The finding of this paper shows that Cordon Bleu plc increased 5.82% of its revenue in 2018 in comparison with the revenue of 2017, but gross profits of this company decreased by 12.56% (£15932,000) in 2018 in comparison to the year of 2017. However, the operating cost of this business increased by 8.4% (£2354,000) from £28010,000 in 2017 to £30364,000 in 2018. Although the operating costs of Cordon Bleu plc increased by 8.40% (£2354,000) from £28010,000 in 2017 to £30364,000 in 2018, the operating profit increased by 2.90% (£2864) from £98880,000 in 2017 to £101744,000 in 2018. Overall, in terms of profitability (including gross profit, operating profit, and return on capital employed) Cordon Bleu plc performed poorly in 2018 in comparison to the year 2017. Gross profit and net margin increased in the Value market by 4.4% and 10.5% respectively in 2018.
That is why Cordon Blue plc decided to invest £120,000,000 in this Value market in 2017. In the Value segment of Cordon Blue plc, the Payback period is about 4 years and 3 months. This means Cordon Blue plc can proceed with this investment but need to be concerned regarding strategy development, its operations and functions. The actual rate of ARR is 11.2% for the project of Cordon Blue plc in its Value segment that exceeds the target of 10%. That is why Cordon Blue plc can proceed with this investment. the project of Cordon Blue plc in its Value market shows 16% of net present value, where the cost of capital is 3% and it has an investment target criterion of 12%. Thus, it can proceed with this investment. Two main sources of finance can be suggested for Cordon Blue plc to arrange £100 million to a food delivery business from 2019 that is a loan from financial institutions, and share capital/equity finance. As Cordon Blue plc is planning to invest for a long time in the food delivery business, this is the right decision to attract financial institutions and shareholders to invest in. Along with the right choice of financial sources, the board of directors of Cordon Blue plc should enough knowledge on legal requirements, requirements of shareholders and financial institutions, and should develop a good relationship with them.
Table of Contents
Part 1: Business Performance Analysis.
1.1 Statement of Profit or Loss.
1.2 Statement of Financial Position.
1.3 Statement of Cash Flows.
1.4 Segmental analysis.
2.0 Investment appraisal
2.1 Management forecast
2.2 Investment appraisal techniques.
2.3 Sources of Finance.
2.4 Non-financial factors.
Appendix A: Cordon Bleu plc Financial Ratios.
The first part of this paper analyzes the business performance of Cordon Bleu plc. For analyzing its performance, the statement of profit or loss, financial positioning, statement of cash flow, and performance of different market segments are analyzed. The second part of this paper analyzes the investment appraisal in terms of Cordon Bleu plc, and the potential sources of finance.
Part 1: Business Performance Analysis
1.1 Statement of Profit or Loss
Revenue increased in 2018
Revenue is the profit that coming from selling goods and services and other properties that connected with the business’s current activities (Kalyani, 2017). The study on the Cordon Blue plc case discloses that the revenue of this company increased by 5.82% (£25331,000) from 435381,000 in 2017 to £460712,000 in 2018. This increase in revenue can be due to effective market research, marketing and promotional strategies, offering quality products at competitive and reasonable prices by Cordon Bleu plc. However, Cordon Bleu plc should develop more effective strategies, mainly marketing and selling strategies, to attract target and potential customers.
Gross profit decreased in 2018
Gross profit refers to the profit made by a business after deducting the cost of sales (Atrill and McLaney, 2011). The statement of profit or loss for Cordon Bleu plc shows that gross profits of this company decreased by 12.56% (£15932,000) in 2018 in comparison to the year 2017.
The main cause of this decrease in gross profit is to increase the cost of sales, where the cost of sales increased by 13.38% (£41263,000) from £308491,000 in 2017 to £349753,000 in 2018.
Therefore, Cordon Bleu plc should develop more effective strategies to reduce its costs of sales. In this case, it can make its supply chain and inventory system more effective and efficient. In addition, it can found out cheaper suppliers of quality products and raw materials reduce its costs of sales.
Operating and net profit increased in 2018
The case study of Cordon Bleu plc shows that the operating cost of this business increased by 8.4% (£2354,000) from £28010,000 in 2017 to £30364,000 in 2018. The main causes of this increase are the increase in staff costs, market research costs, directors’ salaries, IT and maintenance costs, legal costs, selling and marketing costs. The staff costs increased by 33.67% (£893,000) from £2652,000 in 2017 to £3545,000 in 2018. Market research costs increased by 12.39% (£311,000) from £2510,000 in 2017 to £2821,000 in 2018. Directors’ salary increased by 7.49% (£210,000) from £2802,000 in 2017 to £3012,000 in 2018. IT costs increased by 19.62% (£124,000) from £632,000 in 2017 to £756,000 in 2018. Maintenance costs increased by 7.99% (£212,000) from £2653,000 in 2017 to £2865,000 in 2018. Selling and marketing costs increased by 7.19% (£533,000) from £7418,000 in 2017 to £7951,000 in 2018. Legal cost increased by 30.63% (£959,000) from £3131,000 in 2017 to £4090,000. Therefore, it is essential for Cordon Bleu plc to develop more effective strategies to decrease its operational costs (mainly in the legal sector, depreciation, and staffing costs) and increase operating profits.
Although the operating costs of Cordon Bleu plc increased by 8.40% (£2354,000) from £28010,000 in 2017 to £30364,000 in 2018, the operating profit increased by 2.90% (£2864) from £98880,000 in 2017 to £101744,000 in 2018. The key reason behind this increase in operating profit is £21150,000 profit arising on sales of PPE in 2018. This means, in fact, the Cordon Bleu plc could not increase its genuine operating income. Rather, operational profit decreased due to an increase in operational costs in all sectors except depreciation in 2018 in comparison to the year 2017. On the other hand, net profit increased by 6.1% (£4798,000) from £78793,000 in 2017 to £83591,000 in 2018. There are two specific reasons behind the increase in this net profit. The first one is the decrease of interest/finance costs by 2.58% (£55,000) from £2128,000 in 2018 to £2073,000 in 2018. The second one is the decrease of taxation by 10.46% (£1879,000) from £17959,000 in 2017 to £16080,000 in 2018. However, if Cordon Bleu plc faces high taxation and interest in the future, it will be difficult to gain an expected level of net profit.
1.2 Statement of Financial Position
Edmunds (2018) suggested that for expansion financial analysis a business should analyze projected sales, expansion costs, operating cost, effect on cash-flow, and return on investment. The case study of Cordon Bleu plc shows that company revenue increased but due to the increase of unexpected cost of sales and operating costs it faced challenges to gain expected profits (including gross profit and operating profit) in 2018 in comparison to the year of 2017. On the other hand, Cordon Bleu plc sold property, plants and equipment (PPE) worth £21150, 000 in 2018. This means Cordon Bleu plc is facing challenges to expand its business. In this circumstance, it decides to expand its business, it will face high expansion costs that will, in turn, affect its cash flow and return on investment. Therefore, it would be a better idea to develop effective strategies to increase profitability, efficiency, profitability, liquidity and gearing of its existing business, rather than its business expansion………………………………