This paper examines the financial ratios of Wetherspoons, UKs largest leading pub company.
Financial Performance Analysis of JD Wetherspoon
This paper examines the financial ratios of Wetherspoons, UK’s largest leading pub company. The financial analysis is based on the assessment of the gearing, efficiency, share prices, liquidity and performance of investors in the company.
Key words: Profitability, ROA, returns, solvency, liquidity, leverage
Introduction Company Over view
JD Wetherspoon is one of the country’s leading managed pub companies in United Kingdom with its head quarters in Watford, England, UK. It was started by Tim Martin in the year 1979 (Martin, 2014). The company also operates Hotels. The company opened approximately 46 pubs in the year 2014 which increased the number of pubs to 927 at the financial year end July 27, 2014. The company has plans to launch its successful pub chain in to the European continent starting with Paris. Wetherspoon went public in the year 1979 and is listed on the . The company’s total revenue for the year 2014 was £1,409 million with an increase of 9.9% compared to the revenue for the year 2013. Wetherspoon are planning a major ramp up for the year end July 2015 by opening 30-40 pubs (Wetherspoons, 2015).
Comprehensive Analysis of Financial Ratios
Wetherspoon’s revenue increased by 9.99% in 2014, when compared to the revenue figure of 7.01 in the year 2013. The company has reported record sales, profit and earnings per share. However there was a drastic net income fall 10.86% from 46 million to 41 million despite a 9.99% of increase in revenues from 1.28 bn to 1.4 bn. The declining gross margin might be due to a decline in sales prices or higher cost of sales. This is the main reason according to the Wetherspoon annual report (Morning star, 2015)
Table 2 Profitability Ratios
Graph 1 : JD Wetherspoon’s Revenue ( in £ million)
The company’s Return on capital (ROC) is a measure of performance for any organisation and determines how well the capital which is employed in the organisation is utilised (Bragg, 2012). Analysis of the ROC of Wetherspoons in the indicate that the figures have gone down over the last 3 years with the ratios being 10.84% in 2012, 10.55% in 2013 and 8.87% in 2014 (Fiancial times, 2015). This indicates that the company is still struggling to utilise the available resources. The capital employed is not being used to its fullest potential hence the increased net debt of 5.68% in 2012, 2.45% in 2013 and a whopping 17.37% in 2014 (Financial times, 2014). The return on equity ratio indicates the company’s return on investors’ money which is going down ever year. ROE for the year 2012 is recorded as 26.16 percent, 24.02 percent for the year 2013 and the least for the year 2014 which is 18.60 %. The company net debt has increased significantly during the last 3 years £ 462.6 million in 2012, £ 474.2 million in 2013 and with the highest being £ 556.6 million in the year 2014. The factors which lead to the increased debt are 46 new pubs, investment in current pubs, acquisitions of freehold reversions and investment properties, repurchase of shares etc. The declining trend has continued to the other profitability ratios as well. The gross margins came down from 12.42% in 2013 to 11.9% in the year 2014. Return of Assets declined from 4.40% in 2012 to 4.38% in 2013 to a further low of 3.62% in the year 2014 (Richard, 2015).
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Gross profit margin is a measure of the ratio between the gross profit and the net sales. Gross profit is defined as the profit earned by Wetherspoons before the exceptional items and taxes are deducted. Indication of growth in the gross profit margin suggests that the profit made through the net sales of the company is increasing and that the firm is progressing. From the profit analysis of J D Wetherspoon (Appendix 1), it can be analysed that there is a decrease of net profit margin and the possible reasons can be due to the external forces imposed such as the taxes.
Assets turnover is used to understand the ratio between the sales revenue and the total assets (Lee et al., 2009). Even though the profitability ratios were a downward spiral, the company was able to show some significant improvement in total asset turnover over the last 3 years (Money week, 2015). The total asset turnover in the year 2012 was 1.18% which increased to 1.21% in the year 2013 and the climb continued to the year 2014 where the total asset turnover was 1.24%. The improved asset turnover means that each pound of capital employed (or total assets) produces a higher level of sales. The receivables turnover has gone up from 469.46 in the year 2013 to 516.52 in the year 2014 which means that the company has no or less uncollected receivables. The inventory turnover talks a lot about the company’s constant demand of their services which here is very strong over the last 2 years. The inventory turnover registered a 54.95% in the year 2013 and 58.89% for the year 2014.
Table 2 Efficiency Ratios
Liquidity ratio shows the company’s ability to pay bills whenever they are due. The current ratio of Wetherspoon for the last 3 years show less than 1% which means that the company could have trouble meeting existing or current obligations if the sales decline or cease (Financial times, 2015). The same is applicable to the quick ratio which is less than 1% over the period of last 3 years. However Elliot and Elliot (2006) pointed out that the current ratios for brewers is quite low. And quite a significant amount has been invested in new pubs and pub extensions which will in turn increase the turnover of the company in future years and this could be a positive effect on the firm’s liquidity. The increase in financial leverage multiplier means that there has been an increase in liabilities with in the capital employed. The negative working capital of Wetherspoon is also a growing concern here. The company has been borrowing money from bank to fulfil its expansion plans and the profits are being re-invested in the company.
Table 3 Liquidity Ratios
Wetherspoon is a rapidly growing company with increased number of pubs every year. The Price earnings ratio which has been on the rise since 2012, which means the investors are looking for a higher growth in coming years. Especially when compared to the industry standard which is 1.9% which is way lesser than Wetherspoon. So, investing in the company’s stocks could be beneficial in the future. However the dividend yield does not show good picture in terms of dividends paid to the shareholders. Year on year growth in dividends per share remained flat while earning per share has fallen by 10%. The dividend yield ratio has reduced significantly over the last 3 years. The company did not pay out any profits to its share holders in the year 2012 as they decided to fund the operations in order to grow and sustain the competition (Financial times, 2014). But the payouts for the next two years have been strong and improving. This is great news for investors.
Table 4 – Investment Ratio
Long term Solvency Ratio
The interest cover has improved from 2012 to 2014 which indicates greater solvency even though the debt ratio has gone significantly as the company has taken loans to expand its operations. Going by the debt ratio, the gearing of the company will be high as the business is predominantly financed by debt in the recent years and can be forecasted to be high in the coming years as long as the company does not stop borrowing money (Wetherspoons, 2014).
Table 5- Long term solvency ratios
Comprehensive analysis of share performance
Wetherspoon earning per share have been on a steady incline since the year 2012. However the growth percentage has not been very encouraging. The same can be seen in the table 4 above. EPS has increased by 16.7% in the year 2012, 12.5% in the year 2013 and a meagre 4.9% in the year 2014. Even though the profit margins have been low according to some bears of the company’s share, extra sales have been good to make Wetherspoon’s returns on the cash invested justify the money spent. The company plans to invest in the long term and is absorbing some cost increases instead of passing them on to customers to generate good will. One may not worry about whether to buy the shares of the company as it is a great generator of cash which allows the company to continue investing in the businesss (Brealey et al., 2013).
Table 6 – EPF and Growth %
The dividends payouts are not fruitful to a large extent as the company buys back its shares very often and this is not recommended use of shareholders money (Loth, 2015). If shares are to be bought, it is profitable if it is done for long term benefit. The most recent buy back of share by the company was in the month of Jan 2015 at prices ranging from 798.03 to 794.88p for cancellation. As returns on market increase, returns on owning shares of Wetherspoon are expected to decrease at a much smaller rate. During bear market the company is likely to outperform the market (Financial times, 2015).
Weatherspoon share price graph below for reference.
Source: Money Week
To summarise the overall financial performance, JD Wetherspoon has increased its revenue over the last 3 years. Even though the gross profit margins have significantly lowered from £1,197 million in the year 2012 to 168 million, operating expenses have also declined from £1,103 million in 2012 to 52 million in 2014. The company is highly geared and should aim at reducing the debts in the coming financial years in future. The company plans to expand the number of pubs to more than 1500 in near future. There are speculations among the investor circles that the company may be aiming high in number of outlets and may not reach the desired target. While aiming high the company will make less money than it used to when compared to the existing limited number of pubs. The sales model of Wetherspoon will not support the expansion plans. The charges for food and drink are less and in order to make more money, the number of people should increase proportionally. The company founder Tim Martin have been campaigning against the huge tax advantage supermarket have over the pubs which is a serious threat to the pub industries existence.
Though the company’s debt has increased over the years, it cannot draw a comparison with similar establishments like Punch Taverns and Enterprise Inns. These companies have been struggling with huge debts over their heads since the financial crisis. JD Wetherspoon is in a business that is looking to grow exponentially in the near future. All said and done JD Wetherspoon has the best pubs format to prosper where the consumer spending remains tight and the shares which have doubled from mid 2012 dip to 370p, it is time to reap the profits. Key variables show good all round progress with like for like sales increased by 5% and overall revenue up by almost 10%. The management’s progress deserves a specific mention for considering a tax rate 47.53% which means more than £572.8 million was paid in the financial year of 2014. Valuation is largely a question of whether optimistic forecasts for 2015/16 are realistic and what P/E should be applied, as the prospective yield is below 2% in spite of the projected earnings cover of about four times. Wetherspoons is no longer a low cost pub. With its steady and consistent performance in the market, the analysts are more confident about prospects of earnings with strong P/E multiple also rising. The next two years the shares will be broadly priced and the wages may not improve much and the policies of the government are less likely raise the living costs via VAT for super markets.
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