Managing a company’s finance and making financial decisions with effective methods and processes are the key part of business success (Attril and McLaney, 2011). Financial ratios analysis is one of the key techniques to evaluate several aspects of financial performance, to make effective business decisions (such as profit planning, financial structure, pricing, etc), to control and monitor the purposes to meet business goals and objectives, and to invest in by the investors (Elliott and Elliott, 2007).
This study has evaluated the strengths and weaknesses of Greggs plc through its financial ratios calculation and analysis. Then, the study has focused on the implications of the ratios in making decisions to invest in by investors. Finally, the study has concluded and recommended to the Greggs management how they can improve their financial performance, to investors how it would be wise to invest in Greggs plc instead of saving money in conventional financial institutions.
2.0 Company (Greggs Plc) background
Greggs, the home of fresh baking, is the leading bakery retailer in the UK. Greggs has been operating for the last 70 years. It has more than 2200 shops across the UK. It serves millions of customers every week with its around 20,000 devoted and dedicated staff. It is planning to open 100 more shops creating more than 1,000 new jobs by 2015. Greggs can be found in many places in the UK including high streets, airports, local shopping parades, airports, besides parks (retail, business, industrial, etc), bus/rail interchanges, universities, and other places where people live, spend leisure time, work and travel. The key products of Greggs are sandwiches, savories, sweets and drinks. Sandwiches are freshly made throughout the day at every shop by expert makers and not sell on other days. Greggs has highly skilled roughly 300 master backers with combined experiences in the baking field, who make the sweets and savories and deliver every in the morning to every shop. Greggs believes it is totally different in a competitive market because it uses its own product recipes, its people are passionate regarding baking and take pride in baking food, and products are prepared very carefully to make sure quality and freshness at great value prices (Greggs Annual Report, 2014).
Greggs increased its profits by 41.1% from £41.3 million in 2013 to £58.3 million in 2014, while total sales revenue increased by 5.5% to £805 million. According to Greggs chief executive “Roger Whiteside”, Greggs brought significant changes and exceptional steps in business performance in 2014. It has improved its food offers and shop experiences for customers. Greggs is planning to increase its product ranges further in 2015 to compete with EAT, Pret A Manger, Costa Coffee, Starbucks, Burger King and traditional food chain shops including McDonald’s and Subway. Overall Greggs is very confident of delivering good growth and financial progress against its strategic plan in 2015 (Greggs, 2015).
3.0 Financial Performance of Greggs Plc
Attril and McLaney (2011) advise focusing on five particular areas-profitability, efficiency, liquidity, financial gearing, and investment- for analyzing the financial performance of a business organization such as Greggs plc. Thus, these five key factors related to Greggs plc business and financial performance have been analyzed to recommend to the investors if investment in Greggs plc would be profitable or not.
According to Attril and McLaney (2011), a business’s profitability can be evaluated by a number of profitability ratios analysis including gross and net profit margin, return on equity (ROE), return on capital employed (ROCE), etc. These ratios assess business profit comparing with financial variables like sales, costs of sales, capital, equity, etc.
3.1.1 Gross profit margin
Horner (2013) says the gross profit ratio focuses on a business’s ability to generate profits. It reveals the gross profit percentage against the total sales of a business. It shows the differences between total sales revenue and total cost of sales.
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Formula: Gross Profit Margin = × 100
Calculation of Greggs’ gross profits margins:
|Data source: Greggs Annual Report 2010-2014|
Analyze of Greggs gross profits margins:
Chart: Greggs gross profit margins from 2010 to 2014
The chart discloses that Greggs’s gross profit declined from 61.85% in 2010 to 59.65% in 2013 showing poor business performance. However, it increased by 1.07% in 2014 showing a big improvement in business performance.
3.1.2 Net profit
A business net profit can be analyzed by the net profit margin ratio showing the company’s ability to generate profit against the total sales revenue (Horner, 2013).
Formula: Net Profit Margin = × 100
Calculation of Greggs net profit margins:
|Data source: Greggs Annual Reports 2010-2014|
Analyze Greggs net profit margins:
Chart: Greggs net profit margin from 2010 to 2014
The chart discloses that Greggs’s net profit declined from 7.91% in 2010 to 4.38% in 2013 showing poor business performance. However, it increased by 1.79% in 2014 showing a big improvement in business performance.
3.1.3 Return on Capital Employed (ROCE)
Measuring return on capital employed (ROCE) is the most widely used ratio to assess overall business performance. This ratio compares the business profit in percentages against total capital employed (Horner, 2013)
ROCE= × 100
Long term capital employed
Calculation of Greggs ROCE
|Data source: Greggs Annual Reports 2010-2014|
Analysis of Greggs ROCE:
Chart: Greggs’ return on capital employed (ROCE) from 2010-2014
In terms of Greggs Plc, ROCE decreased from 2010 to 2013 by12.12% showing a bad business performance but improved in 2014 to 18.58% showing better business performance.
Return on equity (ROE) is also widely used to express total profit margin in percentages against the company equity including reserves and issued capital (Horner, 2013).
Formula: Profit after tax
ROE= × 100
Calculation of Greggs ROE:
|Data source: Greggs Annual Reports|
Analysis of Greggs ROE:
Chart: Greggs’ return on equity (ROE) from 2010-2014
The chart reveals that Greggs ROE declined from 21.52% in 2010 to 10.24% in 2013 showing poor business performance. However, it increased by 4.98% in 2014 showing a big improvement in business performance.
According to Horner (2013), a business’s efficiency can be evaluated by efficiency ratios, which assess how effectively a company manages its assets and liabilities, and working capital. If the company cannot manage these efficiently, the costs will be higher and the profit margin will be reduced. The key efficiency ratios are stock or assets turnover ratio, inventory turnover ratio, trade receivable and trade payable days…………………………………………