Ratio Analysis for Home Retail Group Plc - Case Study Example

Home Retail Group Plc Module number: of the assignment: ID: Word count: Executive summary IntroductionHome Retail Group Plc is regarded as the leading general and home merchandise in the UK for bringing the most recognisable brands in the UK such as Argos and Homebase under one name. The company is registered under London Stock Exchange and is also a successful constituent of FTSE 250 Index (Home Retail Group, 2015b). It operates mainly in Republic of Ireland and the UK. The vision of Home Retail Group Plc is to bring value to the customers by providing them right type of products either at home or at stores. Argos is known to be leading multi-channel retailer in the UK and Homebase to be the home-enchantment retailer (Home Retail Group, 2015b). The premium brand, Habitat, provides the customers with high quality contemporary styled products and also best-selling iconic designs. The financial services provided by the customers, helps them to purchase the products easily. The company aims at serving its customers through the two renowned retail brands such as Homebase and Argos. Figure 1: Business model of Home Retail Group Plc (Source: Home Retail Group, 2015a) The customers form the heart of the business and the company experiences about 180 million transactions in a year. The main elements of the business model of the company are retail brands, sourcing and infrastructure, products, multi-channel retailer, colleagues, financial services and financial strength. Section 1- Comparison of Latest year results with previous year The financial statement of Home Retail Group Plc is considered for comparing the performance of the company over the past two years i.e. 2013-2014. After comparing the two years financial data of income statement the following deductions can be made. The revenue of Home Retail Group Plc is observed to have increased in 2014 as compared to 2013 (Appendix); this reflects the fact that the company has concentrated on increasing its sales figure over the two years. This indicates that the customers have recognized their products and services over the years and are satisfied with the brands (Home Retail Group, 2015c). The gross profit has increased despite the increase in cost of goods sold. Moreover, the operating expense has increased over the years from 2013 to 2014, which indicates the fact that the company has increased its expenditure. This has been reflected in the operating profit of the company, which is observed to have decreased over the years from 2013 to 2014. Finally, the profit of the company has experienced a declining trend over the years from 2013 to 2014 because of escalating expenditure (Home Retail Group, 2015c). The balance sheet of Home Retail group Plc indicates that the total non-current assets have increased; however, the current asset base has decreased. The overall total asset has decreased over the years from 2013 to 2014. Moreover, the non-current liability has decreased over the years from 2013 to 2014; nevertheless, the current liability has increased. The decrease in current asset and increase in current liability indicates towards the fact that Home Retail Group Plc has failed to balance the working capital for the year 2014. This highlights that the company has encounter liquidity issues in future. Section 2 – Ratio Analysis of Home Retail Group PLC The ratio analysis aims at measuring the financial health of a company over a period of time, whether it has the liquidity position to sustain in the long run. It also helps in measuring the profitability position and efficiency of the company. Profitability measures The profitability ratio gauges whether the company is earning enough profit to finance its developmental activities and sustain in the long run. a. Return on shareholder funds (ROSF) The percentage of income that is returned to the investor has decreased over the years from 2013 to 2014 due to decline in profit during the period of time. Hence, it can be concluded that the company has experienced deterioration in its overall financial performance. b. Return on assets The return on assets has also deteriorated over the years from 2013 t 2014; this implies that the management has not utilised its assets in generating sale for the company. Hence, it has not maintained asset base efficiently during 2014 as compared to 2013; hence it is reflected in the profit c. Profit margin The percentage of the income of the company has experience a declining trend over the years from 2013 to 2014 due to the increase in operating expense. Hence, it can be stated that the company does not have better control on the cost during 2014 as compared to 2013. d. Net asset turnover Home Retail Group Plc has focused on improving the net asset turnover, through which they can generate higher sales and profit. This will ensure an efficient cash flow for future. It can also improve the asset base by cutting down the collection period that is provided to the debtors and customers. Ratios 2014 2013 Change Return on shareholder funds 0.88 1.49 -0.611 Return on net assets 0.03 0.04 -0.017 Profit margin 0.009 0.015 -0.006 Net asset turnover 2.12 2.00 0.11 Efficiency Measures The efficiency ratio helps in understanding whether the company is utilising its assets efficiently for generating sales revenue and income. Net asset turnover ratio The net asset turnover of the company has reduced by 9 days; hence, it can be stated that the company has concentrated on improving the number of days in which it sells to the customers. Therefore, it depicts the capability of the company to employ the assets faster and efficiently. Stock turnover The stock turnover of the company has recued in 2014 as compared to 2013; this indicates the fact that the company has reduced the sales days up to 4 days. Hence, the company is maintaining the inventory efficiently. Trade debtor’s collection period The trade debtor’s collection period has increased over the years from 2013 to 2014, this is indicative of the fact that the company has not managed the debtor’s account efficiently. The increase in trade debtor’s collection period by 3 days highlighted the fact that the company do not get faster access to money and also do not get the opportunity to reinvest the amount elsewhere. Trade creditor’s collection period The trade creditor’s collection period has increased reflecting that the company has paid its suppliers and creditors at a much shorter span in 2014 as compared to 2014. This situation is not at all stable for the company as they are utilising their current asset to pay off its suppliers even before they are recovering payments from debtors. In this way the company is exploiting its current assets to pay its debt obligations; hence, this may lead to liquidity problem. Ratios 2014 2013 Change Net asset turnover 172 182 -9 Stock turnover 58 62 -4 Trade debtor’s collection period 45 42 3 Trade creditor’s collection period 104 108 -4 Cash Operating cycle   2014 2013 Holding time for stock     Stock turnover 58 62 Add:     Credit time allowed to trade customers     Trade debtors collection period 45 42 Less     Credit time taken from suppliers     Trade creditors payment period 104 108 Cash Operating Cycle -1 -4 Cash operating cycle of Home Retail Group Plc has reduced over the years from 2013 to 2014, which is indicative of the fact that the company has concentrated on increasing its cash base during the period. Liquidity/solvency measures The liquidity or solvency ratio helps in measuring the ability of a company to pay back its suppliers and creditors out of the asset base. Working capital is crucial for the successful operation of a company as it determines the available fund that are required ion the daily basis. Gearing ratio The gearing ratio indicates that the company has adopted conservative financing policy in order to fund its operations in the long run. Hence, the company finance its operation with the help of equity that is collected from the shareholders. Current ratio Acid test ratio Ratios 2014 2013 Change Gearing ratio 0.013 0.0007 0.012 Current ratio 1.62 1.72 -0.1.2 Acid test ratio 0.87 0.92 -0.04 Shareholder Measures Section 3 – Ratio analysis Home Retail Group Plc Vs Tesco Plc Section 4 – Advantages and Limitation of applied financial ratios Section 4 – Analysis of Organization’s Key Performance Indicators Section 5 – Evaluation of Organisational Key Performance Indicators Section 5 – Summary of Financial Performance of Home Retail Group Plc Reference List Home Retail Group, 2015a. Our Business Model. [online] Available at: < http://www.homeretailgroup.com/about-us/our-business-model/ > [Accessed 23 February 2015]. Home Retail Group, 2015b. Our Story. [online] Available at: < http://www.homeretailgroup.com/about-us/our-story/ > [Accessed 23 February 2015]. Home Retail Group, 2015c. Reports, Results And Presentations. [online] Available at: < http://www.homeretailgroup.com/investor-centre/reports-results-and-presentations/ > [Accessed 23 February 2015]. Appendix Income statement of Home Retail Group Plc Balance Sheet Profitability ratio of Home Retail Group Plc Efficiency ratio Liquidity/ Solvency ratio Efficiency ratio Read More