Introduction
This report seeks to analyze the financial performance of Dixons Carphone plc using its financial ratios and compare the company with Best Buy as one of its main competitors. The report will detail Dixons Carphone plc’s key features, its current financial position, key resources and some of the challenges it faces in the market. The report will further analyze the company’s financial ratios for 2021 and 2022 and their interpretation. The report will also analyze one of Dixons Carphone plc’s main competitors and seek to establish which of the two companies is attractive to invest in.
Background of the Company
Dixons Carphones plc, renamed to Currys plc in September 2021, is a leading technology products and services provider dealing with electricals, mobile phones and mobile service. The multinational was formed on 7 August 2014 through a merger of Dixons Retail and Carphone Warehouse group. The company owns various brands such as Currys, iD Mobile, Dixons Travels, Elgiganten, Elkjop, Kotsovolos among others.
Dixons Carphones plc enjoys many resources, including 314 stores and 27 logistics facilities and spaces in the United Kingdom and Ireland plus 516 stores and 60 logistics facilities and spaces in the international market. The multinational currently operates through 830 stores and 16 websites in 8 countries. The company also enjoys a human resource capacity of 32,000 employees distributed across the eight countries of operation.
The company has faced financial challenges recently, especially after the Covid 19 pandemic outbreak. This has seen its profitability decline to close some of its stores. The company realized a revenue of £10,144m in the financial year 2021/22 compared to £10,344m in the financial year 2020/21. It controls 24.7% of the market in UK and Ireland as well as 26.8% in the Nordics market. The company’s EBIT improved from 2.5% in 2020/21 to 2.7% in 2021/22.
Dixons Carphones plc has previously experienced market challenges that greatly affected its operations. In June 2019, the company’s shares fell by almost 20% as a result of significant reduction in full year profits. A decline that the company attributed to consumers’ growing delay in upgrading their mobile phones. On 3 April 2020, Dixons Carphones plc permanently closed 531 standalone Carphone Warehouse stores that were solely focused on telephone devices; a move that the multinational said was attributed to the online shift of customers and a lesser extent of phone upgrades (Dixons Carphone plc, 2022).
Evaluation of Dixons Carphones plc’s Financial Performance
Financial ratios analysis is one of the tools used by companies when analyzing their financial performance (Delen, Kuzey & Uyar 2013, p. 3970). Below is the financial ratio analysis for Dixons Carphones plc and the interpretation of the results:
Current Ratio:
| 2021/22 (£ million) | 2020/21 (£ million) | |
| Current ratio = Current Assets / Current Liabilities | 2,137/ 2,703 = 0.7906 | 1,965/2,621= 0.7497 |
The current ratio measures a company’s ability to pay off its short-term liabilities using its current assets. Husna and Satria (2019, p. 50) argue that a current ratio of between 1.2 and 2 is considered better as it depicts that the company can comfortably pay its current liabilities when they fall due. For Dixons Carphones plc, its current ratio moved from 0.7497 in 2020/21 to 0.7906 in 2021/22, meaning that the company has current assets to pay off only 79.06% of its current liabilities. The company needs to manage its current liabilities more efficiently so as to achieve the preferred ratio.
Quick Ratio (Acid-test Ratio):
| 2021/22 (£ million) | 2020/21 (£ million) | |
| Quick ratio = Current Assets – Inventories / Current Liabilities | (2,137-1286)/ 2,703 = 0.3148 | (1,965 – 1178)/ 2,621 = 0.3003 |
Saleem and Rehman (2011 p. 95) note that quick ratio helps companies assess their ability to pay their current liabilities using their current assets without using their inventory. Wijaya and Sedana (2020, p. 323) note that a quick ratio greater than 1 is considered ideal. For Dixons Carphones plc, its quick ratio improved from 0.3003 in 2020/21 to 0.3148in 2021/22. Although this is a positive trend, the quick ratio is far below the recommended and this would cripple the company’s ability to meet its current liabilities when they fall due. As a result, the company may be compelled to use its non-current assets to settle its short-term liabilities (Martina 2019, p. 1).
Debt Ratio:
| 2021/22 (£ million) | 2020/21 (£ million) | |
| Debt ratio = Total Debt / Total Assets | 1349/6913 = 0.1951 | 1332/6880 = 0.1936 |
Khaliq et al., (2014) note that debt ratio assesses a company’s total debt as a percentage of its total assets. It shows the ability of a company to pay off its debt using its assets. According to Al-Shubiri, (2012, p. 21), a company with a higher debt ratio is considered more leveraged and hence riskier. The general rule considers a debt ratio of 0.5 as reasonable. For Dixons Carphones plc, its debt ratio increased from 0.1936 in 2020/21 to 0.1951 in 2021/22. This trend is undesirable but the company is still within the ideal ratio.
Debt to Equity Ratio (D/E):
| 2021/22 (£ million) | 2020/21 (£ million) | |
| D/E = Total Debt / Total Equity | 1,349/2,501 = 0.5394 | 1,332/2,381 = 0.5594 |
Hendrani and Septyanto (2021, p. 681) argue that D/E ratio depicts the percentage of a company’s financing sourced from investors and creditors. A higher D/E ratio indicates that the company has been financed more through debts than investors (Kiema & Jokivuolle 2014, p. 240). A lower D/E ratio usually implies that the company is more financially stable and that the optimal D/E ratio should not exceed 2.0 (Sari, Suryani & Sabrina 2021, p. 72). For Dixons Carphones plc, its D/E ratio reduced from 0.5594 in 2020/21 to 0.5394 in 2021/22. This reduction shows a positive improvement for the company and this would signify that the company is getting more stable and less risky.
Interest Coverage Ratio:
| 2021/22 (£ million) | 2020/21 (£ million) | |
| Interest coverage ratio = Operating income / Interest expenses | 122/96 = 1.2708 | 147/114 = 1.2895 |
Interest coverage ratio assesses the ability of a company to pay interest on its outstanding debt. A higher ratio is considered favorable with the recommended ratio of 3 and above (Farah & Amin 2021, p.68). For Dixons Carphones plc, the ratio reduced from 1.2895 in 2020/21 to 1.2708 in 2021/22, a reduction attributable to a reduction in operating income as seen in the income statement. The negative trend depicts a reduction in the company’s ability to pay off its interest expense for its outstanding debt.
Asset Turnover Ratio:
| 2021/22 (£ million) | 2020/21 (£ million) | |
| Asset turnover ratio = Net sales / Average total assets | 10,144/6,913 = 1.4674 | 10,344/6,880 = 1.5035 |
Firman and Salvia (2021, p. 154) notes that asset turnover ratio assesses the ability of a company to generate sales from its assets. Kurniawan (2021, p. 64) argues that a higher asset turnover ratio is usually considered more favorable as it depicts higher efficiency in asset utilization to generate sales. The general rule considers a ratio above 1 to be good. For Dixons Carphones plc, its assets turnover ratio reduces from 1.5035 in 2020/21 to 1.4674 in 2021/22. This reduction is unfavorable as it shows reduced efficiency in utilizing assets to earn sales for the company but the company is still within the preferred ratio.
Operating Margin:
| 2021/22 (£ million) | 2020/21 (£ million) | |
| Operating margin = Operating income / Net sales*100 | 222/10,144 = 2.19% | 147/10,344 = 1.42% |
Operating margin assesses the profit a company makes from its core activities to its total sales revenue. Langemeier and Yeager (2018) argue that a higher operating margin depicts high efficiency in the generation of profits from sales. A profit margin of 15% and above is generally considered ideal. For Dixons Carphones plc, its operating margin increased from 1.42% in 2020/21 to 2.19% in 2021/22. This is a positive improvement depicting that the company has been able to generate higher profits from sales in 2021/22 compared to 2020/21. Nevertheless, the company’s operating margin is far below the ideal ratio.
Return on Assets (ROA):
| 2021/22 (£ million) | 2020/21 (£ million) | |
| ROA = Net income / Total assets * 100 | 71/6913 = 1.03% | 12/6,880 = 0.17% |
This ratio assesses company’s efficiency in converting its assets into net profit or income. A higher ratio is considered favorable (Hadi, 2018 p.81). A ratio of 5% is considered good while above 20% is considered great. For Dixons Carphones plc, the ratio increased from 0.17% in 2020/21 to 1.03% in 2021/22, which is far below the recommended. This could have been caused by an increase in net income or a decrease in assets. The increase would also depict an improvement in the utilization of assets to earn revenue (Bosch‐Badia, 2010).
Return on Equity (ROE):
| 2021/22 (£ million) | 2020/21 (£ million) | |
| ROE = Net income / Total equity*100 | 71/2,501 = 2.84% | 12/2,381 = 0.50% |
ROE ratio is a profitability ratio that measures a company’s ability to generate profits from its shareholders’ investments. Heikal, Khaddafi and Ummah (2014, p.101) note that ROE ratio helps investors assess how efficiently their investments are used to generate income. According to Gul, Irshad and Zaman (2011) ROE between 15% and 20% is considered good. For Dixons Carphones plc, its return on equity increased from 0.50% in 2020/21 to 2.84% in 2021/22. This means that every pound of common shareholders’ equity earned only £0.0284. Despite this increase, the company’s ratio is far below the recommended. This could depict inefficiencies in utilizing shareholders’ equity to generate income and could negatively affect the confidence of shareholders and other potential investors.
Dixons Carphones plc’s Performance Comparison to Best Buy plc
Once a company has assessed its financial performance, it is prudent to compare with other companies within or outside the industry. Dixons Carphones plc has numerous competitors who compete with the company in the market. Binda et al. (2020, p. 27) argue that a company’s competitiveness compared with its competitors defines its attractiveness to both the customers and the investors. Among the main competitors of Dixons Carphones plc include Best Buy Co Inc.
Best Buy is a multinational retailer of electronic products offering consumer electronics, appliances, computing and mobile phones, home office products, among others. The company also offers services such as design, consultation, technical support, warranty-related services, delivery and installation of mobile audio, home theater and appliances (Best Buy, 2022). Below are the financial ratios for Best buy that will help in the comparison:
Current Ratio:
| 2021/22 ($ million) | 2020/21 ($ million) | |
| Current ratio = Current Assets / Current Liabilities | 10,539/10,674 = 0.9874 | 12,540/10,521 = 1.1919 |
Quick Ratio:
| 2021/22 ($ million) | 2020/21 ($ million) | |
| Quick ratio = Current Assets – Inventories / Current Liabilities | (10,539-5,965)/ 10,674 = 0.4285 | (12,540 -5,612) /10,521 = 0.6585 |
Debt Ratio:
| 2021/22 ($ million) | 2020/21 ($ million) | |
| Debt ratio = Total Debt / Total Assets | 1,216/17,504 = 0.0695 | 1,363/19,067 = 0.0715 |
Debt to equity ratio (D/E):
| 2021/22 ($ million) | 2020/21 ($ million) | |
| D/E ratio = Total Debt / Total Equity | 1,216/3,020*100 = 0.4026 | 1,363/4,587 = 0.2971 |
Interest Coverage Ratio:
| 2021/22 ($ million) | 2020/21 ($ million) | |
| Interest coverage ratio = Operating income / Interest expenses | 3,039/25*100= 121.56 | 2,391/52 *100 = 45.98 |
Asset turnover Ratio:
| 2021/22 ($ million) | 2020/21 ($ million) | |
| Asset turnover ratio = Net sales / Average total assets | 51,761/17,504 = 2.9571 | 47,262/19,067 = 2.4787 |
Operating Margin:
| 2021/22 ($ million) | 2020/21 ($ million) | |
| Operating margin = Operating income / Net sales | 3,039/51,761 = 5.87% | 2,391/47,262 = 5.06% |
Return on Assets (ROA):
| 2021/22 ($ million) | 2020/21 ($ million) | |
| ROA = Net income / Total assets *100 | 2,454/17,504 = 14.02% | 1,798/19,067 = 9.43% |
Return on Equity (ROE):
| 2021/22 ($ million) | 2020/21 ($ million) | |
| ROE = Net income / Total equity *100 | 2,454/3,020 = 81.26% | 1,798/4,587 = 39.20% |
To be able to compare the two companies, below is a summary of the financial ratios for both Dixons Carphones plc and Best Buy plc
| Ratios | Dixons Carphones plc | Best Buy | |||||||
| 2022 | 2021 | 2022 | 2021 | ||||||
| Current ratio | 0.7906 | 79.06% | 0.7497 | 74.97% | 0.9874 | 98.74% | 1.1919 | 119.19% | |
| Quick ratio | 0.3148 | 31.48% | 0.3003 | 30.03% | 0.4285 | 42.85% | 0.6585 | 65.85% | |
| Debt ratio | 0.1951 | 19.51% | 0.1936 | 19.36% | 0.0695 | 6.95% | 0.0715 | 7.15% | |
| D/E | 0.5394 | 53.94% | 0.5594 | 55.94% | 0.4026 | 40.26% | 0.2971 | 29.71% | |
| Interest Coverage ratio | 1.2708 | – | 1.2895 | – | 121.56 | – | 45.98 | – | |
| Asset Turnover ratio | 1.4674 | – | 1.5035 | – | 2.9571 | – | 2.4787 | – | |
| Operating Margin | 0.0219 | 2.19% | 0.0142 | 1.42% | 0.0587 | 5.87% | 0.0506 | 5.06% | |
| ROA | 0.0103 | 1.03% | 0.0017 | 0.17% | 0.1402 | 14.02% | 0.0943 | 9.43% | |
| ROE | 0.0284 | 2.84% | 0.005 | 0.5% | 0.8126 | 81.26% | 0.392 | 39.20% | |
Analysis of the Comparison Between Dixons Carphones plc and Best Buy
Dixons Carphones plc has lower current, quick, and debt ratios compared to Best Buy in the years; hence, it is less liquid. Nevertheless, Dixons Carphones plc experienced a positive improvement while Best Buy experienced a decrease in its 2022. Dixons Carphones plc has a higher debt to equity ratio than Best Buy, which means that Best Buy has performed better in terms of debt management. Nevertheless, the two companies have a D/E ratio below 2.0 hence doing well. Regarding the interest coverage ratio, Dixons Carphones plc performs poorly compared to the ideal ratio and its competitor, Best Buy. On the other hand, Best Buy has a high Interest coverage ratio which shows that the company can comfortably pay its interests when they fall due.
Dixons Carphones plc and Best Buy have their asset turnover ratio above the recommended ratio of 1. Nevertheless, Best Buy has a higher ratio than Dixons Carphones plc, which is more attractive. Dixons Carphones plc has a lower operating margin than its competitor Best Buy, and the company has performed below the recommended ratio of 15%. In terms of return on Asset and return on equity, both companies have recorded an improvement. Nevertheless, Best Buy has performed better compared to Dixons Carphones plc.
Opportunities and Challenges that Dixons Carphones plc and Best Buy has Faced
Dixons Carphones plc and Best Buy have faced similar opportunities and challenges. The outbreak of Covid pandemic has resulted to a shift to online shopping, which as a result, has allowed both companies to sell online and reduce some fixed costs such as rent for stores. Both companies have also faced the challenge of market risks. Dixons Carphones plc is exposed to certain market risks such as foreign exchange and interest rate risks (Dixons Carphones, 2022). Best Buy also faces this risk as exposed to changes in short-term market interests (Best Buy, 2022). The pandemic’s effects continue to be felt all over the globe with both Dixons Carphones plc and Best Buy facing reduced sales as the market contracts and stores are closed down. Both multinational companies have faced operational changes in response to the Covid 19 pandemic with their supply chains being disrupted greatly. Best Buy (2022) notes that the operational changes that have resulted from the outbreak of Covid 19 has significantly reduced customer visits.
Conclusion
From the analysis, Best Buy has higher liquidity and it is less leveraged with lower debt ratio and higher interest coverage ratio hence it is more stable. The company also has a higher asset turnover and return on asset ratio, indicating higher efficiency in asset management. The company has a higher operating margin which shows higher profitability. In addition, Best Buy has a higher return on equity ratio which could instill confidence to investors. This makes the company more attractive to invest in than Dixons Carphones plc. On the other hand, Dixons Carphones plc has performed poorly compared to Best Buy and also has its most financial ratios below the recommended. This makes the company less attractive to invest in.
The assignment has helped me understand the various financial parameters of organizations and how they are used to compare the companies in the industry. It has given me a deeper and more realistic approach of assessing a company’s attractiveness. The assignment has also allowed me to use a real-life example, making the learning deeper and more relating to the real world. As a result, I have gained more insights on the application of financial ratios in assessing a company’s attractiveness.
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