Dissertation 2

Abstract
In this paper I examine and answer whether J D Wetherspoon plc is a financially

healthy company and can attract potential investors. I firstly identify in which sector
operates and if the specific sector grows in the United Kingdom at the moment, even
when there is the uncertainty of BREXIT. Then, I compare the financial performance
Wetherspoon with other three big companies of the same sector. The dividend
policy, the capital structure and the risk management of Wetherspoon are analysed
later in the paper. Lastly, I attempt to evaluate the market capitalisation of
Wetherspoon with five methods.
1
Table of Contents
“1. Introduction” ...................................................................................................................... 8

“1.1 Profile and historical information of Wetherspoon plc” .............................................. 8
“1.2 Industry/sector information and profile of the competitors of Wetherspoon plc” .... 9
“1.3 The UK economy” ....................................................................................................... 11
“2. Financial performance and position of Wetherspoon”.................................................... 13
“2.1 Profitability ratios” ..................................................................................................... 13
“2.1.1 Return on capital employed” .............................................................................. 13
“2.1.2 Return on shareholders’ funds” .......................................................................... 15
“2.1.3 Gross profit margin” ............................................................................................ 16
“2.1.4 Net profit margin” ............................................................................................... 17
“2.2 Liquidity ratios” .......................................................................................................... 18
“2.2.1 Current ratio” ...................................................................................................... 18
“2.2.2 Quick ratio (acid test)” ........................................................................................ 19
“2.3 Efficiency ratios”......................................................................................................... 20
“2.3.1 Inventory turnover” ............................................................................................ 20
“2.3.2 Receivables turnover” ......................................................................................... 21
“2.3.3 Payables turnover” .............................................................................................. 22
“2.3.4 Cash conversion cycle” ........................................................................................ 23
“2.4 Financial structured ratios” ........................................................................................ 24
“2.4.1 Gearing ratio” ...................................................................................................... 25
“2.4.2 Interest cover ratio” ............................................................................................ 26
“2.5 Investment ratios” ...................................................................................................... 27
“2.5.1 Earnings per share” ............................................................................................. 27
“2.5.2 Price to earnings ratio”........................................................................................ 29
“2.6 Stock price performance” .......................................................................................... 30
“3. Financial management policies” ...................................................................................... 32
“3.1 Dividend policy” ......................................................................................................... 32
“3.1.1 Some theories in relation to dividend policy” ..................................................... 32
“3.1.2 Wetherspoon’s dividend policy” ......................................................................... 33
“3.2 Capital structure” ....................................................................................................... 35
“3.2.1 Some theories in relation to capital structure”................................................... 35
2
“3.2.2 Wetherspoon’s capital structure” ....................................................................... 35
“3.3 Wetherspoon’s risk management” ............................................................................ 37
“4. Valuation of Wetherspoon” ............................................................................................. 39
“4.1 Methodology” ............................................................................................................ 39
“4.1.1 The required rate of return of Wetherspoon” .................................................... 39
“4.1.2 The expected growth rate of Wetherspoon” ...................................................... 40
“4.1.3 The expected ROCE of Wetherspoon” ................................................................ 41
“4.2 The dividend discount model” ................................................................................... 42
“4.2.1 Description of the model” ................................................................................... 42
“4.2.2 Empirical process and results” ............................................................................ 43
“4.3 The earnings and investment model” ........................................................................ 44
“4.4 The discounted cash flow models” ............................................................................ 46
“4.4.1 The WACC of Wetherspoon” ............................................................................... 46
“4.4.2 Description of the FCFF and FCFE model” ........................................................... 47
“4.5 The price-earnings multiplier” ................................................................................... 50
“4.6 Critical comparison of the valuation approaches” ..................................................... 52
“5. Conclusion” ...................................................................................................................... 54
“Bibliography” ........................................................................................................................ 56
“Appendices” ......................................................................................................................... 59
3
List of Figures
“Figure 2.1: Annual turnover of restaurants in the UK from 2008-2016 (in million GBP) (The
Statista, 2018)” ...................................................................................................................... 10
“Figure 2.2: The UK GDP between 2013 and 2017 (Trading Economics, 2018)” ................... 11
“Figure 2.3: The UK unemployment rate between 2013 and 2018 (Trading Economics,
2018)” .................................................................................................................................... 12
“Figure 2.4: Return on capital employed” ............................................................................. 14
“Figure 2.5: Return on shareholders’ funds” ......................................................................... 15
“Figure 2.6: Gross profit margin” ........................................................................................... 16
“Figure 2.7: Net profit margin” .............................................................................................. 17
“Figure 2.8: Current ratio” ..................................................................................................... 19
“Figure 2.9: Quick ratio” ........................................................................................................ 20
“Figure 2.10: Inventory turnover” ......................................................................................... 21
“Figure 2.11: Receivables turnover” ...................................................................................... 22
“Figure 2.12: Payables turnover” ........................................................................................... 23
“Figure 2.13: Cash conversion cycle” ..................................................................................... 24
“Figure 2.14: Gearing” ........................................................................................................... 25
“Figure 2.15:Interest cover” .................................................................................................. 27
“Figure 2.16: Earnings per share” .......................................................................................... 28
“Figure 2.17: Price to earnings” ............................................................................................. 29
4
List of Equations
“Equation 2.1: Return on capital employed” ......................................................................... 13

“Equation 2.2: Return on shareholders’ funds”..................................................................... 15
“Equation 2.3: Gross profit margin” ...................................................................................... 16
“Equation 2.4: Net profit margin”.......................................................................................... 17
“Equation 2.5: Current ratio” ................................................................................................. 18
“Equation 2.6: Quick ratio” .................................................................................................... 19
“Equation 2.7: Inventory turnover” ....................................................................................... 21
“Equation 2.8: Receivables turnover”.................................................................................... 22
“Equation 2.9: Payables turnover” ........................................................................................ 23
“Equation 2.10: Cash conversion cycle” ................................................................................ 24
“Equation 2.11: Gearing” ....................................................................................................... 25
“Equation 2.12: Interest cover” ............................................................................................. 26
“Equation 2.13: Earnings per share” ...................................................................................... 28
“Equation 2.14: Price to earnings”......................................................................................... 29
“Equation 2.15: Abnormal buy-and-hold-returns” ................................................................ 30
“Equation 2.16: The CAPM” ................................................................................................... 39
“Equation 2.17: Dividend discount model” ........................................................................... 42
“Equation 2.18: Earnings and investment model”................................................................. 44
“Equation 2.19: Earnings and investment model”................................................................. 47
“Equation 2.20: FCFF model” ................................................................................................. 48
“Equation 2.21: FCFE model” ................................................................................................. 48
5
“List of tables”
“Table 2.1: ABHR of the four companies”.............................................................................. 31

“Table 2.2: DPS, EPS, payout and retention ratio of Wetherspoon” ..................................... 34
“Table 2.3: Dividend yield and dividend cover ratio of Wetherspoon” ................................. 34
“Table 2.4: EBITDA of Wetherspoon” ................................................................................... 36
“Table 2.5: Debt to equity of the four companies” ............................................................... 36
“Table 2.6: Expected growth rates of Wetherspoon” ........................................................... 41
“Table 2.7: Expected ROCE of Wetherspoon” ....................................................................... 42
“Table 2.8: Dividend discount model valuation” ................................................................... 43
“Table 2.9: Expected retention ratios of Wetherspoon” ....................................................... 45
“Table 2.10: Earnings and investment model valuation” ...................................................... 46
“Table 2.11: Weights and costs of debt and equity” ............................................................. 47
“Table 2.12: FCFF model valuation”....................................................................................... 49
“Table 2.13: FCFE model valuation” ...................................................................................... 50
“Table 2.14: P/E ratios of the four companies and average” ................................................ 51
“Table 2.15: Price-earnings multiple valuation” .................................................................... 52
“Table 2.16: Value of Wetherspoon according to different models" .................................... 53
6
List of abbreviations
“Abnormal buy-and-hold returns” ABHR
“Capital asset pricing model” CAPM
“Cash conversion cycle” CCC
"Debt to equity” D/E
“Dividend per share” DPS
“Earnings before interest, tax, depreciation and amortisation” EBITDA
“Earnings per share” EPS
“European Union” EU
“Financial Times Stock Exchange All-share” FTAS
“Free cash flow to the equity” FCFE
“Free cash flow to the firm” FCFF
“Gross domestic product” GDP
“Gross profit margin” GPM
“Internal rate of return” IRR
“Mitchells & Butlers” M&B
“Net present value” NPV
“Net profit margin” NPM
“Present value of growth opportunities” PVGO
“Price to earnings” P/E
“Profit before tax and interest” PBIT
“Return on capital employed” ROCE
“Return on shareholders’ funds” ROSF
“United Kingdom” UK
“Weighted average cost of capital” WACC
7
“1. Introduction”
“1.1 Profile and historical information of Wetherspoon plc”
J D Wetherspoon plc is a company that offers food and drinks in the United Kingdom
(UK) and the Republic of Ireland. It operates pubs since 1979 and the company was
first founded by Tim Martin on December 9, 1979 in north London. Today, it has been
35 years since incorporation in 1983 and Wetherspoon operates over 900 pubs with
approximately 36,550 total employees. Wetherspoon has been innovative and a
pioneer in the industry and this was proven in 1991, when it became one of the first
pubs that launched a dedicated non-smoking area in the bar upstairs. The year after
was also special for the company since it was floated on the Stock Exchange and
became a public limited company; the shares were issued at £1.60. In 1994
Wetherspoon reached an important point because it celebrated its 100th pub in
Watford (where its headquarters are located). Seven years later in 2001,
Wetherspoon opened the 500th pub and was the fastest-growing company in the UK
and at the same time the 9th in Europe. In the following years, Wetherspoon
continued to grow even further and innovate. This resulted in getting awarded as the
Pub Company of the Year in 2010 for the second time and many more awards. Finally,
it is important to mention that Wetherspoon opened its first hotel in Shropshire in
1998. Since then, the company counts over 50 hotels and around 1100 rooms.
Wetherspoon has been successful over the years because of numerous reasons. One
of them that stands out in my opinion is the wide range of food and drinks combined
with the excellent quality and pricing. Wetherspoon offers food promotions over the
weak; these are the Steak Club, the Chicken Club, the Curry Club, Fish and Chips and
the Sunday Brunch. As Tim Martin and Wetherspoon have stated, this is the only of
the large pubs in the UK that opens from early in the morning serving breakfast and
coffee. Wetherspoon offers also deserts such as the British Bramley apple crumble,
the American-style pancakes with ice cream, and many more. Another important
8
factor for Wetherspoon’s revolution is that many of its pubs are conversions of old
existing buildings such as banks, theatres and cinemas, churches, post offices and
even swimming pools. Lastly, as it was previously mentioned, Wetherspoon offers
accommodation as well. Wetherspoon’s hotels provide a convenient stay whether it
is a one-night stay or more and combine excellent customer experience with quality
and value.
“1.2 Industry/sector information and profile of the competitors of

Wetherspoon plc”
For my analysis to be meaningful and to identify whether Wetherspoon is a healthy

company from an investor’s standpoint, it is essential to analyse and compare its
performance with peer companies in the restaurant-pub sector. My most important
criterion for the selection of these companies is the market capitalisation. Market
capitalisation is used to evaluate the total market value of a firm’s outstanding
shares. More explicitly, the companies that were selected have approximately the
same size of market capitalisation as Wetherspoon’s. These companies are Mitchells
& Butlers plc (M&B), Domino’s Pizza Group plc and Greene King plc with $1.11 billion
dollars, $1.661 billion and $1.743 billion respectively. Wetherspoon is between them
in terms of market capitalisation with $1.305 billion dollars. It is worth pointing out
that these four companies are among the seven that are above $1 million worth in
market cap in the UK restaurant sector. Furthermore, they are all listed in London
Stock Exchange. Finally, all four companies have around the same number of
employees, ranging from 36,500 of Wetherspoon to 46,413 of Mitchells & Butlers.
At this point it is worth mentioning that the restaurant sector in the UK has grown
the past years. Consumer expenditure on restaurants has gone over 77 billion British
pounds in 2015. Furthermore, restaurants and pubs seem to be a popular leisure time
activity UK since this sector has the largest proportion of revenue. The graph below
shows that every single year from 2008 to 2016 there is a constant increase to the
9
annual turnover of restaurants in the UK reaching almost 35 million British pounds in
2016.
“Figure 2.1: Annual turnover of restaurants in the UK from 2008-2016 (in million GBP) (The Statista, 2018)”
To start with a brief summary of the companies, Mitchells & Butlers operates pubs
and restaurants in the UK and Germany. The company was founded in 1898 and its
base is in Birmingham in the UK. Their financial year ends in September. Secondly,
Domino’s Pizza operates pizza stores in six European countries; the UK, the Republic
of Ireland, Switzerland, Luxemburg, and Liechtenstein. Domino’s was founded in
1960 and its headquarters are in Milton Keynes in the UK. Their financial year ends in
December. Lastly, the third company of the analysis is Greene King. This company
operates as a pub retailer and brewer in the UK. Greene King was founded back in
1799 and its headquarters are in Bury St Edmunds in the UK. Exactly like
Wetherspoon, Greene King ALSO operates hotels. Their financial year ends in April.
10
“1.3 The UK economy”
In this section, it is important to state two key macroeconomic parameters regarding

the UK economy because all four companies operate in the UK. First, “gross domestic
product (GDP) shows the monetary value, within a specific time-period, of all the
finished goods and services.” In most cases, GDP is extracted annually. In the UK, the
graph below shows how the GDP had been changing over the last 5 years.
“Figure 2.2: The UK GDP between 2013 and 2017 (Trading Economics, 2018)”
The UK’s exit from the European Union (EU) in March of 2019 poses some
macroeconomic risks. Under this uncertainty, no one can clearly claim what will
happen to the UK economy holistically. Goryunox, Kiyutsevskaya and Trunin (2016)
believe that the BREXIT (Britain’s exit from the EU) will decline the capital inflows to
the UK and this will lead to an instability of the British Pound and the balance of the
payments. Therefore, it is obvious that the exchange of goods and services between
the UK and the EU will suffer. They further state that some estimates claim that the
UK might see loses of 5% in the GDP stemming from these difficulties.
Secondly, the other macroeconomic factor that needs to be mentioned is the

unemployment rate. “The unemployment rate illustrates the share of the current
11
labour force that is jobless in percentage points.” It is reasonable that the economy
of a country is associated with the unemployment rate as a meaning that if an
economy is growing it will lead to more job creations and less unemployment rate.
As the graph below explains, the UK unemployment rate is at relatively low
percentages, ranging from 4.2% in the first quarter of 2018 to 8% in 2013.
“Figure 2.3: The UK unemployment rate between 2013 and 2018 (Trading Economics, 2018)”
12
“2. Financial performance and position of Wetherspoon”
In “this chapter, a financial analysis of Wetherspoon will be provided” for the 2013
to 2017 period. It is worth pointing out that for Wetherspoon the financial year ends
in July. This financial analysis stems from the profitability, liquidity, efficiency and
capital structure of Wetherspoon during this five-year period and its main purpose is
to show Wetherspoon’s position and performance. Moreover, it must be pointed out
that I adjusted the exceptional items of each company before undertaking the
analysis. As it was previously mentioned, in order to better understand
Wetherspoon’s performance, it is important that the company is compared with
other companies of the same sector. These three companies were briefly described
in chapter one. In general, since no one can come to any conclusions just by looking
some numbers, an industry average (of the three companies) has been calculated to
better examine the financial position of Wetherspoon.
“2.1 Profitability ratios”
Profitability ratios measure whether a company generates sufficient return for its
shareholders, as owners’ purpose is to maximise shareholders’ value. The ratios that
will be further discussed are the return on capital employed (ROCE), return on
shareholders’ funds (ROSF), gross profit margin (GPM) and net profit margin (NPM).”
“2.1.1 Return on capital employed”
ROCE is a fundamental measure of business performance which expresses the

relationship between the profit generated by the business and long-term capital
invested in the business.”
𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥

“𝑅𝑂𝐶𝐸 = 𝑥100”
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
“Equation 2.1: Return on capital employed”
13
The graph below shows that Wetherspoon’s ROCE is on average at 12.31% which is
higher than its competitors Greene King and M&B but is significantly lower than the
ROCE of Domino’s. That is mainly because of the large increase in Domino’s profit
before interest and tax (PBIT) in 2014 and 2015 and its average over the five-year
period is at 45%. On the other hand, the average ROCE of Greene King and M&B is at
7.46% and 6.01% respectively. As far as Wetherspoon’s ROCE is concerned, there is
the largest increase in 2014 from 10.77% to 12.26% due to the increase in the PBIT
from £91,510,000 to £115,575,000. The following years there is no significant
fluctuation because the PBIT remain on the same level. It is worth pointing out that
the capital employed is increased over the years because the non-current liabilities
are going up since their borrowing are larger and larger every year.
Return on capital employed

70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2013 2014 2015 2016 2017 AVERAGE
JD WETHERSPOON Domino's Greene King M&B AVERAGE
“Figure 2.4: Return on capital employed”
14
“2.1.2 Return on shareholders’ funds”
ROSF is a measure of business performance which expresses the relationship

between the profit generated by the business and the equity capital invested in the
business.”
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠

“𝑅𝑂𝑆𝐹 = 𝑥100”
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠′ 𝑓𝑢𝑛𝑑𝑠
“Equation 2.2: Return on shareholders’ funds”
The same trend is observed in the ROSF. Domino’s performs substantially high with
an average of 61.71% while Wetherspoon is slightly above 20% (21.78%) and Greene
King and M&B perform under 10%, at 9.17% and 7.44% respectively. Wetherspoon’s
highest values are achieved in the last two years at around 24.50% which can be
explained by the increase in the net profit from £44,824,000 to £51,206,000 and
£56,059,000. On the same page, Wetherspoon’s equity remains on the same values
through the five-year period ranging from £207,448,000 in 2016 to £228,823,000 in
2017.
Return on shareholders’ funds

120.00%
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%
2013 2014 2015 2016 2017 AVERAGE
“Figure 2.5: Return on shareholders’ funds”
15
“2.1.3 Gross profit margin”
Gross profit represents the difference between sales and the cost of sales. The ratio
is thus a measure of profitability in buying/producing and selling goods before any
other expenses are taken into account.”
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
“𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑥100”
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
“Equation 2.3: Gross profit margin”
The first thing that can be observed from graph 6 is that Wetherspoon’s GPM is the
lowest (11.40%) out of the four companies and by quite a margin. This happens
because Wetherspoon’s revenues are significantly higher than its gross profit. Since
year 2013, they are only rising; from £ 1,280,929,000 to £ 1,660,750,000 in 2017.
Similarly, their gross profit goes up from year to year since the revenues and the cost
of sales keep increasing at the same time. On the other hand, the competitors have
higher GPMs due to the large revenue figures compared to their gross profit; Greene
King is at 34.04% and M&B is at 20.29%. Lastly, Domino’s has lower revenues from
the other companies but are quite large for the gross profit that they produce.
Gross profit margin

45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2013 2014 2015 2016 2017 AVERAGE
“Figure 2.6: Gross profit margin”
16
“2.1.4 Net profit margin”
Net profit represents the difference between sales and the all other costs including
cost of sales, operating expenses, interest and taxes. The ratio is useful in comparing
overall performance.”
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
“𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = 𝑥100”
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
“Equation 2.4: Net profit margin”
In this ratio, it is easily observed that all companies have low NPMs below the 5%
point except from Domino’s (14.14%). Wetherspoon’s highest NPM figure is in 2013
(3.61%) because it has the lowest revenues out of the five-year period. In the
following years, the revenues are constantly rising, but the net profit of the company
drops from £46,188,000 in 2013 to £41,122,000 in 2014. The next three years their
net profit increases by almost 10% each year reaching a peak at £56,059,000 in 2017.
Net profit margin

25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2013 2014 2015 2016 2017 AVERAGE
“Figure 2.7: Net profit margin”
17
“2.2 Liquidity ratios”
Liquidity ratios are the ratios which examine the relationship between liquid
resources held and amounts due for payments in the near future. The ratios that will
be further discussed are the current ratio and quick ratio or also known as acid test.”
“2.2.1 Current ratio”
Current ratio is the best way to measure the company’s liquidity based on current
assets with current liabilities of the company. Some have suggested that there is an
ideal current ratio of around two times, but this fails to recognise that different types
of business require different current ratios.”
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
“ 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠”
“Equation 2.5: Current ratio”
The graph below clearly shows that the current ratio of Wetherspoon (0.29) is
relatively smaller than the industry’s average (0.78). Wetherspoon throughout the
five-year period has lower current assets in comparison with its current liabilities and
this explains the low average figure. The most important fact that needs to be
mentioned is that Wetherspoon has high numbers of trade and other payables over
the years which increases the current liabilities and makes the ratio to decrease. The
highest current ratio of Wetherspoon is observed in 2013 at 0.33 because the current
liabilities at the time are the fewest during the five-year period. On the other hand,
the lowest of the other three companies exceeds the 0.33 of Wetherspoon and is
0.47 from Greene King in the same year.
18
Current ratio
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2013 2014 2015 2016 2017 AVERAGE
“Figure 2.8: Current ratio”
“2.2.2 Quick ratio (acid test)”
Quick ratio is similar to the current ratio with the difference that inventory is being
deducted from current ratio. As it is more difficult to turn assets into cash, this ratio
provides a more realistic image of company’s liquidity.”
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠−𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠
“𝑄𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜 = ”
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠
“Equation 2.6: Quick ratio”
The quick ratio moved the same way as the current ratio over the years. The reason
is that the inventories that are deducted from the current assets do no change
significantly during the period. Therefore, Wetherspoon’s average is 0.22 which is
expressively lower than the industry average (around 0.70). Lastly, it is observed that
only Domino’s is close to achieving a quick ratio of one in average.
19
Quick ratio
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2013 2014 2015 2016 2017 AVERAGE
“Figure 2.9: Quick ratio”
“2.3 Efficiency ratios”
Efficiency ratios are the ratios that are used to measure the efficiency with which
certain resources have been utilised within the business. The ratios that will be
analysed in this part are the inventory turnover, receivables turnover, payables
turnover and cash conversion cycle (CCC).”
“2.3.1 Inventory turnover”
Inventory turnover is a ratio that measures the average period in days for which
stocks are being held. It is also a measure of value and liquidity, which makes it
important for investors and creditors, as they always want to know how valuable a
company’s inventory is and how fast a firm can convert its inventory into cash.”
20
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
“𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 365”
“Equation 2.7: Inventory turnover”
It is obvious that this ratio is preferable “to be as small as possible because it shows
how quickly the inventory can be converted into cash”.In this case, Wetherspoon is
below the average and is around 6 days. The competitors’ inventory turnover is a
little higher by four days on average. This can be explained by the fact that inventories
have small figures in this type of companies. More explicitly, pubs and restaurants do
not keep their inventory in stock for many days, because they want their products
(food) to be as fresh as possible. Ideally, they want to minimise it to less than seven
days which is the case here for the whole period.
Inventory turnover
18
16
14
12
10
8
6
4
2
0
2013 2014 2015 2016 2017 AVERAGE
“Figure 2.10: Inventory turnover”
“2.3.2 Receivables turnover”
This ratio calculates in days how long, on average, credit customers take to pay the
amounts that they owe to the business and how quickly companies collect these
payments.”
21
𝑇𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
“𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑥365”
“Equation 2.8: Receivables turnover”
The same applies for this ratio as well. As it was discussed above, the inventory
turnover is preferable to be small, the receivables turnover is optimal to be as small
as possible. The graph below shows that Wetherspoon has the smallest ratio out of
the four companies by quite a margin. Wetherspoon’s average is six days, and this
means that their trade receivables are low compared to their revenues, which is ideal.
On the other hand, Domino’s has a large ratio of over a month throughout the five-
year period (41 days).
Receivables turnover
50
45
40
35
30
25
20
15
10
5
0
2013 2014 2015 2016 2017 AVERAGE
“Figure 2.11: Receivables turnover”
“2.3.3 Payables turnover”
This ratio measures in days how long, on average, the company takes to pay out their
trade creditors.”
22
𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
“𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑑𝑎𝑦𝑠 = 𝑥365”
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠
“Equation 2.9: Payables turnover”
In contrast with the previous two ratios, the payables turnover is preferable to be
higher so that the company can delay paying the suppliers to finance itself in the short
term. However, it does not have to be really large because if a company has many
payable days then it might mean that is not in a position to pay its liabilities on time.
In the graph below it is obvious that Wetherspoon is in a decent position compared
to its competitors since their payable days are 72 on average. Greene King has the
most payable days of the four companies with 114 on average.
Payables turnover
140
120
100
80
60
40
20
0
2013 2014 2015 2016 2017 AVERAGE
“Figure 2.12: Payables turnover”
“2.3.4 Cash conversion cycle”
This ratio measures the average number of days that working capital is invested in
operations. It is also referred to as working capital cycle.”
23
“𝐶𝑎𝑠ℎ 𝑐𝑜𝑛𝑣. 𝑐𝑦𝑐𝑙𝑒 = 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 + 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 − 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟”
“Equation 2.10: Cash conversion cycle”
The “CCC of Wetherspoon is negative for each year (-61 days) of the five-year period
which leads to the fact that the company” has more payable days than receivable and
inventory days. Therefore, Wetherspoon has more trade payables than receivables
which means that limits its cash capacity. The competitors of Wetherspoon also have
negative figures with the only exception of Domino’s in 2016 which it has a positive
one of 54 days.
Cash conversion cycle

80 0
60 -10
40
-20
20
0 -30
-20 2013 2014 2015 2016 2017 AVERAGE -40

-40 -50
-60
-60
-80
-100 -70
-120 -80
“Figure 2.13: Cash conversion cycle”
“2.4 Financial structured ratios”
This category of ratios indicates the way that the company is financed. The main
ratios that are used for this purpose are the gearing ratio, also known as Debt/Equity
ratio, and the interest cover ratio.”
24
“2.4.1 Gearing ratio”
The “gearing ratio of a company shows the composition in long-term financing.
𝐿𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡
“𝐺𝑒𝑎𝑟𝑖𝑛𝑔 = 𝐿𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡+𝑒𝑞𝑢𝑖𝑡𝑦 𝑥100”
“Equation 2.11: Gearing”
The graph below shows that Wetherspoon has higher gearing from the industry
average in the whole period of five years. The average gearing of Wetherspoon is at
around 80% (77.46%). In general, the higher the proportion of debt in a company, the
higher the ratio and this means that the company is more exposed to debt risk than
a company with lower figures. In this case, Wetherspoon has low levels of equity
compared to its non-current liabilities, which mostly include the borrowings. As the
years go by, it is observed that Wetherspoon’s borrowings increase while the equity
remains around the same; this explains the slight increase in the gearing ratio over
the years. Therefore, Wetherspoon is the “highly geared” or “highly leveraged”
company out of the group.
Gearing
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2013 2014 2015 2016 2017 AVERAGE
“Figure 2.14: Gearing”
25
“2.4.2 Interest cover ratio”
Another crucial financial ratio is the interest cover ratio which quantifies the capacity
of the company to meet interest payments due out of operating profits. High interest
coverage is preferred as it assures lenders of the company that their funds would be
repaid.”
𝑃𝐵𝐼𝑇
“𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑜𝑣𝑒𝑟 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠”
“Equation 2.12: Interest cover”
The first thing that is observed here is that Wetherspoon has no problem dealing with
the finance costs as the ratio indicates that they can pay them over 3 times (3.31).
The lowest point (2.65) is in 2013 because at the time, they had the smallest PBIT out
of the five years. However, as the years progressed, the interest cover kept going up
even more and this is mainly because its PBIT kept increasing while the interest
expenses remained on the same level on average. On the other hand, Domino’s has
extremely high values of interest cover (68.21 on average) because their finance costs
are insignificant, while Greene King and M&B are covering their interest 2.11 and 1.95
times respectively.
26
Interest cover ratio
250.00
200.00
150.00
100.00
50.00
0.00
2013 2014 2015 2016 2017 AVERAGE
“Figure 2.15:Interest cover”
“2.5 Investment ratios”
From an investor’s standpoint it is quite important to have a closer look on these

ratios. Investment valuation ratios take into account dividends paid, share price,
number of shares which are good indicators of the performance of the company.
However, in this chapter, two important ratios will be analysed; earnings per share
ratio (EPS) and price to earnings ratio (P/E). The last two important ratios (dividend
yield and cover) will be further discussed in the next chapter of financial management
policies.
“2.5.1 Earnings per share”
This ratio measures the potential benefit that shareholders derive from the
profitability of a company in which they have invested, irrespective of actual dividend
distributions.”
27
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
“𝐸𝑃𝑆 = ”
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑖𝑛 𝑖𝑠𝑠𝑢𝑒
“Equation 2.13: Earnings per share”
As it is seen in the graph below, Wetherspoon’s EPS slightly underperforms in the first
three years of the analysis, ranging from 0.310 in 2013 to 0.367 in 2015. The following
two years it performs better than the industry average and in particular in 2017,
Wetherspoon’s EPS is 0.504 while the industry’s average is only at 0.398. The increase
in the EPS can be easily explained by the fact that Wetherspoon keeps increasing its
net profit over the years. Lastly, only Greene King achieves higher figures of EPS than
Wetherspoon (0.64 on average).
Earnings per share

0.8000
0.7000
0.6000
0.5000
0.4000
0.3000
0.2000
0.1000
0.0000
2013 2014 2015 2016 2017 AVERAGE
“Figure 2.16: Earnings per share”
28
“2.5.2 Price to earnings ratio”
The P/E ratio compares the EPS with the market price per share. As such it compares
directly the profit that is generated for equity shareholders with the price that
currently has to be paid to participate in those profits.”
𝑃 𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

“𝐸 = ”
𝐸𝑃𝑆
“Equation 2.14: Price to earnings”
The trend in this case is quite different from the EPS’s ratio. Wetherspoon achieves
its highest figure in 2013 (24.580) and it consecutively drops until 2016 and reaches
a value of 18.571. Then, in 2017 it increases slightly and goes up to 20.238.
Throughout the whole period, Wetherspoon performs better than the industry. It is
important to mention at this point that Wetherspoon has the highest price per share
out of the four. On the other hand, the company that has the highest P/E than
Wetherspoon is Domino’s because its share price is lower and at the same time has
significantly lower EPS, as it was observed earlier.
Price to earnings ratio

50.0000
45.0000
40.0000
35.0000
30.0000
25.0000
20.0000
15.0000
10.0000
5.0000
0.0000
2013 2014 2015 2016 2017 AVERAGE
“Figure 2.17: Price to earnings”
29
“2.6 Stock price performance”
The “stock price performance of a company can be measured by the abnormal buy-
and-hold returns (ABHR)”. ABHR “provides a good indication of the wealth created
for the company’s shareholders. In other words, it means that if investors bought
stocks and held them for a long period, regardless of fluctuations in the market, they
would have earned as much return as they would have if they invested the same
amount of money in the market.
“𝐴𝐵𝐻𝑅𝑖 = ∏𝑁 𝑁
𝑡=1(1 + 𝑟𝑖,𝑡 ) − ∏𝑡=1(1 + 𝑟𝑏𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘,𝑡 )”
“Equation 2.15: Abnormal buy-and-hold-returns”
Where implies ∏ the accumulative multiply, N the period and r the stock return.”
To commence with, I collected the closing daily share prices of each company for the
last three financial years. Wetherspoon’s financial year ends in July, so this is the
benchmark date for all the data. Furthermore, I defined as market the FTSE All-share
(FTAS) and collected the closing prices for the same time period. Then, I extracted the
daily returns and calculated the remaining variables of the formula 15 to obtain the
ABHR for each company.
The table below illustrates that Wetherspoon achieves a high ABHR figure of almost
17%. This means that an investor would most likely prefer to buy shares of
Wetherspoon at the time compared to go long on the index. The same applies for
Domino’s since it has an ABHR of 19.04%, which is slightly higher of Wetherspoon’s
second higher ABHR. On the other hand, both Greene King and M&B have negative
ABHR which indicates that a potential investor would go long on the FTAS instead of
buying shares of the companies.
30
Wetherspoon Domino’s Pizza Greene King Mitchells and
Butlers
16.9968% 19.0482% -35.5752% -56.4763%
“Table 2.1: ABHR of the four companies”
31
“3. Financial management policies”
In “this chapter the financial management policies of Wetherspoon will be assessed

and evaluated. The”management policies that I will analyse include their dividend
policy over the years, their capital structure and how the company deals with risk.
“3.1 Dividend policy”
“3.1.1 Some theories in relation to dividend policy”
The dividend policy is a financial decision that refers to the proportion of the
company’s earnings to be paid out to the shareholders”. As Faulkender, Milbourn and
Thakor (2005) stated, the academic literature on financial management policy, and
in particular dividend policy, dates back to the 1950’s. First, there is the irrelevance
dividend theory of Modigliani and Miller (1958). Their theory was based on the
irrelevance concept of dividend, which means that the dividend policy of a company
does not influence the shares prices. Therefore, the wealth of the shareholders
remains intact. They further suggested that the dividend and investment policy will
not affect the value of the company. However, the problem arises from its own
theory’s assumptions. Arnott and Asness (2001) underline that the assumptions of
no taxes and the rational behaviour of investors, do not exist in the real world.
Another irrelevance dividend policy that has been developed is the residual dividend
theory. More explicitly, the residual dividend policy works for companies when they
want to finance new investments and projects through their equity. This means that
the dividend payments to the shareholders are generated by the equity. However,
this policy in order to be practical, the company needs to have a balanced debt to
equity ratio, meaning that it is not highly leveraged. More discussion about the debt
to equity ratio of Wetherspoon will be in the next part.
32
On the contrary, other than the irrelevant dividend theories, there have the relevant
dividend ones. Walter (1963) came up with a model which claims that investment
and dividend policy of a company does affect the value of the company and thus, the
shareholders’ wealth. He underlines that there is a “relationship between the
company’s rate of return and its cost of capital”. Finally, another relevant dividend
theory that has been developed is Gordon’s (1963). He argued that his model needs
to be with an all-equity company in order to work. Therefore, this company will be
entirely financed through its retained earnings and no external financing or debt will
be used. He also assumed that no corporates taxes exist and that the company has
perpetual life.
“3.1.2 Wetherspoon’s dividend policy”
At this point, I believe it is important to mention how Wetherspoon gives its dividends
to the shareholders by calculating and tracking over some critical ratios. According to
Wetherspoon’s annual reports, they clearly state that the board proposed to pay a
dividend of 12.0p in the year end. This policy is continued throughout the five-year
period 2013-2017. In my opinion, this policy of giving stable dividends signals that the
company is healthy and is trusted among the investors. It also means that the market
value, which will be discussed below, stabilises as the dividend payments remain the
same. The table below shows how the dividend per share (DPS), EPS have progressed
through the years for Wetherspoon. It is observed that the EPS has been increasing
every year; starting from 0.310 in 2013 to 0.504 in 2017 resulting in an average of
0.388. After tracking over the DPS and EPS, I calculated the payout ratio of
Wetherspoon for the period by dividing the DPS with the EPS. The payout ratio is
basically the proportion of earnings that are given to the shareholders as dividends.
Since the DPS remains constant over the years and the EPS is increasing at the same
time, the fraction gets smaller and smaller and therefore the payout ratio gets
smaller. In 2013 it was at 38.71% and during the five years it dropped by almost 15%
33
(23.81% in 2017). On average, the payout ratio is around 32%. The retention ratio is
the opposite of the payout and is seen on the table below and it is obvious that is
constantly rising through the years.
“2013” “2014” “2015” “2016” “2014” “Average”

“DPS” 0.12 0.12 0.12 0.12 0.12 0.12
“EPS” 0.310 0.328 0.367 0.434 0.504 0.388
“Payout” 38.71% 36.59% 32.70% 27.65% 23.81% 31.89%
“Retention” 61.29% 63.41% 67.30% 72.35% 76.19% 68.11%
“Table 2.2: DPS, EPS, payout and retention ratio of Wetherspoon”
Lastly, I believe two other indicators should be mentioned in order to evaluate

Wetherspoon’s dividend policy. Firstly, the “dividend yield ratio measures the rate of return
that a shareholder receives on his/her shares”. Wetherspoon’s dividend yield has slights
fluctuations over the years with its peak in 2015 at 1.68% and a low in 2017 at 1.18%. On
average, Wetherspoon has a dividend yield of 1.51%. Secondly, its dividend cover ranges
from 2.75 in 2013 to 4.20 in 2017. Generally, this ratio shows the ability of the company to
pay its dividends. Wetherspoon’s dividend coverage is on average 3.34.
“2013” “2014” “2015” “2016” “2017” “Average”

Dividend 1.57% 1.64% 1.68% 1.49% 1.18% 1.51%
yield”
Dividend 3.07 2.75 307 3.61 4.20 3.34
cover”
“Table 2.3: Dividend yield and dividend cover ratio of Wetherspoon”
34
“3.2 Capital structure”
“3.2.1 Some theories in relation to capital structure”
According to Faulkender, Milbourn and Thakor (2005), in the capital structure

literature there are two dominant theories; the pecking order theory and the trade-
off theory also known as static theory. In general, capital structure of a company
answers to many questions such as, how a company finances its operations and
projects, what proportion of equity is the external financing and many others.
Frydenberg 2011 argues that the capital structure theories started from the
irrelevance proposition of Modigliani and Miller, as they were previously mentioned.
To commence with, the pecking order model became popular by Myers and Majluf
(1984) where they suggest that equity is less preferable form of raising capital within
a company. Frank and Goyal (2003) argue that if the retained earnings of the
company cannot finance their operations, then debt is used and only in rare
situations the companies will issue new equity. This mainly happens because of the
fact that investors may believe that the company is being overvalued and mangers
are trying to take advantage of it. The following years there was some criticism
against the pecking order theory and the alternative that was developed is the trade-
off theory. The static theory claims that a company’s optimal debt ratio is based on a
trade-off between the losses and gains of borrowing when assets and equity remain
constant (Frydenberg, 2011). He further states that the trade-off theory stems from
the original theory, but with the only difference that in this one, two main
assumptions are broken. These are that there are no bankruptcy costs and no tax
incentive assumption.
“3.2.2 Wetherspoon’s capital structure”
In the company’s annual reports, it is stated that during the five-year period they do
not have any specific measure for managing capital structure. In order to measure its
35
capital requirements, Wetherspoon uses a ratio of net debt to earnings before
interest, tax and amortisation (EBITDA). The table below shows how the debt to
EBITDA has been progressing over the years.
“2013” “2014” “2015” “2016” “2017” “Average”

“EBITDA” 2.88 3.21 3.37 3.47 3.39 3.27
“Table 2.4: EBITDA of Wetherspoon”
It is obvious enough that the EBITDA has an upward trend from 2013 to 2016 and
slightly drops in 2017. Wetherspoon’s total net debt increases from £474.2 “million
in 2013 to £696.3 million in 2017. In the company’s net debt are” included the bank
borrowing, finance leases, but excluding derivatives.
In my opinion, in order to have a clearer view of how Wetherspoon’s capital structure

is, I believe that is essential to be compared with a benchmark. Therefore, the
companies that will be this benchmark are the main competitors of Wetherspoon in
the UK. Furthermore, in my analysis, I calculated the total debt of each company and
divided it by the total equity. This debt to equity (D/E) ratio illustrates a picture of the
company’s financial leverage, as it was mentioned in chapter two with the gearing
ratio. Also, it shows how much external financing a firm uses to finance its assets
regarding its equity.
“2013” “2014” “2015” “2016” “2017” “Average”

“Wetherspoon” 3.98 4.28 4.79 5.39 5.30 4.75
“Domino’s” 1.77 1.25 0.90 1.39 4.91 2.04
“Greene King” 2.30 2.16 2.22 1.99 1.88 2.11
“M&B” 2.67 3.01 2.76 2.53 2.04 2.60
“Table 2.5: Debt to equity of the four companies”
36
From table 5, it is possible to have a more peripheral view on the D/E ratio of these
four companies in the industry. It seems that Wetherspoon has the highest D/E on
average (4.75) out of the group, which explains the statements of the board that they
are trying to expand and grow by opening new pubs and extending their existing ones
over the last years. Moreover, Wetherspoon increases their acquisitions of freeholds
and they use debt to pay dividend payments and share buybacks.
“3.3 Wetherspoon’s risk management”
Risk management within a company is crucial because there are numerous risks and
uncertainties that it can possibly face. In the case of Wetherspoon, within their
annual report there is a section on which their risks are and how they manage them.
More explicitly, the company faces strategic risks which include economic outlook,
regulation of the sale of alcohol etc. Furthermore, Wetherspoon faces commercial
risks (cost increases), reputational risk and operational risks such as recruitment and
retention, health and safety, food safety, information technology and more.
However, in this part I will be focusing on Wetherspoon’s financial risks and state how
they deal with them. To commence with, there is the capital risk; Wetherspoon aims
to maintain its capital and debt at normal levels. Raising debt always involves risk and
the company (chairman, chief executive, finance director and senior finance
managers) reviews weekly their sales, profitability and debt requirements to deal
with the capital risk. Furthermore, Wetherspoon has to deal with interest-rate
changes. Towards this direction, Wetherspoon swaps most of its floating-rate
borrowings into fixes rates which expire in 2026. They have calculated that if the
interest rates increase by 1% then this will reduce their pre-tax profit by £1,584,000
and their equity will be increased by £49,869,000. Therefore, interest-rate risk is very
important for Wetherspoon to be kept under control.
Another risk that needs caution is credit risk. Wetherspoon’s board of directors state
that the company does not pay too much attention to credit risk because most of
37
their revenue is in cash. Moreover, Wetherspoon faces liquidity risk and they believe
by regularly monitoring cash flow forecasts and endeavours they will make sure that
there are adequate funds to meet its business requirements and comply with banking
regulations. Lastly, Wetherspoon has to deal with foreign currency risk. The board of
directors claims that the company is not significantly exposed to this type of risk. They
monitor the growth and uncertainties associated with its overseas business and they
also argue that they will undertake hedging strategies against foreign exchange risk.
The company classifies all the above types of risks as principal risks. The board is
responsible for Wetherspoon’s risk management policies and processes. The board
further argues that the internal audit department, in collaboration with feedback
from senior management of the business functions, delivers a risk register every year.
With these risk management policies, Wetherspoon aims to mitigate its risks as much
as possible.
38
“4. Valuation of Wetherspoon”
From an investor’s standpoint, it is significantly important to be aware of the current

market value of the company they want to invest in. As it was mentioned in chapter
one, market capitalisation is estimated by multiplying the company’s market value
and the number of its outstanding shares.
In this chapter I will be presenting numerous different methods of evaluating

Wetherspoon. These methods include the dividend “model, the earnings and
investment model, the free cash flow to the firm model (FCFF), the free cash flow to
the equity model (FCFE) and the price-earnings multiplier. All the” above, excluding
the price-earnings method, are based on discounted cash flows and indicators; this
means that forecasts were made to estimate expected dividends, earnings, cash
flows, cost of equity, internal rate of return (IRR), retention rate and more.
“4.1 Methodology”
“4.1.1 The required rate of return of Wetherspoon”
The DDM requires some variables to extract an estimate of the value of a company.
The first major requirement is to calculate the required rate of return which is the
cost of equity 𝑟. The cost of equity is calculated by using the Capital Asset Pricing
Model (CAPM) of Sharpe (1964) and Lintner (1965).
“𝑘𝑒 = 𝑅𝐹 + [𝐸(𝑅𝑀 ) − 𝑅𝐹 ] × 𝑏, 𝑖 = 1, 2, . . . , 𝑁.”
“Equation 2.16: The CAPM”
Where 𝑘𝑒 is the cost of equity, 𝑅𝐹 is the risk-free interest rate, [𝐸(𝑅𝑀 ) − 𝑅𝐹 ] is the
risk premium and 𝑏 is Wetherspoon’s beta with the market.”
39
To commence with, I extracted the 𝑏 using a regression between Wetherspoon and
the market. As it was mentioned in chapter one, Wetherspoon is one of the
companies included in the FTAS, therefore I assume that it is the best representative
of the market. Since Wetherspoon’s financial years end in July, I took the daily closing
prices for the past year and calculating the daily returns. Similarly, I calculated the
daily returns for the FTAS. Then, I calculated the excess company returns and excess
market returns by subtracting the risk-free returns. At this point, I need to mention
that I assumed that a UK 6-month bond as a risk-free asset. To justify my decision, if
I had used a higher maturity bond, it would have been riskier and the yields higher.
After collecting all these data, I regressed them with 95% confidence level and the
outputs of these 254 observations extracted a 𝑏 value of 0.5508.
The next step to calculate the 𝑘𝑒 is to the risk premium and the risk-free asset. In this
analysis, I take the monthly closing prices and calculate the returns of the FTAS and
the 6-month bond for the past five years. After conducting an average of all the
returns, I find that the market return is 4.9709% and the UK bond’s yield is 0.4433%
resulting in a risk premium of 4.5276%. Therefore, using formula 17, the 𝑘𝑒 is
2.9373%.
“4.1.2 The expected growth rate of Wetherspoon”
In all the models that will be discussed later, a crucial indicator is needed to obtain
discounted expected dividends, earnings and cash flows. This important indicator is
the growth rate of Wetherspoon. However, in order to estimate the future dividends
and others, the calculation of the historical growth rates of Wetherspoon is vital.
From my analysis in the company’s financial performance in chapter two and its
dividend policy in chapter three, I calculated the ROCE and the retention ratio
respectively. The ROCE multiplied with the retention ratio gives the growth rate for
the year (it will be explained later in methodology). Wetherspoon’s growth rate for
2017 is 8.9614%. Then, some assumptions are needed to estimate the future growth
40
rates. Firstly, I assume that in the long-term, the growth rate of Wetherspoon will be
moving along with the UK’s GDP growth. I assume that a long-term point in the future
is five years from the last financial year of Wetherspoon, which is the 2017 annual
report in July. Therefore, in five years’ time, the UK GDP growth rate will be at 1.6%
according to the IMF. In my analysis, I calculate the percentage that needs to be
subtracted every year from 2018 to 2022 to obtain a growth rate of 1.6% in the fifth
year (2022). I find that steadily reducing the growth rate by 1.4723% every year, it
will drop from 8.9614% in 2017 to 1.6% in 2022. Lastly, I believe that forecasting for
longer periods than five years is quite difficult, I assume that Wetherspoon will have
a constant growth rate of 1.6% from 2023 and forward.
“2017” “2018” “2019” “2020” “2021” “2022” “2023”

Growth 8.9614% 7.4891% 6.0168% 4.5446% 3.0723% 1.6000% 1.6000%
rate”
“Table 2.6: Expected growth rates of Wetherspoon”
“4.1.3 The expected ROCE of Wetherspoon”
A difficult task for an analyst who analyses and evaluates the reports of a company is
to calculate the IRR. This is mainly because it requires to assume an initial investment
and the potential cash flows that will be produced in the future and, then, discount
them back to present. Therefore, I use the ROCE as a measure of the return in the
company’s equity and debt. I believe that this ratio is a reliable indicator of a
company’s IRR because it uses the operating profit in relating to a company’s total
equity and debt.
However, from chapter two, the last ROCE that Wetherspoon achieves is 11.7618%.
The smoothing method that I used earlier for estimating the growth rate, the same
approach I apply here to forecast the expected ROCEs. The goal is to progressively
drop it to 2.9373% in 2022. My explanation behind that is because in the earnings
41
and investments model I need the last year of analysis to get an NPV of zero, this can
only be achieved by equalling the required rate of return with the ROCE.
Consequently, I decrease the ROCE by 1.7649% every year from 2017 to 2022.
“2017” “2018” “2019” “2020” “2021” “2022”

“ROCE” 11.7618% 9.9969% 8.2320% 6.4671% 4.7022% 2.9373%
“Table 2.7: Expected ROCE of Wetherspoon”
“4.2 The dividend discount model”
“4.2.1 Description of the model”
The dividend discount model (DDM) is an approach to evaluate the value of a

company. As its name suggests, this model uses the expected dividends the company
will pay to its shareholders and discounts them back to present by the cost of equity
of the company. This sum of dividends in the future added together with the terminal
value of the dividends, extracts the value of the company. The terminal or continuing
value is the value that is assumed to represent all future dividends. In my opinion,
the terminal value is useful because it is nearly impossible to make a reliable forecast
of the dividends that will occur in the long term. It is also important to mention that
the terminal value uses the dividend that will occur exactly after the forecasting
period; and when this dividend is “divided by the difference of the cost of equity and
the constant growth rate it gives the terminal value”.The formula that calculates the
value of a company using the DDM is the following:
𝐷𝑡
“𝑉0 = ∑𝑁
𝑡=1 + 𝑉𝑁 ”
(1+𝑟)𝑡
“Equation 2.17: Dividend discount model”
42
𝐷𝑡 1 1 1
Where ∑𝑁
𝑡=1 = 𝐷1 × 1+𝑟 + 𝐷2 × (1+𝑟)2 + ⋯ + 𝐷𝑁 × (1+𝑟)𝑁 and 𝑉𝑁=𝐷𝑁+1 ×
(1+𝑟)𝑡
1
, 𝑁 is the number of years, 𝐷𝑡 is the dividend at time 𝑡, 𝑟 is the required rate of
𝑟−𝑔
return and 𝑔 is the constant growth rate of the company.”
“4.2.2 Empirical process and results”
I first calculate the expected dividends in the next five years (2018-2022) by using the
expected growth rates. The sum of these expected dividends and discounted back to
present with the required rate of return gives a total of £71,901,675.50. The terminal
value is calculated by estimating the dividend in 2023, which is the dividends paid in
2022 projected forward with the constant growth rate of 1.6%. Then, this value gets
discounted back by the difference of 𝑟 and 𝑔. Therefore, the terminal value is
£1,265,574,120.44 and the total value of Wetherspoon is estimated at
£1,337,475,795.94.
“2017” “2018” “2019” “2020” “2021” “2022” “2023”
Dividends £13,352,000 £14,351,944 £15,215,472 15,906,954 16,395,664 16,657,994 16,924,522
paid”
Growth rate” 8.9614% 7.4891% 6.0168% 4.5446% 3.0723% 1.6000% 1.6000%
“1+ 𝒈” 1.0896 1.0748 1.0601 1.0454 1.0307 1.016 1.016
"𝒓” 2.9373%
“1+ 𝒓" 1.0297
PV of Terminal £1,265,574,120
value”
Sum of £71,901,675
discounted
expected div.”
Value of £1,337,475,795
Wetherspoon”
“Table 2.8: Dividend discount model valuation”
43
“4.3 The earnings and investment model”
The earnings and investment model is another financial valuation method of a

company using discounted parameters. In this model, the sum of the net future
investments opportunities discounted back to present by the required rate of return
(2.9373%) gives the present value of growth opportunities (PVGO). It is similar to the
previous model with the difference that instead of including the expecting dividends,
the amount of investment opportunities is taken into account for this approach.
Furthermore, these investment opportunities are the net present value (NPV) of the
company. Lastly, there is also a terminal-continuing value in this model such like in
the dividend model. This value is the expected earnings of existing assets and is
growing by the constant required rate of return of the company. “The formula that
calculates the value of a company using the earnings model is the following:”
1
“𝑉0 = 𝐸 ∗ + 𝑃𝑉𝐺𝑂”
𝑟
“Equation 2.18: Earnings and investment model”
1 1 1
Where 𝑃𝑉𝐺𝑂 = 𝑁𝑃𝑉1 1+𝑟 + 𝑁𝑃𝑉2 (1+𝑟)2 + 𝑁𝑃𝑉3 (1+𝑟)3 + ⋯,
𝐸𝑡 ×𝑏𝑡 ×(𝑅𝑂𝐶𝐸𝑡 −𝑟)

𝑁𝑃𝑉 = and 𝐸 ∗ is the expected earnings from existing assets.”
𝑟
44
This method is slightly more difficult than the DDM to implement because it requires
to calculate more parameters. The first step is to calculate the incremental earnings
of the year which are the investment opportunities of the company and multiply
them by the ROCE at that year. Then, the earnings of next year should be the sum of
the incremental earnings’ value and the last year’s earnings. At this point, it is
important to calculate the expected retention rates (𝑏) of Wetherspoon by using 𝑔 =
𝑅𝑂𝐶𝐸 × 𝑏 since I have estimated the expected growth rates and ROCEs for the
period 2018-2022. Afterwards, the NPV can be calculated using the formula shown in
the description.
“2017” “2018” “2019” “2020” “2021” “2022”

Growth 8.9614% 7.4891% 6.0168% 4.5446% 3.0723% 1.6000%
rate”
ROCE” 11.7618% 9.9969% 8.2320% 6.4671% 4.7022% 2.9373%
Retention” 76.1905% 74.9144% 73.0906% 70.2729% 65.3378% 54.4722%
“Table 2.9: Expected retention ratios of Wetherspoon”
In the case of Wetherspoon, the sum of all NPVs discounted back to present with the
1
cost of equity extracts the 𝑃𝑉𝐺𝑂, which is £267,815,705.73. Moreover, the 𝐸 ∗ 𝑟 is
£1,454,111,566.66 and the value of Wetherspoon using the earnings approach is at

£1,721,927,272.39.
45
“2017” “2018” “2019” “2020” “2021” “2022”
Earnings” £56,059,000 £61,082,645 £65,657,185 £69,607,647 £72,771,036 £75,006,781
Retention” 76.1905% 74.9144% 73.0906% 70.2729% 65.3378% 54.4722%
Investments” £42,711,619 £45,759,694 £47,989,219 £48,915,284 £47,547,009 £40,857,858
Inc. Earnings” £5,023,645 £4,574,540 £3,950,461 £3,163,389 £2,235,744 £1,200,108
NPV” £128,317,741 £109,979,943 £86,503,734 £58,781,891 £28,568,626 ≈0
NPV*PVAF” £106,841,683 £81,637,428 £53,892,116 £25,444,754 ≈0
PVGO” £267,815,705
E*/r” £1,454,111,566
Value of £1,721,927,272
Wetherspoon”
“Table 2.10: Earnings and investment model valuation”
“4.4 The discounted cash flow models”
The discounted cash flow models evaluate a company holistically since they are based
on the internal accounts and elements of the cash flows. There are two popular
approaches here; the first one focuses “on the free cash flows to the firm (FCFF) and
the other one on the free cash flows to the equity (FCFE). However, it” is important
to first estimate Wetherspoon’s weighted average cost of capital (WACC).
“4.4.1 The WACC of Wetherspoon”
The WACC is a key measure for a company to identify how much return the
shareholders get from the capital. The WACC is calculated through the weighted
proportion of debt and equity multiplied with the cost of debt and equity. I assume
that the cost of debt for Wetherspoon is the average interest expenses to the total
borrowing for the five-year period. Therefore, the cost of debt is 5.4907%. Moreover,
the average proportionate weights of debt and equity are 74% and 26%.
46
“2013” “2014” “2015” “2016” “2017” “Average”
Weight of
debt” 70.5987% 72.1619% 73.9665% 76.7139% 76.5495% 73.9981%
Weight of
equity” 29.4013% 27.8381% 26.0335% 23.2861% 23.4505% 26.0019%
Cost of debt” 5.4907%
Cost of 2.9373%
equity”
“Table 2.11: Weights and costs of debt and equity”
However, the last element to calculate the WACC is the tax rate. The UK corporate
tax rate for business is 20%. Therefore, using the formula below, the WACC is
4.0142%.
“𝑊𝐴𝐶𝐶 = 𝑊𝑑 × 𝑘𝑑 × (1 − 𝑇𝐶 ) + 𝑊𝑒 × 𝑘𝑒 ”
“Equation 2.19: Earnings and investment model”
Where 𝑊𝑑 and 𝑊𝑒 are the proportionate weights of debt and equity, 𝑘𝑑 and 𝑘𝑒 are
the costs of debt and equity and 𝑇𝑐 is the corporate tax rate for the UK.”
“4.4.2 Description of the FCFF and FCFE model”
The FCFF and FCFE models use the free cash flows generated in the company. These
approaches take into account the earnings before interest and tax (EBIT),
depreciation, capital expenditure, net working capital, finance costs, net debt and
taxation. Since they include numerous of elements to their calculation, it seems that
they are quite accurate metrics. As with the previous models, the FCFF and FCFE are
both discount models since the sum of their expected values are discounted back to
present. A key difference is that the FCFF includes the capital expenditure and
47
working capital and excludes the finance and interest costs and net debt issuance,
whereas the FCFE includes the interest expenses and net debt. Another notable
difference is that the FCFF model the cost that discounts the expected cash flows is
the cost of capital WACC, while the FCFE model discounts them with the cost of equity
𝑘𝑒 as its name suggests. The formula for extracting the value of a company using the
FCFF model is the following:
1 1
“𝑉0 = ∑𝑁
𝑡=1 𝐹𝐶𝐹𝐹𝑡 × (1+𝑊𝐴𝐶𝐶)𝑡 + 𝑉𝑁 × (1+𝑊𝐴𝐶𝐶)𝑁 ”
“Equation 2.20: FCFF model”
1
Where 𝐹𝐶𝐹𝐹𝑡 is the FCFF at time t, 𝑉𝑁 = 𝐹𝐶𝐹𝐹𝑁+1 × 𝑊𝐴𝐶𝐶−𝑔 and
𝐹𝐶𝐹𝐹𝑡 = 𝐸𝐵𝐼𝑇𝑡 × (1 − 𝑇𝐶 ) + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛𝑡 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑡 −

𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑁𝑊𝐶𝑡 ,”where"𝑁𝑒𝑡 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 −
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠”.
On the other hand, the formula for a firm’s value with the FCFE model is:
1 1
“𝑉0 = ∑𝑁
𝑡=1 𝐹𝐶𝐹𝐸𝑡 × (1+𝑘 + 𝑉𝑁 × (1+𝑘 ”
𝑒 )𝑡 𝑒)
𝑁
“Equation 2.21: FCFE model”
1
Where 𝐹𝐶𝐹𝐸𝑡 is the FCFE at time t, 𝑉𝑁 = 𝐹𝐶𝐹𝐹𝑁+1 × 𝑘 and
𝑒 −𝑔
𝐹𝐶𝐹𝐸𝑡 = 𝐹𝐶𝐹𝐹𝑡 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 × (1 − 𝑇𝐶 ) + 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑛𝑒𝑡 𝑑𝑒𝑏𝑡.”
48
To commence with, I first calculate the FCFF for the year 2017 because it is included
in the FCFE. The FCFF requires to obtain all the data from the annual report of
Wetherspoon and I estimate the expected FCFFs for the upcoming five-year period
using the growth rate from previous analyses. As with all discount models, I extract
the sum of the discounted cash flows by discounting them back with the cost of
capital. Then, I find the present value of terminal value of the free cash flows and add
it to the sum of discounted cash flows and it gives the total value of Wetherspoon at
£2,119,009,730.87.
“2017” “2018” “2019” “2020” “2021” “2022” “2023”

“EBIT” £128,508,000
𝟏 − 𝑻𝑪" " 0.8
Deprec.” £66,538,000
CapEx” £180,604,000
NWC” -£55,090,000
FCFF” £43,830,400 £47,112,902 £49,947,591 £52,217,509 £53,821,788 £54,682,937 £55,557,864
Growth rate” 8.9614% 7.4891% 6.0168% 4.5446% 3.0723% 1.6000% 1.6000%
WACC” 4.0142%
Sum of disc. £228,760,612
CFs”
Terminal value” £2,301,342,082
PV of TV” £1,890,249,118
Value of £2,119,009,730
Wetherspoon”
“Table 2.12: FCFF model valuation”
Similarly, the FCFEs are estimated for the next years and discounted back with the
cost of equity of the company. The sum and the present value of terminal value give
the value of Wetherspoon at £1,838,388,344.70.
49
“2017” “2018” “2019” “2020” “2021” “2022” “2023”
“FCFF” £43,830,400 £47,112,90 £49,947,59 £52,217,50 £53,821,78 £54,682,937 £55,557,86
2 1 9 8 4
“Interest £28,557,000
exp.”
“𝟏 − 𝑻𝑪 " 0.8
“Net debt” £50,093
“Growth rate 8.9614% 7.4891% 6.0168% 4.5446% 3.0723% 1.6000% 1.6000%
“𝑘𝑒 " 2.9373%
“Sum of disc. £113,274,719
CFs”
“Terminal £1,993,799,89 £2,301,342,08
value” 5 2
“PV of TV” £1,725,113,62
5
Value of £1,838,388,34
Wetherspoon 4
”
“Table 2.13: FCFE model valuation”
“4.5 The price-earnings multiplier”
The price-earnings multiplier is the last valuation approach of this analysis. There are
also a few others multiplier measures such as the price to book value, price to sales,
price to EBITDA. However, the price-earnings is a popular method of evaluating a
company because this multiplier allows the company to be compared to a benchmark
of companies with similar accounting policies and on the same industry/sector and it
is quite easy to be explained.
In my valuation, I obtain the P/E ratios from chapter two and calculate the average
of all the companies during the five-year period. I believe that, under some
assumptions, the P/E ratio of the industry is a strong representative of the relation
50
between the stock price of Wetherspoon and its current earnings. These assumptions
would require the companies to have similar accounting and management policies,
market capitalisation, stock price etc. In the case of Wetherspoon, the companies
that have been selected in chapter one, they represent a reliable representative in
my opinion.
As it was mentioned above, I use the industry P/E which is obtained by the average
of the four companies for the 2013 to 2017 period. Therefore, the industry P/E ratio
is 16.7526.
“2013” “2014” “2015” “2016” “2017” “Average”

“Wetherspoon” 24.5806 22.3476 19.4414 18.5714 20.2381
“Domino’s” 46.3271 20.6873 25.5182 26.6496 19.6812
“Greene King” 12.4211 14.0879 14.0492 12.4464 9.6328
“M&B” 10.1805 1.9601 11.3754 8.8806 7.0516
“Average” 22.9762 15.9118 16.9809 15.7722 12.18 16.7526
“Table 2.14: P/E ratios of the four companies and average”
Then, I estimate the EPS of next year by using the relevant growth rate. Afterwards,
as the name suggests, I multiply the P/E ratio with the expected EPS and I obtain the
stock price. Lastly, the most recent report states that the shares in issue for the
financial year are 111,293,971 and, hence, the value of Wetherspoon is
£1,010,063,199.49.
51
“2017” “2018”
P/E” 16.7526
Growth rate” 8.9614% 7.4891%
EPS” 0.5040 0.5417
P/E*𝑬𝑷𝑺𝟐𝟎𝟏𝟖 9.0756
No of shares in issue” 111,293,971
Value of Wetherspoon” £1,010,063,199
“Table 2.15: Price-earnings multiple valuation”
“4.6 Critical comparison of the valuation approaches”
In theory, all models that aim to estimate the market capitalisation of a company
should conclude to the same result. As this empirical analysis has shown, this cannot
be realistic because each model works under some assumptions and limitations. In
my opinion, the “major problem with these approaches is that some of them are
based solely on the” discounted cash flows, others are based on the balance sheet
and the income statement and this could lead to different outcomes.
In the context of my analysis, as the table 16 shows, the DDM comes nearest to the
actual market capitalisation of Wetherspoon. I believe this is because dividends are
the only consistent regular inflow received by the company’s shareholders. On the
other hand, the earnings and investment valuation comes a little off and, in my
opinion, the reason behind that is that I use an extra forecasting indicator; in the DDM
I estimate the growth rate and in the earnings model, I add the forecasting of ROCE
as well. In the free cash flow models, it occurs an overvaluation of Wetherspoon and
this stems from the high borrowings of Wetherspoon which increase both the FCFF
and FCFE valuation. Lastly, the price-earnings multiple model is the only one out of
the five that undervalues Wetherspoon. I believe this is because it only uses the stock
price and expected earnings of the company and does not include any other
parameters.
52
Valuation model” “Market capitalisation”
Dividend discount model” £1,337,475,795
Earnings and investment model” £1,721,927,272
FCFF model” £2,119,009,730
FCFE model” £1,838,388,344
Price-earnings multiple” £1,010,063,199
Actual market capitalisation” £1,305,047,370
“Table 2.16: Value of Wetherspoon according to different models"
Fernandez (2007) suggests that the most suitable approach to value a company is to
divide this company to its divisions and add the sum of these divisions; by doing that,
the margin of error between the assumptions of the model are limited. I strongly
believe that there is no correct or incorrect method for valuing a company. There are
some models that suit some companies and other ones that suit other companies. A
reliable valuation comes with the experience of the security analyst that has
conducted numerous valuations for companies of different industries, accounting
policies, market capitalisation.
53
“5. Conclusion”
In this chapter I will summarise all the previous analysis and valuation to identify
whether Wetherspoon is a financially healthy and a company that can attract
investors.
In chapter one, I state the continuing success of the company over the years. They
are always growing by opening new pubs and are pioneers and innovators in the
restaurant industry. They are also big contributors to one of the UK’s largest sectors
in terms of revenues.
In chapter two, I analyse the financial performance of Wetherspoon by comparing to

its main competitors in the restaurant sector. I find that Wetherspoon has low
inventory turnover (6 days on average), which indicates that their stock is always
consumed quickly, and it is a great sign for a company that operates pubs. Another
important factor to look at is that Wetherspoon has high borrowings over the past
five years. However, the interest cover ratio shows that this does not pose any
dangers since it is very high due to high operating profits.
In the next chapter, I examine closely the dividend policy, capital structure and risk
management strategies of Wetherspoon. Wetherspoon pays a constant dividend of
£0.12 which shows a sign of stability and consistency. Their capital structure is heavily
based on debt and borrowings, since their external financing is 4.75 times (on
average) above the value of equity. However, as the previous analysis proved,
Wetherspoon is capable of paying its interest expenses. Lastly, Wetherspoon knows
how to deal with all the types of risks that can occur, according to their chairman.
In chapter four, I evaluate Wetherspoon with five different methods and it seems
that the most appropriate one is the dividend discount model because its outcome is
almost the same as the actual market capitalisation. The other models have bigger
deviation from the actual value of Wetherspoon and this stems from the different
assumptions that were used.
54
After taking all the above into consideration, I strongly believe that Wetherspoon is
a continuingly growing company and its financial performance, dividend policies and
hedging activities are excellent signs for a potential investor.
55
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57
Modigliani, F. and Miller, M. (1958) ‘The cost of capital, corporation finance and the theory
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https://www.jdwetherspoon.com/investors-home/reports-results-presentations
58
“Appendices”
A.1 “Wetherspoon’s financial accounts from 2013 to 2017”

In £000's 2013 2014 2015 2016 2017
PBIT 91,510 115,575 106,495 109,727 128,508
Net profit 46,188 41,122 44,824 51,206 56,059
Equity 214,915 227,168 222,893 207,448 228,823
Revenue 1,280,929 1,409,333 1,513,923 1,595,197 1,660,750
Current assets 74,056 78,528 78,464 79,442 93,248
Current liabilities 222,812 257,259 300,562 279,424 348,320
Inventories 19,857 22,312 19,451 19,168 21,575
Dividind price per share 0.12 0.12 0.12 0.12 0.12
Share price (closing) 7.62 7.33 7.14 8.06 10.20
Dividends paid 15,053 14,949 14,591 14,190 13,352
Non-current liabilities 634,851 715,241 766,655 837,839 863,767
Finance costs 34,485 37,277 34,196 34,568 28,557
Cost of sales 1,121,787 1,241,584 1,347,361 1,432,400 1,470,273
Trade receivables 23,940 23,901 26,838 27,616 21,029
Trade payables 207,947 243,160 283,227 266,523 313,525
Capital employed 849,766 942,409 989,548 1,045,287 1,092,590
Gross profit 159,142 167,749 166,562 162,797 190,477
Borrowings 504,018 588,866 633,283 683,418 746,948
Total liabilities 854,941 972,500 1,067,217 1,117,263 1,212,087
A.2 “Domino’s Pizza’s financial accounts from 2013 to 2017”
In £000's 2013 2014 2015 2016 2017

PBIT 20,396 54,026 73,181 83,047 75,500
Net profit 17,568 42,738 49,663 71,816 66,600
Equity 60,154 73,398 97,675 107,158 64,500
Revenue 268,902 294,378 316,788 360,577 474,600
Current assets 71,548 74,649 89,718 75,418 97,000
Inventories 4,249 4,826 6,208 9,240 8,400
Share price 4.96 5.36 9.11 3.49 2.72
Dividends paid 24,609 27,480 31,006 36,963 40,400
Non-current liabilities 44,880 13,208 16,430 64,820 181,100
Finance costs 1,340 1,996 380 1,250 1,900
Cost of sales 171,954 184,645 193,171 215,719 280,700
Trade payables 40,202 52,071 52,912 2,798 86,400
Capital employed 105,034 86,606 114,105 171,978 245,600
Gross profit 96,948 109,733 123,617 144,858 193,900
Total liabilities 106,274 91,799 87,771 149,213 316,400
59
A.3 “Greene King’s financial accounts from 2013 to 2017”
In £000's 2013 2014 2015 2016 2017

PBIT 229,200 199,400 212,300 366,300 346,500
Net profit 98,300 96,100 89,300 190,900 151,700
Equity 971,500 1,062,700 1,028,900 1,873,600 1,944,200
Revenue 1,194,700 1,301,600 1,315,300 2,073,000 2,216,500
Current assets 163,300 410,500 328,800 545,500 624,100
Inventories 27,000 30,500 32,100 41,300 45,000
Share price (average) 7.08 8.65 8.57 8.70 6.82
Dividends paid 54,500 58,700 62,800 93,300 100,100
Non-current liabilities 1,887,000 1,783,200 1,756,600 2,982,700 2,913,300
Finance costs 115,400 94,600 94,400 178,000 162,600
Cost of sales 792,500 864,000 871,000 1,361,600 1,444,900
Trade payables 249,900 256,500 294,100 424,000 429,300
Capital employed 2,858,500 2,845,900 2,785,500 4,856,300 4,857,500
Gross profit 402,200 437,600 444,300 711,400 771,600
Total liabilities 2,231,100 2,297,200 2,286,000 3,735,600 3,654,000
A.4 “Mitchells & Butlers’ financial accounts from 2013 to 2017”

In £000's 2,013 2,014 2,015 2,016 2,017
PBIT 283,000 264,000 270,000 231,000 208,000
Net profit 135,000 93,000 103,000 89,000 63,000
Equity 1,219,000 1,185,000 1,271,000 1,408,000 1,626,000
Revenue 1,895,000 1,970,000 2,101,000 2,086,000 2,180,000
Current assets 461,000 342,000 353,000 336,000 347,000
Inventories 24,000 27,000 24,000 25,000 24,000
Dividind price per share - - - 0.03 0.05
Share price 3.55 4.23 4.06 2.87 2.46
Dividends paid - - - 31,000 12,000
Non-current liabilities 2,831,000 2,953,000 2,876,000 2,909,000 2,687,000
Finance costs 130,000 132,000 130,000 126,000 125,000
Cost of sales 1,508,000 1,548,000 1,662,000 1,655,000 1,786,000
Trade payables 263,000 300,000 317,000 293,000 297,000
Capital employed 4,050,000 4,138,000 4,147,000 4,317,000 4,313,000
Gross profit 387,000 422,000 439,000 431,000 394,000
Total liabilities 3,254,000 3,572,000 3,511,000 3,557,000 3,312,000
60
Date Price Return 1+return Date Price Return 1+return
Aug 08, 2014 187.33 2.4624% 102.4624% Aug 08, 2014 706.00 -0.1417% 99.8583%
Aug 07, 2014 187.17 0.0854% 100.0854% Aug 07, 2014 700.00 0.8535% 100.8535%
Aug 06, 2014 183.33 2.0729% 102.0729% Aug 06, 2014 705.50 -0.7826% 99.2174%
Aug 05, 2014 184.17 -0.4571% 99.5429% Aug 05, 2014 703.00 0.3550% 100.3550%
Aug 04, 2014 181.83 1.2787% 101.2787% Aug 04, 2014 715.00 -1.6926% 98.3074%
Aug 01, 2014 184.00 -1.1864% 98.8136% Aug 01, 2014 732.00 -2.3498% 97.6502%
Jul 31, 2014 182.33 0.9118% 100.9118% Jul 31, 2014 743.50 -1.5588% 98.4412%
Jul 30, 2014 179.00 1.8432% 101.8432% Jul 30, 2014 729.00 1.9695% 101.9695%
Jul 29, 2014 182.50 -1.9364% 98.0636% Jul 29, 2014 736.00 -0.9556% 99.0444%
Jul 28, 2014 180.83 0.9193% 100.9193% Jul 28, 2014 735.00 0.1360% 100.1360%
- - - - - - - -
- - - - - - - -
Jul 28, 2017 267.30 0.0000% 100.0000% Jul 28, 2017 1020.00 0.0000% 100.0000%
61
Jul 27, 2017 270.00 -1.0050% 98.9950% Jul 27, 2017 1023.00 -0.2937% 99.7063%
Jul 26, 2017 270.40 -0.1480% 99.8520% Jul 26, 2017 1024.00 -0.0977% 99.9023%
Jul 25, 2017 263.70 2.5090% 102.5090% Jul 25, 2017 1011.00 1.2777% 101.2777%
Jul 24, 2017 279.20 -5.7116% 94.2884% Jul 24, 2017 1008.00 0.2972% 100.2972%
Jul 21, 2017 281.00 -0.6426% 99.3574% Jul 21, 2017 1020.00 -1.1834% 98.8166%
Jul 20, 2017 280.80 0.0712% 100.0712% Jul 20, 2017 1021.00 -0.0980% 99.9020%
Jul 19, 2017 280.00 0.2853% 100.2853% Jul 19, 2017 1020.00 0.0980% 100.0980%
A.5 “Wetherspoon’s daily price and returns from July 2014 to July 2017”
A.6 “Domino’s Pizza’s daily price and returns from July 2014 to July 2017”
Jul 18, 2017 284.20 -1.4889% 98.5111% Jul 18, 2017 1020.00 0.0000% 100.0000%
Jul 17, 2017 281.40 0.9901% 100.9901% Jul 17, 2017 1017.00 0.2946% 100.2946%
Date Price Return 1+return Date Price Return 1+return
Aug 08, 2014 380.50 1.1757% 101.1757% Aug 08, 2014 790.50 1.6312% 101.6312%
Aug 07, 2014 375.00 1.4560% 101.4560% Aug 07, 2014 790.50 0.0000% 100.0000%
Aug 06, 2014 376.10 -0.2929% 99.7071% Aug 06, 2014 794.00 -0.4418% 99.5582%
Aug 05, 2014 380.40 -1.1368% 98.8632% Aug 05, 2014 797.50 -0.4398% 99.5602%
Aug 04, 2014 373.00 1.9645% 101.9645% Aug 04, 2014 806.00 -1.0602% 98.9398%
Aug 01, 2014 377.00 -1.0667% 98.9333% Aug 01, 2014 816.00 -1.2331% 98.7669%
Jul 31, 2014 373.90 0.8257% 100.8257% Jul 31, 2014 826.00 -1.2180% 98.7820%
Jul 30, 2014 374.00 -0.0267% 99.9733% Jul 30, 2014 831.00 -0.6035% 99.3965%
Jul 29, 2014 375.00 -0.2670% 99.7330% Jul 29, 2014 830.00 0.1204% 100.1204%
Jul 28, 2014 373.70 0.3473% 100.3473% Jul 28, 2014 827.00 0.3621% 100.3621%
- - - - - - - -
- - - - - - - -
Jul 28, 2017 242.30 0.0000% 100.0000% Jul 28, 2017 675.50 0.0000% 100.0000%
62
Jul 27, 2017 270.00 -10.8245% 89.1755% Jul 27, 2017 679.50 -0.5904% 99.4096%
Jul 26, 2017 223.50 18.9011% 118.9011% Jul 26, 2017 676.00 0.5164% 100.5164%
Jul 25, 2017 225.90 -1.0681% 98.9319% Jul 25, 2017 671.50 0.6679% 100.6679%
Jul 24, 2017 227.20 -0.5738% 99.4262% Jul 24, 2017 671.00 0.0745% 100.0745%
Jul 21, 2017 229.20 -0.8764% 99.1236% Jul 21, 2017 679.00 -1.1852% 98.8148%
Jul 20, 2017 231.70 -1.0848% 98.9152% Jul 20, 2017 684.00 -0.7337% 99.2663%
A.7 “Greene King’s daily price and returns from July 2014 to July 2017”
Jul 19, 2017 227.50 1.8293% 101.8293% Jul 19, 2017 682.50 0.2195% 100.2195%
Jul 18, 2017 224.00 1.5504% 101.5504% Jul 18, 2017 674.50 1.1791% 101.1791%
A.8 “Mitchells & Butlers’ daily price and returns from July 2014 to July 2017”
Jul 17, 2017 223.80 0.0893% 100.0893% Jul 17, 2017 665.00 1.4185% 101.4185%
A.9 “FTSE All-share’s daily price and returns from July 2014 to July 2017”
100.5721%
100.7667%
100.0439%
100.5044%
100.3679%
100.0065%
101.0412%
100.0000%
100.0000%
100.0093%
100.2749%
100.6303%
100.6728%
100.5238%
99.5847%
99.6194%
99.0689%
99.0906%
99.6220%
99.9385%
1+return
-
-
-0.4153%
-0.3806%
-0.9311%
-0.9094%
-0.3780%
-0.0615%
0.5721%
0.7667%
0.0439%
0.5044%
0.3679%
0.0065%
1.0412%
0.0000%
0.0000%
0.0093%
0.2749%
0.6303%
0.6728%
0.5238%
Return
-
-
3621.34
3600.68
3573.18
3571.61
3553.64
3540.59
3540.36
3503.69
3503.69
3517.05
4042.02
4079.83
4079.45
4068.25
4042.69
4079.62
4095.07
4067.61
4046.36
4048.85
Price
-
-
Aug 08, 2014
Aug 07, 2014
Aug 06, 2014
Aug 05, 2014
Aug 04, 2014
Aug 01, 2014
Jul 31, 2014
Jul 30, 2014
Jul 29, 2014
Jul 28, 2014
Jul 28, 2017

Jul 27, 2017
Jul 26, 2017
Jul 25, 2017
Jul 24, 2017
Jul 21, 2017
Jul 20, 2017
Jul 19, 2017
Jul 18, 2017
Jul 17, 2017
Date
-
-
A.10 “Daily excess returns of Wetherspoon, FTSE All-share and daily yields of a UK 6-month
bond”
Date Price Wetherspoon return Excess company return Price FTSE All-share return Excess market return UK 6-month bond
Aug 16, 2017 1,052.00 0.0000% -0.2090% 6,944.43 -0.4627% -0.6717% 0.2090%
Aug 15, 2017 1,055.00 -0.2848% -0.4778% 6,897.58 0.6769% 0.4839% 0.1930%
Aug 14, 2017 1,043.00 1.1440% 0.9510% 6,874.64 0.3331% 0.1401% 0.1930%
Aug 11, 2017 1,036.00 0.6734% 0.4744% 6,832.87 0.6094% 0.4104% 0.1990%
Aug 10, 2017 1,032.00 0.3868% 0.1868% 6,902.01 -1.0068% -1.2068% 0.2000%
Aug 09, 2017 1,028.00 0.3884% 0.1874% 6,964.06 -0.8950% -1.0960% 0.2010%
Aug 08, 2017 1,024.00 0.3899% 0.1859% 7,001.48 -0.5359% -0.7399% 0.2040%
Aug 07, 2017 1,022.00 0.1955% 0.0015% 6,994.93 0.0936% -0.1004% 0.1940%
Aug 04, 2017 1,027.00 -0.4880% -0.6870% 6,978.63 0.2333% 0.0343% 0.1990%
Aug 03, 2017 1,020.00 0.6839% 0.4839% 6,946.91 0.4556% 0.2556% 0.2000%
- - - - - - - -
- - - - - - - -
Aug 03, 2018 1,231.00 0.0000% -0.7140% 7403.08 0.0000% -0.7140% 0.7140%
Aug 02, 2018 1,215.00 1.3083% 0.5963% 7332.41 0.9592% 0.2472% 0.7120%
Aug 01, 2018 1,215.00 0.0000% -0.7080% 7405.43 -0.9909% -1.6989% 0.7080%
Jul 31, 2018 1,219.00 -0.3287% -1.0347% 7484.05 -1.0561% -1.7621% 0.7060%
Jul 30, 2018 1,221.00 -0.1639% -0.8739% 7446.78 0.4992% -0.2108% 0.7100%
Jul 27, 2018 1,219.00 0.1639% -0.5171% 7447.67 -0.0120% -0.6930% 0.6810%
Jul 26, 2018 1,225.00 -0.4910% -1.1680% 7411.53 0.4864% -0.1906% 0.6770%
Jul 25, 2018 1,221.00 0.3271% -0.3479% 7403.69 0.1058% -0.5692% 0.6750%
Jul 24, 2018 1,231.00 -0.8157% -1.4857% 7450.15 -0.6256% -1.2956% 0.6700%
Jul 23, 2018 1,248.00 -1.3715% -2.0455% 7402.59 0.6404% -0.0336% 0.6740%
63
A.11 “Regression output”
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.216947792
R Square 0.047066344
Adjusted R Square 0.043284862
Standard Error 0.006324408
Observations 254
ANOVA
df SS MS F Significance F
Regression 1 0.000497838 0.000498 12.44653 0.000497521
Residual 252 0.010079529 4E-05
Total 253 0.010577367
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.004171572 0.000408789 -10.2047 1.09E-20 -0.00497665 -0.00336649 -0.00497665 -0.003366494
X Variable 1 0.550845241 0.024369342 3.527964 0.000498 0.03798064 0.133967695 0.03798064 0.133967695
A.12 “Monthly price and yields of FTSE All-share and a UK 6-month bond from 2013 to
2018”
Yield (%)
0.464
0.405
0.401
0.394
0.388
0.392
0.402
0.398
0.398
0.402
0.714
0.706
0.632
0.552
0.651
0.489
0.451
0.405
0.468
0.55
UK 6-month
-
-
May-14
May-18
Nov-13
Nov-17
Mar-14
Mar-18
Dec-13
Aug-18
Dec-17
Feb-14
Sep-13
Feb-18
Apr-14
Oct-13
Apr-18
Jun-14
Jun-18
Jan-14
Jan-18
Jul-18
Date
-
-
Jun-14 3,600.19
May-14 3,655.01
Apr-14 3,619.83
Mar-14 3,555.59
Feb-14 3,666.66
Jan-14 3,496.51
Dec-13 3,609.63
Nov-13 3,548.45
Oct-13 3,585.32
Sep-13 3,443.85
Aug-18 4,205.70
Jul-18 4,253.31
Jun-18 4,202.25
May-18 4,222.20
Apr-18 4,127.68
Mar-18 3,894.17
Feb-18 3,981.61
Jan-18 4,137.66
Dec-17 4,221.82
Nov-17 4,033.84
Price
FTSE All-share
-
-
Date
-
-
64

Dissertation 2

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Abstract

In this paper I examine and answer whether J D Wetherspoon plc is a financially

“1. Introduction” ...................................................................................................................... 8

“Equation 2.1: Return on capital employed” ......................................................................... 13

“Table 2.1: ABHR of the four companies”.............................................................................. 31

“Abnormal buy-and-hold returns” ABHR

“Capital asset pricing model” CAPM

“Cash conversion cycle” CCC

"Debt to equity” D/E

“Dividend per share” DPS

“Earnings before interest, tax, depreciation and amortisation” EBITDA

“Earnings per share” EPS

“Financial Times Stock Exchange All-share” FTAS

“Free cash flow to the equity” FCFE

“Free cash flow to the firm” FCFF

“Gross domestic product” GDP

“Gross profit margin” GPM

“Internal rate of return” IRR

“Mitchells & Butlers” M&B

“Net present value” NPV

“Net profit margin” NPM

“Present value of growth opportunities” PVGO

“Price to earnings” P/E

“Profit before tax and interest” PBIT

“Return on capital employed” ROCE

“Return on shareholders’ funds” ROSF

“Weighted average cost of capital” WACC

“1.1 Profile and historical information of Wetherspoon plc”

“1.2 Industry/sector information and profile of the competitors of

For my analysis to be meaningful and to identify whether Wetherspoon is a healthy

In this section, it is important to state two key macroeconomic parameters regarding

Secondly, the other macroeconomic factor that needs to be mentioned is the

“2.1 Profitability ratios”

“2.1.1 Return on capital employed”

ROCE is a fundamental measure of business performance which expresses the

𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥

“Equation 2.1: Return on capital employed”

Return on capital employed

JD WETHERSPOON Domino's Greene King M&B AVERAGE

“Figure 2.4: Return on capital employed”

ROSF is a measure of business performance which expresses the relationship

𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠

“Equation 2.2: Return on shareholders’ funds”

Return on shareholders’ funds

JD WETHERSPOON Domino's Greene King M&B AVERAGE

“Figure 2.5: Return on shareholders’ funds”

“Equation 2.3: Gross profit margin”

Gross profit margin

JD WETHERSPOON Domino's Greene King M&B AVERAGE

“Figure 2.6: Gross profit margin”

“Equation 2.4: Net profit margin”

Net profit margin

JD WETHERSPOON Domino's Greene King M&B AVERAGE

“Figure 2.7: Net profit margin”

“2.2.1 Current ratio”

“Equation 2.5: Current ratio”

JD WETHERSPOON Domino's Greene King M&B AVERAGE

“Figure 2.8: Current ratio”

“2.2.2 Quick ratio (acid test)”

“Equation 2.6: Quick ratio”

JD WETHERSPOON Domino's Greene King M&B AVERAGE

“Figure 2.9: Quick ratio”

“2.3 Efficiency ratios”

“2.3.1 Inventory turnover”