Home Retail Group Financial Analysis - Essay Example

Financial Analysis Table of Contents Table of Contents 2 Introduction 3 Strategic Analysis 3 Implications of Porter’s Five Forces Analysis and PESTEL Analysis for Home Retail Group 3 Bowman’s Strategy Clock Analysis 4 Hybrid Pricing 4 Financial Analysis of Home Retail Group PLC 5 Liquidity Ratio Analysis 6 Working Capital Management Ratios 7 Profitability Ratio Analysis 8 Asset Utilization Resources 10 Solvency Ratios 11 New Accounting Policies and Treatment 12 Comparison Issues related to Certain Accounting Policies and Treatments 14 Stock Market Performance of Home Retail Group PLC 15 Conclusion 19 List of References 20 Appendix 1: Ratio Analysis 22 Appendix 2: Home Retail Group PLC. 24 Appendix 3: Tesco PLC. 25 Appendix 4: PESTEL Analysis 26 Appendix 5: 5 Forces of Home Retail Group 30 Financial Analysis Introduction Home Retail Group is considered as being one of the best home and general item retailers in the UK. The company is listed on the London Stock Exchange and is considered as a customer friendly superior retail service and product provider. This research report will provide its readers with financial, strategic and stock market information of Home Retail group. The information collected pertaining to above mentioned areas would be manipulated into meaningful information so that the stakeholders of the company can analyse where the business is standing currently and where it should be in the future. Strategic Analysis Implications of Porter’s Five Forces Analysis and PESTEL Analysis for Home Retail Group From the analysis of external and internal environment, it can be suggested that the overall conditions of UK are supportive for Home Retail Group. The Government of UK is consistently making it easier for businesses to keep their financial position strong by developing regulations and offering financial support to the businesses. Moreover, technological advancements are bringing rapid change in the style of business decision-making. Due to the rapid technological advancement, businesses have to be flexible in developing strategies to allow flexibility of operations. Moreover, the changing environment also causes business to stay alert while making decisions, which increases the efficiency of the business (Porter, 2008). The social scenario of UK is further supportive for retail businesses as the customers in UK prefer to make purchasing from one place. Home Retail Group in this aspect is focusing on making its presence visible in every county and city of UK in order to make customers’ experience of shopping in a convenient and highly checked and balanced environment. Though, Home Retail Group is facing intense competition from the likes of Tesco and Sainsbury’s but the presence of the business throughout the country and the increasing demand for its products and services allows Home Retail Group to incur less cost of production and earn more than its competitors. Bowman’s Strategy Clock Analysis The utilization of Bowman’s Strategy Clock will enable the readers to understand the competitive position of Home Retail Group against its leading competitors in the retail sector of UK (Coulter, 2012). The analysis is as following: Hybrid Pricing As compare to its competitors, Home Retail group offer products at lower prices. This is because, the philosophy of the business urges it to spend less on cost of production and reinvest the surplus returns in a profitable business or investment plan. Such a pricing strategy is referred to as hybrid pricing strategy (Porter, 2008). Home Retail Group uses hybrid-pricing strategies in order to deliver added value to the customers to retain them as a loyal prospect for the business. The adopted pricing strategy is justified by the fact that the main competitors of Home Retail group, i.e. Tesco and Sainsbury have implicated medium pricing and high pricing strategy respectively. Tesco’s pricing strategy helps Tesco to focus on differentiating its products and services from that of competitors. On the other hand, Sainsbury’s pricing strategy is based on the concept of focused differentiation. Salisbury’s unlike Tesco and Home Retail Group, caters the needs and wants of a niche sector in a given product category or brand line. These products are prime in quality and priced accordingly to balance the financials of the business (Home Retail Group PLC, 2011). Comparing the competitive strategy of Home Retail Group in view, it can be suggested that the business will find it difficult to create a strategic fit, which helps the business to attract majority of the customers in the marketplace. Though the adopted pricing strategy is for the benefit of the customers of retail products and services in UK, but differentiating the product along with cost effectiveness will provide Home Retail group an opportunity to attract new customers to the customer base. Financial Analysis of Home Retail Group PLC The financial analysis of Home Retail Group PLC has been presented in this section, which includes a detailed ratio analysis of the company and also a comparative evaluation of the financial performance and position of the company with its industry peer, Tesco PLC. Following is the analysis of Home Retail Group PLC’s and Tesco PLC’s financial statements and performance for the last five years, i.e. 2009 to 2013. The ratios included in the analysis relate to liquidity, working capital management, profitability, utilization of resources and solvency ratios. 2013 2012 2011 2010 2009 LIQUIDITY RATIO: Acid Test Ratio = (Current Assets - Inventory) / Current Liabilities 0.9 0.8 0.8 1.0 0.9 Current Ratio = Current Assets/Current Liabilities 1.7 1.7 1.7 1.9 1.7 Working Capital MANAGEMENT: Day’s Receivables =( Receivables /Sales)*365 42.5 38.9 38.1 35.3 36.7 Inventory Turnover= Cost Of Sales/Inventory 4.0 4.1 3.9 4.3 4.2 Payable Days = (Payables/Cost Of Sales)*365 108.8 90.9 96.3 93.8 94.1 PROFITABILITY: Gross Margin Ratio = Gross Profit / Sales 0.3 0.3 0.3 0.3 0.3 Net Margin Ratio = PBIT/Sales 0.0 0.0 0.0 0.0 (0.1) Return on Capital Employed=Earnings Before Interest and Tax (EBIT) / Capital Employed 0.1 0.0 0.1 0.1 (0.1) UTILISATION OF RESOURCES RATIOS: Asset Turnover= Sales/Total Assets 1.3 1.5 1.5 1.5 1.5 Return on Total Assets= PBIT/Total Assets 0.0 0.0 0.1 0.1 (0.1) Non-Current Asset Turnover= Sales/Total Of Non-Current Assets 2.5 2.5 2.6 2.7 2.6 Current Asset Turnover= Sales/Total Of Current Assets 2.7 3.2 3.1 3.0 3.1 Solvency: Financial Gearing = Debt/(Debt + Equity) 0.3 0.3 0.0 0.0 0.0 Times Interest Earned = Operating Income/Net Interest Expense 2.8 2.0 5.1 6.5 (7.5) Liquidity Ratio Analysis Liquidity is the ability of a particular business to meet its short term debt obligation, stakeholders including bank, financial institutions and payables or suppliers take keen interest in these ratios, as it provides an indication of going concern of the business and its liquidity in terms of each dollar of assets available to pay a dollar of liability. Home retail group PLC’s quick ratio showed an improvement in 2012 when it showed that the company was able to meet the ideal standard of quick ratio, that is a $1 of asset could be converted to meet a $1 of liability, but it again deteriorated in 2013 (Bragg, 2002). Comparatively Tesco PLC’s quick ratio was less than 30% of Home Retail Group PLC’s quick ratio but in subsequent years improved to more than meeting the standard of quick ratio. (Hirschey, 2009) Subsequently, current ratio is a measure of an entity’s ability to meet its debt normally within the time spam of 12 months. The ideal standard of Current ratio is 2:1 stating that the company has double the asset to meet its liability. Home Retail Group PLC throughout the years from 2009 to 2013 had a current ratio below the ideal industry standard with an improvement in 2010 followed by decreasing and a constant trend in 2011, 2012 and 2013. Contrary to Home Retail Group PLC, Tesco PLC showed quite an improvement in 2011 and 2013 following very weak and falling current ratio 2009, 2010 and 2012. Working Capital Management Ratios Working capital is a measure of a business’s ability to meet its short-term day-to-day expenses and obligations. Working capital comprises of current assets and current liabilities and the excess of current assets over current liabilities is a positive indication of a business overall (Homer, 2013). Receivables days ratio is a measure of how much time in a business cycle, generally of 12 months, do the receivables take to pay the outstanding amounts due to the host business (Randall, 2005). Home Retail Group PLC. as per their annual report records had a receivables day period of 37 which gradually increased by 13% till 2013 to 42 days this mean that Home Retail Group PLC’s have their cash tied up for more days in the form of receivables meaning that they would have to borrow the cash funds needed to meet their short term requirement of running day to day business and also Home Retail Group PLC. has to bear a cost associated with this short term borrowing. On the contrary, Tesco PLC. offers less receivable days as compared to Home Retail Group PLC and ranged from a constant of 12 days in 2009 and 2010, an increment in the days of 14% maintained in 2011 and 2013 with most days being offered of 15 days in 2012. Payable days are the days offered to Home Retail Group PLC by its payables or suppliers, more payable days would be beneficial for Home Retail Group PLC as it would act as a free of cost financing easing the short term cash borrowing. Home Retail Group PLC was offered 94 payable days maintained till 2010 than an increase in the days offered by payables in 2011 followed by a fall in 2012 and a hike in the days offered in 2012. Whereas Tesco PLC as compared to Home Retail Group PLC was offered less payable days by its supplier, with the most payable days being offered in 2012 of 70 days credit which followed by a fall in 2013 and the rest of the years between 2009 and 2011 the payable days had a increasing trend. Inventory turnover indicates how fast inventory is being processed into finished good and sold generating revenue, contributing towards an organization profits; due to this nature higher inventory turnover is beneficial as higher rate would delineate that less time is taken to convert inventory in to sale of goods (Brigham, 2013). With reference to Home Retail Group PLC the trend for inventory turnover is more or less constant between the years 2009 and 2013 with a slight decrease in 2011 and 2013. As for Tesco PLC has higher inventory turnover as compared to Home Retail Group PLC but its annual report records depicts that the group faced a decrease of 12% in inventory turnover between the years 2009 and 2013. Profitability Ratio Analysis Profitability ratios are a measure of company’s ability of generating profits incorporating gross profit margin, net profit margin and return on capital employed. Gross profit margin is a more core analysis of cost associated with raw material and other production costs including production overheads labor costs and a higher gross profit margin indicates that more chances are evident for higher operating and net profit (Randall, 2005). With reference to Home Retail Group PLC the gross profit margin indicates a constant trend between the years of 2009 and 2011 depicting consistency in the policies regarding raw material and associated costs and pricing, but then the margin increased to 3% per year in the years 2012 and 2013 recognizing more potential for profits might be the result of a increase in revenue associated with a increase in the sales price or a decrease in the core production related activities cost. Comparatively, gross profit margin trend for Tesco PLC remained constant for the years 2009 till 2012 but than showed a drastic decrease of 25% in 2013. Net profit margin is a measure of profitability covering issue relating to pricing, production cost and expenses it is an indication of how much sales contribute as profits. Home Retail Group PLC’s has a maximum net profit margin in 2010 and a negative and decreasing net profit margin in 2009, 2011, 2012, and 2013 this could be because its operating expenses are more than the revenue generated leading to comparatively better gross profit margin but vice versa net profit margin (Bhimani & Bromwic, 2009). In comparison Tesco PLC, have a constant net profit margin from 2009 to 2011 followed by a fall of 50% and constant net profit margin in 2012 and 2013. Return on capital employed is a measure of profitability in terms of revenue return generated from the capital employed by the business. The higher value of return on capital employed is a positive indication of a company’s performance (Drury, 2008). Home Retail Group PLC’s return on capital employed is negative for the year 2009 as Home Retail Group PLC faced a loss in that year and in 2010 the ratio improved to a substantive extent increasing the ratio to 10% depicting recovery of loss and the control of expenses and obligations associated with the loss. Following 2010 the ratio deteriorated by 50% and amounted to 5% in 2013 indicating decrease in profits and inefficiency of the company’s asset in generating revenue. Whereas Tesco PLC improved its return on capital ratio in 2010 and remained constant till 2013. Asset Utilization Resources Asset utilization is a measure of effective use of company’s assets to generate profit; the more effective resources are used the higher the profit will be. Asset utilization resources ratio include asset turnover, return on total assets, non-current asset turnover and current asset turnover ratios. Performance or efficiency of HOME RETAIL GROUP PLC in relation to utilizing its resources as depicted in the above calculations is not satisfactory. Asset turnover ratio of Home Retail Group PLC for the year 2009 is followed by a fall in 2010 maintaining stability till 2012 and then further declining by 25%. On the other hand Tesco PLC maintained a sable asset turnover ratio with insignificant changes in years subsequent to 2009. In terms of return on total assets with reference to Home Retail Group PLC no significant changes came onto being and rate was constant throughout years from 2009 to 2013 meaning no improvement were made in the regard of improving assets utilization and hence improving the overall return. Comparing with Tesco PLC the rate of return of total assets can be said to be constant and insignificant as per the results in appendix 1. The rate of return on total non-current assets for both Home Retail Group PLC and Tesco PLC remained same with insignificant changes in years from 2009 till 2013 and consistent stability in the five years. Whereas the total current asset ratio of Home Retail Group PLC and TESCO PLC as compared to total non-current asset ratio seems to be better off with Home Retail Group PLC witnessing an increase in ratio in 2012 rest of the years having a negative trend. Whereas Tesco PLC’s record show continuous improvement in 2009 and 2010 but a state of stability in 2011, 2012 and 2013. Overall both the companies in terms of utilization of their resources namely assets have not been effective and they should investigate as to why asset utilization is below potential. Solvency Ratios Financial gearing is a term incorporating the relationship in the capital structure of debt and equity. A company exposed to high gearing would have more debt as a part of its capital structure and associated costs would also be high. Financial gearing ratio are used by stakeholders usually by shareholders to identify the level of risk associated with a particular company and the components of capital structure of a company whether large proportion is made up of equity or debt (Debarshi, 2011). Financial gearing pertaining to Home Retail Trading Company PLC shows a constant and stable trend with insignificant changes throughout the years from 2009 to 2013 indicating that Home Retail Trading Company is less vulnerable as its capital structure is consisted more on equity. Comparatively, Tesco PLC, in 2011 faced a decrease in financial gearing ratio, which could be supported by their less reliance on long-term borrowing. In the years 2012 and 2013 the financial gearing ratio increased significantly indicating that the capital structure of Tesco PLC increasing their reliance on borrowing. Whereas, in 2010 the financial gearing decreased as compared to 2009, which again could have been the result of change in the capital structure. Time interest earned ratio is a measure of a particular company’s ability to meet its debt obligation. Debt holders would have keen interest in this ratio as it would determine and ensure payment of interest to them (Atrill & McLaney, 2004). Home Retail Trading Company PLC had highest time interest earned ratio in 2010 and 2011 indicating that in these years company paid more amounts in debt consideration than as compared to other years with 2012 and 2013 having significant decrease In the ratio. Whereas Tesco PLC, had higher time interest earned ratio as compared to HRTC PLC and had the highest ratio in 2012 with a fall in the ratio in 2013 suggesting a change in the behavior of interest payments. New Accounting Policies and Treatment Accounting policies are the fundamental element determining the treatment of transactions and disclosures, ranging from methods of recognition, measurement, and systems and procedures for presenting disclosures. Home retail Group PLC one of UK’s prominent firm, annually in its annual report with other accounting statements and disclosures publishes summary of principal accounting policies. Analyzing annual reports of Home retail Group PLC pertaining to years 2011 to 2013, summary of principal accounting policies delineated changes in revenue recognition, introduction of segmental reporting in 2012, removal of borrowing and borrowing costs policy in 2012, Edition in insurance provision in 2012. Primarily, as per accounting policies in the annual report of HRG PLC (Home Retail Group PLC) in sale of goods under revenue recognition a provision for return of goods, which was made in subsequent previous years, has not been included in 2013 impacting on the results depicting in the financial statements (Home retail Group PLC, 2012). The removal of provision for return of goods in 2013 would impact sales, gross, operating, net profit and effect will also be passed on to balance sheet as receivables and retained earnings are impacted by figures of sales. As there is no provision made for sales return than sales of Home Retail Group PLC would be overstated which would mean that gross, operating and net profit in the income statement would be overstated, thereby the balance sheet would have overstated receivables as they would be the ones associated with sales return and net profit effect being passed on to retained earnings. Secondly, HRG PLC in 2012 and 2013 in accordance with International Financial Reporting Standards introduced segmental reporting as an addition to its accounting policies it would ensure accountability, better utilization of resources as the chief operating decision maker would be bestowed with this reporting, furthermore introduction of IFRS 8 would strengthen communication, coordination among respective personnel’s and consistency in the operation of Home Retail Group PLC (Home Retail Group PLC, 2013). As mentioned in the annual report of 2012 that segmental reporting would be consistent with internal reporting which would further minimize errors as a cross reference and exchange of information would take place on a routine basis. Typically, segments are the divided operating activities of an organization even geographical segmentation, incorporating information generated internally specially in listed companies comprising details of major customers, products and services. Referring to Home Retail Group PLC as per its annual report of 2013 the segmental reporting is directed towards the chief operating decision maker and includes board of directors and operating board that makes strategic decisions (Home retail Group PLC, 2012). Thirdly, according to the annual report of Home Retail Group PLC in 2012 and 2013 accounting policy regarding the treatment of borrowing of funds and cost associated with it were not included in the notes following the group financial statements for the respective years (Home retail Group PLC, 2012). In 2011 these notes stated under the heading of Borrowing and borrowings costs elaborated about the valuation, recognition and treatment of borrowings and associated costs (Home Retail Group PLC, 2011). Fourthly, mentioned in the annual report belonging to year 2011, Home Retail Group PLC’s treatment of financial assets, liabilities and derivatives and the initial recognition of financial assets and liabilities by the management furthermore treatment of changes in fair values of particular financial assets and liabilities their classification as current asset or current liability, evidently with reference to subsequent years annual report of 2012 and 2013 the note pertaining to policies regarding financial assets, liabilities and derivatives have not been included (Home Retail Group PLC, 2011) . Moreover, Loans and receivables with reference to the annual report of Home Retail Group PLC in 2011 were categorized as non-derivative financial assets not traded in an active market, with fluctuating or constant income (Home retail Group PLC, 2012). The note on accounting policies described the criteria of loans and receivable’s including their occurrence, recognition, classification and treatment of short and long term fluctuations or changes in the nature of accounts. The note also mentioned loans and receivables as including trade receivables, cash and cash equivalent and other current asset investments in the balance sheet. The latter items would have effect on interest expense generated in the income statement and hence would alter net profit (Home retail Group PLC, 2012). Comparison Issues related to Certain Accounting Policies and Treatments In addition, it is important for listed companies to show consistency in book keeping of accounting record and presentation. The removal of provision for sales returns in 2012 pose a complication as to how the company would deal with future sales returns and the refunds relating to those returns, and as provision exists in the prior years hence comparison is not consistent with previous years. Furthermore, the first time introduction of segmental reporting in accordance with IFRS 8 would relate to comparison difficulty as this is newly introduced accounting policy in Home Retail Group PLC Company history and include both qualitative and quantitative aspects of activities operations. Also since it did not exist in previous years hence its base is the year 2012 hence comparison for previous years would be difficult to make as there are no previous base year before 2012. (Home retail Group PLC, 2012) Finally, in 2012 edition annual report of Home Retail Group PLC, accounting policies relating to borrowing and borrowing costs, financial assets and liabilities and loans and receivables were removed with the notes of Home Retail Group PLC not mentioning the reason as to the removal of accounting policies relating to latter issues. Overall accounting policies in 2011 regarding these issues were basically about the recording, occurrence, recognition, measurement and classification of transactions falling under the above headings, there is lack of evidence in the notes inclusive in the annual report, edition 2012 onwards, of Home Retail Group PLC regarding recording, occurrence, recognition, measurement, classification and disclosure of transaction in relation to borrowing and borrowing costs, financial assets and liabilities and loans and receivables. Comparison of financial statement of Home Retail Group PLC would not be convenient knowing the removal of notes from accounting policies without any alternative notes for each issue provided for reference (Home retail Group PLC, 2012). Hence, above were the changes in the accounting policies highlighted in the annual report of the Home Retail Group PLC impacting its long term profitability and comparison with subsequent years, the issues included removal of provisions and introduction of segmental reporting ensuring smooth function of Home Retail Group PLC’s activities. Stock Market Performance of Home Retail Group PLC For the purpose of analyzing how Home Retail Group PLC’s stock has performed in the past five years, month end closing stock prices for each of the last five years have been taken into consideration. Keeping in view the five years information for market prices of stock, following trends have been noted: It can be noted in the above figure that the stock prices for Home Retail Group PLC followed an upward trend in the first two quarters of the year 2009. However, there has been a downfall observed in the share prices since the mid of the year 2009 till the end of the year 2011. The changes in stock prices since the mid of 2009 were abrupt, but the average trend noted in the price from mid of 2009 till the end of 2011 indicate a declining pattern. One possible reason, which can be associated with the declining trend in the given time frame, is the recent financial crisis, which significantly affected business entities not only in the UK but all across the globe. Comparing its stock performance with one of the industry leader, i.e. Tesco PLC, can make a further analysis of Home Retail Group PLC’s stock performance. The five years stock performance for Home Retail Group PLC and Tesco PLC, on monthly basis, is presented in the following graph: It can be observed in the above graph that although there is a significant difference in the share prices of both companies, i.e. Home Retail Group PLC and Tesco PLC, the trends in the changes in stock prices for both have been similar in the period under consideration. This also indicates that the whole industry faced a decline, in relation to investment conditions, in the post financial crisis period. Moreover, the similarity in the trends for both companies is also indicative of the fact that Home Retail Group PLC’s stock performance has been closely tied with the industry and its peers. In addition to this, investment ratios for Home Retail Group PLC and Tesco PLC have been determined to find out how former has performed in comparison to latter. The price earnings ratio for Home Retail Group PLC has remained stable during the past four years after recovering from a negative figure in the year 2009. This has largely been due to the fact that the company has managed to show sustained earnings in the past few years. On the other hand, Tesco PLC’s price earnings ratio, although significantly higher than Home Retail Group PLC, has been fluctuating in the past five years due to variations in the earnings per share of the company (Kaplan, 2013). Home Retail Group PLC Ratios 2013 2012 2011 2010 2009 Price Earnings Ratio = Market Share Price/Earnings Per Share 10.9 11.4 9.6 10.5 -4.6 Dividend Payout Ratio= Dividends/Net Income 0.1 1.6 0.7 0.6 -0.3 Dividend Cover Ratio= Net Income/Dividend For The Year 11.8 0.6 1.5 1.7 -3.2 As far as the dividend payout ratio is concerned, Home Retail Group PLC’s dividend payout showed gradual increase from 2009 till 2012, but has then declined considerably in 2013. On the other hand, for Tesco PLC, the dividend payout ratio has been consistent in the first four years under consideration, but increased significantly in 2013. Tesco PLC Ratios 2013 2012 2011 2010 2009 Price Earnings Ratio = Market Share Price/Earnings Per Share 2164.2 808.6 1226.7 1419 1221.4 Dividend Payout Ratio= Dividends/Net Income 9.5 0.4 0.4 0.4 0.4 Dividend Cover Ratio= Net Income/Dividend For The Year 0.1 2.4 2.5 2.4 2.4 Lastly, the dividend cover ratio for Home Retail Group PLC indicates that the ability of the company to discharge its dividend payment obligations from its net income has improved considerably in the year 2013; whereas the same has decreased for Tesco PLC in 2013. To conclude, it can be stated that the stock of Home Retail Group PLC has shown normal performance during the past five years, as its movements have been closely tied with its peer and industry trends. Moreover, the analysis of investors’ ratios are indicative of the fact that the company has managed to improve its overall outlook in comparison with its competitors, which can be considered as favorable for making investment in the company’s stocks. Conclusion Following analysis of annual reports of HRG and Tesco Group for the previous five years from 2009 to 2013 interpretations have been conducted using liquidity, working capital management, profitability, utilization of resources, investors and solvency ratios. In addition to this, the environmental analysis provides background to the organizational culture, norms, values and its ability to respond to the external environmental factors such as bargaining power of suppliers or technological development in the said field. Lastly, the analysis of performance of the company on London Stock Exchange reveals the future investment opportunities for the stakeholders (Zucoon & Izmaylova, 2010). The higher profitability or improvement in the profitability of Home Retail Group observed during financial interpretation reveals that the company is improving on the operational capacity of the business. In this manner, it can be suggested that the business is investing more on reducing the prices of the products and services and offer them to the target market at the minimum possible rates. Other key indicators of financial performance of the business also helps the author of the research report to assert that the overall condition of Home Retail Group. List of References Atrill, P. & McLaney, E., 2004. Management Accounting for Decision Makers. London: Financial Times Prentice Hall. Bhimani, A. & Bromwic, M., 2009. Management Accounting: Retrospect and prospect. Burlington: Elsevier. Bpp, 2013. Financial Reporting. London: Bpp Publication. Bragg, S.M., 2002. Accounting Reference Desktop. New York: John Wiley & Sons. Brigham, E.F., 2013. Financial Management: Theory & Practice. Mason, OH: Cengage Learning. Coulter, M., 2012. Strategic Management in Action. New York: Pearson Educacion. Debarshi, B., 2011. Management Accounting. New Delhi: Pearson Education India. Drury, C., 2008. Management and Cost Accounting. Mason, OH: Cengage Learning EMEA. Frankwood , 2012. Frank Woods business accounting 2. England: Harlow,Pearson. Henry, A., 2008. Understanding strategic management. New York: Oxford University Press. Hirschey, M., 2009. Managerial Economics. Mason: Cengage Learning. Home Retail Group PLC, 2011. Annual Report 2011. Annual. London: Home Retail Group PLC. Home retail Group PLC, 2012. Annual Report 2012. Annual. London: Home retail Group PLC. Home Retail Group, 2014. About us. [Online] Available at: [Accessed 3 March 2014]. Homer, D., 2013. Accounting for Non-Accountants. London: Kogan Page Publishers. Kaplan, 2013. Financial Reporting. London: Kaplan publisher. Porter, M.E., 2008. Competitive Strategy: Techniques for Analyzing Industries and Competitors. Rockfeller Centre: Simon and Schuster. Randall, H., 2005. Accounting A Level and AS Level. England: Cambridge University Press. Schermerhorn, J.R., 2010. Exploring management. Hoboken: John Wiley. Zucoon, F. & Izmaylova, D., 2010. Stakeholder management in a multicultural environment. [Online] Available at: [Accessed 3 March 2014]. Appendix 1: Ratio Analysis Home Retail Group PLC Tesco PLC 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 LIQUIDITY RATIO: Acid Test Ratio = (Current Assets - Inventory) / Current Liabilities 0.9 0.8 0.8 1 0.9 1.5 1.4 1.5 0.5 0.6 Current Ratio = Current Assets/Current Liabilities 1.7 1.7 1.7 1.9 1.7 2.1 1.9 2 0.7 0.7 Working Capital MANAGEMENT: Day’s Receivables =( Receivables /Sales)*365 42.5 38.9 38.1 35.3 36.7 14.2 15.2 14.1 12.1 12.3 Inventory Turnover= Cost Of Sales/Inventory 4 4.1 3.9 4.3 4.2 16.2 16.3 17.5 19.2 18.6 Payable Days = (Payables/Cost Of Sales)*365 108.8 90.9 96.3 93.8 94.1 66.7 70.1 69.2 65.9 63.6 PROFITABILITY: Gross Margin Ratio = Gross Profit / Sales 0.3 0.3 0.3 0.3 0.3 0.1 0.1 0.1 0.1 0.1 Net Margin Ratio = PBIT/Sales 0 0 0 0 -0.1 0 0.1 0.1 0.1 0.1 Return on Capital Employed=Earnings Before Interest and Tax (EBIT) / Capital Employed 0.1 0 0.1 0.1 -0.1 0.1 0.2 0.2 0.2 0.2 UTILISATION OF RESOURCES RATIOS: Asset Turnover= Sales/Total Assets 1.3 1.5 1.5 1.5 1.5 1.1 1.1 1.1 1.1 1.1 Return on Total Assets= PBIT/Total Assets 0 0 0.1 0.1 -0.1 0.2 0.3 0.3 0.3 0.2 Non-Current Asset Turnover= Sales/Total Of Non-Current Assets 2.5 2.5 2.6 2.7 2.6 1.8 1.7 1.7 1.7 1.7 Current Asset Turnover= Sales/Total Of Current Assets 2.7 3.2 3.1 3 3.1 5.2 5.2 5.2 4.8 4.1 INVESTORS RATIOS: Price Earnings Ratio = Market Share Price/Earnings Per Share 10.9 11.4 9.6 10.5 -4.6 2164.2 808.6 1226.7 1419 1221.4 Dividend Payout Ratio= Dividends/Net Income 0.1 1.6 0.7 0.6 -0.3 9.5 0.4 0.4 0.4 0.4 Dividend Cover Ratio= Net Income/Dividend For The Year 11.8 0.6 1.5 1.7 -3.2 0.1 2.4 2.5 2.4 2.4 Solvency: Financial Gearing = Debt/(Debt + Equity) 0.3 0.3 0 0 0 0.5 0.4 0.4 0.4 0.5 Times Interest Earned = Operating Income/Net Interest Expense 2.8 2 5.1 6.5 -7.5 4.8 10.2 8.1 6 6.6 Appendix 2: Home Retail Group PLC. 2013 2012 2011 2010 2009 Current Assets 2,019.8 1,731.2 1,898.7 2,031.5 1,877.2 Current Liabilities 1,168.9 1,002.7 1,118.5 1,087.2 1,095.8 Inventory 941.8 933.2 1,016.8 935.4 930.3 Sales 5,475.4 5,582.8 5,851.9 6,022.7 5,897.4 Receivables 636.8 594.6 610.3 582.1 593.7 Payables 1,116.1 944.9 1,047.5 1,042.4 999.2 Cost Of Sales 3,743.3 3,794.0 3,970.7 4,055.6 3,873.8 Gross Profit 1,732.1 1,788.8 1,881.2 1,967.1 2,023.6 PBIT 137.4 98.7 258.0 294.5 -402.0 Capital Employed 2,732.5 2,625.4 2,741.2 2,866.6 2,758.4 Debt 1,118.9 950.1 58.7 62.5 64.0 Equity 2,732.5 2,625.4 2,741.2 2,866.6 2,758.4 Market Share Price 127.2 104.1 222.3 255.0 221.8 EPS 11.7 9.1 23.1 24.3 -47.7 Net Interest Expense 48.5 48.4 50.2 45.6 53.5 Dividends Paid During Year 8.0 117.5 126.3 123.9 127.2 Total Assets 4,245.2 4,008.6 4,137.8 4,277.3 4,189.5 Total Non-Current Assets 2,215.8 2,277.4 2,239.1 2,245.8 2,312.3 Total Current Assets 2,019.8 1,731.2 1,898.7 2,031.5 1,877.2 Profit After Income And Tax 94.0 72.8 190.9 209.8 -413.1 Appendix 3: Tesco PLC. 2013 2012 2011 2010 2009 Current Assets 12,465.0 12,353.0 11,608.0 11,392.0 13,081.0 Current Liabilities 5,889.0 6,386.0 5,692.0 16,015.0 17,595.0 Inventory 3,744.0 3,598.0 3,162.0 2,729.0 2,669.0 Sales 64,826.0 63,916.0 60,455.0 56,910.0 53,898.0 Receivables 2,525.0 2,657.0 2,330.0 1,888.0 1,820.0 Payables 11,094.0 11,234.0 10,484.0 9,442.0 8,665.0 Cost Of Sales 60,737.0 58,519.0 55,330.0 52,303.0 49,713.0 Gross Profit 4,089.0 5,397.0 5,125.0 4,607.0 4,185.0 PBIT 2,188.0 4,182.0 3,917.0 3,457.0 3,169.0 Capital Employed 16,661.0 17,801.0 16,623.0 14,681.0 12,906.0 Debt 14,483.0 13,731.0 10,402.0 11,744.0 12,459.0 Equity 16,661.0 17,801.0 16,623.0 14,681.0 12,906.0 Market Share Price 374.4 318.2 406.1 416.2 331.5 EPS 0.2 0.4 0.3 0.3 0.3 Net Interest Expense 459.0 411.0 483.0 579.0 478.0 Dividends Paid During Year 1,184.0 1,180.0 1,081.0 970.0 886.0 Total Assets 13,096.0 12,863.0 12,039.0 11,765.0 13,479.0 Total Non-Current Assets 37,033.0 37,918.0 35,167.0 34,258.0 32,085.0 Total Current Assets 12,465.0 12,353.0 11,608.0 11,765.0 13,081.0 Profit After Income And Tax 124.0 2,806.0 2,655.0 2,327.0 2,133.0 Appendix 4: PESTEL Analysis It is essential to identify elements, which may have an impact on variety of changeable factors, which can affect the demand and supply curve of any organization along with its costs, within a macro-environment analysis (Schermerhorn, 2010). PESTEL analysis is a helpful tool for analyzing the overall scenario of the work environment of Home Retail Group (Henry, 2008). Keeping in view the vast variety of products offered by the company (from gardening product to electronic item and financial assistance), to meet the demands of their customers, the group must consider external factors which have an impact on its business and will help it to stand firm in the contemporary competitive market (Home Retail Group, 2014). The company deals in some of the UK’s most recognizable retail brands. The company is currently operating Argos, HomeBase and Financial Services (Home Retail Group, 2014). Political Economical Social Technological Environmental Legal Political environment and political factors of UK plays important role on the performance of Home Retail Group. Factors such as government debts and consumer debts in UK are comparatively high. The group has tried really hard to work under the pressurized circumstances. Regardless of unfavorable political factors, Home Retail Group has been able to perform well locally and internationally. Home Retail Group has successfully adjusted itself in all the international markets under their political pressure and competitive market behavior. The group also has one franchise of Argos operating in India since 2007 (Home Retail Group, 2014). Economic Stability is believed to be one of the main elements before venturing into any industry or market. The company has to take risks to enter into international markets to expand their business. Argos which is a brand of the Home Retail Group has its international franchise in India. It has been proved successful as the company has been able to meet the demands of the foreign market. The foreign trade rate of Home Retail Group at present is 1 pound to 72.7 rupees (Home Retail Group, 2014). Social responsibility adds towards the progress of any business. The growing trend of shopping all items under one roof has been very famous in the recent years. Home Group with the help of its three brands has catered this need to its customers. Furthermore the group has also encouraged hiring female staff towards a social cause and support women’s right. Home Retail Group has been found very declined towards social responsibility. In order to enhance their performance and to define their strategic objectives towards social responsibility the group has formulated five basic principles. These principles have allowed the group to help towards a better and healthier society. The group has a comparatively higher rate of recycling (Home Retail Group, 2014). Home Retail Group has always very effectively utilized technology. The group has more than 737 stores followed by websites and apps. The group is working hard to cope-up with the technologically advanced market. For this purpose it has launched its mobile application as well. The group has millions of active online users for Argos and other brands. The group’s website and app has been visited by 635 Million users last year (Home Retail Group, 2014). Organizations need to be environmentally responsible. Home Retail Group try to assure that it contributes towards the progress of environment and its surroundings and keeps it safe. For this purpose the group has adopted various campaigns and techniques. The company to promote a healthier environment among one of the many approaches adopts less use of paper and timber. The group also implements policies that are in alliance with the ethical standards of the correct use of natural resources and to use them responsibly (Home Retail Group, 2014). The policies and regulations imposed by the government have a direct influence on the business of any organization. The tax policies and advertising taxes are relatively high in UK. Home Retail Group has to follow and practice all the policies and legal aspects before operating locally or internationally. Not only in the home country but setting business cross borders can also be challenging as the group have to adjust its operations and standards according to the requirements and practices of business in that particular country (Home Retail Group, 2014). Appendix 5: 5 Forces of Home Retail Group In order to assess and analyze the factors of any organization or industry, the Michael Porter’s five (5) forces of analysis are found very helpful (Porter, 2008). The major forces which helps in identifying and assessing any industry is as follows; 1. Competitive Rivalry 2. Barriers of Entry 3. Threats of Substitutes 4. Power of Buyers 5. Power of Sellers (Porter, 2008). Competitive Rivalry Barriers of Entry Threats of Substitutes Power of Buyers Power of Sellers The retail market in the UK is relatively concentrated. There are many key players in the retail market such as Tesco and others. The major competitor of the group is John Lewis, followed by Marks & Spencer, Debenhams, and Bhs while IKEA, Tesco, Asda, Sainsbury and Furniture Village etc. are some other key competitors. All of these competitors share an overall 70% market making it complex for the operations of Home Group (Home Retail Group, 2014). Keeping in view the size of the UK’s retail market, it can be predicted that the chances of new entrants are comparatively greater. Since the industry is very large and grabs attention of many new investors therefore, it has imposed serious challenges and barriers for Home Group. It does not impose threats in the form of market share but also by launching their own brands (Home Retail Group, 2014). Retail market is a huge market in UK. The threat of substitutes that are available in UK is somewhat a key issue. Since the demand for goods and services, furniture and financial assistance is not a basic necessity, therefore the group may find challenges from the substitutes. The competitors are trying hard to come up with strong innovate ideas to capture the market and to provide pleasurable experience to the customers (Home Retail Group, 2014). Power of buyers is a chief factor for any business growth. It has the tendency to identify the prices of products and services. Furthermore, power of buyers also helps in determining the market share allocation along with customer loyalty etc. Since the retail market in UK is very huge and strong therefore the negotiating power of consumers is strong too. Consumer loyalty in UK’s retail industry is highly unstable. This however imposes threats for the Home Retail Group as new entrants can share their consumer’s loyalty (Home Retail Group, 2014). Since there are many players in the retail market of UK namely John Lewis, Debenhams, Tesco etc., therefore the bargaining power of the supplier greatly fluctuates. The term power of sellers is the certain demand of the supplier, which is asked from the retailers by sharing a definite price on its goods and services. Diverse distribution channels also have an impact on the purchasing power of the supplier. Diverse distribution channels also impacts on the bargaining power of the supplier. It greatly depends on the distributor for raw materials and packaging as Home Retail Group has to pay heavy amounts to the distributor or the group has strong terms and conditions of their own (Home Retail Group, 2014). Read More