Mothercare plc is aspecialist retailer of products for mothers to be, babies, and children up tothe age of eight.
It offers products ranging from clothing, furniture forchildren, bedding and toys.Cash flow from investing activities was negative throughthe years with a peak in investment in 2017. This shows the firm had a decreasingtrend in its investing activities until 2016 where it saw a huge spike of £26.
3mfrom the previous year. The general trend for cash flow from financing activitiesis a decline in paying dividends and/or debt loans. In 2012, the firm startedto obtain more financing than it was paying out in dividends or loans.
Profitability ratios. Return on Capital Employed is aprofitability ratio that has been on a general decline through the years withonly a small pickup in 2016. This shows the total capital deployed was noteffective in generating operating profit. This suggests the company has failedto minimise cost in expenses. The Gross Margin has also had a general decrease butwith an upwards trend in 2015, reflecting trading performance after the new CEOwas appointed. This suggests that a harder negotiating practice was implementedas can be seen in the Cost of Sales being on a downwards trend in 2015 as well,in comparison to its upwards trend from 2010 to 2014. The Operating Margin actedin a similar fashion to the Gross Margin, suggesting that overhead costmanagement improved at the same time as its negotiation strategy to reduce itscost prices in 2013 after the major dip in 2012. It can be inferred that costmanagement in 2012 was extremely inefficient as compared to its competitors,Mothercare did comparatively much worse.
This is shown when the figures for itscompetitors were roughly in the 8% region while Mothercare dropped to approximately-12% in the third quarter of 2012. However, Mothercare possibly picked new managementor changed its cost saving policies to reduce its overhead costs. From 2013onwards, Mothercare had increasing Operating Margins whereas its competitors’figures declined.Efficiency ratios.
Average settlement period for tradereceivables has almost doubled from 2009 to 2017. This shows an inefficiency incollecting money from credit customers as money which is received later cannot currentlybe used for investment or other purposes in the company. The payables periodhas also increased which shows that the company has been delaying payments toits suppliers by almost 15 days from 2009 to 2017. The firm uses free financeprovided by the suppliers but risk losing goodwill of suppliers. Accordingly,the firm’s cash conversion cycle has also been increasing over the years, inline with the rise in the number of days customers take to pay. This is notideal as the company does not receive cash as fast and there is an opportunitycost between efficiency and risk of customers’ goodwill. The firm’s Asset Turnoverhas remained relatively constant throughout the years but it cannot be said ifthe figure is low or high as there is no comparison to the industry trend.Credit Risk Analysis.
Current Ratio has decreased from 2009to 2017, with the figures maintaining a 1-2 ratio range. The Acid Test Ratiohas also maintained stable figures in the 0.5 range over the years. These trendssuggest that the firm has enough liquidity to expand or pay back itsliabilities, but may not be enough to cover operations. It has to be noted thatfor true comparison, industry figures should be compared against the firm’s.Gearing Ratios. The Debt-to-Equity ratio requires the industrybenchmarks to provide a picture of how high debt has a role in the capitalstructure of the company. In 2013 and 2014, the firm had the highest figures, above1 and 2, showing the firm has very high levels of debt relative to equity.
Itdoes not suggest that the firm was not economically sustainable because as seenin 2017, the ratio went down to 0.17. This is likely due to a one-timeexpansion of the firm which led it to borrow. Since debt is a cheaper source offinancing and has higher tax benefits, it could be read that Mothercare is agrowing firm instead of going bankrupt.
The Interest Coverage ratio had droppedfrom 106.002 to 11.12 over the 8 years. The company had possibly taken out alarge sum of debt in 2013 and 2014 and a decrease in the interest coverage showsthe firm is still able to pay back interest with operating profit, but withless leftovers. However from 2012 to 2015, the firm could have faced potential riskof bankruptcy due to not being able to cover interest payable, as shown in 2012when interest coverage had a negative figure of -79.15.
The management clearlyidentified the problem as the next year, the figure rose to -4.5.Investment ratios. The dividend payout ratio had decreasedfrom 2.73% in 2009 to 0.
41% in 2012. This shows the firm has decreased theamount of profit distributed as dividends to shareholders. This could be a caseof putting its money into investments or the company earning less after taxprofits. The Earnings per Share figures had declined even reaching negativevalues in 2012 to 2015. An ordinary shareg=holder would only receive 0.042 ofthe company’s earnings.
This indicates the share performance for this companyis not doing well as shareholders do not get as much return for their investmentin Mothercare as compared to its competitors such as Debenhams. This can alsobe seen in the Return on Equity comparison chart where the gap betweenMothercare had reached approximately 125 difference. To the shareholders, theyare getting less profit from Mothercare from each dollar of their equityinvested. Although this might have been the case from 2012 to 2015, Mothercare hasbecome more investor friendly with 9.63% in 2017 as its Return on Equitymatches its competitor(M&S), with the exception of Debenhams.Overall, Mothercare 1.
Roadto recovery2. Futureproblems