Free Management Dissertations - The Spirit Group Figures Are Extremely Positive And The Small Percentage
The Spirit Group figures are extremely positive and the small percentage difference between gross and net profit suggests certain cost advantages over some of the competition. An explanation for this may be the differing strategic option regarding location. Whilst their competitor JD Wetherspoon favours a location that encapsulates their business image usually an expensive, prominent, historical building The Spirit Group is much more flexible in terms of location and internal design. This allows the business to cater for area-specific demographic tastes and mean that financial results are tied almost exclusively to sales and not capital investments as with JD Wetherspoon.
Future strategy : The business strategy of JD Wetherspoon is unique and their investment in sought-after capital locations gives them a huge property portfolio and security for the future. There is little need or purpose in the Spirit Group following this strategy. Currently The Spirit Group enjoy extremely healthy profit margins and its lower costs are almost certainly a result of its size but may be a result of choosing locations with lower business rates and investment costs than its main rival.
Liquidity ratio
Acid test ratio = Current assets stock
Current liabilities
Acid test
The Spirit Group
0.70
JD Wetherspoon
0.22
The acid test ratio is a crucial measure of business health. Essentially is measures the ability of a business to pay its bills by assessing the ease with which they can raise the immediate finance needed to do so. By eliminating stock the least liquid of current assets the acid test ratio provides a more accurate indicator of liquidity than the current ratio that is inclusive of all current assets.
The ideal acid test ratio is 1. This means that a company has £1 of liquid assets for every £1 of short-term debt a perfect balance. If the ratio is much higher than this then the company may holding too much in cash when they could be reinvesting that money. If the ratio is much lower than 1 then the company may struggle to pay short-term debts with potentially critical consequences.
The figures above show that The Spirit Group have 70p of liquidity assets for every £1 of short-term debt. This is worrying in theory as the company technically does not have enough money to pay its debts but the figure is arguably not low enough to cause any serious concern. For maximum efficiency a company should looked to operate as near to a 1 to 1 ratio as possible. Therefore the Spirit Groups figure should not cause too much alarm.
JD Wetherspoon on the other hand should be viewed upon with caution. Their ratio of 0.22 is near the critical level. A demand for payment from a supplier or a change in interest rates could mean that the company is incapable of paying its debts.
Dissertations - Free Management Dissertations
