Mothercareplc, a British retailer, which specialises in products for expectant mothers,newborns and toddlers, operates onlineand on the high street. During thelast 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 thefinancial performance of this company, a comparison ratio analysis reportbetween itself and its competitors will be conducted, and some suggestionswould be made to mitigate potential problems.
Liquidityratios measure the ability of a company to meet its short-term financial obligations.Inspection of the statements of financial position and ratios of Mothercare plcpresented shows that, from 2009 to 2013, the current ratio dropped due to anincrease in inventories and current liabilities and a significant decrease incash and its equivalent. At the same time, the acid test ratio decreasedfurther to 0.56.
After a new CEO was appointed in 2014, this ratio still wentdown and the cash and its equivalent decreased to 0. This indicates that thecompany was a lack of liquid asset, and its liquidity problem was serious eventhough the management of the company had changed.Profitabilityratios measure the effectiveness of a company at generating profit.
In terms ofmargin ratios, in 2009, both the operating profit margin and the gross profitmargin were the highest among eight years, but they experienced a dramaticdecline in 2012 due to a big decrease in operating and gross profit. Inparticular, the operating profit drop to below zero. After 2014, both ratiosimproved although they were lower than that in 2009. When comparing to itscompetitors Debenhams plc and Marks and Spencer, the overall trend of operatingmargin for the whole industry decreased, but Mothercare plc improved its performanceafter it reached a trough in 2012. For return ratios, a similar trend was shownin the return on capital employed(ROCE), which fell to -59.11 in 2012 butincreased to above zero in 2016. Overall, although revenue year over yeargrowth decreased continuously, the profitability of the company might not seemto be a big problem as its profit for the year increased gradually after 2014.Efficiencyratios are used to measure the ability of a company to employ its assets andliabilities to generate income.
Receivables settlement period, days inventoryand cash conversion cycle increased gradually from 2009 to 2017, and this showsthat the company was inefficient to convert inventories into sales and toconvert receivables into cash, which leads to an even longer cash conversioncycle. On the other hand, the payablesperiod increased which is beneficial to the business as payables provide a freesource of finance for the business, but this may be caused by liquidity problemresulting as a lack of cash to pay to suppliers and a loss of goodwill.Gearingratio can be used to measures the contribution of long-term debt to the capitalstructure of the company, and a high gearing ratio represents a high proportionof debt to equity. The ratio increased from 2009 to 2014, and this shows thatthe company is using debt to pay off its operations. After 2014, in order toreduce gearing, the company sold more shares to increase equity to pay downdebt. The interest coverage ratio decreased significantly from 106.002 to-79.15 in 2012, and this means that the company’s debt burden and thepossibility of bankruptcy was high.
However, this ratio increased to about 11at the end of 2017.Shareholderratios measure the returns that shareholders gain from their investment. After2013, shareholders got no dividends although investment increased. This maybecause the company decided to invest as much as possible into further growthand got negative retained earnings. In terms of return per equity(ROE), the ratiodecreased dramatically at first and increased in a slower rate after 2014, butits competitor Debenhams experienced a sharp increase after 2015.
Thisindicates that its competitor was increasing its ability to generate profit anddeploy shareholders’ capital quicker than Mothercare plc.To sum up, Mothercare plc encounters severeliquidity and efficiency problems, which make an influence on its profit. It istrue that the performance of the company is related to its overall industry andeconomic condition. These days, there is a fierce competition in the industrywhich influences the profit of the company.
At the same time, with thedevelopment of e-commerce, the retail industry faces big challenges because onlineshopping industry is likely to offer customers with lower prices and widerchoices. Mothercare plc can grow if the management make more effort inefficiency management to increase its revenue. Firstly, the company can implementnew market plan targeting more international markets so that the profit of thecompany is less affect by the domestic economic condition and politicaldevelopments such as Brexit.
In addition, the company should pay more attentionon managing inventories by tracking inventories efficiently using the latest ITtechnology so that less resource is tied in stock. Finally, the company shouldimprove its online shopping services by simplifying customers’ online shoppingprocess and improving photos and videos presentation as the popularity ofonline shopping increases dramatically each year, and it is a good way to buildbrand image to enhance customer loyalty. As a result, the company is morelikely to increase sales and defeat its competitors. However, Mothercare plcmay still face some challenges in the future. For example, it need to thinkabout how to decrease its expenses to combat the encroachment of thesupermarkets and online businesses which often have lower costs and prices.