Financial statements: Dividends, Liquidity Ratio and Taxation Rate

Financial statements must be thoroughly and methodically examined in order to offer the type of knowledge about past transactions and other events that is most valuable in making economic decisions. The International Financial Reporting Standards (IFRS) are a set of rules and guidelines that govern financial accounts and reporting (What are IFRS Standards, 2016). The method of measurement to be utilized in financial reporting is causing increasing debate. Several businesses are migrating away from the conventional measurement basis (historical cost) and toward the new measurement base (fair value). IFRS advocates for the use of fair value method while analyzing financial statements (What are IFRS Standards, 2016). Fair value presents the amount for which an asset could be exchanged or settle a liability between the willing parties which are knowledgeable about the transaction. The fair value has been adopted widely in countries with capital-based economies because it provides more reliable financial statements and allows to obtain more reliable information (Ioanas, 2012).

In this case study, the fair value approach would be employed to depict why it is better to invest in Greggs PLC than EAT, Timico, Sabio or other companies presented in the given profile. Greggs PLC operates within the food industry in the UK. A financial and non-financial analysis was done to ascertain why it is agreat choice for any investor. In the financial analysis, aspects such as profitability, return on capital, taxation rate, dividends and cash flow were analysed. Greggs’ financial portfolio has been impressive. The financial leverage for the company has also been in the rise. This gives Greggs PLC more financial power to invest in more market segments and efforts to increase its market niche. The average financial leverage for 2016 was 1.68 as compared to the previous years which were 1.55 and 1.50 in 2014 and 2015 respectively. The financial history is quite captivating. On the non-financial analysis, the SWOT analysis was employed. The strengths, and weaknesses of Greggs PLC were outlined. The emerging opportunities and the threats in the food industry are also depicted. A comparison of the strengths and weaknesses of Greggs PLC with their competitors is outlined to depict how it fairs on with this competition.

Analysis of the Global Economy and UK economy

The UK economy has experienced marginal growth. The food chain industry is among the most competitive sector. Globally, the food sector received great attention. From big chains like KFC, and McDonald’s. Greggs PLC is the biggest bakery-chain outfit in the United Kingdom (UK). Its product range includes sandwiches, savories and other bakery-related products. Greggs PLC has two brand names-Greggs and Bakers Oven (Greggs, 2013). The services offered by Greggs include the takeaway options while Bakers Oven offers in-store dining and bakeries for its customers. Greggs PLC relies on the large regional outlets that act as distribution points for the subsequent retail outlets. The outlets are spread all over UK. However, Greggs PLC has its focus on international expansion of the business outfit (Greggs 2013). The company has expanded its operations into mainland Europe, with the recent stores in Belgium being the notable evidence of such efforts (Sparks, 2014).

Greggs PLC has a great customer service, with its products revered for their impeccable value, freshness and their taste. This gives them a better market niche in the foods industry. Though Greggs PLC has developed a strong position in the bakery industry, it faces stiff competition from other companies (Greggs 2013). The bakery industry is still growing, thereby attracting many players in the market. The major competitors for Greggs PLC include Costa and Subway (Farley, 2014). Furthermore, with the widely distributed stores and prices, supermarkets have increasingly developed as major players in the bakery industry.

Greggs PLC offers the best information and is a key player in the bakery industry. Greggs is a big company with stable growth rate and has a competitive advantage in the market that is why it is suitable for research (Jones, 2012).

Industry Analysis

From the food and retailer segment in the UK, there are numerous companies with fierce competitors ranging from big and fast-growing lucrative companies to those which have performed dismally in the market to the point of going bankrupt. To analyse current and historical financial position and performance of Greggs, the industry analysis has to be narrowed down to bakery industry (Munteanu, 2015). There is great rivalry among the existing firms. Day by day, pressure increases from the craft bakeries and the supermarkets. For Greggs to survive and remain competitive, it has to implement new strategies that attract and retain customers. In the market analysis done between 2007 and 2012 within the bakery industry, Greggs expanded rapidly and dominated the market followed by Costa and Subway.

There is also the threat of new entrants into the market, but for Greggs, its economy of scale has made it difficult for investors to acquire a big portion of the market share. Moreover, certain threats come from the existing firms who get attracted by the high profits realized in the industry and likely to enter the bakery market. Examples of these food stores include the McDonald’s Cafe, KFC and Pizza hot.

Greggs faces a high level of threat from product substitution. This entails products that could act as substitutes for the ones produced by Greggs. Although customers may be loyal, they are always willing to try something new. Their change of choice regarding foods could be due to the impact of globalization. These customers tend to favor cheap and tasty Japanese, Mexican and Chinese food (Trading Economics 2013). Therefore, Greggs find it necessary to take necessary measures having the advantage that it is less costly to switch from one product to a preferred one in the food industry.

Customers have a high sensitivity to the high prices and the low switching costs. As a result, they tend to bargain in a bid to get the products at a discounted price. Customers always try to spend less, especially when affected by a downturn in the economy which makes them more cautious about their expenditure (Munteanu, 2015). The high amount of products purchased at the Greggs enables it have more and better power to bargain than other suppliers giving it an advantageous position in the market.

In order to compare different competitors in a particular industry, efficiency ratios are used. These ratios give an indication which company among those being compared is managed more efficiently. An improvement results in increased profitability. The analysis of these ratios and financial information is presented in the subsequent sections.

Investment Portfolio (financial and non-financial analysis)

Financial Analysis

Profitability

As at June 2016, Greggs PLC had posted reduced net income. However, this is understandable as the whole fiscal year for 2016 had not been considered. Greggs PLC made a net income of $20 million by June 2016 compared to $38 million by December 2015. This depicts the probable growth in revenue by the company considering it had hit half of the previous year’s target by June. The revenue generation has been on an upward trend considering the previous year’s amounts. Greggs PLC had generated at least 800 GBP million by September 2016.

The financial leverage for the company has also been in the rise. This gives Greggs PLC more financial power to invest in more market segments and efforts to increase its market niche. The average financial leverage for 2016 was 1.68 as compared to the previous years which were 1.55 and 1.50 in 2014 and 2015 respectively. Also, the returns on assets for Greggs PLC has been tremendous. The company’s assets keep appreciating contributing to the increased value of the company. The return on the assets in 2016 was 15.02%, which was higher compared to the previous years which was 14.69% and 10.69% in 2014 and 2015 respectively.

Return on Capital

The return on invested capital for Greggs PLC were good. The return on investment are monitored closely as they impact on the valuation of the company and affects the investors’ faith and good will in the company. The company recorded a returns on invested capital of 22.16% in 2015 compared to 15.56% in 2014. This shows the improvement of the returns generated by the invested capital in the company business operations.

Another way of measuring performance of an entity is using the Return on the Capital Employed (ROCE) and Return on Equity (ROE). ROE is the most used indicator in measuring the performance of a company by comparing the profit before interest and deduction with the capital invested to generate profit. Greggs ROCE hit bottom in 2013 and rose for two consecutive years from then indicating that its profit is affected severely by its rivals. Using return on equity (ROE) method of analysis shows that Greggs has a higher probability of retaining profit from sales they make and more efficient in utilising asset base (Irimescu, 2009).

Dividends, Liquidity Ratio and Taxation Rate

The dividends reflect the short term valuation of a company. They usually fluctuate depending on the performance of the company in the market structure. The dividends are largely affected by the EPS of the firm or company. Greggs PLC recorded an EPS (Earnings Per Share) of 0.57 in 2016, an improvement compared to the average EPS of 0.36 in 2014. The increased EPS are one of the indicators for the increased profitability of the Greggs PLC.

The tax rate has also reduced, contributing to the increased profitability of the company. Greggs PLC recorded a tax rate of 22.82% in 2015 compared to 24.50% in 2014. Also, in determining the profitability and valuation of the company, the liquidity ratios are considered. The current ratio depicts the company’s ability to fulfill its short term and long term financial obligations (Damodaran, 2012). Greggs PLC has a current ratio of 0.81, thereby depicting its strong ability to service its short and long term financial needs. This contributed to the rising EPS for the company. Furthermore, Greggs PLC has a cash ratio of 0.40 in 2016. This depicts its ability to pay off the current liabilities in the company by cash and cash equivalents (Stickney, 2007). It contributes to the current strong financial position exhibited by Greggs PLC, but may not forecast its future financial strength or profitability whatsoever.

Cash Flow and Capital Expenditures

Greggs PLC had a decreased capital expenditure in 2016 compared to the previous years. Greggs PLC spent $43 million in capital expenditures in 2016 compared to $68 million in 2014. This has impacted on the profitability of the company in the current financial year as compared to the previous years. Furthermore, Greggs PLC recorded a positive free cash flow of $16.93 million in 2016. The positive cash flow has contributed to the increased financial leverage recorded by the company. The board reviewed the positive cash flow as a sign for increased faith and goodwill from the investors. This has contributed to the increased market cap for the company, currently capped as 7.35 as a percentage of sales, compared to the previous year where Greggs PLC was capped at 7.01 as a percentage of sales recorded in that year.

2. Non-Financial Analysis

SWOT Analysis

A SWOT analysis was taken from popular sources on the company and its products. They had similar aspects. The SWOT analysis is presented below.

Strengths

Greggs PLC has a wide connection. Greggs is particularly a drug and food retailer which includes supermarkets, a series of chain stores and also drugstores. This network enables it to reach more customers in the market. Distribution would be high which affects the revenue turnover of the company.

Weaknesses

Greggs PLC has invested less in ICT. As people are connected to the digital world, they would like to know the product ranges offered by the company, or even make the orders online through the use of mobile phones. Greggs PLC is yet to integrate the online ordering into its current system.

Opportunities

The food market is an ever expanding one. Even when the economy is bad, the demand for food is fairly constant, though the supply may vary. This relative stability in demand provides an opportunity for Greggs PLC to utilize for economic purposes. By improving their customer experience and network, Greggs PLC can generate more revenue with the current economy.

Threats

Product substitution is a great threat to Greggs PLC. Most of the products it offers are available in other stores. They have to try harder to attract more customers to the food products offered in their chains.

Comparison of strengths and weaknesses to key competitors

Greggs don’t have debts to pay. Thus, the funds channeled to investing activities are all from shareholder’s funds and retained profit instead of borrowed funds (Greggs, 2012). This reflects the stability of the company in operations and shows that it is capable of sufficing investments to allow future growth. Greggs is particularly a drug and food retailer which includes supermarkets, a series of chain stores and also drugstores. This large network offers great advantage in terms of distribution of their products, unlike competitors like PizzaHot who have lesser connection to the market. With the weak economy, the food industry annual growth rate is expected to go down, but for the food industry, the impact of the downturn will be relatively smaller since the demand for food is inelastic.

Other key external factors impacting the Company

Greggs competes with its rivals by differentiation. This is achieved by ensuring the food is fresh and is of high quality offered at reduced prices. It operates an integrated supply chain from production stage to delivery stage at the customer’s convenient center (Kennedy 2013). Therefore, a customer who is highly sensitive to prices and prefers conveniently accessible stores will find Greggs the most preferable choice. Greggs is continuously developing their product ranges such that besides the traditional bakeries, it also provides food with low calories giving the customers more choices to meet the increasing need for a healthy diet. To gain more from differentiation, Greggs has put in place strategies which include the brand image, focus on product features. This will lead to brand loyalty for Greggs’ products among customers (Ristea, 2009). Greggs focuses on creating new exciting recipes with an improvement of the old flavors thus giving the customers the variety option, a feature not found in the other brands.

Conclusion

Greggs PLC is one of the profitable chains in the UK. It utilizes technology to keep abreast with emerging competition in the food market. Greggs has adopted the differentiation strategy to mitigate the fierce competition in the market. Thus, Greggs has a competitive advantage in the market having used the differentiation strategy to make itself unique in the market. It has a sound brand and excellent working capital giving it a strong cash flow generation when competing. It is noted that the price of shares in Greggs is underpriced therefore with time it will increase to reflect its true intended value. In conclusion, Greggs shows an upward growth perspective with stable growth, low risk and progressive dividend payout thus recommended for investors to buy or hold their shares. It would be advisable to invest in Greggs PLC with high returns envisioned in the future.

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