Analysis of the Performance of James Latham Plc

Introduction
James Latham Plc is a UK based organisation engaged in the distribution of woodbased sheet materials and joinery quality softwood, hardwood, hardwood flooring
and decking (Financial Times, 2013), the organisation started out as a family
business has been in the timber business since business since 1757, and is today a
leading importer and distributor of wood-based sheet materials. According to James
Latham Plc (2013), the company operates through its main subsidiary - Lathams
Limited - which has a nationwide network of strategically positioned distribution
centres through which it is able to fully integrate its activities with that of its
customers and suppliers. Its products include a comprehensive range of species of
timber and wood sizes and non-standard thicknesses and the newly launched LG HIMACS Natural Acrylic Stone and its own branded version of hardwood flooring, the
Bausen (James Latham Plc, 2013, Bausen and Lathams Ltd, 2013).
The companys other subsidiaries include James Latham Trustee Limited and
Advanced Technical Panels (ATP) which distributes overlaid and prefinished panels
into the transport, access tower and playground manufacturing sectors (James
Latham Plc, 2013). According to Financial Times (2013), the companys main
business focus is to be the supplier of choice for the UKs woodwork industry such
as joinery manufacturers, shop fitters, kitchen manufacturers and other range of
wood-based panel and hard wood, timber and builders merchant businesses. This
report discusses the operating financial performance of James Latham Plc for the
two years 2011 and 2012.

Operating and Financial Analysis

Operating and financial analysis of a company refers to the assessment of the
companys past present and future financial performance and condition in order to
identify the companys financial strengths and weaknesses and to enhance the
fundamental basis for financial decision-making and planning (McMenamin, 1999).
The principal tools of financial analysis is the ratio which is a mathematical tool used
to explain the relationship between two quantities, and are being used by various
stakeholders to assess the financial well-being of a firm (Fabozzi and Peterson,

2003, McMenamin, 1999). According to McMenamin (1999), in order to understand a

firms financial position, there is need to find answers to four key questions, and they
include:

Is the business making money; that is, is it profitable?

Can the business pay its bills on time; that is, is it liquid?
Is the business using its assets productively; that is, is it operating

efficiently?
Is the business depending too much on borrowed money; that is it highly
geared? (McMenamin 1999: 335).

According to McMenamin (1999), a selection of ratios are used to answer these

questions, and these ratios measure profitability, liquidity, operating efficiency, and
capital structure (gearing). These ratios will be applied in the assessment of James
Latham Plc Annual Report for 2012, in order to assess its financial performance, the
companys group performance has been analysed in this report.
Table of Ratios
2012

2011

12.33%
17.46%
5.38%
12.84%
31.9 pence
31.4 pence

13.94%
18.23%
6.20%
12.61%
30.8 pence
30.5 pence

Dividend Yield

As at Monday 13 May:
9.40
2.25%

Market share price

unavailable
Market share price
unavailable

Liquidity Assessment
Working Capital
Current Ratio
Acid Test or Quick Ratio

39,576,000
2.79:1
1.67:1

38,992,000
2.82:1
1.66:1

Operational Efficiency
Asset Turnover
Fixed Asset Turnover
Stock Turnover Ratio
Cash Turnover Ratio
Debtor Days Collection

1.69 times
6.24 times
4.78 times
20.35 times
53 days

1.64 times
6.88 times
4.84 times
14.74 times
53 days

Profitability Assessment
Return on Investment
Gross Profit Ratio
Net Profit Ratio
Return on Equity
Earnings Per Share (EPS)
Diluted Earnings Per
Share
Price Earnings (P/E) Ratio

Period
Creditor Days Payment
Period
Creditor days Debtor
days
Capital Structure
Assessment
Gearing or Leverage Ratio
Debt Ratio
Interest Cover
Dividend Cover

37 days

41 days

16 days

12 days

7.05%
2.84%
13.32 times
1.99 times

2.13%
1.25%
15.17 times
2.09 times

Profitability
In his statement for the financial year-ended 31 March 2012, the Chairman
acknowledged the general downward trend in the UK economy and emphasised the
effects that it had on the performance of the company, noting that it had been a
particularly difficult year for the company in its operations. This is confirmed in the
Annual Report, the directors reported a profit of 143,645,000 in 2012 compared
with 130,151,000 in 2011 which represents an increase of 10.4% and an operating
profit of 7,723,000 in 2012 as compared with 8,070,000 which was higher than the
profit in 2012, this represented a decrease of 4.3%. Also, the operating margin for
2011 was 6.2% while that of 2012 was 5.4% which resulted in an overall decrease of
12.9%. This dismal performance is also reflected in the companys profitability ratios,
although the companys management made efforts to increase shareholder value,
this was only marginal with 2012 basic earnings per share of 31.9pence and that of
2011 is 30.8pence, with only a 1.1pence increase. But other profitability ratios for
2012 are lower than that of 2011.
Liquidity
With regards to liquidity, the company remains strong and it appears to be relying on
the bright performances of the previous years as well as access to additional loans
and borrowings with which it was able to finance its operations. The loans have been
wisely applied in that it has been used to finance the development of new products
which is the companys own branded version of hardwood flooring, the Bausen,
hence the company is holding high level of stocks as well as trade and other
receivables, its cash and cash equivalents all combine with together to make it a

liquid company. This is evidenced by its working capital of 39,576,000 in 2012 and
38,992,000 in 2011, its current ratio of 2.79:1 in 2012 and 2.82:1 in 2011, as well as
its quick ratio which is 1.67:1 in 2012 and 1.66:1 in 2011, although current assets
exceed current liabilities, these ratios highlight the fact that the company is not really
growing but has only managed to remain in stable operating performance, this may
be the result of its new product and the fact that its other products are of better
quality than those of its competitors, which has allowed the company to retain its
customers and not lose them to rivals in the market.
Efficiency
The company is efficiently managing its stock with an asset turnover of 1.69 times in
2012 compared to 1.64 in 2011, the fixed asset turnover for 2012 is however lower
than 2011, of particular importance is the fact that the company is allowing its debtor
to trade with its cash, is reflected in the 53 days debtor collection periods in 2012
and 2011, while the creditors only the company 37 days and 41 days in 2012 and
2011 respectively, in the end the company has a shortfall in its creditor days less
debtor days in 2012 of 16 days and 12 days in 2011. The companys credit policy is a
little lax, although when the economic recession is considered, the company may
want to encourage its customers with the extended creditor days, as it can lose
customers if it has a rigid credit policy in a recession.
Capital Structure
The companys leverage ratio is low, and this is because of the stock of cash it has
built in previous years, this explains why the company did not have to rely on high
level of debt to finance its operations. The stock of cash has also enabled the
company to keep shareholders happy despite its no-growth performance in 2012.
Conclusion
Although, the company has only managed a stable operating performance in 2012,
its performance is encouraging given its P/E ratio of 9.4 and a dividend yield of
2.25% as at 13 May 2013. Its interest cover of 13.32 times shows that it is credit
worthy, but is generally affected by the economic recession all over the world.

APPENDIX
Appendix 1
James Latham Plc - Calculation of Ratios.

Profitability Assessment
Profit before interest and tax (PBIT)
100 ...%
Investment (total assests - current liabilitie s)
1. Return on Investment =
Return on Investment for James Latham Plc

For 2012
Investments = Total assets current liabilities
= 84,757,000 - 22,128,000 = 62,629,000

7,723,000
100 12.33%
62,629,000
Hence, Return on Investment =

For 2011
Investments = 79,313,000 - 21,417,000 = 57,896,000
8,070,000
100 13.94%
57,896,000
ROI =
Gross Profit
100 ...%
Sales (Turnover)
2. Gross Profit Ratio =
25,081,000
100 17.46 %
143,645,000
For 2012, GP ratio =
23,729,000
100 18.23 %
130,151,000
For 2011, GP ratio=

3. Net Profit Ratio =

Profit before interest and tax (PBIT)

100 ...%
Sales

7,723,000
100 5.38%
143,645,000
For 2012, NP ratio =
8,070,000
100 6.20 %
130,151,000
For 2011, NP ratio =
Profit after interest and tax
100 ...%
Ordinary shareholde rs' funds
4. Return on Equity =
6,070,000 43,000
100 12.84%
46,924,000
For 2012, ROE =
5,884,000 106,000
100 12.61%
45,816,000
For 2011, ROE =
5. Earnings Per Share (EPS) =
Net profit or loss for the period attributab le to ordinary sharrehold ers
pence
Weighted average number of ordinary shares outstandin g during the period

The weighted average number of ordinary shares outstanding is calculated as:

2012
Issued share capital (Ordinary)

20,160,000

Less: weighted average number of own

shares held in treasury investment
Less: weighted average number of own
shares held in ESOP Trust
Weighted average share capital
Add: dilutive effects of share options issued
Weighted average share capital for diluted
earnings per ordinary share calculation

20,160,000

(919,000)

(919,000)

(197,000)

(167,000)

19,044,000
268,000

19,074,000
200,000

19,312,000

19,274,000

6,070,000
0.319 or 31.9 pence
19,044,000
For 2012, Basic EPS =

2011

5,884,000
0.308 or 30.8 pence
19,074,000
For 2011, Basic EPS =
6,070,000
0.314 or 31.4 pence
19,312,000
For 2012, Diluted EPS =
5,884,000
0.305 or 30.5 pence
19,274,000
For 2011, Diluted EPS =
Market price of share
Earnings pershare (EPS)
6. Price Earnings (P/E) Ratio =
This ratio is used to evaluate the earnings growth potential of a company and is
closely related to the Earnings Per Share ratio (McMenamin, 1999). The historical
market share price of the company is presented below for the past , accessed on
the 13 May 2013 on the Financial Times website.

James Latham PLCLTHM:LSE

As of May 13 2013 12:52 BST. Data delayed by at least 15 minutes.
Day

Date

Open

High

Low

Close

Volume

Monday

May 13

301.00

300.20

299.40

300.00

4,509

Friday

May 10

301.00

301.00

301.00

301.00

0.00

Thursday

May 09

303.00

307.00

303.00

303.50

5,806

Source: FINANCIAL TIMES. 2013. James Latham PLC [Online]. London, UK: The Financial Times
Limited. Available: http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=LTHM:LSE
[Accessed 13 May 2013]

Therefore based on the closing share price for Monday 13 May 2013, based on the
basic EPS:

The P/E ratio for 2012 =

3.00
9.40
0.319

This ratio is used to evaluate the earnings growth potential of a company and
is closely related to the Earnings Per Share ratio, since
Dividend per ordinary share
...%
Market price per ordinary share
7. Dividend Yield =
6.75 pence
2.25%
300 pence
Dividend yield as at 13 May 2013 =

Liquidity Assessment
8. Working Capital = Current Assets Current Liabilities

For 2012, Working capital = 61,724 22,128 = 39,576

For 2011, Working capital = 60,409 21,417 = 38,992
9. Current Ratio is expressed in the ratio of Current Assets : Current liabilities

For 2012, Current ratio is 61,724:22,128 = 2.79:1

For 2011, Current ratio is 60,409:21,417 = 2.82:1
10. Acid Test or Quick Ratio is expressed in the ratio of Quick assets to Current

liabilities
Quick assets : Current liabilities
Quick Assets = Current assets stock
For 2012, Quick assets = 61,724 24,829 = 36,895
Hence, Acid test = 36,895:22,128 = 1.67:1
For 2011, Quick assets = 60,409 24,771 = 35,638
Hence, Acid test = 35,638:21,417 = 1.66:1
Operational Efficiency
Sales
...times
Total Assets (fixed current)
11. Asset Turnover =

143,645,000
1.69 times
84,757,000
For 2012, Asset Turnover =

130,151,000
1.64 times
79,313,000
For 2011, Asset Turnover =

12. Fixed Asset Turnover

Sales
...times
Fixed assets

143,645,000
6.24 times
23,033,000
For 2012, Fixed Asset Turnover =
130,151,000
6.88 times
18,904,000
For 2011, Fixed Asset Turnover =
Cost of sales
...times
Average Stock
13. Stock Turnover Ratio =

Opening Stock Closing Stock

2

Where Average Stock =

Average Stock for 2012 =

24,771,000 24,829,000
24,800,000
2

118,564,000
4.78 times
24,800,000
For 2012, Stock Turnover Ratio =

Average Stock for 2011 =

19,210,000 24,771,000
21,990,500
2

106,422,000
4.84 times
21,990,500
For 2011, Stock Turnover Ratio =
Sales for the period
...times
Average cash balance
14. Cash Turnover Ratio =

Average cash balance =

Openinn cash balance Closing cash balance

2

For 2012 Average cash balance =

7,004,000 7,113,000
7,058,500
2

143,645,000
20.35 times
7,058,500
For 2012, Cash Turnover Ratio =

For 2011, Average cash balance is =

7,113,000 10,545,000
8,829,000
2

130,151,000
14.74 times
8,829,000
For 2011, Cash Turnover Ratio is =

15. Debtor Days Collection Period =

Debtors
365 ...days
Credit Sales

Debtor Days Collection period for 2012 = 53 days (Figure extracted from
Annual Financial Statement).
Debtor Day Collection period for 2011 = 53 days (Figure extracted from
Annual Financial Statement).

16. Creditor Days Payment Period =

Creditors
365 ...days
Purchases

Creditor Days Payment period, for 2012 = 37 days. (Figure extracted from
Annual Financial Statement).
Creditor Days Payment period, for 2011 = 41 days. (Figure extracted from
Annual Financial Statement).
2012: Creditor days Debtor days = 53-37= 16 days
2011: Creditor days Debtor days = 53-41= 12 days
17. Gearing or Leverage Ratio =

Total debt capital

100 ...%
Total debt capital equity shareholde rs' funds
1,161,000 2,403,000
100 7.05%
3,564,000 46,924,000
For 2012, Gearing Ratio =

For 2011, Gearing Ratio =

Note:

11,000 987,000
100 2.13%
998,000 45,816,000

According to the Notes to the Accounts, Preference shares are included in

non-current liabilities (as interest bearing loans and borrowings), therefore,
this is also recognised as part of Total Debt of the company.
Total Debt Finance
100 ...%
Total Assets (fixed current)
18. Debt Ratio

2,403,000
100 2.84%
84,757,000 237,000
For 2012, Debt Ratio =
987,000
100 1.25%
79,313,000 237,000
For 2011, Debt Ratio =
Intangible assets consisting of Goodwill has been deducted from Total Assets.
Profit before interest and tax (PBIT)
...times
Total interest payable
19. Interest Cover =

7,723,000
13.32 times
580,000
For 2012, Interest cover is =
8,070,000
15.17 times
532,000
For 2011, Interest cover is =
Profit after interest and tax (PAIT)
...times
Dividends payable
20. Dividend Cover =

6,070,000 43,000
1.99 times
1,286,000 1,741,000
For 2012, Dividend cover is =
5,884,000 106,000
2.09 times
1,189,000 1,574,000
For 2011, Dividend cover is =

REFERENCES
BAUSEN & LATHAMS LTD. 2013. Bausen Flooring Range from James Latham
[Online]. Hertfordshire, UK: Lathams Ltd. Available:
http://www.bausen.co.uk/ [Accessed 08 May 2013.
FABOZZI, F. J. & PETERSON, P. P. 2003. Financial Management and Analysis
Hoboken, New Jersey, John Wiley & Sons.
FINANCIAL TIMES. 2013. James Latham PLC [Online]. London, UK: The Financial
Times Limited. Available:
http://markets.ft.com/research/Markets/Tearsheets/Business-profile?
s=LTHM:LSE [Accessed 08 May 2013.
JAMES LATHAM PLC. 2013. James Latham plc - Home Page [Online]. Hertfordshire,
UK: James Latham Plc. Available: http://www.lathams.co.uk/ [Accessed 08
May 2013.
MCMENAMIN, J. 1999. Financial Management: An Introduction, London,
Routledge.