Comprehensive Financial Analysis of Ocado: A Leading UK Retail Company Case Study

Financial Analysis of Ocado: Strategies, Profitability, and Performance Evaluation

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Introduction

Financial statement analysis is an important method that helps in evaluating the performance of the Company with relevance to its financial activities over the years. In addition to that, the external stakeholders to make use of these financial reports and summarization for making informed investment decisions that are going to recoup better results and returns use this analysis. The statement analysis helps in the estimation of the financial wealth and condition of the business and its functioning in the market. The report sheds light on the financial estimation of the UK-based retail market OCADO with relevance to the financial parameters.

Key activities of the business

Ocado is a retailer indulged in the business operations of health, and beauty care clothing and accessories and many more. The Company helps in providing online retail solutions for delivery applications for corporate customers and retailers established in the economy of the UK. The headquarters of the organization is situated in Hatfield, United Kingdom(ocadoretail.com, 2022). The employee strength of the Company is around 19347 and the revenue during the year 2021of around $3.2B.

Business strategies

The key strategies of the business includes the presence of an omnichannel approach that the key marketing strategy that helps in customer engagement towards the business. During the year 2017, it was the first organization that adopted smartphone technology as its communication tool with customers. Ocado collaborated with Company diligent as a way of bringing modification in the communicating medium (annualreports.com, 2022). Apart from that, this was the first organization that embraced artificial intelligence as well as machine learning in order to customize their emails. The adoption of the strategy helped in reading the valuable feedback and opinions of the customers and delivering them solutions.

During the tough time of covid-19 outbreak when many organizations failed to make their impact profound and long lasting. Ocado enhanced its organization with the engagement of the Personalization factor with the adoption of a “new ad campaign” that aimed at highlighting the enhancement of the customer's experience of Ocado (ocadoretail.com, 2022). The platform presents to its valuable customers a plethora of options that were available at their site and how can they be beneficial for the customers. This was introduced as the digital marketing strategy of Ocado and fulfilled their customer's demands despite major havoc around corners of the world.

The transformation with the amalgamation of the holistic point of view has helped the entity t chive a desirable position in the market and remained in the queue even after the pandemic period (annualreports.com, 2022). In addition to that, the strategy that has been used by the Company is to keep its supply chain management ahead with the automation in its warehouse and delivery system. In addition to that, the changes in the digital platform are convenient and reliable for the customers to make it use for their benefit(ocadoretail.com, 2022). Along with that, fixing glitches for the virtual customers has created a reputational value in the point of view of the clints and customers.

Evaluation of the profitability factor from a management perspective

The profitability performance of the Comoany has been understood with the help of the derivation of “Gross Margin” and “Net profit” ratios for the years 2020 and 2021. These indications have been used as factors for evaluating the increase and decrease of the profit level of the Company in the previous years (ocadoretail.com, 2022).

Figure 1: profitability Ratio

According to the above figure 1, it can be seen that the “Gross profit margin ratio” that has been computted with the help of the formula “Gross profit divided by revenue” has relevant increased from 2020 to 2021. The revenue level of Ocado has relevantly increased from 2331800 to 2498300 in the year 2021. In addition to that, the ratio has increased by 2% marking an increase in the profit level earned by the Company. Profit tax margin ratio in the year of 2020 and 2021 are respectively -0.09 and -0.05. The calculation of profit tax margin ratio has been done by using the formula “net income after tax divided by net sales”.

Evaluation of the financial position with the help of the determination of KLiquidty and gearing ratio

The financial position of the Ocado has been generated using the ratio analyst techniques that will help in identifying the core areas of its activities as well as help in depicting the positioning in the market (.

Liquidity Ratio

The ratio helps in the assessment of the liquidity measures of the company and its capability to repay the short-termobligations and debts arising with a sufficient amount of assets generation.

Figure 2: Liquidity Ratio

As per the above figure, it can be seen that the liquidity performance of the Company has decreased over the years owing to the decrease in the current assets. The Computation of the Current ratio with the help of the formula “current assets divided by current liabilities” for the year 2020 stands at 4.82 as in the year 2021 respectively. The quick ratio has been calculated using the formula “Current assets fewer inventories divided by current liabilities”. The value that has been retained from the sum is around 3.85 in the year 2020 and 4.69 in the year 2020. This suggests that the liquidity measure of Ocado has decreased and indicates a financial short obligation towards them. Thus, Company requires proper strategies and models relevant and helpful for the generation of assets and increasing the liquidity position of Ocado. Inventory days in the year 2021 are 20 days and in the year of 2020, the inventory days were 14 days. The calculations of the inventory days using the formula “total inventory divided by the cost of goods sold”. For calculating trade payable days using the formula “average accounts payable divided by the cost of goods sold”.

Gearing Ratio

Gearing ratio is the financial metric tool that helps in the evaluation of the shareholder's equity in comparison to that of the total debt owed them. This computation of the ratio helps in determining the funding of the operations of the Company in a portion of equity and debt.

Figure 3: Gearing Ratio

According to above figure 3, the gearing performance of the Company indicated that states that it has decreased over the years owing to the increase in total debt. The shareholder's equity value of the Company has increased from 1765800 to 1588000 from 2020 to 2021 respectively (annualreports.com, 2022). The value of the ratio during the financial year 2021 is identified to be around 1.15 and that of the year 2020 0.79 respectively. In addition to that, the computation of the “Debt Ratio” with the help of the formula “total debt divided by totals assets” is done. During the year 2020, the valuation of the ratio was 0.35, which has changed to 0.42 in 2021. The ratio indicates that the total debt of the company has rapidly increased over the years marking it financially unstable and risky for the investors to invest. Apart from that, it can be identified that the total debt of the Company is comparatively higher than its shareholder's equity.

Evaluation of the Cash flow statement including cash and profit values

The estimation of the cash flow is beneficial for summarizing the changes in the cash inflows and outflows of Ocado during the financial year 2021 effectively.

The estimation of the CFPS value of Ocado is has been effectively done based on the formula

Table1: CFPS of Ocado

Based on the above figure it can be seen that the “cash generated from operating activities” of the Company is around 15. The value of CFPS is near about 0.66. The determination of the cash per share has helped in evaluating the cash performance of the Company.

Table 2: EPS value

According to the above table, it can be seen that the net profit of the Company is near about 2498300 and the “average outstanding shares” is near about 751487. The valuation of the EPS is around 3.324 approximately.

Evaluation of the performance from the equity investors' perspective

The evaluation of performance from the investor's perspective is estimated with the help of the DPS for the year 2021.

Table 3: Calculation of DPS

According to the above table it can be seen that the changes in the DPS ratio have been calculated suing the formula “total outstanding shares divided by total dividends paid”. The value that has been obtained is 97595.71 respectively. Thus this has effectively helped in analyzing the financial performance of the Company owing to the increase and decrease in the cash valuation throughout the financial year 2021.

Conclusion

The entire conclusion can be drawn from the financial understanding and evaluation of OCADO with context to its financial strategies and objectives. The strategies that have been used by the company are to increase its revenue and create customer satisfaction. As per, the evaluation of the profitability ratio is seen that the Company is in a profitable situation and earning a higher rate of profit even during the pandemic period. The liquidity position of the company has relevantly lowered due in the year 2021 owing to the decrease in the current assets and inventories. Apart from that, the EPS has been computed for the inspection of the financial prospects of the Company in terms of net revenue and earnings.

References

annualreports.com (2022) Annual report of Ocado Available at https://www.annualreports.com/HostedData/AnnualReports/PDF/LSE_OCDO_2021_ab98098ccc744ba1b106cf5f97074ce9.pdf [Accessed on 25 November 2022]

ocadoretail.com (2022) About the Company Available at https://ocadoretail.com/about-us/ [Accessed on 25 November 2022]

Ramli Sulong, N.H., Mustapa, S.A.S. and Abdul Rashid, M.K., 2019. Application of expanded polystyrene (EPS) in buildings and constructions: A review.Journal of Applied Polymer Science,136(20), p.47529.

yahoo.com (2022) about the financial performance of Ocado Available at https://finance.yahoo.com/quote/OCDO.L/cash-flow?p=OCDO.L[Accessed on 25 November 2022]