# Financial Ratio Analysis

Heriot-watt University- Dubai Campus 24th November 2008

∞RICHEL TALWAR ∞PERSCIS BENJAMIN ∞NEHA VYAS ∞LEKSHMI SANKAR ∞IMAAD ALI KHAN ∞HONEY GANGLANI ∞HITEN UMRANIA ∞DILIP JAMES ∞BRINDA PATEL ∞BHUMI SAGAR

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The aim of this presentation is :  to look at some financial data from Debenhams.  to use ratio analysis to evaluate their performance.  assess the value of using ratios in drawing conclusions about their performance.

Debenhams Plc is one of the United Kingdom's longest continuously operating clothing and goods retailers.  The company owns and operates nearly 100 department stores, primarily in England.

Founded in 1778, Debenhams operated independently until its hostile takeover in the 1980s.  Debenhams reported rising profits and revenues in its first year of independence.

– Gross Profit Margin – Net Profit Margin – Return on capital employed

– Gearing Ratio
– Asset Turnover – Stock Turnover

– Debtor Days
– Current Ratio – Acid Test

Ratio analysis helps us check how a business is doing as compared to any of the previous years.

is profitable
has enough money to pay its bills could be paying its employees higher wages

is paying its share of tax
is using its assets efficiently has a gearing problem

is a candidate for being bought by another

company or investor

Table With Profit Report – Annual Report 2007

Table With Financial Information on Income Statement – Annual Report 2007

The gross profit margin ratio tells us the profit a business makes on its net sales before we take off any administration costs, selling costs, etc.

We should have a much higher gross profit margin than net profit margin.

G.P.M = Gross Profit x 100 Turnover

The net profit margin ratio tells us the amount of net profit per £1 of turnover a business has earned.
N.P.M = = Net Profit Turnover x 100

Profit before Interest and Taxation Turnover

x 100

(net profit = gross profit – expenses)

The Return on Capital Employed ratio (ROCE) tells us how much profit we earn from the investments the shareholders have made in their company.

ROCE =

Profit of the year Share holders fund

x 100

90 80 70 60 50 40 30 20 10 0 G.P.M N.P.M

2006 2007

ROCE

Gross-Profit Margin 2006 2007

Net-Profit Margin 2006 2007

Return On Capital Invested 2006 2007

19.4%
Findings(s)

15%

3.63%

6.4%

82%

48.5%

Increase in sales of 3.76% and a higher increase in cost of sales of 8.75% has resulted in a decrease in G.P.M - Acquisition and reorganization of stores in Ireland - Closure of the Jervis street store

NPM increased by around 3% and all administration costs have decreased. - Decrease in distribution costs - Although interest receivable fell by £3.1m, interest payable has fallen drastically by £98m With all the decrease, sales have also increased. Debenhams manages to control their admin costs very well.

ROCE has fallen by 40%

Reason(s)

- There was a 205% increase in equity, but Turnover increase of only 4%. - Redundancy costs and other expenses of £3.7m were incurred Next year will be more promising with the introduction of stores in Ireland.

Comment(s)

Increase Selling Price (low price strategy).

Gearing is concerned with the relationship between the long terms liabilities that a business has and its capital employed.

Gearing =

Long Term Liabilities Equity Shareholders Fund

2006

2007

Long Term Liabilities Equity

Long Term Liabilities Equity

Findings(s)

The gearing (i.e. dependence on long term borrowings) has decreased by 70%. The gearing ratio has decreased from 20.58 : 1 in 2006 to 6.08 : 1 in 2007. Long term liabilities (i.e. bank O/Ds and borrowings) have fallen by around 9.6% from £1,097m in 2006 to £992.1m in 2007. This is a good indicator of the company’s choice of raising funds. Debenhams has cut down on long term liabilities and has increased hedge and other reserves. Gives Shareholders the confidence that their investments are secure.

Reason(s)

Comment(s)

Table With Financial Information on Balance Sheets – Annual Report 2007

The asset turnover ratio simply compares the turnover with the assets that the business has used to generate that turnover.

Total Assets Turnover

=

Turnover Total Assets

 

The lower the investment in stocks the better. Modern stock control theory tells us to minimize our investment in stocks.

Stock Turnover =

Average Stocks (Cost of Sales/365)

An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts.

Debtors' Turnover =

Average Debtors Credit Sales/365

2006

2007

13.3 13.6 0.91 Asset T.O Ratio 0.85

13.7 13.5

Stock T.O Ratio

Drs. T.O Ratio

Asset Turnover Ratio Findings(s)
The ratio has fallen by 6.6%

Stock Turnover Ratio

Debtors Turnover Ratio

Stock turnover ratio has DTR is well decreased since the balanced with not previous year. much of a difference, but it has increased by 1.45%

Reason(s)

Total assets have Not much of a increased by 11.9%, difference. but revenue has increased by only 3.9%
With an increase in total assets, there is a slower increase in total revenue. Turnover is expected to increase next year and make up for the decrease in turnover this year. Stocks of Debenhams are much more liquid than those of any other retailer in the region. Debenhams = 13.3 days Woolworths = 67 days Burberry = 166 days Debenhams debtors pay their accounts within 13-14 days on an average. Woolworths take around 40 days to repay. Debenhams has good and punctual debtors.

Comment(s)

The current ratio is also known as the working capital ratio and is normally presented as a real ratio.

Current Ratio = Current Assets Current Liabilities

The acid test ratio is also known as the liquid or the quick ratio. The idea behind this ratio is that stocks are sometimes a problem because they can be difficult to sell or use.

Acid Test Ratio = (Current Assets - Stocks) Current Liabilities

Current Ratio

0.66 0.64

Acid-Test Ratio 0 0.2

0.21 0.24 0.4 2006 2007 0.6 0.8

Current Ratio

Acid – Test Ratio

Findings(s)

There is a 3% decrease in the current ratio - Current Assets have increased (with an increase in cash deposits from £34m to £80.4m) - Current liabilities have also increased (Bank O/D by £68.2m and Trade Payables by £12.8m) This shows that short term liquidity situation of Debenhams is not very solid. To pay off its bills will be difficult. Its current liabilities are 1.5 time more than its current assets.

Quick ratio has increased by 14.2% - Current assets have increased by 19% and current liabilities have increased by 31% -If the inventories were to be ignored, then the short term stability would be better. With increase in price to increase revenue, Debenhams should at the same time concentrate on increasing their stock turnover ratio which would help them in cost reduction.

Reason(s)

Comment(s)

Profitability Ratio GPM (23.2)

Gearing Ratio 70.5 Asset T.O

Turnover Ratio (6.6) Current Ratio

Liquidity Ratio (3)

NPM
ROCE Total

76
(41) 11.8 70.5

Stock T.O
Drs. T.O

(2.2)
1.5 Quick Ratio (7.3) 14.2 11.2 100.8

Revenue increase led by good performance from new stores and modernizations (including the website

rebuild; The website is expected to result in a huge turnover in the next five years).

Although revenue increased, it was offset by a low pricing strategy and a low stock turnover ratio which led to higher costs of purchases. Its net debt position has decreased in the course of the year by £79.6m which makes it more stable in the long run and less dependent on borrowings.