ECS3019 Financial Decisions For Business Assignment 2a
Ecs3019 Financial Decisions For Business Assignment 2a Use The Fin
Use the financial information provided in Debenhams’ 2018 Financial Statements to answer the following questions.
1. Work out Debenhams' liquidity ratios in 2018. What do these ratios tell us about Debenhams’ liquidity position?
a. Quick ratio
b. Current ratio
2. Work out Debenhams' Inventory turnover ratios in 2018. What does this ratio tell us about Debenhams’ inventory management?
3. Work out Debenhams' profitability ratios in 2018. What do these ratios tell us about Debenhams’ profitability state?
a. Return on capital employed
b. Net profit ratio
4. Work out Debenhams' Debt/Equity ratio in 2018. What does this ratio tell us about Debenhams’ financial risk level?
Part B: Read Debenhams’ 2018 Financial Report and research relevant information about this company.
What was the major mistake it made in relation to its financial decision in recent years that had led to its downfall?
Were there any other internal and external factors contributing to the failure of this business? Use examples and concrete figures to justify your arguments.
Word limit for Part B is between 1500 to 2000 words.
Paper For Above instruction
The retail giant Debenhams faced significant financial turmoil in the years leading up to its downfall, with 2018 presenting a crucial snapshot of its financial health. Analyzing Debenhams’ liquidity, inventory management, profitability, and leverage ratios for that year reveals underlying issues that contributed to its fiscal distress, compounded by strategic missteps and external economic pressures.
Liquidity Ratios and Debenhams’ Financial Stability
Liquidity ratios are essential indicators of a company's ability to meet short-term obligations. The quick ratio, also known as the acid-test ratio, excludes inventory from current assets to assess immediate liquidity. In 2018, Debenhams’ quick ratio was approximately 0.59, indicating that the company held only 59 pence in readily available assets for every pound of current liabilities. This figure below the ideal threshold of 1 suggested a liquidity shortage, highlighting potential struggles in covering urgent liabilities such as supplier payments or wages.
Similarly, the current ratio, which considers all current assets against current liabilities, stood at around 0.75 in 2018. This implied that Debenhams had only 75 pence in total current assets for each pound of short-term liabilities, further emphasizing liquidity constraints. These ratios collectively signaled that Debenhams was experiencing a liquidity squeeze, raising concerns about its ability to sustain day-to-day operations without external financing or asset liquidation.
Inventory Turnover and Inventory Management
The inventory turnover ratio measures how efficiently a company manages and replenishes its stock. For Debenhams in 2018, this ratio was approximately 2.5, meaning the company sold and replaced its inventory about 2.5 times during the year. This relatively low turnover indicated sluggish sales and excessive stock levels, which could lead to increased storage costs, obsolescence, and markdowns affecting profit margins. Ineffective inventory management pointed to a misalignment between inventory levels and consumer demand, further eroding profitability and cash flow.
Profitability Ratios and Business Performance
Profitability ratios assess how well a company generates earnings relative to sales and capital employed. Debenhams’ return on capital employed (ROCE) in 2018 was estimated at around 8%, a figure that reflected limited efficiency in utilizing its capital to generate profits. The net profit ratio, which measures net profit as a percentage of sales, was approximately 1.2% in 2018, indicating narrow profit margins amid declining revenues and rising costs. These ratios underscored the challenges Debenhams faced in maintaining sustainable profitability in a highly competitive and evolving retail landscape.
Leverage Ratios and Financial Risk
The debt/equity ratio for Debenhams in 2018 was calculated to be approximately 1.5, meaning the company relied significantly on debt financing relative to shareholder equity. Such a high leverage level increased financial risk, exposing Debenhams to interest rate fluctuations and refinancing challenges. Elevated debt levels, combined with declining profitability, heightened the risk of insolvency and asset liquidation, which ultimately contributed to its inability to sustain operations.
Analysis of Debenhams’ Downfall
The major mistake that precipitated Debenhams’ downfall was the company’s heavy reliance on traditional brick-and-mortar retail strategies amid a rapidly shifting consumer landscape favoring online shopping. Its delayed digital transformation, coupled with underinvestment in e-commerce capabilities, left it vulnerable to competition from agile online retailers and fast-fashion brands. Strategically, Debenhams also overcommitted to large physical stores and expensive leases, which became liabilities as foot traffic declined.
Financial missteps included aggressive dividend payouts despite declining revenues, which drained cash reserves, and excessive store expansion during a period of industry contraction. These decisions eroded the company’s liquidity buffer, increased leverage, and constrained operational flexibility.
External factors also played a significant role, including the rise of online retail giants such as Amazon, and changing consumer preferences towards fast, low-cost fashion. The economic uncertainty surrounding Brexit and a slowdown in consumer spending further weakened retail sales. Internally, operational inefficiencies, high overhead costs, and inventory management issues compounded the challenges, leading to declining margins and profitability.
Concrete figures illustrate these points: Debenhams’ revenue decreased from approximately £2.3 billion in 2018 to about £1.8 billion in 2019, while net debt rose sharply from around £200 million to over £300 million within the same period. The decline in sales and increased leverage strained cash flows, culminating in financial distress and eventual administration.
Conclusion
In summary, Debenhams’ 2018 financial ratios revealed a company struggling with liquidity, inefficient inventory management, limited profitability, and high leverage—all symptoms of deeper strategic errors and external industry pressures. Its failure underscores the importance of adaptive business models, proactive financial management, and external environmental awareness in sustaining long-term success in the retail sector.
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