The analysis aims to explore the nature of the working capital cycle and requirements of companies from three different sectors. The companies chosen for these purposes are Fuller, Smith, & Turner PLC, Home Retail Group PLC, and Independent News and Media PLC and the methods of investigation are ratio analysis of liquidity and efficiency, and working capital cycle analysis. Fuller, Smith & Turner PLC is a family brewery in Chiswick, London. It produces a number of popular brands of beer, including London Pride, ESB, and London Porter.
The company has more than 360 pubs nationwide, 6 hotels, and 14 inns. Home Retail Group PLC is the leader in the UK for home and general merchandise. The company’s divisions are the retail chains Argos and Homebase, which together comprise of more than 1,000 stores. The group also provides financial services, mainly credit and insurance. Independent News and Media PLC is an international news and communication group operating on 4 continents with its main markets in Australia, New Zealand, Ireland, United Kingdom, South Africa and India.
It offers several products and services concerning publishing, online, radio and outdoor advertising. It publishes more than 200 newspaper and magazine titles. Fuller, Smith ; Turner PLC Liquidity It is evident that the Current Ratio and the Acid-Test Ratio for every year are below 1. The business is highly profitable, it generates a positive cash flow, and it collects receivables faster than it pays its creditors. In this sense, it is not likely that the business should be in trouble.
One possible explanation for the low ratios could be derived from the large amount put into Investment Property (Balance Sheet) and the substantial outflow of cash for Purchase of property, plant, and equipment (Cash Flow Statement). Such investment is generally not converted into cash within one year. The group has also received noticeable amounts of interest (Cash Flow Statement). It pays its creditors more than 50 days after it receives payments from its debtors, which means that during this time there is an excess of cash.
All this could be used to support the assumption that the low liquidity ratios of Fuller, Smith ; Turner PLC are due to investment of excess cash to generate additional income. The large proportion of investment in non-current assets means that more liquid assets are turned into less liquid ones, resulting in fewer current assets. This should not be a problem because the company retails a mass product and as a result it can generate a substantial cash flow for a short period of time. Inventory Turnover
With an average turnover period between 12 and 13 days, the company seems to manage its inventory efficiently, which is likely to decrease associated costs. It can also be interpreted as an indication of regular sales and cash inflow. A dynamic turnover of stocks increases the company’s sensitivity to regular supplies, which requires good relations with suppliers and flawless supply-chain management and planning. Trade Receivables and Trade Payables Collection Period It is very important that the Trade Receivables Period be regarded as average because it varies greatly depending on the type of sales.
Part of the sales is carried through retail in pubs, so goods are paid cash and the relevant collection period is 0 days. Sales through intermediaries like retail chains, however take longer to generate cash because retailers, especially big ones, are slow payers. Tesco’s Trade Payables Collection Period for example is more than 50 days (Tesco 2007 Annual Reports and Financial Statements). Fuller, Smith ; Turner PLC also owns and manages a chain of hotels. It is often normal in this case to receive cash in advance in the form of room bookings, so collection of payables often precedes the sale.
Such diversification is an advantage when it leads to steady and more predictable cash flows. Shorter receivables collection period decrease the commercial risks in the company. Asset Turnover According to Forbes’ Investopedia, a low asset turnover ratio is an indication of a high profit margin. In the case of Fuller’s, however, the operating profit margin is modestly in the range of 15 to 20% and the ratio ranges from 0. 47 to 0. 66 times. A similar case study on Bized, a website for students and educators in business studies, provides a possible explanation.
The business maintains a substantial level of assets in the form of pubs, hotels, and inns and even though sales grow gradually over the years, so do assets. The faster growth of assets compared to the increase of sales further explains the gradually decreasing Asset Turnover Ratio (www. bized. co. uk). Working Capital Cycle The complex nature of the processes in the business leads to a diverse cycle of the working capital. Such a short cash operating cycle (negative values, due to cash sales and credit purchases) reveals the power of the business to generate cash.
The hotel business is even quite likely to bring advance payments for bookings. This leads to lower risk not only for the company, but also its suppliers and creditors, creating a stable environment around the company. Home Retail Group PLC Note: Between year 2005-2006 and year 2006-2007, the company changed its composition from having Argos Retail Group, Experian, Burberry group plc and The Lewis group to Argos group and Experian only. Then, Gus was further consolidated to only Argos group by splitting Experian from the group.
This was due to the company objective in year 2006 to create long term shareholder value by focusing in business with growth potential and exiting from low growth or low return businesses. Due to the change in year ended, the financial report on year 2007 is shorter than 52 weeks. The period ended 3 March 2007 as usual but it starts after 3 March of the previous year which is reported as a Short Period. It also provides certain effect of GUS plc up to the point of demerger on 10 Oct 2006. Therefore, pro forma financial information is given to assist analysis and comparison with the previous years.