Financial analysis is an integral part of the decision making process. Analyzing the financial stability of the large departmental stores such as House of Fraser (Stores) Limited is immensely important. Financial ratio analysis not only helps gauge a firm's performance, it also helps decision making for investors and creditors. Financial performance refers to the methodical evaluation of the financial situation of an organization, person or a project. Several methods of financial analysis exist; however, ratio analysis is considered the most efficient in determining the financial position and performance of an organization.
Financial Ratios
A detailed financial analysis of the House of Fraser (Stores) Limited is provided here onwards, which encompasses various aspects of financial information. Financial ratio analysis will cover the profitability, efficiency, liquidity and the leverage of the. The financial performance that follows is evaluated and analysed from the perspective of shareholder.
Profitability Ratios
Profitability ratios explain the performance of an organization in terms of the profit it earns. They include return on assets, return on equity, profit margin and gross margin.
Return on Assets = Net income /Total assets
1/31/2010
1/31/2009
1/31/2008
1/31/2007
1/31/2006
Profit (Loss) after Tax
5,600
6,000
8,200
-89,300
72,700
Total Assets
562,200
616,100
567,400
463,500
669,400
Return on Total Assets (%)
0.01
0.01
0.01
-0.19
0.11
Return on equity = Net income / Shareholders' equity
1/31/2010
1/31/2009
1/31/2008
1/31/2007
1/31/2006
Profit (Loss) after Tax
5,600
6,000
8,200
-89,300
72,700
Shareholder Funds
8,200
43,100
57,700
38,000
137,600
Return on Shareholders' Funds (%)
0.68
0.14
0.14
-2.35
0.53
Gross profit margin = Gross income / Sales
1/31/2010
1/31/2009
1/31/2008
1/31/2007
1/31/2006
Gross Profit
351,300
341,100
341,300
296,700
314,900
Turnover
581,400
578,200
596,000
663,200
640,100
Gross Profit Margin
0.604231
0.589934
0.572651
0.447376
0.491954
Net profit margin = Net income / Sales
1/31/2010
1/31/2009
1/31/2008
1/31/2007
1/31/2006
Profit (Loss) after Tax
5,600
6,000
8,200
-89,300
72,700
Turnover
581,400
578,200
596,000
663,200
640,100
Net Profit Margin
0.009632
0.010377
0.013758
-0.13465
0.113576
Fixed Asset Turnover = Net Sales/Fixed Assets
1/31/2010
1/31/2009
1/31/2008
1/31/2007
1/31/2006
Turnover
581,400
578,200
596,000
663,200
640,100
Fixed Assets
296,600
314,000
280,000
243,700
447,100
Fixed Asset Turnover
1.960216
1.841401
2.128571
2.721379
1.431671
Operating & Administrative expense to Sales
Operating Expense to Administrative Expense Ratio = Operating & Administrative expense / Sales
1/31/2010
1/31/2009
1/31/2008
1/31/2007
1/31/2006
Admn & Op. Expenses
311,400
316,400
330,500
452,400
218,100
Turnover
581,400
578,200
596,000
663,200
640,100
Admn Exp to Sales
0.535604
0.547215
0.55453
0.682147
0.340728
Efficiency Ratios
Efficiency ratios or activity ratios, explain the performance of an organization. They include inventory turnover and total asset turnover. (Guilding, 2002, pp 64 - 87)
Inventory Turnover = Cost of Goods Sold / Inventory
1/31/2010
1/31/2009
1/31/2008
1/31/2007
1/31/2006
Cost of Sales
230,100
237,100
254,700
366,500
325,200
Stock & W.I.P.
65,000
75,200
90,000
86,300
109,600
Inventory turnover (times)
3.54
3.152926
2.83
4.246813
2.967153
Total Asset Turnover = Sales / Total Assets
1/31/2010
1/31/2009
1/31/2008
1/31/2007
1/31/2006
Turnover
581,400
578,200
596,000
663,200
640,100
Total Assets
562200
616100
567400
463500
669400
Assets Turnover
1.034152
0.938484
1.050405
1.430852
0.956229
Liquidity Ratios
Liquidity ratios enable the organizational management to analyze their position to meet the day-to-day requirements of the organization and to pay off its short-term debts. These include net working capital, current ratio and quick ratio. (Medlik & Ingram, 2000, pp 137 - 141)
Net Working Capital = Total Current Assets - Total Current Liabilities
1/31/2010
1/31/2009
1/31/2008
1/31/2007
1/31/2006
Current Assets
265,600
302,100
287,400
219,800
222,300
Current Liabilities
-159,200
-432,400
-407,500
-328,800
-239,400
Working Capital
106,400
-130,300
-120,100
-109,000
-17,100
Current Ratio = Total Current Assets / Total Current Liabilities
1/31/2010
1/31/2009
1/31/2008
1/31/2007
1/31/2006
Current Assets
265,600
302,100
287,400
219,800
222,300
Current Liabilities
159,200
432,400
407,500
328,800
239,400
Current Ratio
1.668342
0.698659
0.705276
0.668491
0.928571
Quick Ratio = (Total Current Assets - Inventory)/ Total Current Liabilities
1/31/2010
1/31/2009
1/31/2008
1/31/2007
1/31/2006
Current Assets
265,600
302,100
287,400
219,800
222,300
Stock & W.I.P.
65,000
75,200
90,000
86,300
109,600
Quick Assets
200,600
226,900
197,400
133,500
112,700
Current Liabilities
159,200
432,400
407,500
328,800
239,400
Acid Test Ratio
1.26005
0.524746
0.484417
0.406022
0.47076
Gearing Ratios
Gearing, also termed as leverage, portrays the organizational financing policies. It reflects the way an organization raises funds for investments and other organizational purposes. Gearing ratios includes debt to assets ratio and debt to equity ratio. (Guilding, 2009, pp 74 - 79)
Total Debt to Assets Ratio = Total Debt / Total Assets
1/31/2010
1/31/2009
1/31/2008
1/31/2007
1/31/2006
1/31/2005
Long Term Liabilities
166,200
140,600
102,200
96,700
292,400
358,000
Current Liabilities
159,200
432,400
407,500
328,800
239,400
211,200
Total Debt
325,400
573,000
509,700
425,500
531,800
569,200
Total Assets
562200
616100
567400
463500
669400
614300
Debt to Assets
0.578798
0.930044
0.898308
0.918015
0.794443
0.926583
Financial Analysis and Interpretation
In attempting to analyze financial statements through the use of financial ratios organizations should have the expertise to interpret them in order to bring about positive changing in the organizational performances. The paragraphs here onwards interpret the ratios to extract meaningful information for decision-making process from ...