Free Management Dissertations - Financial Analysis Of The Spirit Group And Jd Wetherspoon Plc Ratio Analysis
Financial Analysis of The Spirit Group and JD Wetherspoon PLC
Ratio analysis is used to translate raw numbers into meaningful figures. The use of ratios facilitates accurate analysis of company performance against competitors and against their own previous performances. The ratios that arguably best reflect performance are return on capital employed (ROCE) and gross and net profit margins. Owners, managers, trade unions, shareholders, competitors, economists and all other stakeholders are usually primarily concerned with company profit margins. These are the most demonstrable ratios of company performance but may not tell the whole story.
Ratios are also used to ascertain the security of the business. This may relate to ability to pay back loans, liquidity level or length of time to repay loans for instance. The most popular ration used to assess the current security of a company is the acid test ratio.
Investors will always want and need to know the value of their investment and while the previously mentioned ratios are useful in deciding whether to invest, by looking at the gearing ratio and dividend yield current and potential investors are able to get a better indicator of the potential success or value of their investment.
For the purposes of comparing the performance of the Spirit Group with that of their major competitor JD Wetherspoon PLC, we will look at the primary performance ratios related to profit and contrast this with a liquidity ratio to try and assess whether these profit levels are secure and sustainable in each case.
Performance ratios
Gross profit margin=Sales operating costs
Sales
Net profit margin = Profit after tax
Sales
Gross profit
Net Profit
The Spirit Group
13.4%
9.8%
JD Wetherspoon
9.9%
4.5%
It is important to look at gross profit and net profit together as the difference between the two figures is a reflection of the level of non-operating cost patterns that ideally should be as minimal as possible. Currently JD Wetherspoon has a lower gross profit margin that The Spirit Group and a bigger differential between gross and net profit. This suggests more complex cost patterns and arguably weaker performance and poorer management.
However, this is reflective of the difference between the sizes of the two businesses. As businesses grow it is harder to sustain high profit margins as investments diversify to create long-term security and stability. This is especially true of JD Wetherspoon who have invested heavily in capital assets in the form of prime located property in order to secure the best locations. For these larger companies, the target is redefined to healthy profit margins. JD Wetherspoon have a turnover that is five times larger than The Spirit Group. At that level of business activity it is extremely unlikely that the group will achieve profit levels equivalent to their smaller rival even though their actual profits will be far greater.
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