John-Lewis company

1. Introduction
Financial analysis is about collection, assessment, and understanding financial data, alongside
other relevant information, to help out managers in investing and financing decisions (Drake &
Fabozzi, 2012). Primarily, it is use internally to evaluate issues including credit policies,
operation’s efficiency and company performance; and externally to evaluate borrowers credit-
worthiness and prospective investment, among other things. Financial ratios are useful tools for
owners and managers of small businesses to assess their progress toward achieving
organizational goals and competing with larger firms in a given industry. They show the
connections between various aspects of a company's operations and provide comparative
measures of the firm's conditions and performance. Additionally, measuring different ratios over
time is an effective technique to spot trends within the market, especially to meet wealth
maximization goals. Another reason why business owners should be familiar with financial ratios
is that they frequently have an impact on a company's capacity to secure debt or equity
financing.
2. Company Overview
High-end department store chain John Lewis & Partners, historically and popularly known as John
Lewis, has locations across Great Britain with concessions in Australia and the Republic of
Ireland. The company is a general merchandise retailer and is a component of the John Lewis
Partnership, the biggest employee-owned co-operative in the UK. Spedan Lewis, the founder’s
son, came up with the idea in 1929. Since 1925, the firm has pledged that it “never knowingly
undersells” and would always at least match a lower price given by a national high street rival.
There are currently 35 John Lewis locations around Great Britain firstly opened in Oxford Street,
London, in 1864. The company launched a Christmas television advert as an annual Christmas
tradition in 2007. According to the John Lewis model, each employee has a stake in the company,
making them co-owners. Employees at John Lewis have a say in how the business is run and are
a part of the group’s annual profits. The business had been moving toward financial success for
the previous 92 years, followed by a rise in sales.
3. Economic context
The phrase “economic environment” refer to all external economic factors that have an effect on
how consumers and businesses make purchases and how well a firm succeeds as a result.
Working together for a happier world is a core component of the company, not merely a
catchphrase. It is a firmly ingrained and unwavering commitment that serves as their road map,
informs all principles, and shapes every choice they make, not only doing things differently using
technology and better than competitors. The company anticipates continued volatility over the
short term given the rate of change in the retail sector and the recent economic uncertainty
brought because of Covid-19 and Ukraine war, as well as risks resultant from external
environment volatility linked to energy price increase, inflation, and labour shortages. The
extreme adverse scenario expects that the rising inflation rates will persist for the remainder of
2022–2023. Therefore, it has acquired different assets, including specifically intangible assets.
4. Calculations
4.1. Gross profit ratio
Ratio formula Year 2021 Year 2022
Gross profit / net (3363.2/10771.8)*100 = (3478.1/10837.5)*100 =
sales *100 31.22% 32.09%
After paying direct business costs, which can involve production, material and labour costs, the
gross profit margin shows how much a company earns. One of three crucial cost-effectiveness
ratios, along with net profit and operating profit margin, is this one. In the current scenario, the
gross profit ratio is better in 2022 comparatively 2021.
4.2. Operating profit ratio
Ratio formula Year 2021 Year 2022
Operating profit / net (-359.6/10771.8)* 100 = (118.3/10837.5)*100 =
sales *100 (3.33%) 1.09%
The operating profit ratio demonstrates the amount of profit generated by a company’s core
operations compared to overall sales. Investors can use this metric to determine whether a firm
derives the majority of its revenue from its core business or additional sources, such as
investments (Langemeier & Yeager, 2018). In 2021, the company faced operating loss, but in
2022 profit was earned by the company with an operating profit ratio of 1.09%
4.3. Current ratio
Ratio formula Year 2021 Year 2022
Current assets/current (2368.9/1992.8)*100 = (2423.4/2174.5)*100 =
liabilities *100 118.9% 111.4%
A company’s current assets and liabilities are compared using the current ratio (Nuryani &
Sunarsi, 2020). It explains to investors how well a company can use the assets on its balance
sheet to pay down debt and other obligations in the year 2022. The current ratio is low in 2022,
showing a negative trend to investors.
4.4. Acid test ratio
Ratio formula Year 2021 Year 2022
(Current assets-inventory)/current (2368.9-643.9)/1992.8*100 (2423.4-655.7)/2174.5
liabilities *100 = 86.56% *100 = 81.29%
Determining a company’s short-term solvency is assisted by the acid test ratio with the other
name, quick ratio (Pacurari et al., 2020). Essentially, it indicates to company's capacity to pay
short-term obligations with assets easily convertible into cash. It gauges a company’s liquidity
and capacity to pay bills and other short-term liabilities with assets that can be converted into
cash rapidly; the higher the ratio, the better the performance in 2022 compared to 2021.
4.5. Non-current asset turnover ratio
Ratio formula Year 2021 Year 2022
Net sales / total net book value of non- (10771.8/5116.5) (10837.5/5361.9)
 current assets = 2.1 = 2.02
The above ratio helps to assess how effectively a corporation uses all of its non-current assets. It
helps to figure out how to use such assets to produce income (OLOPADE, 2021). Higher the ratio,
the better the performance in 2021 as compared to 2022.
Conclusion
Despite a difficult operating climate and a heightened level of competition, we as a financial
analyst are nonetheless enthusiastic about the direction the firm is headed in. The business will
keep setting the agenda of meeting consumer demands because of significant innovations and
more substantial brand equity. There is an optimistic chance to enhance performance in
profitability terms in coming years if company recovers outstanding payments, entails more
current assets, increases sales, and sells unwanted or unused fixed assets. Few ratios are not at
the desirable stage, mainly because of Covid-19. Due to losses, John Lewis had also undergone
several business system modifications, including closing various department stores. Considering
this, It is recommended to lower the liability of additional staff and running costs, and financial
ratios could be improved to boost the chain’s profitability. With the shifting business
circumstances, John Lewis could also progress toward how product adoption may be improved
for consumers and add more value to customers, which could improve the company’s
performance.
References
Drake, P. P., & Fabozzi, F. J. (2012). Financial ratio analysis. Encyclopedia of Financial Models.
Langemeier, M., & Yeager, E. (2018). Operating profit margin benchmarks. farmdoc daily, 8.
Nuryani, Y., & Sunarsi, D. (2020). The Effect of Current Ratio and Debt to Equity Ratio on
Deviding Growth. JASa (Jurnal Akuntansi, Audit dan Sistem Informasi Akuntansi), 4(2), 304-
312.
OLOPADE, G. (2021). EFFECT OF NON-CURRENT ASSETS ON THE ORGANIZATIONAL
PERFORMANCE OF CONSUMER GOODS FIRM IN NIGERIA SCHOOL OF POSTGRADUATE
STUDIES, SALEM UNIVERSITY].
Pacurari, D., Shapurova, A., Stanko, B., Subramanyam, K., & Wild, J. (2020). LIQUIDITY ANALYSIS
OF ENGINEERING COMPANIES USING CASH FLOW RATIO IN THE ASSESSMENT OF THEIR
FINANCIAL CONDITION. Proceedings of the 2nd International Conference of Business,
Accounting and Economics, 5(6).