Managing financial resources

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To The Training Manager

From Raj Pathania, MKC Consultants

Title Financial Performance of JD Wetherspoon PLC

Buy Managing financial resources term paper

Date December 001

1 TERMS OF REFERENCE

In accordance with the instructions from yourself, to report on the financial performance of JD Wetherspoon PLC. Particular emphasis has been placed on the profitability, liquidity, efficiency and the investment potential of the company.

Comparisons with previous years, as well as with competitors will be made. The competitors to be examined are the Yates Group PLC and Regent Inns, these companies will be compared to JD Wetherspoon PLC from the years 17 through to 001.

Explanations and interpretations of trends and key figures will also be made.

HISTORY OF JD WETHERSPOON

When 4-year-old law student Tim Martin acquired his first ever pub in North London in December 17, he could never have envisaged how popular his style of operation was to prove.

His first pub offered a good range of cask-conditioned beers in a music-free environment. Twenty years on, the range of beers and the absence of any music, form the twin cornerstones of the companys pubs, together with their all-day food and non-smoking areas. In the formative years of the company, Wetherspoon pubs were all located in North London. But, as the company grew, it began to open pubs across London and in the Home Counties.

Following its successful Stock Market floatation in 1, Wetherspoon began to expand rapidly. In 14 it opened its first pub in the Midlands, The Square Peg in Birmingham, followed by others in major cities, including Bristol, Liverpool and Manchester.

There are now more than 45 Wetherspoon outlets throughout the UK.

INDUSTRY STRUCTURE

The UK market for public houses increased by 18% between 16 and 000 to a total value of £.7 billion (€.8 billion) in 000. The rate of growth was relatively high between 16 and 18. However, growth rates slowed in 1 and 000 to only % in each year, due to reduced capital expenditure by pub owners together with increased competition from alternative leisure activities.

The number of public houses in the UK is believed to have declined during this period, to just 60,14 in 000. Industry consolidation and a high degree of acquisitional activity contributed to this decline.

Food-led public houses are becoming increasingly important, and account for 4% of the number of public houses in the UK in 000. Many experts believe this trend is set to continue in the future with the number of food-led pubs increasing. In contrast, the number of community led pubs decreased between 16 and 000. These types of outlets have suffered as a result of increased competition and customer awareness of issues such as health concerns and drink driving.

Numerous factors affect the demand for public houses. Some of the most significant include

• competition from substitute activities

• economic factors including disposable income

• government policy and legislation

• seasonal demand

The value of the UK public houses market is forecast to continue to increase between 001 and 005. During the same period the number of public houses in the UK is expected to continue to decline by some %. However, the rate of decline is expected to slow during the forecast period.

There are considerable opportunities for suppliers to the public houses market in the UK. Capital expenditure by breweries on public houses is estimated to have increased by a total of 178% between 16 and 000. A significant amount of expenditure has been invested in the refurbishment and re-branding of public houses. Moreover, the leading public house operators have extensive ongoing capital expenditure programmes.

Factors critical to the success of owners of public houses include the correct targeting of customers, the provision of a high quality range of food and drink, well trained staff and regular capital expenditure.

The leading nine operators of public houses industry in the UK accounted for 47% of the market in terms of number of outlets owned during 000. The operators consist of brewing companies, ex-brewing companies and independent companies set up for the purpose of managing public houses.

4 ACCOUNTING RATIOS

Accounting ratios are used to interpret financial statements. Ratio analysis provides the opportunity to gauge a company's performance over time and against industry benchmarks. This enables the detection of trends as well as the identification of financial strengths and weaknesses.

4.1 Profitability Ratios

Profitability should not be confused with profit. Profits are an absolute measure, whereas profitability compares profit to input.

Profitability ratios help to demonstrate the efficiency of a business by relating the profits of that business to its sales and assets. For profitability to be valid, you must compare the same kind of profit, e.g. operating profit, but as different companies have different levels of tax and interest, this "profit" figure becomes distorted and an unreliable comparison between companies. Therefore, accountants generally use the profit before interest and tax (PBIT) as a measure between companies over time.

4.1.1 Return on Capital Employed (ROCE)

This ratio compares the amount of profit made per £1 of money invested in the company and is a measure of return on investment.

Investors in a limited company would compare the ROCE with the return that might be shown by another company, or even a bank or building society.

4.1. Profit Margin

This ratio considers the net profit earned for every £1 of sales revenue.

4.1. Asset Turnover

This ratio measures how quickly assets within the business are turned over.

4. Liquidity Ratios

Along with the cash flow forecast and the cash flow statement, liquidity ratios are a method a finding out whether or not a business has enough cash to pay its debts and continue with its day to day operations.

Many businesses make the mistake of measuring performance in terms of profitability they forget about the importance of cash flow. The working capital, or cash flow cycle, is often called the life blood of the business. This is because, without it, the business cannot survive.

4..1 Current Ratio

This ratio indicates the ability to pay trade creditors and bank overdrafts. There is no ideal current ratio, although some say that 1 is a healthy figure. Many companies, though, run quite happily with a ratio of less than this. Also, it is more important that this ratio remains steady over the years if there is a drastic decrease, then this area needs investigating.

4.. Quick Ratio / Acid Test Ratio

This ratio measures the number of times cash can cover current liabilities. This is said to be the prime measure of solvency within a business. It has the same basis as the current ratio, but only uses the current assets that can be converted quickly into cash the "liquid assets". As there is no guarantee that stocks can be sold quickly enough or at the balance sheet value, this figure is excluded from the calculation.

A ratio of 11 should be the target any less and the business is in danger of not being able to pay its debts; any more would indicate that the business was not making best use of its funds. However, as with the current ratio, it is more important that ratio remains steady over the years.

4.. Gearing Ratio

The capital structure of a business can be considered by looking at the proportions of capital raised by debt and equity.

The gearing ratio shows the relationship between equity capital and fixed interest capital.

4..4 Interest Cover

The gearing ratio is a balance sheet measure of financial risk. Interest cover is a profit and loss account measure. This ratio assesses the company's ability to pay interest by comparing profit to interest payments.

4. Efficiency Ratios

Efficiency ratios show how well a business controls its overhead expenses, how efficient it is in using its assets when compared to sales, how quickly it turns over its stock and collects money from debtors.

4..1 Stock Turnover Ratio

Holding stocks mean money is tied up in the business until they are sold it also costs the business to store the goods.

The stock turnover figure represents the average period of time the stock is held before it is sold. Generally, the quicker the stock turnover, the better. If stocks are not sol quickly enough, they may become out of date, damaged or may deteriorate.

Some businesses operate a system called Just In Time (JIT), where stock arrives literally "just in time" for use.

4.. Debtor Collection Time

This ratio is important to the cash flow cycle of the company. This is the average length of time it is taking for customers who buy goods on credit to pay their debts.

4.. Creditors Payment Time

This ratio shows the time it takes for a business to pay its suppliers.

4.4 Investment Ratios

Investors are interested in the return they might get from buying ordinary shares. A number of ratios can be used to do this. Returns only vary on ordinary shares. Returns on other shares are fixed.

4.4.1 Earnings Per Share (EPS)

This ratio measures the amount each share is earning for the investor.

4.4. Dividend Per Share (DPS)

This ratio shows the amount of money ordinary shareholders actually receive. It is not the same as earnings per share. This is only the dividend paid to shareholders.

4.4. Dividend Yield

This ratio shows the amount the investor receives as a percentage of the market price of the shares.

4.4.4 Dividend Cover

.This ratio takes into account the chance of capital growth. There are two financial motives for buying shares to earn dividends and to make capital gains. If a company's share price rises over time, an investor can make a capital gain when the shares are sold.

4.4.5 Price Earnings Ratio

This is a useful ratio because its compared to the current market price of the share. The ratio may reflect the confidence in the future of the company, so, high ratios are better.

8 Financial Performance

The financial performance of all three companies's varied, each had strengths, and each had weaknesses.

8.1 Profitability Ratios

The performance of all three companies remained profitable in the time period analysed.

8.1.1 JD Wetherspoon PLC

The ROCE figure has remained steady over the five year period; this would indicate to potential investors that this business offers a stable, safe and reliable return on investment. The figure 10.88% in 001 would mean that an investor could earn £10.88 per £100 invested.

The profit margin has been decreasing steadily over the period. Possible reasons could be an increase in overheads in comparison to sales revenue, increased competition, or, it could indicate that the company is expanding too rapidly. A careful eye should be kept on this figure.

The asset turnover figure indicates a steady use of assets over the period.

8.1. Regents Inns

The ROCE figure has been indifferent for this company, with a huge decrease from 18 to 1. However, in recent years, the figure has levelled out, with an increase to the figure in the last year. This figure could indicate that the company is a fairly new business, or, that it has recently ventured into new markets, the fact that the profit margin has been generally increasing further supports this.

The asset turnover figure indicates a steady use of assets over the period.

8.1. Yates Group PLC

The ROCE figure has been steadily decreasing over the period, this is a bad sign for potential investors, but could possibly be explained by the recent expansion and thus expenditure on assets by the Yates group.

Profit margin and asset turnover have remained steady.

8. Liquidity Ratios

Liquidity ratios are a method a finding out whether or not a business has enough cash to pay its debts and continue with its day to day operations.

8..1 JD Wetherspoon PLC

The liquidity of JD Wetherspoon has been stable from 17 to 000, however, there is a major decrease in 001 in both the current ratio and the acid test ratio, and this may result in the company having difficulty paying creditors and overdrafts.

8.. Regent Inns

The liquidity of Regent Inns has been stable from 17 to 000, however, there is a major decrease in 001 in both the current ratio and the acid test ratio, and this may result in the company having difficulty paying creditors and overdrafts.

8.. Yates Group PLC

The liquidity of the Yates Group has been stable over the period, and, unlike its competitors, it has seen an increase in both the current and acid test ratio figures.

8. Efficiency Ratios

Efficiency ratios show how well a business controls its overhead expenses, how efficient it is in using its assets when compared to sales, how quickly it turns over its stock and collects money from debtors.

8..1 JD Wetherspoon PLC

JD Wetherspoon is the largest company of the three, and would therefore have greater difficulty in handling resources efficiently; however, the company's efficiency ratios have remained steady over the time period.

8.. Regent Inns

Regent Inns efficiency ratios have also remained steady over the period; however, there was an improvement with the reduction of debtor collection time. By not reducing the debtor collection time, regent Inns debtors are obtaining free finance, which costs the company money.

8.. Yates Group PLC

The Yates Groups efficiency ratios have remained steady over the time period.

8.4 Investment Ratios

There has been steady improvement by all three company's investment ratios in the period from 17 to 001.

8.5 ICC Juniper Risk Scores

A unique predictive scoring model has been developed by ICC Juniper aimed at enabling investors to detect those companies at risk of corporate failure within the next 1 months. This model is the ICC Juniper risk score.

This is a rough guide to what the score means

1 45 Extreme Caution. Very high risk.

46 70 Normal. Limited Risk

71 100 Confidence. Very Low Risk

ICC's Juniper service offers predictive risk scores on 1.5 million 'live' UK companies and 1.4 million unincorporated businesses, along with advised credit & contract limits backed by major credit insurers, providing a powerful tool in effective risk management.

Interpretation of Ratios

From the information available and the results analysed, I would advise on behalf of MKC Consultants, that the Yates Group is the safest investment, followed by JD Wetherspoon in second place and finally Regent Inns.

The Yates Group is a very sound investment with little financial risk. This is demonstrated with an increase in both the current and acid test ratio figures, which indicates the company sound in terms of liquidity. Other ratios during the time period have remained constant. The assumption that the Yates Group is a financially safe investment is further indicated by the risk score of 8 awarded by ICC Juniper in 001.

JD Wetherspoon PLC is, according to the ICC risk score, in the bracket of normal, to very low risk at 75. The company ratios over the time period were on the whole stable but, , there is a major decrease in 001 in both the current ratio and the acid test ratio, and this may result in the company having difficulty paying creditors and overdrafts.

On paper, and by its financial ratios, Regents Inns seems to be the riskiest company for potential investors. This is again backed up by the ICC Risk score in 001 of 66, however, this company may infact prove to be a very sound future investment. Regent Inns ratios were not the best, however, they are a fairly new company, and, over the course of the five years analysed, the company steadily improved with each passing year. This would be a risky investment, but, could herald the greatest returns.

10 Limitations of Ratios

Ratio analysis does not provide a complete means of assessing a company's financial position. There are problems when using ratios.

When making comparisons over time, it is necessary to take into account the following

- Inflation

- Changes in accounting procedures

- Changes in the business activities of a business

- Changes in the general business conditions and the economic environment

It is also important that investors compare like with like when using ratios, especially when comparing companies.

Providing these problems are recognised, ratios can be a useful tool for potential investors when deciding where to invest their money.

11 Recommendations

JD Wetherspoon PLC is a safe, stable investment, it has shown a steady increase in all areas of the business since its establishment in 17, but, for a safer investment, I would recommend the Yates Group PLC. The Yates Group is a very sound investment with little financial risk.

If however, the investor is prepared to wait for a return and is also prepared to take a financial risk, Regent Inns may also be worth considering.

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