Financial Analysis Of A Listed Retail Company On London Stock Exchange And Its Competitor - Essay.

Choose a listed company on the London Stock Exchange (LSE) in any of the following sectors: Retailers, Food &Beverages, Health Care, Oil & Gas, Pharmaceuticals & Biotech, Telecommunications and Utilities.  Agree your choice with your Lecturer at least 4 weeks before the Assignment submission date.

Obtain the annual reports of the companyand one of its main competitors for the latest FIVE yearsfrom its website or other sources.

a). Write an introductory report on the activities of the company and its position in the industry with respect to its competitor.

b). Critically compare and analyse their financial performance over the last FIVE years. Relating to each category of ratios, which company has performed better? Overall, which company is better managed. Explain your reasons.

c). Arising from your analysis, identify any strategic and operational issues that need to be addressed by the companies and make appropriate recommendations with justifications.

Background of the Company and Its Position in Front of Its Rivals

The objective of the report is to analyses the financial performance of the company namely Debenhams Plc and its competitor. This report is divided into three tasks i.e. background of the company, five year financial performance of the companies through ratio analysis and strategic and operational issues of the company that influences the operations of the business. Ratio analyses of the company analyze the performance of the company and its position in front of its rivals.   

Debenhams plc is a leading British Multinational retail company started under the format of departmental store in UK and Ireland. It has also different stores in different countries The first store of the company is in London which has founded in 18^th century and now the company ahs the 178 locations across the UK, Denmark and Ireland. It is the public company listed in London Stock Exchange (LSE).the current employees are 27,187.The company appointed the new Director namely Mr David Adams in October 2017.Debenhams has the unique position in the fashion accessories of all the ages and genders from more than two centuries (Debenhams, 2017). The company runs its 160 mid size departmental stores in the UK and deals in women, kids and men’s apparel, cosmetics, electrical, house ware and toys. The leading brands of the company are Debut, Red Herring and New England about 70% of its total sales. The company also offers a weeding registry and inbuilt stores and restaurants. Apart from UK the company opened its 7-0 stores at global level which includes the countries like Bahrain, Turkey and Indonesia and company also has 15 stores which is owned and located in Ireland and Denmark. The company also runs its online business in the name of Debenhams Direct (Morning star, 2017).

The Debenhams Plc rivals are John Lewis Partnership Plc, Marks and Spencer Group Plc and House of Fraser Limited.The3 position of the company against these competitors are lag behind in some of its areas. In the below given figure it is identified that company lags behind in some of the areas. In the below given table the position of the competitors are listed according to the financial performance of the business. It can be identified that net income and market capitalization is low as compared to its key competitors like Mark and Spencer and other groups. Similarly, the interest coverage rate is high as compared to its competitors.

Ratio Analysis of Five Years

 

(Source: Morningstar, 2017)

The position of the company is behind as compared to its strong competitors in the market. The presence of many retail stores makes the market share is low. The company’s brand is not into all types of customer segments and limited global geographic presence (Financial Times, 2017). As compared to industry average the position of the company is not good which is clearly indicated in the above given figure.

Ratio Analysis is an important part to analyse the company’s financial performance. Accounting ratios are important to analyses the financial position of the company. It gives important information to its users like investors, bankers and creditors. It analyses the profitability, efficiency and comparing performance of the company with its historical trends to identify the loopholes in the business. Below given ratios calculates the performance of the company and compare with its competitor namely Marks and Spencer Plc.

Profitability ratios

Profitability ratio assesses the profits of the company and it evaluates the capacity of the company to earn profits. The Profit refers that the amount which is left after excluding of all costs and overheads from the income. There are different kinds of ratios which assess the profitability position of the both the companies that includes return on assets ratio, gross profit margin ratio, return on assets, operating margin, return on sales and return on equity. Gross margin is helpful for the company to identify the profitability of the company’s goods and services. Three key ratios can be taken to evaluate the performance of the business i.e. Gross Profit margin, Return on Assets and Return on Equity. Return on assets is a financial ratio that indicates the portion of profit in the form of percentage of the company generates on its assets (Higgins, 2012). It is an important ratio that evaluates the company’s earnings on it’s per dollar of its assets. Lastly, the return on equity is also the best indicator of the company to assess the profits. It is an important ratio for the equity holders as they get the returns in a variable manner. For this reason this ratio is important for the investors to know their returns in a long run. Below given table indicated the profitability ratio of 5 years of both the companies.

Profitability Ratio	2016	2015	2014	2013	2012
Gross profit ratio	12.51	12.8	12.06	13.5	13.5
Return on Assets	3.9	4.3	4.05	6.0	5.9
Return on equity	0.09	0.11	0.11	0.17	0.18

(Source: Yahoo Finance, 2017)

Profitability Ratio	2016	2015	2014	2013	2012
Gross profit ratio	39.11	38.65	37.5	37.8	6.62
Return on Assets	4.9	5.7	6.4	5.9	6.1
ROE	0.11	0.15	0.19	0.18	0.18

It is identified from the results of the table of the profitability ratio analysis the company’s profitability is moderate as compared to its previous years. Similarly, the performance of its peer group namely Mark and Spencer which performs better in its 5 year period. The profitability position of its rival is good and it generates good profits in these years. The company’s profitability is low due to increase in cost of goods and poor pricing strategies that will influence the position of the company’s financial performance (Market Watch, 2017). Moreover, the company’s debt is high so that it influences the profitability of the company. The company needs to set effective pricing and sales strategies to generate sufficient profits and maintain its position in the long run.

Profitability Ratios

It assesses the capacity of the company to pay its debts in the long run. From this ratio, company can assess its capacity to pay its short term debts. It can be computed through two different methods i.e. current ratio and quick ratio. Liquidity ratio measures the capacity of the company to pay its debts and calculates the margin of safety through different methods (Guru Focus, 2017). Current liabilities are measure the importance of current assets to assess the company’s debts at the time of emergency. This ratio is helpful for the financial managers to evaluate the issues regarding going concern and cash flow positioning of the business. It is also helpful for the company to compare the financial results of the company with its previous years to analyze the liquidity position of the company. Below given table indicated the liquidity ratio of the both the companies to analyses the solvency position of the company with its previous years (Vogel, 2014). Below given table indicated the liquidity ratio of both the companies to analyze the solvency position of the company with its previous years. 

Liquidity Ratios	2016	2015	2014	2013	2012
C R	0.73	0.66	0.64	0.63	0.63
Q R	0.18	0.11	0.12	0.07	0.10

(Source: Healy and Palepu, 2012)

Liquidity Ratios	2016	2015	2014	2013	2012
C R	0.69	0.68	0.58	0.56	0.56
Q R	0.24	0.24	0.16	0.17	0.18

(Source: Fridson and Alvarez, 2011)

In the above given table it is indicated that liquidity position of the company is god as compared to its competitor. Moreover, it is also identified that the trend of the company towards upwards according to the previous years. The reason behind this upward trend is the good liquidity position and the average collection period of the company is good and the management effectively received their payments in good time limits so that it maintains the liquidity position of the company (David, 2011). The company needs to maintain this position by framing effective credit policies so that the capital of the company is not hampers at the time of the payment of short term debts. Similarly, quick ratio of the company is also improved as compare to its previous years. As compared to its rival the quick ratio of the company is low. The company needs to improve its liquidity position of the company to meets short term debts. If the company cannot meet its present obligations and debt its existence and survival becomes doubtful and all other measures related to the company becomes secondary if not completely irrelevant (Brigham and Ehrhardt, 2013).

The gearing ratio measures the relationship between the company’s debts to its equity. It measures the financial risk of the company is subjected, High debt results the financial challenges. High gearing ratio indicates the level of debt and equity is at high proportionate level and low gearing ratio depicts the low portion of debts to equity level. It represents the leverage of the company where company can continue its daily operations by using its debts. At the time of downturn or crisis in the business, companies have the trouble to meet its debts payments that will cause the higher financial risk or bankruptcy (Brigham and Houston, 2012). The situation become critical when the company lend the money on volatile rate of interest and sudden growth in interest rates leads to failure of interest payments.

Liquidity Ratios

A high gearing ratio is not favorable for the company as it is the risk of payments of debts on time. A low gearing ratio is a good indicator of effective financial management. The most effective method to calculate gearing ratio is to add all types of debts like long term debts, short debts and bank overdraft by shareholder’s equity (Usman and Khan, 2012). It is computed by earnings before interest and taxes by interest payable. The higher the interest coverage ratio is good for creditors. Below given table indicated the results of the gearing ratio of the company of five years which represents the degree of leverage.

Ratios	Formulas	2016	2015	2014	2013	2012
Gearing ratio	Long Term debt/Shareholder funds	0.22	0.23	0.28	0.31	0.37
Interest coverage ratio	EBIT/Operating Profit/Interest Expense	8.5	7.8	9.2	15.27	14.5

(Source: Paradi, Rouatt and Zhu, 2011)

S. No	Ratios	2016	2015	2014	2013	2012
Gearing ratio	Long term debt/Shareholder funds	0.50	0.53	0.59	0.66	0.66
Interest coverage ratio	EBIT or Operating Profit/Interest Expense	5.09	6.2	4.9	5.3	5.5

(Source: Kar, Nazl?o?lu, and A??r, 2011)

As per the above given table it is indicated that company’s gearing ratio is low in the year 2016 as compared to its previous years. It indicates that company’s debts are less proportionate to its equity. Low gearing ratio is good for company which represents the good financial stability. The trend of the company is good as the company maintain its debts with equity in these years. In 2012 the ratio of the company is high but later on it decreases that indicates the company effectively uses its debts to increase value for its shareholders (Rao, 2011). As compared to its rivals the gearing ratio of the company is low and the interest payment capacity is good as compared to its competitor in its previous years. It means that the company sufficiently pays its interest before tax and interest for a time period (Chandra, 2011). The gearing ratio of the company is better than its competitor according to the given results in the table.

Efficiency Ratios   

This ratio measures that how company uses its assets and liabilities effectively. Efficiency calculates the receivables turnover, repayment of liabilities and use of inventory and machinery. From these ratios company measure how effectively business uses its assets to generate revenues and ability to manage those assets. Below given table indicated the three ratios which determines the efficiency of the company in the long run i.e. inventory turnover ratio, accounts turnover ratio and assets turnover ratios (Tugas, 2012).

Efficiency ratio of Debenhams Plc

S. No	2012	2013	2014	2015	2016
Inventory Turnover ratio	6.1	5.6	5.8	5.9	5.9
Accounts receivable  turnover	96.9	108.6	85.6	82.9	75.5
Fixed asset turnover ratio	2.1	2.1	2.3	2.4	2.5

(Source: Schoenebeck and Holtzman, 2013)   

 Efficiency ratio of Mark and Spencer Plc

S. No	2012	2013	2014	2015	2016
Inventory Turnover ratio	8.2	8.1	7.6	7.9	8.0
Accounts receivable  turnover	74.2	71.1	56.9	58.2	62.8
Fixed asset turnover ratio	5.0	4.9	5.5	6.0	7.03

(Source: Xu, et al., 2014)

It can be identified from the above table the inventory turnover ratio of the company is stable as compared to its previous years it means that company effectively converted its inventories into sales. The performance of the competitor is better than the company it can be identified from the trend of the both the companies the competitor namely Mark and Spencer Plc effectively convert its inventory into sales. Similarly, the accounts receivable turnover ratio is also high as compared to its previous years which indicate that company cannot collect the money from its debtors in a timely manner or the company can take a long time to collect its money from debtors. Similarly, the performance of the company is not better as compared to its competitor (Ongore and Kusa, 2013). The competitor’s ratio is good and it collects the receivables in a timely manner from debtors.     

Operational Issues and Recommendations

Stock Market Performance Ratios

It is an important ratio for the investors to assess the market position of the company on the basis of key important ratios. These ratios are helpful for the investors regarding dividends and profits payout to its earnings of the investors in the current period of time and long time. Four key ratios are calculated in the below given table of both the companies.

Stock Market Performance ratios of Debenhams Plc

S. No	Ratios	2016	2015	2014	2013	2012
1	Earnings Per Share Ratio (EPS)	0.07	0.07	0.07	0.09	0.1
2	Dividend yield	5.9	4.64	4.52	4.66	2.89
3	Dividend payout ratio	43	46	39	33	30.6
4	Price Earnings ratio (P/E ratio)	8.71	10	9.3	11.63	9.9

(Source: Maricica and Georgeta, 2012)

S.NO	Ratios	2016 (In GBP Millions)	2015 (In GBP Millions)	2014 (In GBP Millions)	2013 (In GBP Millions)	2012 (In GBP Millions)
1	Earnings per Share ratio	0.49	0.59	0.64	0.56	0.64
2	Dividend Yield	6.8	4.17	3.78	3.71	1.61
3	Dividend payout ratio	68.5	52.2	51.7	18.4	26.2
4	Price earnings ratio P/E Ratio	16.37	18.14	14.04	13.83	12.9

 
As per the above table, it is indicated that stock performance ratio of the company is increased in its previous years (Dividend yield and payout ratio) which indicates that Debenhams earns sufficient income so that it can pay the reasonable profits to the investors. The trend of the payout ratio is instable in some years but it maintained the ratio of payouts that is profitable for investors. Similarly, EPS of the Debenhams is not stable as it is increased or decreased in its previous years. It indicates that company earned better in most of the years and it is the reliable company to invest in. On the other side as compare to its competitor the performance of the company is not good (Wahlen and Wieland, 2011). Marks and Spencer provides good returns and payout to its shareholders. The good performance of the company indicates that the company invests in the good projects and the goodwill of the company is better so that it generated the sufficient profits and returns on its projects.

It has identified from the financial performances of the company there are five main issues which hampers the growth of the company. As per the chairman statement and company’s reports it is revealed that company’s lags behind these issues.

1) Cost Factor is High: It can be identified from the performance of the company in the above ratio analysis the company’s cost is increases due to large number of stores into the long time lease period. So the management faces the difficulties to close the stores which are of long term lease. Lengthy and expensive leases are the reason for the fall of profitability of the business (David, 2011). The management should strategic plan to reduce the cost of the business by shut down their non profitable outlets and invests in the expansion of the existing outlets of the company which gives the profitable returns to the company.

2) Product development: This is also an major issue faces by the company to cut down its operating profits as compared to its competitor namely Marks and Spencer. Product development means changes in the infrastructure of the stores and product lines are the good strategy of the companies to generate good profits. The company should develop its stores on the basis of new themes and infrastructure so that it attracts the customers well. The company should introduce its own specialize products in the market that will increase the performance and footfalls of the project (Czinkota, Ronkainen and Moffett, 2011). As per the statement of the top executives of the company namely Richard Chamberlain analyst at RBC capital markets said “Company strong in beauty and cosmetics and they’re the market leader in occasion wear”.

3) Online competition: The e-commerce concept of the business can churn the profits of the many companies. The company effectively tied up with e commerce giants and sells its products. The company needs to adopt the online internet and mobile strategy to increase its underperforming products. It has been identified from the sources of the company the online revenues of the company is grown by 9% and accounted for 15% of group sales. The competitor report revealed that 35% of the sales were made online, that indicates that Debenhams has plenty of room to grow its ecommerce business.

4) Labour scheduling and hiring: This issue is takes lots of time normally. The company hires the labour in its stores according to the latest regulations like labour union act and employment act. Changes in regulations will affect the demand and supply factors of the labour capital that will increase the cost of the company (Ameer and Othman, 2012). The company can avoid this issue by forecasting the proper labour planning according to the demand of the company and company should follow the compliance and regulations effectively that will helps the management to save million dollars of fines and legal suits.

5) New Technology: Advanced technology also the boon or bane for the company in the hardcore competition in the retail industry. The company needs to focus on the advanced technology to capture major markets and analyze the latest trends of the consumers. Big data analytics is helpful for the company to evaluate the changing trends of the consumers which helps company to stay competitive in the market and generates effective revenues in the long run (Sanjeev and Jauhari, 2012). Changes in technological factors affect the strategies of the business and its operations.

Conclusion

As per the above report, it is identified that Debenhams position is growing in the retail industry. Moreover, it also concludes n the ratio analysis, the efficiency and gearing ratios of the company is improved as compared to its previous years. The performance of the competitor is better as compared to the Debenhams. Lastly, it also concludes that strategic and operational issues influence the performance of the business performance in the long run.    

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