Financial Statement Analysis

The ratio analysis has been a very useful tool to carry out an evaluate analyses of information performance’s of the company. Thsese ratios are calculated from current year figures and then compared to past years, other companies, the industry and so on. The ratio analysis does provide a basis for the investors to make investment decisions. Another important aspect of the financial ratio is that it highlights the performance of the company in the industry, its weakness and is also the basis for the comparison of the company’s performance with the competitors and also compare the past performance of the company with the current performance.

There are numerous ratios thar can be estimated from the financial statements of a company’s activity. The ratios are divided among Profitability, Liquidity, Efficiency and Capital Structure Ratios.

The proposed report will be conducted with the objective of investigating the financial analyses of John Lewis in 2013 and 2012. In particular, the study will include the financial ratios profitability, Liquidity, Efficiency and Capital Structure Ratios.

Different aspects of the performance of the company have been highlighted. Thus the ratios calculated for the company are analysed and based on the interpretations of the comparison between the performance of the both years has been made. In order to provide an insight into the key areas of the company and the also the performance, the recommendations are made in the end of the report. Furthermore, the reccomendations analyse the way in which the John Lewis could improve its performance in the market.

Profitability Ratio Analysis

The profitability ratio analysis of the company has been divided into two parts, margins and returns. The margin analyses involves ratios such as gross profit margin, net profit margin and interest to sales ratio. Return of Capital Employed (ROCE), Gross Profit Ratio, Net Profit Ratio, Administrative Expenses to sales Ratio. The formulas and the calculator of these ratios are shown below and expressed as a percentage.

1 – Gross Profit Ratio (GP Ratio) : Gross Profit x 100/ Sales

2013 – 449.70 x 100 /8.465,50 = 5.31%

2012 – 391.00 x 100/7.758,60 = 5.04%

2 – Net Profit Ratio (NP Ratio) : Net Profit before tax x 100/Sales

2013 – 151,50 x 100/8.465,50 = 1.79 %

2012 – 136,20 x 100/7.758,60 = 1.76%

3 – Interest Expenses to Sales Ratio : Administrative Expense (interest) x 100/ sales

2013 – 81,00 x 100/8.465,50 = 0.96%

2012 – 70,50 x 100/7.758,60 = 0.91%

Based on the ratios it can be said that the gross profit and the net profit of the John Lewis has been quite low. This can be attributed to the sector where in due to fierce competition the margins can be quite low. Thus highlighting the need to improve the operational efficiency as well as the financial cost of the company as it will impact the returns which have been discussed further in this section. Also it can be seen that the profits in 2013 have improved in comparison to the previous year showing that the company has been successful.

The second aspect of the profitability ratios are the returns. These include return to shareholders equity, capital employed and the total assets. The calculations for these ratios have been based on the formulas shown below.

Return on capital employed: Profit before Interest and tax (Gross Profit) x 100 / capital employed

2013 – 449.70 x 100/3.642,20 = 12.35%

2012 – 391.00 x 100/3.633,60 = 10.76%

As the profit of the companies have increased the returns have also improved.

The analysis for the return on assets and the capital employed highlights that John Lewis have employed huge assets and thus the return on asset value is quite low. Also the performance of John Lewis in terms of return on capital employed is appreciable and have increased from 2012 to 2013.

Efficiency Ratio Analysis

The efficiency ratios highlights that how efficient the company has been in utilizing the assets of the company. The following ratios have been included in the efficiency ratio analysis of the company and are expressed in number of days.

Debtor Turnover Ratio (DTO) : Trade Receivables x 365/Credit Sale

Sales Revenue to Capital Employed : Sales/Capital employed

Total Asset Turnover : Sales/Total Assets

Inventory Turnover Ratio (ITO) : Inventory x 365/Cost of Sales (or purchases)

Inventory Turnover Ratio (ITO) : Inventory x 365/Credit

It is very important to analyse these ratios as these highlight the ability of the company to efficiently utilize the resources. The various ratios that have been shown above contribute differently to the performance and utilization of the resources.

The sales revenue to capital employed ratio highlights that for John Lewis the sales have increased considerably in comparison to the capital employed. This has been the reason for the increase in the returns on the capital employed that has been shown above. In case of Marks and Spencer it can be seen that the sales to capital employed ratio has come down. Thus the operational expenses of the company have come down considerably as although sales to capital employed ratio has come down the returns on capital employed has improved.

The debtor turnover ratio of both the companies have been high and that the creditor turnover is quite low. Thus the cash flow contribution from the trade receivables and the payables has been efficiently utilized by the company. This can be encouraging as both the companies have maintained this level however it can also be said that the companies are not in a position to impove cash flow further by increasing the trade payables and reducing debtors. Thus it can be said that John Lewis has been able to improve the cash flow as the creditor ratio has come down and the debtor ratio has increased.

The inventory turnover ratio shows that the inventory levels have been maintained by John Lewis whereas that of marks and Spencer has increased the inventory levels. Howver the level of inventory levels is estimated by analyzing the liquidity ratios of the two companies. Overall the efficiency ratios highlight the efficient performance of the two companies.

Liquidity Ratio Analysis

The liquidity ratios of the company shows the ability to convert the current assets of the company into current liabities. This is considered as the ability of the company to meet the short term needs of the company. The liquidity ratios that have been included in the analysis have been shown below.

Current Ratio = Current Assets/ Current Liabilities

Acid Ratio = (Current Assets – Inventory)/ Current Liabilities

The current ratio of the companies have been quite low and alarming. Since the value of current ratio has been lower than one the current assets of the company are less than the current liabilities. This means that the assets of the company will be utilized to meet the current liability requirements. In case of John Lewis the inventory levels have considerable contribution in the current assets. This has been highlighted by the acid ratio of the company.

The acid ratio of the two companies also highlight the issue which means that the two companies will be in very difficult liquidity position. The inventory levels has been quite high. This has been the case for both the companies as well.

In case of the operating cash flows ratio to the current liabilities it has been seen that operating cash flow ratio of John Lewis has been quite low and also in comparison to Marks and Spencer it has been lower further. This can be the major issue as the company is already having lower current ratio and also the operating cash flow of the company isn’t sufficient enough to fulfill the current liabilities requirements of the company.

Overall the liquidity ratios of both the company isn’t quite encouraging and further in case of John Lewis it has been a greater issue for the reasons that have been discussed above.

CAPITAL STRUCTURE RATIO

The Capital Structure ratios provide the information on the debt level of the company. This is very important as it will impact the returns to the shareholders and also provides information on the option available for the company to have additional leverage. The ratios that have been calculated are as below.

Debt to Equity Ratio: Long Term Borrowings/ Shareholders equity

Debt to Total Assets: Long Term Borrowings/ Total Assets

Debt to Capital Employed: Long Term Borrowings/ Capital Employed

Interest Coverage Ratio: Gross Profit/ Interest Expense

The gearing ratio of John Lewis shows that the debt to equity ratio of John Lewis has been quite optimum and that in case of marks and Spencer the the debt level has been quite high. The high debt level generally would mean that the returns of the company would be impactd but in case of Marks and Spencer the returns have been maintained but generally there has been quite a issue for returns to shareholders and the decision making.

John Lewis has maintained the interest paid to the sales ratio. Marks and Spencer has although reduced the interest cost. This has been done by reducing the debt levels which can be seen by the debt to equity ratio. Thus reducing the debt levels by 1% the interest cost has reduced considerably.

One more consideration is that although the debt levels of John Lewis has reduced the interes paid by the company has increased as the sales have also increased. Thus the company will have to consider this as the debt levels have reduced but the interest rate would have gone high.

Overall the gearing ratio for John Lewis has been optimal and further the company will have to maintain it so that the considerations can be made to the other ratios that have been discussed above.

Interpretation and Recommendations

The above discussion highlights information regarding John Lewis. The interpretation of the various ratio shows that the company has quite strong financial statements. However there are quite considerations that the company company has to amend. Firstly the liquidity ratio of the company has not been strong enough and that the interest paid by the company.

However for John and Lewis the profit margin could be improved. Thus highlighting the need to improve the operational efficiency as well as the financial cost of the company as it will impact the returns which have been discussed further in this section. Also with respect to the profit, it be seen that it has improved in comparison to the previous year.

The sales revenue to capital employed ratio highlights that for John Lewis the sales have increased considerably in comparison to the capital employed. This has been the reason for the increase in the returns on the capital employed that has been shown above.

The debtor turnover ratio of John Lewis have been high and that the creditor turnover is quite low. Thus it can be said that John Lewis has been able to improve the cash flow as the creditor ratio has come down and the debtor ratio has increased.

John Lewis has maintained the interest paid to the sales ratio.

Thus John Lewis need to reduce the current liabilities so that the non current assets developed by the company are not impacted. Secondly although the interest paid by John Lewis has reduced the rate at which interest is paid has increased. This has been highlighted by the gearing ratios of the company.

References

Helfert E.A., (1996), Techniques of Financial Analysis: A Practical Guide to Measuring Business Performance

Palepu, K.G., Healy, P.M. and Bernard, V.L., (2007), HYPERLINK “http://www.flipkart.com/business-analysis-valuation-8131501515/p/itmdytsda6hdtezx/search-books-valuation/30?pid=9788131501511&ref=166cce82-5dd5-45f7-aedf-bb4383eb246c&_l=THjGib6Q4EgfaGQbpMwtiQ–&_r=2KsT0cDpCiHgzyrBF1lBvQ–“Business Analysis and Valuation: Using Financial Statements, Texts and Cases,

Leo Troy, (2012), Almanac of Business & Industrial Financial Ratios

HYPERLINK “http://www.amazon.com/s/ref=ntt_athr_dp_sr_1?_encoding=UTF8&sort=relevancerank&search-alias=books&ie=UTF8&field-author=Charles%20K.%20Vandyck”Charles K. Vandyck, (2006), Financial Ratio Analysis: A Handy Guidebook, Trafford Publishing

Benedict, A and Elliot, B (2008) Financial Accounting an Introduction. Edinburgh gate: Pearson Education.

John Lewis 2013 2012 Gross Profit £449.70 £391.00 Net Profit £151.50 £136.20 Sales £8,465.50 £7,758.60 Capital employed £3,642.40 £3,633.60 Total Assets £5,363.60 £5,245.90 Fixed Assets £4,116.00 £4,014.00 Current Liabilities £1,721.20 £1,612.30 Current Assets £1,247.60 £1,231.90 Total Liabilities £3,462.40 £3,237.00 Total Equity £1,901.20 £2,008.90 Total Liabilities+Equity £5,363.60 £5,245.90 Loans £627.70 £726.70 Interest Paid £81.00 £70.50 Account Receivable £191.90 £213.20 Account Payable £1,451.30 £1,207.30 Inventory £514.00 £465.20                         Operating cash flows £644.00 £544.00