A Ratio Analysis Of WH Smith

A Ratio comp leftover Of WH metalworkerAs a public limited comp whatever majority of the notes available for WH smith to operate at any point in time is provided by owners in form of constituent metropolis and several forms for capital reserves and retained simoleons. But for the purpose of this abstract, sh are capital bequeath be referred to as funds provided by owners, which was 35million for both(prenominal) 2008 and 2009. However it is important to note that the descend fair-mindedness emergenced 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 CREDITORSNon -current liabilities (including trade and separate settleables, 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. and then, total liabilities and accrued paym ents trim 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.PROFITABLITYProfitability measures the profit allowance account of the business (WH smith) in a pecuniary 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 gross gross revenue and also pre-tax profit as a percentage of ameliorate asset. This clear be represented using the practice belowdecisivenessWH 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 much 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 a ssets dedicated 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 familiar stinting circumstances.GROWTHTurnover Increase total sales trim back from 1352m in 2008 to 1340 in 2009Profit after tax increased from 59m in 2008 to 64m in 2009Total fixed assets reduced from 247m in 2008 to 232m in 2009CONCLUSIONFrom the above point we can conclude that total sales and total fixed assets have reduced considerably amidst 2008 and 2009, whereas, profit after tax has increased. This signifies that WH Smith is not foc utilize 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 as sets e.g. properties, plants and equipment was reduced from 177m in 2008 to 163m in 2009 and utilizing the available resources efficiently.TRADING PERFORMANCEThe accomplishment 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 holders fundsEarnings per share for 2008 and 2009 were 35.3p and 41.3p respectively. Please refer to page 9 of the financial statement for details.CONCLUSIONIn an industry where demand and sales are greatly influenced by consumer income and demographics, the performance of WH Smith will look largely on the marketing strategy and their ability to offer specialized products at lower prices. In 2008 WH smith had a return on share holders 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 41.3pLIQUIDITYCurrent dimension also know 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 ease 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 conform to short-term obligations and result 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 moreover by reduc ing the total current liabilities or increasing their total current assets.Although it is wide believed that a reasonable current ratio should fall between 1.51 and 21, 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 companys performance in the long run if the sales is not improved upon.SAFETYGearingGearing measures the relationship between a companys capital employed and its long time liabilities. It gives us an idea of any companys 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 followsWH 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 Smiths propensity to generate pr ofit 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 scrape to service long term liabilities (e.g. loans with interest) especially in bad years.EFFICIENCYThis 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 belowIt 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%.CONCLUSIONIn the year ending 31 fearful 2009, WH Smith recorded a total (including non-book sale s) 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 2009Total sales reduced to 1,340m from 1,352m in 2008 (where like for like sales dropped 5%, plump 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 cockeyed 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 pronto 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 Smiths propensity to generate profit and returns on capital employed is real 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.RECOMMENDATIONSWH Smith is doi ng 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 Smiths 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 desktop 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, pg1Another 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 and 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 come out booksellers such as WH Smith out of business.