Magoosh GRE

Ratio Analysis of Compass Group Plc

| January 4, 2015

1. Introduction

Overview of Compass Group plc

Compass Group is a contract catering and support services company, it operates in over 50 countries and employs 470,000 people (Compass Group plc, 2011). The company has grown mainly by merger and acquisition and it offers a portfolio of national and international brands, as well as more traditional unbranded contract catering in staff restaurants (Doherty, Klenert, & Manfredi, 2007). It has ambitions to grow, and while its current core markets are in Europe and North America, it is also developing into new markets in Asia and South America.

The group recorded revenues of £15.8 billion during the financial year ended September 2011 (FY2011), an increase of 9.4% over FY2010, and the operating profit of the group was £1,091 million in FY2011, an increase of 9% over FY2010. The profit before tax was £958 million in FY2011, an increase of 5% over FY2010 (Compass Group plc., 2011).

Report objectives

This report is written to fulfil Part B of the Finance for Leisure and Tourism coursework assignment. The purpose of this paper is to describe the development of a set of financial indicators (also referred to as ratios) displayed in the Compass Group plc. Annual Result Announcement for the Year Ended 30 September 2011, which was announced in November 2011. In addition, discussions on the type of finance used by the company, whether it has expanded or contracted in the past two years, and the potential financial and non-financial factors affecting the company’s future performance will also be covered. This report will not compare Compass Group plc.’s financial ratios with the ratios of previous periods nor will it compare the ratios to those of similar organizations.

Research methods and sources

The financial ratios analysis is done against the company’s latest financial statement, obtained from the company’s website. Other reference materials are gathered through secondary research, from databases such as EBSCO and ProQuest, and also news and articles available on the web. EBSCO covers journals such as Academy of Management Journal, British Journal of Management and Journal of Business & Management. ProQuest covers business journals, trade magazines and news sources, such as International Journal of Management, MIT Sloan Management Review and Risk Management. Key business magazines and news titles such as The Economist, Business Week, Fortune, Financial Times and Wall Street Journal are also covered in ProQuest.

There are no ethical issues that arose during the information gathering.

Report structure

The report will start with the analysis of Compass Group’s accounting ratios, covering liquidity, profitability, activity, financial leverage and shareholder ratios. Discussions on type of finance used by the company and the potential financial and non-financial factors affecting the company’s future performance follow. The conclusion summarizes the topics covered.

2. Analysis of Compass Group’s accounting ratios

Financial analysis is the process of taking accounting and other financial data and organising them into a form which reveals a firm’s strengths and weaknesses (Samuels, Wilkes, & Brayshaw, 1998). Financial statement analysis is important to boards, managers, payers, lenders, and others who make judgments about the financial health of organizations. One widely accepted method of assessing financial statements is ratio analysis, which uses data from the balance sheet and income statement to produce values that have easily interpreted financial meaning.

There are six aspects of operating performance and financial condition that can be evaluated from financial ratios (Drake, 2007):
1. Liquidity ratio provides information on a company’s ability to meet its short-term immediate obligations
2. Profitability ratio provides information on the amount of income from each dollar of sales
3. Activity ratio relates information on a company’s ability to manage its resources (i.e. assets) efficiently
4. Financial leverage ratio provides information on the degree of the company’s fixed financing obligations and its ability to satisfy these financing obligations
5. Shareholder ratio describes the company’s financial condition in terms of amounts per share of stock

The following are various ratios that fall under one of the five categories above. Calculations are performed based on Compass Group’s 2011 results (Compass Group plc., 2011). The company’s financial statements are attached in the appendices.

Liquidity ratiosconp

for liquidity. In generally, the larger the liquidity ratios, the better are the ability of the company to satisfy its immediate obligations. The proceeds from bond sale and bank facility will certainly help the company refinance its debts.

From the current ratio, it can be deduced that Compass Group does not have sufficient current assets to meet its short-term obligations, which made worse when inventory is deducted from the current asset value. The company might face an issue in fulfilling its immediate liabilities due to the lack of liquid assets. net

These ratios compares component of income with sales. The gross profit margin and the operating profit margin are similar, which indicates that the costs of goods sold form the majority, if not all, of the operating expenses. As net profit margin indicates how much of each pound of sales is left over after all expenses, it can be deduced that the company earns 40% net profit on each product sold.ivrtnhc

The total debt to asset ratio indicates that 63% of the assets are financed with debt (both long term and short term debt) – and from the long term debt to asset ratio, 20% of the assets are financed with long term debt. Debt to equity ratio indicates the relative uses of debt and equity as the source of capital to finance the company’s assets, evaluated using the equity’s book value. Both the debt to equity ratio and debt to asset ratio are measures of the company’s capital structure (i.e. the mix of debt and equity that the company uses to finance its assets).

Shareholder ratios


The company’s ratio of net debt to market capitalisation as at 30 September 2011 was 8%, higher than 2010 ratio of 6%, this is due to an increase in its net debt, from £621 million in 2010 to £761 million in 2011 (Compass Group plc., 2011). The 22% increase in debt indicates that the majority of the acquisitions are financed by cash. The group has strong cash reserves of £1.1 billion, after a private bond deal worth $1 billion (Clouse, 2011), five times more than expected (Clouse, 2011). This oversubscription of bond took place when the public stock and bond markets are in a downward trend. It shows the confident the private bond market placed on the company as it has a relatively recession resistant credit, with geographic diversity and strong fundamentals (Clouse, 2011). The company also has an undrawn bank facility worth £700 million, provided by a syndicate of 21 banks (Euroweek, 2011). The successes of the bond sale and bank facility ensure Compass’ ability to use the proceeds to refinance its existing debt (Kellerhals, 2011).

Potential financial and non-financial factors affecting future performance

Financial factors

The company has acquired various businesses in the past few years in order to strengthen its market position and geographical reach, to generate incremental revenues and increase Compass’ opportunities to exploit growth prospects in diversified markets. In FY2011, the group spent £426 million on acquisitions – including £91 million in Turkey, £57 million in the USA, £51 million in the Netherlands, £30 million in Canada and £11 million in the UK (Compass Group plc., 2011). It is important for Compass to keep looking for expansion opportunities while maintaining its focus on strategic partnerships.

On the downside, its global footprint makes the company exposed to currency fluctuations. Compass publishes its financial statements and measures performance in GBP; however the majority of its operation is outside the UK. Changes in regulations, such as the US Health Care Bill passed in 2010, is likely to add burden to healthcare costs for the group. The increase in costs can have a negative impact on Compass’ margins.

Non-financial factors

There is a strong growth opportunity in the healthcare sector, driven by the growth in ageing population. By the year 2030, the number of elderly in the US is expected to increase to about 72 million, 20% of the total population (Datamonitor, 2011). Compass has a strong market position to cater to the ageing population, so the group can benefit from this growth projection.

With its global presence, the expansion of food service industry also provides opportunities to Compass. It is estimated that the global food service industry will have a value of $991.7 billion in 2014, an increase of 18.3% since 2009 (Datamonitor, 2011). The company can capitalise on this growth and boost its revenues and profit margins.

4. Conclusion

Compass Group plc reported strong results for the year ending 30 September 2011, with 5-9% increase in its revenue, operating profit and profit before tax. The analysis of its accounting ratios supports this positive performance, except for the net working capital to sales ratio. The company, however, has the proceeds from bond sale and bank facility to refinance its debts. The company also acquired a number of companies throughout 2011, in a bid to expand its geographical footprint and market share. The analysis indicated that the majority of these acquisitions are paid in cash.

The future performance of the company is potentially affected by financial factors such as its ability to capitalise on opportunities and form strategic partnerships, tackle the currency fluctuation risk and manage the changes in regulations which may impact its profit margins. Non-financial factors such as market and industry growth prospects work in the company’s favour, hence it is crucial that the company is ready to maximise its effort in boosting revenue and profit margins.

Clouse, C. J. (2011, August). Compass Group circles this week.
Clouse, C. J. (2011, August). Compass pushes north as markets heads south.
Clouse, C. J. (2011, August). Investors eat up Compass Group.
Compass Group plc. (2011, November). Compass Group: About us. Retrieved November 2011, from Compass Group:
Compass Group plc. (2011). Annual Results Announcement for the Year Ended 30 September 2011. Compass Group plc.
Datamonitor. (2011). Compass Group plc. Datamonitor.
Doherty, L., Klenert, A., & Manfredi, S. (2007). Expanding into Asia: The human resource challenge. Tourism and Hospitality Research, 109-121.
Drake, P. P. (2007, May 7). James Madison University. Retrieved November 25, 2011, from Principles of financial management:
Euroweek. (2011, May). Compass Group serves up £700m revolver.
Google. (2011, November). Google Finance LON:CPG. Retrieved November 2011, from Google Finance:
Kellerhals, R. (2011, January). Banks kick off $200m TLB for Compass Group.
Samuels, J. M., Wilkes, F. M., & Brayshaw, R. E. (1998). Financial Management and Decision Making. Thomson Learning.

Appendix 1: Compass Group plc. Financial statements

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