assignment for accounting.docx

1、assignment for accountingThe analysis of Home Retail Group1. Key activities and brief descriptionHome Retail Group sells products under two distinctive and complementary retail brands, Argos and Homebase. Additionally it also has some financial Services offers a range of credit and insurance product

2、s to make it easy for customers to buy the products they want It has leading market positions, which provide significant purchasing scale. The first 17 Argos stores opened on 21 July 1973. The first two Homebase stores opened, in Croydon and Leeds, on 3 March 1981. They were purchased by home shoppi

3、ng giant, GUS plc, in 1998,2002 respectively. In 2006 Home Retail Group was launched following its demerger from GUS plc. At launch, it comprised Argos, Homebase and Financial Services, but the recent acquisition of Habitat UK gives the Group three distinct retail brands with over 1,000 stores, thre

4、e transactional websites, two mobile shopping apps, a TV shopping channel and the UKs biggest home-delivery operation, making Home Retail Group the UKs leading multi-channel retailer.Home Retail Group operates from a clear scale advantage, derived from a well-invested infrastructure which has been b

5、uilt up over a period of many years. Their strategy supports their vision as follows: Multi-channel expertise and leadership; expansion of product ranges and related services; highly competitive customer offering; acquisitions and joint ventures; continued cost management; financial strength Analysi

6、s of profitability (modified from the income statement)20112012Revenue5,851.95,582.8Cost of sale3,970.73,794.0Gross profit1,881.21,788.8Operating profit258.098.7Profit before tax265.2104.1Profit after tax190.972.8Capital employed3019.33,005.9profitability ratio20112012Gross profit margin32.1%32.0%Op

7、erating profit margin4.4%1.7%Pre-tax profit margin4.5%1.9%Post-tax profit margin3.3%1.3%Return on capital employed8.5%3.3%Return on equity7.0%2.8%The profitability this year is worse than last year. The gross profit margin decrease slightly. Because the financial crisis, on the fact that working-cla

8、ss families were hammered by the recession and havent got out of it. They reduce the consumption even under some of the promotional activities. Therefor revenue drops by 4.6% from 2011 to 2012, the cost of sale increase by 4.45% at the same time. But overall, the gross profit margin is high still mo

9、re than 30%. In the respect of the operating profit margin, the figure fluctuate a lot, which decrease from 4.4% to 1.7%.The big erosion of GPM comes from the selling costs, which is a big and important part of retail industry. Additionally, the administrative costs increase more than 10%, which the

10、 main factors that lead to a great increase in total net operating expense and decrease the operating profit margin. In this case, it is not a good opportunity for management investors to invest this company. So the company needs to control the cost of sale and administration as well as increase the

11、 competition to get the most market share to increase revenue and improve the profitability. The pre-tax profit margin declines from 4.5% to 1.9%, which due to the decrease of finance income is more than the increase of finance expense. The PostTPM also drops from 3.3% to 1.3% although the tax expen

12、se fell by over 33.ROE and ROCE are two important ratios, while they drop from 7% to 2.8% and 8.5% to 3.3% respectively. The capital employed decrease 44% from 2011 to 2012, because equity decreases more than borrowings increase. ROE also decreases, which means less profit is available to shareholde

13、rs as dividends.Equity investors should analysis investment ratioFigures can be seen form the table:20112012Earnings per share23.19.1Dividend per share14.24.7Dividend cover1.6267605631.93617Dividend yield1.103835360.500332668Price earnings ratio3.25324675311.74725275Although the number of shareholde

14、rs has decrease nearly 3.5% the EPS has reduced from 23.1 to 9.1. The most important reason is the drop of profit. It is a bad news for equity investors.Dividend per share 2012 almost half of that in 2011, not only because in 2012 the Board of Directors does not recommend a final dividend in respect

15、 of the year ended 3 March 2012,but also due to the fewer interim dividend. This figure means investors will get fewer dividends from the The dividend cover increase from 1.6 to 1.9, it means the ability to pay dividends become stronger. But due to the limitation of ratio analysis and the situation

16、of dividends distribution, Liquidity ratio20112012current asset1,898.701,731.20current liability1,118.501,002.70inventory1,016.80933.2trade payable58.7055.8cost of sale3,970.703,794.0020112012current ratio1.697541351.726538346liquid ratio0.7884666960.795851202inventory days93.4676505489.77807064Trad

17、e payable days45.9065152245.74525567Trade receivable days31.6667236332.22549617To analysis the financial position of this company, both current ratio and liquid ratio increased which means the short term debt paying ability increased. The liquid ratio is less than 1, mainly because of the large numb

18、er of inventories for resale. The inventory days decrease from more than 93 days in 2011 to about 90 days in 2012,it is a little high, and do not match the “just in time” principle ,but it still can be accept because of the wholesale and retail industry. Large inventories increase the cost of store

19、and management but it provides enough choices for customers and ensures the market share to certain extent.Trade payable days in 2012 almost the same as that in 2011.One and a half month less than period of trade receivable days, which means the company can use the trade receivable to meet the trade

20、 payable and less the use of cash. Gearing ratio20112012Debt to equity00Net debt to equity-0.07400777-0.058113235Interest cover5.1394422312.039256198Net interest coverThe debt to equity drops from 14.49% to 10.15% which means that the company relies less on the money from borrowing. The decrease ind

21、icates that the companys long-term debt paying ability improved.Net debt to equity is less than debt to equity because of the deduction of cash from the non-current liabilities .This ratio decreases from 7.09% in 2011 to 4.33% in 2012 and the deviation from last year means the lower risk of the busi

22、ness failing in 2012.When it comes to Interest cover, the decrease of this ratio demonstrate that the ability to pay the interest become weaker and the decrease of profitability and stability. 20112012Cash flow per share0.3217851560.258558446The cash flow per share shows the percentage of net cash f

23、low from operating activities and total number of equity share. Although the total number of equity shares decrease, the ratio still decrease, because the net cash flow from operating activities drops more than 20%.This ratio is more than EPS, due to the net cash flow generated by the companys norma

24、l operating activities also include the costs deducted from the profits, but do not affect the cash outflow adjustments, such as depreciation charges. So the cash flow is less than the profit. CFPS indicate the highest amount of cash dividends, while EPS cannot show this ability.Appendix:Profitabili

25、ty:1. Gross profit margin=gross profit /revenue2011: =1,881.20/5,851.90=0.3212012: = 1,788.80/5,582.80=0.3202. Operating profit margin=operating profit/revenue2011: =258/5,851.90=0.0442012: =98.7/5,582.80=0.0183. pre-tax profit margin=pre-tax profit/revenue2011: =265.2/5,851.90=0.0452012: =104.1/5,5

26、82.80=0.0194. post-tax profit margin=post-tax profit/revenue2011: =190.9/5,851.90=0.0332012: =72.8/5,582.80=0.0135. Return on capital employed=operating profit/total capital employed2011: = 258/3,019.3=0.0852012: = 98.7/3,005.9=0.0336. Return on equity=profit after tax/equity2011: =190.9/2,741.20=0.

27、0702012: =72.8/2,625.4=0.028Investment ratio1. Earnings per share (EPS) =profit after tax/total number of equity shares*1002011: = 23.12012: = 9.11. Dividend per share (DPS) it is given 2011 :=( 38.1+79.9)/ 831.3=14.2p per ordinary share2012: =37.6/803.3=4.7p per ordinary share.2. Dividend cover(DC)

28、=EPS/DPS2011: =23.1/14.2=1.6267605632012: = 9.1/4.7=1.936173. Dividend yield=total dividend /current market price*100The current market price can get from the London exchange stock which is 106.90 for 22 Nov 2012The current market price for 22 Nov 2011 can get form historical price YAHOO finance, wh

29、ich was 75.15.2011: =118/106.90=1.103835362012: =37.6/75.15=0.500332668 4. Price Earnings ratio=current market price /EPS2011:= 75.15/23.1=3.2532467532012:=106.90/9.1=11.74725275Liquidity1. Current ratio=current asset/current liability=2011: =1,898.70/1,118.50=1.697541352012: =1,731.20/1,002.70=1.72

30、653832. Liquid ratio= (current asset-inventory)/current liability=2011: =881.9 / 1,118.50=0.7884666962012: =798.0 / 1,002.70=0.79585123. Inventory days= (inventory/cost of sales)*3652011: = (1,016.80/3,970.70)*365=93.467650542012: = (933.2/3,794.00)*365=89.7780714. Trade receivable days=trade receiv

31、ables/revenue*3652011: =507.7/5,851.90*365=31.666723632012: =492.9/5,582.80*365=32.225496175. trade payables days=(trade payables/cost of sales)*3652011: =499.4/3,970.70*365=45.906515222012: =475.5/3,794.00*365=45.74525567Gearing1. debt to equity=non-current borrowings/equity*1002011: =0/2,625.4=02012: =0/2,741.2=02. Net debt equity=Borrowings less cash/Total equity2011: = (0-194.3)/ 2,625.4=-0.074007772012:= (0-159.3)/ 2,741.2=-0.0581132353. Interest cover =operating profit/interest2011: =258/50.2=5.139442