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1. Calculate a price per share payable by JD Sport for the purchase of J Barbour and sons, Limited (25%)

2. Calculate the likely impact on the financial statements of JD Sport following the purchase of Barbour (10%)

3.  Share price movements of JD Sport (10%)

Financial Analysis of the Companies

The main purpose of this assessment is to analyze the business of JD Sport Fashion Plc which is engaged in the business of providing retail services for products like sport goods and fashion wears. The management of JD Sport Fashion Plc is thinking of purchasing the business of J Barbour & Son Ltd for which the business needs to analyze the performance of both the companies and also its close competitors. The assessment will be including analysis of cost of capital for the companies and also share prices analysis of both the companies. The assessment will also be showing impact on the business of JD Sport Fashion Plc after the acquisition process. The assessment will be including various calculations which will be included in the appendi section of the assessment.

The financial analysis of JD Sport Fashion Plc and J Barbour & Son Ltd is to be done considering the profit and loss statement and balance sheet results of both the companies. In order to analyze the financial performance of the companies, significant ratios are computed which are based on profitability, Asset management ratios, liquidity ratios and investors relation ratios.

The above image shows the profitability ratios which is computed for JD Sport Fashion Plc and J Barbour & Son Ltd and close competitors for the same. The above image makes it clear that the closest competitor for JD Sport Fashion Plc is WH Smith Plc in the industry. The gross profit margin for JD Sport Fashion Plc is shown to be 48.9% which is lower than J Barbour & Son Ltd and WH Smith Plc which shows that latter companies have better operational structure and thereby earns more profits.

The EBITDA margin which is computed also reveals that the business of J Barbour & Son Ltd has better performance in comparison to JD Sports Fashion Plc. This might signify that the former business has a better control and operational environment which leads to reductions in overall operational costs of the business or the business might have a better sales figure for the period. This is also seen in case of results of operational profit margin. The net profit margin which is computed for the J Barbour & Son Ltd is better which is shown to be 13.1% which is much more than that of JD Sports Fashion Plc which is shown to be 7.5%. Even the net profit margin for WH Smith Plc is better than JD Sports Fashion Plc and the estimate for the same is shown to be 9.4%. 

Profitability Ratios

The above chart shows the profitability ratios which is achieved by the business of JD Sports Fashion Plc for a period of five years. The chart clearly shows that the EBITDA margin which is earned by the business is higher than the net profit margin and operational margin of the business. The gross profit margin is at a higher level than operational margin. The graph also suggest that the management of JD Sports Fashion Plc needs to make improvements in the policies of the business in order to bring about significant changes in the profitability of the business. 

The chart which is shown above reveals the profitability ratio of J Barbour & Son Ltd. The chart clearly reveals that the gross profit margin of the business is shown to be significantly high than other profitability ratio of the business. The other profitability ratio of the business is also higher in comparison to JD Sports Fashion Plc.

The above image shows asset management ratios of the companies which are engaged in sports and fashion industry. The asset turnover ratio of the JD Sports Fashion Plc is shown to be 2.02 which is more than the industry average and it is only second to the close competitor WH Smith Plc. The asset turnover ratio is shown to be favorable for the business of JD Sports Fashion Plc. The return on capital employed of the business is also significant and more than the industry average and the same is shown to be 37.2% and the same is shown to be 24.8% for J Barbour & Sons Ltd. ROCE is one of the financial indicators for overall success of a business and therefore, it signifies that the JD Sports Fashion Plc is meet the needs of the investors and is in its growth phase. The debtor days of JD Sports Fashion Plc is the best in comparison to its competitors which is a favorable sign for the business and suggest that the business has a superior debt collection policy. The debtors period and creditor period suggest the overall efficiency of a business and the efficiency of JD Sports Fashion Plc is appropriate as per current estimates. 

Asset Management Ratios

The ROCE of JD Sports Fashion Plc is shown above and the chart reveals a rising trend in the ROCE % of the business. The ROCE estimate of the business is even better than most of the companies which are present in the industry. 

The ROCE of J Barbour & Son Ltd is shown to be on a declining trend which suggest that the business is not earning appropriate level of return on the amount of capital which is employed by the business. The management of the company needs to make improvements in the same.

The figure which is depicted above shows significant liquidity ratios which are used for the purpose of establishing the liquidity position of the business. The current ratio of the business is shown to be 1.33 for JD Sports Fashion Plc and the same is shown to be 5.67 for J Barbour & Son Ltd. The industry average for current ratio is shown to be 2.40. The current ratio is shown to be favorable for JD Sports Fashion Plc but further scope of improvements is there. The acid test ratio of the business also shows the liquidity position of the business and can be considered to be similar to current ratio. Gearing ratio ad Interest Coverage ratio of a business shows the ability of the business to service debt capital of the business. The gearing ratio for the company is shown to be 14% and interest coverage ratio of the business is shown to be 109.39%. The interest coverage ratio suggest that the business of JD Sports Fashion Plc have more of debt capital and therefore such a high interest coverage ratio is shown in the chart. 

The current ratio and acid test ratio of the business shows favorable results of the business and the current ratio and quick ratio is shown for a period of five years. The current ratio and the acid test ratio of the business of the business is lower than industry average. 

The current ratio and acid test ratio of J Barbour & Son Ltd is shown to be on a rising trend and the same is better than most of the companies in the industry. The chart suggest that the overall liquidity of the business is better than most of the companies in the industry.

Liquidity Ratios

The investors relations ratios comprise of some of the most important ratios which are considered by potential investors before taking any investment decisions for any business. The ROE of JD Sports Fashion Plc shows an estimate of 32.40% which is significantly close to the industry average. The business of J Barbour & Son Ltd shows a ROE estimate of 21.73% The EPS and DPS of the business is shown to be lower than the averages of industry which suggest that the business of JD Sports Fashion Plc needs to improve in this respect so that the business can develop and grow in the industry. 

EPS and DPS of JD Sports Fashion Plc in shown in the above chart. The EPS is shown to have fallen in 2017 which suggest that the business is not meeting with the expectations of the shareholders of the business. The dividend per share of the business has also slightly fallen which is clearly shown in the chart above. The fall in the DPS suggest that the business has decreased the overall dividends which the business offers to the shareholders. 

The EPS of J Barbour & Son Ltd shows a positive estimate of the growth in the EPS of the business in comparison to estimate which is shown in 2016. The growth in EPS estimate is clearly shown in the chart above about the overall growth in EPS of the business.

The business of JD Sports Fashion Plc is considering investment appraisal techniques for which the discounting rate which is considered by the management of the company is between 12% and 15%. The cost of capital estimates the level of risks which is associated with an investment in a business. The major components which are covered under cost of capital for both the companies comprise of cost of equity and cost of debt of the business. The cost of capital which is computed for JD Sports Fashion Plc is shown to be 8.82%. In order to compute the cost of equity for the business, CAPM method is used. It is to be noted that CAPM method is considered to be unrealistic due to the fact that the method does not consider income tax effect on cost of equity of a business.

Investor Relation Ratios

The decision regarding capital structure of the business is considered to be one of the most important and complex decisions which the management needs to undertake for the purpose of setting up an efficient capital structure of the business. The analysis of the financial statement shows that management of JD Sports Fashion Plc has more of debt capital compared to equity capital of the business.  On the other hand, the business of J Barbour & Son Ltd has more of equity capital and lower amount of debt capital in the capital structure mix of the business. This fact is clearly shown in the calculations of ratios such as gearing ratio which is shown to be more for JD Sports Fashion Plc and much less for J Barbour & Son Ltd. This signifies that the debt capital which is used by JD Sports Fashion Plc is significantly more and the management of the company relies more on debt capital instead of equity capital of the business. In the case of J Barbour & Sons the gearing ratio is shown to be significantly less and the same signifies that the management of J Barbour & Sons ltd relies more equity capital and less on the debt capital of the business. The interest coverage ratio also reveals that the servicing of debt in JD Sports Fashion Plc is much higher than J Barbour & Sons ltd. This also signifies that the business has more of debt capital in the capital structure mix of the business.

In order to compute the value of the business which the management of JD Sports Fashion Plc wants to purchase, DCF model analysis is undertaken by the business. The assumptions which re taken for the purpose of calculations are shown in the chart which are that the growth rate is kept constant and working capital, of the business also needs to be kept at a constant level. In case of DCF method, free cash flow is analyzed for the estimated periods which is shown in the image which is shown. The appendix section of this assignment shows the necessary calculations which are associated with the business and the acquisition plan of the company. In case of DCF method the free cash flows are computed and identified and along with the present values for the free cash flows of the business.

The business can finance the cost which the management needs to incur for purchasing the enterprise of J Barbour & Sons ltd can be done by the issue of new equity shares which will help the business to improve the capital structure of the business and also ensure that the company is able to attain a balance between debt capital and equity capital of the business.

The financial statements will be affected by the acquisition of J Barbour & Sons ltd as this will add to the assets and liabilities of the business and also increase the overall assets which the company had before acquisition. The acquisition is expected to impact certain areas favorably for JD Sports Fashion Plc as the acquisition is anticipated to bring about improvements in the liquidity position of the business. Therefore, it can be said that the acquisition process can bring about significant changes in the operational structure and performance of the business. In addition to this, the management needs to shows the assets and equity in a consolidated financial statements form considering all the necessary disclosure requirements for the business.

The overall share price movements of a business mean the fluctuations in share prices of the business which can be in upward trend or downward trend depending on the current market situation or occurrence of an event. In this case, the changes in share prices of business is to be analyzed due to the acquisition which is made by the business of JD Sports Fashion Plc. The chart which is shown above shows the overall fluctuation in the share prices of the business.

The recommendation which can be provided to the management of JD Sports Fashion Plc are given below in points form:

  • The business needs to undertake the acquisition of the enterprise as this will reduce the overall competition in the market and also provide a synergy effect to the business which will help the business to generate more revenue in future.
  • The management must look to expand the business into both domestic and overseas market and create a distinct brand name for itself. The expansion can be done by opening new shops and business in different locations.
  • The management of the company needs to improve the liquidity status and profitability of the business in order to improve EPS and DPS of the business.
  • The management needs to improve the capital structure and add more equity capital into the capital mix to attain an efficient and balance capital mix.
  • The management of JD Sports Fashion Plc needs to increase the overall investments which the business undertakes in order to diversify the business further.

Reference

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Carraher, Shawn, and Howard Van Auken. "The use of financial statements for decision making by small firms." Journal of Small Business & Entrepreneurship 26, no. 3 (2013): 323-336.

Delen, Dursun, Cemil Kuzey, and Ali Uyar. "Measuring firm performance using financial ratios: A decision tree approach." Expert Systems with Applications 40, no. 10 (2013): 3970-3983.

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Lartey, Victor Curtis, Samuel Antwi, and Eric Kofi Boadi. "The relationship between liquidity and profitability of listed banks in Ghana." International Journal of Business and Social Science4, no. 3 (2013).

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