Flawed fortress

Leases are key to the interpretation of French Connection's financial position. With no debt and no defined benefit pension scheme it has very few liabilities on its balance sheet. Bring off-balance sheet obligations into the analysis though, and ratios relating to borrowing change alarmingly.

The lease commitments should be discounted to account for the fact that some of them will be paid many years in the future, but its a vague calculation requiring estimation of how long the leases will be paid for (the notes to the accounts only disclose the commitments falling into three bands, less than one year, one to five years and over five years) and how much to discount the payments by.

As I don’t have this information, and the actual obligations could be higher after future rent reviews anyway, I’ve used the total obligation which seems more prudent than reducing it by an arbitrary amount.

If you consider leases, which are non-cancellable, to be a kind of debt, at nearly 80% of tangible assets, French Connection looks heavily indebted.

If you don't, it's a financial fortress.