Analysis of Lookers Plc as Renowned Car Dealership Chain - Case Study Example

Lookers Plc Executive Summary Lookers plc is a renowned car dealership chain within the domestic markets of the UK. The brand also houses multiple other sub-brands under its parent name. In this regard, statistical interpretation of the financial report of the company by the end of 2013 revealed relevant information relating to the performance and growth of the company. From the financial evaluation, a clear understanding has been attained regarding the specific development areas that have supported the brand in the context of attaining higher percentage of investors’ interests. The brand also appears to have attained higher levels of precision within its inventory management techniques through which it has increased the percentage of financial retaining and eventually decreased the overall resource wastage percentage. Taking these aspects into consideration it is worth mentioning that irrespective of multiple challenges, the financial year 2013 turned out to be quite beneficial for Lookers plc. Table of Contents Executive Summary 2 Introduction 5 I. Company Profile: Lookers plc 5 II. Financial Report Analysis 7 (I). Liquidity Analysis 7 (A). Current Ratio 8 (B). Quick Ratio 9 (A). Stock Days 11 (B). Payment Payable Period 12 (C). Debtor’s Collection Period 12 (III). Long Term Gearing 13 (A). Capital Gearing Ratio 14 (B). Interest Coverage Ratio 15 (IV). Cash Flow Ratios 15 (A). Operational cash Flow Ratio 16 (B). Cash Flow from Marginal Sales 17 (C). Cash Flow from Operations/Average Total Liabilities 18 (V). Profitability Analysis 18 (A). Gross Profit Margin 19 (B). Operational Profit Margin 19 (C). Asset Turnover Ratio 20 (D). Return on capital Employed 21 (VI). Investment Ratios 21 (A). Dividend Pay-out Ratio and Dividend Yield 22 (B). Dividend Coverage Ratio 22 (C). Earnings per Share 23 III. Analysis of the Sources of Finance 25 Internal Sources of finance 26 (A). Retained Earning 26 (B) Capital Attained From Structural Changes 26 (i). Refinement of the financial policies 26 (ii) Effective Inventory Management 27 (iii). Efforts Towards Faster Attainment Of Payables 27 External Source of Finance 27 (A). Financial Support From Investors 28 (B) Liquefaction of assets 28 Conclusion 28 Reference 30 30 Introduction Ratio analysis in financial accounting generally refers to the procedure through which the relationship between two or more accounting outcomes can be understood. It also provides an analyst an appropriate understanding regarding a company’s financial performance and annual profitability. Taking this as reference, the discussion mainly focuses towards the conduction of a financial performance analysis of Lookers Plc during the end of the financial year 2013. The overall analysis will be carried out using certain ratio analysis techniques such as revenue generation, working capital, analysis of profitability and investment ratio among others. The overall discussion will also evaluate the annual financial projections of Lookers Plc with the intention of increasing the precision factor associated with the ratio analysis. Specific portions of the discussion will also focus towards analysing the possible technique based on which Lookers plc can maintain its present marketing stance, irrespective of the competiveness within the global market. The overall analysis will also include construction of specific flow chart in accordance with which Lookers plc can retain considerable portion of its operational revenue. I. Company Profile: Lookers plc Lookers plc is a popular luxury car dealership chain currently functioning within the domestic markets of the UK as well as Ireland. The brand primitively focussed towards two and four wheeler automotive parts. Presently, this dealership chain administers a total count of 90 units and projects an annual business turnover of above £1bn. The company expanded during the period of 1908. The founder of the company is John Looker (Lookers plc, 2013). From the primitive chain of events, Lookers plc has witnessed the association of multiple automotive brands such as Ford or Austin Martin. From a general perspective, Lookers plc acts like a franchisee dealer specifically evolved in the endorsement and high priced automobiles. The company is identified to have adequate dealerships in the UK for commercial vehicles, used cars and motorcycles. Through an appropriate analysis of the provided graph, a clear understanding can be made regarding the systematic increase in the asset valuation possessed by Lookers plc between the financial years of 2009 to 2013. As a matter of fact, one can also understand about the profit earning capabilities of the brand. The brand in the present market scenario has multiple other sub brands under a single name, few of which have been enlisted as under in a sequential manner hereunder. Lomond Audi Group Taggarts Motor Group Charles Hurst Limited and among others Apart from these, the brand also administers a total count of 31 franchisee business processes under its parent name that is distributed over 77 locations. In reference to all these, the financial report depicting the 2013-year performance of this brand has been mentioned in details in the sections hereunder. II. Financial Report Analysis The financial analysis section will encompass elaboration on multiple graphs and charts with the intention of projecting a transparent picture of Lookers plc. (I). Liquidity Analysis The liquidity analysis technique appears to be an effective tool used for analysing the financial capability of Lookers plc in context to paying off its short terms depts. The technique attains huge preference within the shareholders and investors based on the fact that it projects the financial security aspect of the company. The analysis takes consideration of current ratio and quick ratio for ascertaining the perceived outcome. Considering the above graph, it can be clearly identified that the current ratio of Lookers plc to be much higher and thus, ensures the security aspects in context to making suitable investments within the brand. (A). Current Ratio The current ratio associated with Lookers plc has been calculated by taking consideration of the necessary data as projected in the tabular manner above. The calculation has been done by taking consideration of the values relating to total current asset and total current liability. Based on the calculation, it can be stated that the current ratio for the year 2013 (1.080288383) has declined in comparison to that of the current ratio value of 2012 (1.09005848). In this regard, Lookers plc will have more obligations in context to convert its current assets into cash for paying of the liabilities. As a matter of fact, it may have lost certain percentage of investors’ interest due to the downfall in performance. (B). Quick Ratio Irrespective of the decline within the current ratio, Lookers plc has shown significant impairment within its capabilities of converting all the highly liquid assets into cash in case of needs to pay off the associated liabilities. As a matter of fact, a simple perception can be made that the financial year 2013 must have attracted multiple investors for making suitable investments within the company irrespective of the decline within the current ratio values. The quick ratio that has been attained for the financial year 2013 is (0.348353269). Whereas, the quick ratio attained for the financial year 2012 is (0.341325536). This increase within the quick ratio percentage of Lookers plc between the period of 2012 and 2013 eventually provides it with an opportunity of undertaking higher percentage of loans from financial organizations for accomplishing perceived business goals and functionalities. (II). Working Capital Management Analysis Effective management of working capital is accounted as the most vital aspect for continuing with the daily business functionalities. In addition, large business groups such as Lookers plc are subjected to multiple new functional challenges that require the effective utilization of capital. In addition, the working capital analysis also takes consideration of statistical works such as stock days, payable payment period and debtor’s collection period through which the company calculates the associated specificity. This aspect also plays a crucial role for the investors in terms of decision making. For instance, a business process with higher percentage of working capital will gradually ensure a suitable flow within its functionality. As a matter of fact, it will attract the attention levels of multiple other investors. (A). Stock Days Stock days associate with Lookers plc specifically determines the possible count of days within which the overall inventory of the business process is sold and new supplies are procured. The graph projected above provides adequate information relating to the decrease in the total count of stock days for the financial year 2013 (76.59393057) in comparison to the total stock days for the financial period of 2012 (79.96150117). This eventually describes the potential of Lookers plc in terms of selling off existing inventory before the previously recorded period. It also signifies that since the inventory selling process paced up in the financial year 2013, Lookers plc has attained a higher percentage of revenue in comparison to that of the previous year i.e. 2012. (B). Payment Payable Period Payment payable period for Lookers plc also plays a vital role for describing the maximum possible days the business process would undertake in the context of paying the suppliers the total amount of all the credit purchases. Effective evaluation of the provided graph also illustrates the fact that total payment payable period for the financial year 2013 has decreased by appreciable rates (29.49217832). Based on the result attained, Lookers plc has eventually projected a higher percentage of reliability towards its suppliers. Associated business benefits also include increased pace of business performance and higher attainment of profits. In addition, the company by obtaining higher reliability is able to attract new investors. (C). Debtor’s Collection Period Debtor’s collection period specifically implies to the total number of days within which a business process attains all its due amounts from the debtors. However, irrespective of the above-mentioned achievements attained by Lookers plc, still the debtor’s collection period for the brand has went up by considerable number of days (154 >123.8). Based on the analysis of the debtor’s collection period, from the debtor’s perspective, the result is determined to be profitable. However, a contradictory situation can be recognised for Lookers plc. Justification to this context can be provided by taking consideration of the fact that considerable delay within the attainable revenue may also delay multiple other functional processes of Lookers plc. In this context, elongated delay in payment would lead to significant business losses. (III). Long Term Gearing Capital gearing denotes the percentage of financial debts that remains in a business process within every financial year. As a matter of fact, multiple investors will take into consideration of the long term gearing values associated with Lookers plc as a sign of financial and other investment risks that may eventually result in liquefaction of all the fixed and current assets possessed by the brand. Moreover, long term gearing ratio takes consideration of two specific statistical elements that include the capital gearing ratio and the interest coverage ratio with the intention of providing higher specificity within the results. The details regarding such aspects have been illustrated in the undermined sections. For instance, the capital-gearing ratio of 2013 has fallen down by considerable extent. (A). Capital Gearing Ratio Capital gearing ratio illustrates the potency of a business organization in context to financing its on-going functional operations on short term or long-term basis As a matter of fact, higher the capital-gearing ratio of a business process, lower will be the financial risk associated with making suitable investments within the business. The provided above graph illustrated about the decline within the capita-gearing ratio of Lookers plc for the financial period of 2013 (0.000518947) in comparison to that of the capital gearing ratio of 2012 (0.000605263). In this regard, certain specific predictions can be made regarding the prevalence of investment related risk. Correspondingly, the company will have to improvise its capita-gearing ratio in the future with the intention of attaining higher number of inventors. (B). Interest Coverage Ratio The interest coverage ratio takes consideration of the EBIT value mentioned within the annual financial sheet of Lookers plc. The ratio analysis illustrates about the potency of Lookers plc for paying off all the interest expenses. Thus, a simple perception can be made regarding the fact that higher the interest coverage rate of Lookers plc, lesser will be financial risk associated with the brand. In addition, the graph provided in the above section specifically illustrates about the increase in the interest coverage ratio between the periods of 2012 (29.97368421) and 2013 (48.91492381). Based on the analysis of interest coverage ratio, Lookers plc has projected its effectiveness of minimizing the levels of financial risk associated with the brand and thus, attained the preference levels of multiple other investors. (IV). Cash Flow Ratios Cash flow ratios within large-scale business processes such as Lookers plc hold high vitality based on the fact that it projects the effectiveness of the business process in the context of effectively managing its financial resources. Moreover, it encompasses all aspect associated with inflow and outflow of cash within Lookers plc and thus, can be considered as a crucial aspect of sound financial management. Taking these aspects into consideration, the cash flow analysis of Looker plc encompasses certain specific concepts such as ‘Operational cash Flow Ratio’, ‘Cash Flow from Marginal Sales’ and ‘Cash Flow from Operations/Average Total Liabilities’. (A). Operational cash Flow Ratio Operational cash flow elaborates on the inflow and outflow of cash in large-scale business processes such as Lookers plc as a result of its operational functionality. The above projected graph illustrated about the increase in the operational cash flow ratio of Lookers plc between the period of 2012 (0.05497076) and 2013 (0.061445191), which precisely depicts the sign of increasing functionality within the brand. Appropriate management of the operational cash flow ratio may eventually help in minimizing the overall expense levels and attainment of higher profitability. On the contrary, higher percentage of cash flow ratios also depicts about the expansion pace of the brand irrespective of the increasing levels of market competency. Technically, this increasing brand reputation and other dimensions for development have been facilitating the company in performing operations sustainably. (B). Cash Flow from Marginal Sales Higher proportion of cash flow from marginal sales gradually inculcates the fact regarding higher attainment of profit and its effective management. Thus, it is categorised as a specific aspect of effective management for large-scale business processes such as Lookers plc. Effective evaluation of the provided graph also illustrates the fact that in the financial year 2013, the company witnessed lower percentage of cash flow from marginal sales ratio (0.017616386) in comparison to that of the values attained during the financial year 2012 (0.016083956). This deterioration in the cash flow from marginal sales ratio eventually reveals the lower extent of effectiveness projected by the brand in the context of managing cash inflow from goods sold. The brand has to take consideration of this aspect in order to safeguard its interest in the competitive markets. Irrespective of the difficulties, Lookers plc should intend towards increasing its cash flow margin based on which it will attain higher percentage of investors’ interest. (C). Cash Flow from Operations/Average Total Liabilities Cash flow from operations/average total liabilities ratio revealed relevant information in relation to the potentiality of Lookers plc towards sufficing all its financial debts within every financial period. The ratio also takes into consideration the revenue attained from the operations or sales of goods that is utilized by the business process in terms of paying off the annual financial debts. The provided graph also illustrated the increase in ‘Cash Flow from Operations/Average Total Liabilities’ ratio for Lookers plc between the period of 2012 (0.041712891) to 2013 (0.05546927). In this regard, adequate information can be obtained about higher potency of the company to pay off its debt within specified financial periods. Thus, Lookers plc in the financial period of 2013 has appeared as a good investment option. (V). Profitability Analysis Profitability analyses generally encompassed the total percentage of profit that large-scale business organisations such as Lookers plc generate from various functional aspects and accordingly, make investment decisions. Profitability analysis also encompasses the assurance of business survival irrespective of the market competitiveness. The current profitability analysis of Lookers plc takes consideration of multiple evaluative elements such as ‘Gross Profit Margin’, ‘Operational Profit Margin’ ‘Asset Turnover Ratio’ and ‘Return on capital Employed’. (A). Gross Profit Margin Gross profit margin for a business process depicts the balance of total portion of revenue after the deduction of the overall cost of goods sold. In this respect, if higher will be gross profit margin, then better will be the situational advantage of Looker plc in the context of attracting more investors. However, interpretation of the provided gross profit margin graph as provided above does not reveal a favourable financial period for Lookers plc in the year 2013. This is due to the fact that the gross profit margin attained for the financial year 2013 (0.136254818) is much low in comparison to the value attained during the financial period of 2012 (0.147476417). Apart from all these, Lookers plc should also intend towards liquefying certain portion of its current assets with the prime intention of continuing with its workflow. (B). Operational Profit Margin Based on the analysis of the gross profit margin, Lookers plc appears to have projected considerable level of downfall within its operational profit margin between the financial period of 2012 (0.023388116) and 2013 (0.023250152). In this context, the downfall signifies that the variable cost associated with the operational aspects of Lookers plc has increased in a significant manner. In accordance with the attained findings of gross profit margin, specific prediction can be made regarding the decrease in the performance levels of Lookers plc during the financial year 2013. (C). Asset Turnover Ratio Asset turnover ratio emphasises the percentage of revenue that large-scale business organisations such as Lookers plc generate from fixed and variable assets. Thus, higher the asset turnover ratio, better will be for Lookers plc in the context of making profits. The graphical illustration provided above reflects the situation to be highly beneficial based on the fact that the asset turnover ratio in 2013 (2.590393105) is much more in comparison to that of the value attained for the financial year 2012 (2.47039039). In this regard, it can be ascertained that Lookers plc intends to attain higher percentage of profit from every share. (D). Return on capital Employed Return on capital for Lookers plc for the period 2013 (2.590393105) is much high as compared to that of the return on capital value in 2012 (2.47039039). The estimation of return on capital employed signifies that Lookers plc will be generating higher percentage of profitability from its overall annual investments. As a matter of fact, it can be concluded that the period of 2013 has marked this brand as a profitable investment option for the investors. (VI). Investment Ratios Investment rations are vital in the context of judging large-scale business organisations such as Lookers plc regarding the percentage of return on investment, the company provides to the investors. (A). Dividend Pay-out Ratio and Dividend Yield The provided table illustrated about the dividend pay-out ratio and the dividend yield that has been attained by taking into consideration of specific elements such as dividend per share and earnings per share. Thus, the calculated dividend yield that has been attained is (0.021259843), which is quite appreciable for attaining the interest levels of multiple investors. (B). Dividend Coverage Ratio Dividend coverage ratio provides important information based on which large-scale organisations such as Lookers plc are able to pay lucrative amount of dividend to the shareholders. Based on the above estimation, the dividend coverage ratio of Lookers plc in 2013 (3.789473684) appeared to be quite high in comparison to that of the dividend courage ratio of 2012 (3.214285714). In this respect, it can be comprehended that the shareholders investing in the company are able to receive higher dividends. However, the brand will also have to focus towards concealing certain portion of its dividend percentage for future functionalities. From a general sense, it may also strategize towards endorsing its dividend coverage output for attracting venture partnership business process through which it will attain the opportunity of expansion within other potential markets. (C). Earnings per Share Earnings per share Source: (Lookers plc, 2013) From the above graphical representation, it can be comprehended that the increase in the earning per share of Lookers plc in a systematic manner. In this respect, systematic perceptions can be attained regarding the continued increase in the revenue attainment level. In addition, it can be analysed that the company has a high potentiality of growth in the future. III. Analysis of the Sources of Finance The provided diagram illustrates about the possible sources of finance that may be effective in the context of supporting the development and expansion of Lookers plc. A detailed elaboration of the internal and external financial sources has been provided hereunder. Internal Sources of finance Internal source of finance depicts the patterns in which Lookers plc manages its funding requirements on the basis of internal sources. (A). Retained Earning Retaining of available finance is a popular way based on which large business processes such as Lookers plc maintains financial stability. This can be attained through appropriate cost cutting techniques and elimination of non-productive operations within the business process (Lookers plc, 2013). This also includes maintenance of constant level of observations within the inventory level and the resource usage rate with the prime intention of minimizing the wastage percentage by considerable amounts. (B) Capital Attained From Structural Changes Modification of the operational structure of Lookers plc would help in saving a major portion of the available financial sources. In this context, increasing reliance on the technological aspects will help in minimizing the percentile cost associated with labour force implementation. Outsourcing of operational functions to third party payroll organizations may also help in minimizing the cost associated with labour and infrastructure intensive asset implementation. The associated elements have been elaborated hereunder. (i). Refinement of the financial policies Lookers plc intends to bring suitable changes within its debt ratio and payable payment period for having better opportunity of retaining a larger portioning of the available financial sources that are available to the organisation (Lookers plc, 2013). Certain level of minimization can also be brought about within the percentage of dividend being imparted on to the shareholders. In chain of events, this will eventually help in retaining considerable portion of operational profits, which can be diverted on other functional benefits. Appropriate implementation of strategies regarding attainment of higher returns from the employed capital can also act like a potential benefit for Lookers plc in the future competitive market space. (ii) Effective Inventory Management Between the periods of 2012 to 2013, Lookers plc revealed high effectiveness in the context of minimizing the percentage of inventory wastage through effective inventory management techniques. Evidence regarding these can be attained with the decrease attained in the total count of stock days (Lookers plc, 2013). Appropriate establishment of Information Technology Outsourcing (ITO) can be utilized for maintaining suitable observation on the inventory levels with the prime intention of managing an appropriate flow within the functional aspects. (iii). Efforts Towards Faster Attainment Of Payables Irrespective of the attained results in term of debtor’s attainment, Lookers plc will have to frame its policies in a manner that will endure the attainment of due payments within short interval of time. This will eventually add up as a crucial source of finance (Lookers plc, 2013). Moreover, with the attainment of financial benefits within a short time interval, Lookers plc can strategize regarding other organizational expansion plans. For instance, the short term attained capital can be reemployed for attaining higher percentage of returns. External Source of Finance The elements within the external sources of finance have been illustrated hereunder in a detailed manner (Lookers plc, 2013). (A). Financial Support From Investors Between the period of 2012 and 2013, Lookers plc has projected tremendous amount of improvements towards the attainment of higher dividend coverage ratios through which it has successfully attracted multiple new investors as the external sources of finance (Lookers plc, 2013). Justification regarding this can be provided by taking consideration of the fact that within the 2013 financial year, the brand has projected higher percentage of dividend return rate. This in turn will act like a credential factor for attracting investors to a major extent. Moreover, Lookers plc has succeeded in minimizing the attainment period for the payables. This also appears to the customers as a high sign of profitability. (B) Liquefaction of assets Lookers plc also holds the option of liquefying assets for incurring high percentage of financial losses. As a matter of fact, it can also be considered as an appropriate source of external financing (Lookers plc, 2013). The situational analysis of Lookers plc also comprehended the fact that higher capital-gearing ratio as projected by this brand can eventually support the continuation of its functionality under situations of economic or financial crisis. Conclusion Based on the above analysis and interpretation of financial information, it can be comprehended that Lookers plc has been performing business operations in an effective manner in the financial year 2013. The company has been performing business operations successfully due to the management of different financial aspects efficiently. In addition, based on the financial analysis, the company operating as a car dealership chain in the market segments of the UK has been identified to have a better growth and profitability prospect. Apart from these facts, the brand also possesses the potentiality of retaining considerable portion of its operational financial resources in case it implements appropriate cost cutting techniques within its functional structure. In addition, based on the analysis, it can be comprehended that the brand holds higher percentage of current assets that can be easily liquefied to pay off the debts under crises. Further evaluation of the brand may project considerable signs of profitability for the investors due to the increase within the per unit share price. As a matter of fact, the brand also holds the provision of supplying appreciable portion of dividend coverage for the investors to attain appreciable profitability from their investments. Reference Lookers plc, 2013. Annual Report Accounts. Consolidated and Company Income Statements, pp. 1-104. Read More