Financial Analysis and Investment Appraisal for John Lewis Partnership

This report presents a comprehensive financial analysis and investment appraisal of the John Lewis Partnership. Section A focuses on financial analysis, covering operations, strategic policies, accounting quality issues, horizontal and trend analysis of financial statements, and ratio analysis. It includes a comparison with industry data and critical analysis of the company's narrative reporting. Section 2 delves into investment appraisal, evaluating project viability, non-financial factors, alignment with company strategy, and economic environment considerations. The report concludes with a recommendation regarding the project, based on the financial and non-financial factors. The analysis examines the company's performance in the retail sector, addressing profitability, liquidity, and efficiency ratios. The report highlights key figures, accounting policies, and their impact on financial analysis, offering insights into the company's financial health and investment potential.

Accounting and
Financial
Management

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
SECTION A: FINANCIAL ANALYSIS........................................................................................1
Outlining of operations and strategic and operating policies and consideration of the way in
which that may impact the financial analysis..............................................................................1
Discussion of the relevant economy, market or other contextual information............................2
Identification of accounting quality issues..................................................................................2
Horizontal and trend of the financial statements.........................................................................3
Ratio analysis of the financial statements....................................................................................4
Use of information provided in the notes to the accounts...........................................................7
Comparison of the ratios with industry wide data.......................................................................7
Critical analysis of the company’s own narrative reporting on its financial performance and
position........................................................................................................................................8
SECTION 2: INVESTMENT APPRAISAL...................................................................................9
1. Discussion of the viability of the project based on the financial information.........................9
2. Evaluation of non financial factors which may influence the decision to undertake the
investment....................................................................................................................................9
3. Consistency with the strategy of the company........................................................................9
4. Consideration of the economic environment.........................................................................10
5. Consideration of linkage with the financial analysis that have undertaken for Section A....10
6. Recommendation to the organisation regarding the project..................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12
Books and Journals:...................................................................................................................12

INTRODUCTION
Accounting can be defined as the process of recording information of all the business
transactions in appropriate books so that actual spending and incomes could eb determined.
Financial management is the process of managing and maintaining performance of business by
formulating different statements (Arredondo, 2014). These are trading, P&L account, balance
sheet and cash flow statement. With the help of all of them, it could be determined that the
company is performing well or not. In order to determine profitability, liquidity etc, all of them
could also be used. If an organisation is not able to generate then then it may result in lack of
interest of investors and other stakeholders. Present report is based upon financial management
of John Lewis Partnership which is one of the largest entities in retail sector and operating
business all around the world. This assignment is segregated in two parts first is a financial
analysis report and second is report on investment appraisal opportunity. This project covers
various topics such as operations, strategies and operating policies, accounting quality issues,
horizontal and trend of financial statements, ratio analysis, comparison with a competitor,
analysis of narrating reporting etc. Additionally, discussion of the viability of the project,
evaluation of non-financial factors, consistency with strategy of company, economic
environment recommendation to the entity are also covered in this report.
SECTION A: FINANCIAL ANALYSIS
Outlining of operations and strategic and operating policies and consideration of the way in
which that may impact the financial analysis
All the business entities perform different types of operations for the purpose of executing
all the planned activities. Some of them that are performed by John Lewis Partnership are as
follows:
Product management: It is the main operation of John Lewis Partnership in which the
managers make policies for managing the products that are sold to the customers. Main purpose
of it is to meet future goals and objectives.
Supply chain: It is related to the distribution of different products that are sold by John
Lewis Partnership all around the world. It is focused by the entity so that it can supply all the
ordered items in different items on time to meet long term business goals (Bay, Catasús and
Johed, 2014).
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Quality: It is also an operation of John Lewis Partnership which is highly focused with the
maintenance of quality of all the products that are sold by it. Main purpose of it is to meet the
expectation of customers and generate higher profits and revenues.
There are various types of operating and strategic policies that are followed by John
Lewis Partnership so that it can operate business successfully and meet the financial goals. All of
them are as follows:
IFRS 15: It is focused by the organisation for the purpose of recording all the revenues
and contracts and customers.
IFRS 9: It is also a part of operating and strategic policies of John Lewis Partnership in
which the organisation keeps detailed information of all its financial instruments (Chan, 2015).
All the above described operations and policies may impact the financial analysis when
the organisation fails to record accurate information of all of them. If these policies will not be
followed appropriately then it may affect the level of accuracy of financial analysis.
Discussion of the relevant economy, market or other contextual information
John Lewis Partnership is currently operating business at global, multinational and
international level. It is one of the biggest fashion retailers of United Kingdom and also
contributing a huge amount in the total GDP. Total employee strength of it is around 83900 and
it is creating employment for the region so that its economy can grow. The main markets that are
targeted by it are banking, financial services and retail. Major focus of it is upon retail but it also
focuses upon the finance and banking sector so that it can establish itself as a successful entity in
that industry.
Identification of accounting quality issues
In order to assure the accuracy of all the financial statements it is very important for all the
organisations to make sure that they are keeping the quality of all the accounts very high. For
John Lewis Partnership it is also essential to make sure that it is formulating all the financial
statements properly so that possibility of accounting quality issues could be ignored (Finkler,
Smith and Calabrese, 2018). Some of the quality issues that are mentioned in the final accounts
of John Lewis Partnership are as follows:
Key figures in the financial statements: It is one of the biggest quality issue in the
financial statements that may impact upon the financial analysis. Some of the key figures in the
income statement and balance sheet of John Lewis Partnership are revenues, net profits, equities,
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assets and other liabilities. Small mistake in them may result in inaccurate results. In order to get
actual information of the performance of business it is essential for the management to make sure
that these key figures are take in to consideration. Slight changes in them may result in negative
impact upon the financial analysis.
Key accounting policies: All the business entities have some specific accounting
policies that are followed by them so that they can formulate the financial statements
appropriately. These accounting policies include partnership policies, financial instruments,
offsetting, foreign currencies etc. All of them are focused by John Lewis Partnership according
to its annual report. Changes in them may result in modification in the figures of balance sheet
and it will leave negative impact upon the financial analysis because of changes in the amount of
transactions (García, 2014).
Changes mentioned in the annual report: It is considered as the biggest quality issue
because when all the changes that are mentioned in the final account are not accurate then it will
leave adverse impact upon the financial analysis. When all the modifications that are reflected in
the annual report of John Lewis Partnership will be biased by the managers then it will leave the
unfavourable impact upon the analysis of financial position. Due to this, inaccurate result will be
generated by the organisation.
Horizontal and trend of the financial statements
Horizonal analysis: It can be defined as a technique which is used by companies for the
purpose of analysing changes in the number of corresponding items of final accounts over the
year. It is mainly used for balance sheet so that the managers can determine the percentage
changed of different assets and liabilities. Main purpose of it is to determine the trend situation
of the business (Holm, 2018). While conducting it the organisations are required to use two or
more years for comparison. In order to analyse actual performance of John Lewis Partnership it
is being used by the managers so that they can determine that company is progressing or not.
With the help of it, strategic decisions for future are also formulated which helps to attain growth
in future. The horizontal analysis of the balance sheet of the entity is as follows:
Assets and
liabilities
2018 2019 Increase or
decrease
Percentage of
changes
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Total non-current
assets
4563.1 4383.1 180 (D) -3.94%
Total current
assets
1690.6 1929 238.4 (I) 14.10%
Total assets 6253.7 6312.1 58.4 (I) 0.93%
Current liabilities 1945.1 2055.9 110.8 (I) 5.70%
Non-current
liabilities
2006.9 1636.2 370 (D) -18.47%
Equities 2301.7 2620 319 (I) 13.86%
Total equities
and liabilities
6253.7 6312.1 58.4 (I) 0.93%
From the above horizonal and trend analysis it has been determined that the financial
statements of John Lewis Partnership are following increasing trends. Total assets of the
organisation are being increased by 0.93% as compare to previous year and liabilities are also
increased in same trend. Total non-current assets of the entity are decreased by 180 million
pounds and the percentage of changes is -3.94%. Total current assets of the organisation are
being increased by 238.4 million pounds and the percentage changes is 14.10%. Current
liabilities are increased by 110.8 million pounds and its percent of increment is 5.70%. The
percentage changes of non-current liabilities is -18.47% which have taken place due to
decrement of 370 million pounds. Total equities are being increased by 319 million pounds and
its percentage is 13.86% (Annual report of John Lewis Partnership, 2019).
Ratio analysis of the financial statements
Ratio analysis: It can be defined as the process of analysing financial stability of an
organisation so that actual performance of business could be determined. In order to analyse
financial statements of John Lewis Partnership this technique is being used. There are various
types of ratios that are calculated for the organisation. Calculation of all of them is as follows:
 Profitability ratios:
Particulars 2018 2019
Return on equity Profit after tax / equity *100
Profit after tax 77 77.3
Equity 2301 2620
Result 3.35 2.95
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Return on capital employed
Operating profit / capital employed *
100
Operating profit 253.1 229.1
Capital employed 4308.6 4256.2
Result 5.87 5.38
Gross profit margin Gross profit / sales revenues * 100
Gross profit 3368.1 3385.7
Sales revenues 10215.8 10316.7
Result 32.97 32.82
Operating profit margin
Operating profit / sales revenues
*100
Operating profit 253.1 229.1
Sales revenues 10215.8 10316.7
Result 2.48 2.22
Operating expenses to sales
Operating profit / sales revenues *
100
Operating expenses 3115 3270.8
Sales revenues 10215.8 10316.7
Result 30.49 31.70
Working notes: Calculation of capital employed:
Particulars 2018 2019
Total assets 6253.7 6312.1
Less: current
liabilities 1945.1 2055.9
CE 4308.6 4256.2
From the calculations of profitability ratios it has been determined that profitability of the
entity is being decreased in year 2019 as compare to 2018 because the ROE, ROCE, operating
profit margin and operating expenses to sales ratios are showing decrement in the profitability
(Karadag, 2015).
 Efficiency ratios:
Particulars 2018 2019
Sales revenue to capital employed
Sales revenues / capital
employed
Sales revenues 10215.8 10316.7
Capital employed 4308.6 4256.2
Result 2.37 2.42
Sales revenue to current assets Sales revenues / current assets
Sales revenues 10215.8 10316.7
Current assets 1690.6 1929
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Results 6.04 5.35
The above calculation of efficiency ratios is showing that efficiency of the organisation is
decreased in 2019 because the sales to capital employed and current assets are decreased in
current year. It shows that the company is not able to perform all its operations properly.
 Liquidity ratios:
Particulars 2018 2019
Current ratio
Current assets / current
liabilities
Current assets 1690.6 1929
Current liabilities 1945.1 2055.9
result 0.87 0.94
Quick ratio Quick assets / current liabilities
Quick assets 1029.1 1271.4
Current liabilities 1945.1 2055.9
Result 0.53 0.62
From the above calculations of liquidity of John Lewis Partnership, it has been
determined that liquidity of the entity is increased as compare to previous year. In 2019 its
current and quick ratios are increased (Karanja and Nganga, 2014).
 Working capital management ratios:
Particulars 2018 2019
Inventory turnover days Inventory / cost of sales * 365
Inventory 661.5 657.6
Cost of sales 6847.7 6931
Result * 365 35.26 34.63
Settlement period for trade
receivable
Trade receivables / sales revenues *
365
Trade receivables 261.7 259.3
Sales revenues 10215.8 10316.7
Result * 365 9.35 9.17
Settlement period for trade
payables
Trade payables / sales revenues *
365
Trade payables 1677.3 1595.7
Sales revenues 10215.8 10316.7
Result * 365 59.93 56.46
The above calculations are showing that ability of John Lewis Partnership is increased in
2019 as compare to 2018 because the settlement period of trade payables and inventory turnover
days are decreased.
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 Long term financial stability ratios:
Particulars 2018 2019
Gearing ratio Debts / total liabilities * 100
Debts 3952 3692.1
Debts + equity 6253.7 6312.1
Result 63.19 58.49
Debt to equity ratio Debts / equities * 100
Debts 3952 3692.1
Equity 2301 2620
Result 171.75 140.92
Interest cover ratio
Operating profit / financial
charges
Operating profit 253.1 229.1
Financial charges 85.7 80.6
Result 2.95 2.84
From the above calculations it has been determined that long term stability of the
company is decreased because all the ratios are showing decrement in the ratios.
Use of information provided in the notes to the accounts
The information which is provided in the notes of financial statements is to analyse
detailed information of all the figures that are recorded in the final accounts. With the help of it,
stakeholders can determine that the details that are mentioned in income statement and balance
sheet is accurate or not. With the help of notes to the accounts investors can make future
decisions that they want to invest in the enterprise or not (Khumawala, Marlowe and Neely,
2014).
Comparison of the ratios with industry wide data
Ratio 2018 (JLP) 2019 (JLP) Industry wide data
Return on equity 3.35 2.95 7.20
Return of capital
employed
5.87 5.38 5 to 15
Gross profit margin 32.97 32.82 20%
Operating profit
margin
2.48 2.22 20%
Operating profit to
sales 30.49 31.70
Higher is good
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Sales to capital
employed
2.37 2.42 Higher is good
Sales to non-current
assets 6.04 5.35
Higher is good
Current ratio 0.87 0.94 1.5
Quick ratio 0.53 0.62 1: 1
Inventory turnover
days 35.26 34.63
30 to 60
Settlement period
for trade receivables 9.35 9.17
Less than 30
Settlement period
for trade payables 59.93 56.46
30 to 60
Gearing ratio 63.19 58.49 30%
Debt to equity ratio 171.75 or 1.72 140.92 or 1.41 2:1
Interest cover 2.95 2.84 3 or 4
From the above comparison of ratios of John Lewis Partnership and industry average it has
been determined that ROE of the company as compare to the whole industry is very low. ROCE
of the enterprise is average as it is more than 5% which is the lower limit of industry average.
Gross profit margin of the company is very high as compared to the whole retail sector but the
operating profit margin is very low. Operating profit to sales and sales to capital employed are
good because they are higher as compare to previous year. Current and quick ratio are very weak
against industry. Inventory turnover and trade payables are also good for the entity. Trade
receivable of the company is also good because its lower than industry average. Debts to equity
and interest cover are very low as compare to the sector (Laughlin, 2014).
Critical analysis of the company’s own narrative reporting on its financial performance and
position
The narrative reporting of John Lewis Partnership on its financial performance is not
accurate because when all the ratios of it are compared with the industry data most of them are
very low and not able to meet the lower level of it. It shows that company is performing well for
its own but if its performance in compared with the whole industry then it is not able to perform
effectively.
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SECTION 2: INVESTMENT APPRAISAL
1. Discussion of the viability of the project based on the financial information
The business opportunity which is available for John Lewis Partnership regarding
repurpose an existing piece of estate in t a Waitrose EOT store of 1853m at Big Town Retail Part
is seems to be very profitable for the entity. From the provided and estimated financial
information it has been determined that in the first trading year the organisation will be able to
generate profits of around 200k pounds and for the next year the growth rate will b around 17%.
With the passing of time the amount of income will be following the increasing trend and at the
end of 10th trading year the entity will be able to generate profits of 365k pounds. It shows that
the opportunity will be highly financially viable for the entity to adopt. With the help of it, John
Lewis Partnership will be able to sustain in the market in more systematic manner (McKinney,
2015).
2. Evaluation of non financial factors which may influence the decision to undertake the
investment
There are various non-financial factors that may influence the decision to undertake the
investment. First one is the location of the estate. It is a well established retail destination which
will help John Lewis Partnership to attract large number of customers. It is at the big town retail
park which is a famous location and easy to reach for the individuals. The park is located on a
busy route in the big town centre and have an easy access from motorway network. The negative
aspect which may leave negative impact upon the decision is the traffic in the area that makes
shopping difficult. Repurposing decision of the estate which help the organisation to enhance its
market share (Misund, Osmundsen and Sikveland, 2015).
3. Consistency with the strategy of the company
The main strategy of John Lewis Partnership is a set of objectives which are highly
focused with delivery of best services to the customers, partners and other stakeholders so that a
positive image of entity could be established in their mind. This strategy is designed by the
organisation for the purpose of strengthening and developing the business. Whether the
economic environment is good or bad the enterprise never compromises with quality of products.
The organisation can make the consistency of its strategy by forming upon the business
opportunity because it will be able to deliver good products to the clients in the new store. Apart
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from this, its partners will also get benefited with the help of the new opportunity as it will result
in development of the business (Renz, 2016).
4. Consideration of the economic environment
The level of economic environment is highly competitive and in order to survive in it is
very important for all the organisations to execute business in systematic manner. For the
purpose of carrying out operations properly in this environment the new business units should be
opened so that negative impact of economy could be reduced. The level of competitive in retail
industry of UK is very higher. There are various competitors of John Lewis Partnership such as
Marks and Spencer, Arcadia Group etc. In order to compete with all of them the organisation is
required to formulate effective decisions and grab new opportunities. By adopting the
opportunity of buying the estate at big town park the entity will be able to deal with the
competitive economic environment (Shapiro and Hanouna, 2019).
5. Consideration of linkage with the financial analysis that have undertaken for Section A
The financial analysis which was conducted in Section shows that the performance of John
Lewis Partnership is slight weak as compare to the industry. In order to improve the
performance, it should make effective decisions for future so that it can attain competitive
advantage and sustainability for business. The new opportunity of buying estate in Big Town
Park can help the enterprise to deal with all the finance related issues that are impacting it. While
planning to investing in it the organisation will be required to make arrangement of funds for it
will be required to analyse the final accounts of it. The financial analysis shows that performance
of the company is not very good but by adopting the opportunity it could be improved by it.
6. Recommendation to the organisation regarding the project
The project of estate at Big Town Retail Park should be selected by John Lewis Partnership
for the purpose of making investment in future. Main reason for this recommendation is that it
will help the company to improve its market share and profitability along with revenues. It will
be beneficial for the enterprise to deal with the weak performance’s issue which is affecting its
financial stability in the market. As the company’s strategy is to meet expectation of partners and
customers therefore the option of investing in the new estate will help it to meet its goals. If the
estate will be bought by it then it will help to reach maximum number of customers and enhance
profits that will help to meet expectations of partners (Tassadaq and Malik, 2015).
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