Financial Analysis And Management of Metro Group And Booker Group

17% and there has been rise of the operating profit of the organization by 23%. The customer satisfaction in the organization continued to improve. The financial performance of the organization has improved as a result of the improvement of the customer scores. The company is planning to expand the business. The internet sales of the company have risen over the previous years. The earnings per share of the investors in the organization have increased from the previous year by 4.51 pence. It has become 6.06 pence. The performance of the company has been strong in the financial years. The Board took the decision to pay dividend to the share holders of 2.75 pence per share. The food market of UK has remained competitive. The market will remain challenging but the company has been able to survive in the competitive market. Booker Group has been constantly reinventing them by offering better choice of products to the customers. They have undergone through synergy plans and efficiency programs for the innovation of their products. The business efficiency has been improved by tight cash management. They have doubled the net cash in the company. Booker group has improved the system, processes and the buying across the entire Group. Booker group operates in a competitive market. They monitor the prices with the price of the competitors and the price index for the Group has remained competitive. The customers are satisfied with the organization. In UK, Booker has worked to offer best price and service to the customers. They managed the supply chain efficiently.

Impact of economic condition on Metro group and Booker group (BOOKER GROUP PLC, 2013).

Metro group

The global economic momentum has slightly increased during the previous financial year. The two years of economic crisis had severe effect on the financial performance of the organization. The recovery from the financial crisis has remained modest. The company has faced several setbacks during the financial year. The sustainable economic growth of the Metro group was affected by the problems that were related to the government debt. Metro group was posed with severe Government debt during the financial year. The global economic output for the Metro group has been 0.1% above the previous year. The global economic output for 2014 is 2.4% while it was 2.3% for the previous year. The developed countries United States and UK had started to recover from the global economic crisis but the recovery was quite slow for the emerging countries. The slower growth of the developing countries was also as a result of the slow growth of the countries. The sales of Metro group were also affected by the political crisis in Ukraine and Russia. The political crisis and the increase in the turmoil have negative impact on the performance of the organization. The sluggish economic performance of Russia has negative impact on the sales of Metro group. There was decline in the investor performance and the confidence of the investors declined. There was weakening of the currencies of the emerging economies as there was withdrawal of funds by the investors. This resulted in the increase in the current account deficit to high levels. There was more than 10% decline in the currencies of Russia, India and Turkey. The fall in currencies led to the rise of the price of the consumer products. This resulted in the drop of the sales of Metro group in these countries.

Booker Group

Booker group has faced the risk and the uncertainty of the economic condition. The economic crisis has posed the group with severe threats. The economy of UK is expected to be difficult in the year ahead. The customers can acquire the best value from the products. The sale of the wide range of products by the Booker group remains affected as a result of the economic turmoil in the country. In order to provide the customers with best valued products, Booker has to formulate policies that will help them survive in the competitive market. However there is a separate risk management board of the company that is involved in formulating strategies that will mitigate the risk factors faced by the organization. The company operates in an industry that is governed by strict environmental regulations. The safety and the protection of the share holders and the customers are extremely important along with meeting the need of the customers. The company has to abide by the rules of the London stock exchange and the competition law. The emerging countries are adversely affected by the economic turmoil. In order to mitigate the adverse impact of the economic crisis, Booker Group has been formulating strategies that will safeguard the position of the company (Booker Group plc Interim Results for the 24 weeks ended 13 September 2013, 2013).

2: Comparison of financial statement and Risk Exposure

Analysis of the financial performance

The financial performance of Metro Group and Booker group has been compared using ratio analysis. The ratio that has been used to analyze the financial performance of the two companies includes the profitability ratios, investor’s ratios, liquidity ratios and the efficiency ratios.

1. Profitability ratios

The efficiency of the organization to turn the activity of the business into profits is determined by the profitability ratios. The margin of profit determines the ability of the organization to convert the revenue to profits.

Profitability Ratios (2014)	Metro group	Booker group
Return on capital employed	12%	18.95%
Return on equity	4%	17.63%
Net profit percentage	0%	2.25%
Gross profit percentage	21%	4.40%
Operating profit percentage	2%	3%

Return on capital employed

The return on capital employed indicates the return of the organization on the capital employed by the organization. The higher the return on capital employed it shows that the company is in a better position.

The return on capital employed for Metro group for the year 2014 is 12%. On the other hand the return on capital employed for Booker group is 18.95%. This shows that the return on capital employed for the Booker group is higher than the Metro group. The financial position of Booker group is better than Metro group. Metro group saw the closure of three stores in Denmark in the year 2013/14. On the other hand the Booker group saw an increase in the operating profit by 23% in the year 2014 (CENGÄ°Z, 2014).

Return on equity

The return on equity measures the ability of the company to make for the money that is invested by the investors.

The return on equity for the Metro group is 4% while the return on equity for Booker group is 17.63%. The financial position of Metro group is not as strong as the financial performance of the Booker group (Saeidi, 2012). The financial position of Metro group has been affected by the economic crisis of the two years. Thus the growth of Metro group in the subsequent years has been modest. The financial growth of Metro is also affected by the huge debt of the government. On the other hand the financial position of Booker group has shown improvements in the year 2014 with 23% increase in the operating profits (Chaudhuri, n.d.).

Net profit percentage

The net profit margin for Metro group is negligible while the net profit margin for the Booker group is 2.25%. There has been significant decline in the sales of the metro group for the financial year 2014. The decline of the sales is mostly a result of the influence of recession on some stores. There has been closure of 3 stores in Denmark. The net profit for Metro group has declined considerably.

On the other hand Booker group has show significant increase in the performance. There is significant increase in the revenue of the group for the financial year of 2014 than 2013. The profit before tax has also improved. The new strategies of the company have been the driving force behind the increase in sales (Dharmapala and Edirisuriya, 2011).

Gross profit percentage

The gross profit margin for Metro group is 21%. On the other hand the gross profit margin for the Booker group is 4.40%. There is has been significant decline in the sales of the company for the year 2014 than the year 2013 for Metro group. On the other hand, Booker group saw the increase in the sales for the year 2014.

Operating profit percentage

The operating profit margin for the Metro group is 2% while the operating profit margin for the Booker group for the year is 3%. The operating income of the Metro group has also declined for the year 2014. On the other hand it is seen that there is significant increase in the operating profit for Booker group. Thus it is seen that Booker group is in a profitable position that the Metro group (Enever, Isaac and Daley, 2014).

2. Liquidity ratios

The liquidity ratios determine the ability of the organization to repay its short term obligations. The current ratio and the quick ratio are the two liquidity ratio. The ideal current ratio and the quick ratio are considered to be 1:1.

Liquidity ratios (2014)	Metro group	Booker group
Current ratio	0.77:1	0.98:1
Quick ratio	0.4:1	0.43:1

Current ratio

The current ratio for the Metro group is 0.77:1. The current ratio for the Booker group is 0.98:1. The current assets of the Metro group have increased for the year 2014 than the previous year with the significant increase in the current liabilities. The company hast to manage the short term obligations in an efficient manner in future.

On the other hand the current ratio for the Booker group shows a significant increase in the current liabilities than the previous year. However the company has been able to manage the ratio to 1:1 proportion (Epstein and Lee, 2011).

Quick ratio

The quick ratio shows the ability of the organization to manage the short term obligations without using the inventory. The quick ratio for Metro group is 0.4:1 and the ratio for the Booker group is 0.43:1. Both the companies are not being able to manage the short term obligations efficiently. The inventory for the Metro group has increased subsequently than the previous year. On the other hand the inventory for the Booker group has also increased in 2014 than 2013. The increase in inventory each year shows that the company is not being able to manage the inventory efficiently. The over piling of inventory has also resulted in the increase in the cost for both the organizations (Garrett and James III, 2013).

3. Efficiency ratios

The efficiency ratios show the ability of the company to use the assets and the liabilities. The turnover of the receivables and the payment of the liabilities are determined by the efficiency ratios.

Efficiency ratios (2014)	Metro group	Booker group
Inventory turnover ratio ( days )	8.37	13.66
Debtor’s payment period (days)	3.24	8.85

Inventory turnover ratio

The inventory turnover ratio measures the ability of the organization to manage the inventory in an efficient manner. The first component of the inventory turnover ratio is the purchase of stock. The company should sell and utilize the inventory that has been brought. The storage costs and holding costs of the inventory will increase (Pfeiffer, n.d.).

A low inventory turnover period is expected for the company. This will show that the company is managing the inventory in an efficient manner. The inventory turnover period for Metro group is 8.37 for the year 2014 and that of Booker group is 13.66 days. The amount that has been invested by Metro group in the inventory is more than the previous year. In case of Booker group the inventory turnover ratio is 13.66 days. Booker group has not been able to manage the inventory in an efficient manner. The inventory has risen than the previous years (Gazely and Lambert, 2006).

Debtor’s payment period

The debtor’s payment period measures the ability of the organization to turn the receivables from the debtor’s into cash during the period. The ratio indicates how many times the business is able to collect the accounts receivable during the year. The debtor’s turnover period must be less. This will indicate that the company is able to collect the amount regularly from the debtors. The debtor’s payment period for the metro group for the year 2014 is 3.24 while the debtor’s payment period for Booker group for the year 2014 is 8.85. It shows that Metro group is being able to manage the receivables in an efficient manner (Glambosky, 2009).

4. Investor’s ratios

The investor’s ratio serves as a useful tool for the investors to assess the performance of the company. The return of the investment for the investor’s can be judged by the investor’s ratios. The investor’s ratios serve as barometers for the financial health of the organization. The investor can make the comparison with the previous years to determine the company’s stock that will be a better investment (Peterson Drake and Fabozzi, 2012).

Investor’s ratios	Metro group	Booker group
Interest coverage ratio	2.77	72.82
Price-Earnings ratio	75.95	28.46

Interest coverage ratio

The interest coverage ratio indicates the ability of the organization to pay its interest expenses. The company uses the profit to pay the interest expenses. The interest coverage ratio for Metro group is 2.77 while the ratio for Booker group is 72.82. The interest expenses for Metro group have declined but there has been considerable decline in the revenue of the organization for the year 2014 than the previous year (Peng, 2009).

On the other hand it is seen that the interest expense of Booker group has declined significantly. The company is in the better position than the Metro group in the management of the expenses by using the profit (Griffith, 2003).

Price-Earnings ratio

The prices earnings ratio indicates the earning of the company on the investment in each share. The higher the earning, the investment decision of the company will be fruitful.

 Price earnings ratio for Metro group for the year 2014 is 77.95 while the price earnings ratio for the Booker group for the year 2014 is 28.46. The earnings per share of the Booker group have increased in the year 2014 than the previous year. The earnings per share for the Metro group have been negligible (Oehmke, 2000).

Risk exposure of Metro group and Booker group

Metro group and Booker group are exposed to various compliance risks. The risks are regularly monitored. The group is also exposed to the exchange rate risks. The fluctuations of euro will affect the revenue of the organization. The company has been exposed to the recessionary pressure (Nugus, 2006). The increasing competition as a result of the growth of the supermarket has been a major reason for decline of the revenue. There has been closure of three stores in Denmark.

On the other hand the various risks affecting Booker group is the increase in the price competition in the grocery market of UK. In order to compete with the prices set by the other competitors Booker group has to reduce their margin of profitability. The change in the legislation of the Government can have adverse impact on the sales and the operating profit of the organization. The reputation of the group can be affected if it serves poor quality of product to the customers. This will have adverse impact on the sales and the operating profit of the organization. The success of the organization will depend on the engagement of the employees and the retention. The contribution of the employees plays a major role in the success or failure of the organization. The risk can be avoided by training the employees on the various developmental measures proposed by the organization (Hansen and Mowen, 2000).

3: Capital investment Decision making

1. Net present value

Net present value is one of the most efficient ways for the calculation of the investment appraisal techniques. The net present value is the calculation involving the net flow of cash at the present time at a discount rate at the same time. The net present value has inverse relationship with the discount rate. The net present value will be reduced with high discount rate (Nissim and Penman, n.d.).

Strength

The major benefit of net present value is that it considers time value of money.

A high rate of discount rate will reduce the net present value and vice versa.

The project will be accepted when the net present value is positive.

Weakness

The calculation of the net present value is a time consuming process.

The process becomes difficult to understand.

The calculation of net present value is often based on the arbitrary calculation of the rate of interest.

2. Accounting Rate of Return

The accounting rate of return technique calculates and compares the profit that can be earned from a project to the amount of capital that has been invested initially. The company will generally prefer projects that give higher return (McSweeney, 2006). The accounting rate of return is a non discounted process of capital investment. The process does not take into consideration the time value of money (Jagels, Coltman and Coltman, 2004).

Strength

The accounting rate of return is based on the accounting profit and the profitability of the investment decision is calculated on the basis of the accounting profit.

Accounting rate of return is a simple process and it is easy process to understand.

Weakness

Accounting rate of return does not consider the time value of money.

The cash flow from the investment is ignored by the accounting rate of return.

The terminal value of the project is not considered by the accounting rate of return method.

3. Internal Rate of Return

The internal rate of return is defined as the technique where the net present value is considered as zero. It is the discount rate at which the net present value is zero. The efficiency of the capital investment is determined by the internal rate of return method.  The project is rejected when the cost of capital invested in the project is more than the internal rate of return. The time value of money is considered by the internal rate of return (Langdon, 2002).

Strength

Internal rate of return considers the time value of money. The calculation of the internal rate of return is accurate.

It is easy to interpret the method as it is simple method.

The calculation of the hurdle rate is not required in case of the calculation of the internal rate of return. The risk of wrong assumption of the hurdle rate can be mitigated as the calculation of the IRR is not dependent on the hurdle rate.

Weakness

While analyzing a project with IRR it is assumed that the positive future cash flows are reinvested at IRR. A project with low IRR will assume that the reinvestment at a low rate of return. On the other hand the project with high IRR will make assumption that the reinvestment rate at a very high rate of return. But this is an impractical situation.

IRR will not be able to make selection between projects that are mutually exclusive. There might be projects that are acceptable and both of them are worth investment. Thus the IRR method will not be feasible method in case of mutually exclusive projects.

4. Profitability index

The payback period calculates the time that would be taken to get back the initial investment.  It is one of the most simple capital appraisal techniques (Mclean, 2009). The projects that are with shorter payback period are considered than the projects having longer payback periods (Libby, Libby and Short, 2011).

Strength

The profitability index considers the time value of money.

The profitability index analyses the cash flows over the entire life.

The exact rate of return from the project is considered by the profitability index.

Weakness

The calculation of the discount rate and the interest rate is difficult.

The calculation of the profitability index of the two projects with the same economic life becomes difficult.

5. Discounted Payback Period

The discounted payback period is the total time that is taken to cover the total cost of the project. It is calculated by adding the positive discounted cash flow that is coming from the profit of the project. While calculating the discounted payback period the discount rate has to be calculated to discount the future flow of cash over the specific period of time (Marsh, 2012).

Strength

The discounted payback period takes into consideration the time value of money.

The riskiness of the cash flows of the project is considered by the discounted cash flow.

Weakness

The estimation of the cost of capital is required to calculate the payback period.

The flow of cash beyond the discounted payback period is ignored by this method.

Recommendation

Carrefour is planning investment in one of the largest retail stores. The company that has been chosen by the organization is either Metro group or the Booker group. The investment appraisal technique that can be chosen by the organization as its investment appraisal technique is the net present value method. The net cash flow from the investment can be determined by the organization from this method. The method considers the time value of money thus the investment decision will be accurate.

Conclusion

The acquisition decision of Carrefour has been discussed in the paper. The financial performance of Metro group and Booker group has been analyzed. The risk exposures of the two groups have been discussed. It is seen that the Booker group is in a better position than the Metro group. Thus Carrefour should consider acquiring Booker Group. The venture will be profitable for the organization.

References

ABEDIN, S. and DAVIES, G. (2007). Pre-Merger Identification: Ties with the Past Bind us to the Future?. Advances in Mergers and Acquisitions, 6, pp.17-35.

Adler, R. (2000). Strategic investment decision appraisal techniques: The old and the new. Business Horizons, 43(6), pp.15-22.

Annual report. (2015). 1st ed. [ebook] pp.1-100. Available at: https://reports.metrogroup.de/2013-2014/annual-report/business/combined-management-report/economic-parameters.html [Accessed 1 Jul. 2015].

Booker Group plc Interim Results for the 24 weeks ended 13 September 2013. (2013). 1st ed. [ebook] pp.1-20. Available at: https://www.bookergroup.com/~/media/Files/B/Booker-Group/pdf/investor-centre/reposts-presentations/rp2013/int-results-24-weeks-ending-13-september-2013.pdf [Accessed 1 Jul. 2015].

BOOKER GROUP PLC. (2013). 1st ed. [ebook] pp.1-3. Available at: https://www.bookergroup.com/~/media/Files/B/Booker-Group/pdf/investor-centre/reposts-presentations/rp2015/proposed-acquisition-of-londis-and-budgens.pdf? [Accessed 1 Jul. 2015].

CENGÄ°Z, H. (2014). Effects Of International Financial Reporting Standards Application On Financial Ratios In Turkey. International Journal, 10(21).

Chaudhuri, T. (n.d.). Analysis of the Profitability Ratios of HCL. SSRN Journal.

Dharmapala, P. and Edirisuriya, P. (2011). A decision model to predict profitability using revised Thompsonâ Thrall profit ratios in DEA with an application to South Asian banks. IJOR, 12(4), p.407.

Duchin, R. and Schmidt, B. (2013). Riding the merger wave: Uncertainty, reduced monitoring, and bad acquisitions. Journal of Financial Economics, 107(1), pp.69-88.

Enever, N., Isaac, D. and Daley, M. (2014). The Valuation of Property Investments. Hoboken: Taylor and Francis.

Epstein, M. and Lee, J. (2011). Advances in management accounting. Bingley, UK: Emerald.

Garrett, S. and James III, R. (2013). Financial Ratios and Perceived Household Financial Satisfaction.Journal of Financial Therapy, 4(1).

Gazely, A. and Lambert, M. (2006). Management accounting. London: SAGE Publications.

Glambosky, M. (2009). Three essays on competitive acquisition bids.

Griffith, M. (2003). Negotiating and drafting acquisition agreements in Oklahoma. Eau Clair, WI: NBI, Inc.

Hansen, D. and Mowen, M. (2000). Management accounting. Cincinnati: South-Western College Pub.

Jagels, M., Coltman, M. and Coltman, M. (2004). Hospitality management accounting. Hoboken, N.J.: J. Wiley.

Langdon, K. (2002). Investment appraisal. Oxford, England: Capstone Pub.

Libby, R., Libby, P. and Short, D. (2011). Financial accounting. New York: McGraw-Hill/Irwin.

Marsh, C. (2012). Financial management for non-financial managers. London: Kogan Page.

Mclean, S. (2009). Property investment appraisal. J Build Apprais, 4(4), pp.331-331.

McSweeney, B. (2006). Net present value: the illusion of certainty. Strat. Change, 15(1), pp.47-51.

Nissim, D. and Penman, S. (n.d.). Financial Statement Analysis of Leverage and How It Informs About Profitability and Price-to-Book Ratios. SSRN Journal.

Nugus, S. (2006). Financial planning using excel. Oxford: Elsevier.

Oehmke, J. (2000). Anomalies in net present value calculations. Economics Letters, 67(3), pp.349-351.

Peng, Q. (2009). International Conference on Transportation Engineering, 2009. Reston, VA: American Society of Civil Engineers.

Peterson Drake, P. and Fabozzi, F. (2012). Analysis of financial statements. Hoboken, N.J.: Wiley.

Pfeiffer, T. (n.d.). Net Present Value-Consistent Investment Criteria Based on Accruals. SSRN Journal.

Saeidi, P. (2012). The Relationship between Income Smoothing and Income Tax and Profitability Ratios in Iran Stock Market. AJFA, 4(1).

Staehle, M. and Lampenius, N. (n.d.). Are PE- and MB-Ratios Susceptible to Accruals, Growth, or Profitability?. SSRN Journal.

Straub, T. (2007). Reasons for frequent failure in mergers and acquisitions. Wiesbaden: Deutscher Universitäts-Verlag.

Tiffin, R. (2005). Practical Techniques for Effective Project Investment Appraisal. London: Thorogood.