[FULL ACCESS] Financial Ratio Analysis

The provided assignment involves a comprehensive analysis of various financial ratios to evaluate the performance of two companies. The ratios include return on capital employed, return on equity, investment ratios, dividend cover ratio, efficiency ratio, and leverage ratios. The calculations are based on specific financial data, including net income, total assets, current liabilities, long-term debts, and shareholders' equity.

Accounting and Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
External context......................................................................................................................1
Internal context.......................................................................................................................2
RATIO analysis and evaluation..............................................................................................3
CONCLUSION..............................................................................................................................10
RECOMMENDATIONS...............................................................................................................10
REFERENCES..............................................................................................................................12
APPENDIX....................................................................................................................................14
Ratio analysis........................................................................................................................14

INTRODUCTION
Accounting is the systematic record of all the business transactions and the events so that
financial performance and position can be ascertained at the ending of the financial year. On the
other hand, Finance is considered as the part of the economics which relates with the allocation
and management of the resources of the business effectively and efficiently. The purpose of
accounting is to facilitate financial information to the internal as well as the external users of the
company for making rational decisions (Loughran and McDonald, 2016.). The present study is
based on the Lookers Plc set up in 1908, by John Looker, the largest retailer dealing in the
automobiles and also includes the sale of accessories, bicycles and parts. Furthermore, the report
explains about both internal and external environmental aspects with regards to Lookers and
Pendragon. Besides this, it will provide deeper insight about the financial performance and
position of Lookers and Pendragon through ratio analysis.
MAIN BODY
On the basis of cited case situation, one of the client wants to leave Pendragon Plc. Further,
Lookers plc is also looking for new operation director. Thus, now client is thinking to apply for
such position vacant in Lookers plc. However, before this, client wants to assess the extent to
which financial strategy and performance of Lookers plc is sound over Pendragon Plc. In this
regard, company’s performance has been evaluated through ratio analysis and internal as well as
external perspective.
External context
PEST analysis: Lookers Plc
Political factors- As this enterprise is operating worldwide so it is exposed to several
kinds of political system and environment. Instability of the government impacts the corporate
negatively as it results in frequent changes in the trade regulations and the tariffs in terms of the
customer service. On the other hand stable government reflects a positive influence as risk of
changes in the policies and procedures of the government reduces.
Economic factors- High inflation in the country affects the purchasing power of the
people as it results in low disposable income which in turn impacts negatively the revenue of the
Lookers Plc. However, high disposable income and strong currency value increases the sales of
the organization positively (Lookers Plc PESTEL & Environment Analysis, 2019). By facilitating
the high employment opportunities, company can contribute t the economic development of the
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country and this leads to a positive relation with the government. This helps the entity in a stable
growth in the sustainable future.
Social Factors- Culture of the society and the way of operating the things influences the
culture of the enterprise in a social environment. Shared values, attitudes and the beliefs of
population play a crucial role for the marketer of the Lookers Plc in understanding the needs and
the desire of its target customers. Functioning the business keeping in mind the culture of all the
countries across the globe is complex task as different countries pursue different cultures any
default in interpreting the culture effectively impacts the reputation of the entity negatively.
While, on another state, Effective marketing strategy influence the profitability and enables the
company in reaching the large customer base.
Technological factors- It involves the analysis of technological developments adopted by
the competitors of the Lookers Plc, technological diffusion rate, and technological up-gradation.
Matching with the advancements in the technology involves the high investment and huge cost
for recruiting the highly skilled employees and also training to the existing workers (Desai,
2019). Moreover, trending and going with the latest technology infuses favorable outcomes for
the organization as it leads to economies of scale and larger production and the higher market
share can be ascertained.
Internal context
SWOT analysis-
Strengths- Lookers Plc has the strong and reliable distribution network all over the world
by which large potential customers can be reached within the global market. With the upcoming
years, Lookers Plc has built its brand portfolio strongly to create expansion into the new range of
products. Automation of the activities has bought up consistency in the quality of its product and
this assist the enterprise in meeting the demands of its customers. It has the good relationship
building with its customers and has achieved the greater level of satisfaction of its target
audience. Lookers Plc has attain the high succeed in implementing its new projects which
resulted in better returns on its capital expenditure by developing the new streams for generating
greater revenue.
Weaknesses- The inventory days of the lookers Plc is high as compared to its competitors
which can negatively impact the growth of the enterprise in the long term. Investment in the
research and development is very low than the other leading players in overall market worldwide
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(Lookers Plc SWOT Analysis / Matrix, 2019). Competition in context of the innovation cannot be
met by the Lookers Plc in industry. Requirement of investment in the new technologies is more
for integrating the processes at the larger pace across the globe.
Opportunities- Decline in the production cost is the great opportunity for the enterprise
low price has to be bear by the Lookers Plc for shipping its products which facilitate a
opportunity of boosting their profitability and enhancing the market share. Adaptation of new
technology builds an opportunity for the enterprise in developing the differentiated strategy of
pricing.
Threats- Lack of the skilled workforce and the changing trends of the market and the
behavior of the customers stated as big threat to the Lookers Plc.
RATIO analysis and evaluation
Ratio analysis may be defined as quantitative tool which assists in summarizing and
evaluating financial statements from several perspectives (Conley, Gonçalves and Hansen,
2018). Such perspectives include profitability, liquidity, efficiency, solvency and investment.
Calculation is mentioned in appendix.
Graphical presentation
Liquidity ratios
Current ratio
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(Source: LOOKERS plc Annual Results for the year ended 31 December, 2018)
(Source: Pendragon PLC – The leading automotive online retailer in the UK, 2018)
Interpretation: From the above analysis it is interpreted that the liquidity position of the
Lookers Plc is better than its competitor Pendragon Plc. The current ratio of the Lookers Plc
equates to 1.06 which is more close to the ideal current ratio. This states that it has managed its
current assets and current liabilities efficiently that leads the entity in meeting its short term
obligation with enough cash availability as compared to its rival whose current ratio resulted as
0.95 which considered as low ratio and states that it does not have enough cash resources to meet
its current obligations (Jan and et.al., 2019).
Quick ratio
Interpretation: The quick ratio of the Lookers Plc is also computed as 0.23 and the acid
ratio of its competitor evaluated as 0.20 which are concluded as low ratio than the ideal quick
ratio as 1:1. This means both the company is lacking in meeting its quick liabilities which affects
the liquidity position of the enterprise which in turn impacts the image of the firm in negative
way (Smith and Urquhart, 2018).
Cash ratio
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Interpretation: The cash ratio of both the corporate is resulted as same that is 0.04 and is
close to the ideal ratio equal to 0.5 which indicated as better cash position of the organization.
Working capital turnover ratio
Interpretation: Working capital turnover ratio relates with the sales of the companies
(Papanastasopoulos, 2018). It states the effectiveness of the entity in utilizing its working capital.
The working capital turnover ratio of the Lookers Plc is better than as it is positive that is 58.50
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than its rivalry as -32.32 resulted as negative which clearly shows that current liabilities of the
Pendragon are more than its current assets.
Profitability ratios
Interpretation: The profitability position of the Lookers Plc is founded as inefficient
from the above analysis in contrast with the other firm. In other words, it means the financial
performance of pendragon is sound and better because it has gained higher profits as compared
to the Lookers. The gross profit ratio of Lookers resulted as 10.56% which is lower than the
other firm equates to 11.43%. This states that financial health of the Pendragon is good even
after reducing the cost of goods sold from the sales.
The operating profit ratio computed as 1.51% for Lookers and 1.71% for Pendragon
which reflects the profits earned after paying off all the costs and the expenses. Lower operating
profit ratio depicts that cost and expenses of the Lookers are more which results in low profits
for the firm whereas high ratio depicts that cost and expenses of its rivalry is less (Ratio Analysis
– Ratios Formulae, 2019).
Net profit ratio calculated as 0.77% for Lookers Plc while 0.85% for Pendragon which
states that higher ratio indicates low interest and tax expenses and low ratio depicts the high
interest and tax expenses of the enterprise. The other ratios such as return on capital employed
and return on equity is resulted as higher of Lookers Plc than Pendragon Plc.
Return on capital employed
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Interpretation: Return on capital employed computed as 5.71% and 2.78% for Lookers
and Pendragon. This means the capital invested by the Lookers generated higher profits in
contrast with the other firm which helps the firm in attaining the consistent growth in the long
run.
Return on equity
Interpretation: Return on equity of both the organization is evaluated as 9.39% and
4.69% which indicates that the Lookers has created the wealth of their shareholders with the
increased value of their equities than the Pendragon.
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Investment ratios
Interpretation:It includes the Earning per share ratio and dividend cover ratio which
helps in analysing the perspective in terms of the shareholders. The earning per share ratio of the
lookers Plc resulted as 11.07 which is higher than its competitor that is 1.6. It depicts the income
available for making the payment of the dividend to its shareholders which is high in the Lookers
so it has a good ratio and this in turn build the value of the enterprise in the overall market
(Bragg, 2018).
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Interpretation: The dividend cover ratio evaluated as 2.71 for Lookers and 2 for
Pendragon, higher ratio of Lookers depicts healthy ratio for the company in paying of its
preference dividend to its holders.
Efficiency ratio
Interpretation: Interest coverage ratio of the Lookers Plc ascertained as 3.76 and for the
other firm its resulted as 2.81 which shows that Lookers has higher ratio than its rivalry which
means high capability of the company in meeting its interest expenses which helps in enhancing
the reputation of the firm in context of financial leverage (Wang, 2019).
Leverage ratio
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Interpretation:Debt equity ratio of Lookers Plc is also greater than Pendragon computed as
6.63 and 2.17 which tells that Pendragon has the better ratio than Lookers because higher ratio
indicates that company cannot meet its debt obligation as borrowing are more.
CONCLUSION
From the above report it can be conclude that financial ratios helps the organization in
ascertaining its financial position of the business. It can be inferred that financial performance of
Lookers plc is good in against to Pendragon Plc. Further, it can be depicted from the evaluation
that Lookers Plc is highly able to grab the opportunities by using its strengths.
RECOMMENDATIONS
Referring the outcome of ratio analysis, Lookers Plc is recommended to the client from the
perspective of career growth. Moreover, in comparison to Pendragon Plc, Lookers Plc is highly
able to meet its obligations from current assets. Further, ROE of Lookers Plc is higher over
Pendragon which in turn shows that company used equity in an effectual way through the means
of competent strategic and policy framework. Along with this, results of ratio analysis exhibits
that company is highly capable in relation to meet its interest expenses as compared to
Pendragon Plc. Thus, by taking into account all such aspects it can be depicted that financial
performance, strategic and policy framework of Lookers is good over Pendragon Plc. Thus,
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opportunities pertaining to career growth in both monetary and non-monetary terms is higher in
Lookers Plc. Thus, from future perspective, Lookers proves to be more beneficial for the client.
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REFERENCES
Books and Journals
Bragg, S. M., 2018. The Interpretation of Financial Statements. AccountingTools, Incorporated.
Conley, T., Gonçalves, S. and Hansen, C., 2018. Inference with Dependent Data in Accounting
and Finance Applications. Journal of Accounting Research. 56(4). pp.1139-1203.
Desai, C., 2019. Strategy and Strategic Management. In Management for Scientists (pp. 65-84).
Emerald Publishing Limited.
Jan, A. and et.al., 2019. Bankruptcy profile of the Islamic and conventional banks in Malaysia: a
post-crisis period analysis. Economic Change and Restructuring. 52(1). pp.67-87.
Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A
survey. Journal of Accounting Research. 54(4). pp.1187-1230.
Papanastasopoulos, G. A., 2018. JM WahlenS. P. BaginskiM. BradshawReview of Financial
Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective9th ed.
2018Cengage Learning978-1337614689 (995 pp., $228.25).
Smith, S. J. and Urquhart, V., 2018. Accounting and finance in UK universities: Academic
labour, shortages and strategies. The British Accounting Review. 50(6). pp.588-601.
Wang, L., 2019, February. Analysis of the Influence of New Accounting Standards on Enterprise
Financial Accounting. In 2019 4th International Conference on Financial Innovation and
Economic Development (ICFIED 2019). Atlantis Press.
Online
LOOKERS plc Annual Results for the year ended 31 December 2018. 2018. [Online]. Available
through:<http://www.lookersplc.com/~/media/Files/L/Lookers/documents/press-release/
2019/2018-annual-results.pdf>
Lookers Plc PESTEL & Environment Analysis. 2019. [Online]. Available
through:<http://fernfortuniversity.com/term-papers/pestel/nyse4/6818-lookers-plc.php>
Lookers Plc SWOT Analysis / Matrix. 2019. [Online]. Available
through:<http://fernfortuniversity.com/term-papers/swot/nyse/6818-lookers-plc.php>
Pendragon PLC – The leading automotive online retailer in the UK. 2018. [Online]. Available
through:<https://www.pendragonplc.com/documents/2018/pendragon-plc-interim-results-
august-2018.pdf>
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Ratio Analysis – Ratios Formulae. 2019. [Online]. Available
through:<https://www.edupristine.com/blog/ratio-analysis-ratios-formulae>
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APPENDIX
Ratio analysis
Ratio calculations
Particulars Formula Amount (£) Amount (£)
Lookers
Plc(LOOKERS plc
Annual Results for the
year ended 31
December, 2018)
Pendragon
Plc(Pendragon PLC –
The leading automotive
online retailer in the
UK, 2018)
Liquidity ratios
Current assets 1313.8 1230.3
Current liabilities 1239.2 1298.1
Current ratio
Current assets/current
liabilities 1.06 0.95
Quick ratio
Particulars Formula Amount (£) Amount (£)
Current assets 1313.8 1230.3
Stock 1027.7 969
Quick assets Current assets- Stock 286.1 261.3
Current liabilities 1239.2 1298.1
Quick ratio
Quick assets/Current
liabilities 0.23 0.20
Cash ratio
Particulars Formula Amount (£) Amount (£)
Cash and cash
equivalents 44.4 46.6
Current liabilities 1239.2 1298.1
Cash ratio Cash and cash 0.04 0.04
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equivalents/Current
liabilities
Working capital turnover ratio
Particulars Formula Amount (£) Amount (£)
Cost of goods sold 4364 2193.1
Current assets 1313.8 1230.3
Current liabilities 1239.2 1298.1
Working capital 74.6 -67.8
Working capital
turnover ratio COGS/working capital 58.50 -32.35
Profitability ratios
Particulars Formula Amount (£) Amount (£)
Gross profit 515.5 283.1
sales 4879.5 2476.2
Gross profit ratio Gross profit/sales*100 10.56% 11.43%
Operating profit 73.6 42.4
sales 4879.5 2476.2
Operating profit ratio
Operating
profit/sales*100 1.51% 1.71%
Net profit 37.5 21
sales 4879.5 2476.2
Net profit ratio Net profit/sales*100 0.77% 0.85%
Return on capital employed
Particulars Formula Amount (£) Amount (£)
Net income 37.5 21
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Total assets 1895.5 2054.6
Current liabilities 1239.2 1298.1
capital employed
Total assets-current
liabilities 656.3 756.5
Return on capital
employed
Net income/capital
employed*100 5.71% 2.78%
Return on equity
Particulars Formula Amount (£) Amount (£)
Net income 37.5 21
Shareholders’ equity 399.3 447.8
Return on equity
Net
income/shareholders’
equity 9.39% 4.69%
Investment ratios
Particulars Formula Amount (£) Amount (£)
Shareholders view ratio
Net income 37.5 21
No. of Shares 415.1 33.6
Earning per share
Net income/No. Of
shares 11.07 1.6
Dividend cover ratio
Particulars Formula Amount (£) Amount (£)
Earnings per share 11.07 1.6
Dividend per share 4.08 0.8
Dividend cover ratio Earnings per 2.71 2
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share/Dividend per
share
Efficiency ratio
Particulars Formula Amount (£) Amount (£)
Earnings before interest
and tax 73.6 42.4
Interest expenses 19.6 15.1
Interest coverage ratio
Earnings before
interest and tax/Interest
expenses 3.76 2.81
Leverage ratios
Particulars Formula Amount (£) Amount (£)
Long term Debts 128.7 153.2
Equity 19.4 70.6
Debt-equity ratio
Long term
debts/Equity 6.63 2.17
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