Annual Report and Financial Statements 2010 of Debenhams Plc - Case Study Example

Table of Contents Introduction 2 Purpose of the report 2 Background about the company 2 Financial management 3 Reasons for financing 4 Source of finance for Debenhams Plc 5 Performance of Debenhams Plc 5 Risk Involved 13 Conclusion 15 References 16 Introduction Business in this developing world looks to ensure that every minute details are taken care of. Financial management has become an important aspect. It is used while planning. It helps to gauge the funds a company has. It also allows execution of plan. Businesses thereby have increased the dependence on financing and looks at ways to ensure that it doesn’t act as a hindrance in the path of growth. Purpose of the report To identify the reasons for financing To identify the ways of financing being adopted by Debenhams Plc To identify the overall performance of Debenhams Plc To identify the risk involved in Debenhams Plc and steps taken by Debenhams Plc to reduce it Background about the company Debenhams Plc is a retail store in UK. The company has a huge presence and deals in “consumer products, clothes, cosmetics, furniture, electrical, toys and other products” (Debenhams Website, 2011). The company presently has around 155 stores in UK and Ireland which has helped in the growth of the retail store (Company Profile, 2011). The company has around 50 international stores and is listed in the London Stock Exchange since 2006 (LSE, 2011). Debenhams Plc has grown because of the sound marketing strategy adopted by the company. The company has looked into different aspect of the marketing strategy like direct selling, advertisements, promotions, offers and other methods to ensure that they are able to lure customers (Khurana, 2010). The growth in the performance which has been evaluated further in the report gets strengthened by the following graph which highlights the growth in share prices (Share Prices, 2011) The above graph shows that Debenhams Plc has grown and is performing excellently which has got reflected in the share price of the company which continuously rising upwards thereby is providing an excellent opportunity to invest. Financial management Finance has become an important part for management. Every company needs to manage it. It eases the pressure from other department. It helps to take decision accordingly. It helps to build strategies. It also decides the marketing procedure. This is required everywhere. Every decision has money involved in it. Financial management forms an important task. It helps to manage finance. It is important that Debenhams Plc maintains it. It will help to “check the inflow and outflow of funds which will be achieved through financial planning, control and decision making”. (James, 2005) This will help to reduce burden. Every process needs money. It will help to meet those. Debenhams Plc is largely dependent on it. This will remove the constraints. It will ease pressure and management will be better. Reasons for financing Businesses look towards different form of finance due to various reasons. Some of the reasons which make businesses raise finance are as follows Businesses look towards finance while starting a new venture. Finance holds the life blood for the organization and helps to plan the different ways in which they can utilize the money to ensure that the business grows (Finance, 2011) Businesses look towards finance while entering a new market. The company needs finance to ensure that they are able to develop their activities which will ensure the different aspects of business are taken care of (Finance, 2011). Businesses look towards finance to pay for their daily activities. Businesses incur a lot of cost like salary, travelling expenses and others which have to be compensated. Finance forms an important part and helps to ensure that they are kept under control (Finance, 2011) Businesses require finance to takeover new organizations. Businesses look towards acquiring new organization and to bid for them they have to pay the company some money. Finance help to take care of it (Finance, 2011) Source of finance for Debenhams Plc The company has used different source of financing and the capital structure of the company is based on it. A look at the financial report suggest that Debenhams Plc has used retained profits, long and short term borrowings, capital market through equity, commercial paper, bank borrowings and leases in their capital structure. (Annual Report, 2010) The company has been looking to use both the self financing mode as well as financing from outside sources. This has transformed into a strong capital structure and will help Debenhams Plc to ensure that they are able to capitalize on it and grow. Performance of Debenhams Plc A further analysis of the capital structure of Debenhams Plc will help to understand the capital structure better. This ratio is of prime importance and provides relevant information about the company. “It identifies how much of the firm’s assets are financed through debt and includes long term debt”. (Transtutor, 2010) The ratios which help to determine it are as Debt to Equity Ratio: “It determines the proportion of long term debt in relation to the shareholders fund and long term debt”. (Kennon, 2011) This ratio helps to identify the financial soundness. It is calculated as “Long Term Debts / Equity X 100”. The calculation of the capital ratio is as RATIOS FORMULAS 2010 2009 Debt to Equity Ratio Debt(liabilities)/equity 500.3 / 503.4 = 0.99 1099.0 / 425.3 = 2.58 The ratio indicates soundness on the part of Debenhams Plc. It shows that the company has a scope for more investment through debts. This is a good sign and shows the company has a space for future projects. As the company works in a type of market where to grow large debt is needed so the ratio seems to be sound. Debt to Capital Employed Ratio: “It helps to identify the percentage of debt which are long in nature by comparing it with the equity fund and the debt of long term nature”. (Capital Employed, 2011) This helps to determine the funding of the business and is ascertained through “Debt / Fixed Assets + Working Capital”. It is as shown below RATIOS FORMULAS 2010 2009 Debt to Capital Employed Ratio Debt / (Fixed Assets + Current Assets - Current Liabilities) 500.3 / (503.4 + 447.1 - 636.5) = 1.59 1099.0 / (425.3 + 537.1 - 74.4) = 1.23 The findings show financial soundness for Debenhams Plc. The company can finance their project through debt in the future. This will help the company to ensure that they are able to work on new projects. Also the fact that production houses need large debt signifies this ratio as strong. Earnings per Share: “It is defined as the profit attributed to the equity shareholders”. (EPS, 2011) It is calculated as “Net profit available to ordinary shareholders / weighted number of ordinary shares on issue”. The calculation of the capital ratio is as RATIOS FORMULAS 2010 2009 EPS Net Profit/ No of ordinary shares 7.5 given 10 given The above ratio indicates soundness on the part of Debenhams Plc. Debenhams Plc has reduced its earning per share indicating that the return for the shareholders has decreased. The returns for Debenhams Plc have decreased in 2010 as compared to 2009 which shows that the profit has decreased. The overall result for the giant seems sound and is a good prospect to invest. The capital structure thus shows soundness for Debenhams Plc and the company has been able to maintain their planning well. This has also ensured efficient efficiency which has helped the company to build a strategy for the future. Working capital holds an important aspect for any business. It determines the strategy the business will pursue and helps to determine the stability of the business. A business cycle for a business like Debenhams Plc is as follows (Working Capital, 2011) The above cycle shows the manner in which working capital is given importance to. Having identified the areas where the company needs to work upon to ensure stability in working capital goes a long way in building the long term performance of the company. The working capital stability for Debenhams Plc can be identified from the liquidity ratios which will help to identify the management of working capital. This ratio looks into both the short and long term financial stability and helps to find the prospective growth opportunity for the company. The ratios which include both the short and long term financial stability are provided below Current Ratio: “It measures the ability to pay the short term liabilities out of short term assets”. (Current Ratio, 2011) This ratio helps creditors, suppliers and investor to identify the liquid position. It is calculated as “Current Assets / Current Liabilities”. Calculation of is as follows RATIOS FORMULAS 2010 2009 Current ratio Current assets / Current liabilities 447.1 / 636.5 = 0.70 537.1 / 74.4 = 7.21 The ratio shows that Debenhams Plc has a sound liquidity position. Debenhams Plc need to improve it slightly so that the picture becomes better. This might make investors and suppliers stay away. Tesco Ltd on the other hand is in a better position but still needs to take it slightly up around 2. Quick Ratio: It is also known as acid test ratio. “It measures the ability of the firm to meet its short term obligation when inventories are removed as inventories take some time to be converted into cash”. (Quick Ratio, 2011) It is calculated as “(Current Assets – Inventories) / Current Liabilities”. The calculation of the ratio is as RATIOS FORMULAS 2010 2009 Acid test ratio Current assets - Inventory / Current liabilities 447.1 - 295.3 / 636.5 = 0.23 537.1 - 270.9 / 74.4 = 3.57 The ratio also indicates that Debenhams Plc is better positioned in 2009. The ratio indicates the efficiency of the company to meet its immediate debt. Debenhams Plc still need to improve this as it is a concern and presenting a bleak picture. The company thus has sufficient liquidity which helps to ensure that the working capital is sound. To finance the working capital Debenhams Plc has looked towards short term loans, borrowings, derivative instruments, customer deposit and bank deposits (Annual Report, 2010). This method of financing has enabled Debenhams Plc to ensure that they are able to raise finance easily. A graph which represents the different form of financing the working capital is as follows The above diagram shows that Debenhams Plc has relied on different forms of financing their working capital which has ensured stability in their working capital management. This has helped Debenhams Plc to ensure sufficient liquidity and has helped the company to plan their future progress based on the strong working capital management which ensures sufficient liquidity. Profitability ratio is what most users of financial statement looks at. It helps to identify the different factors which help the business to earn and grow and the manner in which can ensure steady growth rates. (Profitability ratio, 2011) Looking into the details helps businesses to bring about a change in the planning process and improve their business. Some of the ratios are shown below Gross Profit Margin: This ratio helps to find the profits from the manufacturing process or the direct process and does not consider the expenses which cannot be directly assigned to a particular product. (Gross Profit Margin, 2011) This thereby helps to find the efficiency in producing a particular product and is ascertained through “Gross Profit / Sales X 100”. It is shown below RATIOS FORMULAS 2010 2009 Gross profit margin Gross profit / Sales Revenue * 100 281 / 2,119.9 * 100 = 13.25 264.9 / 1,915.6 * 100 = 13.82 Debenhams Plc have ensured that their results follow similar trends. Debenhams Plc has been able to get a higher margin as there is more efficiency and the cost of production is low. Debenhams Plc needs to reduce its direct cost and need to look towards efficient management so that it demonstrates similar results. Net Profit Margin: This ratio helps to find the final profits from selling the product and it considers all the expenses which have been incurred to achieve it (Net Profit Margin, 2011) and is ascertained through “Earning before Interest and taxes (EBIT) / Sales X 100”. It is shown below RATIOS FORMULAS 2010 2009 Net profit (operating profit)margin Net profit / Sales Revenue * 100 97.0 / 2,119.9 * 100 = 4.57 95.1 / 1,915.6 * 100 = 4.96 Comparing the performance of Debenhams Plc indicates similarity for both the year. The ratio highlights that net profit has decreased for Debenhams Plc in 2010. This is a bad sign and reflects inefficiency to maintain the indirect expense. An interesting fact to note here is that Debenhams Plc has a higher indirect cost which has resulted in large deduction of the final profits for the company. This requires steps to cut cost and improve the management so that there is efficiency. Return on Capital Employed: This ratio helps to find the profit which has arisen due to use of asset. (ROCE, 2011) This helps to evaluate the manner in which the assets were utilized by the business and is ascertained through “Earning before Interest and Taxes (EBIT) / Total Assets – Current Liabilities X 100). It is shown below RATIOS FORMULAS 2010 2009 ROCE EBIT / (Total Assets - Current Liabilities) * 100 139.9 / (2087.3 - 636.5) * 100 = 9.64 120.8 / (2135.8 - 74.4) * 100 = 5.86 Comparing the performance of Debenhams Plc highlights that the return on capital employed has improved in 2010 in comparison to 2009. It has transformed in better utilization having of the assets. Return on Equity: This ratio helps to find the profit which has arisen due to use of equity. () This helps to evaluate the effectiveness of equity and is ascertained through “Net Profit available to ordinary shareholders / Average Equity X 100”. It is shown below RATIOS FORMULAS 2010 2009 Return on shareholders’ equity Net profit / Shareholder equity * 100 97.0 / 503.4 * 100 = 19.26 95.1 / 425.3 * 100 = 22.36 Debenhams Plc has a better result in 2009 as compared to 2010. Debenhams Plc needs urgent steps to ensure that they grow. This demonstrates the failure in strategies and requires a change in planning. This might also make the investor to withdraw money from the shares of the company hitting the company hard and resulting is a loss of image and reputation. The asset efficiency ratio brings forth the manner in which businesses are able to ensure efficiency in the working environment by looking into sound management of the capital. It helps to find the efficiency by looking at the turnover rates. Some of the ratios which highlights the importance of efficiency are shown below Asset Turnover Ratio: This ratio helps to find the manner in which assets were used by the business over the last year. (Asset Turnover Ratio, 2011) It is ascertained through “Sales Revenue / Average Total Assets”. It is shown below RATIOS FORMULAS 2010 2009 Total asset turnover Sales Revenue/ Total Assets 2,119.9 / 2087.3 = 1.01 1,951.6 / 2,135.8 = 0.91 Comparing the performance of Debenhams Plc shows improvement for in 2010 as compared to 2009. Debenhams Plc has been able to use its assets better. This has made the ratio to improve. It needs to continue similarly. Inventory Turnover Ratio: “It is defined as the number of times inventory is rolled over during a year”. (Schreibfeder, 2011) It is ascertained through “Cost of Goods Sold / Average Inventory”. It is shown below RATIOS FORMULAS 2010 2009 Stock turnover Cost of sales / Avg inventory 1,829.5 / 295.3 = 6.19 1650.7 / 270.9 = 6.09 Comparing the ratio for Debenhams Plc highlights that Debenhams Plc has shown improvement in inventory in 2010 in comparison to 2009. It shows the efficiency on the part of Debenhams Plc to revolve inventory quickly. Risk Involved Debenhams Plc faces many risk while conducting their business. Care need to be taken to counter those. The risks are Business risk: It is a circumstance “that has a negative impact on the operation of the company and maybe due to internal or external factor”. (Tatum, 2009) Debenhams Plc needs to reduce this. This can be managed by “calculating the various ratios which help to manage cash, having proper debt financing options and insuring against the various risk involved”. (Filisko, 2009) This risk plays a huge role. Debenhams Plc decides the budget. Any changes in the business risk will affect it. It will also affect the service rendered which makes it important the company considers the risk seriously. Financial Risk: It is defined as “the risk associated due to the inability to meet the financial obligation”. (Green, 2007) This affects the working of Debenhams Plc. This needs to be checked. This risk can be reduced by calculating the Net Present Value. Since, they are rendering services for the community its importance is high. Also different cash flows calculations will help. Debenhams Plc needs to manage it. They need fund for their service. Shortage of funds will affect them. They need to be largely prepared to meet it. They need to manage and develop proper strategy based on it. Physical Risk: The risk here is for the “employees who work to ensure that the services rendered by them help to improve customer satisfaction”. (Mohan, 2003) This risk arises as employees are susceptible to injuries at work. Economic Risk: It is “the danger that economy can turn against investment” (Little, 2009) raising alarms for Debenhams Plc. They need to manage it to get funds. A proper calcualation and development of strategy will help Debenhams Plc to ensure that the risk is taken care of. Political Risk: This is the “risk associated with a change in government” (Mohan, 2003). Debenhams Plc policies get influenced due it. The company needs to weigh the manner in which changes in government policies is affecting them and need to devise a mechanism so that the risk is taken care of. Environmental Risk: Debenhams Plc has to face it. They need to take steps to reduce carbon emission. This is an important aspect of Debenhams Plc and will help them to build a strong reputation and help them grow. This will also ensure that policies and government support the company which will help them to grow their business at different locations. Thus Debenhams Plc faces a lot of risk and careful analysis and planning in this direction is helping Debenhams Plc to reduce it to a large extent. Conclusion The paper thereby presents the maner in which financing is done by Debenhams Plc and highlights the importance of financing. The paper also shows the performance of Debenhams Plc has grown and has ensured that the different risk associated with financing for Debenhams Plc reduces to a large extent. References Annual Report. 2011. Debenhams Plc. Retrieved on April 12, 2011 from http://www.debenhams.com/ Asset Turnover Ratio. 2011. Asset Turnover Ratio. Retrieved on April 12, 2011 from http://www.financeformulas.net/Asset_Turnover_Ratio.html Company Profile. 2011. Debenhams Plc Company Profile. Retrieved on April 12, 2011 from http://biz.yahoo.com/ic/57/57839.html Capital Employed. 2011. Debt to Capital Employed Ratio. Retrieved on April 12, 2011 from http://www.bized.co.uk/compfact/ratios/ror3.htm Current Ratio. 2011. Current Ratio. Retrieved on April 12, 2011 from http://www.bizwiz.ca/liquidity_ratio_calculation_formulas/current_ratio.html Debenhams Website. 2011. Debenhams Plc. Retrieved on April 12, 2011 from http://www.debenhams.com/ EPS. 2011. Earnings per Share. Retrieved on April 12, 2011 from http://www.traderji.com/fundamental-analysis/1846-earnings-per-share-eps.html Filisko, G. 2009. Ways to reduce business risk. Bankarte.com Finance. 2011. Why business needs finance. Retrieved on April 12, 2011 from http://tutor2u.net/business/gcse/finance_why_needed.htm Graham, B. 2007. The margin of safety. Berkshire Hath way and Value Investing Gross Profit Margin. 2011. Gross Profit Margin. Retrieved on April 12, 2011 from http://financial-dictionary.thefreedictionary.com/Gross+Profit+Margin James, N. 2005. What is financial management. Tata McGraw Hill Khurana, A. 2010. Marketing Strategy of Debenhams Plc. Retrieved on April 12, 2011 from http://www.managementparadise.com/forums/marketing-management/211085-marketing-strategy-debenhams-plc.html Kennon, J. 2011. Debt to equity ratio. Retrieved on April 12, 2011 from http://beginnersinvest.about.com/cs/financialratio/g/debttoequity.htm Little, K. 2009. Economic Risk. The New York Times Company LSE. 2011. Debenhams Plc. Retrieved on April 12, 2011 from http://www.facebook.com/pages/Debenhams-plc/109832179039233 Net Profit Margin. 2011. Net Profit Margin. Retrieved on April 12, 2011 from http://www.investorwords.com/3260/net_profit_margin.html Profitability ratio. 2011. Profitability ratio. Retrieved on April 12, 2011 from http://cnx.org/content/m15556/latest/ Quick Ratio. 2011. Quick Ratio. Retrieved on April 12, 2011 from http://in.advfn.com/Help/quick-ratio-acid-test-113.html ROCE. 2011. Return on Capital Employed. Retrieved on April 12, 2011 from http://www.valuebasedmanagement.net/methods_roce.html Share Prices. 2011. Debenhams Plc. Retrieved on April 12, 2011 from http://www.debenhamsplc.com/phoenix.zhtml?c=196805&p=index Schreibfeder, J. 2011. Inventory Turnover Ratio. Retrieved on April 12, 2011 from http://www.effectiveinventory.com/article2.html Tatum, W. 2009. What is business risk. Retrieved on April 12, 2011 from http://www.wisegeek.com/what-is-a-business-risk.htm Transtutor. 2010. Capital Structure Ratios. Retrieved on April 12, 2011 from http://www.transtutors.com/finance-homework-help/dividend-decisions-and-tools-of-financial-planning/Capital-Structure-Ratios.aspx Working Capital. 2011. Working Capital. Retrieved on April 12, 2011 from http://moneyterms.co.uk/working_capital/ Read More