assignment for accounting.docx

assignment for accounting.docx

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assignmentforaccounting

TheanalysisofHomeRetailGroup

1.Keyactivitiesandbriefdescription

HomeRetailGroupsellsproductsundertwodistinctiveandcomplementaryretailbrands,ArgosandHomebase.AdditionallyitalsohassomefinancialServicesoffersarangeofcreditandinsuranceproductstomakeiteasyforcustomerstobuytheproductstheywantIthasleadingmarketpositions,whichprovidesignificantpurchasingscale.Thefirst17Argosstoresopenedon21July1973.ThefirsttwoHomebasestoresopened,inCroydonandLeeds,on3March1981.Theywerepurchasedbyhomeshoppinggiant,GUSplc,in1998,2002respectively.In2006HomeRetailGroupwaslaunchedfollowingitsdemergerfromGUSplc.Atlaunch,itcomprisedArgos,HomebaseandFinancialServices,buttherecentacquisitionofHabitatUKgivestheGroupthreedistinctretailbrandswithover1,000stores,threetransactionalwebsites,twomobileshoppingapps,aTVshoppingchannelandtheUK'sbiggesthome-deliveryoperation,makingHomeRetailGrouptheUK'sleadingmulti-channelretailer.

HomeRetailGroupoperatesfromaclearscaleadvantage,derivedfromawell-investedinfrastructurewhichhasbeenbuiltupoveraperiodofmanyyears.Theirstrategysupportstheirvisionasfollows:

Multi-channelexpertiseandleadership;expansionofproductrangesandrelatedservices;highlycompetitivecustomeroffering;acquisitionsandjointventures;continuedcostmanagement;financialstrength

Analysisofprofitability（modifiedfromtheincomestatement）

2011

2012

Revenue

5,851.9

5,582.8

Costofsale

3,970.7

3,794.0

Grossprofit

1,881.2

1,788.8

Operatingprofit

258.0

98.7

Profitbeforetax

265.2

104.1

Profitaftertax

190.9

72.8

Capitalemployed

3019.3

3,005.9

profitabilityratio

2011

2012

Grossprofitmargin

32.1%

32.0%

Operatingprofitmargin

4.4%

1.7%

Pre-taxprofitmargin

4.5%

1.9%

Post-taxprofitmargin

3.3%

1.3%

Returnoncapitalemployed

8.5%

3.3%

Returnonequity

7.0%

2.8%

Theprofitabilitythisyearisworsethanlastyear.

Thegrossprofitmargindecreaseslightly.Becausethefinancialcrisis,onthefactthatworking-classfamilieswerehammeredbytherecessionandhaven'tgotoutofit.Theyreducetheconsumptionevenundersomeofthepromotionalactivities.Thereforrevenuedropsby4.6%from2011to2012,thecostofsaleincreaseby4.45%atthesametime.Butoverall,thegrossprofitmarginishighstillmorethan30%.

Intherespectoftheoperatingprofitmargin,thefigurefluctuatealot,whichdecreasefrom4.4%to1.7%.ThebigerosionofGPMcomesfromthesellingcosts,whichisabigandimportantpartofretailindustry.Additionally,theadministrativecostsincreasemorethan10%,whichthemainfactorsthatleadtoagreatincreaseintotalnetoperatingexpenseanddecreasetheoperatingprofitmargin.Inthiscase,itisnotagoodopportunityformanagementinvestorstoinvestthiscompany.Sothecompanyneedstocontrolthecostofsaleandadministrationaswellasincreasethecompetitiontogetthemostmarketsharetoincreaserevenueandimprovetheprofitability.

Thepre-taxprofitmargindeclinesfrom4.5%to1.9%,whichduetothedecreaseoffinanceincomeismorethantheincreaseoffinanceexpense.ThePostTPMalsodropsfrom3.3%to1.3%althoughthetaxexpensefellbyover£33.

ROEandROCEaretwoimportantratios,whiletheydropfrom7%to2.8%and8.5%to3.3%respectively.Thecapitalemployeddecrease44%from2011to2012,becauseequitydecreasesmorethanborrowingsincrease.ROEalsodecreases,whichmeanslessprofitisavailabletoshareholdersasdividends.

Equityinvestorsshouldanalysisinvestmentratio

Figurescanbeseenformthetable:

2011

2012

Earningspershare

23.1

9.1

Dividendpershare

14.2

4.7

Dividendcover

1.626760563

1.93617

Dividendyield

1.10383536

0.500332668

Priceearningsratio

3.253246753

11.74725275

Althoughthenumberofshareholdershasdecreasenearly3.5%theEPShasreducedfrom£23.1to£9.1.Themostimportantreasonisthedropofprofit.Itisabadnewsforequityinvestors.

Dividendpershare2012almosthalfofthatin2011,notonlybecausein2012theBoardofDirectorsdoesnotrecommendafinaldividendinrespectoftheyearended3March2012,butalsoduetothefewerinterimdividend.Thisfiguremeansinvestorswillgetfewerdividendsfromthe

Thedividendcoverincreasefrom1.6to1.9,itmeanstheabilitytopaydividendsbecomestronger.Butduetothelimitationofratioanalysisandthesituationofdividendsdistribution,

Liquidityratio

2011

2012

currentasset

1,898.70

1,731.20

currentliability

1,118.50

1,002.70

inventory

1,016.80

933.2

tradepayable

58.70

55.8

costofsale

3,970.70

3,794.00

2011

2012

currentratio

1.69754135

1.726538346

liquidratio

0.788466696

0.795851202

inventorydays

93.46765054

89.77807064

Tradepayabledays

45.90651522

45.74525567

Tradereceivabledays

31.66672363

32.22549617

Toanalysisthefinancialpositionofthiscompany,bothcurrentratioandliquidratioincreasedwhichmeanstheshorttermdebtpayingabilityincreased.Theliquidratioislessthan1,mainlybecauseofthelargenumberofinventoriesforresale.

Theinventorydaysdecreasefrommorethan93daysin2011toabout90daysin2012,itisalittlehigh,anddonotmatchthe“justintime”principle,butitstillcanbeacceptbecauseofthewholesaleandretailindustry.Largeinventoriesincreasethecostofstoreandmanagementbutitprovidesenoughchoicesforcustomersandensuresthemarketsharetocertainextent.

Tradepayabledaysin2012almostthesameasthatin2011.Oneandahalfmonthlessthanperiodoftradereceivabledays,whichmeansthecompanycanusethetradereceivabletomeetthetradepayableandlesstheuseofcash.

Gearingratio

2011

2012

Debttoequity

0

0

Netdebttoequity

-0.07400777

-0.058113235

Interestcover

5.139442231

2.039256198

Netinterestcover

Thedebttoequitydropsfrom14.49%to10.15%whichmeansthatthecompanyrelieslessonthemoneyfromborrowing.Thedecreaseindicatesthatthecompany’slong-termdebtpayingabilityimproved.

Netdebttoequityislessthandebttoequitybecauseofthedeductionofcashfromthenon-currentliabilities.Thisratiodecreasesfrom7.09%in2011to4.33%in2012andthedeviationfromlastyearmeansthelowerriskofthebusinessfailingin2012.

WhenitcomestoInterestcover,thedecreaseofthisratiodemonstratethattheabilitytopaytheinterestbecomeweakerandthedecreaseofprofitabilityandstability.

2011

2012

Cashflowpershare

0.321785156

0.258558446

Thecashflowpershareshowsthepercentageofnetcashflowfromoperatingactivitiesandtotalnumberofequityshare.Althoughthetotalnumberofequitysharesdecrease,theratiostilldecrease,becausethenetcashflowfromoperatingactivitiesdropsmorethan20%.ThisratioismorethanEPS,duetothenetcashflowgeneratedbythecompany’snormaloperatingactivitiesalsoincludethecostsdeductedfromtheprofits,butdonotaffectthecashoutflowadjustments,suchasdepreciationcharges.Sothecashflowislessthantheprofit.CFPSindicatethehighestamountofcashdividends,whileEPScannotshowthisability.

Appendix:

Profitability:

1.Grossprofitmargin=grossprofit/revenue

2011:

=1,881.20/5,851.90=0.321

2012:

=1,788.80/5,582.80=0.320

2.Operatingprofitmargin=operatingprofit/revenue

2011:

=258/5,851.90=0.044

2012:

=98.7/5,582.80=0.018

3.pre-taxprofitmargin=pre-taxprofit/revenue

2011:

=265.2/5,851.90=0.045

2012:

=104.1/5,582.80=0.019

4.post-taxprofitmargin=post-taxprofit/revenue

2011:

=190.9/5,851.90=0.033

2012:

=72.8/5,582.80=0.013

5.Returnoncapitalemployed=operatingprofit/totalcapitalemployed

2011:

=258/3,019.3=0.085

2012:

=98.7/3,005.9=0.033

6.Returnonequity=profitaftertax/equity

2011:

=190.9/2,741.20=0.070

2012:

=72.8/2,625.4=0.028

Investmentratio

1.Earningspershare（EPS）=profitaftertax/totalnumberofequityshares*100

2011:

=23.1

2012:

=9.1

1.Dividendpershare（DPS）itisgiven

2011:

=（38.1+79.9）/831.3=14.2pperordinaryshare

2012:

=37.6/803.3=4.7pperordinaryshare.

2.Dividendcover（DC）=EPS/DPS

2011:

=23.1/14.2=1.626760563

2012:

=9.1/4.7=1.93617

3.Dividendyield=totaldividend/currentmarketprice*100

ThecurrentmarketpricecangetfromtheLondonexchangestockwhichis106.90for22Nov2012

Thecurrentmarketpricefor22Nov2011cangetformhistoricalpriceYAHOOfinance,whichwas75.15.

2011:

=118/106.90=1.10383536

2012:

=37.6/75.15=0.500332668

4.PriceEarningsratio=currentmarketprice/EPS

2011:

=75.15/23.1=3.253246753

2012:

=106.90/9.1=11.74725275

Liquidity

1.Currentratio=currentasset/currentliability=

2011:

=1,898.70/1,118.50=1.69754135

2012:

=1,731.20/1,002.70=1.7265383

2.Liquidratio=（currentasset-inventory）/currentliability=

2011:

=881.9/1,118.50=0.788466696

2012:

=798.0/1,002.70=0.7958512

3.Inventorydays=（inventory/costofsales）*365

2011:

=（1,016.80/3,970.70）*365=93.46765054

2012:

=（933.2/3,794.00）*365=89.778071

4.Tradereceivabledays=tradereceivables/revenue*365

2011:

=507.7/5,851.90*365=31.66672363

2012:

=492.9/5,582.80*365=32.22549617

5.tradepayablesdays=（tradepayables/costofsales）*365

2011:

=499.4/3,970.70*365=45.90651522

2012:

=475.5/3,794.00*365=45.74525567

Gearing

1.debttoequity=non-currentborrowings/equity*100

2011:

=0/2,625.4=0

2012:

=0/2,741.2=0

2.Netdebtequity=Borrowingslesscash/Totalequity

2011:

=（0-194.3）/2,625.4=-0.07400777

2012:

=（0-159.3）/2,741.2=-0.058113235

3.Interestcover=operatingprofit/interest

2011:

=258/50.2=5.139442