Return on capital employed

ROCE is one of the key ratios which helps to assess how well management have made use of shareholders funds in order to generate profit. “Capital Employed” can be simplified as total assets-current liabilities. The higher ROCE is an indication that funds have been used more efficiently and it should be higher than company’s capital cost, otherwise it will indicate that the company is not employing it’s capital effectively.

Mulberry	2013 £’000	2014 £’000	2015 £’000
ROCE

Ted Baker	2013 £’000	2014 £’000	2015 £’000
ROCE

From the calculations above we can see that Mulberry has declined in ROCE since 2014 resulting in decrease in the overall profitability. Whereas, Ted Baker had a significant increase in ROCE since 2014, which might be an indication that management had used shareholders funds efficiently. However, the ratios above and ROCE

are interrelated. The company can improve ROCE by reducing cost or raising selling prices, and the operating cost will be improved. The other option is to increase it’s sales volume or reduce it’s capital employed. And if we compare Ted Baker with Burberry group where ROCE was 33% in2015 it is significantly good results. Where underperformance of Mulberry since 2014 could be result of increased cost of sales or high prices. However, Mulberry found that if they can make sure that the y handbags cost no more than 500£-1000£, more people would buy them. The strategy of lowering the price range seems to be working for them and retail rose by 1%.

Net profit margin measures the amount of profit left after all the expenses have been deducted from sales. It helps us to see whether the profitability has improved due to the increase sale prices or reduction in cost. It also shows whether the company competitive in the market and can control it’s expenses.

Mulberry	2013 £’000	2014 £’000	2015 £’000
NPM

Ted Baker	2013 £’000	2014 £’000	2015 £’000
NPM

From the results above we can see that the decline of Mulberry in the profitability as per ROCE was due to the decline in NPM. This shows that Net profit is not doing well, comparing to sales after overheads are taken out. This is due to an increase cost of sales and lowering the prices strategy. We can see that Mulberry experienced losses and lower sales due to purchasing power in luxury retail made them to lower their prices, which led to a decline in sales. The loss after tax

can be resulting in the loss per share for the year of £2,3p. Also capital and investment expenditure had occurred related to the acquisition of lease rights to the Paris store and some investment to digital and IT systems. Where Ted Baker experienced the moderate increase in the profitability due to the increase in NPM. But if we compare this companies with Next PLC with Net profit margin of 16% Ted Baker had significantly small increase in net profit. It had a slow start due to the low sales could be because of the weather conditions was unusually mild the year before. The recent sales growth shows the positive changes to the company.

This ratio helps to measure how many times the value of the asset has been obtained during sales times.

Mulberry	2013 £’000	2014 £’000	2015 £’000
Volume of Trade

Ted Baker	2013 £’000	2014 £’000	2015 £’000
Volume of Trade

We can see that Mulberry had slightly negative results in volume of trade due to a decrease in the profitability per ROCE and the decline in Net profit margin and Volume of trade. This was due to capital and investment expenditure. Also they invested in digital and IT systems. Whether, Ted Baker had a positive growth in the profitability per ROCE and a small increase in Net profit margin with a steady growth in Volume of trade, which reflects a strong performance from UK wholesale business and export to US wholesale. Ted Baker continues

to grow as a global brand showing us a good steady growth comparing to Burberry with a Volume of trade of only 1,2 times.

Liquidity ratios

In this section we will analyze the ability of the companies to pay off its short- term debt. These ratios will indicate the cash levels of the companies and the ability to turn other assets into cash to pay its obligations. The liquidity ratios are calculated by dividing cash and other liquid assets by the short-term borrowings and current liabilities. They show us a number of times the short-term debts are covered by the cash. The higher the liquidity ratios are, it is a good indicator of the higher the margin of safety. Liquidity higher than 1, shows us that a company is in a good financial health.

Current ratio measures whether the company has enough cash to pay its current liabilities on time.

Mulberry	2013 £’000	2014 £’000	2015 £’000
Current ratio

Ted Baker	2013 £’000	2014 £’000	2015 £’000
Current ratio

The results above shows us that despite Mulberry’s current ratio had a small decrease in 2015, the company will still be able to cover it’s liabilities as ratio higher than 1 is an indication that a company is healthy and able to pay its current liabilities. Whether, Ted Baker had a small decrease in 2014 but on overall it is a good indicator that company will be able to pay all current liabilities on time. This

assures other users that business is a going concern. Investors look for a current ratio 2:1, current assets twice more to meet current liabilities. A ratio less than one indicates, that company having problems meet short-term obligations. And too high indicates that a company not using current assets efficiently. Where their peer group Burberry had a current ratio of 2,3 times, which shows that both companies on average was very efficient with their use of current assets.

However, in order to see clear picture about financial health of the company, we must to calculate some other ratios such as quick ratio.

The quick ratio measures the ability of the firm to meet short-term debts. It helps us to see how quickly current assets can be converted into cash. This ratio shows the companies strength and weaknesses and gives the information about the short-term liquidity. It helps creditors to see how quickly the company can sell its current assets to meet its obligations.

Mulberry	2013 £’000	2014 £’000	2015 £’000
Quick ratio

Ted Baker	2013 £’000	2014 £’000	2015 £’000
Quick ratio

Ideally ratio should be 1:1, which is not in the case of Mulberry. The ratio fell down to 0,8 in 2015, is an indication that company is struggling to convert its current assets into cash to pay its debts. However, Mulberry is a cash rich company and can easily pay it’s own current liabilities. Ted Baker also experiencing some problems

since 2013 and fell down even further in 2015. The peer average is 0,5 times. The decreasing quick ratio suggests that a company is struggling to grow sales, paying bills or collecting receivables too slowly.