Evaluation Of Financial Performance And Corporate Governance Compliance Of Ocado Company

Background of Ocado

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The Present study is based on the evaluation of financial performance and corporate governance compliance of Ocado Company by considering data of previous five financial years. First part of the study will include financial and non-financial ratios by considering factors such as profitability, liquidity, share prices and key performance indicators. Further, second part of the study assess effective of corporate governance of company and recommendations for medium-term financial strategies for Ocado Group so they can be get listed in FTSE 100.

Ocado Company was founded in 2000 in the UK, and the headquarter of the company is based in Hatfield, the United Kingdom. It is recognized as the world’s largest online grocery seller which deals with the range of products including a pet shop, Sizzle, a kitchen, dining store and beauty store. Due to the diversified product line, it is able to attract a large number of customers, as their current customer’s base is approximately 5, 80,000. It can be stated that Ocado deals with own brand groceries viaWaitrose supermarket. The mission of the company is to provide customers with the best shopping experience in varied terms, i.e., best price, quality and service terms, which is helpful in a developing strong business base (Ocado, 2014).  Along with its store operations, it sells through Ocado.com hypermarket in the main three specialities destination sites. In the recent last year, the company has earned £1,463.8 million revenues with the net income of approx £1.0 million. This organisation is listed under London Stock Exchange.

Table 1: Statement showing profitability ratios of Ocado Group

	2017-11 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2016-11	2015-11	2014-11	2013-11
Net Margin %	0.07	0.94	1.07	0.77	-1.58
Asset Turnover (Average)	1.84	1.97	1.96	1.83	1.67
Return on Assets %	0.13	1.86	2.09	1.41	-2.64
Financial Leverage (Average)	3.3	2.67	2.45	2.47	2.46
Return on Equity %	0.38	4.76	5.13	3.47	-6.13
Return on Invested Capital %	2.61	4.82	5.19	4.32	-1.6
Interest Coverage	1.07	2.25	2.27	1.75	-0.74

Figure 1: Profitability ratios of Ocado Group

The Comprehensive Statement shows the corporate profitability, but it is not able to reflect if or if not the profits are accessible in a liquid manner to use for activities. The cash flow statement discloses that in which manner the company gained profits. The profitability ratio of the company determines the financial performance of how much the company is covering the volume of sale it has generated. In the year 2016, the net profit was 8%, and it decreased to 7% (Annual report of Ocado Group, 2017). The net operating profit ratio determines how much the capital is employed in order to understand the amount of the operating profits against the capital employed by the business. Decline in Return on assets ratio can be noticed with the decrease from 1.86 as on 2016 to .13 as of 2017. In 2016, it was implied by the negative ratio that there is a total loss in the same year (O’Regan, 2015). Hence, the overall performance of the corporate has been decline in 2017 than 2016. In addition, a significant decline has been noticed in the used Return on capital from 4.82 to 2.61 in 2016 to 2017. This states that the company reduce its efficiency to use the capital as well as in 2017 in comparison to 2016.  By considering the effective management of inventory by the company, it can be said that inventory is used in an optimum manner; however, there is still scope for improvement.

Profitability Ratios of Ocado Group

Table 2: Statement showing liquidity ratios of Ocado Group

Liquidity/Financial Health	2017-11	2016-11	2015-11	2014-11	2013-11
Current Ratio	1.01	0.51	0.7	0.88	1.13
Quick Ratio	0.82	0.32	0.49	0.67	0.95
Financial Leverage	3.3	2.67	2.45	2.47	2.46
Debt/Equity	1.3	0.51	0.6	0.66	0.66

Figure 2: Liquidity ratios of Ocado Group

Liquidity ratios show the ability to pay the obligations without any difficulty. Liquidity ratios are particularly useful for the investors, suppliers, employees. Current Ratio is the one of the fundamental liquidity ratios. It measures the ability of how much current assets can be cashed to pay the obligation if the firm (Ocado, 2014). It can be observed from the above table that the current ratio is 2017 is 1.01 and in the remaining years the ratio is below the ideal ratio which is 2:1. In the remaining years the current ratio is below 2:1 and therefore, the company was not performing satisfactory and was not having enough current assets to pay the liabilities.The quick ratio of the company in 2017 is 0.84, and the same was 0.34 in the year 2016. It determines how quickly the assets can be converted into cash to pay back the obligations of the company (Chen, Chou and Huang, 2016). Further, debt-equity ratio and leverage of the company has been stabilised over the years. This stability shows the proper management of debt; it can be said that company has covered its outstanding expenses and liabilities. By considering liquidity ratios of company it can be noticed that overall working capital management of company has been improvised.

Table 3: Statement showing efficiency ratios of Ocado Group

Efficiency	2017-11	2016-11	2015-11	2014-11	2013-11
Days Sales Outstanding	11.2	7.51	6.41	6.29	7.19
Days Inventory	15.6	15.07	14.33	14.78	13.87
Payables Period	35.78	34.68	31.12	32.8	37.87
Cash Conversion Cycle	-8.98	-12.1	-10.38	-11.73	-16.81
Receivables Turnover	32.6	48.6	56.94	58.04	50.78
Inventory Turnover	23.4	24.22	25.48	24.7	26.31
Fixed Assets Turnover	3.44	3.51	3.68	3.8	3.14
Asset Turnover	1.84	1.97	1.96	1.83	1.67

Figure 3: Efficiency ratios of Ocado Group

Efficiency ratios are also known as Turnover ratios or Activity Ratios, it analysis the how the organization has used its assets in an effective manner.  The turnover of debtors is considered as high, thereby leading to the higher efficiency of management of credit (Parrino, Kidwell and Bates, 2012).  In 2017, a bit decline was noticed in the ratio along with the ratio of 32.6 times during 2016 while 48 during 2014, implying a decline in the management of debtors. This shows requirement of improvement in the ratio relative to the previous year.  By considering payable periods there is an increase in the ratio in 2017 from the 34.68 times to 35.78 times in 2014, stating that the company managed to compensate all its due payments to the creditors in a more rapid manner than the previous year (Choi, Kim and Oh, 2017). In the inventory ratio, there is a minor decline than the previous year but on an overall basis this ratio has been stabilised. This aspect also implying good management of inventory by the company.

Liquidity Ratios of Ocado Group

Key performance indicators (KPI) are a set of measures that a company uses to cover its performance over the period of the time. These measures are used to determine the performance and progress of the company in achieving its strategic and objective goals, and also to compare a company’s finances against other businesses within the similar industry (Parmenter, 2015). It is said to be a quantifiable determinant implemented by the company to evaluate and analysis the organizational and involved stakeholder success.

Group sales reflect retail sales as the fees of the business platform. In 2016 the performance reached 15.1%. Average orders per week are used to determine the growth of the business. Currently, the company is collecting 17.9% orders at an average rate.CFC Efficiency is one of the measures the operational efficiency of the management.EBITDA of 2016 of the Ocado Group is 4.2% in the year 2017 and has robustly increased from the previous year which was 3.3%.Active customer base also measures the growth of the core customers who shopped in the last 12 week (Zwetsloot, 2014). And the percent of the accuracy the company measures is also one of the important content. On overall basis, KPI of the company has been improvised.

Non-financial ratios are those ratios which are not expressed in terms of the dollar. Non-financial ratios of Ocado Group are enumerated as below:

To consider environment sustainability company has stabilised their overall wastage percentage.

In present year, company had noticed robust growth in their active customer base as it continued to inflate by 11.2% and 14.3% respectively. This is also supported by highest number of orders delivered in a week which over and above 296,000 in the concerned period.

Company had signed their two* worldwide Ocado Solutions partnerships with the objective to initiate their online operations. Through five retailers are linked with the platform of company which will strengthen overall financial position with the increase in ongoing conversations.

CFC efficiency

Improvisation in CFC is due to scaling of latest CFC of company in Andover, UK, which make use of the first installation of their proprietary equipment solution. This is considered to be radical facility comprehending the latest technology developed by the company.

Figure 9: CFC efficiency ratio

(Source: Annual report of Ocado Group, 2017)

Non-financial ratios of Ocado group shows that company had improvised their productivity by entering into logistics partnerships and improvising on technologies.

Efficiency Ratios of Ocado Group

Figure 10: Share price analysis of Ocado Group

The total of 16 analysts providing price targets of 12 months for the Ocado Group PLC, with an average target of 542.50, having a better estimation of 1,020.00 and a lower estimation of 207.00. -37.15% reduction from the previous price of 863.20 has been represented by the average estimate. As of May 22, 2018, it was predicted by the consensus between the coverage of 18 polled investment analysts (Reid and Myddelton, 2017). IT was suggested by the Ocado Group PLC to the investors to retain their positions within the company. This is considered as the consensus estimate, as the response of investment analysts declined on Sep 21, 2016. The last consensus forecast suggested that Ocado Group PLC would conduct market outperforming.

Ocado Group plc (LSE: OCDO) is considered as a minor-cap-stock together with a market capitalization of $1.79 Billion. The investors primarily concentrated on the potentiality of growth and competitive edge of small-cap corporate; in doing so, they neglected a core aspect, which can result in the major threat to their survival. For summarizing, every profitability ratio implied scope of improvement in context with Profitability as compared to the performance in the last year that is the period ending November 2017

For ensuring transparency and disclosures, certain provisions have been implemented by the board. Ocado has adhered to all the viable and fair principles and provisions of the code of 2012. The non-compliance of the areas are properly justified in the corporate governance statement and also the in the Director Remuneration Report (Epstein and Buhovac, 2014). Further, the company has complied to every provision provided in the 2012 code, the company endeavour to dictate the sound practices and principle they use and comply while they considering the provisions and offering high efforts towards corporate governance.

Despite the fact that Ocado Group maintains a decent reputation amongst its direct customer, but its online presence is, in fact, a disaster. In today’s world, online presence defines how great a company is. The Ocado Group’s media presence is when it comes to masses is incredible it is still question that does it treat customers’ properly and Does company really believe in the term- Customer is the King (Larcker and Tayan, 2015).

Although, the company’s corporate governance compliance is very thorough and delegates the work in a way everyone from Board of Directors to Non-Executive Director knows their tasks and how they are supposed to implement it (Rose, 2016).The Board doesn’t have solid policies against grievance redressal, and when you see its presence online, the reviews are weak, and hence the first impact of the organization does not exactly reflect a huge brand like Ocado Group.

Key Performance Indicators of Ocado Group

Not just that, companies overall presence is also not very strong, and this generally depends upon the board of directors that how are they willing to pitch their brand to their customer through different mediums of communications be it Social media, print or online (McAlister and Ferrell, 2016). This will have an impact on their overall brand as customer reviews are negative which will affect the overall financial position.

By considering following strategies Ocado Group can become an FTSE 100 company:

Expansion- The basic idea behind Ocado Group is amazing. It provides groceries directly to the customer from their own warehouse. Hence, in less exhaustion, customers are able to get better services. However, in order to become an FTSE100 company, it needs to expand its business in international soils as well. Groceries and retail have a huge market in America, Australia, Russia, China and India and if done correctly, then the company can attain a huge chunk of market share in groceries (NAGARIA, 2016). Also, if the company expands their operation oversees then flow of income or revenue will increase and it will definitely help in the rise of the stock price.   

Gaining Trust- Ocado Group should gain more trust of their customers. Although; the company has witnessed a huge jump in stock price in last six months yet the issue of an individual customer is still a thorn in their overall image. They should make more efforts in order to gain individual trust and make more efforts towards customer satisfaction both in terms of micro and macro (Cardon, 2014). Because you never know, your current customer can be your future shareholder.

Creating a better brand image- Although company’s revenue is good the brand name and image is not very attractive in terms of look and feel but the direct customer’s perspective towards the company (Wheeler, 2017). They need to reinforce their brand image in the mind of their customer and create an image which reflects trust and ease.

Conclusion

In accordance with the present study, conclusion can be drawn that profitability of Ocado group has been declined but still overall performance of company has been improvised. Further; current KPI and non-financial ratios of company shows that in future company has huge potential to improvise their overall profitability and efficiency. In terms of corporate governance, the company endeavour to dictate the sound practices by complying regulatory aspects in a proper manner.  However, customer reviews has been adversely affected due to increasing quality issues.  Further company can place themselves in FTSE 100 by expansion, creating a better image and gaining trust.

References

Annual report of Ocado Group, 2017. Available through < https://www.ocadogroup.com/~/media/Files/O/Ocado-Group/reports-and-presentations/2018/fy17-annual-report-and-accounts-v1.pdf>. [Accessed on 24^th May 2018].

Cardon, P.W., 2014. Business communication: Developing leaders for a networked world. New York, NY: McGraw-Hill Irwin.

Chen, Y.S., Chou, J.C.L. and Huang, H.C., 2016, July. Predicting Earning Per Share with Financial Ratios. In International Conference on Frontier Computing (pp. 957-961). Springer, Singapore.

Choi, J.Y., Kim, J. and Oh, K.J., 2017. Portfolio optimization strategy based on financial ratios. The Korean Data & Information Science Society, 28(6), pp.1481-1500.

Epstein, M.J. and Buhovac, A.R., 2014. Making sustainability work: Best practices in managing and measuring corporate social, environmental, and economic impacts. Berrett-Koehler Publishers.

Larcker, D. and Tayan, B., 2015. Corporate governance matters: A closer look at organizational choices and their consequences. Pearson Education.

McAlister, D.T. and Ferrell, O.C., 2016. Corporate governance and ethical leadership. In Business ethics: New challenges for business schools and corporate leaders (pp. 68-93). Routledge.

NAGARIA, M.S., 2016. Finance: A vehicle for enhancing Performance in Indian Micro, Small and Medium Enterprises (MSMEs). Journal of Finance, 2395, p.7492.

Ocado, 2014, Five year Summary, Shareholder information, Available through <https://results14.ocadogroup.com/shareholder-information/five-year-summary>.[Accessed on 24^th May 2018].

Ocado, 2014, Ocado Annual report, Available through <https://www.ocadogroup.com/~/media/Files/O/Ocado-Group/annual-reports/ocado-annual-report-2014.pdf>.[Accessed on 24^th May 2018].

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Parrino, R., Kidwell, D. and Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley.

Reid, W. and Myddelton, D.R., 2017. The meaning of company accounts. Routledge.

Rose, C., 2016. Firm performance and comply or explain disclosure in corporate governance. European Management Journal, 34(3), pp.202-222.

Wheeler, A., 2017. Designing brand identity: An essential guide for the whole branding team. John Wiley & Sons.

Zwetsloot, G.I.J.M., 2014. Key performance indicators.