financial resource management - bam 502

Financial

Resource

Management

AssignmentFinancial Resource Management –BAM 502

BALAMURUGAN CHINNIAH

K0961097

11/15/2010

Executive Summary

This assignment contains the Financial Management report of J D Wetherspoon Plc, which is

presented to one of its competitor Mitchells and Butlers Plc. Critical analysis is done on the

historical and future performance of J D Wetherspoon with the help of the following ratios.

Return on Investment Ratios

Investor’s ratios

Capital structure and Financing Ratio

Short Term Liquidity Ratio

Working Capital Management Ratio

The report tells about the various strategic measures taken by J D Wetherspoon for its

survival in the market.

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Contents

1. Introduction.......................................................................................................................................4

2. Mitchell and Butlers Plc (M&B)..........................................................................................................4

3. J D Wetherspoon Plc (JDW)...............................................................................................................4

4. Ratio Analysis.....................................................................................................................................5

4.1 Return on Investments and Profitability Ratios...........................................................................5

4.1.1 Return on Capital Employed (ROCE)...................................................................................5

4.1.2 Return on Shareholders’ Capital (ROSC).............................................................................6

4.2 Investors Ratio.............................................................................................................................7

4.2.1 Earnings per Share (EPS)......................................................................................................7

4.2.2 Price/Earnings Ratio (PE Ratio)............................................................................................8

4.3 Capital Structure and Financing Ratio.........................................................................................9

4.3.1 Gearing (Leverage) Ratio.....................................................................................................9

4.3.2 Interest Cover Ratio............................................................................................................10

4.4 Short-Term Liquidity Ratio.......................................................................................................11

4.4.1 Current Ratio......................................................................................................................11

4.4.2 Acid Test Ratio...................................................................................................................12

4.5 Working Capital Management Ratios........................................................................................12

4.5.1 Creditors Payment Period...................................................................................................12

5. Conclusion.......................................................................................................................................13

6. References.......................................................................................................................................14

7. Appendix..........................................................................................................................................15

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1. Introduction

One of the main functions of Financial Management is to manage the financial

resources of an organisation. It helps the organisation to know their financial needs for the

day-to-day operations or in new investments which enhances the operations of the

organisation. It supports both internally and externally in decision making process (Coyle B

2004, p.1). The pub chain market suffered due to recession, however it is showing growth in

recent days. The presentation contains the historic and likely future performance of J D

Wetherspoon Plc. It is presented to the senior management of Mitchells and Butlers Plc, the

competitor of J D Wetherspoon. An overview on both the companies is given below.

2. Mitchell and Butlers Plc (M&B)

Mitchells and Butlers Plc was founded in 1898 by the merger of two Midlands family

businesses, its runs more than 2000 managed pubs, bars and hotel in United Kingdom with

the headquarters in Birmingham, United Kingdom. After various joint ventures and

acquisition in 2003, it separated its pubs, bars and restaurants from Six Continents Plc and

was listed in the London Stock Exchange as Mitchells and Butlers Plc It owns several brands

of pubs namely Harvester, Sizzling Pub Co, Ember Inns, O’Neill’s, Town pubs and few more

in UK. It also operates its business in Germany. The company operates with Miller and

Carter, Castle, Vintage Inns, Babylon, Lakota and few more concepts. It has around 40,000

employees.

3. J D Wetherspoon Plc (JDW)

The company was founded in 1979 by Tim Martin. They are the leading pub operators

in the UK. It runs around 770 eating and drinking establishments in Wales, England and

Scotland with the headquarters in Watford, United Kingdom. It operates with low prices and

long opening hour’s functions. It also operates the Lloyds No.1 brand. The company

pioneered in having non-smoking areas in pubs before the introduction of Health Act 2006. It

also operates nearly around 16 hotels in total with the name Wetherspoon Hotels. They have

modernised/refurbished the looks of their pubs with respect to the market changes. It has

around 20,000 employees.

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4. Ratio Analysis

4.1 Return on Investments and Profitability Ratios

Organisations are expected to make profit, investors expect that the amount of profit

earned must be in-phase with the amount of money invested in that organisation. The

financial performance is measured with the return on investments (Coyle B 2004, p.7.5)

4.1.1 Return on Capital Employed (ROCE)

This mainly focuses on the profit with respect to the capital/investment made by the

organisation itself. This return enhances the further investment in mere future. The capital

employed is nothing but the Net Asset invested. Profit before interest and taxation is used to

calculate the ROCE (Coyle B 2004, p.7.5). The formulae is given below,

ROCE = Profit Before Interest and Tax / Capital Employed * 100

Table1 shows the ROCE values for the two companies in three different year.

Table 1: ROCE values of JDW and M&B.

And the comparison is shown in the Figure1

Figure 1: Graphical representation of ROCE

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The ROCE M&B is negative, when compared to JDW. This is because JDW followed a

different approach of small improvements in diverse areas of the business, some such

improvement is that it has achieved 11% volume reduction in energy consumption by

installing ‘smart’ meters (Anon 2009, p.4). In the year 2008 JDW had a net borrowing of £

439 millions which was reduced to £388 million in 2009. The JDW 2009 annual report

claims that the company didn’t pay their final dividends to its shareholders. This is done in-

order to redirect the cash flow to Debt deduction (Martin Waller 2009). This helps the

company to survive in a long run, which is a statistical decision made by the company.

4.1.2 Return on Shareholders’ Capital (ROSC)

This exclusively focuses on the profit with respect to the capital/investment made by the

investors, unlike the ROCE. Profit after interest and before tax is considered, this is the figure

focuses on the profit made by the organisation for the benefits of its investors (Coyle B 2004,

p.7.7). The formulae used is shown below,

ROSC = Profit before Tax / Shareholders Funds * 100

The values of ROSC with respect to the two companies in three different years are given in

Table 2, this doesn’t favour the JDW’s sales growth in mere future. The profit made by JDW

has benefitted the shareholders when compared with M&B.

Table 2: ROSC values of JDW and M&B.

Figure2 shows the comparison between ROSCs of M&B Plc and JDW Plc

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Figure 2: Graphical representation of ROSC

JDW purchased its own share for about 3.8 millions during the financial year 2008. The

company decided to do this, in specific to cancel the 2.7% share capital issue in the beginning

of the financial year 2008. This eventually pushed up the ROSC from going down, which in

return increased the free cash flow up by 42%. This was a just in time action taken by the

company in-order to retain its shareholders. This decision helped them in diverting the cash

flow from final dividends of 2009 to debt reduction (Anon 2008, p.6).

4.2 Investors Ratio

This ratio is used assess the value and performance of the equity investments (Coyle

B 2004, p.7.22).

4.2.1 Earnings per Share (EPS)

Earnings per share are nothing but the amount of profit by an organisation during the

financial year which is attributed to each ordinary share (Coyle B 2004, p.3.12). Table 3

gives the values of the EPS of JDW Plc and M&B Plc.

Table 3: EPS values of JDW and M&B

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Figure 3 shows the graphical representation of comparison between JDW Plc and B&M Plc.

Figure 3: Graphical representation of EPS.

EPS value is high for JDW in 2009 when compared to M&B and the vice-versa in the year

2007 and 2008.

4.2.2 Price/Earnings Ratio (PE Ratio)

It is the ratio of current share price to the earnings per share. It determines the

investor’s confidence for investing in a particular company(Coyle B 2004, p.7.24).

Table 4: PE Ratio values for JDW and M&B.

A high value of PE ratio shows the strong investor confidence in the company and its future.

Table 4 indicates that the JDW has a strong investor confidence when compared to M&B,

which also shows that JDW has good future growth. JDW has changed its way of working

with respect to the shareholders and it never pulls them down. The graphical representation is

given in Figure4.

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Figure 4: Graphical representation of PE Ratio.

This PE ratio determines the share value of a particular company in the market.

4.3 Capital Structure and Financing Ratio

The capital structure of an organisation is analysed in-order to find whether it has high

or low debt. The firm must have profit which is sufficient to pay its debt. If it defaults one of

its debt, it automatically affects the overall progress of the firm (Coyle B 2004, p.7.11).

4.3.1 Gearing (Leverage) Ratio

Gearing is mainly focused on the firm’s long-term capital structure. The long term

loans are financed by shareholders funds or long term debt capital. For a high geared

company slight change in the operating profit will tremendously change Earning Per Share

(EPS) value, than in the low geared company (Coyle B 2004, p.7.12). Table 5 shows the

gearing values of JDW Plc and M&B Plc.

Table 5: Gearing Values for JDW and M&B

The value from above table claims that the change in operating profit of JDW will not affect

its EPS value when compared to that of M&B Plc. A graphical representation is given in

Figure 5. Formula used to calculate this ratio is

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Gearing = Long-Term Debt / Long-Term Debt + Equity

Figure 5: Graphical representation of Gearing Ratio

4.3.2 Interest Cover Ratio

This ratio is used to find whether the firm is earning sufficient profit to pay its interest

costs (Coyle B 2004, p.7.15). The profit before tax and interest is considered to calculate this

ratio. From table 6 and figure 6 it is clear that M&B is earning very low profit to pay its debt.

Table 6: Interest Cover Values for JDW and M&B.

Figure 6: Graphical representation of Interest RatioK0961097 BAM 502 of 16

Normally an interest cover ratio of value 2 is said to be very low and a minimum of 3 times is

considered to be low. The value of interest cover is low in case of the two companies. This

implies that M&B has no chances of paying its debt with the help of its profit when compared

to JDW, which can try to pay its debt, which may or may not happen. The formula used to

calculate this ratio is

Interest Cover Ratio = Profit Before Tax and Interest / Interest Charges

4.4 Short-Term Liquidity Ratio

Liquidity is nothing but the money, that a firm can obtain in a short notice from the

sales, investment or existing cash sources to settle its debts. The standard tests to find the

liquidity are current and acid test ratio (Coyle B 2004, p.7.15).

4.4.1 Current Ratio

A company must have enough current assets to pay its current liabilities. Usually the

current ratio value should be higher than 1, this value changes with respect to the business in

which the company is involved (Coyle B 2004, p.7.16). Table 7 shows the value of Current

Ratio. JDW has a very low current ratio value when compared to M&B (Anon, Mitchells and

Butlers), which tells that the company cannot convert all its current assets into cash very

quickly.

Table 7: Current Ratio Values of JDW and M&B.

Figure 7: Graphical representation of Current Ratio

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The formula used to calculate this ratio is

Current Ratio = Current Assets / Current Liabilities

4.4.2 Acid Test Ratio

This is another test, which is most widely-used in liquidity ratio. Here it is assumed

that the stocks are not covered in the liquid assets. The ratio value can be less than 1.0, when

the company has a fast stock turnover (Coyle B 2004, p.7.17). The values of acid test ratio

are shown in Table 8. The values are high with respect to M&B when compared to JDW, and

also indicates both the companies have fast stock turnover.

Table 8: Acid Test Ratio Values of JDW and M&B.

The annual report 2009 of JDW claims that the company has committed credit facilities, and

they are constantly aiming in to maintain the flexibility in funding by keeping the committed

credit lines available at any time (Anon 2009, p.11).

4.5 Working Capital Management Ratios

This is used to determine the length cash cycle in an organisation and also to monitor

the working capital management. Three different ratios are used in monitoring they are

Debtors Payment Period, Stock Turnover Period, and Creditors Payment Period (Coyle B

2004, p.7.18). One of the ratios is explained below.

4.5.1 Creditors Payment Period

This gives the average number of days taken by the company to pay its creditors. Less

number of days in the payment results in extended credits from suppliers, increased bank

overdrafts and more (Coyle B 2004, p.7.20). Table9 and Figure9 shows the values and

comparison of the creditor payment period of JDW and M&B.

Table 9: Creditors Payment Days of JDW and M&B.

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Table 10: Graphical representation of Creditor Payment Period

This comparison shows that M&B maintains good creditor payment period, which increases

its credit limits. Formula used to calculate this ratio is given below,

Creditors Payment Period = Trade Creditors/Purchases * 365 .

5. Conclusion

Thus after a critical analysis with the help of the ratios, JDW has a like to like growth in

mere future with few drawbacks in the working capital management and structure capital.

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6. References

1. Coyle, B. (2004), ‘Managing Financial Resources’, 2nd ed , London. Kingston

Business School.

2. Anon (2007), J D Wetherspoon Annual Report 2007, Avaialable at

<http://www.jdwetherspoon.co.uk/home/investors/finance-reports/annual-report-

2007.pdf> [Accessed on 11 November 2010].







5. Martin Waller. 2009. JD Wetherspoon focuses on Pounds 100m loan repayment.

The Times, January 21, <http://www.proquest.com/> [Accessed 11 November 2010].

6. Anon, Mitchells and Butlers Plc Annual Report [online]. Available at

<http://www.mbplc.com/index.asp?pageid=393> [ Accessed 11 November 2010].

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http://www.mbplc.com/index.asp?pageid=393

http://www.jdwetherspoon.co.uk/home/investors/finance-reports/annual-report-2009.pdf






7. Appendix

Calculations

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financial resource management - bam 502

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