Ratio Analysis of Laura Ashley 1000 words basic 2.2 standard

 

 

 

 

Laura Ashley Ratios

 

 

 

 

 

A Ratio Analysis of:

Laura Ashley

 

 

 

 

Your Name

Your University

 

 

 

 

 

Introduction

Ratio Analysis is a common tool in financial and investment analysis.  It is a simple way of determining the financial strength of a company and through comparisons of key ratios its operating trends in recent years.  Particularly if a period such as the global financial and economic crisis of the past few years it is important to look at the ratio tools with care and in context with the operating environment of the company in question.  (Graham, Dood, 2009)

Ratios Employed in this project

The following is a list of the ratios employed in this project and the computation of each ratio.  The result and implications of each are discussed briefly.  A few of the measures ratios such as working capital are not true.  They are however valuable tools for the comparison of the operations and the financial position of a company over time.  These are actually available from a variety of sources, but for simplicity a single source, Investopedia, is used for all. (Loth, 2010)

The table on the following page contains data for the years 2006 through 2010 presented in the form of ratios used in analysis.  The data from which these ratios were computed is contained in appendices 1 and 2, Income statements and balance sheets respectively.  These are based on the annual reports for the periods in question somewhat restated to make the computation of ratios easier and somewhat clearer.  The presentation follows GAAP as opposed to IFRS (International Financial Reporting Standards) presentation conventions for purposes of clarity.

Ratios Employed

The Current Ratio is simply current assets divided by current liabilities.  It is a basic measurement of the liquidity of the firm.  This ratio has shown a decrease in liquidity over the period examined except for the marginal improvement in 2010.  It is worth noting that the ratio continued to erode even in 2008 when earnings were at the highest levels in the periods examined.  It should also be noted that a “high” current ratio is not necessarily a positive or a “low” ratio negative.  The comparison over time as presented above does however tend to illustrate a weakening financial position.

The quick ratio is similar to the current ratio except it reflects only the most liquid of the current assets, cash and accounts receivable.  The quick ratio also improved somewhat in 2010, but is still lower than over most of the period.  It is also worth noting that in spite of the profitability of 2008 the current and quick ratios both eroded.

Return on assets is a very basic measurement of corporate operations and future potential.  Return on assets, except in the year 2008 is 5.5% or lower.  This indicates that most of the time the firm is earning less than its cost of capital.  The largest single asset category on Laura Ashley’s balance sheet is inventory.  The second is Property, Plant and Equipment.  In 2010 it completed a major sale and leaseback of warehouse property for its distribution network.  This will probably be reflected in a sharp improvement, at least in fiscal 2011, as appears the company made a one-time profit of about £5 million, which was apparently accounted for as a decrease in operating costs.  An unconventional accounting approach for such a transaction.

Return on Equity fell in 2010 in spite of a decrease in equity.  Again, this ratio has been inconsistent over the five year period examined, and will probably rise for fiscal 2011 reflecting the one time profit on the sale and leaseback discussed above.  Except for the unexplained one time result in 2008, it has always been relatively low.

Gross Margins have always been around the 43% level with the exception of 2008. Operating margins have been considerably less consistent in spite of reductions in operating expenses in 2010.  Pre-tax margins rose as operating margins fell as a result of changes in the corporate tax situation.  The corporate tax rate has varied widely and inexplicably over the period examined.  It was at its lowest in 2008, the strongest profit year overall in the five year period under study, a rather odd situation.  This is repeated in the fist half of fiscal 2011 with its one off profit on the sale and leaseback.

Working capital, current assets less current liabilities, has been slipping over the five-year period covered, and showed only a modest recovery in 2010. Probably one of the reasons for the sale and leaseback transaction is to attempt to rebuild working capital and liquidity.  Total capital, equity plus long debt, has fallen 20.5% since 2007, its peak in the period under discussion. It too will probably recover somewhat in the fiscal year 2011.  Capital turnover, revenues divided by capital, has improved somewhat over the past few years, in part because of the reduction in the capital base of the company.  The dividend of the arithmetic calculation increases as the devisor decreases.

The inventory turnover, cost of sales divided by inventory, has slipped slightly in 2009 and increased somewhat in 2010.  This ratio does not show a positive progression, but the slippage is not serious and unsurprising considering the global economic situation and particularly the UK situation in 2008-9.  The accounts receivable turnover, 365 divided by the dividend of revenues divided by accounts receivable is the only ratio to actually show a positive progression over the period.  The methodology used in computing all of the above is clear in the excel sheets on which the tables in the appendix are based. (Loth, 2010)

Investment recommendation

Based on the financial ratios produced by the above computations there is no way that the entire sum available from the client for investment could responsibly be recommend for investment in Laura Ashley.  The instability of the ratios above are not indicative of a strong or rapidly growing company.  Laura Ashley’s financial position is not particularly strong nor is its record of sales growth or consistent performance impressive.  Moreover, the financial presentations and accounting lack transparency.

Ratio analysis is not a final answer to all investment questions.  It is simply a tool that the investment analyst can employ to understand the financial and operating situation of a company.  In this case the tool has a negative implication for investment in the subject company.  This does not rule out the possibility of investment, but does raise a warning flag and counter indications would have to be convincing to override the spotty financial and earnings history of the firm.

 

 

 

 

 

 

 

 

 

References

 

Graham, B. Dood, D. (2009) “SecurityAnalysis, 6th Ed.”  New York City, McGraw Hill.

Laura Ashley Annual Reports (2006-2010) Company Results.  Recovered 10/01/2011 from: http://www.lauraashley.com/investor-relations/company-results/page/companyresult/

Loth, R. (2010) “Financial Ratio Tutorial.” Investopedia. Recovered 10/01/2010 from: http://www.investopedia.com/university/ratios/

 

 

 

 

 

 

 

Appendices

Appendix 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix 2