Dignity Plc.: Financial Statements

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Introduction

Dignity Plc is a publically listed company in the United Kingdom (UK) that provides funeral services. According to the client website, the company serves over 800 local communities by connecting people with funeral directors around the UK (Dignity Plc, no date). The company offers full-service funerals, simple funerals, and prepaid funeral plans (Dignity Plc, no date). The company’s purpose is to help the customers through their most difficult times, while the company’s vision is to “lead the funeral sector in terms of quality, standards and value-for-money” (Dignity Plc, 2019, p. 2). Two companies, including Co-operative Group (CWS Ltd) and Dignity Plc, share 25% of the funeral market, which is almost 600,000 deaths annually (Competition and Market Authority, 2019). Even though the market does not grow rapidly, funeral prices grow by 6%-8% annually, which allows companies in the market to increase their revenues. The present paper aims at evaluating the financial performance of Dignity Plc by using relevant ratios and exploring their dynamics.

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Profitability

As a front matter, it is essential to evaluate the profitability of the company. According to the market analysis, it was expected that the profitability of the company should go up because of the continually increasing prices of funerals without reference to underlying operating cost pressures (Competition and Market Authority, 2019). In order to test the hypothesis, several profitability ratios were assessed using financial data for the 2017 and 2018 fiscal years provided by Amadeus (2019) database. The calculations are presented in Appendix A. Gross margin in 2018 was 57.22%, which is 2.47% less than in 2017. The operating profit margin in 2018 was 21.01%, which 9.24% less than in 2017. Finally, the net profit margin went down from 17.84% in 2017 to 9.98% in 2018. In short, the results revealed a considerable decline in the profitability of the company in 2018.

The problem is connected to two matters, which can be concluded from the financial statements. First, Dignity Plc experienced a considerable rise in the cost of goods sold, which implies that the cost of labour and materials grew (Amadeus, 2019). Second, the company reported a considerable increase in other operating expenses, which includes marketing expenses, rent and utilities, office expenses, operating leases, software services, and other fixed costs (Dignity Plc, 2019). Therefore, even though the operating revenue declined only by 4.14%, net profit margin declined by 44.05% in comparison with 2017. Therefore, the company is recommended to decrease its fixed costs to improve profitability.

Liquidity

Assessing the liquidity of assets is a vital part of evaluating the financial performance of a company. In order to analyse the liquidity of Dignity Plc, current liquidity ratio was used (see Appendix B). Current assets of the company grew from €107 million to €120 million in 2018, which signifies a 12.3% increase. Current liabilities also grew from €79 million to €94 million, which implies the current liabilities increased by 19.1%. Considering these two factors, the current liability ratio decreased by 5.7%, which is marginally significant. However, current liquidity ratio of 1.28 is adequate since it is above 1. In other words, the company can meet short-term obligations such as repaying their loans and paying their employees, and liquidity crisis are not expected. The analysis can be improved by comparing the findings with other companies in the same market or analysing the dynamics for the last five years. However, the deeper assessment does not seem needed as current liquidity rate is healthy.

Working Capital Management

Working capital management is a strategy utilized by the company to ensure that its current assets and liabilities are used efficiently. According to Tuovila (2019), “the primary purpose of working capital management is to enable the company to maintain sufficient cash flow to meet its short-term operating costs and short-term debt obligation” (para. 1). In order for the company to have enough many to support its current needs, the firm should have positive working capital. Dignity Plc demonstrates a stable performance in terms of availability of working capital. In 2018, the working capital was €26,167,120.00 (see Appendix C). Even though the number is 6.72% lower than in 2017, it is still enough to have enough cash to support the needs of the company.

Working capital management also implies monitoring of average collection period ratio and inventory turnover ratio. The dynamics of these ratios is presented in Appendix C. According to the analysis, the company’s turnover rate decreased by 11.6%, which means that Dignity Plc experiences difficulties with selling its services. However, it should be noted that the average collection period decreased by 7%, which implies that the firm can collect the money and use it for growth faster. In summary, working capital management of Dignity Plc is adequate and stable. Even though there are certain changes in working capital management strategy, further analysis is needed to assess its impact on further development.

Solvency and Risk

Two ratios were utilised to assess solvency and risk of Dignity Plc, including debt to equity ratio and interest coverage ratio. The exact figure is presented in Appendix D. The current position of the company is stable as it can meet interest expenses since the interest coverage ratio of 2.55 is above 1.5, which is a crucial point according to Hayes (2019). However, the dynamics of the ratio are worrying since it decreased from 3.66 in 2017. If the current tendency prevails, Dignity Plc may face problems with paying the interest on its debt. At the same time, the dynamics concerning the debt to equity ratio decreased to 10.65 from 15.01. This implies that the ability of the company to meet outstanding debt obligations increased in 2018 in comparison with 2017. However, the current ratio of 10.65 is still high, which implies that the company uses debt aggressively to develop the company.

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Shareholder Return

In order to evaluate shareholder return, capital gains from holding shares for one year (from the beginning until the end of a fiscal year) and dividends received during the year were considered. The results are presented in Appendix E. According to the analysis, shareholder return decreased by 22.9%. The primary concern is that the price of shares declined from €20.50 to €7.73. However, due to stable dividends, the shares remain profitable with shareholder return of €11.61 per share.

Overall Financial Performance

The overall financial performance was assessed in terms of the financial data presented in Appendix F. The analysis revealed that Dignity Plc experiences a considerable decline in financial performance in the majority of indicators. For instance, market capitalization decreased by more than 60% to less than €387 million from more than a billion in 2017. The number is lower than the long-term debt of the company, which was €612 million at the end of 2018. However, long-term debt decreased by 13.3% and shareholder funds increased by 40%, which is a positive sign. Even though there are some positive dynamics, the current financial performance of the company is poor; therefore, the infestations are associated with an increased amount of risk.

Reference List

Amadeus (2019) Dignity Plc. 

Competition and Market Authority (2019) Funerals market study. Web.

Dignity Plc (2019) Annual Report 2018. Web.

Dignity Plc. Dignity Funeral Directors. Web.

Hayes, A. (2019) Interest Coverage Ratio Definition. Web.

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Tuovila, A (2019) Working Capital Management. Web.

Appendices

Appendix A: Profitability Analysis

Gross Margin
2018 2017 Difference Difference(%)
Gross Profit €200,244,998.00 €217,887,603.00 -€17,642,605.00 -8.10%
Operating Revenue €349,929,796.00 €365,023,699.00 -€15,093,903.00 -4.14%
Gross margin 57.22% 59.69% -4.13% -6.92%
Operating Profit Margin
EBIT €73,511,868.00 €110,408,403.00 -€36,896,535.00 -33.42%
Operating Revenue €349,929,796.00 €365,023,699.00 -€15,093,903.00 -4.14%
Operating Profit Margin 21.01% 30.25% -9.24% -30.55%
Net Profit Margin
Net Income €34,926,453.00 €65,118,425.00 -€30,191,972.00 -46.36%
Operating Revenue €349,929,796.00 €365,023,699.00 -€15,093,903.00 -4.14%
Net Profit Margin 9.98% 17.84% -7.86% -44.05%

Appendix B: Liquidity Analysis

Current Liquidity
2018 2017 Difference Difference (%)
Current Assets €120,080,472.00 €106,915,892.00 €13,164,580.00 12.31%
Current Liabilities €93,913,352.00 €78,863,145.00 €15,050,207.00 19.08%
Current Liquidity 1.28 1.36 -0.08 -5.69%

Appendix C: Working Capital Analysis

Working Capital
2018 2017 Difference Difference (%)
Current Assets €120,080,472.00 €106,915,892.00 €13,164,580.00 12.31%
Current Liabilities €93,913,352.00 €78,863,145.00 €15,050,207.00 19.08%
Working capital €26,167,120.00 €28,052,747.00 -€1,885,627.00 -6.72%
Collection Period
2018 2017 Difference Difference (%)
Debtors 16,299,011.00 36,051,123.00 -19,752,112.00 -54.79%
Average accounts rec. 26,175,067.00 29,346,066.50 -3,170,999.50 -10.81%
Operating Revenue €349,929,796.00 €365,023,699.00 -15,093,903.00 -4.14%
Collection Period 27.30 29.34 -2.04 -6.96%
Inventory Turnover Ratio
2018 2017 Difference Difference (%)
Inventory 9,424,598.00 8,224,299.00 1,200,299.00 14.59%
Average inventory 8,824,448.50 7,671,689.50 1,152,759.00 15.03%
Cost of goods sold 149,684,799.00 147,136,096.00 2,548,703.00 1.73%
Inventory Turnover Ratio 16.96 19.18 -2.22 -11.56%

Appendix D: Solvency and Risk Analysis

Debt to equity ratio
2018 2017 Difference Difference (%)
Shareholder funds (equity) 73,179,235.00 52,274,999.00 20,904,236.00 39.99%
Non-current liabilities 685,556,379.00 705,599,822.00 -20,043,443.00 -2.84%
Current Liabilities 93,913,352.00 78,863,145.00 15,050,207.00 19.08%
Total Liabilities (debt) 779,469,731.00 784,462,967.00 -4,993,236.00 -0.64%
Debt to equity ratio 10.65 15.01 -4.35 -29.02%
Interest Coverage Ratio
2018 2017 Difference Difference (%)
EBIT €73,511,868.00 €110,408,403.00 -€36,896,535.00 -33.42%
Interest expenses 28,828,183.00 30,193,118.00 -€1,364,935.00 -4.52%
Interest coverage 2.55 3.66 -1.11 -30.27%

Appendix E: Shareholder Return

Shareholder Return
2018 2017 Difference Difference (%)
Year beginning price €20.50 €29.82 -€9.32 -31.25%
Year end price €7.73 €20.50 -€12.77 -62.29%
Dividends €24.38 €24.38 €0.00 0.00%
Shareholder return €11.61 €15.06 -€3.45 -22.91%

Appendix F: Summary of Financial Data

2018 2017 Difference Difference(%)
EBIT €73,511,868.00 €110,408,403.00 -€36,896,535.00 -33.42%
Gross profit €200,244,998.00 €217,887,603.00 -€17,642,605.00 -8.10%
Cost of goods sold €149,684,799.00 €147,136,096.00 €2,548,703.00 1.73%
Operating revenue €349,929,796.00 €365,023,699.00 -€15,093,903.00 -4.14%
Financial expenses €28,828,183.00 €30,193,118.00 -€1,364,935.00 -4.52%
Shareholder funds €73,179,235.00 €52,274,999.00 €20,904,236.00 39.99%
Stock €9,424,598.00 €8,224,299.00 €1,200,299.00 14.59%
Debitors €16,299,011.00 €36,051,123.00 -€19,752,112.00 -54.79%
Creditors €9,202,843.00 €8,562,284.00 €640,559.00 7.48%
Long-term debt €611,933,633.00 €705,599,822.00 -€93,666,189.00 -13.27%
Market price €7.73 €20.50 -€12.77 -62.29%
Number of shares outstanding 50,009,000 49,932,000 77,000 0.15%
Market capitalization €386,569,570.00 €1,023,606,000.00 -€637,036,430.00 -62.23%
Dividents €24.38 €24.38 €0.00 0.00%

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