Advice For Potential Investor In Mitchells And Butlers Plc – Financial Ratios And Reporting

Profitability, liquidity and gearing ratios for Mitchells and Butlers Plc

Mitchells and Butlers Plc is the operator of managed pubs and restaurants. The portfolio of the company and the formats involves Toby Carvey, Harvester, Miller & Carter, All Bar One, Sizzling Pubs, Crown Carveries, Browns, Stone house and Ember Inns. Their vision is that the guest must love to drink and eat with them. They operate in UK drinking and eating out and the market is fragmented and large. Food is the primary ling term route for the sustainable growth in the industry to which the company belongs (Mbplc.com 2017).  

Profitability ratio – the profitability ratio of the company are used for assessing the ability of the business for generating the earnings as compared to the expenses and other related costs expended during the particular period of time (Bodie, Kane and Marcus 2014). Under the profitability ratio, having higher value as compared to the competitors and as compared to the previous year’s indicates that the company is progressing.  

• Return on capital employed – it is the operating profit of the company as compared to the capital employed. It calculates the company’s profitability through expressing the operating profit as the percentage of the capital employed. From the above table it can be identified that the return on capital employed of Mitchells and Butlers Plc is 6.5% in 2015 as compared to 6.4% in 2014. Therefore, the company is stable in earning the return on their capital (Heikal, Khaddafi and Ummah 2014).   
• Return on equity – this is the profitability ratio that calculates the company’s ability to generate the profit from the investment of the shareholders in company. To be more specific, the return on the equity indicates the amount of profit that the company earns on each dollar of the shareholder’s equity. From the above table, it is recognized that the return on equity of the company was 0.099 in 2015 as compared to 0.104 in 2014. It indicated that the earning ability of the company is reduced in 2015 as compared to the previous year (Atrill and McLaney 2016).
• Gross profit margin – this ratio measures the financial health and the business model of the company through revealing the percentage of money that is left from the revenues after meeting the cost for selling the goods. The gross profit margin of the company for the year 2014 was 72.5% whereas the same reduced to 53.1% in 2015. Therefore, the profitability margin of the company is reduced as compared to the previous year (Robinson et al. 2015).
• Operating profit margin – operating profit margin measures the operating efficiency and pricing strategy of the company. It indicates the proportion of revenue that is left after meeting the variable costs like raw materials, wages and salaries. The operating profit margin of the company has been reduced to 12.9% from 13.4%. The reason behind this is that the depreciation and amortisation cost is increased by £28 million that led to reduction of operating profit of the company.
• Asset turnover – it measures the efficiency of the company to generate earning from sales using the assets. Asset turnover measures the net sales in percentage form for revealing how the sales are created from each dollar of the assets of the company (Melville 2015). It is identified that the company earned 50.7 cents in 2015 as compared to 47.6 cents in 2014. The reason behind the increase in earnings is owing to the increase in the revenue by £131 million.

Liquidity ratio – it analyzes the company’s ability to pay off the current liabilities on becoming due. To be more specific, it reveals the company’s cash level and the ability to transform other assets in cash for paying off the obligations and other liabilities (Delen, Kuzey and Uyar 2013).

• Current ratio – it is the efficiency ratio that indicated the efficiency of the company to pay off the short-term obligation of the company with the available current assets. From the table presented above it can be identified that for both the year the current ratio of the company is 0.55 that means to say the company has enough asset to pay off 55% of the liabilities. The reason behind this shortage is that a large portion of the money is owed by the company towards trade payables and tax liabilities. Therefore, the company shall pay off these liabilities to improve the current ratio (Elliott and Elliot 2015).
• Acid test ratio – this is the ability of the company to pay off the current obligation of the company. The acid test ratio reveals the efficiency of the company to convert the assets quickly into cash for paying off the current obligation. It can be seen from the calculation that the acid test ratio for both the years is 0.51. It means to say the company has enough assets to pay off 51% of the liabilities with the available quick assets. The reason behind this is that the quick assets and liabilities of the company are stable (Collier 2015).

Efficiency ratio – this is used for analyzing the ability of the company to use the liabilities and assets internally. The efficiency ratio measures the receivable turnover, usage and quantity of liability, liabilities repayments and the general usages of the machinery and inventories.

• Inventory turnover ratio – the inventory turnover ratio is the efficiency ratio that reveals the efficiency of the company with regard to management of its inventory as compared to the cost of the sales associated with the average inventory for specific period. It can be seen from the calculation that the inventory turnover for 2014 was 17.17 times whereas the inventory turnover for 2015 was 9.44 times. Therefore, it can be identified that the efficiency of the company with regard to inventory is reduced (Brigham and Ehrhardt 2013). The reason behind that is the company is taking more time to sell their inventories due to market demand fluctuation and competition in the market for the substitute products.
• Debtor days – it measures how quickly the cash is collected by the company from the debtors. Longer times it takes to collect the cash more will be days for collecting the receivables. It is also known as the debtor collection period. It can be identified from the calculation that the debtor day of the company is increased in 2015 as compared to 2014. The reason may be that the company is allowing more credit to the debtors or the debtors are not paying on time (Helfert 2011).
• Creditor days – it measures how quickly the dues are paid by the company to the creditors. Longer times it takes to pay the dues more will be days for paying the dues. It is also known as the creditor payment period. It can be identified from the calculation that the creditor days of the company are reduced in 2015 as compared to 2014. The reason may be that the company was able to pay off the dues on time or the credit period allowed by the creditors has been reduced (Arnold 2013).

Gearing ratio – it measures the company’s borrowed funds proportion as compared to the equity. High ratio indicates that the company has high debt proportion and low ratio indicated low proportion of the debt to the equity. For both the year the gearing ratio of the company is more or less same which indicates that the company is managing the same debt and equity portion for both the years.

• Interest coverage ratio – it measures the ability of the company to pay off the interests on borrowings from the available operating profit of the company. The interest coverage ratio of more than 1.5 indicates that the company is efficient paying off its interest expenses. As per the calculation for both the years the interest coverage ratio of the company is more than 2. That is to say the company has sufficient operating income to cover up its interest expenses (Petty et al. 2015).
• Earnings per share  – as the earning per share of the company has increased from 0.226 in 2014 to 0.250 in 2015, it can be stated that the company is improving with respect to create the return for the shareholders and attracting the potential investors to invest in the company.
• Price to earnings ratio – it indicates the price that an investor is ready to pay for the profit or earning of the company. The P/E ratio of the company is reduced from 11.76 to 10.27 over the year 2014 and 2015. A lower ratio indicates that the investor’s interest in investing the company will be reduced (Bekaert and Hodrick 2017).  

The main objective of IAS 16 on plant property and equipment is prescribing the accounting treatment for plant, property and equipment. The major issues here are the recognition of the assets, determination of the carrying amount of the assets and the charges of depreciation as well as the impairment losses that is to be recognized in association with them (Picker et al. 2016). The items for plant, property and equipment shall be recognized under assets while it is probable that the asset’s cost can be reliably measured and it is probable that the future economic benefit in relation to the asset will flow to the company. The principle of recognition is applicable to all the costs related to the plant, property and equipment at the point of time while it is incurred (Svoboda and Bohušová 2017). The associated costs includes the costs that are incurred for constructing and acquiring the assets and subsequent costs incurred for replacing, adding or servicing the assets. It also identifies that part of the assets which requires to be replaced regularly.  IAS 16 allows 2 models for accounting the cost of the assets –

• Cost model – under this, the asset is valued at cost reduced by impairment and accumulated depreciation
• Revaluation model – under this the asset is carried on at revalued amount which is the fair value of the asset reduced by the subsequent impairment and depreciation, provided that the fair value of the asset can be reliably measured (Lapointe-Antunes and Moore 2013).  

Analysis of performance and position of MB based on financial ratios

On the other hand, the IAS 36 on impairment of assets ensures that the assets of the company are not carried out at the values which are more than the recoverable amount of the assets. The recoverable amount is the higher value among the value in use and the fair value reduced by disposal costs (Tsalavoutas, André and Dionysiou 2014). The company must carry out the impairment test for the entire asset where there is the indication for impairment with the exception to some intangible assets and goodwill. Further, the impairment test can be carried out for the cash generating unit where the asset is not able to generate the cash inflows, which is largely independent from the other assets. At the closing of each reporting period the company is required to analyse whether any indication is there that an asset have a chance to impair (Mazzi, Liberatore and Tsalavoutas 2016). Under IAS 36 there is a list of internal and external indication list for impairment. If there, is any indication the recoverable amount of the asset shall be calculated. The below mentioned asset’s recoverable amount are annually measured to identify whether any indication is there that the asset may be impaired. These assets are –

• The intangible asset with the indefinite useful life
• The intangible asset which is not yet available for the purpose of use
• The goodwill that is acquired under the business combination.

External indication for impairment is the decline in the market value, increase in the market rate of interest, negative changes in the economy, markets, laws or technology and the net asset of the company is higher as compared to the market capitalisation. On the other hand the internal sources for impairment are the physical damage or obsolescence, the asset is idle or part of restructuring or held for the purpose of disposal or the worsening of the economic performance as compared to expectation (Avallone and Quagli 2015).

Mitchell and Butlers Plc follow the IAS 16 for recognition of plant, property and equipment. For example, the items for plant, property and equipment are recognized under assets while it is probable that the asset’s cost can be reliably measured and it is probable that the future economic benefit in relation to the asset will flow to the company. Further, they adopted IAS 36 for measuring the impairment of the assets. For example, the company recognizes the impairment loss when the carrying amount of the asset is more than its recoverable amount. The recoverable amount is considered as higher among the value in use and fair value of the asset reduced by selling cost which is as per the requirement of IAS 36.  Further, in accordance with the IAS 16, the assets are valued as per the revaluation model that is revalued amount reduced by subsequent depreciation and impairment.

Reference: 

Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.

Atrill, P and McLaney, E., 2016. Accounting and Finance for Non-Accounting Specialists (10th edition), Pearson,

Avallone, F. and Quagli, A., 2015. Insight into the variables used to manage the goodwill impairment test under IAS 36. Advances in Accounting, 31(1), pp.107-114.

Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge University Press.

Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Elliott, B and Elliot J., 2015. Financial Accounting and Reporting, Pearson

Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia stock exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), p.101.

Helfert, E., 2011. Financial Analysis tools and techniques: a guide for managers, McGraw-Hill

Lapointe-Antunes, P. and Moore, J., 2013. The Implementation of IAS 16 and IAS 41 at Andrew Peller Limited. Accounting Education, 22(3), pp.268-281.

Mazzi, F., Liberatore, G. and Tsalavoutas, I., 2016. Insights on CFOs’ perceptions about impairment testing under IAS 36. Accounting in Europe, 13(3), pp.353-379.

Mbplc.com. 2017. Mitchells & Butlers – Home. [online] Available at: https://www.mbplc.com/ [Accessed 30 Nov. 2017].

Melville, A., 2015. International Financial Reporting a practical guide, Pearson

Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015. Financial management: Principles and applications. Pearson Higher Education AU.

Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and Van der Tas, L., 2016. Applying international financial reporting standards. John Wiley & Sons.

Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial statement analysis. John Wiley & Sons.

Svoboda, P. and Bohušová, H., 2017. Amendments to IAS 16 and IAS 41: Are There Any Differences between Plant and Animal from a Financial Reporting Point of View?. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 65(1), pp.327-337.

Tsalavoutas, I., André, P. and Dionysiou, D., 2014. Worldwide application of IFRS 3, IAS 36 and IAS 38, related disclosures, and determinants of non-compliance.

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