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Rock Street, San Francisco

Mothercare plc is a
specialist retailer of products for mothers to be, babies, and children up to
the age of eight. It offers products ranging from clothing, furniture for
children, bedding and toys.

Cash flow from investing activities was negative through
the years with a peak in investment in 2017. This shows the firm had a decreasing
trend in its investing activities until 2016 where it saw a huge spike of £26.3m
from the previous year. The general trend for cash flow from financing activities
is a decline in paying dividends and/or debt loans. In 2012, the firm started
to obtain more financing than it was paying out in dividends or loans.

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Profitability ratios. Return on Capital Employed is a
profitability ratio that has been on a general decline through the years with
only a small pickup in 2016. This shows the total capital deployed was not
effective in generating operating profit. This suggests the company has failed
to minimise cost in expenses. The Gross Margin has also had a general decrease but
with an upwards trend in 2015, reflecting trading performance after the new CEO
was appointed. This suggests that a harder negotiating practice was implemented
as can be seen in the Cost of Sales being on a downwards trend in 2015 as well,
in comparison to its upwards trend from 2010 to 2014. The Operating Margin acted
in a similar fashion to the Gross Margin, suggesting that overhead cost
management improved at the same time as its negotiation strategy to reduce its
cost prices in 2013 after the major dip in 2012. It can be inferred that cost
management in 2012 was extremely inefficient as compared to its competitors,
Mothercare did comparatively much worse. This is shown when the figures for its
competitors were roughly in the 8% region while Mothercare dropped to approximately
-12% in the third quarter of 2012. However, Mothercare possibly picked new management
or changed its cost saving policies to reduce its overhead costs. From 2013
onwards, Mothercare had increasing Operating Margins whereas its competitors’
figures declined.

Efficiency ratios. Average settlement period for trade
receivables has almost doubled from 2009 to 2017. This shows an inefficiency in
collecting money from credit customers as money which is received later cannot currently
be used for investment or other purposes in the company. The payables period
has also increased which shows that the company has been delaying payments to
its suppliers by almost 15 days from 2009 to 2017. The firm uses free finance
provided by the suppliers but risk losing goodwill of suppliers. Accordingly,
the firm’s cash conversion cycle has also been increasing over the years, in
line with the rise in the number of days customers take to pay. This is not
ideal as the company does not receive cash as fast and there is an opportunity
cost between efficiency and risk of customers’ goodwill. The firm’s Asset Turnover
has remained relatively constant throughout the years but it cannot be said if
the figure is low or high as there is no comparison to the industry trend.

Credit Risk Analysis. Current Ratio has decreased from 2009
to 2017, with the figures maintaining a 1-2 ratio range. The Acid Test Ratio
has also maintained stable figures in the 0.5 range over the years. These trends
suggest that the firm has enough liquidity to expand or pay back its
liabilities, but may not be enough to cover operations. It has to be noted that
for true comparison, industry figures should be compared against the firm’s.

Gearing Ratios. The Debt-to-Equity ratio requires the industry
benchmarks to provide a picture of how high debt has a role in the capital
structure of the company. In 2013 and 2014, the firm had the highest figures, above
1 and 2, showing the firm has very high levels of debt relative to equity. It
does not suggest that the firm was not economically sustainable because as seen
in 2017, the ratio went down to 0.17. This is likely due to a one-time
expansion of the firm which led it to borrow. Since debt is a cheaper source of
financing and has higher tax benefits, it could be read that Mothercare is a
growing firm instead of going bankrupt. The Interest Coverage ratio had dropped
from 106.002 to 11.12 over the 8 years. The company had possibly taken out a
large sum of debt in 2013 and 2014 and a decrease in the interest coverage shows
the firm is still able to pay back interest with operating profit, but with
less leftovers. However from 2012 to 2015, the firm could have faced potential risk
of bankruptcy due to not being able to cover interest payable, as shown in 2012
when interest coverage had a negative figure of -79.15. The management clearly
identified the problem as the next year, the figure rose to -4.5.

Investment ratios. The dividend payout ratio had decreased
from 2.73% in 2009 to 0.41% in 2012. This shows the firm has decreased the
amount of profit distributed as dividends to shareholders. This could be a case
of putting its money into investments or the company earning less after tax
profits. The Earnings per Share figures had declined even reaching negative
values in 2012 to 2015. An ordinary shareg=holder would only receive 0.042 of
the company’s earnings. This indicates the share performance for this company
is not doing well as shareholders do not get as much return for their investment
in Mothercare as compared to its competitors such as Debenhams. This can also
be seen in the Return on Equity comparison chart where the gap between
Mothercare had reached approximately 125 difference. To the shareholders, they
are getting less profit from Mothercare from each dollar of their equity
invested. Although this might have been the case from 2012 to 2015, Mothercare has
become more investor friendly with 9.63% in 2017 as its Return on Equity
matches its competitor(M&S), with the exception of Debenhams.

Overall, Mothercare

1.    Road
to recovery

2.    Future
problems

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