Dixons Carphone Plc Financial Analysis

This assignment analyzes the financial performance of Dixons Carphone Plc. It examines key ratios, such as profitability, liquidity, and solvency, to assess the company's creditworthiness and overall financial health. The analysis also covers dividend policy and the company's use of non-domestic finance products, highlighting its global operations and strategic financial management.

International Finance

Table of Contents
INTRODUCTION................................................................................................................................1
RATIO ANALYSIS..............................................................................................................................1
Analysis of profitability...................................................................................................................1
Analysis of liquidity.........................................................................................................................3
Analysis of solvency........................................................................................................................5
Analysis of efficiency......................................................................................................................7
Analysis of investment performance...............................................................................................8
CAPITAL STRUCTURE THEORY....................................................................................................9
DIVIDEND THEORY........................................................................................................................10
NON-DOMESTIC FINANCE PRODUCT........................................................................................11
CONCLUSION...................................................................................................................................11
REFERENCES...................................................................................................................................12
APPENDIX........................................................................................................................................14
Dixone Carphone’s ratio analysis..................................................................................................14
Metro AG ratio analysis.................................................................................................................15

Index of Figures
Figure 1 Profitability ratios of Dixone Carphone Plc...........................................................................1
Figure 2 Gross profit ratios of Dixone Carphone and Metro AG.........................................................2
Figure 3 Net profit ratios of Dixone Carphone and Metro AG............................................................3
Figure 4 Liquidity ratio of Dixone Carphone Plc.................................................................................4
Figure 5 Current ratio of Dixone Carphone Plc and Metro AG...........................................................4
Figure 6 Quick Ratio of Dixone Carphone Plc and Metro AG............................................................5
Figure 7 Debt to equity ratio of Dixone Carphone Plc.........................................................................6
Figure 8 Debt to equity ratio of Dixone Carphone Plc and Metro AG................................................6
Figure 9 Efficiency ratio of Dixone Carphone Plc...............................................................................7
Figure 10 Earnings per share of Dixone Carphone Plc and Metro AG................................................8

INTRODUCTION
In the present times, companies carry out their operations and formal course of activities at
an international market which raise the competition level among the organization. In order to
sustain in the competitive market, establishments are required to analyse their operational
performance and financial status so as to assess that whether they are performing well or not. The
present assignment here emphasises upon financial performance evaluation of an international
electrical and telecommunication company, Dixons Carphone Plc. It was established by the merger
of Dixons Retail and Carphone Warehouse on 7th August 2014. The report will analyse the
performance of the firm by incorporating ratio analysis tool for the two recent financial years, 2015
and 2016. Along with this, capital structure theory and dividend theories will be discussed.
RATIO ANALYSIS
This technique of strategic financial analysis lay emphasises upon computing a different
kind of ratios like profitability, creditworthiness, solvency, efficiency and so on to make an in-depth
evaluation of business performance.
Analysis of profitability
Figure 1 Profitability ratios of Dixone Carphone Plc
Gross profit margin (GPM) quantifies profit percentage generated by adding up a mark-up
on total product cost. However, net profit margin shows percentage of net return obtained after
meeting all the direct plus indirect payments (Kogadeeva and Zamboni, 2016). In the year 2016,
Dixon Carphones’s GPM reported negative movement as it dropped down from 25.89% to 22.44%.
In 2016, company maximized its revenue by 17.96% by delivering superior quality products at fair
1

prices which helps to increase market demand (Dehnavi and et.al., 2015). In this year, DC’s
maximized its product sales from £5641m to £7018m whereas revenues from sale of services
comprises commission, delivery, installation, consumer support, repairing and others got increased
from £2614m to £2720m. DC struggled for the growth in revenues but its innovative, stylish and
top-quality products enable firm to enlarge their like for like sales in both the terms of electrical and
mobile trading. But still, ineffective control on direct expenditures and inflation resulted in
excessive cost of sale as it got enhanced by 23.46%, which in turn, decreased gross profit margin. It
indicates that in this year, DC’s profitability goes declined.
Figure 2 Gross profit ratios of Dixone Carphone and Metro AG
Although DC’s gross margin ratio dropped down, still, in comparison to the competitor,
Metro AG, the ratio is higher because rivalry firm GP ratio dropped down from 19.66% to 19.60%
and also less than Dixone Carphone Plc. Pricing war in the industry, tough competition from the
well established rivalries and volatility in the market demand are the reasons behind decreased
revenues & less return. It clearly reflects that Dixone Carphone Plc is performing well in
comparison to rivalry, Metro AG as its financial statement reported greater gross margin of 22.44%
in latest year 2016.
DC’s net profit margin shows a slight increase as it got increased from 1.18% to 1.65%
which is an improvement of business performance over the previous year. It became possible
because of closure and effective cost control mechanism and monitoring over operational
expenditures. Company’s financial management strategies such as internal audit, controlling of
greenhouse gas emission, closure supervision and proper waste management, recycling process,
2

carbon management, efficient use of energy, expansion strategy are the reasons for control over cost
(Uechi and et.al., 2015). It can be evident from the annual financial reports, as in 2016, it shows a
little bit increase from £1813m to £1877 by 3.57%. However, high taxation obligations worth £84m
and finance cost of £41m give rises to the interest and tax payments.
Figure 3 Net profit ratios of Dixone Carphone and Metro AG
However, on the other side, looking to the graph, competitor Metro AG’s Net profit ratio
came down from 1.13% to 1.03% because of increased interest obligation and additional
operational expenditures. The net profit is less than DC’s net profit ratio of 1.18% which clearly
reflects that Dixone Carphone Plc has earned good return over sales comparatively than Metro AG.
By making various strategies and rationalized cost measures to control their expenditures will
enable the company to earn better return in future.
Analysis of liquidity
Liquidity depicts association between two monetary elements, current assets and current
liabilities reported in the statement of financial position.
3

Figure 4 Liquidity ratio of Dixone Carphone Plc
In recent year, DC’s current ratio got increased from 0.91:1 to 0.93:1 due to high %age
growth in current assets by 16.68% as compare to the increase in current liabilities of 13.95%.
Rising inventories, cash and its equivalent and trade and other receivables bring improvement in
current assets whereas under short-term liabilities, trade payables and provisions have been
increased to £2310m and £78m respectively. However, on the other side, short-term loan of £55m
has been repaid by the DC to maximise their creditworthiness (Annual financial reports of Dixons
Carphone Plc, 2016).
Figure 5 Current ratio of Dixone Carphone Plc and Metro AG
Rising current ratio is a good sign that shows that liquidity position of the firm has been
increased. Moreover, looking to the graph, it can be seen that Metro AG’s current ratio has been
4

derived to 0.92 in 2015 came down to 0.85:1 reflects less availability of short-term funds to pay off
suppliers. However, on the other side, in the industry, 2:1 is considered as an ideal ratio that
suggests both the company’s managers to make decisions in regards to enhancing their short-term
solvency position through more receivables, inventory and liquid availability to make on-time
payments to the suppliers (Bay, Chan and Walczyk, 2015).
However, on the other hand, quick ratio measures business capacity to pay timely to their
short-term obligations without taking into accounts closing inventory balances reported in the
balance sheet. In 2016, DC's acid test ratio rose up from 0.49:1 to 0.55:1 shows that firm have
improved its availability of resources except stock to make deferral payments to their creditors. On
the basis of this evaluation, it can be suggested that DC's managers took initiatives to maximise
their liquidity status (Uechi and et.al., 2015).
Figure 6 Quick Ratio of Dixone Carphone Plc and Metro AG
On the other side, Metro AG’s quick ratio came down from 0.58 to 0.45 because of decline
in cash availability & other assets. In comparison, Dixone Carphone’s quick ratio is still higher to
0.55 which clearly reports that liquidity position of DC is good as it has more liquid funds to pay
debts timely to the suppliers. However, industry considered 0.50:1 as an idle ratio which encourages
both the companies to enhance the funds availability to pay outstanding short-term debts on right
time to the suppliers.
Analysis of solvency
Solvency ratios deliver information about the proportion or composition of debt and equity
in the long-term capital structure of the firm used to evaluate that whether DC is able or not to meet
5

out their longer period debt obligations as per the scheduled repayment (Frieden, 2015).
Figure 7 Debt to equity ratio of Dixone Carphone Plc
DC's debt to equity ratio got inclined from 0.12:1 to 0.14:1. Its reason is in 2016, the
additional capital requirement of the firm has been meet-out by the debt collection as it has been
increased from £330m to £409m by 23.94%. However, on the other side, shareholder's equity
capital rose up from £2763m to £2860m by 3.51%.
Figure 8 Debt to equity ratio of Dixone Carphone Plc and Metro AG
Although DC took more financial risk by collecting money from fixed cost of capital, loan.
But still, as the ratio is far away from the set industry benchmark of 0.5:1 presented in above
illustration, henceforth, it can be seen as a positive change in its solvency position. It is because;
although debt gives rises to the fixed monetary obligations on DC, but still, it is considered as a
6

cheaper financial source relatively to that of equity because it gives tax benefits to the company
(Dehnavi and et.al., 2015). With the help of this, the company will be able to take benefits of
trading on equity (TOI) to maximise return for investors. Apart from this, interest coverage ratio got
reduced from 8.76 to 7.41 times because of higher tax obligations and decreased earnings before
interest and tax by 6.17%. It is a clear indicator that DC's capacity to bear additional debt burden
has been fallen. Therefore, in future, it may be tough for the company to raise money through
additional external borrowings. On the basis of this, it can be suggested to the firm to maximise
their debt burden capacity to meet out their debt obligations on right time.
Analysis of efficiency
Efficiency ratio is used to examine and analyse the efficiency of managers to utilise business
assets. In the year 2016, DC's assets turnover ratio shows positive improvement as it got enhanced
from 1.26 to 1.41. Similarly, stock turnover ratio also has been improved from 6.65 to 7.88 indicates
that in this year, managers used their assets and stock in more effective manner to obtain excess
revenues and drive success (Garnie and et.al., 2015).
Figure 9 Efficiency ratio of Dixone Carphone Plc
Days sales outstanding (DSO) got increased from 40.10 to 42.39 indicate that company
extended their credit period for the consumers by allowing them to make delayed payments by two
days. The credit policy will directly affect the cash inflow as now; consumer will make delayed
payments to the DC. In comparison, Metro AG’s DSO came down from 7.11 to 6.40 days and
clearly demonstrates that its sales policy highly prefers cash basis sales instead of credit supplies as
it provided a credit of only 6.40 days to the debtors for prompt cash collection. However, on the
other hand, Days inventory outstanding depicts downward movement as it got reduced from 54.74
7

to 46.17 days showed the faster movement of stock into sales to generate better revenues due to
optimum and effective utilisation of stock. In comparison, Metro AG’s DIO goes up from 41.61
days to 42.28 days still it is less than DC’s inventory days which reflects quick conversion of goods
into inventory to generate sales revenues. Contrary to this, Days payable outstanding came down
from 116.99 days to 111.63 days demonstrates that DC is making quicker and earlier payments to
their suppliers as compared to previous year (Suzuki and et.al., 2015). It will have a direct impact
on DC's cash funds as quick cash outgoings and delayed receipts from the suppliers affect cash
adversely. DPO of Metro AG changed downward from 73.27 to 72.92 days because and as a result,
company had paid suppliers promptly than preceding year.
Analysis of investment performance
Figure 10 Earnings per share of Dixone Carphone Plc and Metro AG
Earnings per share reports earnings on each holding computed by dividend net earnings
available to the number of outstanding shares. In 2016, it has been incentivised from 10.09p to
14.00p which clearly demonstrates that DC paid better yield to their investors by generating more
net yield on equity capital. Moreover, if we look at DPS, then it can be seen that in the year 2016,
DC paid higher interim as well as a final dividend to the investors worth 3.25p and 6.5p. In total,
dividend per share got increased from 8.5p to 9.75p by 14.71% which satisfied shareholders to a
large extent. Although, both the DPS and EPS shows a positive change, still, dividend payout %age
got reduced from 84.21% to 69.64% exhibits that DC distributed less dividend to the investors out
of total earnings and retained more to hedge against future uncertainties (Belo, DUFRESNE and
Goldstein, 2015). However, on the other hand, Metro AG’s ratio dropped down from 0.41 to 0.37 in
2016 which clearly presents that company had paid this year less return to their shareholders due to
8

declined in net earnings.
CAPITAL STRUCTURE THEORY
Corporate finance deals with the gathering and collection of long-term capital. Dixons
Carphone Plc runs operations at multinational level, henceforth; it often needs long-term capital to
sustain in the competitive age. There are two sources of finance available to the firm that are debt
and equity capital. In such respect, on the fixed capital, DC is accountable to pay fixed cost in
return for the money collected or supplied by the debt holders such as long-term borrowings and
loans from the bank and financial institutions (Wang and Brand, 2015). However, on the other side,
on equity, also called fluctuating capital, there is no liability to pay a fixed monetary return timely.
It is because; on the money invested in the form of equity capital, although DC will need to pay a
dividend, still, the rate of dividend is not fixed. Moreover, a firm does not have any legal
compulsion to pay a specified rate of dividend as financial cost to shareholders.
There are different theories of capital structure such as a net income theory, net operating
income theory, and traditional approach and Modigliani-miller approach, discussed here as under:
Net income theory:
This theory stated that change in the composition or mix of debt and equity bring changes in
the cost of capital and corporate value. The reason behind this is debt is cheaper and less costly
source, hence, by making the use of debt; DC will be able to reduce a cost of capital through fewer
taxation obligations, which in turn, result in the higher value of the firm.
Net operating income theory:
This theory is just adverse to that of net income theory as it believes that whatever mix of
debt and equity company uses no impacts on weighted average have cost of capital and value of the
firm. It is because; it considered firm as a whole by discounting at a standard rate that is irrelevant
to the debt-equity mix (Barberis and et.al., 2015).
Traditional theory:
This theory defined optimum capital structure at where the cost of capital is minimum and
value of the firm is highest. As per the theory, companies must use debt to a specified limit so as to
reduce their overall cost of capital. However, if debt capital are raised beyond that point, then it
gives rises to the financial burden and risk, which in turn, equity investors also expects higher
dividend results in higher cost of capital. Therefore, by making use of debt capital to a certain limit,
cost of capital can be reduced by lowering tax obligations and result in enhanced value (Bodea and
Hicks, 2015).
Modigliani-Miller approach;
9

This theory consists of two propositions, one is in the absence of taxation, and another is
with the taxation obligation. First theory states that capital structure is irrelevant to the value of the
firm and it is based on the potential earnings of the business. It believes that two identical
companies will be same and do not affect by the mode of funds. On the other side, the second
proposition stated that change in the mix of debt and equity proportion affects leverage and results
in the reduction in overall cost of capital and higher value.
Referring Dixons Carphone Plc, it makes suitable mix of debt and equity to gain benefits of TOE in
order to maximise their return to shareholders. It also makes use of hedge instruments like
derivatives to prevent themselves against the occurrence of the financial risk.
DIVIDEND THEORY
Dividend policy comprises rules, regulations and necessary guidelines which managers use
to distribute the dividend to their investors. There are different types of policies available to Dixons
Carphone Plc that are enumerated underneath:
Residual: Under this policy, the company made dividend decisions after determining the
availability of residual earnings. In this policy, firms first set a target dividend payout ratio to
determine the optimal capital structure that will be primarily meet out through equity by investing
retained profits (Frieden, 2015). After that, the rest of the earnings available is termed as residual
which is distributed amongst shareholders as their return.
Stable: With the changing period and market volatility, residual dividend policy gives rises
to the fluctuations and uncertainty in the dividend distribution. Thus, this policy aims at distributing
a constant dividend return to their investors so as to reduce uncertainty and maximising their
satisfaction level.
Hybrid: It is a mixture of both the earlier stated policy, in which, established generally pay a
stable dividend return to the investors and if a company earned a higher return in any year, then it
may distribute an extra and growing dividend to their shareholders. Dixon's carphones follow
hybrid policy because; it aims at distributing a target and stable return every year to their investors
and distribute extra dividend if it generated an extra return. In 2016, the company distributed the
higher interim dividend to their shareholders worth 3.25p because of high earnings, whereas; final
dividend shows a little bit increase to 6.5p only (Bodea and Hicks, 2015). Growth in DPS helps to
raise satisfaction level of investors as they received the better yield on their holdings (Wang and
Brand, 2015). It makes it easier for the DC to raise additional capital from equity resources in the
future period.
10

NON-DOMESTIC FINANCE PRODUCT
As Dixons Carphone Plc conduct operations at the global level, thus it is obvious that
company makes use of non-domestic products in their operations. From the annual financial reports
of the year 2015/16, it has been extracted that its US joint venture is expected to contribute around
40 dollars to 50 dollars billion of annual earnings before interest and taxes (EBIT) by the end of
year 2019/20. The company made a Joint venture with US sprint corporations that had been valued
at 32 dollar million that are delivering its honeybee platform to the overseas clients. Moreover,
being operations at larger scale, it also uses derivatives as financial instruments to hedge against
financial risk from the change in foreign exchange currency and interest rate movement. Moreover,
it raises capital worth 477 dollars million or 457 million Euro by the issuance of Initial Public
Offering (IPO) at Nasdaq stock exchange (Ascarelli, 2016).
CONCLUSION
In conclusion of the above project report, it becomes clear that Dixons Carphone's Plc
performed well this year by having greater profitability and improved creditworthiness position. But
still, in comparison to benchmark, the company needs to make extra efforts to bring some
improvements in their performance such as effective cost control, advertisement and marketing and
so on. Moreover, although, in that year, the company improved their solvency position but still, it
did not achieve ideal ratio, henceforth, it can be suggested to maximise more debt to reach standard
ratio for the better solvency management. Besides this, investment analysis identified that DC's
managers are putting efforts to create an optimum portfolio by utilising debt and equity resources
and thereby delivering solid return to the investors to meet out their return expectations.
11

REFERENCES
Books and Journals
12

13

APPENDIX
Dixone Carphone’s ratio analysis
14

Metro AG ratio analysis
15