John Lewis & M&S Comparison

Paper Summary:

In this article, the writer analyses, compares and contrasts the financial performance and position of John Lewis Plc, and Marks & Spencer Plc, mainly through the process of the ratio analysis of the financial statements of the two companies. The writer provides a brief introduction of the two companies under discussion, such as their background information, similarities and differences and their core business. The writer deals with calculations of important financial ratios of the two companies and then analyses these figures. The writer compares and discusses the ratios in detail, discussing possible causes of changes and fluctuations and coming to various conclusions about the performance of the two companies. In addition, the writer looks at certain limitations of the exercise of ratio analysis, emphasising the fact, that even though ratio analysis is a great means of understanding the financial position of a company better, there are still many other factors which can impact those numbers but are difficult to quantify. The writer concludes by highlighting the main findings of the report and presenting a personal opinion on the attractiveness of two companies from an investor's viewpoint.

Outline:
Introduction
Analysis of the Ratios
Profitability Ratios
Gross Profit Ratio
Net Profit Ratio
Return on Capital Employed
Liquidity Ratios
Activity Ratios
Net Asset Turnover Ratio
Stock Holding Period
Debtor Days
Creditor Days
Gearing Ratios
The Limitations of the Exercise
General Limitations
Company Specific Limitations
Conclusions

From the Paper:

"John Lewis, increased its net profit ratio from 4.31% to 4.49% which is an increase of 4.18%. In regard to turnover, JLP's turnover increased from L4169.1 in 2003 to L4499.5 in 2004, which is an increase of nearly 8%. This shows that in terms of volume, it did a good job, but in terms of efficiency it worsened, as even though there was a volume increase of 8%, the increase in net profit ratio was only 4.18%. Most probable reasons for this could be, there was in increase in administrative expenses, or other overhead expenses, which does reflect poor efficiency. However it is possible that the firm was looking to increase market share quickly and hence might have spent an above average expenditure on things like advertising, which helped increase volume, but affected the bottom line. In this case, the investment may not have shown immediate results, but may improve turnover, and margins in the longer run."

Sample of Sources Used:

• Construction Industry Tra. (1977) Financial Ratios, an aid to Profitability. London: C.I.T.B,
• Fridson, Martin S. (1991) Financial Statement Analysis : A Practioner's Guide. Chichester: John Wiley & Sons.
• Morley, Michael F. (1984) Ratio Analysis. London: Gee.
• Walsh, Ciaran. (1993) Key Management Ratios : How to Analyse, Compare and Control the figures that drive company value. London: Pitman.
• Accounting and business, student accountant, finance matters magazine :ACCA. Association of Chartered Certified Accountants. 07 Jan. 2006 <http://www.accaglobal.com/publications/>.

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