Probability Theory and Mathematical Statistics

HAN YAN

FIN450

E01245266

Financial reporting analysis on the BODY SHOP PLC.

Recommendation

The BODY SHOP plc in these three years was not managing working capital very well and was trying to use reserves to pay dividends. It cannot continue to operate like this in long term.

Statement Problem

The problem of the BODY SHOP in profitability, efficiency and solvency was obviously between 1999 and 2001. It can be indicated by different ratios as the following parts.

Analysis of problem

First of all, financial statements will be analyzed for testing company’s profitability ration, liquidity ratios, shareholder ratio and risk-based ratios. It will help to do some comparability, assessment of management and forecasting.

To begin with, the BODY SHOP’s turnover growth in this three year was stable and it might due to launch new product or productivity increased efficiency. Meanwhile, the gross profit increased so that the ratio of gross margin went up steady and slowly about 58% , 60.3%, 60.2% (Gross margin=Gross profit/Revenue), respectively. In the future, the gross margin will keep growth stably.

Moreover, there are much more changes in the ratio of operating margins, -1.5% (operating margin=net profit/revenue) in 1999, 5.6% in 2000 and 2.5% in 2001. The net profit in the 1999 is negative which caused the operating margin is negative. It might be caused by the number of restructured cost is big. However, the trend did not continue, in 2000, the net profit increased dramatically, from -4.6 million GBP to 18.4 million GBP. Unfortunately, operating margin did not increased in the next year. Although the turnover performed well, the net profit decreased to 9.3 million. In the next several years, it is questionable as whether this rate of growth is sustainable.

Besides, the inventory turnover should be paid more attention. The ratio of inventory turnover rose up from 110.3 day (Inventory/cost of sale *365) in 1999 to 125.7 day in 2001. It has fallen quickly because the BODY SHOP’s products were not popular with customers. At the same time, the receivable days was 33.4 day (receivable/turnover *365) in 1999 and 33.5 day in 2000, but it decreased slightly in 2001 about 29.6 day. This might change because the bad debts among customers have resolved a few. The payable day was a little longer in 1999 approximately 37.1 day (payable/cost of sales*365), but in 2000 and 2001, the situation has been released, 22.7 day and 26.2 day, respectively. It was not increased, which means the BODY SHOP may not have cash problem and not struggle to the debt.