Ted Baker is a very popular lifestyle brand in the UK. The company is a one the fast-growing brands. But from the year 2015 to the end of 2017 Ted Baker has shown a consistent profitability. The gross profit margin of the company shows that it has almost 60% gross profit margin and 9% net profit margin. In last 8 years, the company’s profitability indices fluctuates a little (Jones, 2017, p.205). Though the company has sound profitable business operations it has been facing cash flow problem in recent years.
Company Background
Ted Baker was launched in 1988 through a store which has become a place to buy contemporary clothes for men. The company offers menswear, accessories, women’s wear, footwear, fragrance, eyewear, jewelry, and watches. From the beginning, the company has put its attention to focus and to detail for bringing exceptional personality in its collection and brand (Jones and Hayes, 2016, p.268). The company’s cash conversion cycle is increasing in every year. In future, it may lead to a greater problem. The company is losing its profit consistently.
Figure: Yearly operating profit of Ted Baker
(Source: Jones and Hayes, 2017)
The company’s cash conversion cycle is increasing in every year. In future it may lead to greater problem. The company is losing its profit consistently.
Literature Review
Ratio analysis is a very useful and popular technique to analyze the performance of a business organization. According to Britton and Waterston (2013, p.152). It analyzes performance in terms of profitability, efficiency, liquidity, and leverage. The ratio is mainly the arithmetic relationship between two variables. Industry ratio works as a benchmark. A firm also uses the ratio against its competitor’s ratios. The financial statement is the way through which a company presents its financial data and ratio summarizes the data and makes it useful for analysis. The trend analysis shows whether the firm is a better performer than its major competitor in the long run.
Bull (2008) states ratios are mainly four types. These are categorized under their use. The need of information of a group of stakeholders is diverse. The suppliers are interested in a short-term obligation of a firm; investors are interested in profitability, value, efficiency and financial risk. The creditors are interested in liquidity and leverage of the firm. There are mainly four types of ratios: Liquidity ratios, profitability ratios, efficiency ratios and gearing ratios.
Liquidity ratio
Liquidity ratio is used to measure the creditworthiness of the firm. Liquidity means how quick a firm can turn its assets into cash or cash equivalents. It evaluates the capability of repaying the debt obligations. The main liquidity ratios are a quick ratio, current ratio, interest coverage ratio. The current ratio measures the short-term debt repayment capacity. Quick ratio measures how much liquid money a company holds against its current obligations (Gibson, 2013, p.143)
Profitability ratio
Profitability ratios measure the ability to generate profit from turnovers. Profitability ratios show how much a company is able to generate profit from sales. It is expressed in percentage so that a firm can compare it with industry standard or competitors. Gowthorpe (2008) states profitability ratios comprise with gross profit margin, operating profit margin or net profit margin, return on asset, return on equity etc. Gross profit margin and operating profit margin measures how many dollars a company earns from its $100 dollar sales. Return on equity and asset measures how efficiently the firm uses its assets and equity to generate return or profit.
Gearing ratio
It is also called leverage ratio. Leverage is the ability of a firm to turn its debt into more revenues and profit. Higher leverage implies higher downside risk. It measures the financial risk of a firm. With gearing ratio, a firm measures how many assets of equity it holds against its debt. There are mainly two types of leverage ratios: debt to equity and debt to assets. Debt to equity ratio measures how much risk the firm. Debt to assets measures the proportion of debt in the capital structure (Bull, 2008, p.67).
Relative valuation and share price movement play a very critical role while measuring the performance of a company. The daily share price is the reflection of actions and achievement. Price is considered as a key to succeeding in stock market investment. Investors follow price movement and evaluate it against the fundamentals (Britton and Waterston, 2013, p.172). Though daily fluctuation is not a big concern movement of price for a large period of time tells about the performance of a firm. Just like the share price movement relative valuation ratios shows the market perception. Only share price makes no meaning. When an investor combines the trend analysis with the P/E ratio, Price to book value ratio, price to sales and cash flow ratio he gets more technical information about a company.
Methodology
The methodology of a research paper describes how the study is conducted. A research paper is mainly based on two philosophies: positivism and interpretivism. In positivism philosophy, a natural phenomenon is observed continuously to get a valid reasoning. Interpretivism approach is a passive way to get to a conclusion by argumentative judgment. A researcher can follow one of the three approaches: qualitative, quantitative and mixed approach. The qualitative approach is used when a researcher wants to go beyond the theoretical boundary. A quantitative approach is a rigid approach to conduct research, by using fixed variable and quantitative techniques. The mixed approach is the combination of both approaches. The mixed research approach is followed by descriptive statistics. This is a case study based research. Secondary data have been used for the analysis.
Analysis of Data and Findings
Profitability ratio: The profitability ratios of Ted Baker from 2014 to 2017 are given below in table and graphical chart.
Table 1: Profitability ratios of Ted Baker (2014-1017)
Ratios
2014-15
2015-16
2016-17
Gross profit margin
60.7%
59.9%
61%
Net Profit Margin
9.25%
9.70%
8.77%
Return on equity
28.38%
28.25%
24.31%
Return on Asset
16.55%
15.47%
12.18%
Figure 1: Profitability ratios of Ted Baker
The company earns 9.25% net profit margin in average from its sales. The company earns 27% and 14.4% in average return on equity and return on assets respectively. Profitability ratios show that Ted Baker is least profitable in 2017 comparing other two years.
Liquidity ratio: Yearly Liquidity ratios of Ted Baker are given here,
Table 2: Liquidity ratios of Ted Baker (2014-2017)
2014-15
2015-16
2016-17
Current Ratio
1.75:1
1.75:1
1.59:1
Quick Ratio
.37:1
.40:1
.41:1
(Appendices)
Figure 2: Liquidity ratios of Ted Baker
Liquidity ratio shows that the company holds $1.7 current assets in average against its $1 current liabilities. Quick ratio shows that the company holds $.39 liquid current assets against its $1 current liabilities.
Gearing ratio: gearing ratios of Ted Bakers are given below: (Appendices)
Table 3: Gearing ratios of Ted Baker (2014-2017)
2014-15
2015-16
2016-17
Debt to Equity
---
.34:1
.25:1
Debt to Asset
1.64
1.97
2.02
(Appendices)
Figure 3: Gearing ratios of Ted Baker
The company has $.30 equity in average against its $1 debt. The company holds $1.88 assets against $1 liability.
Share Price Trend: 6-month closing prices and change in prices from 2015-2017 are given below,
Table 4: Closing stock price of Ted Baker
January, 2015
June 2015
January 2016
June 2016
January 2017
June 2017
Price
2227
2916
3009
2430
2451
2390
Change %
22.97%
30.9%
3.1%
-19.24%
0.8%
2.4%
Relative Valuation: Valuation ratios of Ted Baker from 2014-17 are given here,
Table 5: Valuation ratios of Ted Baker (2014-2017)
2014-15
2015-16
2016-17
Price/Earnings
19
20.3
22.9
Price/Book Value
2.7
2.8
3.2
Price/Sales
1.8
2.0
2.2
Price/Cash Flow
11.5
12.4
14.3
Ted Baker’s average price/earnings ratio is 20.73. The investors are willing to pay $20.73 for its earnings per share. Earnings per share show how the market investors value a company. The price to book value ratio is 2.9 in average. The company has higher price to cash flow ratio.
Discussion
In 23rd November 2015 ted bakers share price hit £3428. This was the highest price of stock in last three years. In January, the price quote of Ted Baker was £2228. In the stock market, the investors analyze the present performance and forecast the future performance in June 2015 the price change of Ted Baker was 30.9%. Ted baker's performance was best in 2016. The future performance of Ted Baker was incorporated in the current price. In June 2016 Company’s stock price fell by 19.24% over 6 months (Miller, 2017, p.89). The company performed poorly in a subsequent year. The company has increased the debt level and the profitability was unsatisfactory considering previous two years. The main strength of the company is profitability, quality, and innovation, brand value, and growth. The weakness of the company is the company is inefficient in cash flow management, receivable cycle management which can put the company in danger.
Conclusion and Recommendation
Ted Baker is adept at anticipating the market trends and meets the customer expectation. The company has a wide range of collections. The company has carefully expanded its market in developed countries of Europe and America. The company has few outlets in Asian countries. The growth sales and profit have shrunk due to increase in overhead expense and labor. The reflection of the performance can be deemed from the recent stock price trend. The company can think of expanding its operation in emerging developing countries of Asia such as South Korea, China, Japan, Singapore Malaysia, and Thailand. The company should conduct the market research to understand the brand familiarity and market feasibility.
References
Britton, A. and Waterston, C. (2013). Financial accounting. 4th ed. Harlow: Financial Times Prentice Hall, pp.145-178.
Bull, R. (2008). Financial ratios. Amsterdam: Elsevier/CIMA Publishing, pp.56-98.
Gibson, C. (2013). Financial statement analysis. 6th ed. Mason (Ohio): South-Western Cengage Learning, pp.134-189.
Gowthorpe, C. (2008). Financial analysis. Oxford: CIMA, pp.34-67.
Miller, E. (2017). Report on the UK clothing industry and market. Journal of Fashion Marketing and Management: an International Journal, 1(1), pp.83-96.
Jones, R. (2017). The UK Clothing Industry and the performance trend. Journal of Fashion Marketing and Management: An International Journal, 3(3), pp.205-206.
Jones, R. and Hayes, S. (2016). The UK clothing industry. Journal of Fashion Marketing and Management: An International Journal, 8(3), pp.262-278.
Appendices
1. Financial statements of Ted Baker(2015-2017)
2. Ratio Calculation
Ratios
2014-15
2015-16
2016-17
Gross profit margin
Gross Profit/Sales
235÷388
273÷456
324÷531
Net Profit Margin
Net Profit/Sales
36÷388
44÷456
47÷531
Return on equity
Net Profit/ Equity
36÷141
44÷173
47÷211
Return on Asset
Operating Profit/Assets
50÷232
59÷340
64÷424
Current Ratio
Current Assets/ Current Liabilities
160÷91
191÷109
249÷157
Quick Ratio
(Current assets-Prepaid expense-Inventory)/ CL
38÷91
48÷109
74/157
Debt Equity ratio
Total Debt/ Total Equity
91÷141
168÷173
214÷211
Debt Asset ratio
Total Asset/ Total Debt
232÷91
324÷168
440÷214
