Finance Assignment: Financial Interpretation For JD Sports Fashion Plc
Question
Task:
Write a report on finance assignment drawing a financial interpretation whether it would be wise to invest in the stocks of JD Sports Fashion Plc.
Answer
Introduction:
The finance assignment report would be based on the UK based retailing organisation, JD Sports Fashion Plc. to draw a financial interpretation whether it would be wise to invest in the stocks of the company. The report would start with a background of the UK retail segment followed by the brief organisational information. Then a performance evaluation would be done on the financials of the retailer based on the financial ratios of the company for two consecutive years, 2018 and 2019. This part would be crucial as it would lead to the recommendation whether the JD stocks would be suitable for investment or not.
Background information:
The UK retail sector enjoys a formidable ground at a worth of £394 billion as in 2019 experiencing an annual growth of 3.4% in the current year as the domestic consumers spend one-third of their income for retail purpose (Ons.gov.uk, 2020). There are around 306,655 retail outlets in UK and 208,760 registered retailers and the online retailers has got the market trend with a 19% rise in their growth. The retail industry employs about 2.9 million people contributing 5% to the country’s GDP. The recent trend has been the growth of online sales making Amazon as the 5th largest retailer in UK but the recent Brexit scenario has strained the retail scenario.
JD Sports Fashion Plc. or JD Sports as popularly known is a Bury, Lancashire based UK sport-oriented fashion retailer offering clothing and sportswear accessories across the UK, the US, Europe and the Asia-Pacific region (Jdplc, 2019). It is a subsidiary of the Pentland Group and listed in the London Stock Exchange being an important stock of the FTSE 100 Index. The brand is associated with a number of football teams, association and players like Dundee United, Charlton Athletic and Blackpool amongst others.
Performance evaluation:
The performance evaluation for JD Sports would be conducted taking relevance of the financial ratios worked on for the consecutive years of 2018 and 2019. The evaluation has been done based on profitability, liquidity, gearing and efficiency ratios.
Profitability ratios –
The profitability ratios are being evaluated through operating profit ratio, gross profit ratio and net profit ratio. The operating profit for JD Sports reduced from 9.36% in 2018 to 7.34% in 2019 implying that the variable costs were considerably higher in the current year despite a rise in its revenue (Elliott & Elliott, 2015). The occurrence led to a compromised effect on the operational expertise of the retailer and it would be better to control the variable costs of the company.
The gross profit ratio for JD Sports was 48.45% in 2018 and 47.55% in 2019 showing a marginal overall decrease in its profitability due to an increased level of costs from £1,531.60 million in 2018 to £2,243.30 million in 2019. This is the situation despite the retailer earned a greater revenue in 2019 worth £4,717.80 million against £3,161.40 million last year indicating that the company is incurring a greater sales cost with the passage of time (Warren & Jones, 2018).
The net profit ratio for JD Sports has been 5.60% and 7.48% in 2019 and 2018 respectively. Alike other variables, the net profit ratio as well struggles with the rising cost that the retailer has been countering in the competitive market indicating a lower return to the shareholders after incurring all sorts of organisational expenses.
Liquidity –
The liquidity aspect would be described through current ratio and acid-test ratio. Current ratio for JD Sports stands as 1.42% in 2018 which reduced to 1.32% in 2019 indicating that the retailer has been instrumental in bringing down its liquidity (Maynard, 2017). This exercise would be helpful in utilising the unused resources for the business purpose rather keeping it idle.
Acid-test ratio for JD Sports has been 0.72% in 2019 while in the current year it became 0.47% against the industrial benchmark of 1. It is true that the retailer has aggressively brought down the liquidity level which is meant to address immediate business obligations enhancing the risk of bankruptcy(Henderson, et al., 2015).
Gearing ratios –
The gearing aspect would be discussed in terms of the gearing ratio and the interest-coverage ratio.The gearing ratio for JD Sports stands as 0.01% in 2018 while it is 0.05% in 2019 indicating that the company is low geared having lower dependence on debts for running the business (Warren & Jones, 2018). So the retailer being a low-geared organisation runs little risk while operating owing to its higher dependence in equities.
The interest-coverage ratio for JD Sports stands as 147.95% in 2018 which reduced to 46.16% in 2019 showcasing the firmness of the organisation in the market to have suitable credit and pay it off effectively (Ehrhardt & Brigham, 2016). The industry benchmark is of ‘3’ while the interest-coverage ratio though declines in the current year is at a comfortable position to raise loans from the creditors and pay it off on easy terms.
Efficiency –
The efficiency aspect of JD Sports would be illustrated through Fixed assets turnover ratio, Return on capital employed, Average inventories turnover period, Average settlement period for trade receivables and trade payables, Cash operating cycle and Return on gross assets.
Fixed assets turnover ratio forthe retailer is 8.39% and 8.74% for 2018 and 2019 respectively. It indicates that the organisation is efficient enough to exploit its fixed assets to generate suitable profitability in times of necessity (Damodaran, 2016).
Return on capital employed (ROCE) for JD Sports has been 4.02% in 2019 while it is 9.64% in 2018. The declining ROCE indicates that the retailer is not able to deliver an effective return to its investors compromising on its efficiency (Atanasov & Black, 2016).
The average inventories turnover for JD Sports has been 53.52 days in 2018 increasing to 56.33 days in 2019 as the figures slightlyincreased in the current year from the previous year. It is noticed that the retailer needs more time to recover the capital invested in the inventories and shorter the period it is better for the business (Elliott & Elliott, 2015).
The average settlement period for trade receivables are 16.89 days in 2018 which reduced to 13.71 days in 2019 and lower the figure, it is favourable for the business. The given figures show that JD Sports has been able to improve the performance of its collection team by providing discounts and follow-up for early payment as required(Ehrhardt & Brigham, 2016).
The average settlement period for trade payables stands as 17.77 days in 2018 which reduced to 7.08 days in 2019 and in this case, longer the period it is better for the company. It would have been better for JD Sports to delay the payment to the creditors unless it is able to negotiate with the creditors on favourable terms(Maynard, 2017). But paying off early is a goodpractise as it would be effective in maintain a good relationship with the creditors and suppliers.
Cash operating cycle for JD Sports stands as 52.64 days in 2018 which increased to 62.96 days in 2019 delivering the financial fitness element. The figures increased in the current year although a lower figure would be beneficial for swiftly operating the retailing firm.
Return on gross assets has been 18.19% in 2018 but reduced to 15.70% in 2019 showcasing the lower capability of the retailer to deliver a suitable profitability against the total organisational assets currently against the previous year.
Personal reflection:
I have adopted the financial ratio analysis to interpret the financial position of JD Sports.For this I have sourced the annual reports of the companies for two consecutive periods – 2018 and 2019 for laying a comparative analysis of the business scenario. The analysis would have been better if I could have taken the data for 5-years to lay down a suitable analysis and understand the business trend. Further, interview of the organisational managers could have done wonders to the analysis providing financial insights but I could not manage one. Taking cue from this task, I have decided to make a proper planning for the financial study net time onwards for a better analysis.
Conclusion and recommendations:
The report concludes that although the profitability, liquidity and efficiency level has decreased little in the current year, the UK market has great potential for the retail segment. The efficiency of the business is to be noted as there are elements like the receivables and inventories which are better managed enhancing its expertise. The company has lower debts making it a risk-free business which would be able to raise loans from the market having the capability and resources to pay it off and run the business well.So it would be wiser to invest in the stock of the company owing to a lower debt proposition, capability to perform well in the market and exploit the post-Brexit market scenario. Investing in the stocks of JD Sports might be fluctuating in the short-run but for the long-run it would yield an effective return for its investors.
REFERENCES
Atanasov, V. & Black, B., 2016. Shock-based causal inference in corporate finance and accounting research. Critical Finance Review, 5(2), pp. 207-304.
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate finance. 324 ed. London: John Wiley & Sons.
Ehrhardt, M. & Brigham, E., 2016. Corporate finance: A focused approach. London: Cengage learning.
Elliott, B. & Elliott, J., 2015. Finance assignment Financial accounting and reporting. 18th ed. Harlow, U.K: Pearson.
Henderson, S., Peirson, G., Herbohn, K. & Howieson, B., 2015. Issues in financial accounting. AU ed. Sydney: Pearson Higher Education.
Jdplc, 2019. Our Group - JD Group. [Online]
Available at: https://www.jdplc.com/our-group
Maynard, J., 2017. Financial accounting, reporting, and analysis. London: Oxford University Press.
Ons.gov.uk, 2020. Retail industry - Office for National Statistics. [Online]
Available at: https://www.ons.gov.uk/businessindustryandtrade/retailindustry
Warren, C. & Jones, J., 2018. Corporate financial accounting. London: Cengage Learning.
