreased from 17.10 times to 15.58 times which indicates that the company is not being able to convert the inventory to sales readily and thereby incurring the inventory carrying costs. Similarly, though the payable days has increased from 204.48 to 207.21 days and has had a positive impact on the cash cycle but such a higher payable days is not recommended. This shows deficiency in the internal control. On the other hand, for Young & Co’s Brewery PLC, the receivable days has decreased marginally from 9.77 to 9.15 days. Similarly the payables days has also decreased from 201.64 to 173.78 days indicating the efficiency of operations and good internal control. The inventory turnover has declined marginally from 22.82 times to 21.63 times, indicating a larger holding time and more carrying cost for the company but comparatively Young and Co. has been better off than the Green King PLC (Jefferson, 2017).

Lastly, in case the profitability ratios are being compared, we can see that the gross profit ratio for Green King Plc has been more or less constant whereas the net profit ratio has increased from 6.8% to 7.5% in 2018. The return on capital employed which measures the rate of return on the invested capital has declined from 9.4% to 8.5% (Lessambo, 2018). The capital employed includes both the loan as well as the own capital. The earnings per share has also declined from 70.8p in 2017 to 62.7p in 2017. On the other hand, the net profit as well as the gross profit has been on higher side for Young & Co at 10.8% and 76.8% respectively. The return on capital employed has declined from 6.1% to 5.4% in 2018 and the earnings per share has been more or less constant at 61.5p for both the years. The profitability ratios do indicate that the performance for both the companies has declined in 2018 but the profitability is better for Young and Co whereas the return on capital is better for Green King PLC (Marques, 2018). 

The ratio analysis for Young & Co’s Brewery PLC has been shown below:

(Amt in £m)

Young & Co’s Brewery PLC

1. Liquidity Ratios

2. Debt Management Ratios
Gearing Ratio = (Total Debt/Total owners’ equity) or ((Total assets- total owners’ equity)/total owners’ equity)	2018	2017

4. Profitability ratios
Gross Profit ratio = Gross Profit / Sales	2018	2017
Net Profit ratio = Net Profit / Sales	2018	2017
Return on capital employed = Net income/total capital	2018	2017
Operating profit before exceptional and non-underlying items	37.6	37
Earnings per share = Net earnings for equity shareholders / No. of Equity shares	2018	2017

In case of the Young and Co., the company is divided into several segments as if Young’s managed houses; Geronimo managed houses and Ram Pub Company. Revenue generally comes from food, drink and accommodation whereas the Ram Pub Company generates revenue by leasing the pubs to third parties. The company has had a major change in the management due to the merger and acquisition over the past few years and off late the company has stabilized (Kew & Stredwick, 2017). Besides this, as per the annual report, sustainability report and the audit report of the company, it can be mentioned that the company has complied with all the rules and regulations, accounting standards and the legal requirements while preparing the books of accounts. However, the company’s valuation policy, computation of deferred tax and the supplier rebates and revenue recognition criteria were all challenged and it was seen that the company has adequate back up of the same (Kachelmeier, et al., 2018). In addition, the company has been contributing to the corporate governance and has made adequate disclosures in this regard.

On the other hand, Green King PLC has been the market leader off late in UK because of the synergies in investment and acquisitions. The focus of the company has been on cost mitigation programmes and strengthen the capital structure, improve the underlying sales (Sithole, et al., 2017). The company has also been compliant in terms of corporate governance and sustainability and has come up with various programmes and incentives for the betterment of the company as well its human resource. In terms of auditor opinion in audit report, the company has complied and followed all the rules, regulations, accounting standards and the legal requirements as therefore the auditors have issued a clear opinion and mentioned the entity as going concern (Raiborn, et al., 2016). The auditor did identify few of the risks in the financial statements like those of capital expenditure accounting, impairment calculations of property, plant and equipment, revenue recognition, etc. bit post the additional audit procedures by the auditors, all these were found to be justifiable.   

References 

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Boccia, F. & Leonardi, R., 2016. The Challenge of the Digital Economy. Markets, Taxation and Appropriate Economic Models, pp. 1-16.

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.

Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: https://smallbusiness.chron.com/five-common-features-internal-control-system-business-430.html

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4(3), pp. 103-112.

Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35.

Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.

Kachelmeier, S., Schmidt, J. & Valentine, K., 2018. The disclaimer effect of disclosing critical audit matters in the auditor’s report. SSRN, 2(1), pp. 1-39.

Kew, J. & Stredwick, J., 2017. Business Environment: Managing in a Strategic Context. second ed. London: Chartered Institute of Personnel and Development.

Lessambo, F., 2018. Audit Risks: Identification and Procedures. Auditing, Assurance Services, and Forensics, 3(1), pp. 183-202.

Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.

Marques, R. P. F., 2018. Continuous Assurance and the Use of Technology for Business Compliance. Encyclopedia of Information Science and Technology, pp. 820-830.

Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.

Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.

Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, 93(1), pp. 111-124.