MANAGING FINANCE

Managing Finance

Managing Finance

Evaluation of Performance

It is quite evident that J D Wetherspoon plc is tough to beat if one is looking for stable earnings growth, excellent fundamentals and compelling valuations. It is an excellent proxy to the economic growth in United Kingdom.

Ratios

2010

2009

Profitability

Return on capital employed

12.2%

12.6%

Net profit margin

9.0%

7.9%

Asset turnover

1.36

1.60

Gearing

Gearing

77.9%

72.0%

Interest cover

3.08

2.51

Efficiency

Inventory days

8

8

Receivables days

7

6

Payables days

37

33

Operating cycle (days)

(22)

(19)

Liquidity

Current ratio

0.37

0.23

Acid test

0.26

0.16

The net profit margin has increased slightly because the J D Wetherspoon plc offered majority of its products at cheaper rate to promote its operations. With operations revenue increasing because of this marketing strategy, the ratio is bound to be lower. However the gross profit has also shown an increase due to the increased operations which is understandable as they have a direct relationship. But the increase in revenue is more than the increase in gross profit thus shifting the balance towards the denominator.

When analyzed also with net profit, net profit has also shown a decline. Net profit has marginally decreased over the year. This marginal difference could be attributed to an increase in administrative expenses, increased taxes due to new taxation policy guidelines and finance costs (Interest paid). Similar to gross profit, the increase in revenue surpasses the increase in net profits and hence the ratio has shown a decline. However it can be presumed that the new operations strategy would help in not only increase the operations in the future but also improve profits by a good margin.

The J D Wetherspoon plc has improved its efficiency in utilizing the shareholder funds when compared to previous years. This increase is warranted and expected because of the increase in profits arising due to increased operations, thanks to the new pricing strategy. Increased profit implies increased dividends payout and excellent returns for shareholders. This also makes it an excellent buy option in the capital markets.

The return on capital has shown a slight decrease when compared to the previous year. This implies the J D Wetherspoon plc' earnings before interest and tax have decreased over the previous year. Since capital employed has decreased in previous years, operations have reduced over the year due to high level of investment and this has resulted in higher returns.

The asset turnover has fallen from 1.60 to 1.36 essentially due to increase in administrative expenses and cost of operations. These contribute significantly to the earnings before interest and tax for the J D Wetherspoon plc. Cost of operations plays a vital role especially in the healthcare industry since more inventories sold implies more cost of goods and this holds good for J D Wetherspoon plc also. Thus the increase in operations also results in increased cost of goods sold and the new pricing strategy portrays the increase in cost of goods sold in a blatant manner. All this have a direct hand in the reduction in asset turnover.

The liquidity of the J D Wetherspoon plc has decreased in 2010 as compared to ...