Question:
Describe the financial statement analysis, users of financial analysis and importance of non-financial consideration of Halfords Group Plc?
Analysis and interpretation of the financial statements and taking decisions based on the financial statement analysis and the non financial considerations is quite important from the viewpoint of efficient management of the financial resources. The report has been prepared to conduct such analysis of the Halfords Group the financial years ending 2014. Further the users of this analysis and the different requirements of these users have been discussed. Based on these factors the key aspects of the business of the company are highlighted.
Halfords Group is one of the retailers of car parts, touring and bicycle operating in UK and Ireland. The company made a profit of £52.7 in 2013 and employed 12,397 employees. The market capitalization of the company is £860.25 million. Considering these parameters it can be said that the financial analysis of the company will be important from the viewpoint of investment in the company.
The financial statement analysis is one of the most important tools used by the analysts to analyze the performance of the company. The two key aspects that is highlighted by the financial statement analysis are
The financial ratios that have been included in the financial statement analysis are categorized as profitability ratios and liquidity ratios. These have been discussed below
The profitability ratios can be categorized as returns ratio and margins ratio. The profitability ratios highlight the level of profit made by the company with respect to other factors such as equity, sales, assets and capital employed (White, Sondhi & Fried, 2002). The profitability ratios of Halfords Group have been shown below:
|
Profitability Ratio |
2014 |
2013 |
|
Gross Profit /Operational profit |
53.66% |
54.76% |
|
Net Profit |
5.91% |
6.05% |
|
Interest to Sales ratio |
0.55% |
0.72% |
|
Return on Shareholder funds |
17.02% |
17.64% |
|
return on Assets |
9.34% |
9.37% |
|
Return on Capital Employed |
109.90% |
106.78% |
The gross profit ratios of the company highlight that there has been marginal fall in the gross profit of the company. Although the sales of the company have increased, the gross profit margin has reduced. This fall in the gross profit is attributed to the increased expenses related to cost of sales.
Considering the returns ratios of the profitability ratio the return on assets and shareholders’ equity has been maintained. The fall in these returns is lower than the fall in the gross profit margins. This is because the company has ensured that the profitability with respect to assets and shareholders is maintained.
The overall analysis of the profitability ratio shows that although there hasn’t been growth in the profitability but at the same time there hasn’t been much fall in the profitability. Overall these ratios highlight the strength of the company to a certain extent as the sales and profitability in absolute terms has increased and at the same time gross profit margins and the return on shareholders’ equity and the assets has not come down.
The liquidity ratios highlight the ability of the company to meet the short term financial requirements and the level of leverage/ debt employed by the company. The liquidity and solvency ratios that have been calculated are shown below.
|
Liquidity Ratio |
2014 |
2013 |
|
Current Ratio |
1.09 |
1.07 |
|
Acid Ratio |
0.30 |
0.35 |
|
Inventory Turnover |
2.90 |
2.96 |
|
Debt to Equity |
40.69% |
49.58% |
|
Interest Cover |
96.96 |
75.73 |
In the debt to equity ratio shown above the debt that is considered is only the non-current liabilities of the company as these are the major loans employed by the company. The debt employed by the company is quite low i.e. around 30% and equity employed is around 70%. The company has ensured that the impact of interest on the profitability is reduced (Thompson, 2004). The increase in interest coverage ratio shows that the gross profit is better capable of meeting the interest expense of the company. The liquidity ratio of the company shows that the inventory has the major concern for the company as it is the major share in the current assets of the company. There is huge difference between the current ratio and the acid ratio of the company (Vandyck, 2006). The inventory turnover ratio highlights the increasing level of inventory of the company.
Considering the performance of other retailers in the industry shows that the profitability margin is less than 1% and the return on shareholders equity is also quite lower than Halfords. Thus considering the other retail player such as Sainsbury the performance of Halfords is much better. Further the inventory is one of the major factors for all the retailers in the industry and it is the operations and supply chain management that is of importance for the company.
The overall analysis shows that the liquidity is one of the major concerns for the company. The company needs to take steps so as to improve the liquidity so that more cash is available that can be employed to increase the cash from the business operations which will certainly be beneficial in increasing the sales and if the company can reduce or maintain the cost of sales the profitability will increase resulting in the increased returns to the shareholders. The current debt equity ratio of the company highlights the strength of the company. The company may increase the assets employed and as a result of it increase the sales by employing more debt (Bradshaw, 2013). This will improve the returns for the given level of shareholders maintained by the company. Overall the company has the potential as highlighted by the profitability ratios whereas at the same time there are certain factors that may be of concern of the company and can negatively impact the performance. Lastly reducing the inventory level is of prime concern for the company.
As discussed above the financial statement analysis can be very important as it can highlight different aspects related to the company. However it is important to note that there can be different users of the financial statements having different uses. These have been mentioned below (Brigham & Ehrhard, 2010)
Investors: These are the most important users of the financial statements as the investors provide the necessary capital required for the development of assets and also short term liquidity. The investors are concerned about the profitability and returns on investment in the company.
Creditors: The creditors are concerned about the operational aspects of the business and consider the liquidity and gross profit margin
Management: The management is concerned about the operational aspects of the business and meeting the expectations of the shareholders.
Overall it can be seen that the viewpoint of the users can be different and accordingly different set of ratios are analyzed.
The annual report of Halfords provides the information on the non-financial consideration. The various aspects that have been included in the annual report of the company are strategy of the company, key performance indicators and the risk factors impacting the company.
The strategy of the company has been divided into the group strategy and the retail strategy.
The key performance indicators of the company have been categorized based on shareholders, operations and retain sales of the company.
The risk factors that have been identified in the annual report of the company are economic factors, business strategy, increasing competition, compliances, changing consumer preferences and reliance on foreign manufacturers.
All the three non-financial considerations provide an insight into the factors that can impact the performance of the company in future thereby complementing the financial analysis of the company. Overall it has been highlighted that the maintaining the current financial performance of the company may be challenge however the company has developed suitable strategies to combat the risks.
Conclusion
The report has been prepared to conduct such analysis of the Halfords Group the financial years ending 2014. Based on the analysis it can be said that the liquidity is one of the major concerns for the company. The company needs to take steps so as to improve the liquidity so that more cash is available that can be employed to increase the cash from the business operations which will certainly be beneficial in increasing the sales. The profitability in absolute terms has increased and at the same time gross profit margins and the return on shareholders’ equity and the assets has not come down.
The non-financial considerations comprehend the financial analysis of the company and shows that maintaining the current financial performance of the company may be challenge however the company has developed suitable strategies to combat the risks.
References
Bradshaw K., (2013), Financing your business: choosing between debt and equity, Available At:https://www.royalgazette.com/article/20130319/BUSINESS05/703199999
Charles K. Vandyck, (2006), Financial Ratio Analysis: A Handy Guidebook, Trafford Publishing
White G.I., Sondhi A.C. & Fried D., (2002), The Analysis and Use of Financial Statements, Wiley; 3 edition
Bhattacharya H., (2004), Working Capital Management: Strategies and Techniques
Brigham E.F., Ehrhard M.C., (2010), Financial Management: Theory & Practice
Thompson D.A., (2004), Sources of Business Financing, Available At:https://www.boyneclarke.com/resources/entry/sources-of-business-financing
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