Financial Analysis of Mitchells & Butlers 2007 Annual Report

Title Page Date 12/12/09 The fol wiped gain(p)ing narration is designed for the purpose of a p arentage analysis. I have chosen to analyse Mitchells & Butlers PLC by firstly, looking closely at the annual report produced by the smart set over a cardinal category period and secondly, by researching their financial activities further than the annual report explains. I will compare and contrast ratios to help give the lector a go understanding of the conjunctions get aheadability, placidity, activity and l incessantlyage. step upline In my analysis of Mitchells and Butlers PLC accounts for the eld ending 2007 and 2008 I found that the aggroup has a very complex financial structure.Especially with the occurrence of a financial disaster which ended in the loss of two classs worth of earnings, which, in get resulted in the departure of the finance theatre coach and calls for further boardroom departures from the disgruntled partake inholders. Mitchells & Butlers is a juicy geared business and on that pointfore a risky investment venture. The community are easy positioned in the mart for huge-term success exactly the ratios do let down the attractiveness of investment by their much lower component of menstruum assets to current liabilities, high gearing and low net bread margins. *Brief Historical Background*Mitchells & Butlers is one of the UKs largest operators of managed establishments with a besotted portfolio of branded and unbranded pubs and restaurants with a mass market appeal. Their popular brands imply All Bar One, Harvester and Ember Inns. Founded in Smethwick Birmingham as a result of the Beerhouse Act of 1830 easing the law on domestic brewing, heat content Mitchells and William Butlers breweries merged in 1989. The troupe acquired bear upon breweries and rapidly expanded and merged with Bass in 1961, emerging as Six Continents forward separating into hotel and retail businesses and go Mitchells & Butlers once again.Im plication of proportionalitys on Mitchells & Butlers *(M&B)s Financial Position* Mitchells & Butlers Gross1 pay ratio for some(prenominal) 2008 and 2007 is 25% and 24. 9% regardively. An increase of 0. 1% is satisfactory during these trying measures for Mitchells & Butlers PLC. This indicates that operating(a) costs account for 75% of the sales revenue. These bulky costs are largely down to M&Bs value and mess strategy. The company feel they are considerably placed in the dissolute economy as they offer great value for specie. This strategy makes for a high sales turnover but not a huge mark up on the product.They are constantly striving to be as efficient as possible and have a low paid and low skilled workforce to help combat high operating costs, and gain a competitive advantage. The Group have face a turbulent year, chawing with the economic downturn in consumer spend and the inevitable decline in alcoholic beverage sales crosswise the sector as a whole. This was no t helped by the introduction of the consume ban in England and Wales, following suit from Scotland and Northern Ireland, and costs much(prenominal) as fuel and energy spiralling ever higher.Its no bewilderment then, when we look at the moolah Profit Margin2 and construe that it has decreased by 1. 5% from 10. 9% in 2007 to 9. 4% in 2008. In the center of a depression this decline is not too alarming. With a gear ratio3 of 2. 41 in 2008 and 1. 51 in 2007 there is a high risk involved when investing in this company. From analysing M & Bs debt structure it seems further leveraging of its symmetricalness opinion poll would be difficult given the harsh, current conditions in debt markets. The Groups bounty fund deficit creates further problems when trying to attract future private equity buyers.As you evoke see it has become a considerably higher geared company in 2008 and this is due to the gigantic loss faced by the company in an unexpected twirl in the Mitchells & Butler s story. When entering into a property venture with company R20, both groups were advised by the swear, as part of their loan agreement, to take out hedges against interest rates and inflation. This investment would prevent Mitchells & Butlers from losing as much money as they would have, had they not taken out the hedges in the instance that the market turned against them.The bank also advised the companies to do this, two weeks previous to the investment being made as the hedges could take some time to execute. The hedges were purchased mid July, by the end of July the credit crunch had kicked in and the bank withdrew its credit approved terms. Both companies were left with hedges in place but no investment to back them against. M & B held onto their hedges until January 2008 hoping for an upturn in the market. By January 2008 it had become apparent that this was not going to happen and M&B disposed of them.Using them would have been very risky, especially since finance director Naffah had already been let go. At the end of demise financial year, an portentous accounting loss of ? 155m commit tax was booked in respect of the hedges. The above settlement of the majority of the hedges results in a further ? 119m post tax exceptional loss which will be taken in the current year, the company said in a teaching. Looking evenly bleak is M&Bs current ratio4 of 0. 8881 in 2008 and 0. 3911 in 2007.Many believe that businesses must have a current ratio of at least 21 to survive, proving Michells & Butlers as an unorthodox company. Unbelievably it functions with a negative working capital6, this is due generally to the company keeping stock levels impeccably low and thus grownup the acid test a similar result with a industrious ratio5 of 0. 7941 in 2008 and 0. 3431 in 2007. Most of the stock is perishable, for sheath sustenance served in their restaurants. A stock turnover7 of 9. 95 old age in 2008 and 9. 75 eld in 2007 is quite acceptable in the food and beverage sector.Low stock levels keep the business as liquid as possible. This gives the company some leverage when incorporated with the debtors8 and the creditors9 turnover which whole kit and boodle out in favour of M&Bs debt structure. Debtors, pay-up at bottom an average of 14. 3days. Contrast this with the creditors who give M&B, on average amid the historic period 2007 and 2008, 66. 4 days of credit. Thats nearly five multiplication as long as M&B allow their debtors. some other consideration I wish to highlight concerning the torturely low current ratio is that for the most part M&Bs non-current assets are made up of property, plant and equipment.If the company found themselves with hard currency cling problems these assets could become non-current assets held for sale to help increase the current ratio. Return on slap-up employed10 is 20. 18% and 19. 7% in 2008 and 2007 respectively. This is evidence that M&B is still a profitable company contrary to the problems ar ising in the last two years and are still gaining market share year on year. A tether year plan has been put in place to rectify the hedging mishap. Ordinary Shareholders will not cop any dividend pay-outs for the next year three years as well as board members forfeiting their bonuses in a bid to pay off their ? 74m deficit. *How the inclusion of a Cash Flow* helps in the Analysis of the companys financial position There are several advantages to preparing a cash combine statement along with the balance sheet and profit and loss account. The cash flow statement provides data which allows the reader to better understand where cash has come from, where cash has moved to, and why. If a company has no cash it cannot pay wages or bills or suppliers. Employers wint come to work if you dont pay them. postal code companies will cut off their supplies, as could the suppliers if the bills are not paid.If this happens the company whitethorn not be able to operate. This is why cash flow st atements should be taken seriously by managers and done as ofttimes as daily if cash flow is tight. The cash flow statement explains where the cash and cash equivalents on the balance sheet come from in greater detail. It takes operating profit and adds back exceptional items, depreciation and amortization to give us a better understanding of how much cash is to hand, as well increases and decreases in debtors and creditors. In M&Bs cash flow statement we can see that in 2007 M&B acquired ? m worth of Whitbread Pub Restaurants and made additional pension contributions of? 40m. In the cash flow statement figures can be compared to a greater extent easily, they also aide preparation of forecasts. In both years a considerable amount of cash is spent on property, plant and equipment. It may be that these assets have not had time to realise their full potential. We can see that M&B has increased its cash and cash equivalents by ? 12m at the end of 2008 compared to its previous year. Diff erences between the spread of cash year on year is quite apparent.In 2008 shareholders received ? 480m worth of dividends little than in 2007 as part of M&Bs three year strategy to eliminate hedging debt amounting to around two years worth of earnings. Conclusion At first glance, the ratios I have reckon show the illusion of a company in the midst of a financial crisis. But Mitchells and Butlers are breaking all the rules and coming out with a profit, succeeding where many competitors are failing, due to the down turn in the alcoholic beverage market and consumer spending overall.The hedging losings have no doubt affected a great deal of critical decision making regarding Mitchells and Butlers finances including investment attractiveness, risk victorious and dividend payouts. The high amount of non-current assets is due to the extensive property portfolio which helps diffuse the worrying situation of such a low current and quick ratio. This company is constantly expanding and is year on year gaining market share. It adapts appropriately to its ever changing environment, as it keeps up to date with the economic climate and responds cursorily to consumers needs.The value & volume strategy is working well and the brands are becoming very well established in the UK. Debt payment is accounted for in the long term financial plan and the future looks far from dismal. I see a company trying to be as efficient as possible whilst waiting for the storm to pass. Appendix Gross Profit Ratio Gross profit x 100 Sales (turnover) 2008 477/ 1908 x100 = 25% 2007 472 / 1894 x 100 = 24. 9% Net Profit Margin Ratio Net Profit Before Interest & Tax x100 = Sales / swage 2008 179 / 1908 x 100 = 9. 4% 2007 207 / 1894 x 100 = 10. % Gearing Fixed Income forms of finance equity Fixed Income forms of Finance = Borrowings 2755 + Debentures 33 + preference shares 14 =2802 beauteousness Capital Share 34 + reserves 2008 2802 1175 = 2. 41 2007 2317 + 47 + 14 = 2378 1576 = 1. 51 m enstruum Ratio Current Assets Current Liabilities 2008 current assets 253 + non-current assets held for sale 114 = 367 367413 = 0. 8881 2007 current assets 303 + non-current assets held for sale 6 = 309 309790 = 0. 3911 Non assets held for sale within the next twelve monthsQuick Ratio / acidulated Test Current Assets stock Current Liabilities 2008 367 39 = 328. 328/ 413 = 0. 7941 309 38 = 271 271 / 790 = 0. 3431 Working Capital Days of Inventory /Stock Turnover Stock at the year end x365 Cost of goods sold 2008 39 / 1431 x 365 = 9. 95 days 2007 38 / 1422 x 365 = 9. 75 days Debtors Collection Period Debtors Turnover x365 Sales 2008 80 / 1908 x 365 = 15. 3 days 2007 69 / 1894 x365 = 13. 3 days an average of 14. 3 days Creditors Payment Period Trade Creditors x365 Cost of Sales 008 276 / 1431 x 365 = 70. 4 days 2007 243 / 1422 x 365 = 62. 4 days An average of 66. 4 days Return on Capital Employed Ratio Profit before interest & tax x 100 Capital employed 2008 179 / 1058 x 100 = 16. 9% 2007 207 / 1202 x 100 = 17. 2% Profit & Losss history is profit after tax + any interest paid = 127 + 171 Capital Employed represents Share Capital =Called up shared capital and share premium account = 34 + 14 the balance on the profit and loss account + 127 + 171 and any other reserve accounts in the balance sheets + 3 + 697 + 12 = 1058 for 2008