FINANCIAL ANALYSIS

Harrods Financial Ratio Analysis 2000-2006



Harrods Financial Ratio Analysis 2000-2006

Introduction

Financial analysts comb through companies' accounting reports for the same reason attentive parents delve into their children's grade reports: to find out how well a company performed during a specific period, and identify elements that dragged overall performance down. Financial statement analysis requires attention to detail, familiarity with accounting principles and knowledge of regulatory rules. The objectives of this report are give insight about the financial position of Harrods plc and provide recommendation on areas of concern. For that purpose, we will comprehensively analysis the financial statements of the company and comment on every financial aspect of the company. Moreover, vertical and horizontal analysis will be conducted to see the financial trends of the company.

Discussion

By preparing accurate, complete financial statements, corporate management provides valuable information about the firm's products and services, and directs investor queries to specific personnel. For example, external financiers may question managers in a business unit that posted mediocre performance, asking why their segment is lagging behind others, with respect to revenue and sales growth. By reviewing financial statements, investors can set profitable companies apart from market losers. A full set of accounting data summaries includes a statement of financial position, a statement of profit and loss, a statement of shareholders' equity and a statement of cash flows (Williams, 1998).

Financial-statement analysis tells business partners the challenges that corporate management faces, and how department heads confront rivals' marketplace tactics. This constant scrutiny is essential to preventing bad investment bets or day-to-day business decisions (Warren, 2002).

Vertical analysis and Horizontal analysis

Companies conduct financial analysis to ascertain their position in the market. A company compares its current performances to its past performances, as well as contrasts it to the performances of other players in the market. Financial analysis comprises of three parts: vertical analysis, horizontal analysis and analysis of financial ratios. Vertical analysis compares and establishes a relationship between a single item to the total transactions. The vertical analysis is conducted on all items in the income statement and the balance sheet. Vertical analysis expresses all items in percentages (Varian, 1993).

A vertical analysis is a common activity conducted by analysts, investors and owners of businesses. A vertical analysis for five years is created by obtaining five years' worth of financial statements. The information on each statement is expressed as a percentage, and the percentages for the five years are all listed on one form in order to compare them. Financial statements that use vertical analysis are called common-size financial statements. This means that the statements do not contain dollar amounts, but instead they contain percentages only. Vertical analysis is conducted on income statements and balance sheets (Statman, 1995).

After understanding the concept and purpose of vertical and horizontal analysis, we perform these analyses on Harrods plc income statement and balance sheet. Below these analyses are provided:

Vertical analysis (Income Statement)

2006

2005

2004

2003

2002

2001

2000

2006

2005

2004

2003

2002

2001

2000

Sales

410.7

448.4

433.7

541.8

540.8

540.2

527.9

100%

100%

100%

100%

100%

100%

100%

Cost of Sales

189.7

208.5

209.4

316.6

316.6

316.3

300

46.19%

46.50%

48.28%

58.54%

58.54%

58.55%

56.83%

Gross Profit

221

239.9

224.3

223.9

224.2

223.9

227.9

53.81%

53.50%

51.72%

41.46%

41.46%

41.45%

43.17%

Operating expenses

187

198.4

189.9

195.5

201.3

195.5

185.8

45.53%

44.25%

43.79%

37.22%

37.22%

36.19%

35.20%

Operating Profit

34

41.5

34.4

28.4

22.9

28.4

42.1

8.28%

9.26%

7.93%

4.23%

4.23%

5.26%

7.97%

Other incomes

21

1.8

8.1

0.3

18.5

0.3

10.4

5.11%

0.40%

1.87%

3.42%

3.42%

0.06%

1.97%

Profit Before Interest

55.5

43.3

42.5

28.7

41.4

28.7

52.5

13.51%

9.66%

9.80%

7.66%

7.66%

5.31%

9.95%

Financial expenses

29.7

27.8

26.7

23.1

23.8

23.1

21

7.23%

6.20%

6.16%

4.40%

4.40%

4.28%

3.98%

Taxation

4.3

7.7

2.4

2.6

2

2.6

0.1

1.05%

1.72%

0.55%

0.37%

0.37%

0.48%

0.02%

Profit for Share holders

21.5

7.8

13.4

3

15.6

3

31.4

5.23%

1.74%

3.09%

2.88%

2.88%

0.56%

5.95%

Dividends

5

39

27

59.6

74

59.6

0

1.22%

8.70%

6.23%

13.68%

13.68%

11.03%

0.00%

Retained profits/ (Loss)

16.5

31

-13.6

-56.6

-58.4

-56.6

31.4

4.02%

6.91%

-3.14%

-10.8%

-10.8%

-10.5%

5.95%

Horizontal Analysis (Income ...