Discuss about the Accounting Financial Report Analysis of Pick N Pay.
The paper aims to present financial analysis of one of the company operating or listed in Johannesburg stock exchange. In this case, the company to be analysed is Pick N Pay. In addition, the report also aims to present a comparison of Pick N Pay with Shoprite Holdings in 2017 (Pick N Pay, 2017). This would be based on their financial ratios analysis. The paper would be finalized by summary of the findings and recommendations as to whether it would be recommendable to purchase shares in Pick N Pay or not. Pick N Pay is considered as one of the South African multichannel and multi-format retailers. It usually carries its operations in Namibia, Zambia, Mauritius, Lesotho, South Africa, Mozambique, Botswana and Swaziland (Pick N Pay, 2016). Besides, Pick N Pay offers wide range of groceries and food, general merchandise, clothing as well as services across several store formats both owned and franchised. Its client bases mostly comprises of middle-income South African client. Additionally, the company has a number of stores which comprises of hypermarkets, express shops, supermarkets, local shops, liquor stores, internet shopping platform, pharmacies, clothing shops as well as liquor stores (Pick N Pay, 2017). On the other hand, Shoprite Holdings is one of the Shoprite Group of enterprises and one of the African foods retailers that conduct is operations in numerous nations across Indian Ocean Islands and Africa. In essence, Shoprite main business comprises of food retailing (Shoprite Holdings, 2017). In spite of the food retailing, it operates in house products, liquor business segments, furniture, pharmacies and fast foods.
Financial ratios are crucial financial components in assessing numerous issues in an organization like operation efficiency, profitability as well as liquidity. It also assists in assessing organization’s financial performance within numerous levels. Ratio analysis could be utilized in comparing organization’s financial performance with other firms operating in the same sector.
The ratio would be obtained by dividing the gross income with the organization’s total sales. As such, Pick N Pay gross margin for the last two years; 2016 and 2017 was;
2016 = 12,970/ 72,445 * 100% = 17.90%
2017= 13,937/77,486 *100% = 17.99%
The results above show that Pick N Pay was doing relatively good in terms of utilizing its resources to generate gross profit. Besides, there is an increasing trend in gross margin signifying better performance over the years.
This ratio would be gotten by dividing operating income by an organization’s total revenue. As such, the company operating margin for 2016 and 2017 was;
2016 = 1,515/72,445 * 100% = 2.09%
2017 = 1,774/77,486 * 100% = 2.29%
Based on the above results, it is evident that Pick N Pay operating margin increased over the years. The increase is a clear sign that the company has been doing good in terms of profit generation.
The ratio would be obtained by dividing EBIT by revenue. In this case, the EBIT margin for Pick N Pay for the last two years was;
2016 = 1,474/72,445 * 100% = 2.03%
2017= 1,715/77,486 * 100% = 2.21%
As from the above figures, it is clear that Pick N Pay EBIT margin increased over the last two years. The increase signifies some improvements in the company performance over the years.
The ratio is obtained through division of net income by the total assets. As such, Pick N Pay ROI for the last two years was;
2016 =1,065 /16,585 * 100% = 6.42%
2017 =1,244 /18,102 * 100% = 6.87%
From the above calculations, it is evident that Pick N Pay ROI experienced a significant increase in 2017 in comparison to 2016. This is a clear sign that the company is doing well in terms of investment and therefore presents better investment opportunity to any potential investor willing to invest in this company.
This financial ratio is gotten by dividing organization’s current assets with its current liabilities. As such, Pick N Pay current ratio in 2016 n 2017 was;
2016 = 9,467/11,355 = 0.834
2017 = 10,402/12,526 = 0.830
The figures above show that, Pick N Pay experienced a decreasing trend in its current ratio over the last two years. Furthermore, the figures show that Pick N Pay has been struggling in settling its current debts using its current assets over the last two years.
The ratio is gotten by dividing organization’s current assets minus inventories with its current liabilities. As such, Pick N Pay quick ratio in 2016 n 2017 was;
2016 = (9,467 -5,152)/11,355= 0.380
2017 = (10,402 – 5,995)/12,526 = 0.352
As from the above computations, it is clear that Pick N Pay experienced a decrease in it quick ratio over the last two years. The decrease is a clear sign that the company has been struggling to meet all its short-term or current debts over the past two years using its most liquid assets.
The ratio is computed by dividing 365 days by the inventory turnover. As such, the company inventory days for the last two years; 2016 and 2017 was;
2016 = 365/ (59,475/5,152) = 31.62 days
2017 = 365/ (63,549/5,995) = 34.43 days
Based on the figures above, it is evident that Pick N Pay inventory days increased over the period. The increase is a clear sign that the company took longer time in selling its inventories or converting its inventories to sales in 2017 in comparison to 2016.
In this case, debtors’ days is computed by dividing 365 days by the debtors or receivable turnover. As such for the last two years, Pick N Pay debtors’ day was;
2016 = 365/ (72,445/3,332) = 16.79 days
2017 = 365/ (77,486/3,445) = 16.23 days
The figures calculated above shows that Pick N Pay took relatively shorter time in collecting money owed by debts in 2017 in comparison to 2016. This is a greater improvement on the company operations and is a clear sign of financial performance improvement for the company.
The ratio would be computed by dividing 365 days by the creditors’ turnovers. With these, Pick N Pay creditors’ day in 2016 and 2017 would be;
2016 =365/ (72,445/10,157) = 51.17 days
2017 =365/ (77,486/10,117) = 47.66 days
The above results show greater improvement on the company’s capacity in paying off its creditors. This is evident by the decreasing trend in its creditors’ days over the period.
The ratio is gotten by dividing organization’s total liabilities with its total equity. As such, Pick N Pay debt to equity in 2016 n 2017 was;
2016 = 12,687/3,898 = 3.25
2017 = 14,023/4,079 = 3.44
As from the above computations, it is evident that Pick N Pay experienced an increasing trend in its debt to equity over time. The increasing trend is a sign that for the last two years, the company has been relying on debt financing instead of its owners’ equity.
The ratio is computed by dividing the organization’s net profit by dividend paid to the shareholders. In this case, Pick N Pay dividend cover in 2016 and 2017 was;
2016 = 1,065/1.55 = 687.10
2017 = 1,244/1.80 = 691.11
The result shows that Pick N Pay was capable of paying dividends from its profit attributable to shareholders.
From Table 1 below, it can be stated that Shoprite Holdings was more profitable in comparison to Pick N Pay. This is due to the fact that Shoprite Holdings gross margin and operating margin were relatively higher than those one of Pick N Pay. Additionally, it is evident that Pick N Pay was more efficient in selling its inventories in comparison to Shoprite. This is evident from the fact that Shoprite inventory days was 60.60 days in comparison to 34.43 days for Pick N Pay, meaning that it took Shoprite almost two times more days in selling its inventories than Pick N Pay. In addition, based on the debtors’ days, it is evident that Shoprite was more efficient in collecting money owed by debtors in comparison to Pick N Pay. This is due to the fact that Pick N Pay debtors’ day was 16.23 days which was higher than 14.47 days for Shoprite. Besides, Pick N Pay seems to be doing poor in paying its creditors in comparison to its counterpart Shoprite Holdings.
Table 1: Comparative table of Pick N Pay performance with Shoprite in 2017
|
Pick N Pay |
Shoprite Holdings |
|
|
Gross profit margin |
17.99 |
23.99 |
|
Operating margin |
2.29 |
5.65 |
|
Return on investment |
24.87 |
16.84 |
|
Current ratio |
0.830 |
1.18 |
|
Inventory turnover days |
34.43 days |
60.60 days |
|
Debtors days |
16.23 days |
14.47 days |
|
Creditors days |
47.66 days |
45.08 days |
|
Debt/equity ratio |
3.44 |
1.01 |
Conclusion
Based on the financial analysis above, following conclusion can be drawn. First, based on the profitability ratios such as gross margin, EBIT margin, operating margin and return on investment, it can be stated that Pick N Pay has been profitable enough for the last two years. This is evidenced by an increasing trend in all the mentioned ratios. In addition, it can be concluded that the company has not been experiencing difficulties in settling both its short-term and long-term debt commitments. Such is evidenced by relatively promising ratios in debt to equity, current and acid-test ratios. Further, based on its inventory turnover, creditors and debtors’ days ratios, it can be stated that Pick N Pay management has been efficient enough for the last two years in using or selling its inventories, paying its creditors and in collecting money owed by debtors. Therefore, based on these analysis, it is recommendable for potential investors to put their cash in Pick N Pay since the company seems to be doing relatively better financially, hence, a probability of getting significant yield or returns over time.
References
Faruk, H., & Habib, A. (2010). Performance evaluation and ratio analysis of Pharmaceutical Company in Bangladesh.
Foster, G. (2004). Financial Statement Analysis, 2/e. Pearson Education India.
Fraser, L. M., Ormiston, A., & Fraser, L. M. (2010). Understanding financial statements. Pearson.
Nissim, D., & Penman, S. H. (2001). Ratio analysis and equity valuation: From research to practice. Review of accounting studies, 6(1), 109-154.
Penman, S. H., & Penman, S. H. (2001). Financial statement analysis and security valuation. New York, NY: McGraw-Hill/Irwin.
Pick N Pay. (2016). Pick N Pay integrated annual report 2016; Retrieved at 8th May 2018 from: https://www.picknpay-ir.co.za/downloads/annual-report/2016/pick-n-pay-integrated-annual-report-2016.pdf
Pick N Pay. (2017). Audited annual financial statements group and company Pick N Pay Stores Limited: Retrieved at 8th May 2018 from; https://www.picknpay-ir.co.za/downloads/investor-centre/results-and-presentations/2017/2017-audited-annual-financial-statements-group-and-company-picknpay-stores-limited.pdf
Shoprite Holdings. (2017). Shoprite Holdings integrated report 2017: Retrieved at 8th May 2018 from;https://www.shopriteholdings.co.za/content/dam/MediaPortal/documents/shoprite-holdings/integrated-report/2017/Shoprite_Holdings_IR_2017E_Full.pdf
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