Financial Structure Of The Company For Analysis
Company Overview
Describe about the Financial Structure Of The Company for Analysis?
The financial statement is a statement that represents the detail Financial Structure Of The Company. The information that is derived from the financial report is helpful for all the stakeholders and other people who have some interest in the organization. Users of the information can be segregated into two categories- external users and the internal users. The external users include potential investors, government, and suppliers & customer. On the other hand, internal users are the managers, employees, and shareholders. There are obviously some other users, but here only six main users are taken into the consideration. Two companies are selected here the Next Plc and the Debenhams Plc. Both are belonging to the retail sectors and listed on the London Stock Exchange. The main objective of conducting this study is to make a detailed analysis of the financial statement of both the companies and to understand how the financial statement is helping the users to take their investment decisions (Lunt, 2008).
Debenhams Plc was introduced in the year 1813. There was already an existing company created by William Clark, and the new company was formed when William Debenhams invested in that company. This company is now operating almost 27 countries covering 240 cities around the world. Some of their competitors are Tesco, Sainsbury, and Wal-Mart, etc. They provide an exclusive collection of their brands and ensure a better customer satisfaction (McLeod, MacDonell & Doolin, 2007).
Next plc is one of the reputed companies among the group of plc’s belonging to the retail sector. The company was incorporated in the year 1982. The company is having a large collection of women wear and accessories. They have supplied the official clothing to the Paralympic and Olympic games in 2012. Currently, they are providing services to almost four million consumers, and their business is mainly done through online (Lynch & Gregor, 2004) : (Nextplc.co.uk, 2012).
Before conducting the financial analysis, some relevant information is execrated and calculated from the annual reports of both the companies and the overall calculation is based on the ratios. The useful ratios are presented below:
|
Ratio analysis ( all in £) |
||||||
|
Debenhams Plc |
Next Plc |
|||||
|
2014 |
2013 |
2012 |
2014 |
2013 |
2012 |
|
|
Liquidity Ratios |
||||||
|
Current assets |
486.3 |
470.5 |
459.5 |
1468.1 |
1207.8 |
1139.9 |
|
Current liabilities |
758 |
741.9 |
727 |
834.5 |
816 |
742.4 |
|
Current Ratio |
0.641556728 |
0.634182504 |
0.6320495 |
1.75925704 |
1.480147059 |
1.535425647 |
|
Quick assets |
140.6 |
112.6 |
127.2 |
1082.5 |
876 |
768 |
|
Quick Liabilities |
534.2 |
506 |
563.6 |
831.9 |
810.6 |
734.8 |
|
Quick Ratio |
0.263197304 |
0.222529644 |
0.225692 |
1.30123813 |
1.080680977 |
1.045182363 |
|
Efficiency ratio |
||||||
|
Receivables |
74.7 |
78.3 |
75.4 |
808 |
718.1 |
699.1 |
|
Revenue |
2312.7 |
2282.2 |
2229.8 |
3740 |
3562 |
3441.1 |
|
Receivable turnover |
30.95983936 |
29.14687101 |
29.572944 |
4.628712871 |
4.960311934 |
4.922185667 |
|
Receivable collection period |
11.78946686 |
12.52278503 |
12.342363 |
78.85561497 |
73.58408198 |
74.15404958 |
|
Inventories |
345.7 |
357.9 |
332.3 |
385.6 |
331.8 |
371.9 |
|
Cost of goods sold |
2033.4 |
1982.6 |
1927.5 |
2499.9 |
2437 |
2395.8 |
|
Inventory turnover |
5.881978594 |
5.539536183 |
5.8004815 |
6.483143154 |
7.344786016 |
6.442054316 |
|
Inventory Turnover period |
62.05394905 |
65.88999294 |
62.925811 |
56.29985199 |
49.69511695 |
56.65894482 |
|
payables |
529.3 |
545.8 |
525.4 |
594 |
537.2 |
545 |
|
Cost of goods sold |
2033.4 |
1982.6 |
1927.5 |
2499.9 |
2437 |
2395.8 |
|
Payable payment turnover |
3.841677688 |
3.632466105 |
3.6686334 |
4.208585859 |
4.53648548 |
4.395963303 |
|
Payable payment period |
95.01057342 |
100.4826995 |
99.492088 |
86.7274691 |
80.45876077 |
83.03072043 |
|
EBIT |
118.8 |
149.9 |
170.1 |
720.5 |
690.9 |
604.7 |
|
Interest |
13 |
10.9 |
11.8 |
25.3 |
24.4 |
25.2 |
|
Interest Coverage Ratio |
9.138461538 |
13.75229358 |
14.415254 |
28.47826087 |
28.31557377 |
23.99603175 |
|
Equity |
764.4 |
744.4 |
661 |
286.2 |
285.6 |
222.7 |
|
Total asset |
2148.4 |
2132.8 |
2091.2 |
2144.6 |
1893.6 |
1854.2 |
|
Equity Gearing ratio |
0.355799665 |
0.349024756 |
0.3160865 |
0.133451459 |
0.150823828 |
0.120105706 |
|
Total asset |
2148.4 |
2132.8 |
2091.2 |
2144.6 |
1893.6 |
1854.2 |
|
Revenue |
2312.7 |
2282.2 |
2229.8 |
3740 |
3562 |
3441.1 |
|
Asset Turnover Ratio |
1.076475517 |
1.070048762 |
1.0662777 |
1.743914949 |
1.881073088 |
1.855840794 |
|
Debt |
623 |
646.5 |
703.2 |
1023.9 |
792 |
889.1 |
|
Equity |
767.4 |
744.4 |
661 |
286.2 |
285.6 |
16623 |
|
Debt Equity ratio |
0.811832161 |
0.868484686 |
1.0638427 |
3.577568134 |
2.773109244 |
0.053486134 |
|
Profitability Ratios |
||||||
|
Gross Profit |
279.3 |
299.6 |
302.3 |
1240 |
1125 |
1045.3 |
|
Revenue |
2312.7 |
2282.2 |
2229.8 |
3740 |
3562.8 |
3441.1 |
|
Gross profit ratio |
12.1% |
13.1% |
13.6% |
33.2% |
31.6% |
30.4% |
|
Operating profit |
128.6 |
155.4 |
175 |
722.8 |
695.1 |
601.8 |
|
Revenue |
2312.7 |
2282.2 |
2229.8 |
3740 |
3562.8 |
3441.1 |
|
Operating Profit Ratio |
5.6% |
6.8% |
7.8% |
19.3% |
19.5% |
17.5% |
|
Net Profit |
87.2 |
115.9 |
125.3 |
553.2 |
508.6 |
474.8 |
|
Revenue |
2312.7 |
2282.2 |
2229.8 |
3740 |
3562.8 |
3441.1 |
|
Net Profit Ratio |
3.8% |
5.1% |
5.6% |
14.79% |
14.28% |
13.80% |
(Hernes & Sobieska-Karpińska, 2015)
Payment of dividend (extracted from cash flow) (all amounts are in $)
|
Debenhams Plc |
Next Plc |
|||||
|
2014 |
2013 |
2012 |
2014 |
2013 |
2012 |
|
|
Dividend |
41.7 |
41.4 |
38.5 |
164.8 |
147.7 |
135.1 |
Note: The latest year is taken 2014 as for the year 2015 no full information is available.
1. Potential investors
Potential investors are those persons who are willing to invest in the organization. They are the future investors. Sometimes they knew as the lender of the organization like banks, financial institutions, etc. The main information that is needed by these users is the financial stability of the company and their growth structure. The financial stability can be ascertained through the profitability ratios and with some of the efficiency ratios. They also keep a track on the liquidity balances. Now if the above two companies are taken into consideration, then it can be found that the interest coverage ratio in Next Plc is more than the Debenhams, and it is increasing. More ratios mean more ability to pay the interest obligation. Now if the investors are willing to invest in the fixed capital of the company, then the Next plc will be safer than the Debenhams (Nextplc.co.uk, 2013). On the other hand, the debt equity ratio also is more in case of Next plc it implies that they have more dependency on debt capital than the equity capital. From the view point of the liquidity Next plc is more suitable than the other one as both the current ratio and quick ratio is more, but the analysis of the cash flow statement of both the companies for the year 2014 reveled that Debenhams Plc repaid their loan obligation in order to reduce their financial burden. This may be helpful for the lenders when they approved the loan for the organizations (Duque, 2009).The investor may also have to follow the trend of both the business whether it is increasing and static. All this information may useful for him at the time of selecting his investment option (Annualreports.com, 2012).
Use of financial information
Any economy of the country is regulated by the government of the respective country. They need the financial information in order to know the contraction or expansion of the business, their taxation policy, labour laws etc. Moreover with the introduction of the corporate governance policies it is the responsibility of the government to make supervision regarding the fulfillment of compliances. Here both the companies are paying their tax obligations in time and effectively follow the rules and regulations of corporate governance (Annualreports.com, 2013).
Suppliers and the customers are those parties who purchases or sells their products to and from the company. They are not much interested to know the profitability of the company; they give more focus on the receivable, payable and inventory management policy. As in case of above two companies the receivable management policy is better in case of Debenhams, they collected the dues from their debtors at a frequency of 11-12 days where as the Next plc collected their dues at an interval of 78 days. The payable and inventory management policy is almost in a static position for the company. So if a customer wants to get more credit facility then they should have invested in Next Plc (2013).
4. Managers
Managers are the main internal users of the information. They are the persons who take the decisions and formulate policies based on the information. For example the net profit ratio of Debenhams is in decreasing trend which is not a good sign of profitability. Managers can use this information to find out the reason behind it and as it is observed that one of the main reasons is the enhancement of the operating costs. So the management has to give focus to eliminate some part of the operating cost in order to improve its net profit. Without the financial information it is not possible for the management to maximize the profit (Allan, 2008).
5. Shareholders
Shareholders are the person who makes an investment in the equity share of the company. They are the owner of the organization. They are always concern to know that how the managers are utilizing their money into the operation of the business. They give more emphasis on the profitability and liquidity portion rather than solvency and other management policies. The dividend policy of an organization has an important impact on the share price of the organization. If the amount of dividend is acceptable by the shareholders it will increase their confidence about the company as a result the share price goes up. For both the companies the amount of dividend payment is increasing but in case of Next Plc the growth rate is higher than the Debenhams. On the other hand Debenhams increases their dividend payment a bit in the year 2014 compared to the previous years in spite of having a declining net profit ratio. This situation implies that the company may pay a portion of their dividend from the retain earnings. If this is the case then it will not be a preferable condition for the shareholders. Ultimately the shareholders goal is to maximize their wealth by getting a good amount of dividend and the capital appreciation. So they can select the option of retaining or selling the ownership on the basis of the financial information provided. (Annualreports.com, 2014).
6. Employees
Employees are the main human assets of any organization. They need the financial information to depict the present as well as the future prospective of the company. The information will help them in taking decision regarding their continuation with the organization. Apart from their salaries they sometimes get different benefit options and can participate in the decision making process. ESOP is one of the schemes which allow the employees to purchase shares of the company at a lower cost. All this benefit can only be given if the company is in a stage of higher profitability. So the employees are also getting concern about the profitability and the solvency position of the company in order to ensure their benefit.
From the view point of the above discussion it can be said that the financial information is very useful in each and every single segment of an organization. It is very difficult to say that which part of the information is useful for which users. In the practical world when a person is engaged with an organization or he is willing to engage then all the information which is disclosed by the organization is equally important for him. Say for a creditor it is not enough for him to know that the company is having a good payable policy (Nextplc.co.uk, 2014). It is one of the factors that he can focus but it will not be wise to be totally dependent on the factor. So it can be concluded that the financial information are very much useful for all the users in order to create a healthy relationship with the organization (Coskun & Grabowski, 2005).
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