The company selected is Blacks Leisure Group Plc, which mainly operates in the Outdoor and O’Neil. Outdoor consists of board wear retailing and wholesaling activities of clothing, footwear and equipment. O’Neil comprises retailer of O’Neil commodities and United Kingdom distributors under such brand mark. Our analysis will basically entail comparing this company with one of its main competitors JJB Sports Plc and identify which is the most optimal company to invest in. 1. 2 Financial Analysis of Blacks Leisure Group Plc and JJB Sports Plc
Six main accounting ratios will be applied to the companies selected in this section to cover the profitability & efficiency, liquidity and s...
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...tability in the firm’s valuation. The calculation of such ratios is shown in sub-section 1. 2. 5. 1. 2. 1 Profitability and Efficiency The financial ratios adopted reveal that the profitability and efficiency of Blacks Leisure Group Plc is better than that of JJB Sports Plc. The return on capital employed, which denotes the efficiency of management in generated income from the firm’s resources is superior for Blacks Leisure Group Plc.
A high percentage in the return on capital employed is constantly desirable since it implies that the profitability of the organisation is considerably safe from unexpected movements in the external environment, such as the adoption of new competitive measures, economic slowdown and more. We have to remember that from the market analysis performed in the first section we noted that these corporations operation in a very dynamic and volatile market. Indeed the return on capital employed of both companies is low to ensure a sound margin of safety. The net profit generated from every ?
100 of sales is better for Blacks Leisure Group Plc. From the calculations performed in sub-section 1. 2. 5 we can note that out of every ? 100 sales, Blacks Leisure Group Plc makes a net profit of ? 489, while JJB Sports Plc performs a profit of ? 409. This implies that this firm is more able in controlling costs and marketing goods that possess a high profit margin. Even though JJB Sports Plc holds ? 15,699 higher profits in 2006 than its competing company, from the ratios performed we can state that the other firm is more efficient in its trading. 1. 2. 2 Financial Position
The current assets ability to recoup the current liabilities is in favour of Blacks Leisure Group Plc, as portrayed by the higher current ratio. However, the ratio of the most liquid assets, excluding stock, in relation to the short-term liabilities is superior for JJB Sports Plc. Overall the financial position of Blacks Leisure Group Plc is better than that of JJB Sports Plc, in spite of the high percentage of stock that Blacks Leisure Group Plc holds in relation to the current assets, which amounts to 63. 29% in comparison to 33. 22% of the other enterprise.
In this respect it is important that the stock turn ratio of Blacks Leisure Group Plc is high, which indicates the number of times stock is fully sold, to ensure that the high amount of stock held is quickly turned into sales by the company. The time taken by the debtors of Blacks Leisure Group Plc to pay the amount due is 2 days faster than that of JJB Sports Plc. This is another positive element on the financial position of the firm, because it reveals that credit sales are more quickly turned into cash, which is the lifeblood of the organisation. 1. 2. 3 Financial Stability
Both companies are low-geared companies as indicated by the proportion of debt is to equity portrayed in the balance sheet of the corporations. Therefore the interest commitments arising from the long-term debts are not a serious concern for the stability of the organisation due to its immateriality. However it is always advisable to compute the interest cover ratio to examine the capability of the organisation to meet the interest expense out of the profits generated. A good times interest earned had been determined for Blacks Leisure Group Plc, but a weak 3. 73 times was derived for JJB Sports Plc.
Indeed the ratio for Blacks Leisure Group Plc is 9. 12 times higher, indicating a sound stability position. However the cash and cash equivalents balance of JJB Sports Plc is ? 25,362 higher than the interest commitments, showing that a good buffer of cash is kept to meet such interest obligations. This thus ensures a good stability for this organisation too. 1. 2. 4 Most Optimal Company From the ratios determined, Blacks Leisure Group Plc financial health is better than that of JJB Sports Plc, thus indicating that the investment should be performed in Blacks Leisure Group Plc. 1. 2. 5 Determination of Accounting Ratios Profitability Liquidity Stability
Blacks Leisure (2006). Annual Report and Financial Statements 2006 (on line). Available from: http://www. blacksleisure. co. uk/flash. htm (Accessed 12th May 2007). JJB Corporate (2006). JJB Sports plc Annual Report and Financial Statements for the 52 weeks to 29 January 2006 (on line). Available from: http://jjbcorporate. co. uk/pdf/reports/2006%20-%20Annual%20Report. pdf (Accessed 12th May 2007). McKenzie W. (2003). Using and Interpreting Company Accounts. Third Edition. Harlow: Pearson Education Limited. Randall H. (1999). A Level Accounting. Third Edition. Great Britain: Ashford Colour Press Ltd