6AG502-Financial Statement Analysis University of Derby

Overview of  Halfords Group PLC:

Halfords Group PLC retailer of car parts, car enhancement, camping and touring equipment and bicycles and also leading operator in vehicle, servicing, maintenance and repairs in UK. It operates in two segments: First is Halfords Retail, which operates in both the United Kingdom and Republic of Ireland, and second is Halfords Autocentres, which operates in the United Kingdom. The Halfords Retail segment includes large product range that are available online, and at stores all over country selling motoring and cycling products. The Halfords Autocentres segment provides car service, repair and covering customers throughout the United Kingdom and operating hundreds of centres across the United Kingdom. 

Overview about Dunelm Plc:

It is a UK based consumer retail company which provides home-wares and furniture. This company has record growth in last 39 consecutive years by increased sales year to year. Dunelm Plc is number 1 in the £13bn home-wares market with 8.1% share, thus it has capability to take leadership position in a fragmented sector. There is a opportunity to speed up the expansion of our online business with an enlarged range, and better delivery options, appealing new customers and transform our model for the future. There is a notable growth possibilities in furniture where our share is less than 1% in an £11bn market. Our innovative & liberal  distribution policy has increased dividend per share each year since coming on the London Stock Exchange in 2006. It is a multichannel retailer with 169 superstores, three high street stores. It has a website, Dunelm.com that featuring extended ranges and delivery facility (Home Delivery)

Analysis and interpretation of financial statement of Halfords Group PLC:

This report focuses on major three key area while analysing and interpreting the financial statements of Halfords Group PLC: the structure of financial statements, the economic features  of the industry in which the company is operating and theories the firm pursues to differentiate itself from its competitors. For better analysis and interpretation of financial statement of  Halfords Group PLC the following criteria is considered:

• Strategy followed by company: Halfords  plc  operates  under  the  corporate  strategy  of concentric  diversification  by doing expansion into  related  businesses  and  market activities such as  Halfords was shifted from spare parts of cycles to the sports clothing business. Reason for such diversification is to reduce the failure risk in one segment (Doxey, 2014). Analysing strategy assists in identification of the significant steps taken by company through which Halfords developing and enhancing competitive position in the marketplace.
• Standards and policies adopted by company: Every company is required to disclose standards and policies adopted by company in preparation of financial statement for relevant period. In this context Halfords prepares financial statements based on IAS and IFRS such as IAS 1 ,IAS 16,IAS 27, IFRS 11 although some standards are yet to be adopted by company.

• Market trends and company's performance: Car and bicycle retailer Halfords has reported a slight increase in annual profits after gaining market share in the motoring and cycling segment. This can be seen as favourable growth for company as pre-tax profits before restructuring costs pushed up approx 0.5 per cent to approx £81.5 million. Revenues increased approximately 1.7 per cent to about £1 billion. Also a favourable growth in car maintenance and car accessories can be see as well. However day to day sales in cycling were down approx 0.9 per cent over the previous three year that shows weaker market condition.
• Income statement of Halfords group PLC– It shows profitability condition of company. This statement contains items operating expenses, operating income and other incomes (Vogel, 2014). . Net profit from this report is 55 million in 2018 and decreases from last years due to changes in tax policy.
• Balance sheet of Halfords group PLC – This shows company's assets and liabilities conditions at a particular date. . If there is assets side and liabilities side are equal and matching so it will good for company because it means all items are recorded not missing. In this statement of this particular company shows current assets is 279 million in 2018 and comparative to last years it will increasing that are shows good position of the company (Zeff,  2016). In non current assets total amount is 503 million, so there is total amount of assets side is 782 million that are continuously increase from previous years. In liabilities side current liabilities total amount is 228 million.

Analysis and interpretation of financial statement of Dunelm Plc: 

Financial statements analysis is often reported to senior management and board of directors. They used it as input in decision making of company. It is also helpful for external parties such as investors and regulatory bodies etc. to know more about organisation. There are various methods for this which are as:

Income statement of Dunelm Plc: These statements are present net profit and gross profit carry forward from trading account. In 2018, operating income (68) million and operating expenses 317 million. After all adjustments net income is (64) million due to decreases operating income.

Balance sheet of Dunelm Plc: In this statement including two heads that are assets and liabilities. It provides position of total assets and total liabilities, it is divided into two sub-part that are current & non current assets and liabilities. In current assets, those items which are converted in cash within 12 months and those items which are taken long time they are called as non current items (Fazzini, 2018).

This statement shows that total current assets 196 million during 2018 and it will decrease from 2017. total non current assets 229 in 2018 so here is total assets is 425 million, that are less than the previous year. Reason of decreasing  in liabilities section current liabilities 110 million and non current liabilities 180 million, so total liabilities 290 million that are decreases to past year.

Significance of cash flow, ratio and trends:

This report demonstrates key dynamic factors whether external or internal that affets   the company's ratio, cash flow analysis or trends. Financial statements of a company shows performance of the company on the basis of ratios, cash flow analysis, general financial data and share price movements. Analysis of ratios on the basis of efficiency, liquidity, solvency and investment profitability that are shows company's ability to face these factors and how much companies are affected by these factors described as below: (DeFusco  and et.al., 2015).

Factors affecting cash flow,ratio and trends of companies:

These are the following external or internal factors affecting the cash flow,ratios or trends:

1. Factors affecting Cash Flow: Accounts receivable, Credit terms set for your customers, credit policy regarding extension credit to a customer, Inventory, Accounts payable, Average collection period measurement are the internal and external factors affecting cash flows of a company.
2. Factors affecting ratios: Source of accounting data, ignorance of qualitative factors, different accounting practices, lack of adequate standards, window dressing etc. are the main factors affecting ratio of a company.
3. Factors affecting ratios: Trends for a company or industry is mostly affected by factors like government policies, International Exchange of Goods and Finance policies , Investment Behaviour of major investors and demand and supply etc. (Cooper, 2017).

Ratio Analysis and Interpretation of Halfords group PLC:

Ratio analysis assists management to analysis of the capabilities, performance and some times shows danger level for company's life. By using  liquidity, solvency and profitability ratio a company identifies dynamic factors affecting companies directly or indirectly. Main use of these ratios or trends for management is for decision-making activities.

Liquidity ratio

1.Current Ratio:

The current ratio indicates the ability of the company to pay its short-term and long-term obligations. As per the above table current ratio increase from 2016 to 2018 due to increase in cash. And shows pay out ability of the company.

2.Quick Ratio:

It indicates the company's short-term liquidity positions and how fast it can meet its short-term obligations by using the liquid assets. There is increase in ratio from 2018 shows company have met its short-term obligation more quickly. .

Solvency Ratios -

1.Debt-to-Worth ratio:

 It shows the relationship of debt to equity i.e. total liabilities to shareholders equity. It is used to assess the financial leverage a company. A high debt to equity ratio is too risky. Company has increase in this ratio shows unfavourable condition.  

Total assets to equity ratio:

 Companies finance their operations with equity or debt, so a higher equity multiplier indicates that a larger portion of asset financing is attributed to debt. Over the past three year this shows unstable trend.

Efficiency Ratio -

Accounts receivable turnover:

Accounts receivable turnover shows the number of times in a  year a business collects its average accounts receivable. The ratio is intended to evaluate the ability of a company to efficiently issue credit to its customers and collect funds from them in a timely manner. There is most favourable for this.

From the above table total assets turn over decrease because of sale of assets of the company and that is shows of 2017 to 2018.  

As per the above table fixed assets turn over increase from 201 to 2018 due to increase fixed assets.

From the above information interest coverage ratio shows that after interest expenses how much interest cover that is shows decrease in ratio.

As per the above information cost of goods sold including purchase, closing inventory and sales. Inventory turn over shows changes in inventory due to market situations.

Investment and profitability Ratio -  

From the above table gross profit also based on sales that are fluctuated time to time from 2016 to 2018.

As per the above information that are giving in table represent that net profit ratio basically based on sales. Net profit  decrease due to changes in sales from 2016 to 2018.

As per the above table return on assets shows that how to assets help to achieve profit with the help of net profit and total assets.

From the above table after tax profit calculating and shows that return on equity that are decrease to rather than 2017. Reason of behind that profit changes from 2016 to 2018.

Ratio Analysis and Interpretation of Dunelm Plc:

It helps the Dunelm Plc to find out the performance of company that are presented in current financial statements. Ratio is only useful when it compares with other figures either company's previous figure or industry figure(competitors). Ratio is effected by the internal and external factors. It provides information about a particular area of business so that according corrected action can be taken in that area only without any interruption. Dunelm Plc's financial statements can analysed through calculating following ratios:

• Liquidity ratio:It is calculated to show the liquidity position of the company (Dunelm Plc) i.e. capability of company to pay off its short term liabilities. This ratio includes the current ratio and quick ratio. These ratios for Dunelm Plc are as follows:

Note 1: Current Ratio = Current assets/Current liabilities

             Quick Ratio   = Quick assets/Current liabilities

Note 2: These figures are taken from actual financial statements of Dunelm Plc.

Note 3: Quick assets is calculated after deducting closing inventories from current assets.

• Efficiency Ratio:It is calculated to analysis the company's efficiency in relation to its business so that company can observe profitability trend and it is also important for investors & creditors. By the help of this ratio investors wants to know whether it is suitable to invest in this company (Libby, 2017). It includes various terms which are as follows:

Note 1: Accounts receivable turn over = Revenue/Average receivable

             Inventory Turn Over = Cost of goods sold/Average inventory

             Interest coverage ratio = EBIT/Interest expenses

             Working capital turn over = Sales/Average working capital

             Fixed assets turn over = Sales/Average fixed assets

             Total assets turn over = Sales/Average total assets

• Solvency Ratio:The solvency ratio is used to analyse to examine the quality of a business to achieve it's long term facultative. The ratio is mostly using by prospective and current lenders to traced from the information declared by balance sheet and income statement of the company. This ratio may not describe proper situation of the company but giving idea for contingency liabilities (McKinney, 2015).

Note 1: Debt to equity       = Total debt/ Total equity

             Financial leverage = Total assets/Total equity

• Investment and profitability ratio:

Note 1:  Net profit ratio    = Net profit/Sales*100

              Gross profit ratio = Gross profit/Sales*100

Cash flow analysis of Halfords group PLC

Cash flow analysis – Halfords group PLC prepares cash flow from indirect . Cash flow statement  includes three sources of cash flow respectively :cash flow from operating activities,cash flow from investing activities and cash flow from financing activities. In the context of Halfords group PLC these activities are described as follows:

Cash flow from Operating activities – In the indirect method of cash flow statement , cash flow from operating activities are calculated by adjusting non cash items from net profit of company. In 2018 Halfords group PLC has 79 million from these activities and shows an increasing trend in net cash flows from past years.

Cash flow from Investing activities – Cash flow from these activities are generated from items  such as investment in property, purchase of investment and intangible assets. Halfords group PLC  has negative cash flow of 46 millions in 2018 from this activities and in past two year having negative trend with negative cash flow.

Cash flow from Financing activities – Cash flow from these activities are generated from items like cash received  from raising of long term debts and common stock, cash dividend paid, repurchase of treasury stock and other financing activities. Halfords group PLC  has negative cash flow of 24 millions in 2018 from this activities and in past two year having negative trend with negative cash flow.

This analysis shows that cash flow from operating activities is favourable aspect for company whereas increasing cash out flow from financing and investing is unfavourable.

Cash flow analysis of Dunelm Plc: 

In this analysis, cash flow is prepared using indirect method. In this method, cash flow statements is created through  three activities which is operating, investing and financing. These  activities is effected by internal and external factors that are responsible of changes in the company situation.  

• Operating activities:In this activities, items which is in  the core business of the company is taken and items such as working capital, inventory. Adjustment for non cash items is also require in this activity. In 2018. they have 99 million from these activities and it will increasing from last year (Schmidlin, 2014).
• Investing activities:This activities included items such as investment in property, purchase of investment and intangible assets. In 2018, (46) is total from this activities and from last years its continue going negative.
• Financing activities:In this activities that items included that are issued of debt and common stock, cash dividend paid, repurchase of treasury stock and also including other financing activities. The total of this activities (55) during period of 2018 and continue in negative way.

After analysis of three activities getting that in operating activities company will in good position but remain two activities not showing good activities of the business. It means company is doing good operating business but not so good in other aspects such as financing sector, investing  areas etc.

Conslusion:

From the above report, it is concluded that financial statement is important part of any organisation to evaluate the present situation. This evaluation is necessary for future planning of companies. On the basis of these information company taking economic decisions. For statement analysis using cash flow analysis, ratio analysis and final report analysis of the company. It will helping to strength and adaptability of each business that better managed company and comment on the future prospects.

References

• Cooper, S., 2017. Corporate social performance: A stakeholder approach. Routledge.
• DeFusco, R. A.,  and et.al., 2015. Quantitative investment analysis. John Wiley & Sons.
• Doxey, M., 2014. The effects of auditor disclosures regarding management estimates on financial statement users’ perceptions and investments.
• Fazzini, M., 2018. Financial Statement Analysis. In Business Valuation (pp. 39-76). Palgrave Macmillan, Cham.
• Griffin, P. A., 2015. Financial Statement Analysis. Finding Alphas: A Quantitative Approach to Building Trading Strategies.  pp.119-125.
• Grimm, S. D. and Blazovich, J. L., 2016. Developing student competencies: An integrated approach to a financial statement analysis project. Journal of Accounting Education. 35. pp.69-101.
• Lee, T. A. and Parker, R. H., 2014. Company financial statements: an essay in business history 1830–1950. In Evolution of Corporate Financial Reporting (RLE Accounting)(pp. 27-51). Routledge.
• Libby, R., 2017. Accounting and human information processing. In The Routledge Companion to Behavioural Accounting Research (pp. 42-54). Routledge.
• McKinney, J. B., 2015. Effective financial management in public and nonprofit agencies. ABC-CLIO.
• Schmidlin, N., 2014. The art of company valuation and financial statement analysis: a value investor's guide with real-life case studies. John Wiley & Sons.
• Vogel, H. L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
• Zeff, S. A., 2016. Forging accounting principles in five countries: A history and an analysis of trends. Routledge.

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