Financial Analysis of Goodrington Plc - Report Example

Financial Report Analysis of Goodrington Plc TABLE OF CONTENTS Executive Summary ------------------ 3 Finding and Recommendations ----------------- 3 Terms of Reference ------------------ 3 Methodology ------------------ 3 Introduction ------------------ 4 Company Background ----------------- 4 Activities ----------------- 4 Significant Changes ----------------- 4 Analysis ------------------ 5-9 Profitability ------------------ 5 Liquidity ------------------ 5-6 Working Capital Utilisation ------------------ 6-7 Gearing ------------------ 7-8 Investment ------------------ 8-9 Cash Flows ------------------ 9 Appendix- 1 ------------------ 10 Appendix- 2 ------------------ 11-13 Reference List ------------------ 14 EXECUTIVE SUMMARY This paper provides an insight into the financial position and performance of Goodrington plc. It analyses the company's annual financial statements with the help of a wide range of ratios concerning the profitability, liquidity, working capital utilisation, gearing, investment and cash flow aspects of the company's operation and performance. Finding And Recommendations Goodrington plc's financial statements suggest stable earnings growth leading to better position in terms of investment. The company has been facing a deteriorating position with respect to working capital investment and management. The company should further curtail its over reliance on the borrowed funds and external finance TERMS OF REFERENCE This report attempts to analyse the financial position of the company Goodrington plc with the help of financial ratio analysis based on the information provided in the company's financial statements. Methodology The financial statements of Goodrington plc have been analysed in this paper with the help of financial ratios. The ratios were calculated based on the formulas obtained from various authentic textbooks and the figures used in the calculation were procured from the profit and loss account, balance sheet and cash flow statement sections of the company's financial statements. This paper utilises only books for the purpose of formulas and interpretation of the given ratios. INTRODUCTION Company Background Goodrington group plc belong to fashion retailing industry in the United Kingdom. It comprises three popular brands of retailing in the country that are Goodrington, Newton, and Churston. These three bands provide several retail products to different target groups of the consumers in United Kingdom. Activities Goodrington caters to customers ranging from the young-to-middle aged consumers by providing different items such fashion clothing, footwear and home ware. Newton has its own target market catering to the female consumers aged 45 and over by selling clothing items to them. Churston caters to the consumers with an instinct for fine fragrances and perfumes. It attracts its target consumers with the help of brightly lit and decorated store interior that is highly appealing to the people with artistic sense. Significant Changes The most significant change concerning the company's operations as reflected in the company's annual report is the acquisition of subsidiary costing the company 4,350,000 in the year 2005. ANALYSIS Profitability 2005 2004 Gross Profit Ratio 20.25% 20.56% Net Profit Ratio 5.99% 6.61% Gross Profit Ratio The Gross Profit ratio analyses the company's profit margin before accounting for various operating costs (Mcmenamin Jim, 1999). The gross profit ratio for Goodrington plc shows that the company is earning about 20% out of the total sales revenue after having accounted for the cost of sales. This also shows that the company loses almost 80% of the total sales revenue on production and distribution expenses. The company's gross profit ratio has been stable over the last two years. Net Profit Ratio The net profit ratio analyses a company's profitability after taking into account all the operating costs and interest expense etc (Mcmenamin Jim, 1999). An analysis of the company's net profit ratio reveals that the company only manages to retain about 6% of the total sales revenue after accounting for various operating costs. The difference between gross profit and net profit ratio shows that the company loses about 15% of gross profit on selling, general and administrative expenses. Liquidity 2005 2004 Current Ratio 0.75:1 0.75:1 Acid Test (Or Quick) Ratio 0.24:1 0.25:1 Current Ratio The current ratio measure's a company's abilities to pay off its short-term liabilities (Meigs & Meigs, 1993). An analysis of this ratio shows that the company has maintained the same level of current ratio for the last two years. The ratio also reveals that the company keeps an insufficient amount of current assets to meet all of its short-term liabilities and borrowings, which means that the company is only able to meet 75% of its current liabilities out of all its current assets. Acid Test (Or Quick) Ratio The quick ratio tests the short-term solvency of a company after keeping aside its stock from the current assets (Mcmenamin Jim, 1999). This ratio suggests that the company will only be able to meet about 24% of its current liabilities, if the stock is not counted in the quick current assets. It reflects that about 75% of the company's current assets are tied up in stock. This is a sign of poor management because stock is not always quickly convertible into cash, and the company may fall into problems whenever a sudden need for cash arises. Working Capital Utilisation 2005 2004 Sales to Net Working Capital (14.52) (14.32) Debtors' Turnover 16 days 17 days Stock Turnover 5 times 6 times Sales to Net Working Capital This ratio shows that the company faces an acute shortage of working capital to meet its current and short-term liquidity needs. The company has invested all of its working capital into business operations and therefore has not kept any funds to fulfil the short-term needs and expenses of the business. This is a very serious issue for the company's liquidity and solvency as according to Flamholtz (1986), most of the companies in California at a time filed for bankruptcy and the reason of which was that the companies gradually ran out of necessary cash. Debtors' Turnover The debtors' turnover ratio shows the efficiency of a company's management in collecting cash out of credit sales (Mcmenamin Jim, 1999). This ratio further reveals the management of working capital in terms of collecting cash from customers. According to this ratio, the company received cash from its customers in about 16 days in 2005 and 17 days in 2004. This shows that the company is gradually minimising the time it took to collect cash. Stock Turnover Stock turnover ratio calculates the company's ability and efficiency to finish its entire stock and generate sales during the year (Mcmenamin Jim, 1999). This ratio shows that the company managed to finish its entire stock about 5 times in the year 2005 whereas in 2004, the company managed to do the same activity about 6 times during the year. Although this does not reveal a declining working capital management the company's part, but if it continues to fall down at the same rate it can lead to further deterioration of working capital situation in the company. Gearing 2005 2004 Debt Ratio 61% 65% Debt to Equity Ratio 168.64% 204.12% Debt Ratio The debt ratio analyses the extent of a company's total assets that is financed with the long-term debts (Meigs & Meigs, 1993). According to this ratio, about 61% of the company's assets were financed with the external borrowing and debts in the year 2005, whereas in 2004 this percentage was 65%. It shows that the company has gradually been reducing its reliance upon external funds to finance its assets. Debt to Equity Ratio The debt-to-equity ratio exposes the capital structure of a company i.e., to what extent the company relies on borrowed funds as compared to the equity funds for the purpose of financing its business operations (Meigs & Meigs, 1993). This ratio reflects that the company relies more on external funds rather than equity funds to finance its business operations. The company is highly geared, however it has reduced its dependency on borrowed funds in the year 2005. Investment 2005 2004 Earning Per Share 22.0p 20.5p Dividend Payout Ratio 0.25 0.25 Earnings Per Share "Common shareholders and potential investors in common stock first look at a company's earning record" (Meigs & Meigs, p934, 1993). The company's earning records show that the company has performed well to transfer more earnings to its shareholders in the year 2005. Dividend Payout Ratio The dividend payout ratio shows that the investment potential of the company that the investors and shareholders are getting a stable payout on dividends. This ratio reflects that the company has paid 25% of its earnings as dividends to the shareholders. The dividend payout ratio was the same in 2004 as in the year 2005. This assures the existing and potential investors that the company would be paying a stable percentage of dividends in future also. Cash Flow Ratios 2005 2004 Operating Cash Flow Ratio 0.40 0.43 Operating Cash Flow to Net Income 2.48 2.58 Operating Cash Flow Ratio This ratio indicates the cash available for the company to meet its short-term liabilities. An analysis of this ratio shows that the total amount of operating cash available to the company to meet its short-term liability has declined over the last year. A reduction in available operating cash is the major reason for the decline in working capital of the company. Operating Cash Flow to Net Income The operating cash flow to net income ratio reveals the amount of cash generated with the net income of the company. This ratio has declined over the last year, which reveals that the company has been facing serious cash flow problems. APPENDIX- 1: '000 2005 2004 Gross Profit Ratio 20.25% 20.56% Net Profit Ratio 5.99% 6.61% Current Ratio 0.75:1 0.75:1 Acid Test (Or Quick) Ratio 0.24:1 0.25:1 Sales to Net Working Capital (14.52) (14.32) Receivables Turnover 16 days 17 days Stock Turnover 5.49 5.68 Debt Ratio 61% 65% Debt to Equity 168.64% 204.12% Earning Per Share 22.0p 20.5p Dividend Payout Ratio 0.25 0.25 Operating Cash Flow Ratio 0.40 0.43 Operating Cash Flow to Net Income 2.48 2.58 APPENDIX- 2: '000 2005 2004 Gross Profit Ratio Gross Profit x 100 = 111,015 100,860 Sales 548,172 490,396 = 20.25% 20.56 Net Profit Ratio Profit before interest and tax (PBIT) x 100 = 35,002 32,436 Sales 548,172 490,396 = 5.99% 6.61% Current Ratio Current Assets___ = 116,251 102,418 Current Liabilities 153,992 136,663 = 0.75:1 0.75:1 Acid Test (Or Quick) Ratio Current Assets- Stock = 116,251-79572 102418-68549 Current Liabilities 153,992 136,663 = 0.24:1 0.25:1 Sales to Net Working Capital Sales = 548,172 490,396 Net Working Capital (37,741) (34,245) = (14.52) (14.32) Receivables Turnover Receivables = 24,284 22,260 Turnover/365 548,172 /365 490,396 /365 = 16 days 17 days Stock Turnover Cost of Goods Sold = 437,157 389,536 Stock 79,572 68,549 = 5.49 5.68 Debt Ratio Total Debt Finance x 100 = 184,178 167,985 Total Assets (Fixed + Current) 302,186 258,817 = 61% 65% Debt to Equity Total Debt x100 = 184,178 167,985 Total Shareholders' equity 109,212 82,297 = 168.64% 204.12% Earning Per Share Net Profit = 25,009 22,645 Weighted Average of Common Shares 113,714,098 110,497,569 = 22.0p 20.5p Dividend Payout Ratio Dividends Per Share = 5.7p 5.3p Earning Per Share 22.0p 20.5p = 0.25 0.25 Operating Cash Flow Ratio Cash Flow from Operations = 61,953 58,507 Current Liabilities 153,992 136,663 = 0.40 0.43 Operating Cash Flow to Net Income Cash Flow from Operations = 61,953 58,507 Net Profit 25,009 22,645 = 2.48 2.58 Reference List Flamholtz, Diane T. (1986), "Financial Accounting", Boston, MA: PWS-KENT Publishing Co Meigs & Meigs (1993), "Accounting: The Basis For Business Decision Making", Mc Graw Hill: New York, p934 Mcmenamin Jim (1999), "Financial Management: An Introduction", Routledge, London Read More