The Carphone Warehouse Group - Case Study Example

The business world has been transformed by new technologies which changed the life of the everyday person. At the beginning of the 21st century the era the started all the changed and completely switch the economies of developed countries into a knowledge economy, the Internet Age, ended and with the start of the year 2000 the world entered into a new economic era called the convergence age or the broadband age. The convergence era is defined by the collapse of previously distinct media distribution channels of broadcast, cable, radio, print, online, and mobile services into one single media delivery chain facilitated by the expansion of high speed wireless internet and broadband services worldwide (Pricewaterhousecoopers, 2006). This new economic era changed many industries since it pushed the demand for products for high tech product such as mobile telephones up since mobile technology became a part of the new integrated supply chain of high tech products. In the United Kingdom a major player in the communication services industry is The Carphone Warehouse Group. The emphasis of this report is to analyze the financial position, performance and prospects of this firm as well as providing a brief analysis of the accounting standards that Carphone Warehouse utilizes in its presentation its financial reports. Company Profile Carphone Warehouse is the biggest player in the European market in the independent retailing of mobile phones and related services with over 2,200 retail stores across 11 countries (Carphone, 2007). The United Kingdom company established its operation in 1989 whose founder Charles Jones envision a firm that had the potential of dominating the European market with the implementation of a organic growth model. The organic growth business model is a business or economic philosophy that emphasis on steady constant growth over a prolonged period of time (Moore, 2006). An example of a booming economy that utilized this model to reach constant 10% economic growth for multiple decades is the Chinese economy. Carphone Warehouse transformed from a small mobile retailer 18 years ago, to a multinational giant in the telecommunication industry that obtain annual sales of 3.99 billion pounds in 2006 (Annual Report: Carphone, 2006). The company’s strategic focus includes a continued market share growth, value added services, building lifetime customer relationship and increasing productivity and profitability (Carphone, 2007). The mobile services industry generated global revenues of approximately 3.32 trillion dollars (Plunckett Research, 2007). Carphone placement and position in the booming European market gives them a competitive advantage over other telecommunication players. Accounting and Financial Standards The accounting policies used by The Carphone Warehouse Group PLC for the 2007 report comply with International Financial Reporting Standards (IFRS) standards. The company adopted the International Financial Reporting Standards in fiscal year 2005. Following the adoption of this accounting framework and discontinuing the use of United Kingdom GAAP standards of the financial statements of the firm were affected in the following matter: Headline PBT lowered by 1.7 million pounds Statutory PBT higher by 23 million pounds Effective tax rate lowered by 0.2% Headline EPS lowered by 0.14p Net assets increased by 44.9 million pounds (Carphone Warehouse, 2005). The International Financial Reporting Standards are a particular is a set of accounting standards for global firms which was approved and issued by the International Accounting Financial Board (Investopedia, 2007). One of the primary objectives of the IFRS is create a way that standardizes the financial activity of international firms in order to create consistency among their financial data and allow the capability for comparative analysis among financial statements. The International Financial Reporting Standards have become the preferred accounting framework in the European Union. All public companies listed in the stock market in Europe are now obligated to prepare their consolidated financial statements based on International Financial Reporting Standards (Ey, 2007). The EC was the first to adopt IFAS, but other countries are following the initiative to convert their local accounting standards into IFAS for the sake of global consistency in financial reporting. The IFAS gained credibility after the European Union adopted the framework since the EC is composed of 25 nations. The United States has not been too fond of the IFAS movement, but public firms that utilized the European stock exchanges to market their common stocks are obligated to follow the European rule of creating a set of consolidated financial statements based on International Financial Reporting Standards (Gannon& Ashwal, 2004). Financial Analysis Financial analysis of the state of Carphone Warehouse was performed through ratio analysis, trend analysis, forecasting techniques and comparative financial ratio analysis with regard with the telecommunication industry. Appendix A illustrates a ratio analysis utilizing the company most recent financial statements. Ratio analysis is a quantitative technique that creates different metrics to measure aspects of a company’s financial statements such as profitability, leverage, efficiency and solvency (Dun & Bradstreet, 2007). This firm had solid financial results in fiscal year 2007, with a net income of 66.96 million pounds and an overall equity level of 689.6 million pounds. Other financial highlights of the company are earnings before interest and taxes (EBIT) of 94,720 million pounds which represents an increase of 9.24% in comparison with the previous fiscal year. The company’s strongest income driver is its telecomm business which represents nearly half its overall total revenues (Carphone, 2007). The company’s broadband customer portfolio amounts to 2.3 million clients (Annual Report: Carphone, 2007). The broadband business is tremendous growing segment for this company considering that in 2006 the firm had only 0.2 million clients, thus the overall growth in 2007 was 2.1 million clients which represents a growth of 1050%. The overall revenues of the company increased in 2007 along with its profitability which went up 0.35% in terms of gross margin, but the overall net income went down nearly four million pounds. The ratio analysis of the firm in comparison with industry standards illustrates mixed results. Appendix B illustrates a comparative analysis of the company financial ratios based on its 2007 fiscal year results in comparison with the telecommunication industries for firms with over 25 million dollars in assets. The industry financial ratios were retrieved from Dun & Bradstreet database. The debt to equity ratio of the company is 2.74 which fairs not so good in comparison with the industry average of 1.51. A high debt to equity ratio means the company is compiling high levels of debt in comparison with its equity totals. The metric is not positive, but in reality it does not mean that the company is any risk of not being able to comply with its debtors. Typically large firms have greater debt to equity rations because they reach the maturity business stage. A more telling sign as far as the risk of debt for a company is the current ratio. A current ratio above 1.0 is the minimum standard for corporations. The company has a current ration of 0.92 which is low in comparison with the industry standard of 1.51. This ratio is not a good indicator since the current ratio illustrates the ability of a company to pay its debt. The ratio is much lower than the industry, but only 0.08 below the desirable minimum level. The company has to keep a close eye on this metric since a low current ratio increase the possibility of default on debt and becoming an insolvent company. Two key indicators which show the financial strength or weakness of a company as far as its ability to invest its money well and produce good returns are return of equity (ROE) and return on assets (ROA). The company has very good results on both metrics in comparison with the industry. Carphone’s return on assets is 8.07% which is extremely good considering the industry has a negative ROA of 0.70%. ROA represents the ability of a firm to produce revenues based on its total level of assets. The return of equity of the firm amounts to 2.55%. This is another great sign since the industry ROE equals a negative metric of -5.7%. ROE is defined as the ability of a firm to produce revenues in comparison with its overall total equity level. The sale to inventory ratio of the firm is 24.51, an outstanding ratio in comparison with the -5.5. This ratio shows great supply chain efficiency and that the company has low levels of obsolesce in inventory and a solid just in time inventory philosophy. The sale to working capital ratio is -44.99 which is below the 23.9 industry standard. The poor performance in this metric is associated with the company’s high levels of debt since working capital is the denominator of the formula and the firm has a current ratio below one, thus its levels of short term debt are high in comparison with its current assets. Carphone Warehouse has enjoyed outstanding overall growth during the last five years. The company had total revenues of 1841 million pounds in 2003. The growth in five year span in total revenues based on the firm’s 2007 results of 3862 million pounds is a revenue percentage increase of 109.78%. The years with the greater revenue growth in comparison with the previous year results during the five year span were fiscal years 2007 and 2006 with revenue increase of 31% and 29.6% respectively. The growth in revenue trend started after fiscal year 2004. The non-current assets of the company have tripled during the last five years. The EBITDA results are also very positive with a five year growth of 3.26 times. The company has utilized debt as its main source of financing its growth. The non current liabilities have grown from 49 million pounds to 779 million pounds. The debt acquisition strategy has worked, but as of 2007 the company has to take measures to decrease its debt level especially in short term financing since the numbers reflect a worrisome tendency. The shareholders have benefited from the growth during the last five years. The earnings per share of the company have more than double during this time period. The average sales growth during the last five years per year is 21.96%. Based on this result the forecasted revenues of the firm for fiscal year 2008 are 4710 billion pounds. Conclusions / Recommendations Carphone Warehouse an innovative firm that utilized organic growth since its inception to convert itself into the biggest cellular phone retailer in the European market. During the last five years the company entered into a massive growth strategy that allowed the firm to achieve a revenue growth of more than double its 2003 revenue level. The company diversified its products offering and in 2007 penetrated the booming broadband market. The company utilized debt as its primary financing source to achieve high levels of growth recently. The company has to lower its debt level, especially its current debt level since the current ratio of the company is currently below 1.0 and about 0.6 below the industry standard. The company has invested well which is reflected by strong ROA and ROE metrics. The future of Carphone Warehouse is sound and expansion into other markets such as the Asian and North American market is recommended since the firm has achieved market penetration in Europe near its cap. Tight cash control and reducing its levels of debt along with international expansion plans are the key recommendations for the company. References Annual Report: Carphone Warehouse (2007). Available from Carphone Warehouse (2005). Adoption of International Financial Accounting Standards. Available from < http://media.corporate-ir.net/media_files/irol/12/123964/pdf/IFRSadoption.pdf> [Accessed 7 November 2007]. Cpwplc.com (2007). Home. Available from [Accessed 7 November 2007]. Cpwplc.com (2007). Strategy. Available from [Accessed November 6 2007]. Dun & Bradstreet (2007). Communication Industry Financial Ratios. Available from Dun & Bradstreet database. [Accessed 8 November 2007]. Ey.com (2007). International Financial Reporting Standards. Ernest & Young. Available from < http://www.ey.com/GLOBAL/content.nsf/UK/International_Financial_Reporting_Standards> [Accessed 8 November 2007]. Gannon, D.J. and Alex A. (2004). Financial Reporting Goes Global. Journal of Accountancy. Available from Accessed [9 November 2007]. Moore, J. (2007). The six keys to organic growth. Available from < http://brandautopsy.typepad.com/brandautopsy/2007/04/the_six_keys_to.html> [Accessed 9 November 2007]. Plunckett Research (2007). Telecommunication Industry Statistics. Available from Plunckett Research Database [Accessed 9 November 2007]. Pricewatercoopers (2006). The Rise of Lifestyle Media – Achieving Success in the Convergence Era. Available from [Accessed 6 November 2007]. Appendix A: Ratio Analysis Carphone Warehouse Ratio Analysis of Carphone Warehouse fiscal year 2007 EPS 7.51 (Net income - preffered dividends)/ (avg. number of common stocks) Dividend per share 3.25% Dividend per share / earnings per share Debt to Equity 2.74 (Total debt / Total equity) Current Ratio 0.92 (Current debt / Current liabilities) Inventory Turnover 4.59 CGS / Average inventory Gross Margin 0.33 (Sales - CGS) / Sales Working Capital -88729.00 Current Assets - Current liabilities Return on assets 8.07% [Net income + (Interest expense x (1-tax rate)] / Avg total assets Return on equity 2.55% (Net income-preferred dividends) / average common stockholders equity Sales / Inventory 24.71 Sales / Working capital -44.99 Current Liabilities / Inventory 6.86 Appendix B: Company ratio comparison with telecommunication industry Ratio Analysis of Carphone vs. Telecommunication industry Company Industry Debt to Equity 2.74 1.51 Current Ratio 0.92 1.5 Return on assets 8.07% -0.70% Return on equity 2.55% -5.70% Sales / Inventory 24.71 -5.5 Sales / Working capital -44.99 23.9 Current Liabilities / Inventory 6.86 4.96 (Brad & Dunstreet, 2007). Appendix C: Numerical calculations Numerical calculations 9.24% (94720-8670)/86710 1050.00% (2.3-0.2)/.2 0.35% (0.3263-0.3228) 109.78% (3862-1841)/1841 21.96% 4710 (3862 x 1.2196) Appendix D: Bun and Bradstreet Communication Industry Ratios Appendix E: Carphone Income Statement 2007 Appendix F: Carphone Balance Sheet 2007 Appendix G: Carphone Statement of Stockholders Equity 2007 Appendix H: Carphone 5 year financial results Read More