«Financial Statements Analysis of Wetherspoon» Essay Sample

Financial Statements Analysis of Wetherspoon

Introduction

It is noteworthy that the main purpose of the current paper is to analyze Wetherspoon’s financial statements. The companies’ financial statements are usually used to analyze their financial health. The company’s investors and creditors use financial statement to analyze the company’s profitability, liquidity, solvency, efficiency, and other indicators that may be helpful for making a right business decision.

Wetherspoon is an owner of great number of pubs in the UK. According to the company’s annual report, its main purpose is to provide high-quality food and drinks for the customers. The company’s pubs are beautifully designed and the management team attempts to maintain them properly. The number of company’s pubs is 886, including 29 pubs opened during the past year. The company’s management team plans to open approximately 30 new pubs in the UK. The company’s focus also includes hotels and bars. This business was founded in 1979. The Wetherspoon’s headquarters are in Watford, United Kingdom.

Financial Statement Review

It should be noted that Wetherspoon’s percentage of cash and cash equivalents in the structure of the company’s total assets decreased from 2.8% in 2013 to 2.67% in 2014 (J D Wetherspoon PLC Annual Report and Accounts n.d.). It may indicate that the company`s absolute liquidity dropped. In turn, Wetherspoon’s account receivables as percent of total assets enhanced from 0.24% in 2013 to 2% in 2014 (J D Wetherspoon PLC (JDW.L) n.d.). It is likely that Wetherspoon has problems with its doubtful customers.

Additionally, it is also worth mentioning that the percentage of company’s inventory was practically unchanged in 2014 as compared to the prior year. It should be also emphasized that Wetherspoon’s current assets as a percent of total assets reduced from 6.92% in 2013 to 6.58% in 2014. It may indicate low liquidity.

As it is seen from the data provided in the Weatherspoon’s 2014 annual report, the company’s revenues increased from £1281 million in 2013 to £1409 million in 2014 (J D Wetherspoon PLC (JDW.L) n.d.). However, the Wetherspoon’s net income decreased from £46 million in 2013 to £41 million in 2014 (J D Wetherspoon plc (JDW.L) n.d.). It can be concluded that the dynamics of the company’s indicators from its financial statements may indicate the reduction of Wetherspoon’s profitability and liquidity. In order to confirm these conclusions, the company’s ratio analysis should be conducted (Žager, Sačer & Dečman 2012).

Ratio Analysis

Liquidity Ratios

The company’s ratio analysis may be started from its liquidity. As it is known, liquidity is an important indicator of the company’s financial health. The company’s liquidity indicates the sufficiency of its current assets to cover its current liabilities. Therefore, the company’s liquidity ratios should be analyzed. These ratios are provided in Table 1.

Table 1.

Wetherspoon’s Liquidity Ratios

Liquidity Ratios

2014

2013

Current Ratio

0,31

0,33

Quick Ratio (Acid Test)

0,22

0,24

Cash Ratio

0,12

0,13

Net Working Capital

-178,00

-149,00

The current ratio indicates a company’s ability to return its debts. This ratio measures the level of covering the company’s current liabilities by its current assets. The Wetherspoon’s current ratio decreased from 0.33 in 2013 to 0.31 in 2014. It should be emphasized that the value of this ratio is significantly below the normative values. That is why the Wetherspoon’s liquidity can be considered as very low.

The next important indicator is the quick ratio. This ratio measures the level of covering the company’s current liabilities by its current assets, excluding its inventories. As it is known, cash is an absolutely liquid asset, and the company does not need to sell accounts receivable or merchandise inventory to repay debts. This indicator is calculated by dividing such high-liquid assets as cash, short-term investments, and accounts receivable, by total current liabilities. The Wetherspoon’s quick ratio also reduced from 0.24 in 2013 to 0.22 in 2014. Thus, the company` quick liquidity impaired during the last two years. However, the value of this ratio is also below the normal limits. It indicates that the company has significant problems with its liquidity.

It is also noteworthy that the company’s working capital is calculated by subtracting an organization’s current liabilities from its current assets. As it is seen from the calculations provided in Table 1, the Wetherspoon’s working capital reduced from -£149 million in 2013 to -£178 million in 2014. It means that Wetherspoon’s current liabilities exceed its current assets by £178 million in the 2014 fiscal year. Therefore, Wetherspoon’s current assets do not cover its current liabilities. Thus, the previously made conclusion regarding the Wetherspoon’s low liquidity is right.

Summarizing the results of conducted analysis of the Wetherspoon’s liquidity, it can be concluded that the company’s liquidity ratios dropped in 2014 as compared to 2013. In addition, it should be emphasized that the values of the company’s liquidity ratios are significantly below the normative limits. Therefore, the company’s liquidity can be considered as very low.

Solvency

The Wetherspoon’s solvency can be analyzed by using financial leverage ratios. These ratios are also called the solvency ratios, or debt-paying ratios, since they indicate the structure of the company’s financial resources. The Wetherspoon’s solvency ratios are presented in Table 2.

Table 2.

Wetherspoon’s Solvency Ratios

Debt-Paying Ratios

2014

2013

Debt-to-Assets

0,81

0,80

Debt-to-Equity

4,29

3,98

Gearing Ratio

5,29

4,98

Capitalization Ratio

0,76

0,75

Long Term Debt to Total Assets Ratio

0,60

0,59

In this respect, a very important solvency indicator is debt to assets ratio. This indicator is determined by dividing total liabilities by total assets. It shows the percentage of total liabilities in the structure of assets. Therefore, Wetherspoon’s solvency decreased since the debt-to-assets ratio increased from 0.80 in 2013 to 0.81 in 2014. It means that the company’s debt comprises 81% of the total assets. That is why Wetherspoon’s financial stability and solvency can be considered dangerous, since the value of this indicator exceeds the normative values. It should be noted that an organization’s state can be considered as safe if the value of this ratio is less than 50%. As a result, the company has problems with its financial stability. In fact, it is important to mention that such indicator as the debt-to-equity ratio also increased from 3.98 in 2013 to 4.29 in 2014. “This ratio is one of the significant measurements of a company's health that lending institutions look at before extending credit” (Newman 2013, p. 5). It means that Wetherspoon’s debts exceed its equity by more than 4 times. It should be also noted that the company’s long-term debt as percent of its total assets increased from 59% in 2013 to 60% in 2014. In general, the company’s solvency cannot be considered safe.

Efficiency Ratios

The Wetherspoon’s efficiency of usage of its assets should be also analyzed by using asset management ratios. These ratios are presented in Table 3.

Table 3.

Wetherspoon’s Efficiency Ratios

Efficiency Ratios

2014

2013

Inventory Turnover

64,05

64,05

Accounts Receivable Turnover

58,71

498,44

Stock Holding Period (days)

58,80

61,26

Debtors Payment Period (days)

6,22

0,73

Creditors Payment Period (days)

62,95

28,49

Cash Conversion Cycle (days)

8,299

8,55

As it is known, such a popular indicator as an inventory turnover ratio shows a period over which a firm’s inventory is sold and replaced. According to the data provided in the Table 3, Wetherspoon’s inventory turnover has not changed. It means that the company’s effectiveness of its inventory usage is stable. Generally, the main rule is that all indicators of turnover should increase.

The accounts receivable turnover describes a number of times that the accounts receivable are collected within one year (Accounting Coach n.d.). As it is evident from the calculations provided in Table 3, the accounts receivable turnover has decreased. Wetherspoon’s accounts receivable turnover decreased from 498 in 2013 to 58 in 2014. It means that Wetherspoon’s effectiveness of using its accounts receivable decreased during the analyzed period.

All in all, most efficiency ratios showed a negative dynamics during the analyzed two years. It means that the company’s efficiency of usage of its assets has decreased.

Profitability Ratios

Wetherspoon’s profitability should be also analyzed by using the appropriate ratios. These ratios are presented in Table 4.

Table 4.

Wetherspoon’s Profitability Ratios

Profitability ratios

2014

2013

Return on Total Assets

3,42%

4,30%

Return on Capital Employed

8,27%

6,73%

Return on Shareholders’ Funds

18,06%

21,40%

Net Profit Percentage (based on profit after interest and tax)

2,91%

3,59%

Gross Profit Percentage

11,85%

12,41%

Operating Profit Percentage

8,16%

7,18%

The rate of return on total assets is used to determine the total assets profitability. It shows how much profit a company receives per dollar of its total assets. “A higher ROA generally means greater efficiency, because you're earning more money on less investment” (Levinstein 2014, p. B-48). It is defined as the net earnings divided by a company’s total assets.

As it is evident from the data provided in Table 4, Wetherspoon’s ROA decreased from 4.3% in 2013 to 3.42% in 2014. For this reason, the company’s effectiveness and profitability decreased.

Generally, as it is seen from the ratios provided in Table 4, most of them have reduced in 2014 as compared to 2013. Thus, it can be concluded that the efficiency of the company’s activities worsened during the analyzed years.

Type of Finance

As it is known, there are several types of finance used by the companies, including bank loans, overdraft, receivables finance, and others. Most part of the total liabilities of the company under question comes from its short-term debt. It means that the company uses bank loans as the main type of financing. Thus, the company’s capital structure may be improved by lowering the share of liabilities in the structure of total assets. In addition, the company’s efficiency may be improved by increasing its total sales and selling surplus current assets.    

Financial and Non-Financial Factors

Based on the results of the conducted analysis of the company’ financial statements, it may be concluded that Wetherspoon’s profitability, financial leverage, efficiency, and liquidity ratios decreased during the analyzed period. As a result, some factors that might affect the performance and financial position of the company should be considered. Wetherspoon’s effectiveness and profitability reduced during the past two years. However, the company is able to improve its profitability by increasing investments in the marketing activities in order to attract more potential customers. What is more, the firm should pay more attention to its economic profit, or economic value added, which is calculated by deducting capital cost from profits (Investopedia n.d.). In addition, the company tries to provide only high-quality food and drinks. However, Wetherspoon should make its food and drinks special. Moreover, the company may consider an option of diversification of its activity.

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