Efficiency ratios

Efficiency ratios look at how well companies utilize their assets to generate profit. They look how long it takes the company to collect cash from customers or how long it takes to convert the inventory into cash. The management uses these ratios to improve the company. When companies are efficient with their resources its an indication that company is profitable.

The ratio calculates the number of days that it takes for a firm to collect cash from sales made on credit. The shorter time period for the trade receivables will be results in the larger revenues and improve the company’s cash flow.

Mulberry	2013 £’000	2014 £’000	2015 £’000
Receivables collection period

Ted Baker	2013 £’000	2014 £’000	2015 £’000
Receivables collection period

From the results above we can see that Mulberry had improved in 2014 but then its got slightly worst in 2015 as it took 32 day to

collect the cash. Ted Baker took 34 days to collect cash made on credit, which is significant improvement comparing to previous years. The two companies position is better than peer Burberry, which took 38 days to collect cash from sales on credit.

Inventory turnover shows how effectively inventory is managed. This ratio is very important and depends on two components stock and sales. The high turn is an indication of good inventory management.

Mulberry	2013 £’000	2014 £’000	2015 £’000
Inventory turnover

Ted Baker	2013 £’000	2014 £’000	2015 £’000
Inventory turnover

We can see that the turnover is quit high, which is a good sign and can be an indication of high sales. Inventory turnover for Burberry was 210 days in 2015. On another hand high ratio can also be an indication of ineffective buying. But also high inventory levels can lead to trouble and prices begin to fall.

A trade payable measures how quickly a company can pay its suppliers for good delivered on credit. It helps creditors to analyze the liquidity of the company. The more frequently throughout the year they can pay the supplier is an indication to a creditor that the company will be able to meet an interest payment. The higher ratio

shows suppliers and creditors that a company pays their bills regularly.

Mulberry	2013 £’000	2014 £’000	2015 £’000
Payables payment period

Ted Baker	2013 £’000	2014 £’000	2015 £’000
Payables payment period

From the calculations above we can see that a number of days to pay back to its supplies slightly decreased for Mulberry but almost the same to the previous years. And Ted Baker decreased since 2014, which is a not a bad sign on the overall. However, Burberry took 56 days to pay its suppliers, which shows us that both companies did well comparing to a peer group. The first explanation can be that Burberry is cash rich company and do not require to buy on credit the raw material from their suppliers. Some companies don’t like to get into a debt and prefer to pay invoices straight away. But high ratio can also help company to get a better deal with creditors in the future. But for every industry accounts payables have different standards. That’s why it is hard to judge. But looks that both companies have efficient financial management.

The working capital cycle is the time it takes to convert current assets and current liabilities into cash and it helps us to understand the liquidity of the company. The longer the cycle, the more difficult is for the company to support its operating expenses and short-term debts. That’s why it is important for the company try to reduce the working capital cycle.

Mulberry	2013 £’000	2014 £’000	2015 £’000
Working capital cycle

Ted Baker	2013 £’000	2014 £’000	2015 £’000
Working capital cycle

We can see that Mulberry’s WCC had increased since 2015 to 98 days. And Ted Baker’s WCC was 163 days in 2015, which is much higher than Mulberry’s. But in order to understand if it was good results, we need to compare the average of the sector. If we look at Burberry’s WCC it took them 151 day to convert current assets and current liabilities into cash. This shows us that Mulberry and Ted Baker outperformed the sector average.