Accounting & Financial Management

Prepared by: Bolaji Akinyemi Project Manager / Lead AnalystEnterprise Analytics ConsultingMay 2013Analysis of the Performance of James Latham PlcIntroductionJames Latham Plc is a UK based organisation engaged in the distribution of wood-based sheet materials and joinery quality softwood, hardwood, hardwood flooring and decking (Financial Times, 2013), the organisation started out as a family business has been in the timber business since business since 1757, and is today a leading importer and distributor of wood-based sheet materials. According to James Latham Plc (2013), the company operates through its main subsidiary - Lathams Limited - which has a nationwide network of strategically positioned distribution centres through which it is able to fully integrate its activities with that of its customers and suppliers. Its products include a comprehensive range of species of timber and wood sizes and non-standard thicknesses and the newly launched LG HI-MACS Natural Acrylic Stone and its own branded version of hardwood flooring, the Bausen (James Latham Plc, 2013, Bausen and Lathams Ltd, 2013).The companys other subsidiaries include James Latham Trustee Limited and Advanced Technical Panels (ATP) which distributes overlaid and prefinished panels into the transport, access tower and playground manufacturing sectors (James Latham Plc, 2013). According to Financial Times (2013), the companys main business focus is to be the supplier of choice for the UKs woodwork industry such as joinery manufacturers, shop fitters, kitchen manufacturers and other range of wood-based panel and hard wood, timber and builders merchant businesses. This report discusses the operating financial performance of James Latham Plc for the two years 2011 and 2012.Operating and Financial Analysis Operating and financial analysis of a company refers to the assessment of the companys past present and future financial performance and condition in order to identify the companys financial strengths and weaknesses and to enhance the fundamental basis for financial decision-making and planning (McMenamin, 1999). The principal tools of financial analysis is the ratio which is a mathematical tool used to explain the relationship between two quantities, and are being used by various stakeholders to assess the financial well-being of a firm (Fabozzi and Peterson, 2003, McMenamin, 1999). According to McMenamin (1999), in order to understand a firms financial position, there is need to find answers to four key questions, and they include: Is the business making money; that is, is it profitable? Can the business pay its bills on time; that is, is it liquid? Is the business using its assets productively; that is, is it operating efficiently? Is the business depending too much on borrowed money; that is it highly geared? (McMenamin 1999: 335).According to McMenamin (1999), a selection of ratios are used to answer these questions, and these ratios measure profitability, liquidity, operating efficiency, and capital structure (gearing). These ratios will be applied in the assessment of James Latham Plc Annual Report for 2012, in order to assess its financial performance, the companys group performance has been analysed in this report.Table of Ratios20122011

Profitability Assessment

Return on Investment12.33%13.94%

Gross Profit Ratio17.46%18.23%

Net Profit Ratio5.38%6.20%

Return on Equity12.84%12.61%

Earnings Per Share (EPS)31.9 pence30.8 pence

Diluted Earnings Per Share31.4 pence30.5 pence

Price Earnings (P/E) Ratio As at Monday 13 May: 9.40Market share price unavailable

Dividend Yield2.25%Market share price unavailable

Liquidity Assessment

Working Capital39,576,00038,992,000

Current Ratio2.79:12.82:1

Acid Test or Quick Ratio1.67:11.66:1

Operational Efficiency

Asset Turnover1.69 times1.64 times

Fixed Asset Turnover6.24 times6.88 times

Stock Turnover Ratio4.78 times4.84 times

Cash Turnover Ratio20.35 times14.74 times

Debtor Days Collection Period 53 days53 days

Creditor Days Payment Period37 days41 days

Creditor days Debtor days 16 days12 days

Capital Structure Assessment

Gearing or Leverage Ratio7.05%2.13%

Debt Ratio2.84%1.25%

Interest Cover13.32 times15.17 times

Dividend Cover1.99 times2.09 times

ProfitabilityIn his statement for the financial year-ended 31 March 2012, the Chairman acknowledged the general downward trend in the UK economy and emphasised the effects that it had on the performance of the company, noting that it had been a particularly difficult year for the company in its operations. This is confirmed in the Annual Report, the directors reported a profit of 143,645,000 in 2012 compared with 130,151,000 in 2011 which represents an increase of 10.4% and an operating profit of 7,723,000 in 2012 as compared with 8,070,000 which was higher than the profit in 2012, this represented a decrease of 4.3%. Also, the operating margin for 2011 was 6.2% while that of 2012 was 5.4% which resulted in an overall decrease of 12.9%. This dismal performance is also reflected in the companys profitability ratios, although the companys management made efforts to increase shareholder value, this was only marginal with 2012 basic earnings per share of 31.9pence and that of 2011 is 30.8pence, with only a 1.1pence increase. But other profitability ratios for 2012 are lower than that of 2011.LiquidityWith regards to liquidity, the company remains strong and it appears to be relying on the bright performances of the previous years as well as access to additional loans and borrowings with which it was able to finance its operations. The loans have been wisely applied in that it has been used to finance the development of new products which is the companys own branded version of hardwood flooring, the Bausen, hence the company is holding high level of stocks as well as trade and other receivables, its cash and cash equivalents all combine with together to make it a liquid company. This is evidenced by its working capital of 39,576,000 in 2012 and 38,992,000 in 2011, its current ratio of 2.79:1 in 2012 and 2.82:1 in 2011, as well as its quick ratio which is 1.67:1 in 2012 and 1.66:1 in 2011, although current assets exceed current liabilities, these ratios highlight the fact that the company is not really growing but has only managed to remain in stable operating performance, this may be the result of its new product and the fact that its other products are of better quality than those of its competitors, which has allowed the company to retain its customers and not lose them to rivals in the market. EfficiencyThe company is efficiently managing its stock with an asset turnover of 1.69 times in 2012 compared to 1.64 in 2011, the fixed asset turnover for 2012 is however lower than 2011, of particular importance is the fact that the company is allowing its debtor to trade with its cash, is reflected in the 53 days debtor collection periods in 2012 and 2011, while the creditors only the company 37 days and 41 days in 2012 and 2011 respectively, in the end the company has a shortfall in its creditor days less debtor days in 2012 of 16 days and 12 days in 2011. The companys credit policy is a little lax, although when the economic recession is considered, the company may want to encourage its customers with the extended creditor days, as it can lose customers if it has a rigid credit policy in a recession. Capital StructureThe companys leverage ratio is low, and this is because of the stock of cash it has built in previous years, this explains why the company did not have to rely on high level of debt to finance its operations. The stock of cash has also enabled the company to keep shareholders happy despite its no-growth performance in 2012.

Conclusion Although, the company has only managed a stable operating performance in 2012, its performance is encouraging given its P/E ratio of 9.4 and a dividend yield of 2.25% as at 13 May 2013. Its interest cover of 13.32 times shows that it is credit worthy, but is generally affected by the economic recession all over the world.

APPENDIXAppendix 1James Latham Plc - Calculation of Ratios.Profitability Assessment1. Return on Investment =

Return on Investment for James Latham Plc For 2012 Investments = Total assets current liabilities = 84,757,000 - 22,128,000 = 62,629,000

Hence, Return on Investment = For 2011 Investments = 79,313,000 - 21,417,000 = 57,896,000

ROI = 2. Gross Profit Ratio =

For 2012, GP ratio =

For 2011, GP ratio=

3. Net Profit Ratio =

For 2012, NP ratio =

For 2011, NP ratio =

4. Return on Equity =

For 2012, ROE =

For 2011, ROE =

5. Earnings Per Share (EPS) =

The weighted average number of ordinary shares outstanding is calculated as:2012 2011Issued share capital (Ordinary) 20,160,000 20,160,000Less: weighted average number of own shares held in treasury investment (919,000) (919,000)Less: weighted average number of ownshares held in ESOP Trust(197,000) (167,000)Weighted average share capital 19,044,000 19,074,000Add: dilutive effects of share options issued 268,000 200,000Weighted average share capital for diluted earnings per ordinary share calculation 19,312,000 19,274,000

For 2012, Basic EPS =

For 2011, Basic EPS =

For 2012, Diluted EPS =

For 2011, Diluted EPS =

6. Price Earnings (P/E) Ratio = This ratio is used to evaluate the earnings growth potential of a company and is closely related to the Earnings Per Share ratio (McMenamin, 1999). The historical market share price of the company is presented below for the past , accessed on the 13 May 2013 on the Financial Times website.

James Latham PLCLTHM:LSEAs of May 13 2013 12:52 BST. Data delayed by at least 15 minutes.DayDateOpenHighLowCloseVolume

MondayMay 13301.00300.20299.40300.004,509

FridayMay 10301.00301.00301.00301.000.00

ThursdayMay 09303.00307.00303.00303.505,806

Source: FINANCIAL TIMES. 2013. James Latham PLC [Online]. London, UK: The Financial Times Limited. Available: http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=LTHM:LSE [Accessed 13 May 2013]

Therefore based on the closing share price for Monday 13 May 2013, based on the basic EPS:

The P/E ratio for 2012 =

This ratio is used to evaluate the earnings growth potential of a company and is closely related to the Earnings Per Share ratio, since

7. Dividend Yield =

Dividend yield as at 13 May 2013 =

Liquidity Assessment8. Working Capital = Current Assets Current Liabilities

For 2012, Working capital = 61,724 22,128 = 39,576

For 2011, Working capital = 60,409 21,417 = 38,992

9. Current Ratio is expressed in the ratio of Current Assets : Current liabilities

For 2012, Current ratio is 61,724:22,128 = 2.79:1For 2011, Current ratio is 60,409:21,417 = 2.82:1

10. Acid Test or Quick Ratio is expressed in the ratio of Quick assets to Current liabilities Quick assets : Current liabilitiesQuick Assets = Current assets stock

For 2012, Quick assets = 61,724 24,829 = 36,895Hence, Acid test = 36,895:22,128 = 1.67:1

For 2011, Quick assets = 60,409 24,771 = 35,638Hence, Acid test = 35,638:21,417 = 1.66:1Operational Efficiency11. Asset Turnover =

For 2012, Asset Turnover =

For 2011, Asset Turnover =

12. Fixed Asset Turnover

For 2012, Fixed Asset Turnover =

For 2011, Fixed Asset Turnover =

13. Stock Turnover Ratio =

Where Average Stock =

Average Stock for 2012 =

For 2012, Stock Turnover Ratio =

Average Stock for 2011 =

For 2011, Stock Turnover Ratio =

14. Cash Turnover Ratio =

Average cash balance =

For 2012 Average cash balance =

For 2012, Cash Turnover Ratio =

For 2011, Average cash balance is =

For 2011, Cash Turnover Ratio is =

15. Debtor Days Collection Period = Debtor Days Collection period for 2012 = 53 days (Figure extracted from Annual Financial Statement).Debtor Day Collection period for 2011 = 53 days (Figure extracted from Annual Financial Statement).16. Creditor Days Payment Period = Creditor Days Payment period, for 2012 = 37 days. (Figure extracted from Annual Financial Statement).

Creditor Days Payment period, for 2011 = 41 days. (Figure extracted from Annual Financial Statement).

2012: Creditor days Debtor days = 53-37= 16 days

2011: Creditor days Debtor days = 53-41= 12 days

17. Gearing or Leverage Ratio =

For 2012, Gearing Ratio =

For 2011, Gearing Ratio = Note:According to the Notes to the Accounts, Preference shares are included in non-current liabilities (as interest bearing loans and borrowings), therefore, this is also recognised as part of Total Debt of the company.

18. Debt Ratio

For 2012, Debt Ratio =

For 2011, Debt Ratio = Intangible assets consisting of Goodwill has been deducted from Total Assets.

19. Interest Cover =

For 2012, Interest cover is =

For 2011, Interest cover is =

20. Dividend Cover =

For 2012, Dividend cover is =

For 2011, Dividend cover is = REFERENCES

BAUSEN & LATHAMS LTD. 2013. Bausen Flooring Range from James Latham [Online]. Hertfordshire, UK: Lathams Ltd. Available: http://www.bausen.co.uk/ [Accessed 08 May 2013.FABOZZI, F. J. & PETERSON, P. P. 2003. Financial Management and Analysis Hoboken, New Jersey, John Wiley & Sons.FINANCIAL TIMES. 2013. James Latham PLC [Online]. London, UK: The Financial Times Limited. Available: http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=LTHM:LSE [Accessed 08 May 2013.JAMES LATHAM PLC. 2013. James Latham plc - Home Page [Online]. Hertfordshire, UK: James Latham Plc. Available: http://www.lathams.co.uk/ [Accessed 08 May 2013.MCMENAMIN, J. 1999. Financial Management: An Introduction, London, Routledge.