A Ratio Analysis Of WH Smith

As a public limited company majority of the funds available for WH Smith to operate at any point in time is provided by owners in form of share capital and several forms for capital reserves and retained earnings. But for the purpose of this analysis, share capital will be referred to as ‘funds provided by owners’, which was £35million for both 2008 and 2009. However it is important to note that the total equity increased from £161m in 2008 to £188m in 2009. The main reason for this was in increase in the retained earnings from £329m in 2008 to £365m in 2009.

FUNDS PROVIDED BY CREDITORS

Non -current liabilities (including trade and other payables, tax obligations, bank overdrafts and borrowings and short-term provisions) added up to £303m in 2008 and £281m in 2009, while non-current or long-term liabilities amounted to £24m in 2008 and £25m in 2009. Thus, total liabilities and accrued payments reduced from £327m in 2008 to £306m in 2009. This is largely due the fact that £25m bank overdrafts were drawn in 2008 while no overdrafts were drawn in 2009. This means WH Smith is relying mainly on retained earnings and share capital as the major source of cash for the business year.

PROFITABLITY

Profitability measures the profit margin of the business (WH smith) in a financial year. In this analysis however, the profitability of WH Smith will be calculated and compared for the 2008 and 2009 financial years by relating pre-tax profit as a percentage of sales; and also pre-tax profit as a percentage of fixed asset. This can be represented using the formula below:

CONCLUSION

WH Smith has improved its profit margin by a small percentage of 0.5% in 2009 from 5.62% to 6.12% as a result of more sales in higher margin categories such as confectionery and books. This means that out of £100 sales the company made £5.62p in 2008 and £6.12p in 2009.

Fixed assets generated 4.57% more profit in 2009 than in 2008, which signifies a more efficient use of capital and fixed assets. Thus we can conclude that the company is being managed well despite stiff competition from other large companies such as Borders and the prevailing economic circumstances.

GROWTH

Turnover Increase – total sales reduced from £1352m in 2008 to £1340 in 2009

Profit after tax increased from £59m in 2008 to £64m in 2009

Total fixed assets reduced from £247m in 2008 to £232m in 2009

CONCLUSION

From the above point we can conclude that total sales and total fixed assets have reduced considerably between 2008 and 2009, whereas, profit after tax has increased. This signifies that WH Smith is not focused on growth at the present (due to the prevailing economic conditions), rather they are focused on consolidation and profit maximization (which in essential in the survival of any business especially in the short run). This was done by getting rid of unused or unnecessary fixed assets e.g. properties, plants and equipment was reduced from £177m in 2008 to £163m in 2009 and utilizing the available resources efficiently.

TRADING PERFORMANCE

The performance analysis of any company does not carry adequate validity without making reference to the performance of other companies in the same sector, because a comparison of its performance must be measured against that of its competitors. Trading performance is calculated by using the gross profit as a percentage of share holder’s funds:

Earnings per share for 2008 and 2009 were 35.3p and 41.3p respectively. Please refer to page 9 of the financial statement for details.

CONCLUSION

In an industry where demand and sales are greatly influenced by consumer income and demographics, the performance of WH Smith will depend largely on the marketing strategy and their ability to offer specialized products at lower prices. In 2008 WH smith had a ‘return on share holder’s fund for 2008 was 47.20% while it was -1.93 for Amazon.co.uk ltd for the same year. At the end of the financial year, earnings per share went up 17% from 35.3p to 41.3p

LIQUIDITY

Current ratio also known as the working capital ratio measures the amount of cash available to a business in form of stock and creditors and is referred to as the working capital.

WH Smith has been able to increase its level of liquidity from 0.8 in 2008 to 0.93 in 2009. This increase could be attributed to an increase in the bank balance from £22m in 2008 to 47m in 2009 however, not a large proportion of resources were tied up in stock during the same period as inventories only increased by £4m from £147m in 2008 to £151m in 2009. However, WH Smith was able to increase its ability to meet short-term obligations and settlement of a major proportion of their current liabilities. It is important to note however that the ratio of current assets to current liabilities is still less than 1, this means that WH Smith still needs to improve on these figures further by reducing the total current liabilities or increasing their total current assets.

Although it is widely believed that a reasonable current ratio should fall between 1.5:1 and 2:1, given the prevailing economic conditions in this period, we can safely conclude that WH Smith is doing exceptionally well.

Also, the liquid ratio reveals that a large amount of resources are tied up in liquid form, which could affect the company’s performance in the long run if the sales is not improved upon.

SAFETY

Gearing

Gearing measures the relationship between a company’s capital employed and its long time liabilities. It gives us an idea of any company’s ability to pay back its long term liabilities. However, the acceptable gearing ratio for most companies is 50%, but the lesser the better. It is calculated as follows:

WH Smith has been able to reduce the gearing of the business 1.81% from 14.90% to 13.29% and the gearing ratio for both 2008 and 2009 is almost at zero, this means that WH Smith’s propensity to generate profit and returns on capital employed is high. Therefore, shareholders can expect some dividend at the end of the business year. Also, the business will not have to struggle to service long term liabilities (e.g. loans with interest) especially in bad years.

EFFICIENCY

This is also known as return on capital employed and is used to measure how effective a business has used its available resources to generate profit within a certain period. It is usually represented by the formula below:

It can be deduced from the above figures that WH Smith has been able to use their fixed assets more efficiently in 2009 than in 2008 by 3.3%, despite the reduction in the total amount from £247m to £232m. Although the efficiency of the total assets has hardly improved in the same period, with the difference being 0.7%, the most noticeable increase in efficiency is that of fixed assets which has increased by 3.3%.

CONCLUSION

In the year ending 31 August 2009, WH Smith recorded a total (including non-book sales) turnover of £1,340m which was lower than £1,352m recorded in the previous year. Pre-tax profit increased from £76m in 2008 to £82m in 2009. And also, earnings per share increased from 35.3p in 2008 to 41.3p in 2009

Total sales reduced to £1,340m from £1,352m in 2008 (where like for like sales dropped 5%, travel sales grew by 8% and high street sales also dropped by 5%). Whereas, WH Smith has improved its profit margin by 0.5% in 2009 from 5.62% to 6.12%. This improvement in gross profit margin was enhanced by tight cost control and a reduction of the total fixed assets.

WH Smith has also been able to increase its level of liquidity from 0.8 in 2008 to 0.93 in 2009. This increase could be attributed to an increase in the bank balance from £22m in 2008 to 47m in 2009. Although a substantial amount is still tied up in stock, which could be a problem in the future. Therefore, WH Smith needs to come up with sale strategies that will quickly clear up the stock.

In 2009 however, WH Smith was able to increase its ability to meet short-term obligations and settlement of a major proportion of their current liabilities. Although, WH Smith still needs to improve on these figures further by reducing the total current liabilities or increasing their total current assets.

WH Smith’s propensity to generate profit and returns on capital employed is very high with gearing being reduced by 1.81% from 14.90% to 13.29%, and also, the gearing ratio for both 2008 and 2009 is almost at zero, this means that shareholders can expect some dividend at the end of the business year even in bad years (Dividend per share increased to 16.7p in 2009). Also, the business will not have to struggle to service long term liabilities (e.g. loans with interest) especially in bad years.

Finally it is worthy of note that WH Smith has been able to employ their fixed assets more efficiently in 2009 than in 2008 by 3.3%, despite the reduction in the total amount from £247m to £232m.

RECOMMENDATIONS

WH Smith is doing very well given their financial performance in the past year despite the prevailing economic circumstances. It is important to note that a large proportion of WH Smith’s profit in the 2009 financial year was generated from the travel business (which includes outlets in train stations, airports, highway service stations etc.) where total sales increased by 8% driven mainly by new business wins and acquisitions. Therefore, WH Smith should focus on setting up more travel shops in areas not yet covered.

“Competition to sell the highest number of bestsellers is tough, as high-street bookshops are being undercut on price by supermarkets and online booksellers. Publishers appear to be offering supermarkets and online booksellers the highest discounts on their highest-profile books, allowing lower prices to be offered in these outlets.” -Isla Gower ed. 2008, marketing report, pg1

Another important area that WH Smith should focus on is the online book sales, which makes companies like Amazon.co.uk ltd a major competitor. Although WH Smith already sells books online, there should be more marketing and promotion in this area, which would eventually lead to a market expansion if harnessed properly. Also, the digitization of books through the use of e-books has made remote downloads and print-on-demand possible, and this has remarkably reduced the cost of production and can easily put booksellers such as WH Smith out of business.