Question

In: Accounting

Harrods is a high-end department store chain in London. House of Fraser is high-end department store...

Harrods is a high-end department store chain in London. House of Fraser is high-end department store in Edinburgh, Scotland. Consider the following data for these two companies (Millions of £).

Current Liabilities in 2015

Current Liabilities in 2016

Cash from Operations

2016

Expenditures on PPE

2016

Harrods

1293.7

1703.7

316.2

42.8

House of Fraser

357.5

354.0

17.2

18.1

Compute the operating cash flow to current liabilities ratio for both firms

Compute the free cash flow for both firms.

Compute Operating cash flow to Capital Expenditures

Comment on the results of your computations (at least 3 comments).

Solutions

Expert Solution

operating cash flow to current liabilities ratio = operating cash flow/current liabilities

Free Cash flow = Operating cash flow – Capital expenditure

Operating cash flow to Capital Expenditures = Operating cash flow/Capital Expenditures

Harrods House of Fraser
operating cash flow to current liabilities ratio 316.2/1703.7 = 0.19 17.2/354 = 0.05
Free Cash flow 316.2- 42.8 = 273.4 17.2 - 18.1 = - 0.9
Operating cash flow to Capital Expenditures 316.2/42.8 = 7.39 17.2/18.1 = 0.95

Comments on the basis of above calculations:

(i) operating cash flow to current liabilities ratio of Harrods is better as compared to House of Fraser which shows Harrods greater ability to meet its current liabilities.

(ii)  Free Cash flow of Harrods is positive whereas free cash flow of House of Fraser is negative which indicates that Harrods has surplus free cash flows which can be used for other purposes like dividend payment but House of Fraser has no surplus cash.

(iii) Operating cash flow to Capital Expenditures of Harrods is very high in comparison to House of Fraser which means that Harrods is still left with surplus cash even after capital expenditure but House of Fraser has not sufficient free cash flows to meet its capital expenditure.

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ekkarill92 answered 1 year ago
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