Risk and Uncertainty - Case Study Example

Risk and Uncertainty Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Compass Company Plc This company provides financial management support services and contract catering. These activities fund the company through selling of the services and foodstuff. The initiative of the company is to communicate wellbeing and good health. Compass Company is an international business that emphasizes on quality of its services and spirit of innovation remains its core aim. The company gets funding from selling of goods and services such as foodservices, support services, business and industry services, healthcare and seniors, education, sports and leisure, offshore and defence and remote services. Food services are the main and principle services that Compass Company provides. As such, the company provides choice of nutritious, high quality and well-balanced food that meets the customer requirements (Robinson 2013). The company serves around four billion meals in a single financial period. It delivers support services and food services to persons at work and to the public. Through the support services, it is able to work place support for persons working in demanding and hostile conditions or terrain around the globe. The company designs a wide range of food service solutions to meet the different needs of their customers. It also provides food services at grab and go deli, free flow restaurants, formal dining, vending, hospital services and café outlets. These are the selling modes and selling points. The company gets funding by selling its services to generate profits (£437 million in 2013 financial period). From the profits, it is able to finance its activities. The profits are therefore very important to this company in providing services to their customers. With the help of its acclaimed food services, Compass Company provides service hospitality excellence with unrivalled reputation in leisure and sports sector. In addition, the company is a leader in provision of senior care and healthcare services in different locations in the private and public sector. Holistically, Compass Company is a multi service company. These services range from cleaning, building maintenance and operations, office and business services, transport and logistics, project management, outdoor, security and reception services. The company employs standardized processes through is operations worldwide. This helps the company to provide continuity and consistency for local, national or international contracts. Although the company faces stiff competition from its competitors such as Sodexo Company, it has enormous opportunity in the market in rapid data growth services as well as online services (Hill et al., 2011). This will enable the company to not only raise capital for diversifying in these markt opportunities, but also for increasing its revenue and therefore stable funding and financial health of the complete Compass Company. With realignment of its workforce, the company will increase its market share and improve customer’s confidence. In general, these are the activities of the company. The company derives its funding by selling the services. The market for its services improved as its revenue increased by four percent as the chief executive officer of the company disclosed in the 2013 financial statements. This means that the company operations were more efficient in 2013 than for 2012 financial period. Analysis of the Compass Company Ratios The analysis of ratios of Compass Company involves calculation of some ratios for year 2012 and year 2013 for comparison purposes. The ratios under consideration are return on capital employed, financial leverage multiplier, and current ratio, operating return on equity, the gearing ratio, interest cover ratio and the dividends cover ratio. Although the company registered an increase in revenue by four percent, the company profits decreased. The return on capital-employed ratio decreased from 9.3 to 8.8 from 2012 to 2013 (appendix 1). This indicates that the company profitability decreased, as well as decrease in efficiency in use of the capital employed to generate profits. Better utilization of the capital employed would increase the profitability of the company. The financial leverage multiplier increased from 2.9 to 3.3 from 2012 to 2013 (appendix 1). This ratio indicates that the company increased the use of debt to finance its assets. The financial leverage increased meaning that the company increased its reliance on more debt to finance its assets. There were higher levels of borrowing and subsequent payment of interest for year 2013 as compared to year 2012 (appendix 1). The current ratio increased from 0.90 to 0.96 from 2012 to 2013. It indicates the company's ability to meet its short-term obligations as they fall due. Its ability to meets its short-term obligations with the current assets increased. Nevertheless, the company would not be able to meet its short-term obligations because its short-term liabilities are more than the current assets. The operating cycle of the company is therefore not efficient enough. It is not efficient enough in turning its services in to cash. The operating return on equity increased from 30.8 to 37.3 from the same period. It indicates that the amount of net profits returned to the company investors increased. It also indicates that the company increased profits from using investor’s fund. The gearing ratio also increased from 0.78 to 1.02 (appendix 1). This indicates that the riskiness of the company increased because it increased the use of debts. The proportion of ownership between borrowed funds and shareholders’ equity increased to the favor of borrowed funds. The company gearing went up because of increasing the use of creditor’s funds. The interest cover increased from 9.1 to 9.4. This indicates that the company decreased the debt expense by paying off some debts for year 2013. The ratio also indicates that the company is generating enough cash flows to meet the debt interest expenses. Finally, the dividend cover decreased from 1.6 to 1.1 meaning that the amount of the company earnings paid to the shareholders in form of dividends decreased. Investors may look this decrease in a negative way and therefore may decrease the company stock price in the market. The decrease in dividend Payment is because of decrease in the company profitability. However, the company has enough earnings to support the payment of dividends. Comparison of Compass Company and Sodexo Company Ratios Compass Company profitability is higher than for Sodexo Company as the return on capital-employed ratio indicates (appendix 1). As such, Compass Company generates more profits than Sodexo Company. Sodexo Company uses more debt to finance assets than Compass Company does: the financial leverage ratio of Sodexo Company is bigger than for Compass Company. The two companies have relatively the same current ratio; they cannot meet their current obligations with their current assets. Sodexo Company is more efficient as it is generating more earnings from the shareholders funds than Compass Company is as the operating return on equity ratio indicates. Sodexo Company earnings are far greater than for Compass Company. Both companies have relatively the same gearing ratio although Sodexo Company gearing decreased. Sodexo Company interest cover is much less than for Compass Company although it is able to meet all the costs of its debts. Sodexo Company has higher dividend cover meaning than it paid its shareholders more pay out than Compass Company does. Compass Company Financial Risk A financial risk is the possibility that an investor will lose funds when they invest their funds in a debt stricken company. It is a situation where a company's inflows are not sufficient to meet the company obligations. The financial risk affects a company's advantage position. Compass Company faces numerous financial risks. These risks are such as foreign exchange rate risk, currency risk, interest rate risk, market risk, business risk, credit risk and systematic and unsystematic risk. The company faces market risk, as such, the company's stocks and options in the market keeps fluctuating. Compass Company has exposure to transactions because it has many contractual cash flows in both payable and receivables (Christoffersen 2012). The transaction exposure affects the value of the company funds and investments especially in foreign countries. Moreover, the company faces a risk that the investor’s value will decrease due to changes in the rate of interest. This affects the financing of the company and therefore it is a major financial risk that the company's management should focus to eliminate and reduce its effects. The company assets are also affected by systematic risk. To reduce the systematic risk the company should hedge the risks. Changes in the interest rate are a major risk to Compass Company. It reduces the amount of earnings and increases the cost of financing and therefore very costly to the company. Foreign exchange risk is another major concern for Compass Company. It may change the value of the investor’s portfolio or the company’s investments due to changes in the currency exchange rates. Converting money to the different currencies changes the value of the money because either it decreases or increases when the money is exchanged back to the original currency (Horcher 2011). As such, changing from one currency to another presents a foreign exchange risk to Compass Company. This increases or decreases the value of the company investment in foreign countries. The above risks present different concerns to the company. It is therefore very important for the management of the company to deal appropriately with each kind of risk. Importantly, the company faces additional risks due to its presence in many countries. Hedging against these risks is very important because it will not only minimise the loss but also it will stabilize the company earnings. References Christoffersen, P. F. (2012). Elements of financial risk management. Academic Press. Hill, N. T., Perry, S. E., & Andes, S. (2011). Evaluating firms in financial distress: an event history analysis. Journal of Applied Business Research (JABR), 12(3), 60-71. Horcher, K. A. (2011). Essentials of financial risk management (Vol. 32). John Wiley & Sons. Robinson, J. (2013). The accumulation of capital. Palgrave Macmillan. Appendix 1 Calculation of Ratios     Compass Company   Sodexo Company   £m   €m   2012 2013   2012 2013  ETURN ON CAPITAL EMPLOYED Operating Profit (PBIT) x100 9.274106176 8.7861525   7.693510555 6.45621827 Capital Employed (Total Assets)                           FINANCIAL LEVERAGE MULTIPLIER             Total Capital Employed   2.856700712 3.28109274   4.167481264 4.21672241 Shareholders' Funds                           CURRENT RATIO             Current Assets   0.900373241 0.96013667   0.936825397 0.86911679 Current Liabilities                           OPERATING RETURN ON EQUITY             Financial Leverage Multiplier   30.80297613 37.3439084   54.16878594 65.3125751 Return on Capital Employed                           GEARING             Non-Current Liabilities   0.775611266 1.01545651   1.114695341 0.91438127 Shareholders' Funds                           INTEREST COVER             Operating Profit/PBIT   9.106382979 9.43529412   4.25974026 3.65022422 Interest Paid/Finance Charge             DIVIDENT COVER             Profit for Year/PAIT   1.616402116 1.08168317   2.091254753 1.87044534 Dividend Paid             Read More