Technological products and services and a multinational electrical company

Introduction:

Dixon Carphone Plc. is a retailer of technological products and services and a multinational electrical company. It is located in London, operating with 829 stores all over the world. Dixon offers a large variety of products and services on digital platforms and also builds a good relation with customers and also increases their values. They keep customers at the very first place (Diaw and Asare, 2018). Company is engaged in learning and growing and celebrating together as a part of their business. The Group is able to achieve an EBIT margin of 4.0% and also generate a cash flow of more than £1 billion over 201920 to 202324. The active credit customers of the companyover 1.4m, results in 8% growth on crest sales (Dixons – Annual Report, 2021). It has an online adoption rate of 10% and credit sales increased to 28% as compared to last year.

The strengths of the company are that it has a modern online digital channel to provide services through an omnichannel. It has a flexible infrastructure to sell their products through any channel which is convenient for the customers. They have strong relationships with customers and suppliers to provide products at a very wide range and at very low prices. The present colleagues and staff of the company help the customers to choose and enjoy the right products for them. During the pandemic they faced a lot of challenges while working at their workplace and required significant home and working adjustments (Jauzaa and Hirawati, 2021). At the time of the pandemic, many stores were shut as it was made mandatory by the government which resulted in huge uncertainty in their share price. Dixons faces a challenge for falling profits in the current year due to contraction in the UK electrical markets and higher minimum wage requirements.   

Evaluation of financial statements of the company:

Dixons Carphone Plc. is one of the leading telecommunications and electrical companies of the UK. We will evaluate the financial statements and other financial information of the company in order to review the performance of the company over the past two years using the financial ratios. We have calculated some of the ratios that are related to the income statement and balance sheet of the company. The ratios that are being analysed are profitability ratio, solvency ratio, efficiency ratios, liquidity ratio and market value ratios. All figures have been taken from the annual report pasted at Appendix 1 (Dixons – Annual Report, 2021)

Profitability ratios: These ratios show the results of the companys capability to have control on their expenses and make a proportionate number of profits from their revenues. From the above analysis of the ratio. We see that in the last two years the profitability of the company has increased. The net profit margin and gross profit margin have been increased in the year from 2020 to 2021. From the above table we can evaluate that the revenues have increased from the last year, but the company is not able to have control on their expenses. The revenue has increased to £10,344m from £ 10,170m. Net profit margin has also shown a growth as the percentage of sales in the year 2021. This means with the increase in sales the indirect expenses such as taxation costs have also increased and we cannot ignore this expense (Gunanta, 2021).

Gross profit margin also shows an increasing rate in the year 2021 but it was negative in the year 2020, which indicates that the costs of goods sold is much higher than the revenue earned. In the current year the company is earning its revenue by keeping control on their costs of goods sold.

Efficiency Ratio: It is used to measure how efficient the company is to use their assets in a maximum possible way and earn incomes through it. The company has a total asset of £6,880 m in the year 2021 that has been decreased from the year 2020. This shows that the company is utilising their current assets to generate income. If the ratio is more than 1, it means that the companys turnover is much higher than the total assets.

The inventory turnover ratio is calculated by dividing turnover with average inventory. The inventory has been properly utilised to earn revenue in the current year and which has been increased to 9.63 times in the year 2021.

The assets turnover ratio identifies the capability of the company to use their overall assets to become profitable. And from the above analysis we can see that the company has utilised their inventories and other assets and increased their revenues in the current year.

Liquidity ratios: Companys liquidity can be analysed by using this key financial ratio. It is important to identify how fast a company can generate cash to meet their short term obligations. It shows the relationship between the current assets and current liabilities, to check if the current assets of the company is able to cover all the current liabilities (Lalithchandra, 2021).

The ideal current ratio is 2:1. In both the years, the current ratio is less than 1, which indicates that the current liabilities is more than its assets and they are not capable of meeting their shortterm liabilities.

But we see that the quick ratio is less than the current ratio, this means that the company is totally dependent on their inventories to produce income. Because quick assets do not include inventory as it takes the assets that are more liquidable in nature.  We see that the quick ratio is also less than one in both the years, i.e., 0.3 times in the year 2021. The quick assets of the company are unable to generate much cash as needed to meet its liabilities.

Solvency Ratio: This ratio is used to measure the ability of the company to cover its longterm obligations. The lenders of the company analyse the repayment capacity of the company each year in order to see that the company has not defaulted in repaying their liabilities. As the company has to pay monthly interest payments to the lenders whether they are having loss or profits. At the time of losses, the company faces a big trouble as it may become insolvent. Therefore, the company must have sufficient free cash flow to pay off their obligations (Baraja and Yosya, 2019).

Debt equity ratio is the comparison between the debt and equity of the company. In the current year, the company is not having any debt but in the last year the company was burdened with debts. If the ratio is more than 1, that means the company is having more debts than equity and the company is financed by equity presently. In both the years, the equity is more in the company which is a good sign. The company with less debt is less risky and they have less chances of becoming insolvent.

Interest coverage ratio is used to determine how the company can easily pay off their dues to lenders or debt holders. It is calculated by dividing EBIT with finance cost of that period.

Market value ratios: These ratios evaluate the current market price of the company and determine their value. The investors use these ratios to assess whether the price is high or low as compared to the market. There are many types of market ratios such as earnings per share ratio, price earning ratio, book value per share and return on equity. The net income of the company is compared with no. of shares of the company to calculate earnings per share. These ratios indicate the profitability of the investors for each share they hold. The higher the EPS, the higher the value of its shares. As we saw from the above analysis the company is having negative EPS in the year 2020 because the net income was negative. But in the year 2021 the net income of the company has slightly increased which results in positive EPS, it means that the current price of the company will become profitable for the investors in the future.

Return on equity is calculated by dividing net income for shareholders with total equity share capital of the company. Equity share capital is the amount which the shareholders have invested in the business. And the net income represents the income remaining for the shareholders after deducting all the expenses from the revenues. ROE was negative in the previous year as the net income was negative. ROE helps the investors to determine their return on the investments. By the analysis of the company, ROE of the company is very low i.e., the return on the equity capital of the shareholders is not much higher (Ibrahim, 2019).  

Comparing Dixons performance with its competitors:

Every business faces competition throughout their lifecycle of running a business. Dixons is in such an industry where there is too much competition among other telecommunication companies. In London, UK, there are many other companies which give tough competition to Dixon and they also face the same challenges and opportunities as the Dixons has faced, they are Avnet Inc or Telephonica(O2) Plc.

Let us take one of the competitor companies of the Dixons and compare them with Telephonica(O2). Telephonica is popularly known as O2, is a telecommunication service provider in the UK. It is the largest mobile network operator. In the current annual report of the company, it is mentioned that the company is facing social and environmental challenges and for that they have to invest in very large amounts and engage them in both public and private sectors. Their main challenge is to be digitalised, as they want every person to be digitised. The second main challenge for the company is quick transformation and innovation in the markets. As the market is changing continuously, they also have to change themselves with the changing environment.

Telephonica is a company which has certain strengths and has competitive advantage in the market. Some of the strengths of Telephonica is their brand and their uniqueness in their products, cooperation of their colleagues, and their value of the brand. Telephonica has a market position and they also focus on the research and development team to innovate their products. The advertising of this company is one of the main strengths. Dixons and Telefonica both companies are having opportunities to develop their markets and to diversify into new products within the market. They are rapidly growing into the market and have acquired a position in the markets.

Let us compare the financial statements of Telefonica to Dixons and evaluate how both the companies are performing and how it is reflected in their financial statements. The company’s financial statements are taken as a base for analysing the financial performance of the company(Ozturk and Karabulut, 2020).  The financial ratios are calculated for the past two years. Let us take the balance sheet and profit loss of the competitors.

1. Net profit margin (2021) = Net profit/ Sales*100

                             = €10717/ €39277*100

                             = 27.28%

As the net profit margin of the company is much higher as compared to the Dixons net profit margin. Thus, indicates that the company’s revenue is much more as compared to its costs and taking all the direct and indirect costs. Telefonica has a good sign to be profitable in the future. But the Dixons are just growing their revenues in the current period. The company’s current market position is very profitable, and they can maintain these by keeping control over their markets. 

1. Gross Profit margin (2021) = Gross profit/sales*100

                                 = €21983/ €39277

                                 = 56%

The GP margin is quite very high in the case of this company. Hence it can give a tough competition to Dixons in managing their costs. Telefonica is capable of maintaining their cost of goods sold to the acceptable level and increasing their selling price per unit.

1. EPS= Net income/ No. of shares

          = €10717/ €7765

         = €1.38 per share

Earnings per share of every company indicates its current share price in the market. If we compare the EPS of both the companies then we can see that share price of the latter company is higher than the first company. Therefore, dixon is facing a severe competition with its competitors. 

1. Debt equity ratio= Debt / equity

                           = €35290/ €28684

                           = 1.23 times

Telefonica is overburdened with the debt capital in their capital structure as compared to equity. But in the Dixon, it is more financed with the equity capital which is a good sign as it involves less risk to be insolvent and on the other hand Telefonica has the chances to be insolvent if they discontinue to be profitable in the future. Debt is sometimes good as the companies dont have to share their part of ownership with the outsiders (Monga and Khandelwal, 2018).

Conclusion:

We can conclude that the investors may invest in the near future as the company is currently growing and capturing market share by introducing diversified products in the market. The Dixons have an internal strength that is more financed by the equity and it has less chances to become insolvent in the near future. The management of Dixons must put efforts in managing the costs of the company in order to become profitable. We would suggest the company to further review their financial statements on a regular basis to analyse how the company is performing and attract investors to invest in their companies. 

References:

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Dixons – Annual Report, 2021; Available at: https://www.currysplc.com/media/ayaja1np/dixonscarphoneannualreport202021.pdf

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Appendix 1: