Introduction
Comparative evaluations of companies in the same trade provide an interesting study. Sodexo and Compass Group Plc. are in the industry of hospitality. Comparative operational and financial reviews of the business operations of these two companies have been conducted, bringing forth their main operations and composition of their capital structure in the first section of the report. In the second part, a comparative study of profitability, performance, and liquidity status has been taken up with the help of ratio analysis. Finally, it is reviewed whether the companies have been able to put up themselves as per the expectations of the stakeholders.
Analysis of the informative status of Operational and Financial Review statement
Main operations and uncertainties of the business
Compass Group Plc is in the hospitality business of providing food and a range of selected services at workplaces. The company’s operations extended to 62 countries speak volumes about the success of the company. The company provides services under different brand names. As per the company’s website, “many of these are in-house brands unique to Compass and often specific to particular markets, regions, countries, or in certain cases clients.”(Compass Group). The company provides food and support services around the world under these brand names to specified sectors like Business and Industry, Fine Dining (creative hospitality services to executive dining rooms), Education, Healthcare & Seniors, Sports & Leisure & Others
Chairman and auditor views
Sodexo, the other company under the study, is also in the hospitality business and is considered a worldwide provider of food and facilities management services. Sodexo offers personalized service under its trade mark that “identifies customer catering needs and expectations by taking into account their mindset and consumption behavior at work.”(Sodexo experience). The company servers in its eight areas of expertise, namely, Corporate service, Leisure, Defense, Correctional Services, Health Care, Seniors, Education, and Remote Sites.
Uncertainties are associated with any, but the business of hospitality conducted by both Compass and Sodexo is extra prone to vagaries of uncertainties. These uncertainties are risks of conducting hospitality business. However, Sodexo has very specific risk management policies that “identify and evaluate the key risk exposures faced by Sodexo; reduce contractual risk, in particular by using the limitation of liability clauses or hold harmless agreements; and achieve the right balance between risk retention (self-insurance) and the insurance market in covering the potential financial consequences of Sodexo’s risk exposures.” (Annual Return 2007, page 83). The annual report 2007 of Compass also very clearly specifies its risk management policy by stating at page 16 that “The board has proactive approach to risk management with the aim of protecting its employees and customers and safeguarding the interests of the company and its shareholders.” That means both companies have taken adequate steps to meet the effects of uncertainties on their constituents.
The chairman of Compass, Mr Roy Gardners, has emphasized in his report in annual report 2007 two major achievements of the company. One related to the adoption of MAP, a management and performance framework, that has really given the company the required intensity drive to improve performances at all levels of management; and second is the commitment of the company with regards corporate social responsibility to take up social and environmental issues. Besides the regular details of financial and other achievements, the chairmen specifically pointed out the proposal of a final dividend that will make a total dividend of 10.8 pence per share, bringing an increase of 7% over last year’s declared dividend. The independent auditor’s report is a routine report as nothings, in particular, has been qualified in the report of auditors.
On the other hand, Mr Pierre Bellon, Chairman of Sodexo, was more vocal in his statement in the Annual report for 2006-07 about three major acquisitions of the company, namely Gardener Merchant, Partena, and Marriot Management Services, and termed these acquisitions as an ‘alliance’. He emphatically explained the importance of deletion of word ‘h’ from its brand name, but actual future performances will tell the real story. The most important thing to note in his report is that Sodexo is one of the largest employers in the world. The most refreshing thing about the Sodexo chairman report is that it does not jingle out the financial achievement as those are rightly explained elsewhere in the report.
It is not possible to comment upon independent auditors report as that is not available with the annual report. Even form 20F, wherein the independent auditor report is compulsorily attached, is not available for the years 2006.
Capital structure
Capital structure implies the compositions of owned and debt capital of the business. In other words, the composition of sources of financing the total assets of the company is called capital structuring of the business. Where debts and liabilities are more than own capital, the capital structure is said to be highly geared, and the capital structure of a company is low geared when debts and liabilities are lower than total equities of the business. Sodexo has total assets of € 8697 million as of August 2007. Out of these, € 2300m have been financed through equities and the rest €6397m through debt capital and other liabilities. As more than half of the capital is financed through borrowed funds, the capital structure of Sodexo is highly geared.
Compass has total assets of $6432m as of 30 September 2007. The sources of finance of total assets are $2170m from equities and $4262m from borrowed funds and liabilities. Therefore like Sodexo, Compass has also high geared capital structure. High geared capital structure has high liabilities bearing a fixed rate of interest. Equity holders, being the residual beneficiaries, stand benefited from such capital structure during the period of rising profitability. This is because after meeting fixed liabilities, the residual profits belong to equity holders. The reverse is true during depressions where equity holders suffer under the high geared capital structure as residual beneficiaries.
Analytical review of financial performances
In order to evaluate the competitive financial performances of Sodexo and Compass, various financial ratios have been calculated in the table below for three years in respect of both companies. Based on ratio analysis, the financial performances are evaluated hereinbelow.
Profitability Review
The operating profit margin and net profit margin of an entity describe its complete profitability performance. “The operating profit margin measures the percentage of each sales dollar remaining after all costs and expenses other than interest, taxes, and preferred stock dividend are deducted.”(Lawrence J. Gitman, page 67). Sodexo’s operating profit margins have been steadily rising over the last three years. This is basically due to an increase in revenue and keeping efficient control on the cost of sales. Compass has also shown an impressive rise in operating profits, and that is better than Sodexo. This is because both Sodexo and Compass have operating margins at the rate of 3.85% in 2005. The good performance of Sodexo took this to 4.78% in 2007, whereas Compass has taken the performance to a high of 5.15%.
Lawrence J Gitman (2006, page 67) also states that “net profit margin measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted.” Looking from the net margin’s point of view, the performance of Compass is highly appreciable as compared to Sodexo. Sodexo’s net margins had risen from 1.89% in 2005 to 2.71% in 2007. On the other hand, Compass has more than doubled its net margins over this period of three years. Its net profit margin ratio has increased from 2.07% to 5.1%, and that is really commendable.
Performance Review
For measuring comparative financial activities performances, two activities ratios, namely, total assets turnover ratio and average collection period, are considered keeping in view the nature of the hospitality business of both companies.
“Total Assets Turnover shows the relationship between the dollar volume of sales and the average total assets used in the business. The ratio indicates the efficiency with which company uses its assets to generate the sales.” (Hermanson, Edward and Maher, page 442). The higher the assets turnover, the better it is. Sodexo rotated its assets 1.54 times in 2007 to generate sales, and this has remained almost static when compared to 2006, but risen slightly from 1.47 times in 2005. In absolute terms, Sodexo is better placed, but in relative terms, the increase from 2005 to 2007 is just 4.76%. On the other hand, Compass has a tremendous relative increase of 36.75%. This is because the assets turnover of Compass was 1.17 times in 2005, and that has gone up to 1.6 times in2007, providing a relative increase ratio of 36.75%.
“The average collection period is the average length of time that sales dollar remains in the form of trade debtor. The longer the average collection period, the longer the operating cycle and greater your investment in trade debtors.” (John W English, page 119). That means a longer collection period is a sign of inefficiency. In that way, Compass has improved its average collection period from 57.03 days in 2005 to 47.74 days in 2007. On the other hand, Sodexo has shown a creeping inefficiency as its average collection period has risen from 54.63 days in 2005 to 56.97 days in 2007.
Compass is efficient not only in collections from debtors, but it has shown remarkable performance in the rotation of assets for generating revenue.
Liquidity Review
“The liquidity of a firm is measured by its ability to satisfy its short term obligations as they come due.”(Lawrence J. Gitman, page 58). The liquidity status of a company explains its short term solvency position. In this respect, the current ratio provides a better look at the liquidity position of the entity. “The current ratio compares the current assets with current liabilities. A ratio below 1.0 means that current assets are less than current liabilities. This is a clear indication that the company has liquidity problems.”(Edward, page 83). The optimum current ratio for any industry is considered at 2:1. However current ratio needs to be developed, taking into consideration the circumstances of the firm and industry.
From a liquidity point of view, both Sodexo and Compass are really struggling. The current ratio of Sodexo is 1.01, 0.97, and 0.94 in 2007, 2006, and 2005 respectively, and that is much lower than even the minimum required standards. Similarly, Compass’s current ratios are just 0.72, 0.99, and 1.06 in the years 2005, 2006, and 2007 respectively. Though both companies are making real efforts and their current ratio is rising over the period. But still, companies have serious trouble; and both of them might not be able to meet their short term obligations when those become due.
Satisfaction of stakeholders’ aspirations
Shareholders’ basic interests lie with dividend payout and earning per share. Comparative dividend payout for the year 2007 and earning per share of both companies as reflected in respective annual reports for 2007 are detailed as under:
Dividend per share
Year 2007 2006 2005
Sodexo € 1.15 0.95 0.75
Compass $ 0.103 0.101 0.98
Earning per share
Sodexo $ 2.22 2.07 1.36
Compass $ 0.256 0.133 0.90
So far as dividends and earnings per share are concerned, both companies have made a sort of objective to keep equity holders satisfied. Dividends per share and EPS have been rising for both companies for the previous three years, but the rise in the case of Compass is more acute than Sodexo.
Other stakeholders say creditors and debt providers are concerned with future cash flows so that their obligations are met at due dates. As performances of both the companies are encouraging, it is expected that both will be able to generate suitable cash flows to meet the liabilities of stakeholders other than equity holders.
Conclusion
Though both Sodexo and Compass are progressing in the right direction, the performance of Compass is comparatively better than Sodexo. This is very much clear from its activities as measured through assets turnover and average collection period of receivable. Both companies are facing a liquidity crunch and have to make serious efforts to maintain their short term solvency.
Reference
Compass Group, Food Service Brands, 2008. Web.
Sodexo Experience, Corporate Services, 2008. Web.
Annual Return 2007, Sodexo, Risk Management, page 83, Web.
Annual Return 2007, Compass Group Plc, Business Review, page 16. Web.
Lawrence J. Gitman, Principles of Managerial Finance, Eleventh Edition, Pearson Education, 2006, page 58, 67.
Hermanson, Edward and Maher, Accounting Principles, Freeload Press Inc., page 442.
John W English, How to organize and operate a small business in Australia, Allen and Unwin, 2006, page 119
Edward Fields, The Essentials of Finance and Accounting for Non Financial Managers, AMACOM Div American Mgmt Assn, 2002, page 83.