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Mouthing off

Mr Martin has nothing to fear on that score. He gets by on a fixed fee of £324,000 a year, although he has the advantage of being able to pocket over £4m a year in Wetherspoon dividends. That, however, is because he still owns 33 per cent of the company he founded 40 years ago, so it might be attributed to the rewards for real entrepreneurialism, not the ersatz version often concocted by the bosses of listed companies.

His exhortations for the UK to leave the EU, which almost make Dominic Cummings seem ambivalent, are entertaining enough. His attacks on the UK’s corporate governance rules are more significant since they come from inside the largely self-serving machine that acts as a cover for company bosses to extract economic rents or – worse – as an encouragement for them to do so.

However, the question is whether Mr Martin is entitled to do this? The point being that, if Wetherspoon’s financial performance is good enough, he will have the credibility to attack both the EU’s fisheries policy and the UK’s corporate governance code in equal measure; if it’s not, sooner or later he becomes a tiresome windbag.

Happily, Wetherspoon’s performance looks just fine. The table compares it with its four obvious quoted competitors; the lines to focus on are those for return on capital, both for accounting profits and for cash flow. Note, also, that these metrics – as for other performance measures in the table – are for the equally-weighted average of the past five years; in other words, they indicate a company’s underlying capability in the face of varying economic conditions.

 

Let the figures do the talking
 JD WetherspoonMitchells & ButlersMarston'sEi GroupYoung & Co
Share price (p)1,5404601202801,670
Market cap (£m)1,5521,9077791,233733
Five-year share price return (% pa)14.35.2-3.022.99.8
Dividend yield (%)0.8nil6.1nil1.2
Ebitda margin (%)11.919.019.143.523.7
Net income margin (%)3.54.73.3-1.911.0
Return on capital (%)7.74.73.74.54.4
Return on equity (%)23.36.64.2-1.26.1
Cash flow/capital (%)12.05.74.09.64.8
Free cash/equity (%)29.14.91.912.93.6
Net debt/ebitda3.75.18.77.22.4
Debt/equity (%)30615119915631
Five-year growth rates (% pa):     
Revenue5.22.67.62.87.5
Ebitda4.0-0.14.9-1.89.1
EPS16.08.2nana4.5
Dividendnil*2.9*6.0
Source: S&P Capital IQ; all measures of company performance, five-year average; *Dividends axed 

 

On each of the four measures for returns on capital, Wetherspoon scores the best and is furthest ahead on, arguably, the two most important measures – those for returns on equity (RoE). Its average accounting RoE at 23.3 per cent is more than three times better than its nearest rival, Mitchells & Butlers (MAB) at 6.6 per cent. Its free-cash RoE at 29.1 per cent is more than twice that of second-placed Ei Group (EIG) at 12.9 per cent.

True, two caveats are needed. First, measuring the equity employed in a business – let alone comparing equity between companies – is hellishly difficult; accounting rules and varying accounting treatments see to that. So equity-based returns must be treated cautiously.

Second, while Wetherspoon’s accounting RoE has been remarkably steady over the five years, its free-cash RoE has been dipping fast. Its best free-cash return was the first year of the five – 2014-15 – and the most recent year generated barely more than half the five-year average of 29 per cent. Granted, returns are also falling among the competition, possibly connected to consumers’ fading confidence as the UK stutters towards the Brexit that Mr Martin eagerly awaits. Only Marston’s (MARS) and Young & Co (YNGA) produced a free-cash RoE in their latest full year higher than their five-year average. At both these companies, however, the figures were still low enough to be below their cost of capital. Marston’s managed a 2.1 per cent return against an average of 1.9 per cent. For Young’s, the latest RoE was 4.4 per cent against a 3.6 per cent average.

As to how Wetherspoon manages to produce such superior returns, that is connected to efficiency. It is surely no coincidence that Wetherspoon turns over its capital far more rapidly than its rivals. In its latest full year, revenue was 1.4 times fixed assets compared with a fixed-assets turn of just 0.6 times at its nearest rival on this measure, Fuller, Smith & Turner (FSTA). That allows keen pricing and unexceptional profit margins (see table) to generate exceptionally good capital returns. Sure, there is a bit more to it than that and it’s much easier to say what makes a business successful than to put it into practice. But if a boss can earn the right to mouth off, Mr Martin has done that.