Financial Analysis of Hotel Chocolat PLC

Financial Analysis of Hotel Chocolat PLC

Assignment

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 13

Task 1: Evaluation of the performance of the company across all categories of ratios

            In accordance to the study conducted by Prawirodipoero, Rahadi and Hidayat (2019), the financial ratio is a useful tool and techniques for assessing the financial performance of an organization. The information that is commonly examined through the ratios are balance sheet, income statement and the cash flow statement. Furthermore, the study of Myšková and Hájek (2017) indicates that there are mainly five categorized of financial ratios which comprises of profitability, liquidity, efficiency, gearing and investor. The different categorizes provides with the different aspect of the company where it is critical to investigate different categorizes of ratio. Based on the importance of conducting the financial ratios, the five categorizes of ratio are analysed for the company Hotel Chocolat PLC. The ratios for the selected company is analysed for three years period which is for 2019, 2020 and 2021. The data and the results for each of the ratios are provided below:

Profitability Ratio

Table 1: Profitability Ratio

Liquidity Ratio

Table 2: Liquidity Ratio

Efficiency Ratio

Table 3: Efficiency Ratio

Gearing Ratio

Table 4: Gearing Ratio

Investor Ratio

Table 5: Investor Ratio

Task 2: Summarizing the findings of the ratios

            Based on the computation of the ratios, Table 1 represents the profitability ratio which is examined through gross profit margin and profitability ratio. As illustrated from the tables, Hotel Chocolat gross profit and net profit margin were significantly lower in the period 2020 where the company has even suffered a loss in the period. This was mainly due to the covid-19 pandemic where the lockdown has affected its temporary closure of stores where the company has shifted more of its focus in online market (Wood, 2020). However, both the profitability ratio has improved in the period 2021 due to the easing of covid-19 restriction where the level of sales has increases and the company also achieved a profit in that period. The improvement of the financial in the latest period demonstrates a positive performance for the investors. Moving to liquidity ratio in Table 2, the current ratio of the company has drastically declined in 2021 which is the result of increasing current liability. This shows concern for both investors and creditors as the ability of covering its short-term debts is declining. Regardless, the company still have the ability in repaying its short-term debts with its current assets as the value is above 1. Similarly, referring to the quick ratio, it has significantly declined from 0.953 in 2020 to 0.104 in 204. This demonstrates that Hotel Chocolat does not have any rapid convertible assets for covering its short-term debt and can face liquidity issues. This is a major concern for the company as it can lose its potential investors based on its poor liquidity position.

            Assessing the efficiency of the company based on Table 3, the invesntory turnover days has drastically increased to 186 days in 2021 which demonstrates a poor efficiency in respect to converting the inventory to sales from the perspective of chocolate manufacturer and seller. The increase of inventory was the result of unsold stock due to Covid-19 pandemic while also the company has acquired Rabot 1745 limited that led to also obtaining the inventories of the company (Hotel Chocolat Annual Report, 2021, pg. 60). The receivable day’s turnover has also observed to increase which indicates inefficiency in collecting its receivables from the clients. Table 4 represents the gearing ratios which consist of debt to equity and interest coverage. Based on the debt to equity ratio, it has drastically increased from 0.504 2019 till 1.176 2021 which indicates that the dependence on debt is inclining.

The increase of debt was regarding the Government Coronavirus Large Business Interruption Loan which amounted for £25 million and was signed in 1^st July, 2020 (Hotel Chocolat Annual Report, 2021, pg. 110). Thus, it indicates that the company has shifted to debt for dealing with the effects of Covid-19 pandemic. As a result, it has also drastically affected its interest expense and thus decreased the interest coverage by significant amount. Table 5 represents the investor ratio where it is investigated through EPS and P/E ratio. The EPS was drastically affected as result of the net profit caused by the Covid-19 pandemic in 2020 but the EPS has started to recover. Moreover, the P/E ratio has also started improving in 2021 due to the improvement of its EPS but the value of its share market is determined to be undervalued as a result of low share price. In conclusive with the assessment of the financial performance, it is clear that the financial performance of Hotel Chocolat PLC has been negatively affected in 2020 as a result of Covid-19 pandemic but has started to improve in 2021 based on the improvement of its sales and profitability. However, the major concern is observed on its liquidity and efficiency performance that is also affected by the acquisition of Rabot 1745 limited.

Task 3: Recommendations for improving the performance

            The profitability ratios of the company show no weakness based on which recommendations could be provided as the company was affected due to COVID-19 as whole world had suffered. However, still it could be suggested that company should have emergency plan for future to immediately cut the maximum expenditures during the uncertainty periods so that it is less affected by the shocks.

            The liquidity ratios of the company reveals that company has favourable current ratio but it must improve the quick ratio by increasing weightage of the most liquid assets into the short-term assets so that it has instant access to the funds when needed such as during COVID-19 and financial crises. Therefore, it must make short-term investments in private projects or in government securities to enhance the quick ratio and maintain the short-term liabilities stable at least.

            With respect to the efficiency ratios, the company must reduce the inventories days which has been rising for which it must employ an effective demand forecast system that could guide company how much inventory should be purchase for a specific period of time and how much should be hold as constantly to meet with the seasonal and cyclical demands. Furthermore, company must ensure to reduce the receivables days which has been increasing and reveals inefficiency of the company. In order to reduce the receivables days, it should offer the discounts to the customers to receive payments earlier or at least if not possible and feasible then it should maintain a higher payable days’ turnover to compensate receivable days’ turnover. Because the capita tied up in the receivables could be compensated with higher payable days turnover.

            The Gearing ratio of the company seems to be fine which is near to 1 suggesting that half of the capital is financed by equity and half of the capital is financed by debt. It also reveals another fact that debt to equity significant more than 100% in one year and the core reason behind this is the pandemic. It suggests that firm is less resilient to the shocks which made it to acquire the funds to support the operations. Hence, it must develop strengths to face such shocks in future by having liquid assets as suggested earlier. However, interest coverage remains within the favourable range despite it turned negative in 2020 due to COVID-19 shock.

Task 4: Analysing the Operational Review

Statement 1

            The first statement talks about the investment in people and systems which will affect the debt to equity ratio as in both cases company will need funds to investment into the people and systems. Furthermore, the other ratios that will be affected are gross profit margin and net profit margin citing the fact that further investment will increase the sales and net income leading improved profitability conditions and ratios.

Statement 2

            Statement 2 talks about the collection of Easter inventory from closed retail estates and repacked it for online sales which tend to affect the inventory turnover days positively, improve the net profit margin and also reduce the receivable turnover days.

Statement 3

            Statement 3 talks about the fact that company pursued the growth strategy and raised £22 million in equity and this will affect the debt to equity ratio of the company.

Statement 4

The statement 4 talks about the investment into the manufacturing infrastructure for the fourth production line which is going to meet with the additional demand of the product and would positively affect the overall profitability ratios of the company including gross profit margin and net profit margin.

Statement 5

The statement 5 talks about the company has improved the total site capacity and asset utilization and this tend to improve the efficiency ratios of the company where assets turnover will improve and net profit tend to improve as result of economies of scale after revenues improves.

Statement 6

            The statement 6 talks about the investment which doubled storage and despatch capacity which will help company in seasonal peak sales. Hence, company will be able to meet more demand and generate more sales and ultimately net profit margin will improve along with the receivable day’s turnover.

Task 5: Assessment of the risk and its potential impact

Risk 1: Global and Regional Pandemic

            This has reduced the overall demands of the products and ultimately sales of the company, thus the gross profit margin and net profit margin of the company would be negatively affected.

Risk 2: Negative Publicity affecting Brand

            This has also affected overall demand of the products which tend to negatively affect sales and net profit margin of the company as it will higher operational costs than profit itself.

Risk 3: Disruption to Supply Chain or Production or Goods

            The disruption in supply chain would lead to higher cost of transportation, higher cost of raw materials and also short of labour force for the work as well. Hence, overall sales will be negatively affected and cost of doing business will increase, thus, gross profit margin will decline and net profit margin may turn negative.

Risk 4: Inconsistent Quality

            Inconsistent quality, fear of contamination and COVID-19 tend to reduce overall demand, so the lower inventory turnover is expected following by higher inventory days’ turnover, higher receivable days turnover and also lower net profit margin consequently.

Risk 5: International Expansion

            International expansion tend to increase complexities and cost of doing business at some extent, so initially relatively lower net profit margin is expected.

References

Prawirodipoero, G.M., Rahadi, R.A. and Hidayat, A., 2019. The Influence of Financial Ratios Analysis on the Financial Performance of Micro Small Medium Enterprises in Indonesia. Review of Integrative Business and Economics Research, 8, pp.393-400.

Myšková, R. and Hájek, P., 2017. Comprehensive assessment of firm financial performance using financial ratios and linguistic analysis of annual reports. Journal of International Studies, volume 10, issue: 4.

Wood, P. 2020 Hotel Chocolat swings to loss as pandemic bites into sales, CityAM. Available at: https://www.cityam.com/hotel-chocolat-swings-to-loss-as-pandemic-bites-into-sales/ (Accessed: 14 December 2021).

Hotel Chocolat Annual Report. 2021. Available at: https://www.hotelchocolat.com/on/demandware.static/-/Sites-HotelChocolat-Library/default/dw7d9a0747/37446%20HOTC%20AR21%20WEB.pdf