According to results of Profit Margin found in the table of ratios, pricing strategy of Dixons is quite successful, even if ratios are small. Small ratios which tend to decrease can be explained by their dependence on Dixons external environmental factors like heavy competition and general change in industry and market conditions. Asset Turnover ratio is useful to determine the amount of sales that are generated from each pound of assets. Companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover. For companies in the retail industry, like Dixons in our case, a high turnover ratio can be expected – mainly because of competitive pricing.
Acid Ratio, which is calculated as Current Assets/ Current Liabilities, indicates if a firm has enough short-term assets (without selling inventory) to cover its immediate liabilities. Therefore, looking at the ratios, it seems like the company has just enough liquid assets to cover an unexpected drawdown of liabilities. However, ratio is a bit low in 2003. Working Capital ratio is designed to show how much working capital is required to support turnover, and provides an indication of overall working capital needs. The formula is
Stocks + Trade Debtors –
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P/E ratio is one of the most widely used ratios, it compares the current price with earnings to see if a stock is over or under valued. On average P/E ratio should be 20-25, and in 2001 this ratio shows that Dixons was quite successful. However, the current P/E ratio is just 12.3, thus the company should not expect much in future. But it does not necessarily shows that a stock is undervalued, it can also indicate a slow growth or financial trouble Debt-Equity ration= Total Liabilities/Shareholder’s Equity indicates what proportion of equity and debt that the company is using to finance its assets. Dixons ratios are quite reasonable and the distribution of share capital and debt is well structured.
Shareholder Value Analysis Shareholder Value Analysis (SVA) demonstrates how decisions affect the net present value of cash to shareholders. The analysis measures a company’s ability to earn more than its total cost of capital. This tool is used at two levels within a company: the operating business unit and the corporation as a whole. Within business units, SVA measures the value the unit has created by analyzing cash flows over time. At the corporate level, SVA provides a framework to assess options for increasing value to shareholders: the framework measures tradeoffs among reinvesting in existing businesses, investing in new businesses, and returning cash to stockholders.
Rappaport’s value drivers that are considered to determine the value of the company: Sales growth – 15.79% based on revised pricing strategy. Seems to be appropriate according to the increasing number of shops and products in Dixons Group. Operating profit margin – 6.16 % seems credible due to Dixon’s clear cut pricing strategy. Working Capital investment – 23.22 % is reasonable considering the amount of total capital invested each year into the group. Fixed Capital investment (FCI) 6.79 %additional shareholder value can be created if more capital is invested in the company. For these calculations we have assumed that the Incremental FCI rate of year 2000 is not representative and can be removed from the formula. In 2000 Dixons has made significantly larger investments comparing to other years.
WACC- 6.00% An expression of the cost of capital is used to see if certain intended investments or strategies or projects or purchases are worthwhile to undertake. WACC is a minimum return that is needed on an investment within a firm that will be needed to satisfy the lenders and will leave just enough to give shareholders their return. Otherwise shareholders will quickly recognise that 6% is available elsewhere for that level of risk. Dixons works with a WACC of 6%, this means that only (and all) investments should be made that give a return higher than the WACC of 6%. The anwer is based on the assumption that return on the market is calculated on the basis of 15 years FTSE All Share Index, and the risk free rate is based on 3 Months UK Treasury Bills rate.