JD Sports is a retailer in sports wear. It has several stores in the United Kingdom and Ireland. The company offers a wide range of products such as sports shoes, uniform and general sports accessories. The company is one of the leading companies in the sports retail sector in the United Kingdom.
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This is a financial report of the company based on the financial statements for the years 2010 and 2011. The analysis is based on year to year performance and comparison of JD Sports performance against the industrial performance (Gill & Chatton 1999, p. 12-15).
Summary of the financial statements
The profitability of the company has been declining over the past three years of analysis. The gross profits were GPB 142.1 million and GPB 124.9 million for 2010 and 2011 respectively. The net operating loss for the Company was GPB 67.3 million and GPB 181 million for 2010 and 2011 in that order. From the trend, the company has been running at a net loss for the two years and the net loss is on the increase (JB Sports Financial Statements 2011, p. 1).
The cash and cash equivalents of the company have decreased greatly from 2010 to 2011. Short term investments have been disposed and they do not appear in the balance sheet for 2010 and 2011. Total cash and cash equivalents, Total receivables and the general current assets for the company are falling.
The same trend is seen in the property, plant and equipment where the values are GPB 615.3 million and GPB 166.5 million 2010 and 2011. The total current liabilities and total liabilities increased in 2010 but declined in 2011. The total liabilities are GPB 430.7 million in 2010 and GPB 122.4 million in 2011. Total common equity decreased from GPB 184.6 million in 2010 to GPB 44.1 million in 2011. The total liabilities for the company decreased in the period of analysis (JB Sports Financial Statements 2011, p. 2).
The cash flow from operating activities is on the decrease in the period of comparison. The cash from operations was GPB 37.9 million and GPB -71.9 million for 2010 and 2011 respectively. There is no cash generated from investing activities.
The company has reduced it’s investment over the two years since cash outflow to investment projects is GPB 5 million and GPB 4.5 million in 2010 and 2011. Cash from financing activities was GPB -6.3 million and GPB 24.1 million for 2010 and 2011. Net change in cash was GPB 26.4 million for 2010 GPB -53 million for 2011 (JB Sports Financial Statements 2011, p. 3).
The key ratios to be considered are the ratios that show the growth and profitability of the company, the liquidity and asset management (JB Sports Key Ratios 2011, p.1). Growth ratios will be calculated based on the results for the previous year, 2010. These ratios are ratios for the recent financial year which is 2011. These ratios are current ratio, the quick ratio, return on equity, and return on assets, return on capital, inventory turnover, receivable turnover and asset turnover among others (Lee 2007, p.241)
These show the comparison of the profits of the year with the profits for the previous year (Epstein 2008, p. 45). They are shown as a percentage change. They are sales, income and earnings per share. The change in sales is -2.6%; growth in income is -196% and the growth in earnings per share is 60.7%.
These ratios show the profitability of a company and they include gross margin, pre-tax margin and net profit margin. The gross margin for JP sports in 2010 was 49.3% and 49.5% in 2011 thus showing a 0.20% change. The net profit for 2010 and 2011 was 8% and 8.90% respectively which reflects a 0.90% change. The mark up was 97.20% and 97.80% in 2010 and 2011 which show a percentage change of 0.60%. The return on capital employed was 70.92% in 2010 and 59.60% in 2011. This showed a percentage change of -11.32%.
The liquidity ratios show the ability of a company to meet its short term obligations as they fall due (Gibson 2008, p. 23). The main liquidity ratios are the current ratio and the quick ratio. The current ratio for JB sports was 1.29:1 and 1.45:1 in 2010 and 2011respectively. The quick ratio was 0.73:1 for 2010 and 0.87:1 for 2011.
Asset Management Ratios
These are also known as management efficiency ratios and they show the ability of the company assets to generate income. They include income per employee, turnover per employee, receivable turnover, asset turnover and inventory turnover. Income per employee and revenue per employee were -47.993 and 96,029 in 2011; receivable turnover was 3.9; inventory turnover was 3.9 and the asset turnover was 1.0. The stock turnover for the company was 70T and 69T for 2010 and 2011, which shows a 1 day change.
These show the leverage of the company or the general financial condition of the company in the long term perspective. The ratios include debt/equity ratio, interest coverage ratio, and the leverage ratio. The debt/equity ratio is 0.56 and the leverage ratio is 3.8. The gearing ratio was 24.1% in 2010, 19.7% in 2011. This is a change of 4.4%.
Comparison of JD sports financial status with the industry average.
Table 1: Ratios of JB Sports against industry average ratios
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|RATIO||JB SPORTS||INDUCTRIAL RATIO|
|Gross profit margin (%)||49.50||27.1|
|Pre-tax margin (%)||-50||17.3|
|Net profit margin||8.90||4.1|
|Growth in sales (from 2010, in %)||-2.6||9.20|
|Growth in income (From 2010, in %)||-196.8||31.80|
|Growth in EPS (%)||60.70||28.60|
|Income per employee||-47.993||12,063|
|Revenue per employee||96,029||191,277|
|Return on assets (ROA)||-52.4||6.3|
|Return on Equity (ROE)||-135.5||19.4|
|Return on capital||59.60||10.5|
The financial status of JB Sports Company is not good. From the analysis, the profitability of the company is declining and the debts for the company are piling up. According to the liquidity ratios, the company is not able to meet the short term obligations as they fall due. This is because the current ratio and quick ratio are below the rule of thumb thresholds of 1.0 and 2 respectively. The company in not able to generate income using it’s assets as shown by the asset management and profitability ratios (Gill & Chatton 1999, p. 151).
Compared to the industrial average, the financial status of the company is weak. This is because the profitability of the company is worse that the profitability of the industry average. The company is operating at losses while other companies in the same industry are operating at profit. The company is also high levered (leverage ratio of 3.8) compared to the industry average (leverage ratio of 3.2). The conclusion therefore is that the company is not financially sound and it is not worth investing in since the risk is high (Gibson 2008, p. 95).
List of References
Epstein, L 2008, Reading financial reports for dummies, Prentice Hall, New Jersey.
Gibson, HC, 2008, Financial reporting and analysis, Cengage Learning, New Jersey.
Gill, OJ & Chatton, M 1999, Understanding financial statements: a primer of useful information, Cengage Learning, New Jersey.
JB Sports Financial Statements 2011. Web.
JB Sports Key Ratios 2011. Web.
Lee, T A 2007, Financial reporting and corporate governance, John Wiley and Sons, London.