Financial Analysis in Business

This report conducts a financial analysis of John Lewis, a recognized chain of department stores in the UK, to provide recommendations for potential investors. The analysis includes profitability, efficiency, liquidity, and leverage position of the company.

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Financial Analysis in Business
ACC336

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Executive Summary
John Lewis is a recognized chain of department stores operating across the UK offering
diverse range of products through both offline and online challenges to its target customers. The
report as such has conducted financial analysis of the company to provide recommendations for a
potential investor. The financial analysis has been conducted with the use of ratio analysis
technique which has analyzed profitability, efficiency, liquidity and leverage position of the
company. It has been depicted through the financial ratio analysis that the company has good
future growth prospects on account of its strong financial performance.

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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
General Information of Company....................................................................................................4
Brief History................................................................................................................................4
Market Position and Information about its competitors...............................................................4
Swot Analysis...........................................................................................................................4
Porte five forces Analysis.........................................................................................................5
Comparison of John Lewis performance with its competitor......................................................6
Key aspects of the company performance through using ratio analysis as an important tool.........7
Profitability Ratio.........................................................................................................................7
Liquidity Ratios..........................................................................................................................10
Asset management ratio or efficiency ratio...............................................................................12
Gearing Ratio or Leverage Ratio...............................................................................................13
Conclusion & Recommendation....................................................................................................15
References......................................................................................................................................17
Appendix........................................................................................................................................19

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Introduction
The present report is developed for undertaking financial analysis of a selected UK public
listed company in order to provide support to potential investors for taking accurate investment
decisions having very little knowledge. In this context, it has specifically provided a general
description of the company including details about its market performance and key competitors.
This is followed by conducting an analysis of the financial performance of the company through
the use of ratio analysis technique. Lastly, it provides an overall summary of the key findings
generated from the report for facilitating the investment taking decisions of a potential investor.
General Information of Company
Brief History
John Lewis and Partners is an established chain of department stores operating within the
UK. The chain of department stores of the company is owned by John Lewis Partnership and at
present known to operate about 51 stores across England, Scotland and Wales. It has been
established within the year 1929 and since then has achieved a distinctive position in the
competitive retail market of the UK. The company operates within the retail sector of the UK
and is regarded to be the third largest company by sales within the retail sector of the country.
The company deals in with retailing large number of products such as clothing, watches, jewelry,
electrical, cosmetics, furniture and financial services (John Lewis & Partners, 2019).
Market Position and Information about its competitors
John Lewis has achieved a dominant position within the retail market of the UK has also
outperformed the market within the year 2017 by enhancing its sales by about 2.8%. The sales
growth is mainly driven by the online platform that accounts for about 22% of the overall
merchandise sales. It has achieved sales growth mainly in the sectors such as Fashion, Home,
Electricals and Home Technology and thus reported higher profits. It has achieved distinctive
competitive advantage within the retail sector on account of its product quality, value and
product innovation (Voinea, 2016). The SWOT and Porter five force analysis of the company is
carried out as follows to gain an insight into its current market position:

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Swot Analysis
Factors Analysis
Strengths
It has achieved a position of one of the major
upper market retail stores across the UK. It
provides wide range of fashion products
through both online and offline stores.
Weakness
The price of the products offered by the
company is higher as compared with the other
supermarket and grocery stores.
Opportunities
The improved lifestyles and purchasing power
of consumers is driving more sales revenue of
the company
Threats
Intense competition from other supermarkets
and grocery stores can negatively impact the
growth potential of the company
(John Lewis SWOT Analysis, Competitors & USP, 2019)
Porte five forces Analysis
Market Forces Analysis
Threat of New Entrants Fairly Low: Due to high original capital
investment required for developing
infrastructure and gaining benefit from the
economies of scale
Bargaining Power of Suppliers Fairly High: The restrictions in the supply of
raw materials and concerns regarding the
global supply chain is leading to increasing
their bargaining power
Bargaining Power of Buyers
Extremely High: There are large number of
suppliers within the market and thus customers
have variety of choices to access the products
Threat of Rivalry
High: There are large number of supermarket
and grocery stores operating within the retail

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sector of the UK and thus making level of
competition too high
Threat of Substitutes
Low: The threat of substitutes is very low in
terms of specific retail product requirements by
the customers
(Bäder, 2016)
Comparison of John Lewis performance with its competitor
The major competitors of John Lewis are Mark & Spencer and Tesco. There are many
other competitors but Tesco and Mark & Spencer are two most important competitors of John
Lewis. In this section key performance indicators of all the three companies has been compared
and graph has been prepared for the same.
Company Name
Revenue
(In
Billions)
Group Profit before
exceptional items
and tax (in Millions)
Stores
John Lewis
(Group) £ 10.00
£
370.00 400
Mark& Spencer £ 10.60
£
613.80 1010
Tesco £ 49.90
£
1,280.00 6809
(John Lewis, 2017; Tesco, 2017 and Mark & Spencer, 2017)

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Revenue (In Billion) Group Profit before
expectional items and tax
(in Million)
Stores
£-
£1,000.00
£2,000.00
£3,000.00
£4,000.00
£5,000.00
£6,000.00
£7,000.00
Performance Measurement
Key aspects of the company performance through using ratio analysis as an important tool
Ratio analysis is performance measurement tool that measures performance of the
company in the current period and also compares it previous year performance. The ratio
analysis of John Lewis has been performed for last four years, so that its performance can be
evaluated and recommendation can be provided to the company. The four categories of ratios
used to evaluate the performance of John Lewis are profitability, liquidity, efficiency or asset
management and solvency ratios. John Lewis has been legally established as partnership firm
where all its equity shares are held by John Lewis Trust which is controlled by company
management. It means company has limited market presence as it is not publically traded on
stock exchange.
Profitability Ratio
Profitability ratios aims to evaluate the company’s ability to generate income in regards
to sales, equity and capital employed. All the profitability ratios use some metrics to evaluate
ability to earn income on such metrics. For example, net profit ratio measures percentage of net
profit earned on total sales (Bragg, 2010)
Net profit ratio

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This ratio is most important profitability ratio that measures ability of company to earn
net profit after tax on total amount of sales. It is expressed in term of percentage. Net profit after
sales refers to each sales dollar left after meeting all expenses including taxes and operating
expenses (Tracy, 2012).
Formula: Net Profit after tax/Net Sales
2017 2016 2015 2014
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00% 3.53%
2.29%
1.48%
1.13%
Net profit ratio
Percenatage
The above bar graph represents the percentage of net profit earned by John Lewis over
last four years. The increasing trend in net profit ratio indicates that company is on right path and
it has potential to provide higher percentage of net profit in future years. There was sharp
increase in year 2017 that reflects management ability to turn most of its inventory into sales and
control the expenses (John Lewis, 2017 and John Lewis, 2015).
Return on Equity
Return on equity measures the amount of net income that has been returned to the equity
shareholders. It indicates percentage of net profit earned on the total amount of shareholder’s
equity company keep on their balance sheet (Feldman and Libman, 2011). This ratio is very
important from the investor’s point of point of view as they seek to calculate return they receive
from investment they have made in company.
Formula: Net profit/Shareholder’s Equity

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2017 2016 2015 2014
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
Return on equity
Percentage
The above bar graph shows that during the last four years the return on equity
shareholders has been increased from 5.70% in year 2014 to 17.20% in year 2017 that reflects
strong profitability position of the company. John Lewis has able to maximise the shareholder’s
return and it is also expected the profit of the company will increase in future period (John
Lewis, 2017 and John Lewis, 2015).
Return on Capital Employed
This ratio is very important form the management point of view as it measures the return
that business has achieved from the total amount of capital employed by them. Capital employed
means sources of funds used to finance the assets of the company and it includes equity capital,
reserves, and long term debt finance. This ratio uses earnings before interest and tax as the profit
to calculate the return earned by the company on their capital employed (Bragg, 2010).
Formula: Earnings before interest and tax/Capital Employed

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2017 2016 2015 2014
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00% 10.33%
8.55%
10.82% 11.09%
Return on Capital Employed
Percentage
Every company wants to maximise its return on capital employed as it is very important
factor that decides the margin return company earns through its operations and also help in
taking the capital investment decisions. John Lewis has earned stable return on capital employed
with maximum return earned in year 2014. Return on capital employed of 10.33% in year 2017
reflects strong profitability position of John Lewis and it is expected that it will improve in future
years looking at performance of the company in current year (John Lewis, 2017 and John Lewis,
2015).
Liquidity Ratios
Liquidity ratios measure the ability of company to pay its short term liabilities through
use of short term assets. It means liquidity analysis provides information about the short term
solvency position of the company. This analysis helps to figure out working capital requirements
of the company in next accounting cycle.
Current Ratio
Current ratio calculates times the current assets company have in relation to current
liabilities. Ideal current ratio of the company is 2:1 as there is requirement of working capital to
run the business properly.
Formula: Current Assets/Current Liabilities

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2017 2016 2015 2014
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Current Ratio
Times
Current ratio of John Lewis has been improved in last four years but it is not enough to
meet the working capital requirements of the company. Level of current assets had been very low
as compare to current liabilities (John Lewis, 2017 and John Lewis, 2015).
Quick Ratio
The quick ratio depicts the ability of a company to meet its short-term financial
obligations from the most liquid asset base that can be easily transferred to cash such as accounts
receivable, marketable securities and other such asset base.
Formula: Quick Assets/Current Liabilities
2017 2016 2015 2014
0.00
0.10
0.20
0.30
0.40
0.50
0.60
Acid Test Ratio
Times

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The quick ratio of the company has improved significantly over the selected financial
period 2014-2017 from 0.34 to 0.55. This depicts that the ability of company to meet its short-
term financial obligations from the asset base has been strengthened during the past few
years. However, the ratio for the company over the selected financial period is less than 1 which
means that there is liquidity risk present within the company that can negatively impacts its
future growth prospects (John Lewis, 2017 and John Lewis, 2015).
Asset management ratio or efficiency ratio
The ratios are used for analyzing the ability of a company to manage its asset base and
realize sales. It has been analyzed fro the company through calculation of the following ratios:
Inventory turnover ratio
The ratio is used for depicting the effectiveness of a company to manage its inventory
base and is calculated by the use of following formula:
Inventory turnover ratio=Cost of goods sold/Average inventory
2017 2016 2015 2014
10.20
10.40
10.60
10.80
11.00
11.20
11.40
10.62
10.71
11.33
10.85
Inventory turnover ratio
Times
The inventory turnover ratio of the company has remained almost static during the
financial year 2014-2017 which depicts that it has not gained any improvisation to convert its
inventory level into sales. The ratio has increased from the year 2014-2015 but has been
gradually reduced from the year 2015-2017. However, it has maintained a good inventory
turnover ratio over the selected financial period depicting it is able to effectively realize sales
from the inventory base (Baker and Powell, 2009).

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Total asset turnover ratio
The ratio measures the ability of a company to realize sales from the use of its asset and
is calculated with the use of following formula:
Total asset turnover ratio=Net Sales/Average total assets
2017 2016 2015 2014
1.54
1.56
1.58
1.60
1.62
1.64
1.66
1.68
1.70
1.72
Total asset turnover ratio
Times
The total asset turnover ratio of the company has also remained static during the financial
period from 2014-2017. The ratio has depicted an increasing trend from the year 2014-2015 but
then has relatively declined from the year 2015-2017. This means that it is not able to enhance
the realization of sales from the use of its asset base. However, it has maintained a satisfactory
ratio over the selected financial period which means that it is able to effectively manage its asset
base and realize revenue from it (Baker and Powell, 2009).
Gearing Ratio or Leverage Ratio
The ratios are used for depicting the financial debt acquired by the company for carrying
out its operational activities. The leverage position of the company has been assessed through the
use of the following ratios:
Debt to equity ratio
The ration is used for depicting the relative proportion of debt and equity used by the
company in its capital structure. The formula used for its calculation is depicted as follows:
Debt to Equity Ratio=Debt/Equity

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2017 2016 2015 2014
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Debt to equity ratio
The ratio has depicted an overall decreased trend from the year 2014-2017 for the
company. It has initially recorded an increase from the year 2014-2015 but has been gradually
reduced during the subsequent year time-period that is from 2015 to 2017 (John Lewis, 2017 and
John Lewis, 2015). This means that the company is able to reduce the proportion of debt in its
capital structure as compared to equity. However, the ratio is higher for the overall selected
financial period which means that it is utilizing higher proportion of debt as compared to equity
in its capital structure. This can pose a risk from the investor point of view by increasing the
financial risk of not effectively meeting the debt obligations in future context (Baker and Powell,
2009).
Interest coverage ratio
The ratio depicts the ability of a company to meet its interest’s obligations on its
outstanding debt payments. The formula used for calculation is as follows:
Interest converge ratio=Earnings before interest and tax/Interest expenses

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2017 2016 2015 2014
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Interest coverage ratio
The ratio has depicted an increasing trend from the financial year 2014-2017 and thus it
can be said that the ability of the company to meet its interest’s expenses have been improved.
This can be regarded as good from the investor’s point of view as there is less financial risk of
not meeting the interest’s expenses for the debt payment (Gibson, 2008).
Conclusion & Recommendation
It can be summarized from the overall discussion held within the report that John Lewis
is one of the most recognizable brands within the retail sector of the UK. The financial analysis
of the company carried out in the report has presented some key findings to be considered by a
potential investor. The company profitability is on increase since the year 2014-2017 as depicted
from the results of return on equity and return on capital employed ratios. This is largely due to
increase in the online sales of the company that has facilitated it to reach international delivery
and thereby enhancing its customer base and sales revenue.
It has also maintained strong asset management efficiency as depicted by its inventory
turnover and asset turnover ratio. The ratios calculated are higher depicting that the company is
able to effectively realize sales from the use of its inventory ad asset base. However, the
company should enhance its effectiveness of asset management as it has remained static during
the selected financial period of 2014-2017.
The analysis of the leverage position of the company has revealed that it is incorporating
higher use of debt in its capital structure. The company, though, has relatively reduced the
proportion of debt in the capital structure as revealed from the calculation of debt-equity ratio.
The results of the interest coverage ratio has depicted that it is able to effectively meet its interest
obligations as the ratio has depicted an increasing trend during the selected financial period.

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The company has also shown larger improvement in its liquidity position as revealed
from the financial results of the current and quick ratio. Both the ratios have shown larger
increase over the selected financial period of 2014-2017 depicting that its ability to meet the
financial obligations from its asset base has been improved. However, the ratios are less than 1
and therefore it is necessary that the company should improve its asset base so as to reduce the
risk of not meeting its financial obligations.
As such, it is recommended to a potential investor that although the company has good
profitability and efficiency position yet it is necessary that the future financial performance of the
company must be considered for analyzing its leverage and liquidity risk. This is essential to gain
an analysis of the elements of financial risk of the company that could negatively impact its
future growth prospects.

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References
Bäder, M. 2016. Strategic Analysis of the John Lewis Partnership plc. GRIN Verlag.
Baker, K. and Powell, G. 2009. Understanding Financial Management: A Practical Guide.
USA: John Wiley & Sons.
Bragg, S. 2010. Business Ratios and Formulas: A Comprehensive Guide. US: John Wiley &
Sons.
Bragg, S. 2010. Business Ratios and Formulas: A Comprehensive Guide. USA: John Wiley &
Sons.
Feldman, M. and Libman, L. 2011. Crash Course in Accounting and Financial Statement
Analysis. USA: John Wiley & Sons.
Gibson, C. 2008. Financial Reporting and Analysis: Using Financial Accounting Information.
Australia: Cengage Learning.
John Lewis & Partners. 2019. [Online]. Available at:
https://www.johnlewispartnership.co.uk/about/who-we-are/our-history.html [Accessed on: 29
March 2019].
John Lewis SWOT Analysis, Competitors & USP. 2019. [Online]. Available at:
https://www.mbaskool.com/brandguide/lifestyle-and-retail/9226-john-lewis.html [Accessed on:
29 March 2019].
John Lewis. 2015. Annual Report. [Online]. Available at:
https://www.johnlewispartnership.co.uk/content/dam/cws/pdfs/financials/annual-reports/john-
lewis-partnership-plc-annual-report-2015.pdf [Accessed on: 29 March 2019].
John Lewis. 2017. Annual Report. [Online]. Available at:
https://www.johnlewispartnership.co.uk/content/dam/cws/pdfs/financials/annual-reports/jlp-
annual-report-and-accounts-2017.pdf [Accessed on: 29 March 2019].
Mark & Spencer. 2017. Annual Report. [Online]. Available at:
https://corporate.marksandspencer.com/documents/reports-results-and-publications/plan-a-
reports/plan-a-report-2017.pdf [Accessed on: 29 March 2019].

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Tesco. 2017. Annual Report. [Online]. Available at:
https://www.tescoplc.com/media/392373/68336_tesco_ar_digital_interactive_250417.pdf
[Accessed on: 29 March 2019].
Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to
Analyse Any Business on the Planet. Australia: RatioAnalysis.net.
Voinea, A. 2016. John Lewis reports profit fall in spite of market share increase. [Online].
Available at: https://www.thenews.coop/103448/sector/retail/john-lewis-boosts-sales-increasing-
market-share/ [Accessed on: 29 March 2019].

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Appendix
Financial Data of John Lewis for last four years
Particulars 2017 2016 2015 2014
Amount in £ million
Current Assets £ 1,627.60 £ 1,534.70 £ 1,173.30 £ 1,139.50
Current liabilities £ 1,834.20 £ 1,848.70 £ 1,694.90 £ 1,705.60
Quick Assets £ 999.80 £ 912.80 £ 592.60 £ 585.50
Inventory £ 627.80 £ 621.90 £ 580.70 £ 554.00
Net Profit £ 353.50 £ 223.20 £ 143.50 £ 101.60
Revenue £ 10,026.20 £ 9,748.80 £ 9,701.00 £ 9,027.80
Operating Profit or EBIT £ 649.40 £ 531.40 £ 450.20 £ 423.60
Shareholder's Equity £ 2,055.40 £ 2,065.10 £ 1,518.80 £ 1,781.70
Non-current liabilities £ 4,230.70 £ 4,146.60 £ 2,641.70 £ 2,036.70
Average Inventory £ 624.85 £ 601.30 £ 567.35 £ 554.00
Cost of Goods sold £ 6,633.10 £ 6,442.10 £ 6,426.90 £ 6,008.90
Total Assets £ 6,286.10 £ 6,211.70 £ 5,855.40 £ 5,524.00
Average total assets £ 6,248.90 £ 6,033.55 £ 5,689.70 £ 5,524.00
Total liabilities £ 4,230.70 £ 4,146.60 £ 4,336.60 £ 3,742.30
Interest Expenses £ 109.70 £ 100.80 £ 102.50 £ 97.50
Financial Ratios of John Lewis
Particulars 2017 2016 2015 2014
Profitability Ratios
Net profit ratio 3.53% 2.29% 1.48% 1.13%
Return on equity 17.20% 10.81% 9.45% 5.70%
Return on Capital Employed 10.33% 8.55% 10.82% 11.09%
Liquidity Ratios
Current Ratio 0.89 0.83 0.69 0.67
Acid Test Ratio 0.55 0.49 0.35 0.34
Asset Management or efficiency ratios
Inventory turnover ratio 10.62 10.71 11.33 10.85
Total asset turnover ratio 1.60 1.62 1.71 1.63
Gearing Ratio/Leverage Ratio
Debt to equity ratio 2.06 2.01 2.86 2.10
Interest coverage ratio 5.92 5.27 4.39 4.34