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Financial Analysis on Greggs Essay

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Gearing

According to Atrill and McLaney (2008), gearing can work on both directions, which means a higher gearing can bring more profit while a company with higher gearing is considered more risky because it has to pay the debts no matter how well/bad the company operates. The gearing of Greggs was 14.9% in 2010 and decreased 1.9% to 13.0% in 2011. Compared with Whitbread whose gearing was49.4%in 2010 and 50.4% in 2011, Greggs shows generally a better stability.

Profitability

ROCE shows how much a company can gain from its assets and liabilities. It is a primary measure of profitability and a vital assessment of effectiveness (Atrill and McLaney, 2008). The ROCE of Greggs reduced 2.1% from 25.3% in 2010 to 23.2% in 2011 while the one of Whitbread increased from 12.6% to 13.3%. Even though Greggs had experienced a decrease, it performances better with the return on assets than Whitbread in general. What ROSF different from ROCE is that it considers the net profit after taxation and preference dividend, representing the profit available to owners (Atrill and McLaney, 2008). Same as ROCE, a higher ROSF reveals a better performance. With the ROSF of 21.5% in 2010 and 19.7% in 2011, Greggs shows a more satisfied return than Whitbread (15.8% in 2010 and 17.5% in 2011).

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Liquidity

Current ratio and acid test ratio measures a company’s ability to fulfill its short-term debt obligation. The current ratios of Greggs in 2010 and 2011 are 0.75 times and 0.69 times respectively. Meanwhile, the ones of the competitor are 0.42 times and 0.40 times. Both companies experienced a slight decrease in this ratio and those ratios are below the “ideal” current ratio of 2 times. Nevertheless, the two companies can deal with their short-term debt smoothly because the current ratio for retail industry is lower due to its industry peculiarity of selling in cash and buying with credit. The nuance between current ratio and acid test ratio is that the latter includes no inventory. Greggs, with higher acid test ratio (0.59 times in 2010 and 0.51 times in 2011) and current ratio, demonstrates a stronger ability of dealing with its short-term debts than Whitbread whose acid ratio is 0.37 times in 2010 and 0.34 times.

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