Lewis Group [Part 3]

In depth Fundamental Anaylsis of the Lewis Group Balance Sheet

Looking at the consolidated statement of financial position of Lewis Group as at 31 March 2023 we can make the following observations surrounding the companys balance sheet health:

The entity has total assets of R7.047b and total liabilities of R2.437b. Total assets thus exceed total liabilities by R4.610b and Lewis is thus in a solvent position. Lewis currently has a market capitalisation of R2.28b compared to its net asset value of R4.610b and is thus trading at a large discount 49.5% to its net asset value.

When assessing the liability structure of Lewis, we can see that liabilities are made of the following components:

• Non-current liabilities: Lease-liabilities, deferred taxation and retirement benefit liabilities
• Current liabilities: Trade and other payables, income received in advance, insurance liabilities, short-term interest-bearing borrowings and taxation

From this we can see that entity has no long-term debt which is a massive benefit when interest rates are high. The business has very limited gearing and equity shareholders thus do not have to wait for lenders to be paid out before receiving any retained profits.  Available short-term facilities include revolving credit and overnight facilities and thus given the entity flexibility in financing its working capital. 

Looking to the balance sheet of the business we can see that majority of the balance sheet relates to trade and other receivables of R4.071b which is expected of a business that makes more than 50% of the sales on credit. My primary concern when investing Lewis would be the debtors book of the company and there ability to recover these amounts when consumers come under pressure.

The gross receivables of the company are R6.122b and the net receivables recorded on the balance sheet are R4.071b as mentioned above. Lewis have thus provided for over a third of the debtors book as bad debt which appears reasonable given then current economic environment and the profile the target consumer. 

Thus % provision, is however down from the prior period in which indicates management expect to recover a greater percentage on debts going forward than in the prior year. 

Lewis divides the debtors book into three groups: satisfactory paid, slow payers and non-performing accounts. The following impairment provisions have been recognised for the respective customers:

1. Satisfactory paid: 21.5%
2. Slow payers: 73.2%
3. Non-performing accounts: 88.4%

Lewis has current assets of R5.269b and current liabilities of R1.664b which comes out to a current ratio of 3.16 well above the industry norm in the retail industry. Overall, I would rate the balance sheet of Lewis as 4/5 and the only thing that I would like to see would be more cash on the balance sheet. The entity currently has R183m in cash on hand, but this is not sufficient to cover short-term obligations like trade payables.