Dissertation: Analysis of Financial Statements

Introduction

This chapter is about the analysis of the financial statements of two companies.  As a first step, internal analysis of the financial statement has been done of both the companies, in which the researcher has calculated the key liquidity ratios from the financial statements of both the companies and tried to find the trend over the past four years from 2005 till 2008. Then the comparative analysis of both companies has been done by comparing ratios of both the companies with each other in order to find out, which company is performing well from the cash flow point of view and the methods applies to speed up cash flows. It has also tried to find some trends present in the data over the years. At the end, the overall conclusions of the analysis and recommendations are described.

5.1 Trends in Statements of Cash Flows

The cash flows and income statements of the two companies are analysed here to evaluate the trend in the inflow and outflow of cash. The analysis of both Debenhams and Marks and Spencer based on the past four years is as follows.

5.1.1 Debenhams

The operating cash flows of Debenhams were increasing from YoY basis till 2007 as shown in figure 1. There was an increase of 347% from the year 2005 to 2006, but in 2007, there was increase of only 19%. The situation further deteriorated in the year 2008 when there were negative cash flows of 16% from the last year’s figure because of the economic recession.

There were a lot of cash outflows year after year on account of investing activities because the firm heavily pursued the growth options. There was huge cash consumption in the year 2008 in terms of financing activities, because of the increasing cost of capital. The net cash flows were fluctuating from one year to the next. In the year 2008, company end up with the negative net cash flows. It is not a favourable signal because cost of capital has risen tremendously and it was the better strategy for the company to rely more on the retained earnings for further investment rather than borrowing from banks. If this negative trend in the net cash flow persists, company has to borrow cash from the financial institutions to fulfil its day to day needs in the coming years. As a measure to curb cash outflow, company has also delayed payments to it suppliers for around 50 days which is a good measure. However, it has to be reduced its operating cycle which is around 67 days and increase the inventory turnover through the special discount offers on the out of fashion items so that speed of cash is not hindered by the huge sock of unsold and unproductive inventory.

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