Introduction to Accounting 2 - CASH FLOW Analysis

∞JYOTSNA KANJHAN 081424597∞PERSCIS BENJAMIN 081411195∞NEHA VYAS 081469990∞LEKSHMI SANKAR 081413557∞IMAAD ALI KHAN 081419032∞HONEY GANGLANI 081440405∞HITEN UMRANIA 081438413∞BRINDA PATEL 081411380∞BHUMI SAGAR 081419087

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Aim and Coverage

AIM of the presentation is to :

� Analyze the annual report of Debenhams PLC with special

reference to its cash flow statement.

� Conclude on its financial strengths and the ability to sustain

in uncertain market conditions.

COVERAGE :

� Finance Director’s review and his critical evaluation on the

operating and financial conditions.

� Analysis of the Income Statement and Balance Sheet.

� Critical analysis of the Cash Flow Statement.

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� Debenhams Plc is one of the

United Kingdom's longest

continuously operating

clothing and goods retailers.

� The company owns and

operates nearly 100

department stores, primarily in

England.

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The year in Brief

� Strong performance from the Designers at Debenhams and

changes to the Women’s wear ranges which has led to increase in

sales.

� Seven new department stores have been launched; Ten new

international franchise stores opened.

� A flagship store at Westfield London, opened on 30th October

2008.

� With such developments, there have been market share gains

in all major clothing categories.

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The year in brief…Financial Outlook

� From the Financial point of view, the Net Cash generated from

operating activities has been £191.4m, a reduction of 16% as

compared to last year.

� Improvement was recorded on the Net Debt of £22.5m over the

prior year.

� No change in the Gross Profit Ratio is seen, but the Net Profit

Ratio has decreased by 1% because of increase in administration

expenses.

� An additional 0.5p per share was paid as dividend together with

the interim dividend of 2.5p.

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Cash Flow Analysis

� Analysis of Cash Flows from Operating Activities:

� Taxation

� Depreciation

� Interest Income

� Interest Expense

� Working Capital

� Trade Receivables

� Trade Payables

� Analysis of Cash Flows from Investing Activities:

� Purchase and Sale of Property, Plant, Equipment and other

intangible assets.

� Analysis of Cash Flows from Financing Activities:

� Long Term Credit Facilities

� Payment of Dividends 6

Analysis of Cash Flows from Operating Activities

Taxation

� Findings - Profits before taxes were low [£6.3m lower than last

year]

� Taxation has reduced from £79m to £77.1m, there is a change of

£1.9m

� Analysis - This is because there was a change in the tax rate in

the UK corporation tax system from 29.2% - 28%.

Conclusion

� If the tax rate had not reduced, the company would’ve ended up

paying more tax as compared to what they’ve paid this year,

resulting in more outflows of cash.

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Analysis of Cash Flows from Operating Activities

Depreciation

� Findings – depreciation has reduced by 15.8%.

� Freehold property and long leasehold has not increased, and

therefore our depreciation was calculated as last year.

� But for short leasehold, there was an addition of £16m, but a

disposal of only £7.8m.

� Depreciation has reduced due to disposal of fixed assets, mainly

freehold property.

Conclusion

� This doesn’t show a rundown in the business, because there is

also an increase in other non-current assets.

� With the disposal of fixed assets, they have also raised more cash,

since there has been a profit on the disposal of fixed assets

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Analysis of Cash Flows from Operating Activities

Interest Income

� Cash from interest received – £4.2 to £4.8, due to increase in the

interest rate on bank deposits

Interest Expense

� Our interest expense has increased by £4.2m as our bank loan

and overdraft have increased from £104.8m to £144.5m

� Bank overdraft has increased this year because Debenhams has

availed more revolving credit facilities.

� Conclusion – Debenhams has changed its gearing strategy, as

we have analyzed its past 2 years reports, we found that in the

year 2006, it depended more on long term liabilities and less on

equity. In the year 2007, it shifted its focus from long-term liability

to more equity, and in 2008[that is the current year of analysis],

we’ve seen that it’s again shifted its focus from equity and is

focusing more on borrowings such as bank credit facilities. 9

Analysis of Cash Flows from Operating Activities

WORKING CAPTIAL

� There was a decrease in inventory, trade and other receivables,

and trade and other payables

� Inventory has reduced since there was a reduction in purchase of

inventory in 2008 because of left over inventory from last year

� Also, sales have increased this year due to increased demand and

market share, plus opening of new stores.

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CASH GENERATED FROM OPERATING ACTIVITIES HAS

REDUCED IN COMPARISON TO THE PREVIOUS YEAR AND

HENCE THERE IS LESS INFLOW OF CASH.

Analysis of Cash Flows from Investing Activities

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PURCHASE OF PLANT AND EQUIPMENT

� Investment in Property, Plant and Equipment for the year has

increased by £40m.

� This shows that Debenhams has invested a great deal in

equipment to achieve higher operational efficiency and this will

help increase future cash flows.

� Disposal and write-off of assets is £49.2m which is £2.5m times

lesser than the purchase.

Conclusion:

� This means that they are efficient in balancing their non-current

assets.

� There was a 30% increase in investment this year.

Analysis of Cash Flows from Financing Activities

Repayment of Term Loan Facility

� Debenhams enjoys a term loan and a revolving credit facility

(£1,050.00m).

� This term loan facility(effective from the year 2006) is repayable in

installments, the loan will be repaid fully by 2011. So far, the loan

has been repaid up to only £200m, £100m being paid in the year

2007 and £100m being paid in 2008.

Conclusion:

� Debenhams still has an unpaid term loan of £805m, which is

supposed to be paid in the next 3years, the chances of which are

highly unlikely.

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RATIO ANALYSIS FOR DEBENHAMS PLC.

2008 2007 Variance

Profit & Loss Account

Sales 1,839.20 1,774.40 64.80

Gross Profit 267.60 266.00 1.60

Operating Profit 176.10 179.80 (3.70)

Current Asset 348.60 393.60 (45.00)

Current Liability (645.30) (609.40) (35.90)

Quick Asset 348.60 393.60 (45.00)

Quick Liability (645.30) (609.40) (35.90)

Euity / Shareholder funds 125.30 163.00 (37.70)

B/s Total Asset 348.60 393.60 (45.00)

B/s Net Asset 125.30 163.00 (37.70)

Gross Profit Ratio 14.55% 14.99% 0%

Net Profit Ratio 9.57% 10.13% -1%

Current Ratio (0.54) (0.65) 0

Quick Ratio (0.54) (0.65) 0 13

Ratio Analysis for Debenhams PLC.

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Conclusion on Cash Flow of Debenhams

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-200 -100 0 100 200 300

1. Net Cash & Cash

Equivalents

2. In Financing Activities

3. In Investing Activities

4. From Operating Activities

2007 79.3 -51.9 -96.5 227.4

2008 -2.9 -148 -125.6 191.4

Chart Title

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Final Conclusion

� Even though the Chairman’s Report states that “Gross margin was

maintained at the same level as last year”, which is shown to be

favorable is actually not.

� The Net Profit Margin has taken a negative form.

� Even though the Net Debt position has improved by £22.5m, they

still have an outstanding term loan repayment of £805m which is

supposed to be repaid by the next 3years which is very unlikely

looking at the current market and macroeconomic conditions.

� Market Share is shown to have increased by 0.3%(almost

negligible) but for a well established retailer like Debenhams, it has

not stood to its own potential.

� Potential share holders should not be lured in to the attractive trap

of high dividends and plans of deleveraging the balance sheet as

the company has a high net debt, decreasing profit margins and

negative net cash and cash equivalents. 20