Analysis and Interpretation of Financial Performance - Essay Example

Strategic Financial Management By JD WETHERSPOONS PLC (JDW.L Analysis and interpretation of financial performance. In order to invest in a Company, the most important thing I look for is its ability to increase the amount of money I have invested in it. Looking at Wetherspoons Company’s financial statements and reports over the last five years, any potential investor would be very willing to buy shares in it, given the statistics (Maynard, 2013). From my analysis of the Company’s current trading and financial position, I gathered the following; 26th October 2014, total sales increased by 11.3% while like- for-like sales increased by 6.3%. The company’s revenue was at £1,409.3million compared to£1,280.9million, the same time in 2013. The operating margin and operating profit stood at 7.7% and £115.6million respectively compared with 8.3% and £111.3million respectively in the same period last year. The Company has taken on an extra five-year bank facility with Handelsbanken, hoping to increase their overall facilities to £740 million (Yahoo Finance) Without profit, a firm would be unable to attract outside capital. That is why I identified the profitability ratios as the most efficient and effective way to evaluate the financial performance of the Wetherspoons Company. The profitability measures enable me to evaluate the company’s profits in relation to the level of assets, or owners’ investment as stipulated in the company’s financial statements. I looked into statements dating back from 2010 to 2014. I calculated Return on Capital Employed (RECE) by determining the ratio between the operating capital and the capital employed. This helped me know how well the firm utilizes the capital employed. In 2014, the Return on Capital Employed (RECE) for the company was 12.94%, as compared to 11.83% in 2013.It means that the company has had a steady increase on its return on capital employed thus showing that the Company keeps on improving its’ utilization of capital employed. To begin with, I established the Gross profit margin by determining the ratio between gross profit and net sales. The gross profit of the firm in 2014 was £79.4m, compared to £76.9m in 2013, which translates into a 3.1% increase in profit. This growth in gross profit margin serves as a good indicator that J D Wetherspoon firm is progressing well and promises good returns on investment. The decrease in the net profit margin of J D Wetherspoon can be attributed to external forces such as taxes. I established the assets turnover by determining the ratio between sales revenue and total assets to find out how efficiently J D Wetherspoon Company’s assets are being utilized. The company’s asset turnover increases over the years showing an improvement in the utilization of assets. Its Revenue was $1,239 Million as at July 2014 while the company’s Average Total Assets for the same period was $1,956 Million. Therefore, Wetherspoon’s asset turnover as at July 2014 was 0.63. I used the gearing ratio between total debts and shareholders’ equity (2.45) to determine the capital contribution by shareholders against the part of the capital funded by debts. In the case of J D Wetherspoon, gearing is on the decrease. The interpretation is that there is a decline for debt and therefore, better financial situation for the company. The company is a viable choice of investment because, having used the interest cover ratio to determines how easily J D Wetherspoon can pay interest on outstanding debts. I found that the interest cover of the Company is increasing over the years considering the company’s operating income was $102 Million as at July 2014, while its Interest Expense was $-29 Million. Therefore the company’s interest coverage as at July 2014 was 3.53. It shows the company is in a good position to pay its debts. Therefore, there is no risk for me as a potential investor, to lose my money because it has been used to pay off company debts. My analysis also had me look into the efficiency of the company. For instance, I multiplied cost of sales by the 365 days in a financial period and determined the ratio between the product and inventories. I used it to measure the amount of time taken by the company to convert inventories to sales. The ratio increases over the years, meaning that the conversion at J D Wetherspoon is improving. I went further and established the receivable days. (The amount of time it takes for the debts of the firm to be paid by clients). There was a decrease in receivable days in J D Wetherspoon, clearly indicating an improved financial structure. We measure accounts receivable by Days Sales Outstanding. Wetherspoon (J D) was 0.00 for the period ending in July 2014. At J D Wetherspoon plc, the ratio between current assets and current liability (Current ratio) is increasing meaning that the firm is becoming liquid. The company’s current ratio was 0.31 as at July 2014. Normally, a firm whose liabilities are rising faster than assets is bound get into financial problems. I also deducted inventories from current assets and then divided the result by current liabilities, to carry out an Acid test. I used this test determines J D Wetherspoon plc’s ability to sought its bills using quick assets. The acid test of the company is improving and therefore can be interpreted as improving financial situation of the company. I also looked into the viability of the company by also comparing its profitability with the profitability of two rival firms, Punch tavern and Enterprise Inns. I found out that J D Wetherspoon had the highest return on capital, return on assets and the second highest return on equity. In my interpretation, J D Wetherspoon is generally the more profitable than its two competitors are. Performance of a firm can also be calculated by ratio. When the price of shares per earnings ratio of a company increases, it means that the price of the company’s shares is increasing therefore placing the firm in a better financial position. The price per earnings ratio of J D Wetherspoon plc increases from 12.27 in 2011 to 13.12 in 2012. Even the Earnings per share(including shares held in trust) increased to 47.0p in 2014 from 44.8p in 2013. I also looked into Property of the Company. J D Wetherspoon plc since the start of the financial year, has opened two additional pubs and are developing 15 pubs in line with their most previous update. The company also intends to open 30–40 new pubs in the current financial year. This will translate ito more business for the company and subsequently, more profits for shareholders. Stealth taxes and pub closures The fiercest financial turmoil to the Company is the VAT and business rates disparity between pubs and supermarkets and the continuing imposition of stealth taxes, for example, the reduced allowances for gaming machine income and the late-night levy (Weatherspoon). Due to these cost increases and the stall in sales growth in October, the Company currently anticipates an operating margin ranging 7.2–7.8% for the current financial year. The Company also aims at achieving a satisfactory outcome for the current financial year. This proves that the company knows what challenges it faces and has prepared itself sufficiently to counter the effects of these challenges. These are enough reasons to encourage any investor to purchase shares in the J D Wetherspoon plc company. 2. Is objective of maximization of shareholders wealth realistic in a world where corporate ownership and control are often separate? It is true that ownership and control in corporations are often separate functions because stock ownership is absentee ownership. A minority of stockholders, who happen to be executives of the corporations, may have a significantly large percentage of the stock to exert control; or control may be placed in the hands of the executives because stock ownership is spread out, and because of the powers of self-perpetuating character of the positions, they hold. However, owners are the possessors of tangible property, whereas managers exercise control over the business proportionally because they own other intangible property of the business including common stock (Stephen,1999). According to the article Environmental Factors in Strategic Planning, by Leo Isaac, managers have for a long time now, made money for the absentee owners and guarded their stakes although the two groups did not share the same objectives. This is because the managers were initially businesspersons whose main objective was maximization of shareholders wealth. With the increasing competition, the businesspersons have found it necessary to adopt changes in the way they set their objectives, because a lot more is at stake concerning reaching their full potential. The businesspersons are now managers. They have progressively become less interested in the industrial process. They now seek to ensure excellence in the environmental and social factors of their respective companies. The external pressure to perform best in these factors is so high, that maximising shareholders wealth is arguably of less concern to the companies these days. We will establish how the social and environmental factors have played a major role in influencing the decision making process in any company today, taking centre-stage over maximization of the shareholder’s wealth (Fligstein,2002). From the book ‘The failure and the future of accounting: strategy, stakeholders, and business value’, all enterprises seeking to prosper in the competitive world of businesses now have an internal and external environment. The internal environment closely relates to the human resource of the business, and the way in which the people employed undertake work with respect to the mission of the organisation (Hatherly, D. J. 2013). However, he internal environment can be controlled to some extent, and is expandable through management and planning processes. In contrast, the external environment, the managers of a business have no control whatsoever, over business competitors, changes to law or general economic conditions (Brewer, & Stern, 2005). Internal environmental factors. Management - The companies of today are very keen on getting the best top management for their company. This is because; the leadership styles employed by the top executives and the potential of the management team will have a major effect on the morale of staff and organisation culture. Companies are spending so much time and resources to ensure that they have the best-qualified people to take the top management positions (Kaufman, Lashley & Schreier, 2009). Human resource - The experience, knowledge and capability of an companys workforce is a vital factor of success. It is for this reason that corporations now pay very close attention to the recruitment of their staff. They have opted to engage in the training of staff and volunteers in order to develop their corporations capability. In seeking to achieve both training and recruitment strategies, corporations often face financial difficulties, but training of staff remains major aspect of good business management. This is among the main reasons why I stand to say that the objective of maximization of shareholders wealth not entirely realistic today. Organization culture - The culture a corporation adopts within it is a key factor in achieving business success. The attitudes and beliefs of all staff and volunteers, and their willingness to "go the extra miles" make a major difference in how successful the company will be in the end. The culture of the company also determines how many people will want to invest in it as shareholders. Negative attitudes can majorly affect the organization’s ability to adopt strategies for development, however thorough the planning processes. However, according to the book ‘The future of business: the essentials’, if the staff and volunteers have positive attitudes, they will not only make the management task easier but also their culture will catch the attention of customers of the business, prospective investors or even the media (Gitman & Mcdaniel, 2008). Organization structure - Businesses and corporations these days dwell on establishing a structure, constitution and/or forms of governance. Organization structure is the manner in which an organization divides the work it needs to carry out the mission among its workforce. Companies are keen to establish a working structure that serves the needs of the various departments in the company, and a structure that harmonizes the whole organization into one working towards same objectives (Pol & Thomas,1997). Assets – companies and corporations are targeting to boost their company’s internal environment and credibility by increasing their assets (Morck, 2000). Today, the more assets a company has, the more likely it is to attract investors and customers alike. It is because of this reason that the ownership of assets is a key factor influencing decision making in these organizations. For example, if equipments are not of the expected standard or are in short supply, then this hinders the staff’s duty performance. Going from the book ‘Business for higher awards,’ financial strength is another factor that influences the decision making process of a corporation. Despite however viable other internal environmental factors may be in influencing decision-making in the company, it is very hard for the organization to adopt strategies within the strategic plan if it is too short of cash (Needham, 1999). If the companies these days dwell a lot on making sure that they avoid financially strenuous activities, and strife to make as much money as possible to be able to take up all their operations swiftly. Lastly, the rapid technological change over the last 50 years has been a factor in the external environment that business or organizations have to deal with. Technology plays a vital role in decision making because businesses risk losing market share, if they fail to adapt sufficiently quickly to technological change. References Weatherspoon. Investors. Available from: Weatherspoon. Investors. Available from: Yahoo Finance. Wetherspoon (J D) PLC (JDW.L). Available from: https://uk.finance.yahoo.com/q?s=JDW.L Leo Isaac. Environmental Factors in Strategic Planning Available from: http://www.leoisaac.com/planning/strat016.htm Stephen G. (1999). The separation of ownership and control. Boston University School of Law. Brewer, G. D., & Stern, P. C. (2005). Decision making for the environment: social and behavioral science research priorities. Washington, DC, National Academies Press. Gitman, L. J., & Mcdaniel, C. D. (2008). The future of business: the essentials. Mason, OH, Thomson South-Western. Pol, L. G., & Thomas, R. K. (1997). Demography for business decision making. Wesport, Conn, Quorum Books. Kurtz, D. L. (2012). Boone & Kurtz contemporary marketing / David L. Kurtz. Mason, OH, South-Western Cengage Learning. Fligstein, N. (2002). The architecture of markets: an economic sociology of twenty-first century capitalist societies. Princeton, N.J., Princeton University Press. Morck, R. (2000). Concentrated corporate ownership. Chicago, University of Chicago Press. http://public.eblib.com/choice/publicfullrecord.aspx?p=408217. Needham, D. (1999). Business for higher awards. Oxford, Heinemann. Hatherly, D. J. (2013). The failure and the future of accounting: strategy, stakeholders, and business value. Farnham, Surrey, England, Gower. Maynard, J. (2013). Financial accounting, reporting, and analysis. Oxford, Oxford Univ. Press. Kaufman, T. J., Lashley, C., & Schreier, L. A. (2009). Timeshare management: the key issues for hospitality managers. Oxford, Elsevier/ Butterworth-Heinemann. Read More