Financial Analysis of Markies Catering's UK Expansion

Introduction

Markies catering is a reasonably sized company with between 201 - 500 employees and was founded in 1996. Markies Catering strives to encourage pupils at school to make the right, healthy choices in terms of eating and drinking and to show that responsible nutrition is tasty and fun they do this by, “thinking out of the box” and “always deliver what they promise”, according to their linkedin account. They specialise in Educational catering and is expanding to the UK. This report will contain the balance sheet, income statement and an analysis of their financial assets in the UK and budgeting.

Income Statement

The income statement is a document that is constantly changing as it is an account of the whole financial year. This allows Markies Catering to see the, “bottom line”, the bottom line shows how successful the company was in the past year.

The first line of the income statement is usually the name of the company and the end of the financial year that the income statement was created.

Revenue : (£ 150 000)

Next is the, “Revenue” . This line can be written in many different ways but is mainly just to show how much sales the company made during the past year combined into one number. This might be a Good place to see if the company is successful, however it move heavily depends of the total amount of expenses that the company had that year.

Cost of Sales : (£ 50 000)

Next is the, “less cost of sales”, line. This is the direct costs attributable to the production of the goods sold by the company.

Cost of Sales is calculated by adding Opening stock to purchases and subtracting closing stock, in this case it makes the cost of sales 50 000 ((5000+51000)-6000=50000).

Gross Profit : (£ 100 000)

It is the amount of money made, subtracted from the amount of money spent to make those products that were sold. It is the total amount of profit made without subtracting non direct expenses (such as mortgage repayment, advertising and wages & salaries etc). This is divided into 3 sub categories, opening stock (the amount of stock that the company has in the beginning of the financial year), purchases (the financial amount of goods purchased during the financial year) and the closing stock (which is the amount of stock that is left after the financial year).The gross profit that markies made in the financial year of 2017-2018 was 100 000.

Expenses : (£ 54 800)

This is the category where all the non direct expenses are put that need to be paid in order to keep the company operational. This includes any purchase that the company made to produce that product, the facilities used to produce the goods sold, the personnel/machinery that create the products,etc.

Net profit before Tax : (£ 45 200)

And in the immortal words of Benjamin Franklin, “Only 2 things are certain in life, death and, TAXES”. The last line of the Income statement is the pure amount of money left over after the cost of sales and expenses have been deducted. The only thing left before dividends and/or re-invested into the company.

It would be used by a lot of stakeholders such as the CEO, the CFO, accountants,managers and government) of the company to determine the health of the company. Investors would also use this in combination with the balance sheet to determine the profitability of the company, to then decide to invest in the future of that company.

Balance Sheet

The balance sheet on the other hand is a document that shows a snapshot of the company at a certain point in time. This sheet shows all the assets and liabilities at a given point in time. The assets in the company are resources that the company owns and that had monetary value, including cash, stocks and debtors (money owed to the company). The liabilities on the other hand is everything the company owes to other companies or individuals and has a monetary value. Capital & reserves on the other hand is money that has been invested into the company, including retained profits.

This sheet will also be used to project the net worth and provide company valuation. The sheet will be used with the Income statement by any variety of stakeholders (CEO, CFO, accountants, managers, investors and government alike). This is the overall outlook of the company at a point in time, the sheet must also be balance as to show where all the money was spent and where that money came from.

The balance sheet is comprised of 8 sections:

Fixed assets (£ 80 000)

These are assets that remain in company’s ownership until they are sold, cannot complete their task or they can be kept and used for long periods of time. This includes premises, fixtures and fittings, machinery and vehicles.

Current assets (£ 21 000)

Current assets are defined as assets such as cash or assets that can be converted into cash within a year. This includes stock, bank, debtors and cash. As stock can be sold and converted into cash within a year it is considered a current asset.

Current liabilities (£ 7 000)

Current liabilities are liabilities with a short or ASAP time frame. Basically they are debts that need to be paid within a year or shorter amount of time ie Creditors (creditors are companies or individuals that owe the company any form of debt).

Working capital (£ 14 000)

Working capital is the capital of the company which is used in a day to day operations of that company. Which is the amount of current assets that the company has subtracted from the current liabilities that company has. If the number is positive it means that the company has no debt (that needs to be paid in the short term).

Total assets less current liabilities (£ 94 000)

This number should be equal to the one at the bottom of the balance sheet (Capital employed) as it is where all the money was spent is pursuit of acquisition of profits.

Long term liabilities (60 000 + 15 000 = 75 000)

Long term liabilities finance (together with capital and reserves) the top half of the balance sheet creating Capital employed witch should balance with total assets less current liabilities.

Capital and Reserves

Capital and reserves are financial assets that originate and generate from extra profits that the company made over the period that they were operational. Capital employed, also known as funds employed, is the total amount of capital used for the acquisition of profits (this number should match with the one linked with Total assets less current liabilities.)

Ratio’s

Markies Catering LTD can use ratios to work out their solvency by using the current ratio, acid test ratio and the debt to equity ratio. These ratios will allow Markies Catering LTD and potential investors to see how well they are able to meet their liabilities.

Current ratio

21 0007000 = 3

Their current ratio can be calculated by dividing the current assets by the current liabilities. It is considered, “healthy”, for the company to have between 1.5 and 2 for this figure, this is to insure that the company can repay its liabilities with relative ease. However this is an not impartial view of the health of the company. A figure of 3 is a very good and extremely well performing branch of Markies Catering LTD however further ratios reveal another fact.

Acid test ratio

(21 000-15 000)7000=0.875

Their acid test ratio shows the assets compared to liabilities. Unlike the current ratio, the acid test shows the current assets (21 0000) divided by the current liabilities (7000) without the stock figure (15 000) and if the calculated figure is under 1 (and in this case it is, (0,875)). It shows how well Markies Catering Ltd can repay its liabilities without having to sell stock. The figure expected is between 1 and 2 in order for the company to be considered, “healthy”. This means that Markies Catering LTD must sell £1000 worth of stock in order to be safe. This helps to monitor the performance of the company, as having a figure under 1 would mean that the company has more current liabilities than current assets, basically if their creditors ask for their money back in the near future, Markeis Catering LTD would be unable to pay them back immediately however if they have more retained profit from selling more stock they would be able to cover the creditors they owe in the near future.

Debt to Equity Ratio

82 000(101 000-82 000) =4.3

Their Debt to Equity ratio is calculated by dividing Markies Catering LTD total liabilities (7 000 (current liabilities) + 75 000 (long term liabilities)= 82 000) by their shareholder equity. (Shareholders equity is found by subtracting the company’s total assets (21 000 (current assets)+ 80 000 (fixed assets)= 101 000)) from their total liabilities (7 000 (current liabilities) + 75 000 (long term liabilities)= 82 000)). Some analysts believe it is healthy and safe to have a ratio of 0,4, however as the expansion to the UK is showing merit and a lot of promise (as seen in the company’s history in the Netherlands) it would be wise for investors to invest a large sum to have a maximum return on that investment in the medium to long term with some risk but a higher chance of return on the initial investment for the investors. This ratio allows investors and the management team of Markeis Catering LTD to monitor their assets to liabilities (a More indepth version of the current ratio.)

Ratios can also show how profitable the company really is (either within a set moment in time or over a set period of time). There are three ways of working out how profitable the company really is using ratio analysis.

Gross Profit Percentage

This calculation shows gross profit as a percentage of the turnover that the company has generated over the previous financial year. For example, if the gross profit is £ 1,000 and the turnover of the company is £2,000,the gross profit percentage is (50%) :

10002000*100 = 50%

The calculation for Markies Catering LTD is as shown below.

100 000150 000*100 = 66.(6)%

Gross profit percentage shows the first step in determining the profitability of the company as it subtracks the costs generated to create the goods that were sold and the percentage is the return of their input so for every £100 pounds in revenue they make a profit of £ 66,(6)7. The average and considered the norm in the businessworld is to have a 50 % ratio however having a higher ratio would mean possible drop in sales (revenue) and therefore a recommendation would be to lower the gross profit percentage to 60 % by reducing prices in hopes to increase sales and therefore revenue and thus increasing the performance of the company by providing with possible retained profit (however this would not work if the demand for the products does not increase).

Net Profit Percentage

This shows the profit that the company has made before tax has been taken off. It shows how well the company manages its expenses. Net profit is calculated in the balance sheet and to find the percentage it is multiplied by 100 then divided by the revenue.

45200*100 150 000=30.1(3)%

So this means that from 150 000 in revenue they made a 30.1(3)% profit. This is fairly low and the previous recommendation (lower the gross profit percentage to 60 % by reducing prices in hopes to increase sales and therefore revenue) could increase the net profit percentage by increasing revenue however this would not work if the demand for the products does not increase. Monitoring this ratio will allow Markies Catering LTD to make adjustment to their strategy and will determine shareholder happiness which is a very important thing to a company's health.

ROCE

This is the final calculation that the company or a potential investor might use to assume the profitability of Markies Catering LTD. It is worked out by considering the net profit (45 200(income statement)) as a percentage of the capital employed (94 000(balance sheet)) by that company.

The ROCE is calculated by dividing net profit before tax by the Capital employed (including shareholder funds), then multiplying the result by 100 and that number is the ROCE percentage.

4520094000*100=48.085%

The higher the percentage the more investors receive as a return from their initial investment within Markies Catering LTD.

This means that investors will only receive 48.085% back from their investment at the moment. However monitoring this ratio is inadequate to assuming the health of Markies Catering LTD as it does not assume future profitability, nevertheless this percentage is one that is mostly used alone and is important to determining the performance at a given time.Markies Catering LTD should raise their revenue as to make the return on the investors capital more profitable.

Performance

The final set of ratios that Markies Catering LTD might want to use are the ratios that determine the performance of the company. These ratios show the stock turnover, debtor’s collection period and asset turnover for the company.

Stock turnover ratio. There are two main ways to work out the stock turnover ratio and they show how quickly the company has sold its stock in a set amount of time. The calculation for stock turnover can be shown either as a percentage or in days. The way to show stock turnover as a percentage by dividing the cost of sales by the average stock. However to find the stock turnover, in the number of days the calculation should be multiplied by 365.

50 0005500=9.09%

The stock turnover in percentage shows how much stock has been sold and replenished during the financial year (31/03/17 to 01/04/18). It means that 9.09% of the stock is left over after the financial year and an additional 100 %. Instead of purchasing 90.91%, purchasing 100% would facilitate the growing demand for the new year.

550050000*365 = 40.15 days

It takes Markies Catering 40.15 days to turn over 9.09% of their stock and they turn 9.09% of their stock over in 11 times in 365 days. Monitoring these ratios will allow potential investors to assume or even predict future profitability and therefore must be kept low as a sign of extreme effectiveness and great health of any company.

Asset Turnover Ratio

The final ratio that can help to determine the performance of Markies Catering LTD is an asset turnover ratio. This ratio looks at the sales as a percentage of the total assets that the company owns. It is calculated by dividing the sales by the total assets.

150 000101 000=£ 1,485

This ratio shows how much profit they make pound per pound (0,485). This is considered under the norm as it is considered good practice to make at least 50% profit (however this os 48.5%). This ratio will help all stakeholders to determining the efficiency and health of markies Catering LTD.

Conclusion

The financial analysis of Markies Catering's expansion into the UK reveals a company with strong profitability and efficient asset management. However, the liquidity ratios suggest a need for improved short-term financial planning. By focusing on these areas, Markies Catering can enhance its financial health and support its growth strategy in the educational catering sector. This analysis serves as a vital tool for stakeholders to make informed decisions regarding their involvement with Markies Catering.