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Financial Ratio Analysis of John Lewis On Profitability
Financial Ratio Analysis of John Lewis On Profitability
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Contents Introduction ............................................................................................................................. 3 Objectives .............................................................................................................................. 4 Brief history of John Lewis .............................................................................................. 4 Balance Sheet Statement.5 Profit and Loss Account..6 Profitability Ratio Results/Workings.8 Analytical Findings10 Return On Capital Employed Margin11 Gross Profit Margin12 Operating Profit Margin13 Net Profit Margin.15 Limitation of using Financial Ration....16 Recommendation...17 Conclusion..18 Bibliography...19 Appendices/Keywords...20
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Introduction
Whether you're a do-it-yourself or rely on guidance from an investment professional, learning certain fundamental financial statement analysis skills can be very useful - it's certainly not just for the experts. (Loth, 2012) hence why this analysed financial report of John Lewis PLC, has been prepared by me, to help with you coming to a good financial decision to invest or not This Report will be analysing John Lewis Plc financial report, looking at Profitability on their performance ratios Financial Ratios are pillars of Financial Statement analysis. (INDEPENDENT INVESTOR, 2010). Finally will be going into some details and focusing on the return on capital employed, Gross Profit Margin, Operating Profit Margin and finally Net Profit Margin. This report will help you in coming to a decision to invest or not in John Lewis Plc.
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Objectives
This report aims to provide conclusion detailing the result of analysis and a recommendation with reasons why potential shareholders should buy shares in the John Lewis Partnership Plc that is also part of London Stock Exchange from an analyst perspective. I will be analysing the profit and loss account and balance sheet; the analysis will be covering John Lewis PLC financial report for 5years from 2008-2012.The analysis done by me will provide potential shareholders information on profitability, before finally focusing on the operating profit margin, gross profit margin, net profit margin and finally return on capital employed. Finally will be concluding if to invest or not in John Lewis PLC and recommendation on reasons to buy shares or not with John Lewis Partnership PLC.
John Lewis is very popular for their saying Never Knowingly Undersold, which promises to give customers value for money. John Lewis has over 40stores in the UK. The first John Lewis store in Oxford Street is the biggest store out of the partnership. John Lewis refer to its employee as partners and it was the vision of its founder John Spedan Lewis All 81,000 Partners have a say in how the Partnership is run, as well as an equal percentage share in the profits. Giving our Partners a voice is central to the principles of co-ownership, and we engage their views and opinions in a number of ways, including the annual Partner Survey, first started in 2003. (JOHN LEWIS, 2010)
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Balance sheet
31/01/2012 th GBP 12 months Cons. Unqualified IFRS Fixed Assets Tangible Assets Land & Buildings Freehold Land Leasehold Land Fixtures & Fittings Plant & Vehicles Plant Vehicles Other Fixed Assets Intangible Assets Investments Fixed Assets Current Assets Stock & W.I.P. Stock W.I.P. Finished Goods Trade Debtors Bank & Deposits Other Current Assets Group Loans (asset) Directors Loans (asset) Other Debtors Prepayments Deferred Taxation Investments Current Assets Current Liabilities Trade Creditors Short Term Loans & Overdrafts Bank Overdrafts Group Loans (short t.) Director Loans (short t.) Hire Purch. & Leas. (short t.) Hire Purchase (short t.) Leasing (short t.) Other Short Term Loans Total Other Current Liabilities Corporation Tax Dividends Accruals & Def. Inc. (short t.) Social Securities & V.A.T. Other Current Liabilities Current Liabilities Net Current Assets (Liab.) Okikiola lookman imam Net Tangible Assets (Liab.) 31/01/2011 th GBP 12 months Cons. Unqualified IFRS 31/01/2010 th GBP 12 months Cons. Unqualified 31/01/2009 th GBP 12 months Cons. Unqualified 31/01/2008 th GBP 12 months Cons. Unqualified
3,391,000
3,176,800
3,021,800 2,485,900
535,900 0
465,200 3,600 800 460,800 77,100 550,800 145,600 0 0 47,200 98,400 2,700 1,241,400
422,000 5,100 800 416,100 78,600 512,700 157,800 0 0 62,700 78,000 17,100 1,171,100
13,600 1,140,000
23,400 712,200
13,800 691,800
-530,100 -376,900 -60,100 -74,200 0 -600 -600 -242,000 -705,300 -9,200 0 -210,100 -143,100 -342,900 -1,612,300 -370,900 3,469,300
-424,500 -223,200 -165,300 -57,100 0 -800 -800 0 -691,900 0 0 -193,200 -141,400 -357,300 -1,339,600 -168,500 3,495,500
-358,200 -159,400 -115,600 -43,100 0 -700 -700 0 -599,700 -1,600 0 -165,200 -117,200 -315,700 -1,117,300 22,700 3,498,100
-318,900 -108,300 -75,800 -31,900 0 -600 -600 0 -471,700 -17,900 0 -95,800 -86,300 -271,700 -898,900
-342,500 -80,000 -58,400 -20,900 0 -700 -700 0 -533,800 0 0 -98,300 -120,400 -315,100 -956,300
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Balance sheet
Working Capital Total Assets Total Assets less Cur. Liab. Long Term Liabilities Long Term Debt Group Loans (long t.) Director Loans (long t.) Hire Purch. & Leas. (long t.) Hire Purchase (long t.) Leasing (long t.) Preference Shares Other Long Term Loans Total Other Long Term Liab. Accruals & Def. Inc. (long t.) Other Long Term Liab. Provisions for Other Liab. Deferred Tax Other Provisions Pension Liabilities Balance sheet Minorities Long Term Liabilities Total Assets less Liabilities Shareholders Funds Issued Capital Ordinary Shares Preference Shares Other Shares Total Reserves Share Premium Account Revaluation Reserves Profit (Loss) Account Other Reserves Shareholders Funds Profit & Loss account
-753,100 0 0 -26,400 -26,400 -2,300 -724,400 -85,800 -85,000 -800 -147,700 -32,100 -115,600 -638,100 -1,624,700 2,008,900
-847,200 0 0 -28,000 -28,000 -819,200 -65,600 -65,600 0 -207,600 -94,700 -112,900 -414,000 -1,534,400 2,072,500
-1,886,400 1,704,200
-1,418,800 1,722,500
-1,171,600 1,683,900
6,700 6,700
6,700 6,700
6,700
6,700
6,700
31/01/2012 th GBP 12 months Cons. Unqualified IFRS Turnover UK Turnover Overseas Turnover Cost of Sales Exceptional Items pre GP Other Income pre GP Gross Profit Administration Expenses Okikiola lookman imam Other Operating Income pre OP Exceptional Items pre OP Operating Profit Other Income Total Other Income & Int. Received 7,758,600
6,734,600
6,267,200
-5,166,500
-4,878,700
-4,460,400
-4,195,400
2,274,200 -1,937,500
2,071,800 -1,801,100
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2,044,600 -1,676,100
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31/01/2012 th GBP
31/01/2011 th GBP
2,100 -2,100 258,600 32,800 -70,500 -2,600 -1,200 -66,700 -37,700 188,100 -51,900 136,200
240,800 6,100 -67,700 -2,000 -1,300 -64,400 -61,600 173,100 -45,600 127,500
242,500 -87,600
334,500 -53,500
237,800 -39,200
127,500 -100 127,400 215,500 214,900 600 751 400 100 300
700 300
700 500
900 200
24,400
19,100
17,700
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PROFITABILITY
Profitability can be define as a measure of how well a company can make profit compared to expenses, it basically shows a company overall performance and efficiency. Information that follows is the calculations of profitability ratios for John Lewis Partnership covering 2007 to 2012
2012 Return on Capital Employed (W1) 2011 2010 2009 2008
3.8
3.6
2.9
7.5
4.9
33.4
33.7
33.8
33.1
33.8
5.1
5.8
4.3
6.1
1.8
1.7
1.6
3.7
2.3
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2855500
23330000 3141300
= 4.87 or 4.9
(1,418,800 + 1,722,500)
YEAR 2010. 106,600 X 100% ( 1,886,400 + 1,704,200) YEAR 2011. 127,500 X 100% (1,534,400 + 2,072,500) YEAR 2012. 136,200 X 100% (1,624,700 +2,008,900)
= 7.42 OR 7.5
10660000 3590600
= 2.96 OR 3
= 3.53 OR 3.6
= 3.74 0R 3.8
33.78 or 33.8
207180000 6,267,200
33.05 OR 33.1
227420000 6734600
33.76 OR 33.8
248310000 7361800
33.72 OR 33.7
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259210000 7758600
33.40 OR 33.4
WORKING 3 Operating Profit Margin OPERATING PROFIT x 100% SALES YEAR 2008
368,500 x 100% 6,052,200 = 36850000 6,052,200 =6.08 OR 6.1
YEAR 2009
270,700 x 100% 6,267,200 = 27070000 6,267,200 = 4.31 OR 4.3
YEAR 2010
336,700 x 100% 6,734,600 = 33670000 6734600 =4.99 or 5
YEAR 2011
429,300 x100% 7,361,800 YEAR 2012 391,000 x 100% 7,758,600 = 42930000 7,361,800 =5.83 or 5.8
39100000 7,758,600
= 5.03 OR 5.1
Working 4 NET PROFIT MARGIN Net Profit x 100% Sales YEAR 2008
139,200 x100% 6,052,200 YEAR 2009 233,300 x 100% 6,267,200 YEAR 2010 106,600 x 100% 6,734,600 = 13920000 6,052,200 = 2.29 or 2.3
23330000 6,267,200
= 3.72 OR 3.7
10660000 6,734,600
= 1.58 or 1.6
YEAR 2011
127,500 x100% 7,361,800 YEAR 2012 136,200 x 100% 7,758,600 = 12750000 7,361,800 = 1.73 or 1.7
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13620000 7,758,600
=1.75 or 1.8
Return on capital employed (ROCE) is a ratio that indicates the efficiency and profitability of a company's capital investments. (Loth, 2012) In simple terms it is a measure of how much return a company can generates from its investment for those who have invested in the company such as bondholders and stockholders. ROCE can also identify if shareholders or owners should put their money in a bank deposit or leave it invested in the company (Waterston, 2010) ROCE is calculated as net income times 100%, divided by (non-current liabilities + shareholders fund). ROCE is a very good indicator of how strong and big a company is. 2008/2009: Looking at the above column chart, there was an increase from 2008 to 2009 and this is down to high increase in net profit for 2009 than the other five years, this was due to interest receive by John Lewis from their finances could have been in form of interest from money kept in bank. Managerial decision in lowering their long term debt also had a positive effect on kicking the ROCE up on 2009, even though for the 5year shareholders fund keep a steady increase. 2009/2010 A different story for 2010 as we see from the column, ROCE came crashing down and this was down to lower net profit on the year before, because of lower sale(down to cause highlighted above), higher administrative expenses with managers not keeping cost down and their long term liability went from 1,418,800 to 1,886,400 and finally their interest paid to banks/other lending was at its highest for 2010. All this couple together make their ROCE lower than it was in 2009. 2010-2011 Very interesting to see for the year 2011, managers significantly cut their non-current liabilities 1,886,400 to 1,534,400 and this will probably to make sure their non-current
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liabilities is not more than their cash flow. Other reason that saw the rise of ROCEis substantial increase in revenue/sales in turns affecting net profit and increase in shareholders fund is other reason for the increase of ROCE for 2011. 2011-2012 We see same trend for 2012 as 2011, turnover/sales increase hence pushing the net profit up as well.
Future prediction
Potential investors like yourself, want to know what they likely to get back from every of their pound invested, ROCE was at the highest for 2009 but decrease very low in 2010 and its on the rise again till date, from the information available to me it can be predict or assume that the ROCE will increase for the coming year.
The gross profit is the total of turnover or sales/revenue subtracted by cost of sales (what it cost in generating that revenue). Gross Profit Margin (GPM) a measure of how a company is doing in terms of production and distribution efficiency Looking at the above income statement, it is very visible to see that in (2009) there was high jump in cost of sales hence making GPM drop to 3.1 and this could be down to the financial crisis of 2009 or loose of consumer confident in the market, affecting John Lewis turnover and cost of sales in turns or vice versa Figures this morning from John Lewis, showing a sharp fall in profits from its department stores, further underlined the difficulties facing the high street. (Guardian plc,
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2009) Other factor that could have affected john lewis GPM is changes in cost of sales, because labour cost are major part of cost of sales and this could come in form of increase in insurance of labour, badly manage HR, government regulation in changes to minimum wage. John Lewis could have change inventory method because inventory method adopted by a company does have effect on their gross profit, is either they use the first in, last out system or last in, first out with the later causing a decrease in gross profit. Lastly, marketting strategy of John lewis could have been the reason for some drop on their Gross Profit in some years
Future Prediction
Nevertheless, looking at their GPM for the following years, it can be assumed that the tough times are over for John Lewis as their turnover increase snappishly and the same for 2011 and 2012, even though their cost of sales also increase a fracture(this is not alarming as its expected and only a small percentage increase).
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Operating Profit is what is left over after a company has taken out their cost such as the cost of production i.e. wages, distribution cost, operation cost, raw materials etc. Operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each pound of sales. (Loth, 2012) 2008-20012 Increase in the cost of sales and administrative expense from 2008 to 2009 affected total operating profit for 2009, making it drop and this will be down to some aspect that will affect cost of sales such as economic situation like the 2009 recession or managerial decision in not keeping operational cost down or cost above John Lewis managerial control such as increase in price of raw material. 2009 to 2010 turnover/sales went up and this was down to a marketing campaign by managers or increase in consumer confidence and this had a positive effect on operating profit even though cost of sales keep increasing but not as high as the increase from 2008 to 2009. Steady increase in revenue/turnover allow a steady increment in operating profit from 2010 to 2011 due to the changes mentioned above, even though cost of sales and administrative expenses continue to rise and this will be down to some management factors such as unable to control spending, inability to delayering to reduce operational cost, lack of needed marketing strategy, and non-management factor such as the increment in the cost of natural resources. 2011 to 2012 Administration expense Increase from 2,107,500 to 2,260,700 one of the highest percentage rise within the last 5years and as mention above this could be down to managers not being able to keep their expenses down by delayering when needed or things outside of their power such as increment in fuel prices, even with a very high turnover, it had a negative effect on John Lewis Operating Profit for 2012
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Future Forecast
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Good news is that the UK is now out of one of the worst recession ever seen Official figures
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today showed economic output or GDP rose by 1 per cent between July and September (HAWKES, 2012) this is good new for John lewis of course and consumers confidence is now on the increase again Global consumer confidence increased one index point to 92 in Q3 2012, and is up four index points from the same period the previous year (Q3 2011), according to global consumer confidence findings from Nielsen (Nielsen Holdings , 2012). This can only mean good news for prospective investors, even though John Lewis are failing to keep operating cost down but the percentage at which operating cost is rising is nothing alarming, because in reality a higher revenue or sales normally comes with some increase in in cost.
Net profit margin are calculated by multiplying Net Profit by 100% divided by sales, so in simple terms it is a total of how much profit a company is making Net profit margin indicates how well the company converts sales into profits after all expenses are subtracted out Looking from the above column chart, there was different increase or decrease from 2008 to 2012 and this was probably down to some factors that can affect net profit margin such as interest receive on John Lewis capital in banks or subsidiary investment. Interest paid is interest on hire purchase, interest on leasing and some interest paid on bank loans. Finally tax paid in a given year will affect total net profit and turnover/revenue of the company and cost. 2008-2012 John Lewis did receive some interest for the year 2008 to 2010 probably due to having spare capital in savings or investments for this period, but instead of John Lewis Plc to receive profit on other income from 2010 to 2012 they were paying out more interest, this had an effect on. The interest paid to bank and on their other loan agreement rise from 2010-2012 was at its highest in 2010.
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According to John Lewis Partnership the increase in sales for 2012 was primary down to 3 factors, firstly is the ceremonial such as the diamond jubilee, Olympic and Paralympics Firstly, we benefited from the more favourable conditions created by a number of one-off events, such as the Diamond Jubilee, the lead up to the London 2012 Olympic and Paralympic Games (John Lewis, chairman, 2012)
Future Prediction
Looking at the above income statement and balance sheet, the highest interest paid for the years was 2009 and it was a rise from 2008, but it start coming down in 2010 and at its lowest for 2012. I can therefore predict that the interest paid for the next accounting year and thereafter will be lower. Turnover is on the increase from 2009 to 2010 and it can therefore be assumed that this increase will continue for the following years. Inability of the senior managers in keeping cost down, because we keep seeing increase in operational cost and other cost, then I will also be predicting increase for the coming years in relation to cost.
EXTERNAL ENVIRONMENT
There are certain external factors that affect a business and this is not what John Lewis managers will have much control over and this is what is called in business management as the PESTEL analysis Political: changes to the Vat by the government or changes in the fiscal policy or monetary policy will have some sort of effect on John Lewis sales as a whole Economical: the 2009 recession had a big effect on the total turnover for the company. Social/Cultural: the social changes happening nowadays are having some negative effect on big company such as John Lewis as consumer confidence is low, hence why allot of 1 shop are thriving in this day and age. Technology: John Lewis has tried not to be overtaken on the online market shares but they couldnt rival with the introduction of website such as Amazon or eBay. Environment: Everyone nowadays want to know where their product is coming from and how energy efficient the company they dealing with his Legal: this can be interlink with laws that has been made the government and such laws does affect business overall productivity
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Recommendation
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(LSE, 2012)
As seen from the above line graph that John Lewis did have some problems in the initial years, some possible managerial fault (no keeping cost down, not reducing liability and inability to catch on with recession sales i.e. pound land, pound saver etc) and some out of managerial control (such as recession of 2009, and after careful analysis of the information available to me, it can be said that the bad times are somewhat over for John Lewis PLC. This report hereby recommended, practical diversification of your investment portfolio, diversification meaning the distribution of risk by putting your money in a variety of investment opportunity asset allocation is the most strategically important aspect of a clients investment portfolio (Waterston, 2010)
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Conclusion
John Lewis has had some problems when it comes to making profit in the past but recent financial figures that the good old days are back for john Lewis. There are some areas in which john Lewis can improve or change strategy such as keeping cost down and looking from the above analysed information then it can be assume managers are getting better at keeping their cost down and improving turnover. These reports hereby conclude that John Lewis will be a good and potential Gold mine for potential investors thinking of investing in the company, as their future forecast shows John Lewis will return to making profit and return substantial dividends to shareholders.
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Bibliography
Unsupported source type (Report) for source LSE12. Guardian plc (2009) Guardian.co.uk, 17 September, [Online], Available: HYPERLINK "http://www.guardian.co.uk/business/2009/sep/17/retail-sales-recession-consumer-spending" http://www.guardian.co.uk/business/2009/sep/17/retail-sales-recession-consumer-spending [29 October 2012]. HAWKES, S. (2012) thesun.co.uk, 25 October, [Online], Available: HYPERLINK "http://www.thesun.co.uk/sol/homepage/news/4608737/UK-out-of-recession-after-the-fastest-growth-in-5years.html" http://www.thesun.co.uk/sol/homepage/news/4608737/UK-out-of-recession-after-the-fastest-growthin-5-years.html [29 October 2012]. INDEPENDENT INVESTOR (2010) http://www.independent-stock-investing.com, 9 February, [Online], Available: HYPERLINK "http://www.independent-stock-investing.com/Understanding-Financial-Statements.html" http://www.independent-stock-investing.com/Understanding-Financial-Statements.html [25 October 2012]. investor (2011) investorpedia.com, 12 January, [Online], Available: HYPERLINK "http://www.investopedia.com/terms/o/operatingmargin.asp" \l "axzz2Ac4vdQnB" http://www.investopedia.com/terms/o/operatingmargin.asp#axzz2Ac4vdQnB [29 October 2012]. John Lewis, chairman (2012) http://www.johnlewispartnership.co.uk, 1 october, [Online], Available: HYPERLINK "http://www.johnlewispartnership.co.uk/content/dam/cws/pdfs/financials/interim%20reports/john_lewis_partners hip_interim_report_2012.pdf" http://www.johnlewispartnership.co.uk/content/dam/cws/pdfs/financials/interim%20reports/john_lewis_partnersh ip_interim_report_2012.pdf [8 November 2012].
JOHN LEWIS (2010) Johnlewis.com, 20 January, [Online], Available: HYPERLINK "http://www.johnlewispartnership.co.uk/about/the-partnership.html" http://www.johnlewispartnership.co.uk/about/the-partnership.html [29 October 2012]. Loth, R. (2012) investopedia.com, 20 January, [Online], Available: HYPERLINK "http://www.investopedia.com/articles/basics/06/financialreporting.asp" \l "axzz2Ac4vdQnB" http://www.investopedia.com/articles/basics/06/financialreporting.asp#axzz2Ac4vdQnB [28 October 2012]. Nielsen Holdings (2012) finance.yahoo.com, 12 February, [Online], Available: HYPERLINK "http://in.finance.yahoo.com/news/global-consumer-confidence-increases-one-040100304.html" http://in.finance.yahoo.com/news/global-consumer-confidence-increases-one-040100304.html [29 Octobner 2012]. Waterston, A.B.&.C. (2010) Financial Accounting, 5th edition, London: Pentrice Hall. Okikiola lookman imam 121396
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Appendices
Keywords Cost of sales: this is the main cost directly link to the goods sold by a business or company and this is calculated thus: opening stock + purchases closing. Turnover/Sales/Revenue: this represent the total money value of goods or services sold or offered between a given period of time Formation/Equation: is a mathematical statement or logical statement and it expresses the equality of two or more expression Shareholders fund: this is the total money value on the balance sheet that shows shareholders interest in a company Long-term liabilities/Non-current Liabilities: this is what the company owes and they are only due only after a one year and example of long-term liabilities in this report is hire purchase, long term leasing, loan, pension obligation
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