Financial Strength of Lookers Plc.

This report provides recent market position and financial strengths of Lookers Plc, in order to compare Looker’s performance with that of Pendragon whether to be a good career and financial move to this senior management position of Lookers Plc.

Financial Strength
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EXECUTIVE SUMMARY
Lookers Plc. announced their new strategy for 2019 to embark the competitive advantages
against the automotive market.
In 2018, Lookers Plc.’s profit before tax is £67.3m, slightly decreased 1.6% YoY (2017:
£68.4m), revenue increased to £4.9bn (2017: £4.7bn). Their used car volume growth offsets
margin pressure
and continued strong growth in aftersales division. Furthermore, Lookers had adjusted earnings
per share to 14.68p from 14.57p in 2017, final dividend increased by 5% per share
(Lookersplc.com., 2019). Taken together with its strong financial performance and position,
shows Lookers is a competitive company in the market. In 2018, Looker’s ROCE is 11.2%,
recorded 1.72% points down compare with 2017, the fall was caused by cost inflation in
property, salaries and investment to improve dealerships, but it is still an impressive return
compared with Pendragon’s ROCE at
-2.1% in 2018.
Looker’s business has significant transformation and developments in recent years. To align with
their business strategy, they closed two underperforming businesses, the Vauxhall dealerships at
Warrington and Yardley in March 2018. In October 2018, they also closed Hyundai and Nissan
business in Motherwell to reduce cost. Besides, they acquired a Ford dealership in July 2018
which complements the larger representation of Ford in Essex and acquired the Jennings Group
for a gross payment of £10.1m. Because of the acquisitions, it incurs reorganization costs of
these changes. It has been earnings neutral this year and the group expected a modest
contribution to earnings in 2019 (About Lookersplc, 2019)
Introduction
Lookers Plc. are looking for a new Operations Director, as a recruitment specialist, this report
aims to provide information and analysis to the client who interested with this position.
This report provides recent market position and financial strengths of Lookers Plc, in order to
compare Looker’s performance with that of Pendragon whether to be a good career and financial
move to this senior management position of Lookers Plc. The package would include stock
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option, and this would also be a key factor to consider the total package. The CORE Strategic
Financial Analysis Model would apply for elaborate key ratios to compare Lookers Plc and
Pendragon Plc.
External Context
Lookers Plc. has a national network in car dealerships, with a wide ranges of car manufacturers
and different brands. The company also sells used vehicles, equipment and machinery, and
operates the United Kingdom's leading wholesale auto parts distributor. The company operates
through over 160 franchised auto dealerships in the UK, Lookers has wide ranges of competitors,
such as Pendragon, Rybrook Holdings Ltd & Sytner Group Ltd (Hoovers, 2019). Lookers would
be able to maintain its competitive advantage as they provided one stop services including selling
used cars, new cars and auto parts services with wide range of brands to fulfill customer needs.
Internal Context
Lookers Plc. is operating 117 subsidiaries and 159 branches (Hoovers, 2019) with 8323
employees as of 2018(About Lookersplc, 2019).
Lookers continued their strong growth in used car & aftersales division and play a resilient
performance in the challenging market. They have strong market presence, having 20 lenders
representing 60% of the market. However, Lookers have the needs to review the commission
structures and revise to more transparency, removed discretion and aligned all rate bands and cap
in place.
Lookers provides online customer experience with vehicle recommendation engine in their
website and mobile version to improve in operational efficiency. They also continued investment
in the development of multi-channel customer experience and improving the dealership estate.
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Table 2: Improving used to new sales ratio (Resources:
Profitability ratios: Under this category of ratios, analysis is done over the profits earned by
company at different points, for instance, gross profit ratio, net profit ratio (Chandra, 2020).
Under it, different kinds of ratios are computed and some of them are explained below in such
manner:
Gross profit ratio= (Gross profit/sales) *100
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 Return on Capital employed: EBIT/Capital employed
(amount in $, in million except ratio)
Particulars Lookers plc Pendragon
2017 2018 2017 2018
EBIT 77 74 86 -39
Capital employed 602 657 784 702
Calculation 77/602 74/657 86/784 -39/702
Return on capital
employed
0.13 times 0.11 times 0.11 times -0.06 times
Interpretation: According to the calculations made in above table, it can be interpreted that, there
is decrease in return in both the companies in year 2017 to 2018. There can be several reasons
behind this decrease such as, decrease in sales, increased cost of production, no disposing of
assets which are of no use, low economies of scale, etc. This may be the effect of some external
factors like Brexit regulations, etc. In comparison of both companies, Lookers plc is performing
comparatively better than Pendragon, as ROCE of latter has gone negative in the year 2018.
 Gross profit ratio= (Gross profit/sales) *100
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Particulars Lookers plc Pendragon
2017 2018 2017 2018
Gross profit 504 516 553 490
Sales 4696 4880 4739 4149
Calculation (504/4696)*100 (516/4880)*100 (553/4739)*100 (490/4149)*100
Gross profit ratio 10.73% 10.60% 11.66% 11.81%
 Net profit ratio= (Net profit/sales) *100
Particulars Lookers plc Pendragon
2017 2018 2017 2018
Net profit 48 44 53 -51
Sales 4696 4880 4739 4149
Calculation (48/4696)*100 (44/4880)*100 (53/4739)*100 (-51/4149)*100
Net profit ratio 1.02% 0.90% 1.12% -1.23%
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Interpretation: In accordance with above calculation, it is elucidated that profits rates have
decreased over the year, specially, net profit margin. There is no significant effect on gross profit
margin, in fact in case of Pendragon, gross profit margin has increased. Thus, it is crystal clear
that profitability has decreased due to increase in indirect expenses and not due to any change in
sales.
Efficiency ratios: Under this a range of ratios are calculated in order measure efficiency of a
company in terms of various kinds of aspects including assets, stock etc.
 Asset turnover ratio
Formula: Total Sales / [(beginning assets + ending assets)/2]
(amount in $, in million except ratio)
Particulars Lookers plc Pendragon
2017 2018 2017 2018
Total sales 4696 4880 4739 4149
Average assets 1802 1896 1968.5 2038.5
Calculation 4696/1802 4880/1896 4739/1968.5 4149/2038.5
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Asset turnover
ratio
2.61 2.57 2.4 2.03
Interpretation: Above table shows that, Lookers plc turns over its assets at a faster rate than
Pendragon. For every dollar in asset, Lookers generate $2.61 and $2.57 in years 2017 and 2018
respectively. While in the same time period, Pendragon generates $2.4 and $2.03 respectively.
Generation against asset from sales has reduced in both the companies due to some possible
reasons like low collection methods, sluggish sales or holding of obsolete inventory. Another
possible reason can be of underutilized capacity of sales.
 Working capital turnover ratio
Average working capital= (opening working capital+ closing working capital)/2
working capital = current assets – current liabilities
(amount in $, in million except ratio)
Particulars Lookers plc Pendragon
2017 2018 2017 2018
Total sales 4696 4880 4739 4149
Average working 39.5 41 -53 -62
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capital
Calculation 4696/39.5 4880/41 4739/-53 4149/-62
Working capital
turnover ratio
118.89 119.02 -89.41 -66.91
Interpretation: From the above calculations, it can be concluded that Lookers plc uses its
working capital more efficiently as compared to the benchmark in the same industry. They are
earning approximately $118 for $1 of working capital. This shows there proper working capital
management and also no blockage in face of accounts receivable. This also reduces the risk of
bad debts in case of Lookers plc. In the contrary, negative working capital ratio represents that
there is negative working capital in the Pendragon, also this means that current liabilities exceed
current assets.
Liquidity ratios: It is an important part of financial metrics which determines company's ability
to pay its current debts without raising funds from external sources. To measure liquidity of
company is an important part of financial manager job roles (Robinson, 2020).
 Current ratio = current assets/ current liabilities
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Particulars Lookers plc Pendragon
2017 2018 2017 2018
Current assets 1332 1314 1201 1268
Current liabilities 1294 1239 1277 1314
Calculation 1332/1294 1314/1239 1201/1277 1268/1314
Current ratio 1.03 1.06 0.94 0.96
Quick ratio = quick assets/ current liabilities.
(amount in $, in million except ratio)
Particulars Lookers plc Pendragon
2017 2018 2017 2018
Quick assets 321 259 181 289
Current liabilities 1294 1239 1277 1314
Calculation 321/1294 259/1239 181/1277 289/1314
Quick ratio 0.25 0.21 0.14 0.22
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Interpretation: Ideal ratio in current ratio is 2:1, which no company out of two matches, but in
case of Lookers plc, it is in safe zone in both the years and also the situation is improves in 2018.
it has more than equal current funds to pay off current liabilities. In case of Pendragon, there is
slight danger on company, has the ratio is less that 1:1 also, but the situation has slightly
improved.
Mentioning about Quick ratio, the study is about the pure cash and cash equivalents,
which is better in Lookers plc, but there is still scope for improvement. This low quick ratio
signifies that company do not possess enough absolute liquid flow to settle down current
liabilities if any emergency arises. In case of Pendragon, the situation is worse. Both companies
need to give attention on their liquid position as if this situation continues, it may be harmful in
long – term.
Ratio from shareholder's view: One of the main users of financial analysis are shareholders of
the company, they need to know about their earnings, efficiency with which their invested funds
are utilized, etc. There are various ratios which comes under this category (Sabour, 2020). To
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name some, Earning per share, dividend per share, etc. There are numerous other ratios as well
from shareholder's point of view.
 Earnings per share: (Net income – Preferred dividends) / number of equity shares
outstanding
(amount in $, in million except ratio)
Particulars Lookers plc Pendragon
2017 2018 2017 2018
Net income 48 44 53 -51
Number of
shares
outstanding
400 400 1325 1325
Calculation 48/400 44/400 53/1325 -51/1325
Earnings per
share
0.12 0.11 0.04 -0.04
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Interpretation: In case of Lookers plc, EPS has decreased in 2018, but it remains positive,
comparing it with benchmark, i.e., Pendragon, its EPS has not only decreased but had become
negative, thus, shareholder of this organisation are not at all satisfied. This can be because of less
profits due to decreased sales or increased cost of production.
 Dividend per share
Formula for calculating DPS= (sum of dividend- one-time dividend)/ number of
outstanding shares
(amount in $)
Particulars Lookers plc Pendragon
2017 2018 2017 2018
Dividend 4000 0.04 1000 2000
Number of
shares
outstanding
400 400 1325 1325
Calculation 4000/400 4000/400 1000/1325 2000/1325
Earnings per
share
10 10 0.75 1.5
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Interpretation: In above table, it is clearly visible, that dividend per share is very low in both the
companies, and Pendragon is making improvements, but Lookers plc is still on the same level,
managers need to look into this matter on immediate point, as this is the basic ratio that is
calculated by every investor. Reason for this low DPS can be reinvestment in firm's opertion,
debt reduction or poor earnings.
EVALUATION
Ratio analysis is an important tool used by financial managers of every company. This is
used to not only identify weak areas but also to communicate important and useful information
for managerial level of organisation. In the given report, various ratios are calculated for two
different organisations, that are Lookers plc and Pendragon. Latter has been used as the
benchmark for evaluating performance of former organisation. So in context of comparison, it
can be concluded that Lookers plc is performing better than the set benchmark in every aspect.
Just the need of attention is at the point of EPS and DPS. Satisfaction of investors is very
important from company's point of view, thus, it is necessary, to identify cause behind this lag
and then identifying the solution for this. Furthermore, liquid position of Lookers plc, is far
better than the benchmark. It is also using its working capital very efficiently and generating
good revenues. Thus, it can be elucidated that performance of Lookers plc is so far matching and
doing good in comparison of other firms in the same industry.
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REFERENCES
Books and Journals
Hoovers, D.B., 2019. Live Nation Entertainment, Inc. Company Summary. Retrieved on
November, 6.
Chandra, P., 2020. Fundamentals of Financial Management|. McGraw-Hill Education.
Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.
Sabour, K., 2020. The Impact of Programmed Accounting Analysis (PAA) for the Financial
Statements on Qualitative Characteristics of Useful Financial Information. Sabour,
Khaled. 4195955.
Online:
About financial data of Lookers plc, 2019. [online] available through:<
http://financials.morningstar.com/income-statement/is.html?
t=LOOK&region=gbr&culture=en-US >
About financial data of Pendragon plc, 2019. [online] available through:<
http://financials.morningstar.com/income-statement/is.html?
t=PDGNF&region=usa&culture=en-US>
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