We have taken the company Debenhams for our analysis. The methodology adopted for the analysis includes ratio analysis and a comparative study with Lewis, a leading apparel company in U.K Company profile: Debenhams Debenhams plc engages in the operation of department stores. The company’s stores provide a range of products, including women’s wear, men’s wear, children’s wear, lingerie, health and beauty, and home ware products, as well as gifts and accessories. It offers its products under its own brands comprising Red Herring, Mantaray, Maine New England, Debut, and Bluezoo. The company also provides its products under the international brands, such as Chanel, Clarins, Denby, Levi Strauss, Radley, and Ben Sherman; and concession brands consisting of Coast, Jacques Vert, Oasis, Phase Eight, Wallis, and Warehouse. It operates approximately 166 stores in the United Kingdom, the Republic of Ireland, and Denmark, as well as operates approximately 60 international franchise stores in 23 countries. In addition, the company offers its products through an online store, debenhams.com. Debenhams plc was founded in 1778 and is headquartered in London, the United Kingdom.” (Debenhams plc (DBHMY.PK), 2009). Ratio Analysis of Debenhams Ratio analysis is considered to be a powerful method for analyzing the financial health of a company. We are analyzing Debenhams with the help of some key ratios in the below section.
Sales Chart Here, sales of Lewis and Debenhams showing a increasing trend. In 2007, Debenhams sales was below 2000 million and at the same time, the sales of Lewis is below 6000 millions. If you consider the rate of growth, Debenhams overcome Lewis, as its sales growth is more steeper than Lewis after 2009. Comparison of Key performance Measures: Here, the chart indicates a rising trend in key performance measures. If we observe it closely, it would be clear that he percentage growth of Interest coverage, Operating profit and gross profit ratios are higher in Debenhams against Lewis. Limitations of Financial Ratio Analysis Ratio analysis is a powerful tool for company’s analysis. But as much as ratio analysis can help you, it can also mislead, so I thought it would be good to delve into the limitations of financial ratio analysis today. Ratio analysis cannot be a substitute of other analysis methods: Ratios are wonderful tools which boil down a complex set of numbers and relationships to a simple, 1 or 2 digit numbers which tells volumes. But we should be check whether those numbers are accurate or not. In the small business environment things like reconciled trial balance and monthly, reviewed financial statements cannot be fully believed upon. The main reason for making errors in the preparation of final accounts because of the lack of adequate accounting systems in neither place nor do they all have competent accounting personnel making sure the monthly financial results are not only available, but actually accurate. So calculating any ratios based on questionable data and an unrecognized set of books can be very dangerous for investment decisions.
So, before any analysis is even attempted, the accounting records must be brought up to par. 2. Ratio comparisons against companies can be meaningful only, if data is truly comparable: The ratio analysis should be made with companies in the same industry. There are ratios, which are unique to some industry. For e.g.: Average selling price per sqft or operating profit per selling sqft specifically used for retail industries. Also different depreciation methods, different inventory valuation methods used, different policy regarding capitalization of certain expenditures make it very hard to arrive at financial statements which can be compared meaningfully. 3. Ratio analysis shows only what given in financial statements: Ratios are calculated on the basis of past data. Therefore, they do not provide complete information for future forecasting. And, it does not capture many factors which can have a profound impact on the business and yet cannot be expressed in accounting terms. Now let us go to the conclusion section. Conclusion: We have analyzed the company Debenhams with a powerful tool used in the finance world. He performance chart shows that company is has healthy key financial ratios and the stock market performance of the firm indicates a booming performance in the coming year. Also the work environment and employee compensation policy of the company also looks better, In 2010 financial report shows that, the company is employing around 1,60,000 employees. It is an increase from the 2006 number of 50,000. Also an attractive compensation package provided by the company ensures maximum employee satisfaction. The comparison with a leading competitor Lewis shows a promising future of the company in the retail world. So it is the right time for the investment in the company. An investment looks brighter in Debenhams for the long-term.
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