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Mothercare
plc, a British retailer, which specialises in products for expectant mothers,
newborns and toddlers, operates online
and on the high street. During the
last few years, there have been a change in retail industry, and as a result,
the performance of the company failed to meet its expectation. To evaluate the
financial performance of this company, a comparison ratio analysis report
between itself and its competitors will be conducted, and some suggestions
would be made to mitigate potential problems.

Liquidity
ratios measure the ability of a company to meet its short-term financial obligations.

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Inspection of the statements of financial position and ratios of Mothercare plc
presented shows that, from 2009 to 2013, the current ratio dropped due to an
increase in inventories and current liabilities and a significant decrease in
cash and its equivalent. At the same time, the acid test ratio decreased
further to 0.56. After a new CEO was appointed in 2014, this ratio still went
down and the cash and its equivalent decreased to 0. This indicates that the
company was a lack of liquid asset, and its liquidity problem was serious even
though the management of the company had changed.

Profitability
ratios measure the effectiveness of a company at generating profit. In terms of
margin ratios, in 2009, both the operating profit margin and the gross profit
margin were the highest among eight years, but they experienced a dramatic
decline in 2012 due to a big decrease in operating and gross profit. In
particular, the operating profit drop to below zero. After 2014, both ratios
improved although they were lower than that in 2009. When comparing to its
competitors Debenhams plc and Marks and Spencer, the overall trend of operating
margin for the whole industry decreased, but Mothercare plc improved its performance
after it reached a trough in 2012. For return ratios, a similar trend was shown
in the return on capital employed(ROCE), which fell to -59.11 in 2012 but
increased to above zero in 2016. Overall, although revenue year over year
growth decreased continuously, the profitability of the company might not seem
to be a big problem as its profit for the year increased gradually after 2014.

Efficiency
ratios are used to measure the ability of a company to employ its assets and
liabilities to generate income. Receivables settlement period, days inventory
and cash conversion cycle increased gradually from 2009 to 2017, and this shows
that the company was inefficient to convert inventories into sales and to
convert receivables into cash, which leads to an even longer cash conversion
cycle.  On the other hand, the payables
period increased which is beneficial to the business as payables provide a free
source of finance for the business, but this may be caused by liquidity problem
resulting as a lack of cash to pay to suppliers and a loss of goodwill.

Gearing
ratio can be used to measures the contribution of long-term debt to the capital
structure of the company, and a high gearing ratio represents a high proportion
of debt to equity. The ratio increased from 2009 to 2014, and this shows that
the company is using debt to pay off its operations. After 2014, in order to
reduce gearing, the company sold more shares to increase equity to pay down
debt. The interest coverage ratio decreased significantly from 106.002 to
-79.15 in 2012, and this means that the company’s debt burden and the
possibility of bankruptcy was high. However, this ratio increased to about 11
at the end of 2017.

Shareholder
ratios measure the returns that shareholders gain from their investment. After
2013, shareholders got no dividends although investment increased. This may
because the company decided to invest as much as possible into further growth
and got negative retained earnings. In terms of return per equity(ROE), the ratio
decreased dramatically at first and increased in a slower rate after 2014, but
its competitor Debenhams experienced a sharp increase after 2015. This
indicates that its competitor was increasing its ability to generate profit and
deploy shareholders’ capital quicker than Mothercare plc.

To sum up, Mothercare plc encounters severe
liquidity and efficiency problems, which make an influence on its profit. It is
true that the performance of the company is related to its overall industry and
economic condition. These days, there is a fierce competition in the industry
which influences the profit of the company. At the same time, with the
development of e-commerce, the retail industry faces big challenges because online
shopping industry is likely to offer customers with lower prices and wider
choices. Mothercare plc can grow if the management make more effort in
efficiency management to increase its revenue. Firstly, the company can implement
new market plan targeting more international markets so that the profit of the
company is less affect by the domestic economic condition and political
developments such as Brexit. In addition, the company should pay more attention
on managing inventories by tracking inventories efficiently using the latest IT
technology so that less resource is tied in stock. Finally, the company should
improve its online shopping services by simplifying customers’ online shopping
process and improving photos and videos presentation as the popularity of
online shopping increases dramatically each year, and it is a good way to build
brand image to enhance customer loyalty. As a result, the company is more
likely to increase sales and defeat its competitors. However, Mothercare plc
may still face some challenges in the future. For example, it need to think
about how to decrease its expenses to combat the encroachment of the
supermarkets and online businesses which often have lower costs and prices.

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