COMPANY PROFILES
Greene King
Greene King Plc. is a UK pub retailer and brewer that brews, markets and sells beer. It has three operating segments; Retail, Pub Partners, and Brewing & Brands. It also operates restaurants and hotels. The company had about 1909 franchised pubs, hotels, and restaurants as of May 2015. It was founded in 1799 and has its headquarters in Bury St Edmunds.
Swot analysis of Greene King
Strengths:
Its strength lies in the high quality of products. It has sustained the high quality of its products.
The company also has strong local roots that have contributed to customer loyalty.
It also has a strong distribution and sales network.
Weaknesses:
Over-reliance on the UK market.
High costs of production also exert pressure on the firm’s revenues.
Opportunities
Greene King has made several acquisitions that provide opportunities for creating synergies.
Partnership opportunities created through the Pub Partners Segment enhance the company’s presence in the market.
The increased desire for people to drink and eat outside their homes.
Threats
Increased competition and the rising costs of barley, thus its cost of production.
Increased regulation of the sector may reduce its revenues.
Marston’s Plc.
Marston’s Plc. is a UK company managing tenanted, leased and franchised pubs both in the UK and internationally. It brews and sells bottled beers and premium cask. Marston’s operates through five segments; Taverns, Leased, Brewing, Destination and Premium, and Group Services. It is also involved in the insurance business, telecommunications and property management and development.
Swot analysis of Marston’s Plc.
Strengths
Well-diversified business thus, spreading risks as well as increasing revenues.
Innovation capability and the localness appeal of its pubs also enhance its performance.
Qualified workforce and maintenance of premium quality of the products.
It also has flexible menus that allow customization of meals.
Weaknesses
The poor cost structure that leads to high costs of production.
It also has small business units thus they do not enjoy economies of scale.
Inadequate investment in research and development limits its innovation.
Opportunities
The growth in the eating-out market provides a valuable opportunity for increasing revenues.
There is also a growing demand for premium drinks.
The growth in the UK hotel market also offers an opportunity for enhancing hotel revenues.
Threats
Increased competition and costs of raw materials may lower its profits. Increased regulation may reduce beer sales.
Segmentation
The segments in Marston's Brewery are premium and destination, Taverns, Leased and Brewing. The revenues from the segments increased from £787.6 to £845.5 in 2014 and 2015 respectively. On the other hand, Green King have Retail, Pub Partners and Brewing as its major segments. The revenue that was generated between 2014 and 2015 are almost the same. The two companies decided to maintain their segments despite a loss of (£ 59.2) in Marston’s in 2014.
FINANCIAL ANALAYIS
Vertical analysis
Income Statement
The analysis indicates that Greene King’s operating expenses were about 83.86% of its total revenues in the year 2015. This implies that 83% of its revenues were used to cover the operating expenses for the period. In 2014, operating expenses were 84.86% of the total revenue. The decline in this percentage suggests an improvement in the profitability of Greene King. Of the company’s 2015 revenues, 93.09% were from goods while services contributed 6.91%. Revenues from goods increased from 92.56% in 2014 while revenues from services declined from 7.44%. Further analysis shows that cost of products sold is the largest operating expense constituting about 34.09% of total revenue in 2015. In 2014, the cost of products sold were 34.70% of revenues. The decline shows a fall in the cost of production for Greene King. Operating profit was 16.14% and 15.32% of the total revenue in 2015 and 2014 respectively. Profit before tax wad 8.99% and 8.08% of the total revenue in 2015 and 2014 respectively. Net profit was 6.79% of revenues in 2015, down from 7.38% in 2014. The decline in net profit can be attributed to the increase in tax expense. Tax expense was 0.7% in 2014 and increased to 2.2% of the total revenue in 2015.
Vertical analysis of the income statement of Marston’s indicates that its operating expenses were 87% and 94% of the total revenue in 2015 and 2014 respectively. Net finance costs were 13% and 9% of total revenues in 2014 and 2015 respectively. Profit after tax was 3% of the total revenue in 2015 and -6% in 2014. Comparative analysis indicates that Greene King was more profitable than Marston's. Its operating expenses as a percentage of total revenues was less than that of Marston’s. Besides, Greene King’s net income as a percentage of revenue was higher.
Balance sheet
Analysis of Greene King’s balance sheet shows that property, plant and equipment constitute the largest percentage of the total assets. Its PPE was 66.75% and 64.58% of total assets in 2015 and 2014 respectively. Borrowings, both current and non-current, constitute about 48% of the company’s total assets. Retained earnings were about 27% of the total assets. The initial assessment indicates that more than half of Greene King’s assets are acquired through borrowing.
Marston’s property, plant and equipment are also the largest assets constituting 76% of the total assets. Its current borrowings are 5.78% of the total assets while non-current borrowings are 46.98% of the total assets. This indicates that borrowings finance more than half of Marston’s total assets.
Horizontal analysis of income statements
Greene King’s total revenues increased by 1.05% in 2015. Total operating costs also increased by 0.07% in 2015. The rise in operating costs was less than that of total revenue. Consequently, operating profit increased by 6.47% in 2015. Profit before tax also increased by 12.36% in 2015. However, net income decreased by 7.08% owing to a 217.58% increase in tax expense. On the other hand, Marston’s total revenues increased by 7.76% while its operating expenses declined by 0.18%. Its operating profits increased by 131.77% and its net income increased by 145.96% in 2015. Therefore, the improvement in the profitability of Marston’s was higher than that of Greene King.
Its total assets increased by 7.4% in 2015. The change is due to acquisitions as well as disposals. The company implements a strategy of disposing its non-core pubs (Reuters UK, 2016). It has also undertaken several acquisitions including the acquisition of Spirit Club Company (Spickernell, 2015).
RATIO ANALYSIS
Profitability analysis
Return on assets
Greene King’s return on assets was 2.67% in the year 2015. This implies that the firm earned a net income of 2p per pound of total assets used in the company. The return on assets was 2.86% in 2014. The decline suggests a fall in the profitability of Greene King. Marston’s return on assets was 0.83% up from -1.94% in 2014. The trend shows an improvement in the profitability of Marston’s.
Return on equity
Greene King’s return on assets for 2015 was 8.07% implying that its equity holders earned a net profit of 8.07p for every pound of equity held during the year (Keown, Martin and Petty, 2008). This indicates that the company is profitable since the ratio is positive. The ratio declined from 9.04% in 2014 implying a fall in the profitability of Greene King. Marston’s return on equity was 2.98% hence its equity holders earned a net income of 2.9p per pound of equity held (Keown, Martin and Petty, 2008). Marston’s return on equity increased from -6.67% in 2014 indicating that its profitability improved in 2015.
Asset turnover
The asset turnover for Greene King in 2015 was 47.22% meaning that it earned a revenue of 47p per pound of total assets (Moles, 2011). The ratio increased from 45.75% in 2014 denoting an improvement in Greene King’s efficiency in utilizing its assets to generate revenues. Marston’s asset turnover increased from 36.09% in 2014 to 35.75% in 2015 thus suggesting that its efficiency in total asset utilization improved (Moles, 2011).
Net profit margin
Greene King’s net profit margin was 6.79% and 7.38% in 2015 and 2014 respectively. The ratio is positive implying that the company’s operations were profitable during the two years (Gibson and Gibson, 2010). However, the decline in net profit margin indicates a fall in the profitability of Greene King. Marston’s net profit margin increased from -6.22% to 2.65% indicating an improvement in its profitability.
Overall profitability analysis
The above analysis indicates that Greene King is profitable. All the profitability ratios are positive. Its profitability is also higher than that of Marston’s since all Greene King’s profitability ratios were greater than those of Marston’s. However, the profitability of Greene King declined in 2015 as shown by the decrease in most of the profitability ratios (Gibson and Gibson, 2010). This is consistent with the Chairman’s review that the firm’s operating profit fell by 1.7%. The fall was due to slow and lower growth of LFL sales as well as the disposal of its 275 pubs to Hawthorn Leisure. On the other hand, the profitability of Marston’s improved in 2015. Net income increased from a net loss of £50.70 million in 2014 to £23.3 million in 2015. All its profitability ratios increased in 2015. Its CEO cited its successful implementation of the strategy as the primary cause of this improvement. Its strategy involves enhancing the quality of its pub estate, new-build program and disposal of lower-end pubs. The growth in pubs, growth in beer brands, and impact of new openings as well as the acquisition of Thwaites’ beer division were the main drivers of its improved profitability in 2015.
Liquidity analysis
Greene King’s current ratio as at 3 May 2015 was 0.58, down from 0.64 in 2014. This indicates that its current assets could only repay about 58% of its total obligations. The decline in the current ratio denotes a fall in the Greene King’s liquidity (Berk and DeMarzo, 2007). The acid test ratio also dropped from 0.58 in 2014 to 0.53 in 2015. Marston’s current ratio as of 3 October 2015 was 0.821 up from 0.81in the previous year. Its acid test ratio also increased. The above figures indicate that Marston’s had a better liquidity than Greene King. Besides, the liquidity of Marston’s improved while that of Greene King declined.
Debt equity ratio for Greene King was 1.53 indicating that its total debt is more than total equity by 53%. It dropped from 1.55 in 2014 showing an improvement in the firm’s solvency (Powers and Needles, 2011). Total debt ratio was 0.69 up from 0.68 in 2014. The ratio indicates that Greene King acquired 69% of its total assets through external financing. Marston’s debt-equity ratio as at 3 October 2015 was 1.837 up from 1.816. Total debt ratio also increased from 0.713 to 0.721. The increase in the two gearing ratios shows that the solvency of Marston’s declined in 2015. The ratios show that Greene King had a stronger solvency than that of Marston’s (Tracy, 2012). Besides, its solvency improved in 2015 while that of Marston’s deteriorated.
Efficiency analysis
Greene King’s average receivables period for 2015 was 14.01 days down from 15.2 days in 2014. The decline indicates an improvement in the firm’s efficiency of collecting accounts receivable. Its average payables period increased from 73.37 days in 2014 to 87.26 days in 2015. Inventory days were 26.13 days in 2015 up from 24.65 days in 2014. This shows a decline in the effectiveness of its inventory management (Peterson Drake and Fabozzi, 2012). Marston’s average collection period was 17.12 in 2015 up from 14.59 in 2014 indicating a fall in the effectiveness of its debt management policy.
Investment ratios
Greene King’s earnings per share were 40.9p in 2015 down from 44.2p in 2014. The decline in EPS was due to the fall in operating and net profit. Dividend per share increased from 28.4p in 2014 to 29.75p in 2015. Greene King’s P/E ratio also increased from 19.6 times to 21 times. Dividend cover declined from 1.55 in 2014 to 1.06 in 2015 owing to a decline in the firm’s net income. Marston’s dividend per share for 2015 was 7.0p up from 6.7p in 2014. The CEO attributes this increase to strong earnings growth and an increase in its dividend cover. Marston’s dividend cover increased from -1.303 in 2014 to 0.628. Earnings per share grew from -11.7p in 2014 to 12.9p in 2015. The ratios show that Greene King’s stock has better investment returns and value than Marston’s stock (Peterson Drake and Fabozzi, 2012). However, the decline in EPS, dividend cover and the increase in P/E ratio suggests a fall in the value of the stock.
Limitations of the analysis
Ratios are based on past financial data which may not reflect the current and future state of Greene King’s financial affairs. Besides, comparing the two companies using financial ratios may be inappropriate due to differences in operations, accounting policies and other conditions. They also do not take into account external factors such as economic growth, recession, among other variables.
SUSTAINABILITY REPORTING
Greene King does adequate corporate responsibility reporting for all its operations and subsidiaries. The company is committed to conducting its business in an ethical and responsible manner. Its main areas of focus in sustainability and CSR include health and safety, environment, community and charity, responsible retailing and employee engagement. The sustainability report includes Greene King’s commitment to efficient energy and waste management. The report also includes the impact of its operations on the environment. Greene King discloses environmental data detailing data on gross emissions from sources such as natural gas, electricity, LPG, gas oil, among other sources (Greeneking.co.uk, 2016). It also includes CO2 emission in tons per £100,000 turnover. It provides detailed reports as well case studies on the impacts of their CSR initiatives.
Marston’s also does adequate sustainability reporting. Its CSR report reiterates its commitment to responsible and sustainable practices (Marston, 2016). CSR is under its Corporate Risk Director. The company has established a Business Continuity Committee and Corporate Social Responsibility Committee which oversees its CRS targets. The CSR Committee ensures adequate external reporting on the CSR activities of the company.
Conclusion
Greene King is profitable as shown by the profitability ratios. Its profitability declined in 2015 owing to the fall in LFL sales and the disposal of 275 pubs to Hawthorn Leisure. Its efficiency ratios show that it is efficient in asset utilization. Liquidity ratios indicate that Greene King is not in a financial despite the high leverage. It had adequate dividend cover and managed to increase its dividend per share despite the reduction in its net income. Its performance and financial stability are better than Marston’s although Marston’s profitability increased in 2015. Greene King does adequate sustainability reporting and is committed to ensuring sustainable operations.
Bibliography
Berk, J. and DeMarzo, P. (2007). Corporate finance. Boston: Pearson Addison Wesley.
Gibson, C. and Gibson, C. (2010). Financial reporting and analysis. 3rd ed. Cincinnati, Ohio: South-Western College Pub.
Greeneking.co.uk. (2016). Greene King - Responsibility - Environment. [online] Available at: http://www.greeneking.co.uk/index.asp?pageid=78 [Accessed 19 Mar. 2016].
Keown, A., Martin, J. and Petty, J. (2008). Foundations of finance. Upper Saddle River, N.J.: Pearson Prentice Hall.
Marston. (2016). Corporate social responsibility - Marston. [online] Available at: https://marstongroup.co.uk/ethics-and-governance/corporate-social-responsibility/ [Accessed 19 Mar. 2016].
Moles, P. (2011). Corporate finance. Hoboken, N.J.: Wiley.
Peterson Drake, P. and Fabozzi, F. (2012). Analysis of financial statements. Hoboken, N.J.: Wiley.
Powers, M. and Needles, B. (2011). Financial accounting principles. Australia: South-Western Cengage Learning.
Reuters UK. (2016). Brewer Greene King accelerates disposal of non-core pubs. [online] Available at: http://uk.reuters.com/article/uk-greene-king-disposal-idUKKBN0DH2GL20140501 [Accessed 19 Mar. 2016].
Spickernell, S. (2015). Greene King share price jumps on news of higher profits. [online] Cityam.com. Available at: http://www.cityam.com/230035/greene-king-share-price-jumps-as-profits-rise-and-spirit-integration-continues-ahead-of-plan [Accessed 19 Mar. 2016].
Tracy, A. (2012). Ratio analysis fundamentals.
APPENDICES
INCOME STATEMENT
BALANCE SHEET
RATIO CALCULATION
GREENE KING
MARSTON’S
