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Analysis of Aramark Limited Company

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Analysis of Aramark Limited Company

Introduction

The objective of this report is to, critically, analyse the performance of Aramark Ltd in the financial years 2009 and 2010. The financial report of the company for the years 2009 and 2010 shall form the basis of the evaluation. Trend analysis and cross analysis shall be used to evaluate Aramark’s performance over the years and its performance when compared to a rival company in the food and hospitality industry. Information obtained from ratio analysis shall be useful in concluding the general performance of the corporation to suggest recommendations that the company can employ to improve the company’s financial position.

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The company used as the comparison company in the report is Compass Group Plc. Cross analysis will use the following ratios capital structure and solvency, liquidity, operating efficiency and profitability ratios. Trend analysis is also used to critical examine other important matters contained in the financial sto arrive at accurate conclusions with regards to the financial position and the performance of Aramark Ltd.

Executive Summary

Aramark Ltd is a company operating in the food and hospitality industry mainly based in the US and the UK. The company specializes in providing food and catering services across a wide range of industries including education and health care among others. The company is rated third among contract food-provision companies after Sodexo and Compass group Plc. Its services range from corporate dining, concessions lending and beverage services.

The corporation commenced in 1959 with its main headquarters located at Philadelphia in the US. Its UK subsidiary started in 1972. It has grown to become the leading food service provider in the UK.

Compass Group Plc, established in 1959 in the UK, is one of the main competitors of Aramark. It operates in the food service industry and hence is a good company to use for cross sectional analysis. The company offers similar kind of services as Aramark hence it is a main rival. The performance of Aramark Ltd can consequently be pegged to that of Compass Plc for a precise analysis of the financial performance of the firm for the year 2009. Apart from the cross sectional analysis with Compass limited, other important matters can be noted in the financial statements of Aramark limited from the year 2006 to 2010 through which important trends can be depicted.

Cross Sectional Analysis

In this section, we shall compare the financial statements of Aramark ltd for the year 2009 with those of Compass Group plc. This shall facilitate comprehensive analyses using major financial statements ratios.

Liquidity ratios

Aramark ($) Compass (pounds)
Current ratio
1715662/1751956
0.9
2550000/3099000
0.8
Quick ratio
(1715662 – 464157)/1751956
0.71
(2550000- 230000)/3099000
0.74

Aramark Ltd can be said to be liquid, this can be deduced from the company’s liquidity ratio, which stood at 0.9 in the year 2009. This company therefore is highly capable of meeting its short term maturing obligations. Compared to Compass Ltd, Aramark is liquid and more likely to offset any outstanding maturing obligations. The differences are however marginal since the two firms only differ by a slight margin of 0.1. Having a high current ratio of 0.9, which is even better than its main competitive rival, Compass plc, indicates that Aramark has a healthy liquidity position.

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The quick ratio however depicts a different picture. Standing at 0.71 in 2009, which is slightly lower than the current ratio, we can say that Aramark has a slightly lower rate of converting current assets into cash. Even though the general liquidity position is good and better than that of compass plc, its ability to convert current assets into cash is slightly lower. This is because most of Aramark’s current assets are in the form of inventory as compared to compass whose inventory levels are lower. (Ramesh, 2001)

Profitability Ratios

Aramark ($) Compass (pounds)
Net profit margin
-6.9/12297
0.00056
-0.05%
592/13444
0.04
40%
Return on Investments
-6900/10326653
0.0068
-0.06%
592/7641
0.077
7.7 %

The profitability ratios of Aramark are unfavourable compared o those of its rival Compass Plc. Aramark has a net profit margin of -0.05% as compared to Compass which has a superior ratio of 40%. This shows that the sales revenue of Aramark is low compared to the profits generated from the sales. This may be attributed to the fact that Aramark’s operating expenditures are higher therefore reducing the value of net profit after tax which in this case is a loss. Aramark is therefore less profitable as compared to Compass Plc.

The return on investments ratio also supports the finding that Aramark is less profitable than Compass. From the computations, Aramark has an inferior return on investments ratio of -0.06 as compared to Compass whose ratio stood at 7.7% in the year 2009. The return on investments ratio normally shows how efficient a firm is in turning its total assets into revenue. Aramark is inefficient in this sense, as its rate of converting total assets into revenue is a negative. Compared to Compass, one of the leading firms in the industry, Aramark underperformed in the year 2009. Concisely, negative profitability ratios indicate that Aramark is not efficient when it comes to revenue generation.

Operating efficiency Ratios

Aramark ($) Compass (pounds)
Total Assets Turnover
12297869/10326653
1.19 times
13444/6921
1.94 times
Fixed assets Ratio
12297869/(8610991/5)
7.14 times
13444/(5091/8)
21.2 times

Operating efficiency ratios normally measure how active a firm is in converting its assets into revenues, the higher the ratio the more active the firm. From the total turnover ratio, we can deduce that Aramark ltd is active. Its total assets are being efficiently used to generate sales hence the ratio of 1.19 times. In the cross sectional analysis however, Aramark is slightly off pace when compared to its rival Compass. Compass is generating more revenue from its current assets than Aramark hence is more operationally efficient.

The same situation is witnessed in the fixed assets turnover ratio. Despite Aramark’s ratio is 7.14, it is still less than that off compass, which stood at 21.2. This shows that there is stillroom for improvement for Aramark when it comes to fixed assets conversion into revenues. Market leaders such as Compass utilize their fixed assets more efficiently. This is one of the many reasons why the corporation ranks higher than Aramark in the hospitality industry. Generally we can conclude that Aramark is an active company but not as active as its main rivals. (Helfert, 1997)

Capital structure and solvency ratios

Aramark ($) Compass (pounds)
Debt ratio
8789893/10326653
0.8
80%
5096/7641
0.66
66%
Debt to equity ratio
8789893/1360365
6.46
5096/2536
2.0

Not only does the debt ratio show the composition of the total assets to total liabilities, but also the financial risk of the firm. Aramark has a higher debt ratio than compass. This means that of the two companies, Aramark has a higher financial risk due to its overreliance on liabilities instead of assets to finance their operations. Both firms however have a poor solvency because they have a debt ratio of more than 50%.

The debt to equity ratio also yields the same conclusion. Compared to compass ltd, Aramark Corporation is highly geared. With a debt to equity ratio of 6.46 Aramark uses six times more debt capital than equity, this makes it insolvent and risky. Non-owners than the owners hence finance the firm more in case of liquidation the owners might not be compensated as appropriate. The debt to equity ratio of Compass on the other hand is slightly lower hence making it a less risky investment. The decision to rely on debt might have also been informed by the cost of debt capital as compared to equity capital. Debt capital is cheaper as it does not require any floatation cost unlike equity capital, which is expensive to rise.

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Trend Analysis

Besides the in-depth cross sectional analysis of Aramark ltd, this section shall critically examine important talking points that can be drawn from the financial statements for the year 2008 2009 and 2010. (Alexander, 2007)

Cash and Cash Equivalents

The cash flow statement is useful as it is used to indicate how cash changed hands throughout the year. From this statement, we notice that most cash is generated from operating activities instead of financing or investing activities. The cash from operations is on an upward trend, gradually rising from 2008 onwards. In contrast, cash generated from investing activities in 2010 is lower than the amount generated in 2008. This shows that despite there being higher revenues from operations, minimal expansion projects/ investment projects are being undertaken thus the company is growing at a very slow rate.

The slow growth rate is also evident in the minimal increase of funds from financing activities from 2008 to 2010. Aramark ltd seems to be concentrating on its current operations instead of undertaking more investment projects to increase their cash flow and consequently, propel growth.

Despite there being a positive cash and cash equivalents figure throughout the three years, this only indicates stabilisation and not growth/expansion. It can also be noted that in the year 2009 when the company reported the highest cash and cash equivalents amount as compared to the preceding and predecessor year, the company reported a net loss. This is a clear indication that an increase in cash and cash equivalents does not automatically translate into higher profitability.

Net profit margin

The net profit margin over the year 2006 to 2010 depicts a very worrying trend for the company. This rent can be easily manifested using a graph of the net profit margins from 2006 to the year 2010.

2006 2007 2008 2009 2010
2% 0.3% 0.3% -0.05% 0.2%
Graph of net profit margin Vs year
Graph of net profit margin Vs year.

From the graph, we can see that the net profit margin of Aramark limited is on a slump. The net profit margin fell sharply in the year 2007 and has struggled to recover since then. In 2009, the company reported a negative net profit margin, which was followed by a slight increase in net profit margin in the next year. The sharp fall may be attributed to the global economic recession that hit the world in the year 2008 forcing many corporations to close shop.

From the graph, it is clear that Aramark is not an exception from the devastating effects of the global economic recession but rising net income margin could be an indicator that the firm is gradually picking up its pieces. The sharp drop may also be attributed to the gradual increase in the financing and interest costs of the company over the years 2006 to 2010.

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Dividends per share on common shares

The dividends per share paid to ordinary shareholders fell from 0.28 to an interim dividend of 0.07 in 2007 after which no dividends were being paid in the following years. Ordinary shares attract a variable rate of dividends. Dividends are paid depending on the net profit and the amount retained for a given year. The company has not paid any dividends on ordinary shares since the year 2008 and this is a worrying trend for both current and potential investors.

Investors may shy away from acquiring shares of this company as it might force them to buy more costly preference shares. From the financial statements, we cannot attribute the failure to pay ordinary dividends to a higher retention of earnings as there is no substantial increase in the retained earnings of Aramark limited.

Conclusions

From the cross sectional ratio analysis and the trend analysis on the financial statements of Aramark ltd, the following conclusion can be drawn in connection to the company’s financial performance and position.

Despite Aramark limited having a favourable liquidity ratio, which enables it to meet its maturing obligations, the solvency ratios indicate that the company faces a risk of being rendered insolvent and possible liquidation. A comparison of the liquidity ratio of Aramark limited and that of its main competitor, Compass limited, indicates that the company relies too much on debt financing as opposed to equity financing and this could cause problems for the firm.

Generally, the operations of the firm can be said to be favourable as can be deduced from the operating efficiency ratios. Both the total assets turnover and fixed assets ratio are favourable and can be complemented by the positive cash flows generated from operations. Even though the ratios are not as good as those of Compass, Aramark ltd can be said to be operational efficiency. The financing and investments function of the company is however not doing as well. Cash flows generated from investing activities and negative value.

From the trend analysis it can be noted that the dividends per share of the ordinary share are going to be low if at all any would be paid in the near future. The reduction of dividends per share up to zero is not in correspondence to a proportionate increase in retained earnings. Trend analysis on the net profit margin indicates that the firm is earning very little net profit as compared to the predecessor years. The reasons for this slump in net profits may be attributed to the global economic depression of 2008, increased operational costs among other factors. (Friedlob, 2003)

Recommendations

The purpose of this report is not merely to analyse the financial position of Aramark limited but also to come up with suggestions that could be used to improve the financial position as well as its performance in the coming financial years. Based on the conclusion a few recommendations can be made.

The decision to rely on debt might have also been informed by the cost of debt capital as compared to equity capital. Debt capital is cheaper as it does not require any floatation cost unlike equity capital, which is expensive to rise. To avoid the risk of being highly geared and at the same time save money on financing costs, Aramark should strike a balance between debt capital and equity capital.

It has been noted that Aramark performs efficiently when it comes to operations but the financing and investing functions are inefficient. To complete, favourably with industry leaders such as Compass plc, Aramark should aim at improving its financing and investment functions to yield at least positive cash and cash equivalents. This means that the company is doing quite fine.

In order not to scare away potential investors, the management of Aramark ltd must not continue with its trend of not issuing ordinary share dividends. Distribution of dividends is good for the investment ratings of Aramark and must only be compromised when there is a proportionate increase in retained earnings.

In light of the alarming decrease in the net profit margin, Aramark ltd can be said to e generating below optimum net profits. The reasons for the slump in net profits should be investigated and proper actions are taken so as generate optimum net profits. (Walsh, 2001)

List of References

Alexander, D. (2007) International Financial Reporting and Analysis. London: Thomson Learning.

Friedlob, G. (2003) Essentials Of Financial Analysis. New Jersey: John Wiley and Sons.

Helfert, E. (1997) Techniques Of Financial Analysis. New York: Mc Graw Hill.

Ramesh, R. (2001) Financial Analyst’s Indispensable Pocket Guide. New York: McGraw Hill.

Walsh, C. (2001) Key Management Ratios ( Financial Times Series). New York: Financial Times.

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