Analysis of the Financial Ratios JJB Sport

Introduction

In the process of summarizing, the correct meaning and content of crucial financial information may become weak or even get lost. Due to the lack of well laid out measures, rules and policies for financial reporting, experts felt that the supplementary graphs, pie charts, etc, are likely to exaggerate the execution of the company for the year in respect of which the annual report is prepared and downplay things which have not gone on very well during that period (Ampofo, 2005).

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The impact of globalization has to lead to many new signs of progress in the field of finance and global stock markets. One such interesting development that has recently taken place is the unionization of the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) (Fontes, 2005; Lucas, 2006). This convergence is viewed by many as a measure to maintain sound financial health and stability globally in most of the capital markets (Jacob, 2004; Intangible Business, 2008). For investors to make optimal investment decisions, the financial information available from the global capital markets should be transparent and consistent (Tipgos and Keefe, 2004).

Financial analysis

Operating performance

Ratio analysis is one of the easiest measures for identifying salient features of the company. These ratios include profitability ratios, liquidity ratios, efficiency ratios and leverage ratios (Keown, Martin and Petty, 2005).

Profitability ratios

These ratios give a measure of the company’s ability to generate a profit using the existing resources. In this category, only four ratios have been considered and they are

Gross profit margin 50.76% =50.03%
Net profit margin -23.33% 1.19%
Return on equity -90.75% 2.64%
Return on assets -27.23% 1.22%

From the table above, the company’s profit margins signify what the company’s pricing policy is and how it keeps its profits in terms of mark-up margins. This company is a classic case of a firm initially starting out well but quickly things turn sour. The Gross profit margin although shows a significant increase in the two years researched. But the massive decline in the firm’s Net profit margin depicts a bad picture about the company’s management to manage expenses. The net profit margin on sales ratio tells one how much profit a company makes for every $1 in sales. This demonstrates that the company has not been able to properly manage its operating and administrative expenses in order to maximize its profit. It is the same story with the Return on shareholders’ equity and return on total assets.

The net profit to equity ratio shows an investor whether there has been a sufficiently high return on the business’s investment. The decline seen in these two ratios is a testament to the firm decreasing its Income in a very quick time. Although this is not a favorable ratio, considering the fact that during the recent recession most organizations have gone into liquidation, maintaining profitability is a feat in itself (Kennedy, 1999).

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The sudden decrease in income is also because of the offsetting of the income from the organization’s subsidiaries that was upset due to the decrease in the value of the dollar. DuPont Analysis is for the purpose of demonstrating higher ROE with, of course, minimal liabilities or debts which may later expand without relying on large capital outlays of most companies and at the same time, permitting the owners of the companies in access the needed cash to be generated by way of re-investment or business consumption (ICFAI Center for Management Research ICMR., 2004). The graphical trend for these ratios is shown below;

Profitability ratios

The return on total assets ratio demonstrates that the firm is making poor use of its assets in terms of earning profits and is weighed down by lumpy assets. This ratio indicates that the organization has room for improvement and in order to survive in the competitive environment the organization will have to increase its capital return ratio.

Liquidity ratios

These ratios include current and quick ratios. These ratios are very important for the day-to-day smooth functioning of the firm; there have been examples of firms failing just because they did not have enough money to meet short-term needs although they were able to turn over a healthy margin.

Liquidity ratios
Current ratio 6.14:1 3.03:1
Quick ratio 4.79:1 2.1:1

The current ratio indicates the ratio of liabilities covered by the assets of the organization or it shows the relationship between the current assets and the current liabilities. The ideal ratio should be 2:1 so as to avoid liquidity problems. In the 2008 the ratio shows no problem as they have $3.03 available for every $1 owed. It takes a steep increase in 2009 to $6.14. It also indicates that the organization can increase its borrowing if it intends to as the capacity to do so exists within the organization.

The quick ratio shows the liabilities that are covered by the organization’s liquid assets. It tests the ability of the business to meet its current liabilities under abnormal conditions, for example when a business is experiencing an upsurge in liquidity, although there is a drastic drop in prices and economic depression in 2009. The ideal quick ratio is 1:1 where $1 would be readily available to pay back a short-term liability of $1. In this case, as well the organization has the capacity to borrow more as the organization has 2.1 assets for every 1 liability that it has for 2008 and 4.79 for 2009. This ratios trend is shown in the graph below;

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Liquidity ratios

They have taken an upward trend.

Leverage ratio

Long term debt to equity ratio show to what extent the owner’s equity can cushion creditor’s claims in the time of liquidation. In both years they are showing high risk. The organisation’s long term solvency ratios present unpleasing sight to the company’s shareholders (Needles, Powers, and Crosson, 2007). The debt to total equity ratio of the firm shows that the firm has recently decreased their debt. This a less risky capital structure to have and the company would be advised to focus on raising funds though Equity rather than debt to remain less risky.

The debt to total assets shows how much protection there is for creditors. The ratio shows the total liabilities divided by total assets, the higher the ratio the higher the risk. The debt to total assets ratios demonstrates that the company has enough Assets to cover for potential insolvency to cover its debt sufficiently. Lastly, the interest cover ratio has drastically gone down from 2008 as it now shows that the interest that the company owes to creditors every year, it can make negative 15.23 times that amount in 2009. This is shows a greater risk.

Leverage ratios
Long term debt to total equity 0.24:1 0.26:1
Total debt to total assets 70% 53.76%
interest cover ratio -15.23 times 0.91 times

Efficiency ratios

Now with respect to the efficiency of the firm, it can be deduced from the ratios that the firm has some work to do. This is especially evident in the fact that the average inventory period has gone up. Receivable turnover also needs to see improvements. The cash conversion cycle is also a good indicator of the efficiency of the firm and it can be said that the firm needs to keep its Receivables time shorter by offering discount for early payments to its customers. These measures are important for the company as it would lead it to have more opportunities to take advantage of once it has a steady stream of effectual flow of money goods to and from it (Ormiston and Fraser, 2004).

Efficiency ratios
Inventory turnover 7.74 times 7.06 times
Receivable turnover 17.14 times 17.88 times
Total assets turnover 1.17 times 1.03 times
Fixed asset turnover 2.44 times 1.95 times

Further investigation

There is need to consider further analysis of

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Price / Book Value Net Assets Available to Common SH / Common Shares Outstanding
Price / Earnings Per Share Market Price Per Share / Outstanding Shares
Price/EBITDA Per Share EBITDA / Outstanding Shares

Non-financial influences play a crucial rule in every entity’s growth or demise. These influences may come forth through Political bodies, Economical instabilities, or Managerial efficiencies (Blander,1994). There is need to carry out a careful analysis of these factors for the company in UK.

Conclusion and Recommendation

JJB has been in the sportswear business for a long time, but this is not reflected in their recent financial statements. The sudden economic changes and the policy changes within the organization, has affected the performance of the company. The financials make for an overall poor reading. There has been a phenomenal decrease and the company should look to the future by making sure that some of inefficiencies of the operations are ironed out in order to help them achieve better things in terms of their business vision and mission (Tracy, 2009).

In addition to this another factor of concern for the company should be the amount of debt that it has taken up, although manageable at these levels of profit making, it will be very hard to sustain once the company has a bad patch. It would be advisable that the company use sources of financing other than direct debt to grow organically rather than on steroids. However in line with the positive future outlook of the company, it will be a worthwhile investment since it is expected that share prices are low right now, but it’s just a matter of time before JJB kicks off well resulting in a upsurge in share prices.

List of References

Ampofo, A., 2005. Examining the differences between US GAAP and IAS: implications for the harmonization of accounting standards. Accounting Forum, Vol: 29 , 219-231.

Blander, J., 1994. How To Use Financial Statements- A Guide to Understanding the Numbers. New York: McGraw-Hill Publisher.

Fontes, A., 2005. Measuring convergence of National Accounting Standards with International Financial Reporting Standards. Accounting Forum , vol: 29 415-436.

ICFAI Center for Management Research ICMR., 2004. Financial Accounting & Financial Statement Analysis. Hyderabad: ICFAI Center for Management Research.

Intangible Business, 2008. International IFRS 3. Intangible Business. Web.

Jacob, R., 2004. “Are we approaching a universal accounting language in Five Years?”. Foresight, Vol: 6 , 353 – 356.

Kennedy, J., 1999. Discussion of the joint effect of management’s prior forecast accuracy and the form of its financial forecast on investor judgment. Journal of Accounting Research, 37(3), 125-134.

Keown, A., Martin, J., & Petty. J., 2005. Financial Management principles and applications. New Jersey : Pearson/Prentice Hall.

Lucas, H., 2006. The Rationale and impact of the adoption of IFRS: The case of the United Arab Emirates. Asia-Pacific Conference on International Accounting Issues (pp. 3-18). Maui Hawaii: University of Wollongong.

Needles, B., Powers, M., & Crosson, S., 2007. Financial and Managerial Accounting. New York: Cengage Learning.

Ormiston, L., & Fraser, A., 2004. Understanding Financial Statements. New Jersey : Pearson-Prentice Hall.

Tipgos, M., & Keefe, T., 2004. A comprehensive structure of corporate governance in post-Enron corporate America. CPA Journal, 74(12), 46-51.

Tracy, J., 2009. How to Read a Financial Report: Wringing Vital Signs Out of the Numbers. New York: John Wiley and Sons.

Appendix

Ratio and formula 2009 2008
Profitability ratios
1 Gross profit margin
= gross profit
Sales
364,585,000
718,281,000
= 50.76%
406,112,000
811,754,000
=50.03%
2 Net profit margin
= net profit
Sales
(167,556,000)=
718,281,000
= -23.33%
9,630,000
811,754,000
=1.19%
3 Return on equity
Net income
Shareholders’ Equity
(167,556,000)
184,631,000
= -90.75%
9,630,000
365,055,000
=2.64%
4 Return on assets
Net Income
Total assets
(167,556,000)
615,342,000
= 27.23%
9,630,000
789,548,000
=1.22%
Liquidity ratios
1 Current ratio
Current assets
Current liabilities
321,542,000
52,362,000
=6.14:1
372,348,000
122,846,000
=3.03:1
2 Quick ratio
Current assets-inventory
Current liabilities
321,542,000-70,569,00
52,362,000
=4.79:1
372,348,000-114,984,000
122,846,000
=2.1:1
Leverage ratios
1 Long term debt to total equity
=long-term debt / total equity
43,894,000
184,631,000
= 0.24:1
96,285,000
365,055,000
=0.26:1
2 Total debt to total assets
=total debt / total assets
430,711,000
615,342,000
=70%
424,493,000
789,548,000
= 53.76%
3 interest cover ratio
=net profit before tax and interest/ interest
(178,663,000)
11,730,000
=-15.23 times
11,295,000
12,442,000
=0.91 times
Efficiency ratios
1 Inventory turnover
Turnover
Average stock
718,281,000
(70569000+114984000)/2
= 7.74 times
811,754,000
114,984,000
=7.06 times
2 Receivable turnover
Turnover
Average receivable
718,281,000
(38,381,000+45,412,000)/2
=17.14 times
811,754,000
45,412,000
=17.88 times
3 Total assets turnover
Turnover
Total assets
718,281,000
(615,342,000)
= 1.17 times
811,754,000
789,548,000
=1.03 times
4 Fixed asset turnover
Turnover
Fixed asset
718,281,000
293,800,000
=2.44 times
811,754,000
417,200,000
=1.95 times

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