Halfords Group Plc- Profitability Indicators and Strong Position of the Company - Example

Halfords Group Plc. Halfords Group Plc. Introduction The primary aim of this report is to carry out a comprehensive analysis of Halfords Group Plc. based on key financial ratios. The financial ratio analysis is based on the financials of the company for two year ending in March 2013 and 2014. In order to analyze values of these ratios a discussion is formed using management report and notes to financial statements provided by the company in its annual report. Furthermore, the company’s results are compared with Cambria Automobiles Plc., which is a direct competitor company. In addition, different users of financial information are identified along with the use of non-financial information. Halfords Group Plc. is a UK based company established in 1982 in Redditch. It is engaged in automotive, cycling, and leisure retailing. The company’s automotive function is related to repairing and maintenance of vehicles and their accessories. The company operates more than 303 service stores throughout the UK. (151) Financial Ratio Analysis The summary of results of financial ratio analysis is provided in the following table. Halfords Group Plc. Cambria Automobiles Plc.   2014 2013 2014 2013 Profitability ROCE (Return on Capital Employed) 18.45% 18.67% 14.6% 14.3% Gross Margin 53.66% 54.76% 12.22% 12.88% Mark-Up 115.77% 121.03% 13.92% 14.78% Liquidity Current Ratio 1.09 1.07 0.97 1.07 Acid Ratio 0.30 0.35 0.21 0.28 Solvency Gearing Ratio 0.22 0.28 0.46 0.40 Sources: (Halfords Group Plc. - Annual Report and Accounts 2014, 2014; Cambria Automobiles PLC (CAMB.L), 2014; Black & Al-Kilani, 2013) The above table indicates values of three profitability ratios, two liquidity ratios and one solvency ratio. These are discussed in the following. Profitability Overall, the company’s profitability weakened in the year ending 2014 as compared to 2013 as the values of three ratios declined. ROCE Although the company’s revenues increased in 2014 by 7.9%, the company could not control its cost of sales and operating expenses that increased by higher percentage. The company’s sales improved mainly due to the company’s ability to provide value services to its clients and leading position in its core business of car servicing. However, the company’s annual report indicated that it did not achieve the targeted financial performance in its autocentres. The operating costs of autocentres increased by almost 13% that had a negative effect on the company’s operating profits. It was mainly due to the change of the leadership that was not helping the company to achieve its set targets. The company also invested significant amount in expanding and improving its infrastructure, stores, and relationship with employees that all helped the company’s revenues increase in 2014. These resulted in lower gross profits and operating profits of the company for the year ending 2014. In 2014, the company also paid off a large proportion of its long-term loans and its retained earnings went up by 9.2%. The outcome of these movements in the values of financial items used in the calculation of ROCE resulted in lower value of ROCE in 2014 as compared to 2013. Halfords’s ROCE remained above Cambria in both years. Gross Margin The company had high gross margins in both years. However, a slight decline was recorded in its value in the year ending 2014. It suggested that the company’s cost of sales went up in the year 2014 despite an increase in its revenues. It was mainly due to the decline in the gross profit of the company’s retail business by 144 basis points. Moreover, it improved for its autocentres. High gross margin in both years reflected positive performance of the company to manage its cash well (Wild et al., 2007). Factors such as service revolution and investment in the company’s infrastructure were major contributors to the company’s ability to generate high gross margin. Halfords outperformed its competitor Cambria in terms of gross margin as Cambria was only able to generate gross margin of 14.6% and 14.3% in 2014 and 2013 respectively. Mark-Up The firm’s ability to generate profits by managing its cost of sales is measured by mark-up. It helps to identify the pricing of the company’s products and services (Black & Al-Kilani, 2013). It could be stated that the company earned significantly high mark-up. The key factors contributing to this included the firm’s strong position in its market and ability to charge high price for its products and services as compared to its competitors because of its long-established reputation and the level of service quality and ease it offers to its customers. It was reported that the company’s network allowed customers to easily reach its service centers and avail its services. In comparison to Halfords, Cambria only charged a mark-up of 13.92% and 14.78% in 2014 and 2013 respectively. Liquidity The liquidity of the company is measured by two ratios including current ratio and acid test. Overall, the liquidity position of the company remained weak. Current Ratio The current ratio value determines the firm’s ability to meet its short-term business obligations. The business needs to have sufficient liquidity to pay off its current liabilities in case of any financial distress. From the results, it could be indicated that the company’s current ratio remained above the benchmark value of 1 (Wood, 2010). It reflected that the company’s current assets (2014: £208.3m and 2013: £196.8m) were more than its current liabilities. However, a closer look at the current assets of the company indicated that the company held large inventory in its stock. It held up a large cash value in relatively illiquid asset. If the company faces any financial problem then it may get into financial trouble as the company’s cash holding was just £5.3m in the year ending 2014. A firm’s ability to generate cash is more relevant than its earnings as profit may not be realized at the time of the firm’s financial requirement (Wild et al., 2007). Cambria’s current ratio is less than 1 and suggested weak position of the company as compared to Halfords. Quick Ratio The quick ratio excludes inventory from current assets to ascertain the firm’s liquidity position (Black & Al-Kilani, 2013). It is apparent from Halfords’s Statement of Financial Position that it held huge inventory of finished products. Although holding large inventory in the retail business is a common practice, it could create major problems for the company if it is not able to generate sufficient cash from its operating activities. Solvency Overall, the company’s solvency position remained strong. Gearing Ratio The company financial report indicated that the company was majorly financed by equity in both 2013 and 2014. The gearing ratio values were very low. It is a positive sign for the company’s shareholders as they could expect higher returns on their investment as low payments were required by the business to meet its long-term obligations. Cambria, on the other hand, had higher gearing suggestive of higher dependency on external borrowing. Users of Financial Information There are different users of financial information including internal management, shareholders, customers, suppliers, debtors, creditors, debt-holders, tax authorities, government, trade unions, pressure groups and community members and organizations (Carroll & Buchholtz, 2014). In particular, shareholders would be interested primarily in the company’s profitability. Financial indicators such as ROCE, Markup and Gross Profit Margin as calculated in the previous section would be of interest as they allow shareholders to assess the firm’s ability to create shareholders’ value (Eisen, 2007). High profits imply greater payouts and capital gains possible for Halfords’s shareholders. Furthermore, creditors and debt-holders would be interested in the company’s liquidity and solvency position as it helps them evaluate the company’s ability to meet its interest and principal repayment obligations. Higher gearing ratio indicates that the company already have borrowing more than its equity and any cash problems could jeopardize future payments to Halfords’s debt-holders. In this way, it could be stated that every user having financial interest in the firm’s business would be using financial information to evaluate its relationship with the company. Non-Financial Information In addition to financial information reported by companies, provision of non-financial information also addresses needs of different users of the annual report (Carroll & Buchholtz, 2014). Halfords Plc. provided detailed non-financial information that encompasses core business strategies and the business relationships with communities, suppliers, employees, media and the government. In particular, the strategic report included in the annual report of the company provides analysis of the performance of each business function at different levels and how they contributed to the overall strategic aim of the company. The company emphasized on The ‘H’ Factor, Service Revolution, Click with the Digital Future, 21st Century Infrastructure to present insight to the users about the company’s plans affecting its current financial performance and future business. In addition, the company provided information such as GHG emissions, water consumption etc. pertaining to its processes that ensured sustainability of the business environment. Furthermore, the company provided details of its investment in improving employee relationships (Halfords Group Plc. - Annual Report and Accounts 2014, 2014). Conclusion The company’s profitability indicators reflected strong position of the company. However, in light of the tightening economic conditions that could affect automobile industry, it is suggested that the company reconsiders its mark-up and work on reducing its cost of sales to give better value to its customers. The company needs to be careful regarding its liquidity position. The company must work on its inventory management and ensure that the stock held by the company is easily replaceable in case of any financial problem. It should also try to minimize its inventory holding and focus on improving its net cash position. Although the company invested significantly in increasing efficiency of its business and delivering high value to its customers, it must work on cutting down its operating costs and get the most out of it current position in the market against its competitors. List of References Black, G. & Al-Kilani, M., 2013. Accounting and Finance for Business. London: Pearson Education. Cambria Automobiles PLC (CAMB.L)., 2014. [Online] Available at: [Accessed on 23 December 2014] . Carroll, A. & Buchholtz, A., 2014. Business and Society: Ethics, Sustainability, and Stakeholder Management. Mason: Cengage Learning. Eisen, P.J., 2007. Accounting. New York: Barrons Educational Series. Halfords Group Plc. - Annual Report and Accounts 2014., 2014. Redditch: Halfords Group Plc. Wild, J.J., Subramanyam, K.R. & Halsey, R.F., 2007. Financial Statement Analysis. New York: Mc-Graw Hill. Wood, F., 2010. Business Accounting. New Delhi: Pearson Education India. Appendix: Working of Financial Ratios     Halfords Group Plc. Cambria Automobiles Plc.       2014 2013 2014 2013 Profitability ROCE (Return on Capital Employed) Operating Profit / Total Equity + Long Term Loans x 100 77.6/(326.1+94.6) 77.1/(298.7+114.2) 6000/(13000+28000) 5000/(10000+25000) Gross Margin Gross Profit / Revenue x 100 504.2/939.7 477.1/871.3 55000/450000 51000/396000 Mark-Up Gross Profit / Cost of Sales x 100 504.2/435.5 477.1/394.2 55000/395000 51000/345000 Liquidity Current Ratio Current Assets / Current Liabilities 208.3/191.3 196.8/183.1 98000/101000 89000/83000 Acid Ratio Current Assets - Inventory / Current Liabilities (208.3-150.2)/191.3 (196.8-133.2)/183.1 (98000-77000)/101000 (89000-66000)/83000 Solvency Gearing Ratio Preference Shares + Long-term loans / Share Capital + Reserves + Long-Term Loans x 100 94.6/(326.1+94.6) 114.2/(298.7+114.2) 13000/28000 10000/25000 Read More