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PERFORMANCE ANALYSIS OF INDITEX GROUP
EXECUTIVE SUMMARY
The analytical and critical review of a company’s performance is a very important managerial responsibility. Most of the decisions are based on the figures generated by the finance and accounting departments and this calls for strict observance of the financial reporting standards in the preparation of the financial statements. They must capture all the relevant information so that the inferences drawn from them can be realistic and effective. These figures must reflect the true and fair view of the company.
INTRODUCTION
Inditex Group is a Spanish company and one of the major players in the textile industry. It is composed of more than 100 companies all engaged in the manufacturing, designing and distribution of textiles all over the world.
Question 1.ANALYSIS OF FINANCIAL PERFORMANCE
Comparison of latest year with previous year reports.
The financial year for the Group ends at 31st January of the proceeding year.
The following are extracts from the Group’s financial statements;
| Year ending 31stJan.2011 | Year ending 31st Jan. 2012 | |
| Sales | 12,527 | 13,793 |
| Operating Income | 2,966 | 3,258 |
| Operating Profit | 2,290 | 2,522 |
| Pre-tax Profit | 2,322 | 2,559 |
| Net Income | 1,732 | 1,932 |
| Earnings per share (Euros) | 2.78 | 3.10 |
.
There was growth in each of the above variables, an indication of the company’s good performance.
Question 2
| Ratio analysis of both latest and previous years: | |||||||||
| (A) LIQUIDITY | |||||||||
| Current ratioThis ratio indicates the company’s ability to meet its current liabilities obligations using current assets; | |||||||||
Therefore for the year ended 31st January 2012 the current ratio for the company
The current ratio for the year ended 31st January 2011 was
Quick ratio
The second liquidity ratio is the Quick ratio. This ratio shows the ability of a company to satisfy its current liabilities using its most liquid assets ( Deverrel, 1999).
Current liabilities
Therefore the quick ratio for the year ended 31st January 2012= 5437- 1277 = 1.54
2702
For the year ended 31st January 2011 the quick ratio was =5203- 121
2675
Networking capital to sales ratio
This ratio indicates the liquid assets of a company based on its need for that liquidity (as indicated by sales) after the company meets its short term obligations.
Therefore for Inditex Group, the networking capital to sales ratio for the year ended 31st Jan 2012 was = 5437- 2702 =0.19
13793
The ratio for the previous year was = 5203- 2675 = 0.2
12527
The larger these liquidity ratios are, the greater is the company’s ability to meet and finance its short term obligations. If for instance one considers the current ratio, huge amounts of current assets and less amount of current liabilities will imply that the company can successfully meet its short term obligations.
The Inditex group is performing very well because the liquidity ratios analyzed increase in the present year as compared to the previous. This shows that chances of the company lacking liquid capital for its immediate requirements are minimal (Keegan, 2005).
(B)SOLVENCY RATIOS
These ratios show the ability of a company to service its long term debts and also any interest earnings that will accrue on those debts. The larger these ratios are the more solvent a company is and hence its ability to service any of its long term debt commitments (Caroline, 1997). These ratios include:
Solvency ratio.
This is expressed as a ratio of the total assets to liabilities. Therefore;
For Inditex company the solvency ratio for the year ending 31st January 2012 is =10959 =3.09
3544
For the year ending 31st January 2011=9826 =2.85
3440
For the year ending 31st January 2010= 8335 =3.62
2304
Debt ratio
This ratio shows the degree of reliance on debt by a company to finance its assets. The lower the debt ratio the stronger is the company.
Debt ratio= Total debt
Total assets
The debt ratio for the company for the year ending 31st January 2012= 1.54 = 0.00014
10959
The debt ratio for the year ended 31ST January 2011= 4.17 = 0.00042
9826
These figures are very low and this indicates that the company is very strong and can fully service its debts which are very low.
Indebtedness ratio
This ratio is used as an indicator of what makes up the debt liability of a company. This is because a company’s total debt can be in other areas like payables, salaries and not only in form of bank loans.
Indebtedness ratio= Total debts
Total liabilities
For Inditex Company, the indebtedness ratio for the year ending 31st Jan 2012=1.54 =0.0004
3544
For the year ending 31st January 2011 = 4.17 =0.001
3440
(C)WORKING CAPITAL MANAGEMENT RATIOS
The working capital enables a company take advantage of opportunities as they arise. The working capital is normally the difference between current assets and current liabilities.
Working capital ratio = current assets
Current liabilities
This ratio indicates the ability of the company to finance its long term obligations. It is the same as the current ratio.
Collection ratio
This ratio gives the average number of days it takes a company to transform receivables into cash.
Collection ratio= accounts receivable
Average daily sales
The collection ratio for this company for the year ending 31st Jan 2012=548.28 =14.5
13793/365
For the year ending 31st Jan 2011 = 498 =14.5
12527/365
Inventory turn over ratio
This ratio indicates how efficient a business is in the selling and management of its inventory.
Inventory turn over ratio= Net sales
Inventory
The inventory turn over ratio for Inditex group for the year ended 31st Jan.2012=13793 =10.8
1277
For the year ended 31st Jan.2011= 12527/1214=10.3
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(D) PROFITABILITY RATIOS
These ratios are an indicator of how well a firm is performing. The net profit margin ratio shows how much profit a company is making for every unit currency of sales (Fred, 2000).
Net profit margin ratio = Net profit after tax
Sales
The net profit margin ratio for the company as at 31st January 2012 was 14.2% and for the previous year was 12.1%
Return on assets ratio (ROA)
This shows the level of profitability as a comparison to investment in new capital.
Return on assets = Net income
Total assets
The return on investments for the company as at 31St January 2012 was 18.4% and for the previous year it was 14.9%.
This ratio tells how efficient the management is in using the company’s assets to generate earnings.
Return on equity
This rate indicates how mush the shareholders earned for their investment in a company.
Return on equity= Net income
Total shareholders equity
The rate for the Inditex group was 24.8% for the year ended 31st January 2012 and 21.7% for the previous year.
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(E) ASSET EFFICIENCY RATIOS
Inventory turn over ratio
This ratio indicates the number of times inventory is sold and stocked every year. If it is high the company could be in danger of having stock outs and if it is very low the company could be having some obsolete inventory that does not sell in the market.
Inventory turn over ratio= Net sales
Inventory
Inditex Group had an inventory turn over ratio of 13793/1277=10.8 for the year ended 31st January 2012 and the ratio for the previous year was 12527/1214=10.3
Days’ sales in inventory
This ratio measures the performance of the company for the management and the owners of the company.
Days’ sales in inventory = 365 days / inventory turn over
For this company the ratio will be 365/10.8=33.8 for the year ended 31st January 2012 and 365/10.3=35.4 for the previous year.
Fixed assets turn over ratio
This ratio gives a picture of how the fixed assets like plant and equipment are being used to generate sales.
Fixed assets turn over ratio= sales/ net fixed assets.
For the company, the ratio is 13793/4082= 3.4 times for the year ended 31st January 2012 and 12527/3414=3.7 times for the previous year. This means the fixed assets were used more to generate sales in the year ended 31st January 2011 than the proceeding year.
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Question 3
Most of the industry operators experienced moderate sales. On average majority had net profit margin ratios of between 4 to 9 %. This was mainly due to the effects of the global financial crisis of 2008 and the majority have not fully recovered.
Question 4 Key performance indicators (KPIs)
| Current ratio | 2.01 |
| Solvency ratio | 3.09 |
| Collection ratio | 14.5 |
| Net profit margin ratio | 14.2% |
| Inventory turn over ratio | 10.8 |
Question 5
Key performance indicators denote the level of success of an activity and the achievement of a company’s goals and objectives. KPI’s are used in various departments of the organization and therefore those choosing the indicators to be used in a particular section must have a good understanding of the organization. There should also be good management frameworks in companies to enable better understanding of the procedures and hence the selection of the correct KPI for use.
Question 6
The level of liquidity and solvency for Inditex is healthy. The liquidity levels have also been rising meaning that the ability of the company to meet its current liabilities obligations using current assets has been improving. The company has also been able to continuously give dividends to its shareholders due to the impressive performances in the management of its assets and equity.
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Question 7
Advantages of using KPI’s
- Provides vital information necessary for making business decisions
- Alerts managers on the direction the business is taking and need for precautionary and intervention measures.
- Provide information that enables the optimal allocation of resources and achievement of set goals and objectives.
Disadvantages
- Requires a lot of resources in form of qualified personnel for monitoring and managing the processes involved.
- Any biases in the data collection, computation and analysis can have negative implications to the business.
The compilation of this data helps in making key decisions concerning the business. Decisions to acquire other businesses, increasing the product range, marketing strategies to be adopted usually rely on this data (John, 2010).
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References
Caroline, H (1997). Financial Analysis Techniques. London. Prentice Hall, P.28
Deverrel, W (1999). Performance Indicators. Sydney. Lakers Publishers, P.4
Fred, D (2000) “The need for Financial Analysis” (Online) Available from http://www.fin.edu.au/ (Accessed on 19th May 2012)
John, V (2010). Basic Business Decisions. Dublin. Ace Books, P.19
Keegan, B (2005). Analysing Business Environments. Freiburgh. Hewmann Books, P.81
Appendix 1
| 2012 | 2011 | 2010 | 2009 | 2008 | |
| Period End Date | 01/31/2012 | 01/31/2011 | 01/31/2010 | 01/31/2009 | 01/31/2008 |
| Stmt Source | ARS | ARS | ARS | ARS | ARS |
| Stmt Source Date | 04/02/2012 | 03/30/2011 | 03/30/2010 | 04/01/2009 | 06/11/2008 |
| Stmt Update Type | Updated | Updated | Updated | Updated | Updated |
| Assets | |||||
| Cash a | 3,517.44 | 3,433.53 | 2,420.11 | 1,466.29 | 1,465.84 |
| 548.28 | 498.8 | 437.44 | 600.65 | 465.44 | |
| Total Inventory | 1,277.01 | 1,214.62 | 992.57 | 1,054.84 | 1,007.21 |
| Prepaid Expenses | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Other Current Assets, Total | 94.56 | 55.55 | 93.67 | 142.26 | 43.11 |
| Total Current Assets | 5,437.29 | 5,202.51 | 3,943.8 | 3,264.04 | 2,981.6 |
| Property/Plant/Equipment, Total – Net | 4,082.87 | 3,414.44 | 3,306.81 | 3,450.78 | 3,191.59 |
| Goodwill, Net | 218.09 | 131.69 | 131.69 | 131.69 | 125.58 |
| Intangibles, Net | 614.11 | 555.75 | 533.28 | 547.94 | 517.95 |
| Long Term Investments | 9.5 | 8.92 | 15.39 | 14.42 | 36.17 |
| Note Receivable – Long Term | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Other Long Term Assets, Total | 597.31 | 512.78 | 404.48 | 367.78 | 252.72 |
| Other Assets, Total | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Total Assets | 10,959.18 | 9,826.08 | 8,335.44 | 7,776.65 | 7,105.6 |
| Liabilities and Shareholders’ Equity | |||||
| Accounts Payable | 1,838.09 | 1,886.67 | 1,557.75 | 1,540.77 | 1,577.94 |
| Payable/Accrued | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Accrued Expenses | 178.46 | 145.57 | 133.92 | 0.0 | 0.0 |
| Notes Payable/Short Term Debt | 0.0 | 0.0 | 0.0 | 220.47 | 333.49 |
| Current Port. of LT Debt/Capital Leases | 0.69 | 2.68 | 35.06 | 13.57 | 37.78 |
| Other Current Liabilities, Total | 685.54 | 639.98 | 578.23 | 616.05 | 508.86 |
| Total Current Liabilities | 2,702.77 | 2,674.91 | 2,304.96 | 2,390.85 | 2,458.07 |
| 1.54 | 4.17 | 5.0 | 13.24 | 42.36 | |
| Deferred Income Tax | 182.53 | 172.65 | 172.89 | 213.85 | 110.96 |
| Minority Interest | 40.77 | 36.98 | 41.38 | 26.89 | 23.92 |
| Other Liabilities, Total | 616.75 | 551.19 | 482.04 | 410.11 | 277.17 |
| Total Liabilities | 3,544.37 | 3,439.9 | 3,006.27 | 3,054.93 | 2,912.47 |
| Redeemable Preferred Stock | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Preferred Stock – Non Redeemable, Net | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Common Stock | 93.5 | 93.5 | 93.5 | 93.5 | 93.5 |
| Additional Paid-In Capital | 20.38 | 20.38 | 20.38 | 20.38 | 20.38 |
| Retained Earnings (Accumulated Deficit) | 7,312.64 | 6,359.81 | 5,343.42 | 4,722.56 | 4,181.55 |
| Treasury Stock – Common | 0.0 | -0.62 | -0.62 | -0.62 | -6.93 |
| ESOP Debt Guarantee | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Unrealized Gain (Loss) | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Other Equity, Total | -11.72 | -86.89 | -127.51 | -114.11 | -95.37 |
| Total Equity | 7,414.81 | 6,386.18 | 5,329.17 | 4,721.71 | 4,193.13 |
| Total Liabilities & Shareholders’ Equity | 10,959.18 | 9,826.08 | 8,335.44 | 7,776.65 | 7,105.61 |
| Total Common Shares Outstanding | 623.33 | 623.11 | 623.11 | 623.11 | 620.96 |
| Total Preferred Shares Outstanding | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
Financial data in EUR
Appendix 2
| Annual Income Statement Data |
| Actuals in M €Estimates in M €Fiscal Period January2010,2011, 2012201320142015 Sales11 08412 52713 79315 63617 14618 858 Operating income (EBITDA)2 3742 9663 2583 7334 1414 556 Operating profit (EBIT)1 7292 2902 5222 8913 2263 553Pre-Tax Profit (EBT)1 7322 3222 5592 9183 2433 618 Net income1 3141 7321 9322 2192 4572 689EPS ( €)2,112,783,103,553,954,32 Dividend per Share ( €)1,201,601,802,112,402,67 Yield1,79%2,38%2,68%3,14%3,58%3,98% Annoucement Date 03/17/2010 06:18am03/23/2011 06:02am03/21/2012 06:40am— |
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