TED Bakers Annual Analysis - Assignment Example

TED Bakers annual report analysis Task Introduction TED Baker was established in 19888. The company specializes in the production of lifestyle outfit and accessories for both men and women. The company is dedicated to combining style and different colors in the production of top fashion outfits. The company has its store in various parts of the world (where it generates its revenue) as follows: 16 stores in the US and Canada, 37 stores in the UK and Europe, 22 stores in Asia, 13 stores in the Middle East, and 5 stores in Australia and New Zealand. Ted Baker continually strive to provide a fair and safe environment to the employees to enable the production of high-quality products. The company’s strategy is to be the provider of the leading global lifestyle brand by expanding the Ted Baker collection, controlling distribution through three main channels (retail, wholesale, and licensing), and managing the development of foreign markets. The company’s distribution structure composes of retail, wholesale and licensing (TED baker annual report 2014, pp. 1-10). Question 2 The following information contained in Ted baker’s annual report is of interest to various shareholders: the net profit, the amount of debt, and the amount of net assets. Concerning the net profit, shareholders would use the information to evaluate the ability of the company to pay the cash dividend. In addition, they use the information to assess the earnings per share. Second, the prospective shareholders use the information to determine the level of return and risk. The information helps them evaluate and select an asset. Third, the employees use the information to determine the employer’s financial stability. They also are interested in assessing the ability of the organization to provide fair salaries and retirement benefits. Fourth, suppliers use the information to evaluate whether the amount owed to them by Ted Bakers will be paid without default (Saudagaran 2009, pp. 51-56). Fifth, the customers, use the net profit level of the company to evaluate its capability to meet their needs (both short and long run). Last, the government uses the information for tax purposes. Concerning the level of debt, both the shareholders and the potential shareholders use the information to analyze the influence of the interest payment on the company’s profitability. The employees use the information to ascertain the ability of the enterprise to pay salaries timely. Concerning the level of net assets, the both shareholders and potential shareholders use the information to determine the book value of the business. Thus, help them decide whether to buy or sell the shares (Saudagaran 2009, pp. 51-56). Question 3 Concerning the impairment of goodwill and other intangible assets, TED baker uses the regulation set by the UK GAAP, which states that fixed assets and goodwill should be reviewed for impairment when the conditions indicate that the carrying amount of such assets might be irrecoverable. Based on note 11 of the balance sheet preparation, the indications of impairment at the balance sheet date sparks the process of impairment tests (TED baker annual report 2014, pp. 35). Concerning the measurement of financial assets, TED baker adopts the regulation provided under the UK GAAP, which states that the basis of the recognition is the book value (initial cost – impairment/depreciation). Based on the financial statement, the book value is the basis of recognizing cash and cash equivalent by Ted Baker due to their short maturities and immediate access. Similarly, the basis for identifying the accruals from equity accounted investee, the trade receivables, and the amounts due from group activities is the book value (TED baker annual report 2014, pp. 40). Concerning the recognition and the measurement of the derivatives, TED bakers adopt the regulations and guidelines set by the IFRS. The regulations state that the basis for recognizing and measuring derivatives should be the fair value (UK GAAP vs. IFRS 2011, pp. 33). Based on TED baker’s annual report, fair value is the basis of valuing the financial derivative assets and liabilities. The gains and losses commonly known as other income and expenditures are not part of the items in the company’s profit and loss account. Such items are the unrealised foreign exchange differences, changes in the revaluation reserve, and gains or losses on defined benefit pension schemes. These items arise due to the secondary activities of the company. Therefore, they are not the actual income generators to the enterprise. Consequently, by excluding them from the income statement, TED bakers follows the UK GAAP guidelines (Cutting through UK GAAP n.d, pp. 41). Question 4 TED bakers recognize and measure their property, plant and equipment at book value (original cost – accumulated depreciation). The mentioned accounting principles imply as follows: first, the historical cost concept means that companies should value their assets and equity investment at the initial cost (original cost). On that note, this theory disregards the practice of valuing assets at either fair value or carrying amount. Concerning TED Baker, the implemented principle (book value) changes to the original cost. Second, the matching concept implies that firms should simultaneously record their revenues and the relevant expenses. For instance, when TED Baker records the income for year 2013, the costs of sales should accompany the earnings. The concept is not relevant to the policy implemented by TED bakers concerning the valuation of property, plant, and equipment. Therefore, it will not influence the policy (Basic Accounting Principles 2015, par. 1-13). Third, the going concern concept implies that the operation of a company is to continue to the predictable future period. Thus, expenses such as depreciation should be deferred (should not be recognized in their year of occurrence, but at a later date. The principle conflicts with the policy implemented by TED bakers. The basis of the recognition of the company’s property, plant and equipment is book value, whereas, the going concern proposes the original cost. Fourth, the prudence concept implies that firms should be quick to record expenses and liabilities but should be slow to record assets and revenues. The concept does not influence the TED baker’s property, plant and equipment valuation policy (Basic Accounting Principles 2015, par. 1-13). Last, the notion of consistency implies that firms used maintain the implementation of the current principle until such a time that a better policy is formulated. The concept discourages the tendency of continual change in the accounting principle. Consequently, the notion of consistency encourages TED Baker to maintain the book value or use fair value (whichever is better between the two) (Basic Accounting Principles 2015, par. 1-13). Question 5 (see appendix 1, page 9) The profitability ratios Operating profit margin- the ratio shows the level of a company’s profitability after meeting the operational and costs related to sales. It also displays the capability of a company to service the cost of capital and pay taxes. Concerning TED Baker, the ratios for the year 2013 and 2014 are 11.60% and 12.30% respectively. The interpretation of the 2013 ratio means that 11.6% of the company’s sales were operating profit. The remaining 88.4% were consumed by the cost of sales and operating costs. The ratio increased between the two years due to a rise in the earnings before interest and tax. From the analysis, the company is capable of pay of meeting interest and tax expenses (Sarngadharan & Kumar 2011, pp. 121-135). Gross profit margin- the ratio shows the level of a company’s profitability after meeting the costs related to sales (cost of goods sold). It also displays the capability of a business to meet the relevant operating costs. Concerning TED Baker, the ratios for the year 2013 and 2014 are 62.38% and 61.65% respectively. The interpretation of the 2014 ratio means that 61.65% of the company’s sales were gross profit. Cost of sales consumed the remaining 38.35%. The ratio decrease between the two years due to a more than proportionate increase in sales. From the analysis, more than half of the company’s revenue was gross profit. That indicates that the enterprise can manage the costs of sales (Sarngadharan & Kumar 2011, pp. 121-135). Return on capital employed- the ratio indicates the return generated by every pound of capital used. Concerning TED Baker, the return on capital employed in the year 2013 and 2014 are 21.84% and 25.75% respectively. The ratio interpretation for the year 2014 means that the company’s capital used generated 25.75% of the net profit. The ratio increased between the two periods due to an increase in the net profit. Based on the analysis, the utilization rate of the company’s capital employed is suitable (Khan & Jain 2007, 6-40). Gearing ratios Debt/equity - ratio indicates the proportion of fixed charge capital in the capital structure of a firm. Concerning TED baker, there is no record of the company seeking for long-term debt in the financial statement. Interest coverage ratio – this ratio evaluates a company’s ability to meet interest payments. Concerning TED Baker, the ratios for 2013 and 2014 are 35.82 times and 30.17 times respectively. The ratio interpretation for the year 2013 means that, the company could pay interest 35.82 times using the EBIT. The ratio decreased between the two periods due to an increase in the interest expense. However, the company is still capable of meeting the interest charges (Bowhill 2008, pp. 265-284). Liquidity ratios Current ratio- this ratio measures the ability of the business to meet its current obligations using the current assets. Concerning TED Baker, the current ratio for the year 2013 and 2014 are 1.722 times and 1.613 times respectively. Based on the ratio for the year 2014, the company had £ 1.613 of current assets to cover every pound of the current liabilities. The ratio decrease between the two periods due to an increase in the current liabilities. The ratio clearly shows that the company is liquid enough sufficiently to settle its short-term obligations using the current assets during both years (Khan & Jain 2007, 6-40). Quick ratio – It measures the ability of a company to meet the short-term obligations using highly liquid assets. An extremely liquid asset is that which is easily converted into cash. Concerning TED Baker, the quick ratio for the year 2013 and 2014 are 0.6849 and 0.7145 respectively. The ratio increased between the two periods due to an increase in the cash and cash equivalent. Based on the ratio, the company’s liquidity is moderate (Bowhill 2008, pp. 265-284). Earnings per share – the companys basic EPS for 2010 to 2014 are 0.326, 0.415, 0.422, 0.515, and 0.672 respectively. The ratio shows the amount of earnings to every share held. Therefore, EPS is another criterion for measuring a company’s profitability. The EPS increases over the period, indicating an increase in the company’s profitability (Currie 2011, pp. 100-120). In conclusion, based on the analysis, TED Baker is capable of controlling the operating costs. It can meet the interest expenses. It also efficiently utilizes the capital employed and is capable of meeting the current obligation. As a result, the company’s financial condition is healthy. List of References Basic Accounting Principles 2015, Viewed 26 February 2015, http://www.accountingtools.com/basic-accounting-principles Bowhill, B 2008, Business planning and control: integrating accounting, strategy, and people, Wiley, Chichester, England. Currie, M 2011, The search for income: an investors guide to income-paying investments, Harriman House Ltd, Hampshire, England. Cutting through UK GAAP n.d., Viewed 26 February 2015, http://www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Documents/PDF/Audit/cutting-through-uk-gaap.pdf Khan, M. Y., & Jain, P. K 2007, Financial management, Tata McGraw-Hill, New Delhi. Sarngadharan, M., & Kumar, R. S 2011, Financial analysis for management decisions, Wiley, NY. Saudagaran, S. M 2009, International accounting: a user perspective, CCH, Chicago, IL. TED baker annual report 2014, Viewed 26 February 2015, http://www.tedbakerplc.com/~/media/Files/T/Ted-Baker/results-and-reports/report/2014/TedBaker_AnnualReport_07_may_2014.pdf UK GAAP vs IFRS 2011, Viewed 26 February 2015, http://www.ey.com/Publication/vwLUAssets/UK_GAAP_v_IFRS_-_The_basics_-_Spring_2011/$FILE/EY_UK_GAAP_vs_IFRS_-_The%20basics_-_Spring_2011%20.pdf Appendix 1: the ratio calculations Profitability ratios 2010 2011 2012 2013 2014 Operating profit margin (EBIT/Sales)*100 11.60% 12.30% Gross profit margin ( gross profit/ Sales)*100 62.38% 61.65% ROCE (Net profit/Net assets)*100 21.84% 25.75% Gearing ratios Debt/equity (fixed charge debt/equity) 0.00% 0% Interest coverage (EBIT/Interests charges) 35.82 30.17 Liquidity ratios Current ratio (current asset/current liabilities) 1.722 1.613 Quick ratio (CA-Stock)/CL 0.6849 0.7145 EPS 0.326 0.415 0.422 0.515 0.672 Read More