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STUDENT NAME

ROLL NUMBER

BUSINESS COMPETITOR
ANALYSIS
Finance for Marketers

Contents
Competitor Business Analysis.................................................................................... 2

Critical Evaluation of the Financial Performance.........................................................4

Variance Evaluation.................................................................................................. 10

Break Even Analysis................................................................................................. 11

Appraisal of new outlet proposals.............................................................................12

References................................................................................................................ 15

Part 1- Competitor Business Analysis


The statement of cash flows for Threads R Us provides three categories of cash
flows through which the net cash flow will be determined for the company. Since
they have launched a more premium price point range of clothing, it can be said
that they have different source of finance. From the operating activities, their net
cash is GBP 5851000. The positive figure indicates that the cash inflows are higher
than the outflows. If the net cash flow for operating activities is positive, then it
would indicate the cash the companys core business has generated (Steyn, 2010).
This means that the the company can easily expand its business as they did while
launching a premium price point range of clothing. Through adequate cash flow
from operating activities, the Thread R Us can develop other products, pay
dividends, pay short term debt obligations, or even buy back stock. Therefore,
analysts view this section initially to find out if the company cores business is found
to be a cash generating engine. This would also benefit the company Threads R Us
to get more investors and shareholders since they have an improved cash flow from
operations. This is further illustrated below:
Cash flows from operating activities
Profit before taxation (after interest)

2489

Add /adjust: Finance costs


(interest)
Depreciation

92

Profit on disposal
of assets

493

4479

7553
Change
inventories
Change in
receivables
Change in
payables

in

-857

trade

-1051

trade

-667

Changes in income
payable
Change in Bank
OD
Cash generated from operations
Net cash from operating activities

tax

484
389
-1702
5851

The second category of the cash flow statement for Company Threads R Us is the
cash flow from the investing activities. This is the item of cash flow statement that
explores the total change in the position of companys cash that is due to the gains
and losses from the investments within the operating subsidiaries and financial
markets emulated by the changes that result from the spent amount on investment
within the capital assets like property, plant and equipment (McAllister, 2009). The
cash flow from investing activities for this particular company is illustrated below:

Cash flows from investing


activities
Purchase of property
Purchase
of
plant
and
equipment
Proceeds from sale of plant and equipment
Net cash used in investing
activities

-5731
-1137
225
-6643

From the above extract of the statement of cash flows, it can be said that the
company Threads R Us has utilized its cash in the investing activities as the net
cash is negative. They have purchase property, plant and equipment for their
business operations. This means that the company is spending the cash in order to
expand its business and this could mean that the company wants to generate more

cash for its expansion as the company Threads R Us did. They can pay off the
shareholders later and invest more in their investing activities (Kousenidis, 2010).
The third category of the statement of the cash flows in the cash flow from the
financing activities. This means that the investors and other prospective investors
can take a lot of interest in this particular section of the cash flow statement. This
would illustrate as to how much flow of the cash is attributable to the obtaining of
the funds in contrast to earning through the operations of the business and repaying
of the funds that is specifically interest and dividend payments. The cash flow from
financing activities for the company Threads R Us is illustrated below:
Cash

flows

from

financing

activities
Increase in long term loan
Proceeds from share issue
Paymentof interest
Net cash used in financing activities

530
200
-92
638

The above extract shows that the company Threads R Us has obtained enough cash
from the long term loan and the issuance of shares where the only cash outflow was
the interest payment. The net cash is a positive figure which entails that the more
cash is flowing in to the company than flowing out which would result in the
increase of the assets of the company Threads R Us (Farshadfar, 2010).

Critical Evaluation of the Financial Performance


In this part, the financial performance will be determined through various financial
ratios. The ratios with their explanations are as below:

Revenue

2014
1%

2013
n/a

growth
GPM
NPM
Net Margin
Inventory
T/O
Current
Ratio
Quick Ratio
Asset
Turnover
PAT / equity
(ROE)
ROCE
Debt Ratio

57.0%
22.1%
14.1%
2.23

61.0%
25.6%
19.5%
2.67

2.26

1.80

1.13
0.65

0.90
0.73

9.6%

14.7%

14.4%
4.3%

18.7%
2.9%

1. Revenue growth
The revenue growth for the company Threads R Us shows that with the expansion,
the company has increased its revenues by 1.2% which would further indicate that
the company can keep on increasing its revenues.
2. Return on equity (%)
From the above calculation, it can be said that the return on equity reduced from
2013 to 2014 which means that the net income on equity funds invested is lower
than the previous year. This would mean that since the company has already
invested more in the new premium store, the expenses might have increased due to
which it affected the net profit and that is why, the return on equity decreased but it
can be said that it did not decrease that much as the decrease was around 5%
3. Return on capital employed
After expansion, it can be said that the return on capital employed for Threads R Us
decreased from 18.6% to 14.4% which indicates that in 2013, the company made
0.186 GBP of profits from every GBP 1 invested in the capital employed and it was

quite lower in 2014 as it was 0.144 GBP. This shows that in 2014, the assets did not
effectively perform which considering the long term financing (Chadwick, 2011).
4. Gross Profit Margin
The gross profit margin for the company shows that it reduced from 61% to 57% in
2014 which means that since they expanded their business, the expenses increased
considerably due to which the gross profit margin decreased by 4%. However,
decrease in gross profit margin shows that the company cannot cover operating and
other interest plus tax expenses in an effective manner as they did in 2013 due to
which the net income was also higher.
5. Net Profit Margin
As mentioned earlier, the gross profit margin also decreased considerably due to
which the expenses cannot be convered in a way they were covered through gross
profits in 2013. Due to this particular reason the net profit margin also decreased
considerably which indicated that GBP 0.19 of the net profit was earned in 2013
from GBP 1 of sales while GBP 0.1407 of the net profit was earned from GBP 1of
sales.
6. Asset turnover (times)
In 2014, it can be said that the company did not use its assets effeciently as they
did in 2013 to generate sales as in 2014, each GBP 1 of assets generates GBP 0.65
of sales or revenues. However, it was GBP 0.73 in 2013. Therefore, the difference is
quite clear.
7. Current Ratio
The current ratio for the company increased in 2014 from 2013 i.e. 2.26 from 1.80
which indicates that the companys ability to pay off short term debt obligations
increased considerably. This signifies that in 2014, for GBP 1 of liabilities, the

current assets were GBP 2.26 which is quite higher than GBP 1.8 in 2013. Therefore,
with the expansion, the current ratio seems more favorable for the company
Threads R Us.
8. Quick Ratio
The quick ratio eradicates inventory which means that the ratio involves only the
quick assets that can be converted into cash to meet the companys short term
needs. The quick ratio for this particular company is 1.13 in 2014 and 0.90 in 2013
which indicates that even with the quick assets, the company Threads R Us has the
ability to meet short term debt obligations in 2014.
9. Inventory turnover
The inventory turnover for this company reduced in 2014 from 2013 i.e. from 2.67
to 2.23 which means that the ability to efficiently manage the merchandise was low
as compared to the year of 2013.
10. Debt ratio
The debt ratio entails the capital structure of the company as to the dependance of
the company on debt or equity funds. For this company, the debt ratio was 2.9% in
2013 and 4.3% in 2014. This means that the company has acquired more of the
debt funds in 2014. But still the company is more equity funded. This is more
significant and favorable for the company. Even after expansion, they have totally
relied on the equity funds and less on the debt funds (Dury, 2012).
11. Interest Coverage
The interest coverage ratio is utilized to make a determination as to how a company
can make payments of the interest expenses on the outstanding debt. The interest
coverage ratio decreased in 2014 which means that the companys debt burden has
increased to a certain extent.

12. Inventory turnover in days


The inventory turnover in days means that inventory is sold in these number of
days which indicates that the year 2013 is found to be favorable for the inventory
being sold in a lesser number of days.

13. Receivable turnover in days


The receivable turnover in days entail that the company collects cash from the
customers in a lesser number of days during 2013 while it takes more 20 days to
collect cash in 2014. From the above ratio analysis, it can be said that some
favorable and unfavorable outcomes have been visible enough for the company
Threads R Us following their business expansion. The current ratio has increased to
a certain extent. Apart from this, all of the ratios like return on equity, profit margin
and other key ratios have decreased somehow which entails that the company
experienced some unfavorable outcomes following this expansion (Hopwood, 2010).
If Fashion Craze Ltd follow the same strategy to open up premium store points, then
it would be quite clear that they do have to rely more on equity funds and
experience some unfavorable outcomes as the company Threads R Us faced.

Variance Evaluation
With the evaluation of the variances between actual results of 2014 and budgeted
results of 2015, it can be said that the sale price is favorable for the budget 2015
since it is 2% more than the actual results of 2014. If the cost of goods sold is to be
evaluated, it can be said that the budgeted costs for material and labour were
higher for the budgeted results than the actual results in 2014. The contribution

margin reveals as to how much revenue of a company will contribute to the fixed
expenses of the company and net income. In accordance with the variance
evaluation, the contribution margin per unit was higher for 2014 than the budget of
2015. The units sold were higher for 2015 budget due to which the revenue was
also favorable for the budget 2015 as compared to the actual results of 2014.
However, the total contribution margin was lower than the actual results of 2014.
The profit was also unfavorable if the results of the budget are to be compared with
the actual results. The costs of goods sold have increased considerably due to which
it affected the contribution margin and profits as well for the budgeted results. The
recommendation would be to look for an alternate supplier to reduce these costs.

Break Even Analysis


Break even is such a point where there is zero loss or profit. Within a break even
point, the business revenues are equal to the total costs and that the contribution
margin is equal to the total fixed costs. The break even can be determined below:
Selling price per unit = GBP 209
Variable cost per unit = GBP (69+74) = GBP 143
Fixed cost = GBP 20,000
Break even point in sales units = 20000/ (209-143)
Break even point in sales units = 303 units
Break even in dollars = 303 x 209 = GBP 63,333
The importance of this break even can be judged from the fact that it is simply a net
zero the total revenues equals total expenses. It indicates as to what volume of

sales is basically necessary to cover the costs. Some of the limitations of the break
even analysis includes that the variable costs fluctuate within a direct proportion to
volume, fixed costs are found to be costant through the range of volume, the unit
selling price is found to be constant throughout the range of volume, efficiency in
the resource usage would remain steady over the time period and that the
volumetric increase will be the only factors that would affect costs.

Appraisal of new outlet proposals


1. The payback period for the mall proposal is computed below:

Year
0
1
2
3
4
5

Cash Flow
-75000
15000
20000
50000
25000
15000

Net Cash Flow


-75000
-60000
-40000
10000
35000
50000

Payback Period = 2+40,000/50000 = 2.8 years


Therefore, the payback period is 2.8 years or near to 3 years
The net present value is computed as below:
Time

'00

DCF @ 7%

0
1
2
3

0
-75
15
20
50

-75
14.01
17.47
40.81

4
5

25
15
NPV

19.1
10.7
27.09

The advantages and disdvantages for both of the capital budgeting techniques are
listed as below:
Payback Period Advantages and Disadvantages
Advantages
1. It is quite simple to compute
2. It makes a provision of a good project ranking that would return money quite
early and this is for those companies that are facing liquidity issues/
Disadvantages
1. It would never take in to account the occurance of the cash flows that occur
after the payback period.
2. It does not take into account the time value of money
Discounted Cash flows Advantages and Disadvantages
Advantages

1. It can be applied for the business valuation as a whole.


2. It is easy to calculate.
3. It can be utilized by the shareholders as through the calculation of DCF, the
two companies can be compared.

Disadvantages
1. It is heavily dependent on the inputs being used for the purpsoe of valuation

2. It utilizes the input future cash flows that is difficult to predict.


In accordance with the two proposals, the recommendation will be to go with the
Mall proposal because the payback period is nearly 3 years that is higher than the
Broad Town proposal but the NPV is quite favorable for the Mall Proposal. Therefore,
among the two capital budgeting techniques, the most significant is the NPV and
that the payback period is 0.8 years higher than the other proposal but the NPV is
quite higher.

References
Chadwick, L., 2011. Comparing financial performance: Ratio analysis and retail
management. Retail and Distribution Management, 12(2), pp. 35-37.
Dury, J. C., 2012. A Study of Industry Financial Ratios. Management Decision, 19(1),
pp. 24-35.
Farshadfar, S., 2010. The relative ability of earnings and cash flow data in
forecasting future cash flows: Some Australian evidence. Pacific Accounting Review,
20(3), pp. 254-268.

Hopwood, W., 2010. Market Effects, Size Contingency and Financial Ratios. Review
of Accounting and Finance, 2(1), pp. 3-15.
Kousenidis, D. V., 2010. A free cash flow version of the cash flow statement: a note.
Managerial Finance, 32(8), pp. 645-653.
McAllister, P., 2009. The appraisal of data centres: deconstructing the cash flow.
Journal of Property Investment & Finance, 27(1), pp. 65-80.
Steyn, B. W., 2010. Revamping the cash flow statement. Meditari Accountancy
Research, 11(1), pp. 181-198.

Appendix
Ratios Calculation
Revenue growth (%) =

Revenue (yr 1) Revenue (yr0) x 100


Revenue (yr 0)

Revenue growth = 17678-17464/17464 x 100 = 1.22%


Return on equity (%) =

Profit after taxation x 100


Total equity

Return on equity in 2013 = 3411/23144x100 = 14.17%


Return on equity in 2014 = 2489/25833 x 100 = 9.6%
Return on capital employed = EBIT/total Assets current liabilities x100
Return on capital employed in 2013 = 4463/ (26731-2817) x 100 = 18.6%
Return on capital employed in 2014 = 3913/ (30156-3023) x 100 = 14.4%
Gross Profit Margin = Gross profit/ Sales x 100
Gross profit in 2013 = 10653/17464 x 100 = 61%
Gross profit in 2014 = 10076/17678 x 100 = 57%
Net Profit Margin = Net Profit / Sales x 100
Net profit margin in 2013 = 3411/17464 x 100 = 19.53%
Net profit margin in 2014 = 2489/17678 x 100 = 14.07%
Asset turnover (times) = Revenue/Total Assets current liabilities
Asset turnover in 2013 = 17464/26731-2817 = 0.73 times
Assets turnover in 2014 =17678/30156-3023 = 0.65 times
Interest coverage in 2013 = 4463/29 = 153
Interest Coverage in 2014 = 3913/92 = 42.5
Inventory turnover in days 2013 = 365/2.67 = 136 days

Inventory turnover in days 2014 = 365/2.23 = 163 days


Receivable turnover in days 2013 = 365 x 2373/17464 = 49.59 days
Receivable turnover in days 2014 = 365 x 3424/17678 = 70.7 days
Statement of Cash Flows for Thread R Us

Cash flows from operating activities


Profit before taxation (after interest)
Add /adjust: Finance costs (interest)
Depreciation
Profit on disposal of assets

Change in inventories
Change in trade receivables
Change in trade payables
Changes in income tax payable
Change in Bank OD
Cash generated from operations
Net cash from operating activities
Cash flows from investing activities
Purchase of property
Purchase of plant and equipment
Proceeds from sale of plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Increase in long term loan
Proceeds from share issue
Paymentof interest
Net cash used in financing activities
Add opeing balance
Net movement in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

Variance Table

2489
92
4479
493
7553
-857
-1051
-667
484
389
-1702
5851
-5731
-1137
225
-6643
530
200
-92
638
-154
154
0

Actual 2014

Sales price
Material cost
Labour cost
Contribution
Units
Total Sales
Total contribution

Everyda
y jeans

Casual
polo

50
12.5
18
19.5

40
10
12
18

489
24,450

833
33,32
0
14,99
4

9,536

Smart
trouser
s
60
18
20.5
21.5
204
12,240
4,386

Evenin
g shirt

205
58
75
73

263
14,46
5
3,682

1789
84475

4950

F
F

32598

898

20000
12598
0.15

0
898

Everyday
jeans
52
14
18
20

Casual
polo
42
12
12
18

Smart
trousers
60
20
20
20

Evening
shirt
55
23
24
8

Units
Total Sales

500
26,000

210
12,600

Total contribution

10,000

850
35,70
0
15,30
0

275
15,12
5
2,200

Sales price
Material cost
Labour cost
Contribution

Fixed costs
Profit / Loss
Margin %

4,200

Varianc
e

55
17
24
14

Fixed costs
Profit / Loss
Margin %
Budget 2015

Total

Total
209
69
74
66
1835
89425
31700
20000
11700
0.13

4
11
1
7
46

F
U
F
U