Manchester Money Universal Plc Investing in the Shares of Coppice Plc - Case Study Example

Executive Summary Coppice Plc works in the hotel industry and looks to provide cheap hotels to the travelers. The company has looked towards its business based on the same premises and has spread its network over UK. Recently, Manchester Money Universal Plc is looking towards investing in the company by acquiring 20% shares of the company. The report thereby presents the financial analysis of the same The report highlights that Manchester Money Universal Plc should not look towards investing in the shares of Coppice Plc despite increase in the bottom line. Further, Coppice Plc has also been able to ensure that it is able to ensure efficiency in the use of assets. The only concern for Coppice Plc is the poor liquidity condition and the inability of the business to ensure proper dividend for the company. The company was also not ethical in disclosing the profits while declaring dividend creates doubt on the company thereby making it important that Manchester Money Universal Plc doesn’t look towards investing in the company. Table of Contents Introduction 3 Financial Analysis 3 Profitability Ratios 3 Liquidity Ratios 6 Efficiency Ratios 7 Financial Stability Ratios 8 Recommendations 12 References 13 Appendix 14 Introduction Coppice Plc which is into hotel business is looking towards tapping the low end consumers by having hotels which are provided at low cost. This has allowed Coppice Plc to spread its hotel chain entire across UK and looks towards using the tag line “No Frills Nice Bills”. The report thereby looks towards presenting information on the financial information of Coppice Plc so that Manchester Money Universal Plc can look towards acquiring 20% shares of the company. The paper also looks towards examining whether investing into the shares of Coppice Plc will be beneficial for Manchester Money Universal Plc. Financial Analysis Organizations look towards analyzing the financial information of companies so that they are able to understand the manner in which the company has performed over the years and also provides useful insights into the future actions of the company. Evaluating the financial information helps all stakeholders and helps to identify the steps that will benefit them (Moyer, Mcguigan & Kretlow, 2003). Below is the financial analysis of Coppice Plc Profitability Ratios This ratio has prime importance for every person associated with the company as it helps them to identify whether the business is able to generate adequate profits out of its normal business operations. This helps investors and others to understand the future prospects of the company (Ryan, 1996). The ratios are as Return on Total Assets: The graph looks as The return on total assets has increased for Coppice Plc in 2011 because 1. The profits have grown by 2.44% 2. The total assets has decreased in 2011 by 6.56% 3. The efficiency in the use of assets to multiply the profits have increased for Coppice Plc highlighting better use of assets Net Profit Margin: The graph for the same is as The net profit margin has increased for Coppice Plc in 2011 because 1. Net Profit has increased by the tune of 2.44% in 2011 2. Sales has come down by 3.28% in 2011 3. Coppice Plc has been able to reduce the indirect cost as decrease in sales has resulted in increased profits suggesting cost cutting methods have been used Gross Profit Margin: The graph for the same is as The net profit margin has decreased for Coppice Plc in 2011 because 1. The gross profit i.e. direct profit after meeting the direct expenses has reduced by 4.17% 2. The sales has decreased by 3.28% but the decrease in gross profit is higher compared to the decrease in sales 3. Increase in direct expenses which has resulted in gross profit fall more in comparison to the decrease in sales Liquidity Ratios This ratio is of importance to investors as it helps to understand the safety of the funds and also the ability of the business to be able to meet its short term liabilities out of the short term assets (Deloof, 2003). The ratios for Coppice Plc is as follows Current Ratio: The graph for the same is as The current ratio has improved for Coppice Plc in 2011 because (Saleem & Rehman, 2011) 1. Current assets have grown by 9.52% in 2011 over the previous year 2. Current liabilities have decreased by 2.48% in 2011 3. Both the increase in current assets and decrease in current liabilities has resulted in the current assets to improve Quick Ratio: The graph is as The quick ratio has improved for Coppice Plc in 2011 because 1. Quick assets i.e. current assets without inventories have grown by 10% in 2011 2. Current liabilities have decreased by 2.48% in 2011 3. Both the increase in current assets and decrease in current liabilities has resulted in the current assets to improve Efficiency Ratios This ratio determines the efficiency of the management in using the assets. This helps to thereby understand whether the business has more assets than required or not thereby helping to identify the efficiency in using the assets. The ratios are as follows Stock Turnover Ratio: The graph for the same is as The stock turnover ratio has decreased for Coppice Plc in 2011 because 1. Cost of sales has decreased by 2% in 2011 2. Inventories are constant and hasn’t changed 3. This has resulted in the decrease to be substantial thereby increasing the risk of inventories becoming obsolete Financial Stability Ratios This ratio helps investor to identify the risk associated with investing in the shares of the company and provides direction to the investor whether investing in the shares of the company is relevant or not (Peel & Wilson, 1996). Following is the ratios of Coppice Plc Earnings per Share: The graph for the same is as The earnings per share has decreased for Coppice Plc in 2011 because The earnings have seen a dip for Coppice Plc and has decreased by 2.44% The shares are constant Dip in profits with shares being constant has created doubt on the earnign ability of the business for its stakeholders Price Earning Ratio: The graph for the same is as The Price earning ratio has improved for Coppice Plc in 2011 because The share prices have decreased drastically by 18.92% making investors stay away from the company The Earnings per share has decreased by 21.43% A mix of dip in the share prices and earnings has resulted in the ratio to rise but will make investors stay away from the company as the investors are not getting adequate returns Dividend per Share: The graph for the same is as The dividend per share has improved for Coppice Plc in 2011 because 1. There has been an increase in dividend by 28.57% 2. The company has given more dividends despite lower profits just to create a fales impression about the company thereby highlighting that the company hasn’t looked into the ethical aspect of business Dividend Cover: The graph for the same is as The dividend cover ratio has decreased for Coppice Plc in 2011 because 1. The earnings per share has decreased by 21.43% 2. There has been an increase in dividend by 28.57% 3. The dip in earning is less significant compared to the rise in dividnd which has resulted in presenting a bleak picture of the organization Income Gearing Ratio: The graph for the same is as The income gearing ratio has decreased for Coppice Plc in 2011 because 1. Interest payable has decreased by 14.29% 2. Income has increased by 2.44% 3. The dip has been substantail as the dip in interest is substantial in comparison to the income thereby making it risky for the business to pay its interest Recommendations The financial performance of Coppice Plc presents a dicey situation before Manchester Money Universal Plc. Coppice Plc has grown when profits is concerned and has also ensured that they are able to use their assets effectively. The analysis also suggests growing investor confidence in the company but a look at the liquidity and dividend cover highlights a different picture. This ratio shows that the company has poor liquidity and has also given more dividend then their earnings to create a false impression about the company. Overall, the fundamentals of Coppice Plc looks sound but the inability of Coppice Plc to ensure proper ethical conduct and the ability to ensure high returns for the shareholders should make Manchester Money Universal Plc stay away from investing in the company. References Deloof, M. 2003. Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3&4), 573-587. Moyer, R. C., Mcguigan, J. R., & Kretlow, W. J. 2003. Contemporary Financial Management (Ninth ed.). United States of America: Thomson. Peel, M. L. & Wilson, N. 1996. Working capital and financial management practises in small firm sector. International Small and Business Journal, 14(2), 52-68. Ryan, H. 1996. The Use of Financial Ratios as Measures of Risk in the Determination of the Bid-Ask Spread. Journal of Financial & Strategic Decisions, 9 (2), 33-41 Saleem, Q. & Rehman, R. 2011. Impacts of Liquidity Ratios on Profitability. Interdisciplinary Journal of Research in Business, 1 (7), 95-98 Appendix Ratio of Copplic Plc RATIOS FORMULAS 2011 2010 2009 ROTA PBIT / (TOTAL ASSETS-INTANGIBLE)* 100 126 / (1111 - 100) * 100 = 12.46% 123 / (1182-100) * 100 = 11.37% 98 / (1022-100) * 100 = 10.63% NET PROFIT MARGIN PBIT / SALES * 100 126 / 354 * 100 = 35.59% 123/366 * 100 = 33.61% 98 / 320 * 100 = 30.63% GROSS PROFIT MARGIN GROSS PROFIT / SALES * 100 207 / 354 * 100 = 58.48% 216 / 366 * 100 = 59.02% 192 / 320 * 100 = 60% CURRENT RATIO CURRENT ASSETS / CURRENT LIABILITIES 46 / 157 = 0.29 times 42 / 161 = 0.26 times 42 / 122 = 0.34 times QUICK RATIO CURRENT ASSETS - STOCK / CURRENT LIABILITIES 46 - 2 / 157 = 0.28 times 42 - 2/ 161 = 0.25 times 42 - 2 / 122 = 0.33 times STOCK TURNOVER COST OF SALES / STOCK 147 / 2 = 73.5 150 / 2 = 75 128 / 2 = 64 INCOME GEARING INTEREST PAYABLE / PBIT * 100 24 /126 * 100 = 19.05 % 28 / 123 * 100 = 22.76 % 24 / 98 * 100 = 24.49 % EARNING PER SHARE BASIC BASIC 33p 42 P 34.5 P PRICE EARNING RATIO MP PER SHARE / EPS 600 / 33 = 18.18 times 740 / 42 = 17.62 times 670 / 34.5 = 19.42 times DIVIDENDS PER SHARE DIVIDENDS / NO OF SHARES 18 p 14 P 13 P DIVIDEND COVER EPS / DPS 33 / 18 = 1.83 times 42 / 14 = 3 times 34.5 / 13 = 2.65 times Read More