Comparative Analysis John Lewis Example For Free - Free Essay Example

Sample details Pages: 7 Words: 2231 Downloads: 3 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? We have taken the company Debenhams for our analysis. The methodology adopted for the analysis includes ratio analysis and a comparative study with Lewis, a leading apparel company in U.K Company profile: Debenhams Debenhams plc engages in the operation of department stores. The companys stores provide a range of products, including womens wear, mens wear, childrens wear, lingerie, health and beauty, and home ware products, as well as gifts and accessories. Don’t waste time! Our writers will create an original "Comparative Analysis John Lewis Example For Free" essay for you Create order It offers its products under its own brands comprising Red Herring, Mantaray, Maine New England, Debut, and Bluezoo. The company also provides its products under the international brands, such as Chanel, Clarins, Denby, Levi Strauss, Radley, and Ben Sherman; and concession brands consisting of Coast, Jacques Vert, Oasis, Phase Eight, Wallis, and Warehouse. It operates approximately 166 stores in the United Kingdom, the Republic of Ireland, and Denmark, as well as operates approximately 60 international franchise stores in 23 countries. In addition, the company offers its products through an online store, debenhams.com. Debenhams plc was founded in 1778 and is headquartered in London, the United Kingdom. (Debenhams plc (DBHMY.PK), 2009). Ratio Analysis of Debenhams Ratio analysis is considered to be a powerful method for analyzing the financial health of a company. We are analyzing Debenhams with the help of some key ratios in the below section. Sales (top line) growth: Growth of Debenhams  1 yr 3 yr 5 yrs Sales 10.67 6.11 5.67 EPS -24.67 -5.98 -21.67 (Financials: Debenhams Plc. (DBHMY.PK), 2010). Description: the data given above shows that companys last one year sales is higher than the average of last five years. The EPS is showing a negative growth. The sales growth of the company in the last one year gives an indication of the better growth of the firm. Profit margins  2010 2009 2008 2007 Gross Profit 281 264.9 267.6 266 Gross Profit margins 13.25534 13.82857 14.5498 14.99098 Operating Profit 189.7 182.2 176.1 179.8 Operating Profit margins 8.948535 9.51138 9.574815 10.133 Description: companys gross profit margin ratio is 13% in 2010 and showing a decreasing trend compared to previous year. Also the operating margin shows a consistency and the ratio stand between 8% to 13% for the last 5 years. Gearing Ratios: Operating leverage is a tool in finance to estimate the percentage change in operating income for a one percent change in revenue. Financial leverage is used to estimate the percentage change in net income for a one percent change in operating income. We can see variations in the computation of these ratios from industry to industry. Gearing Ratios of Debenhams  2010 2009 2008 2007 Operating leverage= (Revenue- Variable cost)/Operating income  1.486031 1.457739 1.522998 1.481646 Financial Leverage= Operating Income/ Net Income  1.95567 1.917895 2.287013 2.275949 Description: operating leverage of the company is showing a consistent trend for the last four years. In 2010, the operating leverage shows a number of 1.48, i.e., 1% change in the revenue leads to 1.49% change in operating profit. It is definitely a good sign of companys growth. Also the Financial leverage also shows a companys financial strength. In 2010, it is standing at 1.96%. Interest coverage ratio: Times interest earned (TIE) or interest coverage ratio is a measure of a companys ability to repay its debt obligations. Times Interest Earned or Interest Coverage is a great tool when measuring a companys ability to meet its debt obligations. If the interest coverage ratio is less than 1, it indicates that the company is not generating enough cash from its operations to meet its interest obligations. If this is the case, then the Company would then have to either use cash on hand to finance for repayment of debt. It is considered t be a warning signal, when interest coverage falls below 2.5 xs. The formula for calculating the ratio is: Interest Coverage Ratio= EBIT / Interest Charges Interest Coverage Ratio of Debenhams  2010 2009 2008 2007 Interest Coverage Ratio 3.809237 2.967427 2.508547 2.6997 Description: company is generating enough profit to cover its interest obligations. The ratio in 2010 stood at 3.80 shows a good number. Dividend per share: Dividends are payments made by a company to its shareholders during a specified time intervals, say, quarterly or yearly. It is the portion of corporate profits paid out to stockholders. When a company earns money out of the business, that money can be put to two uses: it can either be re-invested in the business or it can be paid to the shareholders. This payment is called dividend. 2010 2009 2008 2007 Dividend per share 4.3 No dividend paid 3 3.8 Description: the data shows that, company is paying a dividend in the last three years and for 2010 dividend is 4.3 per share. Earnings per share: EPS is the amount of earnings per each outstanding share of a companys stock. The EPS formula does not include preferred dividend for categories outside of continued operations and net income. Earnings per share for continuing operations and net income are more complicated in that any preferred dividends are removed from net income before calculating EPS. (I.M. Pandey, n.d). Earnings per share = Net Income/ Weighted Average Common shares EPS of Debenhams  2010 2009 2008 2007 Earnings per share 7.5 10 9 9.3 Description: companys Earning Per Share is ranging between 7 to 9 for the last four years. In 2010 EPS is 7.5. Dividend coverage Ratio: It is the ratio of companys over the dividend paid to shareholders. The ratio is calculated as EPS divided by the dividend per share. Generally if the DC is 2 or higher, it is considered to be safe, but anything below 1.5 is risky. Formula is: Dividend cover Ratio = EPS/DPS Dividend cover Ratio of Debenhams Earnings per share 7.5 10 9 9.3 Dividend per share 4.3 No dividend paid 3 3.8 Dividend cover Ratio 1.744186 #VALUE! 3 2.447368 Descriptions; the above figures shows that, the company is generating good EPS which adequately cover the dividends. This means that, company could pay dividend to the shareholders without being effect its financial operations. Return on Capital Employed (ROCE): ROCE compares earnings with capital invested in the company. ROCE is used to prove the value the business gains from its assets and liabilities, a business which owns lots of land but has little profit will have a smaller ROCE to a business which owns little land but makes the same profit. It basically can be used to show how much a business is gaining for its assets, or how much it is losing for its liabilities. (Panday n.d). ROCE= EBIT/ Capital employed: ROCE of Debenhams  2010 2009 2008 2007  1897 1822 1761 1798 Description: company is employing 0.6 mln capital for the operation of the business. So the above data shows that business is generating enough profit from the invested capital. ROE: ROE is a tool to measures the rate of return on the ownership interest of the common stock owners. It measures a firms efficiency at generating profits from every unit of shareholders equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth. ROEs between 15% and 20% are considered desirable. ROE= Net Income/Shareholders equity ROE of Debenhams  2010 2009 2008 2007 ROE 970 950 770 790 Description: the above data shows that, companys ROE is showing an increasing trend for the last four years. In 2010, ROE is 970. Total shareholders return (TSR) Total Shareholder Return (TSR) is a concept used to compare the performance of different companies stocks and shares over time. It combines share price appreciation and dividends paid to show the total return to the shareholder. The absolute size of the TSR will vary with stock markets, but the relative position reflects the market perception of overall performance relative to a reference group. TSR is computed as: TSR = (Price end Price begin + Dividends) / Price begin (Panday, n.d). TSR of Debenhams TSR 2010 2009 2008 0.020785 1.89881 -0.7704 Description: The above table shows TSR figure for the last three years. It shows an improving signal from negative figure if -0.8 to 0.02 in 2010. Total Shareholder Return benchmarked against Dow Jones The above chart shows, companys share performance for the last one year in comparison with Dow index. In the beginning of the year company was showing a declining trend and fall is high in the month of May, Jun and July. After that the companys stock performance was showing an increasing trend. So the expectation that it stock price will cross the zero percentage mark in the beginning of the next year, as the combined index also in the rising trend for the period. Total Shareholder Return (TSR) benchmarked against Lewis (JOHN) Partnership The John Lewis Partnerships 70,000 Partners own the leading UK retail businesses John Lewis and Waitrose. Our founders vision of a successful business powered by its people and i ts principles defines our unique company today. The profits and benefits created by our success are shared by all our Partners. The company is considered to a leading brand in U.K retail business. (Gandhi Lewis n.d). In the above chart,compared to Lewis, Debenhams showing a rising trend after September. From Jun to December it is showing a 20% improvement in the share price. On the other hand, Lewis is in a decreasing trend November onwards, or it is showing a stabilizing movement over all. Performance comparison of Debenhams against Lewis Here we are analyzing the performance of Debenhams in comparison with Lewis to make a final decision on the subject matter. First, we are showing the key ratios of Lewis and then drew chart for a comparative study. The flowing table describes the performance of Lewis for the last four years.   John Levis Partnership      2010 2009 2008 2007 Sales Growth 6734 6267 6052 5686 % growth 7.451731 3.552545 6.436862 110.4292   Gross Profit 2274 2071 2044 1901 Gross Profit margins 33.76893 33.04611 33.77396 33.43299 Operating Profit 389 323 391 339 Operating Profit margins 5.776656 5.153981 6.460674 5.962012   Gearing  Operating leverage= (revenue- Variable cost)/Operating income  5.845758 6.414861 5.230179 5.60767 Financial Leverage= Operating Income/ Net Income  1.513619 0.902235 1.221875 1.059375   Interest Coverage Ratio= EBIT/Interest Charges   4.370787 5.872727 9.775 7.902098   Dividend per share 3.05 3.05 2.74   Earnings per share = Net Income/ Weighted Average Common shares   ROCE= EBIT/ Capital employed 7.7* 6.8* 8.5** 7.9**   ROE= Net Income/Shareholders equity 151.4286 388.3333 216.6667 180 source: *Lewis 2010 financial report **Lewis 2008 financial report Sales Chart Here, sales of Lewis and Debenhams showing a increasing trend. In 2007, Debenhams sales was below 2000 million and at the same time, the sales of Lewis is below 6000 millions. If you consider the rate of growth, Debenhams overcome Lewis, as its sales growth is more steeper than Lewis after 2009. Comparison of Key performance Measures: Here, the chart indicates a rising trend in key performance measures. If we observe it closely, it would be clear that he percentage growth of Interest coverage, Operating profit and gross profit ratios are higher in Debenhams against Lewis. Limitations of Financial Ratio Analysis Ratio analysis is a powerful tool for companys analysis. But as much as ratio analysis can help you, it can also mislead, so I thought it would be good to delve into the limitations of financial ratio analysis today. Ratio analysis cannot be a substitute of other analysis methods: Ratios are wonderful tools which boil down a complex set of nu mbers and relationships to a simple, 1 or 2 digit numbers which tells volumes. But we should be check whether those numbers are accurate or not. In the small business environment things like reconciled trial balance and monthly, reviewed financial statements cannot be fully believed upon. The main reason for making errors in the preparation of final accounts because of the lack of adequate accounting systems in neither place nor do they all have competent accounting personnel making sure the monthly financial results are not only available, but actually accurate. So calculating any ratios based on questionable data and an unrecognized set of books can be very dangerous for investment decisions. So, before any analysis is even attempted, the accounting records must be brought up to par. 2. Ratio comparisons against companies can be meaningful only, if data is truly comparable: The ratio analysis should be made with companies in the same industry. There are ratios, which are uni que to some industry. For e.g.: Average selling price per sqft or operating profit per selling sqft specifically used for retail industries. Also different depreciation methods, different inventory valuation methods used, different policy regarding capitalization of certain expenditures make it very hard to arrive at financial statements which can be compared meaningfully. 3. Ratio analysis shows only what given in financial statements: Ratios are calculated on the basis of past data. Therefore, they do not provide complete information for future forecasting. And, it does not capture many factors which can have a profound impact on the business and yet cannot be expressed in accounting terms. Now let us go to the conclusion section. Conclusion: We have analyzed the company Debenhams with a powerful tool used in the finance world. He performance chart shows that company is has healthy key financial ratios and the stock market performance of the firm indicates a booming performance in the coming year. Also the work environment and employee compensation policy of the company also looks better, In 2010 financial report shows that, the company is employing around 1,60,000 employees. It is an increase from the 2006 number of 50,000. Also an attractive compensation package provided by the company ensures maximum employee satisfaction. The comparison with a leading competitor Lewis shows a promising future of the company in the retail world. So it is the right time for the investment in the company. An investment looks brighter in Debenhams for the long-term. Bibliography Debenhams plc. (DBHMY.PK), 2009. [Online] Yahoo. Finance. Available at: https://in.finance.yahoo.com/q/pr?s=DBHMY.PK[Accessed 1 January 2011]. Financials: Debenhams Plc (DBHMY.PK), 2010. [Online] REUTERS. Available at: https://www.reuters.com/finance/stocks/financialHighlights?symbol=DBHMY.PK[Accessed 1 January 2011]. Gandhi, PLewis. J. n.d., [Online] JOHN LEWIS ARTNERDHIP. Available at: https://www.johnlewispartnership.co.uk/Display.aspx?MasterId=482b4fe9-6f2b-4061-a418-164535098742NavigationId=542[Accessed 1 January 2011]. India heads for 9 per cent growth in 2011, 2009. [Online] yahoo. Finance. Available at: https://in.finance.yahoo.com[Accessed 1 January 2011]. Panday, I.M., n.d. Financial Management. Himalaya Publications, P. 254, 1st Edition