Financial Statement Analysis
Following on from this, your manager has asked you to look at ( Dunelm PLC ) and report back on any potential for investment opportunities.
As you want to impress your manager, you are keen to provide an in-depth fundamental financial statement analysis with broad coverage looking at the strengths and adaptability of this company. This will include an evaluation of internal and external factors on the future prospects for the business. You intend to cover the most recent three years published accounts (plus any interim results available) for your company and also to compare performance against DFS (Furniture) PLC competitor and the sector in general.
You will need to:
Highlight interesting findings to date
Explain why you have chosen this company & industry/sector
Justify your choice of potential competitor for comparative purposes.
Include discussion of your planned structure for the final report.
Explain which sources you intend to use for your ratios/trends/financial data in the final report for task 4
Therefore, we are expecting an interesting and creative explanation of what the organisation is and what the interesting findings/issues are. The Company chosen must be from the list provided on the assignment brief.
The “Team Manager” will be looking for application and engagement of the student with this assignment. You should be pro-active and engaged with the “manager”. You should show your ability to communicate progress, knowledge and interest in the companies and sector concerned.
Consumer services Retail (General retailers):
In this report, key interesting finding about the company has been taken into consideration. The ratio analysis, capital budgeting and trend analysis are the some of the financial tools which are used to assess the financial performance of the company. In the starting of this report, key interesting finding of the company and the reasons for choosing Dunelm Plc and selected industry for potential investment. After that ratio analysis and capital structure of the company has been assessed.
Till date the interesting facts discovered about the Dunelm Group are as follows:
The current P/E ratio of Dunelm Plc is 17.20 times which highlights an earnings yield amounting to 5.8% approximately. The company’s P/E ratio denominates a figure which crosses above the average P/E ratio for the Great Britain market’s 16.8 times. Interpretatively, the company’s current investors are ready to pay a price higher to what they are ready to pay for other companies in the Great Britain’s market. The EPS growth in company’s recent financial year amounted to 37.8%, where it rose from 36.2 p to 49.9 p (Simply Wall St, 2019).
Along with, the company’s sector, i.e. homewares retailing and specifically the furniture sector in the same has a promising growth potential. The industry’s support to UK’s GDP is significant which amounted to GBP 8.4 million of support to GDP in 2016 (Mordor Intelligence, 2019). Also the impact of Brexit casting economic and political uncertainities in many UK’s industries could not impact the retail furniture sector of UK much. Further, the number of furniture consumers in UK is huge. The online business of the players of this industry is also growing progressively.
Hence, this retail furniture industry, as well as the Dunelm Plc, both are growing together and make a good choice for investment. So the selection of the industry as well as Dunelm particularly in this industry is justified.
The volatility attached to the shares of DFS (Furniture) is high as its relative beta is higher. At times the shares of the company mover at reportedly higher margins and at the next instance move to a lower ground, allowing its investors to play with numbers and earn good margins. Currently the actual valuation i.e. the intrinsic value attached to the stock is computed by analysts at GBP 4.31, yet the share is still undervalued at GBP 2.5 approximately. Hence buying this share adds to potential profitability because the chances of share price moving up and shareholders earning are huge (Simply Wall St, 2019). Therefore, after Dunelm Plc, any other player in the sector if could raise profitability is DFS (Furniture) only.
The different sources used for obtaining financials and related analysis are the company’s annual reports, and different secondary research done from the findings presented online by stock market analysts.
This report firstly highlights the interesting findings about Dunelm Plc, followed by the choice of this concern and its industry for making an investment it. Later, the reasons for choosing of DFS (Furniture) as an alternate to Dunelm Plc are justified. Followed by it, the sources used for formulating this report and the eventual results are presented.
Dunelm’s efficiency in managing current assets is both better as well as could be improved at the same time in comparison to DFS (Furniture) and industry. Dunelm’s inventory turnover for 2019 is 3.55 times which is lower than the industry average of 8.48 times and DFS’s 7.03 times. Hence, DFS’s inventory turnover is better than Dunelm’s. The receivables turnover for Dunelm is far better than industry at 1375.5 times compared to 15.05 times for industry. Also, it exceeds DFS’s turnover standing at 107.9 times. The creditor’s turnover for Dunelm i.e. 9.18 times has also improved as compared to the falling creditor’s turnover of DFS at 3.38 times.
The overall efficiency measures for Dunelm have improved from 2017 in the year 2019.
The current ratio for Dunelm Plc fell to 1.38 times in 2019 from 1.50 in 2017 and even 1.78 in 2018. The company’s current assets are lesser than 2017, while the current liabilities have shown a grown of GBP 9.3 million approximately. Still, the current ratio of Dunelm is better than DFS’s current ratio at 0.54 times.
The quick ratio for Dunelm is 0.33 times which has improved over 2017, and is better than both industry’s average at 0.27 times and DFS’s ratio at 0.30 times.
The net margin standard set by industry averages is 2.14%. Dunelm’s net margin is far ahead of this at 9.21% because of exponential growth shown by the organization in its profitability in recent years. Also, DFS’s net margin of 2.01% is not able to compare with Dunelm’s at any place. The company’s profits are supported by better customer service and improvement in online sales as well as customization approach which company follows (Dunelm Group Plc, 2019).
The return on assets as well as equity resulted by Dunelm is also way ahead of DFS’s returns. The DFS’s profitability is declining, while Dunelm’s profits are growing. The main reason behind DFS’s falling profits is poor quality and reduced customer satisfaction, which directly impacted revenues (DFS Furniture Plc, 2019).
The reliance of Dunelm on debt has reduced from 75% to 55% as could be observed from the debt and proprietary ratios. The company is now keeping a balanced debt in its asset financing. While DFS is following an inverted structure to this, where debt proportion rose from 65% to 67% of assets (DFS Furniture Plc, 2019). The debt to equity ratio is just 1.24 times for Dunelm hence; while for DFS the same is 2.75 times. Hence Dunelm is less risky. The debt to equity ratio for industry is just 0.6 times. Hence, Dunelm still need to lower down its debt to equity ratio.
So, Dunelm Plc stands to be more competitive as well as profitable as compared to DFS (Furniture) Plc.
|a. inventory turnover||cost of goods sold/ average inventory||3.55||3.42||3.47|
|b. days debtors||operating sales/ average debtors||1375.50||3000.29||3185.33|
|c. days creditor||purchases/ average creditors||9.81||8.26||8.16|
|a. current ratio||current assets/ current liabilities||1.38||1.78||1.50|
|b. quick ratio||quick assets/ current liabilities||0.33||0.38||0.32|
|a. (net) profit margin||(net profit after tax/ total revenue) * 100||9.21%||6.98%||7.65%|
|b. return on equity||net income/ shareholder's equity||54.52%||54.42%||66.39%|
|c. return on assets ratio||net income/ total assets||24.29%||17.25%||16.87%|
|a. debt ratio||total debt/ total assets||0.55||0.68||0.75|
|b. debt to equity ratio||total debt/ total owner's equity)||1.24||2.16||2.93|
|c. proprietary ratio||shareholder's equity/ total assets||0.45||0.32||0.25|
|RATIO||FORMULA||DFS (Furniture) PLC|
|a. inventory turnover||cost of goods sold/ average inventory||7.03||7.99||17.96|
|b. days debtors||operating sales/ average debtors||107.90||96.72||66.61|
|c. days creditor||purchases/ average creditors||3.38||3.77||8.14|
|a. current ratio||current assets/ current liabilities||0.54||0.58||0.69|
|b. quick ratio||quick assets/ current liabilities||0.30||0.35||0.48|
|a. (net) profit margin||(net profit after tax/ total revenue) * 100||2.01%||2.16%||5.18%|
|b. return on equity||net income/ shareholder's equity||9.74%||13.96%||35.88%|
|c. return on assets ratio||net income/ total assets||2.37%||2.43%||5.66%|
|a. debt ratio||total debt/ total assets||0.67||0.67||0.65|
|b. debt to equity ratio||total debt/ total owner's equity)||2.75||3.87||4.11|
|c. proprietary ratio||shareholder's equity/ total assets||0.24||0.17||0.16|
After assessing the financial performance of the company, it has been assessed that profitability of company is strong and company could maintain the high financial leverage in its business to sustain in market. The high financial leverage will also help company to lower down its cost of capital and increase the return on capital employed.