IDD 1114

docx

School

Asian Business School *

*We aren’t endorsed by this school

Course

7003

Subject

Finance

Date

Nov 24, 2024

Type

docx

Pages

Uploaded by ChancellorQuail1879

Introduction Three primary sections make up the report on financial and management analysis. Comparing the fundamentals and ratios of two companies over the course of five years will be used to offer a financial analysis of the two businesses in the first section (2019 to 2023). John Lewis & Partnership PLC (JLP) and Marks & Spencer were chosen as two companies for this section (M&S). With their corporate offices in the UK, JLP and M&S are both retailers. JLP is an international company that offers its consumers in the UK and the rest of the globe a diverse choice of products through its retail locations and online presence. The company's clothing line, grocery items, and financial services are some of its most noteworthy goods. While having its own groceries and home furnishings brands, M&S mostly focuses on branded apparel. The UK's retail industry has been transformed by both businesses' extraordinary performance over the years. According to the SIC Code, the wholesale and retail trade sector is where both of these businesses are classified. With more than 400,000 registered businesses and an impressive industry growth rate of 2.6% in 2020, it is one of the major industrial sectors in Britain. A critical assessment of the investment appraisal techniques utilised in finance will be provided in the second section of the study. The Internal Rate of Return (IRR), Net Present Value (NPV), and payback period are the most used methods of appraisal (IRR). They will be assessed after a thorough analysis of the relevant literature. The report's last section will concentrate on the methodology and valuation procedures employed by evaluators to judge business performance and stock price. A corporation is valued using a variety of techniques, including the Dividend Discount Model and the Free Cashflow Technique. In conducting secondary research on the subject, this can also be looked into. Objective The fundamental issue that underlies the research is that a wide range of selected approaches and models can cause the investment assessment and financial valuation of companies to become excessively subjective. The goal of the research is to examine several models and determine the most suitable ways of evaluation or value. The study's main finding is that financial appraisals need to be made simpler to make it easier to compare businesses and industries. This can be achieved by offering a logical justification for various evaluation methods. Helping investors make wise decisions in the current environment is the research's secondary primary goal.

Investors have become more speculative as a result of COVID-19, and the resulting increase in uncertainty has destroyed their faith in the equity market. The investors' ability to make logical decisions about their investment behaviour will be facilitated by the analysis of data from two companies. This goal can be achieved since the financial information for JLP and M&S will give a neutral understanding of how well the two businesses are performing. With the use of this analysis, their intrinsic worth may be calculated. This can be contrasted with the current share price to determine whether the stock is overpriced or under-priced. Ultimately, the reports will give a general summary of the financial analysis tools that can be useful for finance students. Methodology Financial analysis and a literature review make up the study in the paper. These are both second- level research methods. Ratio analysis is the procedure that will be utilised to analyse the financials of the organisation. By using two or more financial variables, ratio analysis is a technique for evaluating a company's performance or position in a certain area. Due to the ability to compare businesses of various sizes, it is a useful tool. The performance is assessed using proportions rather than a comparison of the absolute values. Literature review makes up the other part of the study. In the second and third sections of the report, this will be used. Using previously collected facts and knowledge to investigate a novel scenario is known as the review of literature approach of secondary research. As a result of the data being gathered and available, conducting this type of research is simpler. The fact that the actual data might have been gathered for a different reason is one issue with literature reviews. To solve this issue, the goals and objectives of prior study were noted, and only those studies whose goals complemented the ongoing investigation were selected. This report will use a sequential process as a result. Analysis and Discussion Part A The financial reports for the two businesses were taken directly from their websites. The financial figures demonstrated that in 2020, M&S and John Lewis will both turn a profit. Using ratio analysis, it is possible to look at their performance further. During the two businesses' most recent five years of operations, a total of 10 ratios were determined. In Table 1 below, the ratios are displayed.

Profitability The profitability ratio is the first category of ratios. It gauges how profitable the business is performing. The gross profit margin displays the percentage of a company's trading profit in relation to its sales. Compared to M&S, JLP had a much greater GP Margin. The cause is that M&S employs a cost model that places the majority of its expenses under the heading of cost of goods sold. A clearer picture is given by comparing the two companies' net profits. In 2019 and 2020, JLP's NP margins were 0.73% and 0.75 respectively. M&S, on the other hand, outperformed JLP in 2020 with a margin of 3.14% while having a lower NP margin in 2019. This indicates that Marks & Spencer will be more successful in 2020. A similar picture can be seen in operating profit margin. OP margin for JLP was 3.34% in 2020 versus 5.80% for M&S. It is safe to say that, of the two retail behemoths, M&S was the most lucrative business based on the three profitability ratios. By reducing costs and raising sales turnover, it was also able to significantly more successfully than its competitor improves its low profitability from 2019. Finance Management The financial management ratios are the next group of measures that are used to compare businesses. Debt-to-equity ratios evaluate a company's leverage by contrasting its debt and shareholders' equity. The corporation is more leveraged and may experience financing challenges if its D-to-E ratio is higher. Compared to M&S, JLP had a lower debt to equity ratio in 2019. The company's debt to equity increased dramatically in 2020, though. It worsened its financial situation by issuing more bonds. The ability of each company to cover finance charges and interest was evaluated using the interest coverage. Compared to M&S' coverage ratio of 2.55, JLP's interest coverage in 2020 is substantially lower at 1.93. M&S will now be better able to pay the interest on its debts as a result of this. The two liquidity ratios were the other ratios in the section on finance management. An organization's liquidity is its capacity to settle its immediate liabilities. M&S is experiencing a serious liquidity issue, according to the current ratio for each company. In 2020, JLP's current ratio was only just high enough to cover its current liabilities, which are short-term obligations. At a current ratio of 0.66, M&S is, however, significantly worse. A similar picture is presented by the acid-test ratio. By 2020, JLP will have a substantially superior liquidity position than M&S, as evidenced by its acid test ratio of 0.66. Overall, the financing management section demonstrates that M&S's short-term obligations are problematic

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

whereas John Lewis' non-current debts are problematic. Both businesses are struggling with serious funding challenges. Efficiency To gauge the effectiveness of both businesses during the previous two years, the third category of ratios was used. When compared to JLP, Marks & Spencer had a greater inventory turnover ratio, and it also managed to increase its turnover in 2020 over 2019. The evidence here suggests that M&S was more effective in replenishing and selling inventory. The turnover of trade receivables serves as a second metric of efficiency. It displays the frequency with which receivables are converted to cash. With a turnover of 39.03 in 2020 as opposed to M&S' turnover of 32.82, JLP was able to convert its account receivable more frequently. Last but not least, the turnover of trade payables reveals that JLP was more effective in clearing the payables less frequently in 2020. This section can be summarised by saying that John Lewis was able to increase the efficiency of its resource use. Overall Profitability The evaluation of the two companies' combined profitability is the fourth section of the financial analysis. To illustrate this idea, three ratios were chosen. The ability of the business to make money from its resources is gauged by return on assets (ROA) (assets). The ratios demonstrate that M&S outperformed JLP in terms of ROA in 2020. JLP's ROA increased in 2019. As a result, M&S' performance has been outstanding. The other two ratios support this judgement as well. Marks & Spencer's ROE was likewise higher than that of its equivalent in 2020. In 2020, John Lewis had earnings per share of £0.0177 while Marks & Spencer had earnings per share of £0.1687. Compared to its competitor, John Lewis, M&S has a significantly higher total profitability and more promising future. Shareholders’ Investment The assessment of shareholders' investment was the final phase of the financial study. To evaluate the performance and shareholder value of both organisations, two ratios were utilised. In contrast to M&S' yield of 8.8%, JLP's dividend yield in 2020 was 20%. This is largely caused by the difference in share prices between JLP and M&S, with JLP's stock trading at £0.90 and

M&S's at £150.85. This distinction is particularly pronounced in the price to earnings ratio. M&S's P/E ratio was significantly higher, indicating that the company was able to provide shareholders with bigger profits in relation to the price they paid. Recommendation Notwithstanding the ongoing pandemic and the political challenges brought on by Covid-19, the financial study of the two firms revealed that M&S has performed significantly better. Compared to John Lewis, it is more profitable and in a better position to leverage its assets. Also, it did better when the evaluation of overall profitability and shareholder investment was done. JLP's stronger liquidity position and more effective use of its resources are both beneficial aspects of the company. Due to M&S's superior profitability and greater P/E ratio, I would advise a short- term investor to select it over John Lewis based on the study. Based on the two companies' DDM-based share price valuations, an investor with a longer time horizon can pick one. M&S is a lot safer investment right now.

Part B Investment assessment is the process of assessing investments or projects based on past or anticipated information about the projects. Financial analysts utilise a variety of techniques and resources to evaluate an investment. The most popular techniques are the payback period, accounting rate of return (ARR), net present value (NPV), and internal rate of return (IRR). It

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

has been observed that NPV and IRR have become more popular in recent years. The viability of various appraisal techniques has been the subject of numerous research. emphasised that because of its comprehensive approach, NPV is becoming increasingly more widespread. Using the data from the market, it produces an estimate for future earnings and cashflows. Because it takes into account the idea of the time worth of money, it is also commonly employed. Payback time and other methods have been rendered outdated since they do not take this crucial idea into account. According to some, NPV can become a laborious procedure, especially if the underlying circumstances are unknown. Because it predicts future cashflows and a concession rate for the project, the methodology itself is arbitrary. The accuracy of these estimates is not necessary. The internal rate of return is what the other approach reveals to be. It refers to the discount rate at which the NPV is equal to zero. It is, in other words, the largest rate of discount that a project can be considered feasible at. Because IRR places a strong emphasis on profitability over the long term, it is frequently used in conjunction with the NPV technique, which has been recognised as having grown popular in many businesses. The profitability of a project after the initial investment has been recovered is not taken into account, for instance, when calculating a payback period. The concepts of time value of money are taken into account by both NPV and IRR, which are thorough methodologies of project evaluation. Aside from that, it has been discovered that is not totally correct. Many research indicates that ARR, discounted ARR, and payback are still in use globally. According to the research, the payback time method has several inherent advantages that other appraisal techniques cannot match. It is first and foremost an easy way. Second, it offers an overview review of the investment's timing for starting to pay off. The ARR is a different way to assess an investment. Profits are used to value an investment as opposed to cashflows, which makes it distinct from other approaches. As the accounting data rather than the anticipated cash flow from activities is used, this method is incredibly arbitrary. According to the research's findings, it is clear that a lot of businesses are now appraising projects using discounting methods. This comprises the three primary approaches of discounted payback, NPV, and IRR. Yet, it has been discovered that this idea is only partially accurate because there is no doubt that the use of these techniques has increased over time. The only problem is that many businesses have recently begun adopting simulative methods, like Monte- Carlo, to more precisely analyse investments. Because of these limitations, NPV and IRR are both helpful techniques but cannot be depended upon completely.

Part C Various approaches are taken to value the company's share price. Assessing whether a share is trading at a price greater or lower than its inherent worth is the key. Investors purchase shares that are under-priced while disposing of overvalued shares. Discounted Cashflow (DCF), Residual Income (RI), and Dividend Discount Model are the most popular valuation techniques utilised by financial analysts (DDM). Other additional techniques, including comparable company analysis and the times revenue method, are also employed for the same goal. In order to arrive at a rational share price, the DDM model lowers the dividends that the company has paid. It employs a fundamental component of the business (dividend) to value the share price in the market, making it a very consistent strategy. Due to the strong correlation between earnings and dividends and how investors view the share price, the dividend theory also supports its use. The fact that DDM is not based on accounting measures like profits further supports the idea that it is an impartial way to evaluate prices. DDM's flaw is that it doesn't take a company's buybacks into account, according to the criticism. The formula used to gauge the price of a company's share becomes less accurate as a result. Because it uses data from annual reports that are made available to the public, the RI model is simpler to calculate. A minor inconvenience and inaccuracy of the RI model is caused by the ease with which accounting data can be manipulated. Before deciding which valuation method to apply, evaluators perform this cost- benefit analysis. Using the residual income model has a number of serious drawbacks, one of which is that it does not offer a divisional or group assessment of the organisation. Similar to how DCF or DDM may, it cannot be used to assess the performance of distinct divisions. A widely used technique for determining the share price is to use discounted or free cashflow. Considering how heavily it relies on scientific evaluation methods, it is widely employed. Studies have shown that all share price valuation methods have some flaws and restrictions. To get at an average or rational pricing for the share, financial analysts should apply a variety of valuation techniques. There is also the option of valuing a company's share price using a Monte- Carlo simulation. Conclusion Three key components were the main emphasis of the report on financial analysis and management. The first component involved a performance review of two publicly traded

corporations. The profitability, liquidity, and operational effectiveness of the two businesses were examined using the financial information for John Lewis & Partnership PLC and Marks & Spencer Ltd. It was revealed that M&S had fared better than its competitor. It was advised that the investors pick Marks & Spencer instead of John Lewis for this reason. The evaluation of investment appraisal methods was the second part of the report. It was discovered that NPV and IRR have increased in popularity recently because of their thorough evaluation of a project and focus on time value of money (discounting). The evaluation of financial analysts' methodologies for estimating share values of corporations made up the third component. The analysis of the literature revealed that the DDM and DCF models are the ones that are most frequently employed to determine the share price. However, it was also found that the traditional methods of valuation had been supplanted by simulative techniques like the Black-Scholes Model or the Monte-Carlo simulation.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version