Critical Analysis Of Thomas Cook UK: Accounting And Corporate Finance Report

Introduction of the company

The report is developed with an aim to create knowledge and understand the key concepts of corporate finance and accounting. The report is divided into two sections. The first section discusses the operations and financial performance of Thomas Cook UK. For this purpose, the profitability, earnings, stability, and liquidity of the organization are analyzed by interpreting the past 5 year performance through the ratio analysis technique. In addition to this, the second section discusses the non financial information related to the organization. This is done by analyzing any news which has impacted the performance of the organization.

The report also includes the reflection of the organization portrayed by the financial reports and journalists. The corporate governance of Thomas Cook is also discussed in the report identifying the number of directors and non-executive as well as their roles in the organization. Furthermore, the report identifies the asset value per share as well as the existing share price of the organization in the market. Whether the organization represents an opportunity for investment or not is also assessed in the report. Lastly, recommendations are provided for improving the financial performance of the company.

Section A

1. Introduction of the company

Thomas Cook is one of the leading travel groups of UK, which is registered in LSE (London Stock Exchange). The organization was established in the year 1841 and operates in the travel and hospitality industry. The organization has its own distribution channels of travel, tour operation, and airline. 22,000 colleagues support the organization and it operates in 17 different countries. Thomas Cook owns 100 aircraft and 190 hotels and resorts of their own brand.

There are total 22,000 employees serving to 20 million customers across UK, Ireland, Norway, Sweden, Finland, Russia, Denmark, Netherlands, Germany, Poland, Belgium, Czech Republic, France, Switzerland, Austria, and Hungary (Thomas Cook Group, 2018). The tour operator business is comprised of Thomas Cook, Neckermann, and Spies Tjareborg Ving operating in UK, Continental Europe, and Northern Europe respectively. The hotels and resorts comprises of Sunwing Family resorts, Supreme Hotels, SunConnect Resorts, Cook’s Club Hotels, Sentido Hotels and Resorts, Smartline, Casa Cook Hotels, and Aldiana. The airlines business of Thomas Cook comprises of Thomas Cook Airlines for UK, Scandinavia, and Balearics and Condor Germany (Thomas Cook Group, 2018).

2. Identification of Profits and earnings for past 5 years

Profitability ratios:

In order to discuss the profitability of Thomas Cook, three different ratios can be calculated such as gross profit margin, net profit margin, and return on capital employed. The calculations are discussed below:

Ratio type	Formula	Year
		2017	2016	2015	2014	2013	Average
Gross profit margin	Total sales –COGS/Total sales	22%	23%	22%	21%	21%	21.8

Identification of Profits and earnings for past 5 years

Findings:

From the above analysis it can be observed that gross profit margin of Thomas Cook increased by 1% in the year 2015 and 1% in 2016 and decreased by 1% again in 2017. This depicts that the sales of the company exceeds its COGS by only 22% in 2017, 23% in 2016, 22% in 2015, 21% in 2014, and 21% in 2013 respectively. The value of gross profit margin is also not much high which shows that the company is not using its material and labor for producing and selling products profitably (Means, 2017).

Ratio	Formula	2017	2016	2015	2014	2013	Average
Net profit margin	Net profit/Total revenue	0.1%	0.01%	0.11%	(1.33%)	2.28%	0.234

The net profit margin of the company also shows a negative trend as the value is decreased from 2.28% in 2013 to 0.1% in 2017. This shows that very less percentage of revenue is left over to company for paying shareholders or reinvesting in the company.

Ratio	Formula	2017	2016	2015	2014	2013	Average
ROCE	Net operating profit/(Total assets-current liabilities)	(0.11)	(0.09)	(0.10)	(0.02)	(0.007)	(0.0654)

The values of ROCE for Thomas Cook for the year 2013 to 2017 is observed to be (0.06), (0.07), (0.02), (0.02), and (0.02) respectively. The negative value of the returns shows that the amount of capital employed by the company is not able to generate profit (Keynes, 2018). The capital is not employed efficiently and even the long term strategies related to finance are not well structured.

The overall financial performance of Thomas Cook is not good according to the profitability ratio analysis as the net profit margin is low, gross profit margin is very low, and returns on capital employed are in negative. In order to improve its financial position, the company shall employ its material and labor in constructively, reduce current liabilities by reducing overheads, restructuring debts, and selling some of its assets on lease (Warner and Hussain, 2017). Moreover, the long-term strategies of the company are also required to be redesigned so that the company can get positive rate of returns.

3. Identification of dividends

In order to identify dividend through ratio analysis, different ratios can be used which include dividend yield, and dividend payout ratio. The calculations are discussed below:

Dividend Ratios
Ratio type	Formula	Year
		2017	2016	2015	2014	2013
Dividend yield	Cash dividend per share/Market value per share	0.50%	0.70%	0	0	0

Findings:

The dividend yield is the measure of dividends distributed among the shareholders of the company in relation to their market value per share. As per the above analysis it can be observed that Thomas Cook has not provided any dividend in the year 2013, 2014, and 2015 respectively. Also the amount of dividend paid to the investors by the company is very less in relation to the price of the share. The dividend yield is valued to be 0.50% in 2017 and 0.70% in 2016. This shows that the company was not able to provide even 1% return to the investors in the form of dividends.  

Identification of dividends

The reason behind lower payment of dividend is due to heavy debts and reinvestment in their core operations. Clearly the financial performance of Thomas Cook in terms of payment of divided is very low. Since the company have started paying out dividends from two years only the investors may not feel safe in investing their money in the company. It is due to the fact that investors usually like to invest only in the companies which are paying out dividends from a prolonged period of time (Damodaran, 2016). 

4. Financial stability and liquidity of Thomas cook using ratios

In order to analyze the financial stability and liquidity of the Thomas Cook the following ratios shall be determined:

Stability and Liquidity Ratio
Ratio type	Formula	Year
		2017	2016	2015	2014	2013
Current ratio	Current assets/Current liabilities	0.52	0.57	0.55	0.47	0.52

Findings:

The current ratio shows the how easily the company can pay off its current liabilities from its current assets. If the ratio is high then it shows that current assets are available in adequate amount with the company and the payment for current debts can be made effectively. The above value shows and increasing trend in the current ratio from 2013 to 2016 but the ratio was dropped by .05 % in 2017 which is considerable. The value of the current ratios are .52%, .47%, 0.55%, 0.57%, and 0.52% for 2013, 2014, 2015, 2016, and 2017 respectively. Thus, it can be said that the company was eligible to pay only 52 percent of its current liabilities in 2017. The company is required reduce short-term loan so that it can pay them with the current assets available to them.

Ratio	Formula	2017	2016	2015	2012	2012
Quick ratio	(Cash + Cash equivalent + Short-term investments + Current receivables)/Current liabilities	0.39	0.45	0.14	0.32	0.36

The quick ratio is the refined form of current ratio. It is more specific with the type of current assets which can be used for covering the current liabilities (Demerjian and Owens, 2016). The values of quick ratio from the above analysis for the year 2013 to 2017 are 0.36, 0.32, 0.14, 0.45, and 0.39 respectively. The overall value of quick ratio is low but a little increment was observed in 2016. This shows that current assets are not enough to pay current liabilities of the company. This is an indication of increasing liabilities and decreasing sales in comparison to it. To balance the current assets with current liabilities, the company shall focus on receiving accounts receivables and follow a policy of paying bills less frequently.

Ratio	Formula	2017	2016	2015	2012	2012
Debt to equity	Total liabilities/Total equity	5.15	6.30	4.24	5.45	2.98

The debt to equity ratio is a comparison of total debts of the company to it total equity (Givoly, Hayn, and Katz, 2017). The values of the debt to equity ratio of Thomas Cook are 2.98, 5.45, 4.24, 6.30, and 5.15 for the year, 2013, 2014, 2015, 2016, and 2017 respectively. It is clear that the debts of the company are increasing in comparison to its equity each year. Generally, a lower debt to equity ratio implies that the business of the company is financially stable. In case of Thomson Cook the situation is just opposite.

Financial stability and liquidity of Thomas cook using ratios

The debt to equity ratio of Thomson Cook shows an increasing trend and its current value is highest. Regular payment of interest is required in debt financing therefore it is more expensive as compared to equity financing. The value shows that the company holds five times more liability than its equity Thus, it can be said that the financial performance of Thomas Cook in term so debt to equity ratio is a poor show. Looking at the high ratio it can also be considered that the company will face difficulties in making payments in the later course.

Section B

1. Moves by Thomas Cook which can impact its performance

Recently Thomas Cook Group announced that an investment of €40m will be raised by the company which will be invested in the hotels around the Mediterranean. The funding will raised by the joint venture of LMEY and Thomas Cook through debt funding. Piraeus Bank will be providing the funds to the company being an experience holder in providing loans to the hospitality industry from a very long time. The funds will be used for investment in the properties of Hotel across beach markets and Mediterranean sun majorly focusing on grabbing the opportunities in Greek Islands. More properties will be acquired near the Mediterranean by Thomas Cook.

This investment is raised mainly for supporting the growth of its own brand portfolio for hotel. The investment is also considered to be the strategy of company for taking greater control on the inventory of the hotel and customer experience. Moreover, the underinvested, distressed, and underperforming hotels of Thomas Cook in the core destinations will be transformed into the hotels of their own brand (Thomas Cook Group, 2018).

2. Reflection portrayed by the journalist on Thomas Cook

According to BBC, the shares of Thomas Cook faced a sharp fall in 2017 when a drop was reported in the earnings of the UK business. The earnings of UK division of Thomas Cook fall up to 40% costing £52m and the share price of the company sank by 13% in the early trade. The rising prices of hotel, increasing completion in the market of Spain, and reduction in pound affected Thomas Cook in adverse manner. Despite of the UK divison’s weak performance there was an increment in the underlying earning of Thomas Cook as a whole by £24m to £330m. The recovery was helped by the German airline Condor.

It was promised by Peter Fankhauser that the drop in the UK business will be addressed. The company will implement a set of actions for improving the performance even in the challenging conditions of UK. The holidays demand in Egypt and Turkey fallen due to the terror attacks. But recently both markets are gaining popularity again. The trading in the winter season was as per the expectations of the company. Due to strong recovery in the Egypt holidays and steady demand for Canaries trips, the company was able to hold 5% booking in the winter season last year (BBC, 2018).

3. Corporate governance of Thomas Cook

Corporate governance is a framework which includes practices and rules through which fairness, accountability, and transparency is ensured by the board of directors among different stakeholders of the company. The Board of Thomas Cook comprises of one Chairman, two executive directors as well as eight non-executive directors. Which are discussed in the below table:

Name Board members of Thomas Cook	Board Position
Frank Meysman	Non-Executive Chairman
Peter Frankhauser	Chief executive officer
Bill Scott	Chief Financial Officer
Dawn Airey	Senior independent nonexecutive director
Annet Aris, Emre Berkin, Paul Edgecliffe-Johnson, Lesley Knox, Jurgen Schreiber, Warren Tucker, and Martine Verluyten	other non-executive independent directors
Karim Bitar	Chief Executive

The responsibilities of the board members are as follows:

• Guising the strategic aims of the group and approving the strategy of the group as well as business and budgetary plans.
• Approval of capital expenditure, investments, policy of dividends and payment.
• Establishment and maintenance of internal control system, risk appetite, approved authorities and governance.
• Performance monitoring of executives and planning for succession, and remuneration.
• Reviewing of policies related to safety, health, environment, community responsibilities, and ethics standard (Thomas Cook Group, 2018).

4.  Asset value per share and current price of share in the market

The total value of investment fund divided by outstanding number of its share is referred to as asset value per share. It is also referred to as fair value of company minus the total liabilities and divided by the outstanding number of shares (Gitman, Juchau, and Flanagan, 2015). The asset value per share of Thomas Cook is -186.32p. The negative sign denotes that the property and cash are not in much amount as compared to what it owes.

The current market share price of Thomas Cook Group is 44.74 resulting with an increment of 2.80% i.e. 1.22. According to consensus forecast polled by 14 investment analyst, the Thomas Cook Group will be outperforming in the market. Therefore, the investors can be advised to keep holding their shares in the company. Buying the shares of the company at a cheap price whose outlook is robust could be a great investment.

The earning of Thomas Cook Group is expected to get doubled in future (Simplywall.com, 2018). This indicates that the future of the company is optimistic and the company will have stronger cash flow resulting in higher value of shares. Looking at all these perspectives, it can be said that an opportunity for investment is represented by the company.

5. Conclusion

From the above analysis it can be concluded that Thomas Cook Group is one of the leading brand in the travel and hospitality industry. The ratio analysis of the company depicts that the company is not performing well financially. This is mainly due to the fall in the holiday business of UK. The organization has started paying dividends to its shareholders but in very less amount. Moreover, the liquidity is vey less as the current asset is less in comparison to the current liquidity.  It is also analyzed that Thomas Cook Group is one of the leading brand in the travel and hospitality industry. The ratio analysis of the company depicts that the company is not performing well financially.

This is mainly due to the fall in the holiday business of UK. The company is putting efforts in improving its operations for financial stability and covering its liabilities by generating more revenue. For instance, the company will be investing €40m in which will be funded through Bank. This strategy is to cover core destinations from hotels of their own brand. The journalists see an opportunity of growth for the company as the strategies such as new investments will help the company to generate more revenues in the coming future.

As s financial director I would suggest Thomas Cook Group to form partnerships with other groups. By doing this, the liabilities can be divided between two groups which is in the favor of the company as it has more debts than equity. Moreover, the processes within the company shall be streamlined to mitigate duplication and significant amount of savings can be generated through it.

References

BBC (2018) News. [Online].

Damodaran, A. (2016) Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). USA: John Wiley & Sons.

Demerjian, P.R. and Owens, E.L. (2016) Measuring the probability of financial covenant violation in private debt contracts, Journal of Accounting and Economics, 61(2-3), pp.433-447.

Gitman, L.J., Juchau, R. and Flanagan, J. (2015) Principles of managerial finance. Australia: Pearson Higher Education.

Givoly, D., Hayn, C. and Katz, S. (2017). The changing relevance of accounting information to debt holders over time, Review of Accounting Studies, 22(1), pp.64-108.

Keynes, J.M. (2018) The general theory of employment, interest, and money. Germany: Springer.

London Stock Exchange (2018) TCG THOMAS COOK GROUP PLC ORD EUR0.01. 

Londonstockexchange, (2018) Exchange. [Online]. 

Londonstockexchange, (2018) Exchange.

Means, G. (2017) The modern corporation and private property. UK: Routledge.

Simplywall (2018) Stocks.

Thomas Cook Group (2018) News. 

Thomas Cook Group (2018) Our Business. 

Warner, S. and Hussain, S. (2017) The Finance Book: Understand the numbers even if you’re not a finance professional. UK: Pearson.