Understanding company accounts and reports: Mothercare - Essay Example

?Company Overview: Mothercare Mothercare is a British Company which specializes in products for expectant mothers and for children up to 8 years old and is a specialist retailer of products for mothers-to-be, babies and children up to the age of eight. Mothercare meets the needs and aspirations of parents for their children, worldwide. Mothercare was founded in 1961 and continues to grow locally and worldwide, with total sales increasing by 16.3 per cent during last year and retail space by 20 per cent. International sales now represent around 50 per cent of total network sales. Talktalk TalkTalk (officially TalkTalk Telecom Group PLC) is a company which provides pay television, telecommunications and internet access services to businesses and consumers in the United Kingdom. Talk started in 2003 as a fixed landline provider but now operates and sells broadband, home phone and mobile packages to UK customers. TalkTalk has grown rapidly during the past few years through a combination of acquisition and organic growth. They have spent the last year integrating their businesses to build a leaner, more efficient company which provides the best value to homes and businesses by offering competitive pricing and innovative products backed up by good service. Accounting Policies and Audit: Mothercare’s financial statements (individual and consolidated) are prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use in the European Union, International Financial Reporting Interpretations Committee (IFRIC) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. They therefore comply with Article 4 of the EU IAS Regulation. The directors are responsible for the preparation of the company financial statements and for being satisfied that they give a true and fair view. Their responsibility is to audit and express an opinion on the company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require then to comply with the Auditing Practices Board’s Ethical Standards for Auditors (Ferber, 2001). The Consolidated financial statements of the Talktalk Company are also prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted for use in the European Union and as applied in accordance with the provisions of the Companies Act 2006. These financial statements therefore comply with Article 4 of the European Union International Accounting Standard regulation. The Company has, however applied United Kingdom Generally Accepted Accounting Practice (‘GAAP’) in the preparation of its individual financial statements unlike mothercare. Similar to mothercare, directors are responsible for the preparation of the company financial statements and for being satisfied that they give a true and fair view. Financial Analysis Liquidity Ratios Liquidity ratios illustrate the company’s ability to pay off obligations in the short term (Jae K. Shim, 2008). Current asset ratio and quick ratio are observed closely when liquidity is in question. Mothercare is in a good position in both of these parameters (Alexander & Nobes, 2007) . In 2010, their Current ratio was 1.54 which decreased steadily to 1.39 in 2011. This dip is due to decrease in current assets from ?201.6m to ?193.8m and increase in current liability from ?131.0m to ?139.4m. However, the ratio is still significant enough for day to day operations of the company. The Quick Ratio of the company has increased drastically from 0.84 to 0.56 which is a cause of concern for the company. Along with the decrease in current assets, it also suggests that a lot of stock is accumulated in inventory. In 2011, the company only has ?15.8m cash in hand and ?116.0 is piled up in inventory. Quick ratio is an illustration of immediate liquidity of the firm (Perks & Levy, 2007) The current ratio for Talktalk company is very low as compared to other companies in UK. The current ratio for 2010 and 2011 was on the low side; 0.379 and 0.339 respectively for the two years. This is not good for the company as liabilities of the company are high and assets are not sufficient enough to finance them. The quick ratio for the company shows a similar trend to the current ratio. It is just slightly lower than the current ratio indicating that company does not have much stock in hand. The liquidity ratio for the company shows that the primary activity of the company is to deal on credit (Weetman, 2010). The company’s liability is very high and current assets are largely composed of receivables. Although the company has increased its customers each year by an average 25%, this has also resulted in decrease in its liquidity ratios quite significantly. Efficiency Ratios Efficiency ratios judge the ability of a company to earn from its resources in an effective and efficient manner (Brigham & Ehrhardt, 2010). These include receivable turnover ratio, inventory turnover ratio, and payable turnover ratio. This indicates the level of efficiency of operations and is indicative of management expertise (Atrill & Mclaney, 2008). Inventory Turnover ratio is just average for mothercare. It is approximately 8.39 in 2010. This means that in a matter of 8.4 days, inventory is converted into sale. This ratio decreases to about 6.84 in 2011. This means that a lot of stock is accumulated in inventory; it also suggests that the sale of the company is not increasing significantly (Chandra, 2009). Efforts need to be made to increase its turnover rate as investment in inventory yields zero return and a company would always refrain from having its capital tied up in such an investment (Collier, 2003). Another indicator of efficiency is Receivable turnover which is calculated by dividing credit sales from average receivables. This ratio measures the efficiency of a company to collect its receivables. In 2010, the receivables turnover was 27.1 days which increased to 28.3 days in 2011. This is because the company is having difficulty in collecting sales made on credit. Payable Turnover Ratio for mothercare is also on the average side, it is fairly constant for 2010 and 2011 with 64.79 and 64.37 days respectively. Talktalk Company is a telecom company and therefore inventory free. The inventory turnover for the company in 2010 and 2011 is less than a single day indicating that inventory is bought every single day. Talktalk Company has a wide difference in its receivable and payable turnover. The receivable turnover for the company is fairly average with about average of 30 days; however the payable ratio is on the rise. The payable ratio is approximately 6months for the two years indicating the weak financial position and low cash in hand for the company. Profitability Ratio Profitability ratios are an indicator of a company’s performance over the year. Profitability ratios include gross profit margin, return on total asset, return on net worth and return on net working capital (Kimmel, et al., 2010). Gross Profit margin for mothercare is fairly low. During the year 2010 it was 11.35%. However, the ratio was at 7.04% in 2011. This shows that that cost of sales for mothercare has increased during the period. Gross profit margin is on the low side for mothercare compared to other companies and this is a cause of concern for the company. Return on asset has declined drastically in 2011 from 5.76% to 1.59%, this is due to drastic decrease in net profit from ?23.6M to ?6.5M in 2011. This suggests that the profit per assets has decreased significantly. Return on asset is very low for mothercare in 2011 and they must increase their net profit quite sharply. ROA is a widely used measure that estimates return per unit of asset investment (Eisen, 2000) The gross profit margin for Talktal is fairly high for the company, going beond 50% for both the years. It is fairly constant for both the years with slightly above 50% and is due to strong sales of the company in the following years. Return on Equity for the company is quite low when compared to gross profit indicating high expenses for the company. Return on equity is -0.763 in 2010 and has increased sharply to 8.43% in 2011 showing its efficiency in expenses. Return on assets is also quite low indicating limited funds for the company to finance its assets. Cash flow Analysis: Cash flow for mothercare is quite high suggesting good operating and financing activities of the company. It has decreased slightly during the year 2011 but overall is quite good showing bright prospect for the company. In 2010, Strong EBITDA growth was partially offset by an outflow on working capital; however, there was no deterioration in working capital. The major elements of the capital expenditure on the network in 2010-11 were the additional exchanges unbundled, increased capacity in existing exchanges, and the continuation of our project to increase backhaul capacity within the network. Talktalk Company has constantly increased its cash flow every year since 2008. In 2010, the company’s cash flow improved rapidly than its previous year. The company improved its operating and financing activities significantly. Operating activities improved by almost 40% to ?199m in 2010. Financing activities increased significantly to ?155m in 2010 from ?6m in 2009. EBITDA also improved slightly from ?146m in 2009 to ?174m in 2010. There was further improvement in operating free cash flow in the year 2011. The Group grew operating free cash flow to ?156m (2010: ?119m) an increase of 31.1% on the prior year reflecting the significant improvement in EBITDA in the year. EBITDA after exceptional items grew by 31.0% to ?228m (2010: ?174m). The improvement in EBITDA principally reflects the benefits of the integration program together with an additional quarter of Tiscali and growth in broadband revenues. They continued to control their investment in capital expenditure in line with their guidance to focus on delivering our unbundling strategy and unified billing system. As a result of their cash generation net debt reduced by ?70m to ?438m (2010: ?508m). Corporate Social Responsibility: Corporate Social responsibility is the managerial obligation to take action that protects and improves both the welfare of society and the interest of the organization. Mothercare pays a lot of attention to corporate social responsibility and protects and improves its communities. By acting responsibly, mothercare secures its long-term success and fulfill its mission to meet the needs and aspirations of parents for their children, worldwide. Mother care’s corporate social responsibility is focused on the following key areas, Communities- parents and children, Charity giving, Employee care and Supplier care TalkTalk also gives a lot of attention to corporate social responsibility and plays a pivotal role in helping over 4.8 million consumer and business customers to connect, communicate and thrive in the digital age. They have always been active in the communities in which they operate and in 2011 they gave their activities more structure and clearer targets so they can more easily track and share achievements. Their Corporate Responsibility program is built around three themes where they believe they can make the biggest difference – digital inclusion, the environment and employee engagement. Corporate Governance: Mothercare believes that by seeking to achieve a high standard of corporate governance in all of the activities undertaken by the group, the group’s reputation and performance will be enhanced. In addition, it will also promote and benefit the interests of investors, customers, staff and other stakeholders. To this end, the Company considers that it has complied throughout the 52-week period ended on 26 March 2011 with the relevant provisions set out in Section 1 of the 2008 Combined Code on Corporate Governance published by the Financial Reporting Council (FRC) having applied the main and supporting principles set out in Section 1 of the Code (IAS, 2010). Talktalk has not paid much attention to corporate governance so far. The board is focused much on other activities like sales and acquisition. The Board has established four Committees: Audit, Remuneration, Nomination and Compliance; the first three as required by the Code, only the fourth committee is to ensure the compliance of the Group within the regulatory environment in which it operates. Appendix: Name Formula Year Mothercare Talktalk 2010 2011 2010 2011 Liquidity Ratios Current Ratio  1.390 1.54 0.379 0.339 Quick Ratio 0.56 0.84 0.375 0.33 Efficiency Ratio: Inventory Turnover  6.84 8.39 0.8711 days 1.25 days Receivable Turnover  28.3Days 27.1Days 38.96 days 32.05 days Asset Turnover  1.94 1.87 156.49 days 174.22 days Profitability Ratio Gross Profit Margin  7.04%  11.35% 50.29% 50.31% Return on Total Asset 1.59% 5.76% (0.765) 8.43% Return on Equity 3.37% 12.53% (0.216)% 2.70% Recommendations: Mothercare Plc has shown above average performance for the year 2010 and 2011. The efficiency, liquidity and profitability have jumped up significantly. For an industry that the company operates in, it is a shining star for an investor. The company has for long been growth oriented and with the recent analysis they will continue to do so. As a research analyst, one would suggest the investors to buy the stock. The company has established its existence in the market and is in a phase to sustain their position in the market. The short term rating is a ‘buy’ for the security. As far as TalkTalk is concerned, the company’s growth has been stagnant. They have been encountered with difficulties in managing their assets efficiently and sustaining profitability parallel to it. The company has risen to higher level from 2010 but most of the growth is due to high CapEx in the recent past. The growth is driven by the increased assets which can be seen by the decreasing asset turnover ratio of the firm. The firm’s performance has not been impressive but still they have grown from an unacceptable level to a level which does not repel investors from buying the stock. I would suggest the investor to hold his decision of ‘buying’ or ‘selling’ the stock. The investor should wait for the corporate plan to come out and with recent news and last quarter results being published, the investor should make the decision to buy the security or not. For now, my suggestion is to ‘hold’. Conclusion: In a nutshell, the two companies differed from each other with reference to the industry, sector, accounting policies, financials and nature. The companies were analyzed thoroughly and on the basis of the analysis, we can figure out that ‘Mothercare Plc.’ Is a better firm from the eye of an investor and TalkTalk is struggling a bit but would eventually stabilize itself, provided that the management takes the right decisions. Works Cited Alexander, D. & Nobes, C., 2007. Financial Accounting: An international introduction. s.l.:s.n. Atrill, P. & Mclaney, E., 2008. Accounting and finance for nonspecialists. s.l.:s.n. Brigham, E. F. & Ehrhardt, M. C., 2010. Financial Management Theory and Practice. s.l.:Cengage Learning. Chandra, P., 2009. Financial Management. s.l.:Tata McGraw-Hill Education. Collier, P. M., 2003. Accounting for managers. s.l.:s.n. Eisen, P., 2000. Accounting. s.l.:s.n. Ferber, K. S., 2001. Corporation Law. s.l.:s.n. IAS, 2010. Conceptual Framework for financial reporting. s.l.:s.n. Jae K. Shim, J. G. S., 2008. Financial Management. s.l.:Barron's Educational Series. Kimmel, P. D., Keiso, D. E. & Weygandt, J. J., 2010. Accounting: Tools for decision making. s.l.:s.n. Perks, R. & Levy, S., 2007. Accounting: Understanding and Practice. s.l.:s.n. Weetman, P., 2010. Financial and management accounting: an introduction. s.l.:s.n. Read More