Information about the Position of the Debenhams Company and about Its Management Structure - Case Study Example

Recommendations Report for Debenhams About the report Usefulness of the Director’s report The Director’s report essentially provides information regarding the company’s activities other than the operational and financial ones. It is providing useful information specifically for the shareholders of the company regarding the shareholding pattern of the company, its dividend policy and share capital situation (media.corporate-ir.net). Besides these aspects, the report covers reference to the details about the board of directors and corporate governance report. It also talks about the auditors of the company. Thus, most of the report is administrative information and is not very useful for investors who are more interested in financial performance. This report is useful to the extent that it provides information about the position of the company and about its management structure which might have future implications for its strategic decisions. By looking at the dividend policy, key stake can understand the expected returns from the company or its future growth plans. Key aspects of the corporate responsibility report This report highlights the activities that the company is doing for the community as a whole. This includes imbibing “green” operations which do not have negative impact on the environment, following ethical practices which means that the company does not indulge in activities that immoral, being employee focused and ensuring their professional and personal growth, being customer centric by understanding their requirements and being useful to the society as a whole by donating to the needy or starting projects that help in improving the quality of life of individuals (media.corporate-ir.net). Report Analysis Business risks Strategic risk Consistent fall in consumer spending is a very significant risk for the company especially at the time when the world has still not come out of the economic crisis of 2008. Most of the company’s business is in UK and Ireland with only 2.7% of the total transactions being contributed by international business (media.corporate-ir.net). This can cause a major slowdown of the company owing to the fact that UK is going for major fiscal tightening measures and Ireland is also not showing much economic recovery. The company is trying to mitigate this risk with increasing its reach in international markets. Failure to roll out new stores can reduce sales. This has been accounted for by appropriate mitigating steps. Product risk This arises on account of failure of the company to understand consumer expectations and also on account of competition. The company claims to counter these risks by maintaining good customer as well as supplier relations. The company has competition from brands like Zara, Monsoon fashion etc. However, Debenhams ensures adequate product differentiation as well market intelligence gathering techniques. Financial risk As the company is becoming global, it is bound to be affected by currency fluctuations. The company has a treasury department which takes care of such risks and the management keeps a tab on its activities by monitoring the key performance ratios of this function (media.corporate-ir.net). Treatment of depreciation of property, plant and equipment The company uses straight-line method of depreciation. This means that its depreciation is more or less constant over the life of an asset. This is in contrast to other methods like double depreciation which try to maximize the tax returns in the early years of the asset’s life which causes a reduction in profitability in the beginning years. The straight-line method helps the company show higher income. Company’s performance based on key ratio analysis   2009 2008 Sales 1915.6 1839.2 Net Profit 95.1 77.1 Net Profit ratio 4.96 4.19 Operating profit 182.2 176.1 Operating profit ratio 9.5 9.6 current assets 537.1 348.6 Fixed assets 1598.7 1635.7 current liabilities 74.4 296.7 Capital employed 2061.4 1687.6 Profit before int.tax and dividend 182.2 176.1 Return on capital 8.8 10.4 fixed liabilities 1099 1213.7 Total liabilities 1173.4 1510.4 Total assets 2135.8 1984.3 Debt ratio 0.55 0.76 Inventories 270.9 237.5 Inventory turnover 7.1 7.74 Source of financial data : Debenhams Annual Report 2009 Net profit ratio This tells about the overall operational efficiency of the company. This figure has improved for Debenhams. In 2008 it was 4.19 as compared to 2009 figure of 4.96. Operating profit ratio This tells us about the operational efficiency of the company. It compares the company’s operating costs to sales. Higher the cost, lower the operating profit and lower the ratio. This has gone down by a slight margin in 2009 to 9.5 as against 9.6 in 2008. Return on Capital This tells us about how well the company is able to provide returns to the investors with respect to the capital employed. This has gone down from 10.4% in 2008 to 8.8% in 2009 which shows an inefficient management of capital. Debt ratio This signifies the debt servicing capability of the company. This figure was 0.55 in 2009 as compared to 0.76 of 2008. This shows that the company has significantly reduced its liabilities with respect to its assets and hence a good coverage and lesser chances of insolvency. Inventory turnover ratio This is important because it tells about of speed of conversion of inventory into sales. This ratio for 2009 is 7.07 as compared with the 2008 figure of 7.74. This shows that the turnover has reduced showing slow sales and increasing inventories. Conclusion Looking at the key ratios in the areas of profitability, return on capital, debt servicing capacity and inventory conditions, we can see that though the company has improved its overall profitability, it has to work on its operating costs which will then have a positive impact on its return on capital. It needs to boost up its sales and reduce inventories though its debt servicing capacity has significantly improved despite rising interest rates in UK. Cash flow statement analysis Cash flow generated from operations has reduced in 2009 over 2008 (media.corporate-ir.net). Major contributors to this were increased inventories, increased receivables and decreased payable. This shows (as also seen in ratio analysis) that inventories are accumulating. However, the cash flow statement also shows that the company is not able to realize cash from its debtors while it is unable to get adequate credit terms from its creditors. However, net cash at the end of the year is seen to be much higher at 188.2 million pound as against a negative value of 2.9 million pounds in 2008 because of issue of shares in 2009 (media.corporate-ir.net). References media.corporate-ir.net, Annual Report and Accounts 2009, viewed on November 30, 2010 http://media.corporate-ir.net/media_files/IROL/19/196805/reports /ar2009_new.pdf Read More