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.

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 2, 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 2, 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/.

Blystone, R., & Blodgett, K. (2006). WWW: The Scientific Method. CBE—Life Sciences Education, 5(1), 7-11. doi: 10.1187/cbe.05-12-0134

Blystone, R., & Blodgett, K. (2006). WWW: The Scientific Method. CBE—Life Sciences Education, 5(1), 7-11. doi: 10.1187/cbe.05-12-0134

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.

Appendices 

Apendix 1: Income statement for Debenhams plc from 2014 to 2017

Currency in GBP. All numbers in thousands

Revenue	02/09/2017	03/09/2016	29/08/2015	30/08/2014
Total revenue	2,335,000	2,341,700	2,322,700	2,312,700
Cost of revenue	2,046,100	2,039,800	2,023,500	2,033,400
Gross profit	288,900	301,900	299,200	279,300
Operating expenses
Research development	–	–	–	–
Selling general and administrative	181,400	169,800	165,000	151,300
Non-recurring	–	–	–	–
Others	–	–	–	–
Total operating expenses	2,227,500	2,209,600	2,188,500	2,184,700
Operating income or loss	107,500	132,100	134,200	128,000
Income from continuing operations
Total other income/expenses net	-48,500	-26,300	-20,700	-22,200
Earnings before interest and taxes	107,500	132,100	134,200	128,000
Interest expense	-12,200	-13,400	-17,800	-14,400
Income before tax	59,000	105,800	113,500	105,800
Income tax expense	10,200	19,900	20,000	18,600
Minority interest	–	–	–	–
Net income from continuing ops	48,800	85,900	93,500	87,200
Non-recurring events
Discontinued operations	–	–	–	–
Extraordinary items	–	–	–	–
Effect of accounting changes	–	–	–	–
Other items	–	–	–	–
Net income
Net income	48,800	85,900	93,500	87,200
Preferred stock and other adjustments	–	–	–	–
Net income applicable to common shares	48,800	85,900	93,500	87,200

Appendix 2: Debenhams financial ratios

Key Ratios
		Company
PER (E)	r	0.00
Dividend Yield (E)	%	29.65
Price Earning Growth (E)	r	0.00
Return on Capital Employed	%	4.55
Operating Margin	%	0.04
EPS Growth (E)	%	-0.34
EV/EBITDA	x	3.42
Net Tangible Asset Val PS	p	-1.73
Price to Tangible Book Value	x	0.00
Price/Cash Flow	x	0.76
Price/Sales	x	0.05
Valuation
		2013	2014	2015	2016	2017
Fiscal Year Ends		31/08/2013	31/08/2014	31/08/2015	31/08/2016	31/08/2017
Net Tangible Asset Val PS	p	-10.00	-9.73	-4.25	0.02	-1.73

Profitability
Operating Margin	%	0.07	0.06	0.06	0.05	0.04
Profit Margin	%	5.08	3.77	4.03	3.67	2.09
ROE	%	16.49	11.54	11.54	9.89	5.42
ROCE	%	10.85	8.54	8.96	7.85	4.55
Financial Health
Gross Gearing	%	53.60	55.50	41.31	37.93	34.43
Dividend Cover	x	3.03	2.56	2.18	2.32	1.93
Interest Cover	x	12.68	9.14	8.01	9.74	6.41
Quick Ratio	r	0.14	0.18	0.16	0.20	0.18
Current Ratio	r	0.63	0.64	0.66	0.73	0.66

Growth
DPS Growth	%	0.10	0.03	0.00	0.01	0.00
Norm EPS Growth	%	-0.05	-0.20	0.02	-0.05	-0.34
Reported EPS Growth	%	-0.06	-0.23	0.07	-0.08	-0.43
Cash Flow
Cash Flow PS	p	15.86	16.83	17.75	17.42	14.08
CAPEX PS	p	10.61	10.42	10.87	10.30	10.16