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This question firstly requires the preparation of key financial performance indicators focusing on profitability and operating performance
These key ratios would be as follows
ROCE
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|
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2000 x 100
120000
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1.67
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%
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27,000 x 100
400,000 |
6.75
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%
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Operating profit margin
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2000 x 100
40,000
|
5
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%
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27,000 x 100
120,000 |
22.5
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%
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Capital employed turnover
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40,000
120,000
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€0.33
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|
120,000
400,000 |
€0.30
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Gross profit
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23,000 x 100
40,000 |
57.5
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%
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77,000 x 100
120,000 |
64.17
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%
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Labour costs to sales %
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12,000 x 100
40,000 |
30
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%
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30,000 x 100
120,000 |
25
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%
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Overheads to sales %
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9000 x 100
40,000 |
22.5
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%
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20,000 x 100
120,000 |
16.67
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%
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Sales mix
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Bar
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10,000 x 100
40,000 |
25
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%
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40,000 x 100
120,000 |
33.33
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%
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Rest
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30,000 x 100
40,000 |
75
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%
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80,000 x 100
120,000 |
66.67
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%
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Bar gross profit %
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5,000 x 100
10,000 |
50
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%
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26,000 x 100
40,000 |
65
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%
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Rest gross profit %
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18,000 x 100
30,000 |
60
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%
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51,000 x 100
80,000 |
63.75
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%
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In comparing the profitability and operating performance of both companies one must note that while both companies are operating in the same sector, Mulligans is significantly larger with 3 times the sales of Daly’s and has net assets values ( capital employed) 3.33 times greater than Dalys.
From a profitability perspective Mulligan’s is generating operating profits of €27,000 compared to Daly’s of €2,000. Much of this can be related to the relative size of the investment in both businesses. Mulligan’s however does generate an average ROCE of 6.75% compared to Daly’s return which is very poor at 1.67%.
Once can further analyse these ratios into their to component parts.
- Capital employed turnover: Dalys perform better in this regard that Mulligans. Dalys is generating 0.33 cent per € invested in the business. This is 10% higher than the sales generated by Mulligans for its level of investment.
- Operating profit margin: Mulligans completely out-perform Dalys in this regard. They generate an operating profit of €22.5 for every €100 sales whereas Dalys generate only €5.00 per €100 sales. This requires further analysis. The operating profit margin is influenced by two factors
- Gross profit margin. Here Mulligans out-perform Daly’s generating a gross profit of €64.17 per €100 of sales compared to Daly’s of €57.5 per €100 sales. When analysing this further Mulligans generate a higher gross profit percentage in both the bar and restaurant. Daly’s must investigate why its bar gross profit percentage is significantly lower than Mulligans This difference can be due to a number of reasons such as
i. Mulligans charging a higher selling price.
ii. Mulligans can gain higher trade discounts due to bulk buying of stocks.
iii. Lack of cash and stock control in Daly’s operations.
- Expenses to sales ratios. Mulligans have lower labour costs and overheads as a percentage of sales. Total labour and overhead expenses for Mulligans are 2.5 times higher than Dalys however Mulligans are generating three times the level of sales. Thus their costs to sales percentages are lower.
Overall while Dalys is efficient in generating more sales per € invested in the business however it is poor is extracting a reasonable profit from those sales. The problems are focused on the lower gross profit margin for the Bar as well as the higher labour and overhead costs. Management must investigate these areas with the overall objective of generating more profit per € sales.
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