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Investment report: John Lewis Partnership (plc)
Investment plan report——John Lewis Partnership (plc)
John Lewis Partnership (JLP) plc is an employee-owned UK company which operates John Lewis & Partners department stores, Waitrose & Partners supermarkets, its banking and financial services, and other retail-related activities. It is unique and successful among large companies in Britain. As a potential investor, I mainly need to consider its solvency, profitability and future planning.
This essay will explain five parts of the comparison of the income statement and the statement of financial position, the analysis of ratios over the past five years (2014-2018), and information of the chairman and media reports about the future plan of John Lewis partnership plc.(johnlewispartnership.co.uk, 2013)
Income statement and statement of financial position
According to FAME database, there are some significant changes from income statement over the last five years. Firstly, there is a smoothly growth tendency of turnover from 9,027,800 to 10,204,000. As an investor, I know that the growth of turnover is just a scale of operation, and turnover are not proportional to profit. Secondly, cost of sales has a slight increase about 830600 from 2014 to 2018. The last one is Net income. There was a clear increase from 2014 to 2017. However, its net income decreased approximately 79% in 2018. From profit and loss account, it is obvious that exceptional items have increased a lot about 111,300 in the first four years. As we all known, more useful expenses can get more benefits. Through the observation of the income statement, JLP plc ‘s profit in the past five years is relatively stable despite a small fluctuation.
From statement of financial position, there are four main changes. For Fixed Assets, in general, there is a relatively stable trend over last five years. For Current Assets, the trend is almost uniformly upward from 1,173,300 to 1,690,600 in recent five years. It shows that the number of assets that JLP plc can liquidate or use over a business cycle of one year or more has increased. but it doesn’t mean more is better. The most important point is liabilities. In short term, JLP (plc)’s current liabilities have only a few changes. In a long term, its liabilities fell by about 12.5% in 2018. It shows that JLP (plc) has more profits to pay off its debts. (fame4.bvdinfo.com, 2018)
As a potential investor, the following six ratios should be considered: return on capital employed (ROCE), current ratio, investment ratios.
Firstly, return on Capital Employed can be calculated as profit before interest and tax divided by capital employed which is Shareholders funds plus Non-current liabilities. It is used to measure the capital investment efficiency indicator, which is the ratio showing the company’s capital investment efficiency and profitability. Generally speaking, ROCE should be higher than the company’s borrowing rate, otherwise it will reduce the return of shareholders. In JLP (plc), ROCE reached the lowest point at 2.36 in following five years. And its return on shareholders also had a sharp decrease.
Secondly, current ratio is measure of whether a business can pay its current liabilities without using non-current assets and is an indicator of short-term risk. It can be calculated as current assets divided by current liabilities. According to FAME database, JLP (plc)’s current ratio has climbing trendy. Usually 2:1 is reasonable but it is very difficult to achieve. In JLP plc, the gradually increasing ratio indicates that it has a stronger ability to repay debts in the short term.
The most significant point are investment ratios. For gearing ratio, JLP plc shows 93.81% in 2018. The formula of gearing ratio is fixed cost capital divided by total asset and multiply 100%. The result over 50 percent which mains a large proportion of profit is paid in interest or funds. So JLP (plc) has a high gearing and risks that may not able to pay more interest or dividends. For interest cover, it equals to profit before tax and interest divided by interest payable. In 2018, it is lower than last four years about 3 times which means give less assurance to leaders and shareholders. Through the analysis of above ratios, I found that JLP plc did not bring more profits to shareholders in 2018. (fame4.bvdinfo.com, 2018)
Information of financial news
From John Lewis Partnership income statement and financial position, it clearly shows that the financial situation this year is not very good, and the overall decline. Accounting to The Guardian, there are three key reasons why John Lewis profits have dive in 2018. Firstly, the ‘never knowingly undersold’ pledge. The JLP chairman, Sir Charlie Mayfield said: “The biggest single reason for the decline in profits is all about margin. This year there has been twice as many extravaganza days as there were a year ago and actually the discounts have been even deeper.”
Secondly, Costs soared as the pound weakened. Mayfield also blamed a rise in the cost of buying goods overseas, still 13 per cent below Brexit referendum levels, as the pound weakened.
At last, high street malaise and Brexit uncertainty, John Lewis said his department stores had been hit by falling demand for “large ticket and bespoke items” as consumers cut back on discretionary spending.(theguardian.com,2018)
Information of future plan
John Lewis Partnership (plc) released their next phase of strategic plan, focusing on the development and strengthening of the business in June 2018. There are following three key points.
First of all, focus on differentiation, not scale: expand the competitiveness of the entire company through differentiation and innovation. They have clear plans to build on their strengths and strengthen their differences between Waitrose and John Lewis.
Secondly, maintain higher level of investment in product and service innovation. continue to invest between 400 million and 500 million pounds a year, and take further steps worth 500 million pounds over three years to strengthen balance sheets while recognizing short-term pressures on profits. This is a good explanation for the decline in JLP (plc)’s net income because of increasing their investments in 2018. This will allow them to maintain investment at a rate of £400m-£500m a year. Additional, they expect their level of capital investment as a percentage of sales will be more than 10% ahead of typical competitors. For an investor, this plan can bring me more benefits.
The last point is partner at the heart: Recognizing and enhancing the role Partners play in the differentiation of both Waitrose and John Lewis. The inherent strength of the John Lewis Partnership lies in its partners. They are the differences of partnership, its competitive advantage and investment in them will continue to exist. (johnlewispartnership.co.uk,2018)
According to analysis of JLP(plc), its future plans are to put partners in the main position and increase investment in them. Although, the benefits John Lewis Partnership brought to shareholders in 2018 were reduced. In 2018, In 2018, the British economy was affected by the uncertainty of Brexit. In the short term, all industries showed a depression. John Lewis Partnership is no exception, but its financial situation is relatively stable overall. As an investor, through the analysis of fiscal ratios. It is a good choice to invest.
- Fame4.bvdinfo.com. (2018). Fame | The definitive source of information on companies in the UK and Ireland | BvD. [online] Available at: https://fame4.bvdinfo.com/version-20181129/fame/1/Companies/report/Index?format=_standard&BookSection=BALANCESHEET&seq=0 [Accessed 6 Dec. 2018].
- Fame4.bvdinfo.com. (2018). Fame | The definitive source of information on companies in the UK and Ireland | BvD. [online] Available at: https://fame4.bvdinfo.com/version-20181129/fame/1/Companies/report/Index?format=_standard&BookSection=PROFITANDLOSS&seq=0 [Accessed 6 Dec. 2018].
- Knowledge, J. (2018). John Lewis Partnership – About us. [online] Johnlewispartnership.co.uk. Available at: http://www.johnlewispartnership.co.uk/about.html [Accessed 6 Dec. 2018].
- Knowledge, J. (2018). John Lewis Partnership – John Lewis Partnership sets out its future: Better products and service, driven by Partners and sound finances. [online] Johnlewispartnership.co.uk. Available at: http://www.johnlewispartnership.co.uk/media/press/y2018/press-release-27-june-2018-partnership-direction.html [Accessed 6 Dec. 2018].
- Kollewe, J. (2018). Five reasons why John Lewis profits have dived. [online] the Guardian. Available at: https://www.theguardian.com/business/2018/sep/13/five-reasons-why-john-lewis-profits-have-dived [Accessed 6 Dec. 2018].
Profit or loss account
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