Ratio Analysis Of Accounts At Majestic Wine Plc Finance Essay

This assignment aims to measure a chosen high-street retail merchant based on its Annual Report. Having a pension fund to put in a chosen UK company and knowing that the British economic system is in recession, a concern study has been asked to be prepared and a ratio analysis in one out of four given retail merchants to be used. The assignment is divided in four parts. The first two chapters have to make with shaping, ciphering ( utilizing ratio expression ) and depicting the ratios. In the 3rd chapter are necessary three to five countries to be described where a farther probe is needed, every bit good as to explicate what sort of information is required. In the 4th chapter, cyberspace beginnings are used to analyse company ‘s operating public presentation and fiscal place, including jobs the company has faced, like the hazard of bankruptcy and the public presentation of the other rivals. The last chapter is a decision of the findings in chapters 2nd, 3rd, 4rth and clarifies whether the chosen company is over-valued or non and if it is possible to travel into disposal during the following 12 months.

2. Ratio Analysis

2.1 Liquidity ratio

2.1.1 Current ratio

Used particularly by loaners in order to see if the company has the appropriate liquidness to pay its liabilities. The minimal proportion of current assets and current liabilities is 1:1 and the ideal 2:1. The disadvantage of this ratio is that companies with large figure of stock lists seem to hold good liquidness but stock lists can non be transformed so easy in money in a short-run period ( Bragg, 2002 ) .

2.1.2 Quick ratio

Excludes stock lists and is better to utilize this, because decisions about company ‘s liquidness can be better drown ( Bragg, 2002 ) .

2.1.3 Cash ratio

Used to happen out if the company can get by with its current liabilities in a really short-run period. Lenders can see if the corporation can pay off every current liability. The consequence of this ratio depends on the policy the company follows, how frequently the clients should pay the measures. If the pay-off period is short, the hard currency ratio is good, but as pay-off period additions, hard currency ratio lessenings ( Bragg, 2002 ) .

2.2 Turnover ratio

2.2.1 Average aggregation period

Shows the clip needed in order to transform the demands from clients into money. The smaller this ratio is, the better ( Thanos et al. , 2002 ) .

2.2.2 Average payment period

Illustrates how frequently the company pays its measures. The bigger the ratio is, the better ( Thanos et al. , 2002 ) . It is obvious that a company should hold little mean aggregation period and large mean payment period in order to avoid bankruptcy.

2.2.3 Inventory turnover

Provides information about the mean clip of a merchandise which stays in the company until it is sold. Additionally, it measures the liquidness of stock lists, every bit good as, it helps to form better the purchases of a company ( Thanos et al. , 2002 ) .

2.3 Gearing ratio

2.3.1 Debt ratio

Illustrates the per centum of assets which had been financed from external beginnings. The demands of creditors on company ‘s assets are besides evident. The smaller this ratio is the better for the creditors. If the ratio is high, so the stockholder ‘s equity is excessively little so the creditor ‘s harm will be tremendous in instance of bankruptcy ( Thanos et al. , 2002 ) .

2.3.2 Debt to equity ratio

Lenders are concerned about this ratio because it demonstrates if their money is safe or non. A high proportion of debt on equity agencies that their loans are at great hazard. Lenders should besides see the proportion of short-run and long-run debt because as the short-run debt grows, the chance of bankruptcy additions. Investors besides worry about if the company financess its activities with debt or with company ‘s net incomes ( Bragg, 2002 ) . High debt is non ever bad, and harmonizing to Walsh ( 1996 ) , ”debt increases both net income and hazard. It is the occupation of direction to keep the proper balance between the two ” .

2.3 Efficiency ratio

2.3.1 Cost of gross revenues to gross revenues

Informs about the relationship between the cost of production and the income from the units sold. Demonstrates if a company functions ordinary, when the available resources are right used ( Thanos et al. , 2002 ) .

2.3.2 Return on equity ( ROE )

Measures the return delivered to stockholders. If a company has a good Roe agencies that is turning and traveling good so the investors buy its stocks without vacillations, accordingly is easier for company to acquire the necessary financess ( Walsh, 1996 ) .

2.3.3 Return on gross revenues

Shows how much is the border of net income. It is the true per centum of net income which the company has from its activities. A company must acquire the best net income available from each unit sold. For the aforesaid ground, corporations want this ratio to be large. ( Thanos et al. , 2002 ) .

2.3.4 Return on entire assets ( ROTA )

It is similar with ROE, though it is about impossible for a company to hold bad ROE and achieve high ROTA. This ratio explains how good the company uses its assets in order to bring forth net incomes ( Walsh, 1996 ) .

2.4 Profitability ratio

2.4.1 Net incomes per portion

By utilizing this ratio, stockholders can foretell alterations in net incomes per portion held. The trouble with this ratio is that if the direction wants to hold high net incomes per portion ratio, prevents them from puting in assets with long-run net income and takes false determinations in order to maximise the company ‘s value ( Bragg, 2002 ) .

2.4.2 Price to net incomes ( PE )

Presents the association between portion monetary value and the net incomes of a portion. The company has no consequence on this ratio. In a long-run period this ratio depends on ROE ratio. The advantage of a large Pe is that even more investors are willing to purchase the peculiar stock so it is easier to acquire the necessary financess. Another benefit is that if the company has high PE, minimizes the danger of a coup d’etat ( Walsh, 1996 ) . Furthermore, it is easy to be recognised if a stock is overvalued so that the stock can be sold and frailty versa ( Thanos et al. , 2002 ) .

2.4.3 Dividend output

Informs about how much per centum of the addition in market monetary value gets in investors pockets. Indicates the return earned by investors from dividends ( Bragg, 2002 ) .

2.4.4 Dividend payout

Indicates how much money a common shareholder gets from the company ‘s net incomes for each stock owned. If the ratio & gt ; 1, the company gives more dividends than can afford. If the ratio is excessively low, the company gives a little sum of its net incomes to dividends. If the director uses the non-distributed net incomes right, the value of company ‘s stock must increase. Otherwise, the stockholders need to look into if direction uses the money decently. In order to utilize this ratio, the accounting accumulations should be taken into consideration, because grosss can be recorded now but they can be collected afterwards. In this manner, the money in the company is less than the net incomes ( Bragg, 2002 ) .

3. Performance

3.1 Liquidity ratio analysis

The company has improved about all of its ratios in 2010. More specific, the current ratio increased 5.3 % and the proportion is about 1:1 which indicates that the company has good liquidness and the creditors should experience rather unafraid. Of class, is far from regulation of pollex 2:1 ( Bragg, 2002 ) . The speedy ratio is rather low due to high stock lists. An betterment of 11 % in 2010 has been made even if an addition has occurred in stock lists. In 2010, the company about doubled the hard currency ratio and that because the company had about 9 times more clients compared to 2009.

3.2 Turnover ratio analysis

The proportion of the mean aggregation period is besides optimistic. The company chooses to pay easy. From 2009 to 2010, Majestic ‘s mean aggregation period increased by 8.19 % and the mean payment period declined by 2.39 % . Possibly the company has changed its policy, due to economic recession, in order to accomplish better monetary values from the providers and sing non losing clients. The mean payment period is about 5 times bigger so there will be no job because of the high gross revenues. An betterment in stock list turnover by 8.58 % is assessed intending that in 2010, Majestic organized better the purchases of stock lists and sold its merchandises faster comparing to 2009 ( Thanos et al. , 2002 ) .

3.3 Gearing ratio analysis

A big proportion of investings have been done by internal funding. Even though a lessening in debt, an investing to assets shows that Majestic is a healthy corporation. Furthermore, there is a lessening by 6.9 % in debt ratio due to an investing to assets. Furthermore, the proportion of equity and debt improves by 12.5 % significance that company is more independent and gets the necessary financess on its ain. It is obvious that neither the company nor the creditors are traveling to lose their money ( Walsh, 1996 ) .

3.4 Efficiency ratio analysis

The return on entire assets was doubled because the company makes better usage of the assets and ROE jumps 200 % up. This happens thanks to the dramatic addition on incomes, something that was expected because of the great connexion between these two ratios. This besides indicates that Majestic is a turning company with great potencies. The gross revenues increased by 75 % within a twelvemonth. The lone ratio that remained stable was the cost of sales/sales ratio because it is hard for a company to alter the cost of production within a twelvemonth ( Walsh, 1996 ) . The company had a development in profitableness in comparing to 2009.

3.5 Profitability ratio analysis

Net incomes per portion increased by 31.4 % , the company ‘s net income increased by 117 % and monetary value to net incomes ratio ( PE ) increased by 25.2 % . The dividend output declined by 33.3 % because the monetary value of stock increased compared to dividends. The dividend payout ratio besides declined. This happened because even if Majestic increased net incomes per portion by 31.4 % , it boosted dividends per portion merely by 5.1 % . Gross saless enlarged 15.6 % and the clients increased from 54,000 to 472,000. Additionally, an betterment in cyberspace gross revenues by 0.9 % took topographic point. The alteration from 12 bottles to 6 bottles was really valuable and intelligent. The monetary value per bottle increased and the clients rose severally. Consumers prefer to purchase six bottles and to pass an mean ?8.79 per bottle against ?7.60 per bottle for those purchasing a twelve, which means that the entire value declined. It seems that the battle with clients is really effectual until now.

4. Areas with farther probe

There are some issues about Majestic that require farther probe in order to hold a better position of company ‘s fiscal status. First, an addition of 144.62 % in commissariats ( see balance sheet ) . On one manus this is sensible due to economic recession ; on the other manus the addition is immense. Conversely, the company had 418,000 new clients in 2010 so this is rather explicable. It must be checked how this history will germinate through clip. The addition of 71.73 % in involvements is another thing which must be investigated because the addition is besides tremendous within one twelvemonth.

It must be besides searched why Majestic decided to worsen payout ratio in 2010 although it had an addition in net income before revenue enhancements 117 % . Even though it gave 0.5p to boot in dividends per portion, compared to net incomes per portion, is still a little addition. The effectivity of ”wine class ” is to be measured in order to hold a better thought about the profitableness of this activity. Last, the ground forced Majestic to alter the policy of mean aggregation and payment period. Some ratings have been done above but more elaborate information is needed. The effectivity of this determination must be calculated excessively.

5. Published commentary

Majestic Wine plc is the largest vino retail merchants in United Kingdom ( Daily Mail, 2009 ) . The Majestic ‘s direction planned to spread out the concatenation and to transform it to a profit-making concern ( Birmingham Post, 2008 ) .

In the financial twelvemonth stoping of March 2009 the company presented ?12.7 million pre-tax net income, down 22 % on a twelvemonth ago whereas the dividend was held at 9.8p ( London Evening Standard, 2009 ) . The stock was down 4.5 % valuing the concern at about ?111million due to revenue enhancement hikings, hapless conditions and lifting conveyance costs, harmonizing to company ‘s manager ( Daily Mail, 2009 ) . On the contrary, the autumn inA the poundA againstA the euro, occurred in 2009, has made vinos from euro-zone expensive, giving domestic merchandises a compelling value on exports ensuing in an addition of 9 % in net incomes and 5 % in dividends ( London Evening Standard, 2010 ) . Furthermore, the house ‘s gross revenues were speed uping, with same-store gross growing increasing from 5.4 % in the first half to 6 % in the same twelvemonth ( Daily Mail, 2009 ) .

In present twelvemonth, concern was boosted by new shops and the minimal order was halved ( The Mirror, 2010 ) . After a period of recession and consumers ‘ response, they decided to cut down the minimal purchase from 12 bottles to six bottles. Furthermore, it was an effort to attack citizens, who live in towns, to acquire better entree to the mercantile establishments instead than driving in order to transport a twelve of bottles ( The Daily Record, 2010 ) . After Christmas period of 2010, studies showed an 11.7 % rise in gross revenues. There are four factors that influenced the vino market. First of wholly, the supermarkets are hard to vie because they keep industry under force per unit area. Second, the revenue enhancement policy burdened net incomes ‘ borders of 20 % the current twelvemonth and pressed the independent retail merchants to raise monetary values in comparing with supermarkets which could more easy to afford the cost of revenue enhancements on the merchandises ( London Evening Standard, 2009 ) . The chief menace, from supermarkets ‘ competition for vino retail merchants like Majestic, is marauding pricing and important scope extensionA ( The Daily Mail, 2008 ) .

Majestic ‘s rivals after confronting the impact of revenue enhancement hikings and supermarket competition have late experienced serious fiscal troubles “ The Local ” , “ Wine Rack ” and “ Haddows ” , some of the cardinal rivals, are vanishing from the High Street, while “ First Quench ” collapsed into disposal last month. In the same manner, “ Oddbins ” posted pre-tax loss in the twelvemonth to 2008 although its recovery program reflected the likely form of the whole industry ( London Evening Standard, 2009 ) .

6. Conclusion-Recommendations

Taking into history the above analysis and the status of local and planetary economic system the public presentation of Majestic Wine plc is highly high. The company has good liquidness and is about certain that can cover with its duties. The corporation besides reduced its debt compared to its assets and equity. The above indicates that it can do the necessary investings by itself. The efficiency of the company has grown due to high net incomes in 2010. The profitableness of Majestic is more than obvious and harmonizing to fiscal reappraisal, the net incomes of 2010 increased 117 % compared to old old ages.

The pension fund is a long-run investor and marks to hold net incomes from dividends and non from the difference between purchasing and selling monetary value of the stock. Furthermore, PE ratio in 2006 was 22.00, in 2007 was 23.00 and in 2010 was merely 13.9 ; it is a good option to purchase at current monetary values ( Thanos et al. , 2002 ) . Furthermore, it is known that in a well-functioned market the monetary value of a stock in long-run is determined from the following twelvemonth ‘s dividends, sing the chance cost of capital ( Brealey et al. , 2008 ) . Because Majestic is both, healthy and profitable company, is extremely recommended Majestic ‘s stocks to be bought.

7. Mentions

Anonymous 2009, ‘Majestic Wine gets net incomes concern as Champagne gross revenues dry up in recession ‘ , Daily Mail, 15 June, viewed 30 October 2010, & lt ; hypertext transfer protocol: //www.dailymail.co.uk/ & gt ; .

Anonymous 2008, ‘Majestic Wine recovers from budget katzenjammer ‘ , Birmingham Post, 16 June, viewed 30 October 2010, & lt ; hypertext transfer protocol: //www.birminghampost.net/ & gt ; .

Anonymous 2009, ‘Majestic down as drinkers head for the supermarkets ‘ , London Evening Standard, 15 June, viewed 30 October 2010, & lt ; hypertext transfer protocol: //www.thisislondon.co.uk/ & gt ; .

Anonymous 2009, ‘Majestic Wine enjoys gross revenues encouragement as more people choose to imbibe at place ‘ , Daily Mail, 16 November, viewed 30 October 2010, & lt ; hypertext transfer protocol: //www.dailymail.co.uk/ & gt ;

Bragg, S.M. , 2002, Business ratios and expressions: a comprehensive usher, John Wiley and boies, New Jersey.

Brealey, R.A. , Myers S.C. , & A ; Allen F. , 2008, Principles of corporate finance, 9th edition, McGraw-Hill/Irwin, New York.

English, S 2008, ‘Majestic Wine loses its fizz in slack ‘ , Daily Mail, 13 November, viewed 30 October 2010, & lt ; hypertext transfer protocol: //www.dailymail.co.uk/ & gt ; .

Goodway, N 2010, ‘Majestic Wine ‘s move to six-bottle instances pays off ‘ , London Evening Standard, 14 June, viewed 30 October 2010, & lt ; hypertext transfer protocol: //www.thisislondon.co.uk/ & gt ; .

Snowvalley 2009, Majestic Wine PLC Annual Report and Accounts 2009, available at:

& lt ; hypertext transfer protocol: //maj-cms.snowvalley.com/upload/pdfs/investors/results2009.pdf & gt ; , accessed 25 October 2010.

London Stock Exchange, 2010, MjwA Majestic Wine plcA ord 7.5p, viewed 25 October 2010, & lt ; hypertext transfer protocol: //www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html? fourWayKey=GB00B021F836GBGBXAMSM & gt ; .

Manning, A C 2010, ‘Wine house ‘s Majestic net incomes ‘ , Mirror, 15 June, viewed 30 October 2010, & lt ; hypertext transfer protocol: //www.mirror.co.uk/ & gt ; .

McLeod, K 2010, ‘Britons turn to pizza and wine in command to crush the recession ‘ , Daily Record, 7 January, viewed 30 October 2010, & lt ; hypertext transfer protocol: //www.dailyrecord.co.uk/ & gt ; .

Thanos, G. , Kiohos, & A ; P. , Papanikolaou, G. , 2002, Chrimatodotisi ton epihiriseon, Sinhroni ekdotiki, Athens ( in Greek ) .

Tobin, L 2009, ‘Majestic bubbly but it ‘s still tough for wine trade ‘ , London Evening Standard, 16 November, viewed 30 October 2010, & lt ; hypertext transfer protocol: //www.thisislondon.co.uk/ & gt ; .

Walsh, C. , 1996, Key direction ratios: how to analyze, compare, and command the figures that drive company value, Pitman Pub, Glasgow.