Case Study on "Aztec's Capital Investment Company Overview Aztec Caterings"

Case Study 11 pages (2788 words) Sources: 11 Style: Harvard

[EXCERPT] . . . .

Aztec's Capital Investment

Company Overview

Aztec Caterings is in catering line of business. The company provides the catering service for business, hospitals, recruitment home, schools and colleges. Aztec operates entirely in the UK midlands and south of the UK and its competitors are the Compass Group and larges multinational UK companies. Two directors formed Aztec Catering 40-year ago and after they left the company, they still own 70% of the company shares, and the venture capita owns 30% of the company shares. Outcome of the board meeting held in 2012 made the directors set a future direction for the company focusing on the following three corporate objectives:

To maintain a profit margin of 24%

To maintain current strong financial position for the company

"To satisfy the shareholder by maintaining a dividend payout ratio of 50%"

Objective of this report is to carry out the investment analysis for Aztec Caterings. The paper also carries out the appraisal and suitability of the company chosen financial objective and the company financial records.

Appraisal of the Company Chosen Objectives

Profit margin is a profitability ratio that measures every dollars earned from sales. Typically, a profit margin is a useful financial tool used to compare a company with the industry. It is also a useful tool to compare a company with the competitors and the higher the profit margin, the more profitable a company and the more a company has a better control over its costs. Overview of the Aztec's profit margin reveals that the company records 24% ratio in profit margin in 2012. The company profit margin ratio reveals that the company records a net income of $0.24 from every dollar made from sales. With reference to the company objective, Aztec intends to maintain its 24% profit margin and overview of the company projected financial records reveals that Aztec intends to increase the sales by £120 Million in 2013, $150 Million in 2014, and £190 on 2015. To maintain 24% ratio in profit margin, Aztec will need to increase its net income as the company increase its sales. As being revealed in Table 1, the company will need to record £29 Million in the net income in 2013, £36 Million in 2013, and £46 Million in 2015. The increase in the net income and decline the cost of sales will assist the company to maintain 24% profit margin.

Table 1: Financial Record of Aztec Caterings (£Million)

2015

2014

2013

TOTAL REVENUES

NET INCOME

46

36

29

Net Margin

24.2%

24%

24.2%

Comparative analysis of Aztec financial record with Compass Group financial record reveals that Aztec has potential to maintain 24% profit margin. Compass Group primary objective is "to provide the best possible service to our customers." Based on the company financial record, Compass Group has been able to provide high quality service to customer. Since 2008, Compass has recorded the increase in sales because of the increase in the customer participation. Typically, the Compass has been able to increase its total revenue from £14.5 Billion to £15.8 Billion between 2010 and 2011. More impressively, the company has been able to reduce its cost of goods sold from 91.60% to 91.51% making the company to achieve a bottom line growth from £675.0 Million to £728.0 Million in 2010 and 2011 respectively. As being revealed in Table 2, the Compass net income increased from £443 Million in 2008 to £728 Million in 2011. Moreover, the company net profit margin increased from 3.9% in 2008 to 4.5% in 2011. Thus, Aztec could also maintain its sound financial record because Aztec and Compass Group are operating within the same industry.

Table 2: Financial Record of Compass Group (£Million)

2011

2010

2009

2008

TOTAL REVENUES

15,833.0

14,468.0

13,444.0

11,440.0

NET INCOME

Net Profit Margin

4.5%

4.6%

4.3%

3.9%

GROSS PROFIT

1,344.0

1,216.0

1,096.0

2,426.0

ROE

17.44%

17.75%

16.97%

14.35%

ROCE

79.85%

Net Assets

2,208

2,545

3,073

3,503

Source: (Businessweek, 2012, Morningstar, 2012)

Aztec second objective is to maintain its current strong financial position. Aztec is operating in the UK hospitality and leisure industry, and the industry has enjoyed a robust slow growth in the last few years. However, pressure on the household budget has made the growth rate within the industry to slump down from 3% to 2.8% at the second quarter of 2012. Since the onset of the financial crisis, the industry has experienced volatility in the growth rate coupled with the adverse impact of severe weather condition. However, the slow growth that the sector has experienced in the last few years has been due to the 7% increase of North American visitors coupled with the 2% increase in European visitor.

Slow growth rate in restaurants and pubs sector will specifically affect Aztec's to maintain its current financial position. In the UK, consumer spending continues to decline annually and the real growth rate of restaurant and pub slowed by 1.7% in the second quarter of 2012 making the growth rate in the restaurant and pub sector to remain challenging. To maintain current strong financial position, Aztec will need to use different strategies based on the current challenges facing the UK Hospitality and Leisure industry in the last few years. Although, the industry experienced a drastic decline in the growth rate between 2008 and 2009, however, since 2010, the industry has enjoyed a gradual slow growth. (Barclays, 2012). Thus, Aztec will need to use brand differentiation strategy to outwit the competitors in the market to maintain the current strong financial position.

To maintain shareholders' value by maintaining dividends payout ratio of 50%, the company will need to maintain its current strong financial position. Ernst & Young (2012) argues that the growth rate of the UK pubs and restaurants sector depends largely on the performances of the UK economy as a whole. Based on the data presented by Ernst & Young (2012), the UK pubs and restaurants sector experienced a considerable improvement between 2010 and 2011. The data in Table 1 reveal that the consumer spending increases with the growth in the UK GDP. The GDP and domestic demand forecast between 2013 and 2014 reveals that the consumer spending will greatly improve between 2013 and 2014.

Table 1: Forecast of the UK GDP Domestic Demand Consumer Spending

Year

GDP

Domestic Demand

Consumer Spending

2008

-1.1

-1.4

-1.5

2009

-4.4

-4.4

-3.5

2010

2.1

1.6

1.2

2011

0.7

-0.9

-1.2

2012

0.4

0.3

0.8

2013

1.5

1.0

1.1

2014

2.6

2.0

2.1

Source: (Ernst & Young, 2012)

Based on the data projected for the GDP and consumer spending in 2013 and 2014, Aztec Caterings will be able to satisfy shareholders' by providing a dividend payout ratio of 50%. Comparatively, Compass has been able to enjoy the growth rate in the last 4 years based on the fact that the company increases yearly return on equity ratio. Thus, Compass has been able to achieve its primary objective by providing best possible service to customer. Since Aztec Caterings is trying to follow the footstep of Compass, the company will be able to achieve its corporate objectives.

Effective financial plan is critical to assist a company to achieve its laid down objectives. The paper presents Aztec's financial plan needed to assist the company to achieve its corporate objectives.

Task 2: Three-Year Financial Plan

Financial plans are the series of steps that organizations use to achieve their financial objectives. The plan allocates the future income and various expenses of Aztec Caterings within the next three years. More importantly, the plan will also allocate savings of the company assets projected to produce future income. Overview of the Aztec Caterings' 2012 financial statements reveals that the company non-current assets is equal to the company current liabilities making the company to record zero non-current assets. While the company non- current assets are £60 million, the company current liabilities are also £60 Million. Although, the company current assets is £100 Million, however, the company depends more on bank loans than raising share capital from the public. The company debt / capital employed ratio is 40% revealing that the company long-term debt is very close to the shareholder funds. Clarke, (2002) argues that if the debt / capital employed ratio is above 50%, the company debts is more than shareholders' fund. By relying on bank loan, the issue could serve as a setback for Aztec, which could make the company to face challenges in meeting its financial objectives.

The paper assesses the company liquidity position to enhance greater understanding on the extent the company could meet its current liabilities. Overview of the company current ratio reveals that the Aztec may have problem in the future to meet its current liabilities.

The Current Ratio is stated as Current Assets/Current Liabilities

Aztec Current Ratio= 100/60

Aztec Current Ratio 1.66

The current ratio of Aztec Caterings is 1.6:1. Clarke, (2002) argues that current ratio of 2:1 is recommended for most businesses because the current ratio indicates the availability of the company liquidity to meet its current liabilities. Based on the rate Aztec intends… READ MORE

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