Stock Recommendation Report

Financial analysis is the process of evaluating different financial entities such as projects, budgets, financial statements or any other financial related entity to determine their suitability, sustainability or performance. Through financial analysis, it is possible to determine whether a business is liquid, profitable, or solvent enough to be worth investing in (Wahlen et al., 2018). Investors can be able to understand and determine strengths, profitability, liability, weaknesses, and potential earnings of the business in the future (Subramanyam, 2014). This report presents a historical trend analysis for Debenhams PLC to determine if it is worth investing in the company.

Company background

Before carrying out trend analysis, it is important to determine the sector or the industry in which the company is a part. Debenhams operates as a holding company that takes part in selling fashion clothes and accessories, beauty and gifting products, and cosmetics used at home (Subramanyam, 2014).  The company operates in the United Kingdom with a store based in the U.K and also offers online retail services. It has international subsidiaries in Denmark and the Republic of Ireland besides having online operations and international franchise. William Clark founded the company in 1778 and had its headquarters in the United Kingdom (Alexander, 2018).  The company falls under Consumer Cyclical, retailers, department stores, and diversified retail sector.

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Historical trends in accounting statement entries

Based on Debenhams PLC’s income statement as depicted in Appendix 1, it is evident that Debenhams PLC has recorded a constant increase in total revenue from 2014 to 2017. In 2014, the total revenue that the company collected was £2,312,700 followed by an increment to £2,322,700, £2, 341,700, and £2,235,000 in 2015, 2016, and 2017 respectively. However, the cost of revenue was £2,033,400, £2,023,500, £2,039,800, £2,046,100 in 2014 to 2017. The result shows a mixed trend where the cost of revenue declined in 2015 before increasing in 2016 and 2017. As a consequence, the gross profits recorded by the company in that period were £ 279,300, £ 299,200, £ 301,900, and £288,900 from 2014 to 2017 respectively. The gross profit in the period, therefore, shows a constant increase before a decline in 2017. The decline in gross profit in the company is attributed to the increase in the cost of revenues in the same year.

Ratio Analysis

Liquidity ratio 

Liquidity ratio is used to measure business stability over a short period thus, shows its ability to take care of its short-term financial obligations (Samonas, 2015). The liquidity ratio can either greater than one, less than one or equal to one. A liquid ratio that is greater than one shows that company firm has fewer liabilities concerning assets. On the contrary, if the ratio is less than one, it insinuates that a business has fewer assets compared to liabilities (Goel, 2016). Elsewhere, if the ratio is greater than 1 this may mean that a company is not maximizing its capital utilization. In 2013, Debenhams recorded a 0.63 liquidity ratio, which declined to 0.64 in 2014 then rose slightly to 0.66 before increasing to 0.73 in 2016. In 2017, the ratio dropped to 0.66, signifying that Debenhams uses its assets to generate revenue. From that, the company has fewer assets compared to liabilities. Therefore, the company cannot pay its short-term liabilities. 

Return on Assets

Return on assets (ROA) is a good measure of the net earnings to total assets in a business. Goel (2016) adds that ROA is used to determine the amount of revenue a company can generate after paying taxes and how well they are utilizing the assets available. In appendix 4, Debenhams ROA was 6.06% before declining to 4.07% in 2014 and further declined to 4.36% in 2015. It further reduced to 3.96% then to 2.22% in 2016 and 2017 respectively. 

Return on Equity

ROE shows how best a company rewards its shareholders on their investment. ROE shows how much an investment would earn for a value of $1 invested. In appendix 4, Debenhams ROE was 18.2% before declining to 11.54% in 204 and remained unchanged in 2015 and further reduced to 9.89% to 5.42% in 2016 and 2017 respectively. 

Earnings per share 

Earnings per share are the portion of the profit that a business allocates to each outstanding share in common stock. Debenhams recorded 0.36 earnings per share in 2013 then recorded 0.28, 0.3, 0.28, and 0.16 in 2014, 2015, 2016, and 2017 respectively. 

Dividend per share 

Dividends per share are the amount that a company declares to issue per ordinary outstanding share. Debenhams recorded a constant 0.13 dividends per share from 2013 to 2016 before increasing to 0.14 in 2017.

Conclusion

Even though companies may have impressive financial records, other factors like regional deference, the location of companies, labor cost, shipping cost, and ease of doing business can affect the result of an important ratio. From the trend analysis, although Debenhams is making profits, it is a matter of concern that in 2016 and 2017 their company recorded a decline in profit. Therefore, internal and external investors should be concerned about the declined trend. The company should, therefore, strive to decrease the cost of operations or engage in other money generating activities that would see the company regain its profitability. 

References

Alexander, J. (2018). Financial planning & analysis and performance management.

Goel, S. (2016). Financial ratios. Retrieved from http://www.businessexpertpress.com/.

https://uk.finance.yahoo.com/quote/DEB.L/financials?p=DEB.L
https://www.youinvest.co.uk/market-research/LSE:DEB?tab=11

Samonas, M. (2015). Financial forecasting, analysis, and modeling: a framework for long-term forecasting. Retrieved from http://www.books24x7.com/marc.asp?bookid=80781.

Subramanyam, K. R. (2014). Financial statement analysis.Wahlen, J. M., Baginski, S. P., & Bradshaw, M. T. (2018). Financial reporting, financial statement analysis, and valuation: A strategic perspective.

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