Thomas Cook Case Study Finance Essay

This study analyses the fiscal and non-financial public presentation of Thomas Cook in the 2011 fiscal twelvemonth with a recommendation on whether One-World Investment Consortium should put ?150 million in the company. Thomas Cook is a prima leisure travel company but faced tough operating environment in 2011. The public presentation of the company is besides analysed in visible radiation of the Chairman ‘s statement because the statement high spots countries where the company needs to concentrate upon in the immediate hereafter. The study besides analyses company ‘s budgetary control system as mentioned in the Chairman ‘s statement to do recommendations on possible actions that can be taken to better public presentation of the company.

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Company profile

Thomas Cook is one of the universe ‘s prima leisure travel companies. The company operates in 22 states and had 23.6 million clients in 2011 ( Thomas Cook concern sections, 2012 ) . The company has a figure of taking travel trade names that occupy top places in their several classs.

The products/services of the company can be classified into two chief classs – Mainstream and Independent. Mainstream includes charter bundles where assorted merchandises are bundled together for sale as a individual merchandise and it includes retail foreign exchange. As the different constituents of a bundle are owned by the company, Mainstream engagements are recognised on a gross dealing footing. Independent section allows persons to plan their single bundles and includes fiscal services excepting retail foreign exchange. Gross is largely recognised on committee footing in the Independent section. The merchandises are distributed through retail, on-line, call Centres and 3rd parties. The scheme of the company is to maximize value from the Mainstream concern section and purchase its graduated table by constructing a prima place in the Independent travel concern section ( Thomas Cook about us, 2012 ) .

The grosss and net loss for the fiscal twelvemonth to 31 December 2011 were ?9,809 million and ?521 million severally. However, the implicit in net income for the period was ?303 million. The company operates in six geographic sections. The percent portions of gross and net income from operations of each geographic section are shown in chart 1. UK, Ireland, India and Middle East geographic section contributed highest in footings of gross. However, it was the Northern Europe part that accounted for the highest portion in net income from operations.

Chart 1 – Percentage portion in grosss and net income from operations

( Beginning: Thomas Cook concern sections, 2012 )

Analysis of fiscal and non-financial public presentation

Profitableness

Thomas Cook recorded a 10 % addition in gross revenues in 2011 which is a strong accomplishment given the economic and political environments in its markets. Chart 2 shows the per centum alteration in gross revenues in different geographicss in 2011. Thomas Cook reaped the benefits of variegation as low growing in the UK section was compensated by high growings in other parts.

Chart 2 – Percentage alterations in gross in 2011

The growing in gross revenues was at the disbursal of gross borders which declined from 24 % in 2010 to 22 % in 2011. However, the company managed to maintain its runing border invariable in both old ages at 2.8 % implying that the direction took stairss to maintain operating costs under control in 2011. Thomas Cook reduced its operating costs by 2 % of gross revenues, the difference between the gross borders in 2010 and 2011. One of the chief factors in cut downing operating costs was forces disbursal which declined from 12 % in 2010 to 11 % of costs in 2011. This is besides reflected in 9 % addition in gross revenues per employee in 2011. The decrease in operating costs was in line with one of the chief countries of focal point as mentioned in the Chairman ‘s statement in the 2011 one-year study of the company ( Thomas Cook, 2012 p. 2 ) . The economic clime in developed states is improbable to better in the short term and competition is traveling to be terrible as clients ‘ travel budgets are impacted by high unemployment and lower income. Hence, decrease in costs is likely to be cardinal to bettering net incomes in the close hereafter.

Chart 3 shows net income borders. The EBITDA border declined in 2009 to 4.8 % from 5.7 % in the old twelvemonth and has remained changeless at that in the last two old ages. The EBITDA of the company increased 10 % to ?475 million in 2011 which shows the strong resiliency of the Thomas Cook trade name name. However, the net income border declined aggressively in 2011 due to high damages of intangible assets.

Chart 3 – Net income borders

Among parts, the grosss of the Northern Europe are tierce of the UK, Ireland, India and Middle East but its net incomes are three times higher. This implies that the profitableness of the Northern Europe was nine times that of the UK, Ireland, India & A ; Middle East part.

Liquid

Chart 4 shows the current ratios of the company ( refer appendix I for inside informations ) . The current ratio was less than 50 % in 2011, that is, the current assets covered less than half of the current liabilities. It implies a weak short-run liquidness place from creditors ‘ position.

Chart 4 – Liquid ratios

Gearing

Chart 5 shows the entire debt to entire assets ratio of the company ( refer appendix II for inside informations ) . The ratio increased aggressively in 2008 and remained at around that degree since so. 18.4 % ratio in 2011 implies that less than fifth parts of entire assets of the company were financed by debt, which is non a high ratio.

Chart 5

However, the entire debt to entire equity of the company increased aggressively over the old ages ( mention chart 6 ) . The ratio was more than 103 % in 2011, a crisp addition from 23 % in 2007 because of addition in debt and diminution in equity over old ages. The underperformance in the UK and political tensenesss in the Middle East were chief grounds behind the hapless public presentation by the company and hence, an addition of loan installation by ?200 million in December 2011 ( Thomas Cook, 2011 p. 2 ) . The increasing debt to equity ratio implies two things. First, the company is funding higher proportion of its assets through liabilities. Second, it raises bankruptcy concerns as the equity has declined over old ages. The Chairman ‘s statement besides mentions that the company should concentrate on beef uping its balance sheet.

Chart 6

Dividend

The Chairman ‘s statement indicates the focal point on hard currency direction for bettering the fiscal strength of the company. The statement mentions the arrest of dividend payments for the clip being till the fiscal strength of the company is restored. This is a major corporate finance determination as investors analyse dividend proclamations for their signalling consequence. Empirical surveies have shown that decrease in dividend is met with negative portion monetary value reactions ( Neale and McElroy, 2004 p. 357 ) .

Besides, the Pecking order theory suggests that companies prefer internally generated hard currency over external fundss for capital investing ( Myers, 1993 p. 7 ) . The direction of Thomas Cook wants to retain internally generated hard currency to cut down debt or pass it on capital outgo instead than administering it to stockholders and adoption.

Overall, the profitableness of the company remained stable in footings of operating net income border but net net income borders declined due to high write-down of intangible sums. The major concern is sing the short and long-run fiscal strength of the company. Gearing ratios have increased aggressively due to a decrease in equity and an addition in debt in 2011.

Budgetary control systems

The Chairman ‘s statement raises some cardinal issues that are related to the budgetary control system in an administration. The Chairman ‘s statement mentioned that the public presentation of the direction of Thomas Cook fell abruptly of the expected criterions. It indicates that the direction of the company did non execute as per the budget at the beginning of the 2011 fiscal twelvemonth. A budget is an of import papers for planning and commanding activities of an administration as it involves mensurating existent public presentation against the budget ( Greenwood, 2002, p. 153 ) . The discrepancy between the expected and existent consequences of the company was likely high for the Chairman statement to include underperformance in the one-year study. Proper discrepancy analysis can throw light on factors that resulted in hapless than expected public presentation ( Hobbs, 1964 p. 905 ) .

The fact that public presentation was well different across parts was besides highlighted in the Chairman ‘s study as it was said that the company can profit from sharing of best patterns across the Group. It indicates that budgetary treatments are held between senior direction and single parts at a clip.

The Chairman ‘s statement besides mentioned that the company should implement ‘proper wage for proper public presentation ‘ . Budgetary control systems are utile tools in analyzing and honoring public presentations of employees. However, if public presentation inducements are non decently defined, budget based public presentation wagess can increase short-run focal point over long-run ends of the company. Budgeting can besides ensue in directors seting their involvements before that of the administration ( Warren et al. , 2009 p. 230 ) .

Recommendations

Thomas Cook has a strong trade name and has managed to increase its EBITDA in 2011 in malice of tough operating and economic climes in its markets. The company besides has a strong substructure in footings of retail mercantile establishments, aircrafts and multiple-channel presence. Leisure travel concerns do good when economic system improves and Thomas Cook can leverage its top trade names to better its net incomes.

However, the chief issue with the company is its balance sheet. Increasing debts and decrease in equity has caused major concerns about the long-run viability of the concern in the current signifier. The unsure economic status besides does non assist the company. The company was hard currency positive before funding in 2011 which is good point from an equity investor ‘s position. The direction has besides made advancement in footings of bettering operations and run intoing its strategic aims. These are positive marks and their possible impact on net incomes could be significant when economic system improves.

It is recommended that One-World Consortium should research the proposed investing of ?150 million in deepness. The Consortium should besides prosecute the direction of the company with a position of doing alterations in a figure of countries. First, Thomas Cook can better its budgeting procedure. Discussions across divisions at the clip of budget readyings can assist in sharing of good direction patterns. The company should promote higher engagement of employees in budget readying. Additionally, wage bundles of senior direction should be designed in a manner to reflect higher correlativity to the public presentation of the company every bit opposed to single divisions. This would ensue in better sharing of direction patterns as underperformance in one division will negatively impact fillips in other divisions besides.

Second, the UK, Ireland, India & A ; Middle East geographic section is the largest in footings of gross but has the lowest profitableness in footings of borders. Thomas Cook needs to concentrate on this section as per centum additions in net income borders in these markets will ensue in highest absolute addition in net incomes of the company. The implicit in net income from operations from the UK, Ireland, India & A ; Middle East part in the fiscal twelvemonth 2011 were ?73.4 million lower than the old twelvemonth and hence, there is significant possible to increase the current profitableness of this part. UK operations should look at direction patterns, pricing of merchandises and distribution channel mix of other parts to analyze factors that could ensue in higher profitableness. However, the differences in demographics, economic environment and competition across parts should be taken into history when comparing public presentations across geographicss. Economies in Northern Europe have suffered less as compared to those in the UK, Ireland and Middle East. Exchange rate motions in GBP and Euro should besides be analysed for the twelvemonth 2011 to understand the differences in operating public presentation in the UK and Europe.

Third, the company should research cut downing the figure of retail mercantile establishments. This will cut down fixed disbursals of the company. It will besides better hard currency coevals and aid in cut downing debt and bankruptcy concerns.

Decision

It is recommended that One-World Consortium should analyze the proposed investing of ?150 million in deepness because of Thomas Cook ‘s trade name name, strong web and potency from additions when economic system improves in the hereafter. The Consortium should besides prosecute the board of the company to better its budgetary control systems in footings of timely discrepancy analysis and better alliance of wage and public presentation. The significant differences in profitableness besides shows that the UK concern section can profit from using some of the better gross revenues and cost direction patterns adopted by other parts such as Northern Europe.

Part 2 – Investing assessment

Introduction

A figure of capital investing assessment methods are used to measure the fiscal feasibleness of long-run investings. The methods differ in their attack and utilize different standards to measure investings and hence, are utile in deriving a position from multiple angles. This study analyses four investing assessment methods – payback period, accounting rate of return ( ARR ) , net nowadays value ( NPV ) and internal rate of return ( IRR ) – for measuring long-run investings. The advantages and disadvantages of each method along with its applications are reviewed.

Payback period

This method calculates the clip required to retrieve the initial investing from its associated operating hard currency flows ( Jiambalvo, 2010, p. 334 ) . For an investing to be superior over another under this method, the clip required to reimburse initial investing should be shorter ( Armstrong, 2006, p. 427 ) . The payback period every bit calculated as below.

Payback period = ( n-1 ) old ages + ( -Cumulative cyberspace hard currency flow outstanding at the terminal of ( n-1 ) th year/Net hard currency flows in the twelvemonth ‘n’1 )

Where ‘n ‘ is the twelvemonth in which cumulative hard currency flows turn positive for the first clip.

The payback period method is utile for a speedy analysis as it gives an thought about when will the company retrieve its investing. However, there are major restrictions of this method. First, the payback period ignores the clip value of money as the hereafter hard currency flows are non discounted in this method ( Baker and Powell, 2005, p. 249 ) . This is a major drawback as it does non take into history the hazard associated with long-run hard currency flows. Second, the method can ensue in proposing an investing that yields lower returns over another investing that gives higher returns. Hence, the payback period method is non recommended for measuring long-run investings.

Accounting Rate of Return ( ARR )

The Accounting Rate of Return is the ratio of the mean one-year net income over the life of an investing to the mean investing ( Armstrong, 2006, p. 429 ) . This method, similar to the payback period method, is besides comparatively simple to cipher as it needs accounting projections merely. However, the simpleness of this method is besides the chief ground behind its major restrictions. Similar to the payback period attack, this method besides does non take into history the clip value of money ( Baker and Baker, 2011, p. 179 ) . For long-run investings this is a major drawback as hard currency flows over long term carry higher hazards due to a figure of grounds such as political, currency exchange rates and involvement rates. Ignoring these hazards, by non dismissing the hereafter hard currency flows is makes this method unsuitable for measuring long-run investings. Additionally, the ARR as it can be calculated in a figure of ways and this can make misinterpretation and miscommunication ( Arnold, 2008, p. 132 ) .

Net nowadays value ( NPV )

The method discounts the future hard currency flows of an investing by an appropriate rate that reflects the hazards of those hard currency flows. This is better from long-run investings as discounting hereafter hard currency flows will reflect the true profitableness of an investing. It is besides better when comparing two investings with different investing skylines. The discounting component of the NPV method makes it better than the payback period and ARR methods when measuring long-run investings. The price reduction rate used to cipher the present value of the hereafter hard currency flows can be adjusted for a figure of factors such as political hazards and involvement rates.

However, the NPV method has disadvantages excessively. The major drawback of this method is that it takes attempt to find the cost of capital for dismissing hard currency flows and even so its truth can non be guaranteed. Discount rate depends upon a figure of factors such as political hazard and fiscal geartrain, and therefore subjective elements come into image when finding a price reduction rate. Variations in price reduction rates can significantly impact the value of an investing. Besides, extra work is required when comparing two long-run investings that use different sum of initial capital.

Internal rate of return ( IRR )

This method is a fluctuation of the attack used in the NPV method. The IRR method calculates the price reduction rate at which the NPV of an investing is zero. So instead than finding the price reduction rate, this method gives the price reduction rate that can be compared with the cost of capital of an investing for determination devising. A undertaking would add value it its IRR is higher than the cost of capital and vice-versa. The IRR attack is besides utile for long-run investing analysis as the hereafter hard currency flows are discounted.

As observed in instance of the old three methods, the IRR method has restrictions excessively. The major restriction of this attack is that it can ensue in multiple IRRs for same set of hard currency flows when net hard currency flows change marks often during the life of a undertaking ( Besley and Brigham, 2008, p. 368 ) . Multiple IRRs can do it hard for the direction of a company to make up one’s mind. This method besides does non demo the value add-on by a undertaking and hence can ensue in wrong determination when two undertakings differ well in their initial investings.

Decision

The above analysis shows that each method has certain advantages and disadvantages. The NPV and IRR methods are more suitable for long-run investings because they discount the hereafter hard currency flows by a rate that reflects the hazards of those hard currency flows. Hence, these two methods should be preferred over the payback period and accounting rate of returns methods when measuring long-run investings.

Appendix I – Liquid ratios

Appendix II – Gearing ratios

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