Word Count: 1485
CRANFIELD SCHOOL OF MANAGEMENT
Executive MBA Programme 2011/2012
Sodexo Vs Compass
This assessment/report is all my own work and conforms to the University’s regulations on plagiarism
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TABLE OF CONTENTS
1. EXECUTIVE SUMMARY
The analysis of the financial ratios of Sodexo and its peer Compass has revealed important deviations that must be considered by the board.
Despite the increase in revenues announced for 2010, Sodexo maintained a lower operating profit margin than that of Compass. Thus, indicating an inefficient cost management and a weak pricing strategy adopted by Sodexo.
Liquidity appears to be a challenging issue for Sodexo and Compass. Both companies, clearly, are undergoing a competition of growth through acquisition of subsidiaries which had a negative impact on the liquidity in both companies. Nevertheless, Sodexo’s long trade receivables settlement period has even worsen the company’s liquidity.
Seeking a better image vis-à-vis its rival Compass, Sodexo has increased its dividends pay out on the account of its liquidity, thus, relying on borrowing rather than operating activities. This is explained by the high financial gearing ratio that has not been translated to an increase in the company’s profitability, a short sighted strategy that should be reconsidered by the board.
1. Focus on maximising profit from operations,
2. Revaluate the entire trade receivables strategy that appears to be performing inefficiently, 3. Maintain a correlation between the amount dividends pay out and the operating profit margin.
This report compares Sodexo’s performance to that of its peer Compass based on the financial ratios, profitability, efficiency, liquidity, financial gearing and investment. In addition to that, it emphasises on the areas that appear to be in need of improvement.
Appendix 1 gives an overview for all the ratios where Appendix 2 details all the ratio calculations in addition to the assumptions considered to calculate them with highlights on the most relevant ratios to the purpose of this analysis.
The report assumes the validity and accuracy of all the financial figures offered in the annual reports offered by Sodexo and Compass.
The financial ratios provide the evaluation and the quantification metrics to measure the performance of businesses. Sodexo and Compass are roughly the same size and have roughly the same geographical split. In this competitive environment, Sodexo must consider its performance in relation to that of the other firms operating in the same industry where success depends on the ability to achieve a comparable level of performance. 3.1 PROFITABILTY1
Sodexo announced sales revenues of €15256m in the 12 months ended August 31, 20102 with about 4% increase in revenues compared to the previous year. The profitability analysis revealed that this revenue has not been translated into ‘real’ profit.
The Return on Capital Employed ratio, that expresses the relationship between the operating profit and the long terms funds (equity and borrowings) invested in the business, has declined for Sodexo from 13.89% in 2009 to 12.4% in 2010, whilst for Compass, the same ratio has increased from 19.15% 2009 / 19.6% 2010.
Sodexo has reported a flat profit margin in 2009 and 2010 (5.1%), a figure that is almost one-quarter lower than of Compass whose margin has grown from 6.5% 2009 to 6.8% 2010. The operating profit margin measures how much of a company's revenue is left over, before taxes and other indirect costs, for paying the variable costs of production.
The low operating margin indicates an inefficient cost management and a weak pricing strategy adopted by Sodexo. Its operating expenses increased to €14,485m in 2010, as...
1) McLaney, Artill, 2010, Accounting an Introduction, Fifth Edition, Financial Times Ltd,
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