Solvency Ratios:
These ratios indicate the long term solvency of the company, i.e., if the company will be able to honor its long term obligation. Furthermore, it also helps in understanding the capital structure of the company. Below discussed are the solvency ratios of Debenhams Inc:
i) Debt to Equity: Debt/ Equity
(Debenhams, 2013)
ii) Interest Coverage Ratio: Operating Earnings/ Interest Expense
iii) Debt to Capital Employed Ratio: Debt/ Capital Employed (Mckeith, Collins, 2013)
*Debt= Total Debt
*Capital Employed: Total Assets- Current Liabilities
Analysis:
The above analysis of the company using Solvency Ratios indicates that, over a year, the long term financial position of Debenhams Plc has improved. While the debt equity ratio remained almost constant from 2011 to 2012, but decreased to 0.32 during 2013. Interestingly, where the company’s debt equity ratio was declining, the interest coverage ratio of the company was increasing, which again was a positive indicator regarding the financial stability of the company.
Even when we used an advanced indicator of the debt position of the company, i.e. debt to capital employed ratio, the results were again optimistic here. While the ratio increased from 0.49 to 0.51 during 2011-2012, but the ratio decreased significantly to 0.46 during 2013, signifying that the company is indeed solvent and is doing well over the years. Important to note that Debt to Capital Employed ratio gives a more complete picture of the group’s debt situation than just interest bearing debt.
Valuation Ratios:
Also known as Fundamental Ratios, these ratios are used to calculate the fair value of the company. Below discussed is the trend in valuation ratio of Debenhams Plc.
i) Earnings per Share Ratio:
ii) Price/Earnings Ratio:
iii) Dividend Yield:
iv) Dividend Cover:
Analysis: Valuation Ratios
The above discussed valuation ratios are one of the most popular valuation ratios used by the analyst to comment on the valuation of the company. Out of all the valuation ratios, PE ratio is one of the most simple and powerful resource to find the fair value of the company. For Debenhams Plc, the PE ratio has been on the up-down trend. By the end of 2013, the PE ratio stood at 7.6 which although was lucrative but when compared with industrial average of 87, was extremely low.
Other fundamental criterion for valuation of the company i.e. Dividend Yield was also not in favor of the company. Over the years, the dividend yield of a company has consistently declined from 5.5% to 3.2%. This means that, over the years, the company has gone low on dividend and the shareholders are receiving low cash payouts in terms of dividend payments.(Alexander, et all, 2011)
Finally, for the dividend cover, this multiple shows many times the company could have dividends over the profits. For Instance, if the dividend cover is 2, it indicates that the company’s profit attributable to shareholders was double the amount of the dividend paid out. As for Debenhams, the dividend cover during 2012, decreased from 3.03 to 2.97 and finally improved to 3.0 during 2013. This indicates that although the dividend of the company has gone low, but the company has improved ability to maintain the dividend even if the profit drops.
References:
McKeith, J. and B. Collins (2013). Financial Accounting and Reporting. McGraw-Hill.
Alexander, D., A. Britton, and A. Jorissen (2011). International Financial Reporting and Analysis. Thomson, Cengage Learning.
Debenhams Plc (2014) Debenhams Plc, Available at: http://www.debenhamsplc.com(Accessed: 28 March 2014).
