Balance sheet Financial Reporting

Balance sheet Financial Reporting
Balance sheet Financial Reporting

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Balance sheet Financial Reporting

The balance sheet captures the current financial position of the NGO. Net assets should balance with the liabilities and equity since the each of the asset is funded by the resources contributed by members and other sponsors. The statement should provide a snapshot of the assets, liabilities, and net assets as the specified date. Gabel’s statement of financial position gives detailed information about the financial position of the company as indicated by the figures. It has the assets section, the liabilities section, and the equity section.

Each fixed asset should have its book value minus the depreciation to get the current net value. By giving the value of the asset in a different line with its total depreciation value makes the balance sheet untidy and crowded making it hard to analyze (Elizabeth, 2010). The net of the fixed asset is the one used to analyze the current financial position of the organization. It is therefore important to indicate the net of the fixed assets to avoid confusion. Deductions and accruals should just indicate the total amounts instead of individual amounts since the receipts will be attached to the statement to avoid congesting the statement.

Since the company is a non-profit, the balance sheet should only indicate the assets and the liabilities. The assets and liabilities are the values used to indicate the financial position of the organization and not the equity hence the net income and equity are not inclusive.

Also, it is important for the accountants to indicate the previous year’s balance sheet values for comparison purposes. The current values should be shown against the previous year’s or, at least, the past three years to make the analysis of the statement viable. When the values of two periods are shown, it makes it easy for analysts to make comparisons and understand the changes that may have taken place to get the current balance sheet values.

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Income Statement

The statement is used to give information regarding the operating activities of the organization from one date to another. It gives information pertaining the revenues and expenses during a particular time, and it’s useful to forecast future activities. For NGOs, activities are measured as received and used contributions. The statement is divided between temporary, restricted, unrestricted, and permanently restricted activities.

Recorded revenues should be classified into one of the four activities based on the donor’s intent. Expenses should be divided into the program, administrative, and fundraising expenses. Revenues are either in the form of activities, membership dues, program revenues, special event and investment income. By categorizing revenues and expenses in the different classification, it provides for better analysis as well as being in line with the global accounting standards.

Gabel’s statement does not give columns for the different activities under income and expenses. By generalizing the revenues and expenses and indicating their categories randomly makes it hard for analysis and is not in line with the required reporting standards. It is also important that the statement also records prior year values for comparison purposes. Categorizing each activity and expense into the section they fall helps stakeholders identify gaps in the company for improvement.

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Statement of cash flows

Statement of cash flow is used to record the cash inflows and cash outflows over a specified period. The statement is divided into three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities (Ron, 2013). The total amount from the three sections gives an explanation of how the cash flow from the beginning of the period was converted to the balance at the end of the operating period.

Gabel’s statement should show the net cash for each of the sections and sum up the amounts resulting from same activity instead of detailing each activity. The statement is supposed to provide an overview of the cash flows to make it easy for reporting.

Accrual accounting

NGOs have a stringent requirement of using the accrual method of accounting as per the Generally Accepted Accounting Standards (Elizabeth, 2010). The accrual method records revenues when earned and expenses when they have been incurred. By using the accrual method, an organization can indicate its current financial position in a pronounced manner than the cash accounting method.

As an NGO, it is possible to get donors that offer to donate at a later period and when the amount is recorded, it gives the organization a stronger financial position. If Gabel uses the accrual methods, it can recognize pledges of donations and income when they have been made and record cash when it has been received making the income higher than if it used the cash accounting. Cash accounting only considers income when cash has been paid and expense when the amount has been disbursed making it hard to present the current financial position of the organization.

As long as a transaction is to take place and all the necessary conditions have been met then it should be recorded in the financial statements. With addition of statement of activities to the three financial statements, the company should apply accrual accounting to all its recordings not only to meet the required regulations but also to enable stakeholders have a correct view of the current financial position of the firm.

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Recommendations

1.    Gabel’s Company should increase its campaigns to reach to more people hence increase its chances of donations. Though the company has net profit, it has a lot of activities it requires to attend to and perform using its wide assets base. Through fundraising campaigns, more donors will be attracted to pay and if they are followed up, they may end up increasing the contributions amount hence increasing the net realized income.

2.    Another method the company can use is to increase member’s contributions and subscription fees as well as holding part of dividends to investment in rentals. The amount contributed by members can be added up at a small percentage with respect to individual member’s contribution and set of activity. If each member’s contributions is increased by a small margin, the total amount will subsequently increase helping to cover up for the administrative and other expenses to have a high income at the end of the period.

3.    The company should also dispose of some of its unused assets before they lose their value. The amount generated can then be used to invest in some of its productive investment activities. There is a lot of available assets that may be disposed of to increase the net income. Some of the depreciating assets should be sold and a portion of the land rented out or even sold to raise extra income for the company to facilitate its daily operations.

References

Elizabeth, 2010. How to assess non-profit financial performance. Retrieved from: http://www.nasaa-arts.org/Learning-Services/Past-Meetings/Reading-5-Understanding-Financial-Statements.pdf

Ron, 2013. Cash flow statement for NGOs. Retrieved from: http://smallbusiness.chron.com/purpose-cash-flow-statement-nonprofit-organization-11283.html

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Financial Position Reporting: Balance Sheet

Financial Position Reporting
Financial Position Reporting

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Financial Position Reporting

Balance sheet

The balance sheet captures the current financial position of the NGO. Net assets should balance with the liabilities and equity since the each of the asset is funded by the resources contributed by members and other sponsors. The statement should provide a snapshot of the assets, liabilities, and net assets as the specified date. Gabel’s statement of financial position gives detailed information about the financial position of the company as indicated by the figures. It has the assets section, the liabilities section, and the equity section.

Each fixed asset should have its book value minus the depreciation to get the current net value. By giving the value of the asset in a different line with its total depreciation value makes the balance sheet untidy and crowded making it hard to analyze (Elizabeth, 2010). The net of the fixed asset is the one used to analyze the current financial position of the organization. It is therefore important to indicate the net of the fixed assets to avoid confusion. Deductions and accruals should just indicate the total amounts instead of individual amounts since the receipts will be attached to the statement to avoid congesting the statement.

Since the company is a non-profit, the balance sheet should only indicate the assets and the liabilities. The assets and liabilities are the values used to indicate the financial position of the organization and not the equity hence the net income and equity are not inclusive.

Also, it is important for the accountants to indicate the previous year’s balance sheet values for comparison purposes. The current values should be shown against the previous year’s or, at least, the past three years to make the analysis of the statement viable. When the values of two periods are shown,  it makes it easy for analysts to make comparisons and understand the changes that may have taken place to get the current balance sheet values.

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Income Statement

The statement is used to give information regarding the operating activities of the organization from one date to another. It gives information pertaining the revenues and expenses during a particular time, and it’s useful to forecast future activities. For NGOs, activities are measured as received and used contributions. The statement is divided between temporary, restricted, unrestricted, and permanently restricted activities.

Recorded revenues should be classified into one of the four activities based on the donor’s intent. Expenses should be divided into the program, administrative, and fundraising expenses. Revenues are either in the form of activities, membership dues, program revenues, special event and investment income. By categorizing revenues and expenses in the different classification, it provides for better analysis as well as being in line with the global accounting standards.

Gabel’s statement does not give columns for the different activities under income and expenses. By generalizing the revenues and expenses and indicating their categories randomly makes it hard for analysis and is not in line with the required reporting standards. It is also important that the statement also records prior year values for comparison purposes. Categorizing each activity and expense into the section they fall helps stakeholders identify gaps in the company for improvement.

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Statement of cash flows

Statement of cash flow is used to record the cash inflows and cash outflows over a specified period. The statement is divided into three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities (Ron, 2013). The total amount from the three sections gives an explanation of how the cash flow from the beginning of the period was converted to the balance at the end of the operating period.

Gabel’s statement should show the net cash for each of the sections and sum up the amounts resulting from same activity instead of detailing each activity. The statement is supposed to provide an overview of the cash flows to make it easy for reporting.

Accrual accounting

NGOs have a stringent requirement of using the accrual method of accounting as per the Generally Accepted Accounting Standards (Elizabeth, 2010). The accrual method records revenues when earned and expenses when they have been incurred. By using the accrual method, an organization can indicate its current financial position in a pronounced manner than the cash accounting method.

As an NGO, it is possible to get donors that offer to donate at a later period and when the amount is recorded, it gives the organization a stronger financial position. If Gabel uses the accrual methods, it can recognize pledges of donations and income when they have been made and record cash when it has been received making the income higher than if it used the cash accounting. Cash accounting only considers income when cash has been paid and expense when the amount has been disbursed making it hard to present the current financial position of the organization.

As long as a transaction is to take place and all the necessary conditions have been met then it should be recorded in the financial statements. With addition of statement of activities to the three financial statements, the company should apply accrual accounting to all its recordings not only to meet the required regulations but also to enable stakeholders have a correct view of the current financial position of the firm.

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Recommendations

1.    Gabel’s Company should increase its campaigns to reach to more people hence increase its chances of donations. Though the company has net profit, it has a lot of activities it requires to attend to and perform using its wide assets base. Through fundraising campaigns, more donors will be attracted to pay and if they are followed up, they may end up increasing the contributions amount hence increasing the net realized income.

2.    Another method the company can use is to increase member’s contributions and subscription fees as well as holding part of dividends to investment in rentals. The amount contributed by members can be added up at a small percentage with respect to individual member’s contribution and set of activity. If each member’s contributions is increased by a small margin, the total amount will subsequently increase helping to cover up for the administrative and other expenses to have a high income at the end of the period.

3.    The company should also dispose of some of its unused assets before they lose their value. The amount generated can then be used to invest in some of its productive investment activities. There is a lot of available assets that may be disposed of to increase the net income. Some of the depreciating assets should be sold and a portion of the land rented out or even sold to raise extra income for the company to facilitate its daily operations.

References

Elizabeth, 2010. How to assess non-profit financial performance. Retrieved from:  http://www.nasaa-arts.org/Learning-Services/Past-Meetings/Reading-5-Understanding-Financial-Statements.pdf

Ron, 2013. Cash flow statement for NGOs. Retrieved from: http://smallbusiness.chron.com/purpose-cash-flow-statement-nonprofit-organization-11283.html

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Return on Equity: Financial Statement Interpretation

Return on Equity
Return on Equity

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Return on Equity: Financial Statement Interpretation

Volkswagen

The German automobile company was created in 1937 under the Volkswagen group of companies and is recognized as one of the top-selling automakers in the entire world. In fact, it is considered to be the second largest automobile manufacturing company in the automotive industry. As such, three of its products are in the top ten of bestselling cars. Better still, the company recorded $244.985 billion in revenues as of 2014. With a workforce of 588,902 employees and $424.982 billion in total assets, the company generated $13.393 billion profits (Morrow, 2016).

The company has focused its primary goal to double its market share in the United States. Through this, the firm would be focusing on its vision of becoming the world’s largest manufacturer of automobiles by the year 2018. In keeping faithful to this vision, they are expanding to bigger markets with the major ones being Germany and China (Morrow, 2016).

Return on Equity

Return on equity checks the return on the shareholders’ equity. In simpler terms, it measures the firm’s efficiency in earning profits from every unit of the shareholder’s equity. This means that a company needs to invest funds in an appropriate manner for them to get growth in their earnings. It is essential to note that measuring consistent margins in earnings per share does not sufficiently explain the performance. Therefore, Return on equity serves to be the best profitability ratio in measuring efficiency in performance. In this case, Volkswagen’s Return on equity ROE using the Du Point analysis for the last two years would be;

ROE using the DuPont method = (net income/revenue) * (income/assets) * (assets/equity)

Or

ROE = (RNOA) + Return on debt

2015 = -1.67

2016; (10271.714922/227011) * (227011/429031.72385) * (429031.72385/97714.633) = 10.51

High return on equity mean that firms are not capital intensive. However, even if there are high returns with leverage in 2016, there is still a solid balance sheet. This means that the firm has utilized little of its capital this year on income-generating investing as opposed to 2015. All in all, it is critical to invest in firms with high Return on equity as they fluctuate due to company earnings or cycles when looking at long-term investments. For that reason, investors should look at investing in this year’s company ventures for them to get high returns.

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Microsoft

Microsoft is an American technology company that deals with the manufacture and distribution of computer software, electronics, as well as services. It is also recognized as the world’s largest software company and the most valuable. Founded in 1975, the company had its headquarters in Washington and recorded a revenue of $93.58 billion by 2015. It is also noted that the company has produced billionaires and millionaires from its 118,584 employees. More so, the firm is known to register high profits with a net income of $12.19 in 2015. As such, the company continues to grow to be a major player in the computer and electronics industry.

Return on Equity

ROE using the DuPont method = (net income/revenue) * (revenues/assets) * (assets/equity)

(Net profit margin) * (Asset turnover) * (Leverage)

2014; (25.42%) * (0.50) * (1.92) = 24.59%

2015; (13.03%) * (0.53%) * (2.20) = 15.23%

As stated earlier, firms that have registered high ROE often generate more cash rather than investing it. Even though, higher Return on equity show that the company is making good use of their equity in making more income, they are not exhausting their full potential in investments. In this case, Microsoft’s 2015’s Return on equity is lower than in 2014 by 9.36%. This means that they have been investing more rather than making profits. As a result, their balance sheet is not rigid since cash is always flowing in and out of investments. Better still, the higher rates of ROE show that the company is making good use of efficiency in utilizing their capital or shareholders’ equity in generating more income.

Walmart

In the same sense as Microsoft, Walmart is an American company but classified under the retail industry where it manages hypermarkets, departmental stores, and groceries. The firm has grown to establish 11,543 stores in 28 countries with its main operations being in the United States and Canada. The company has a registered revenue of $482.13 billion by 2016 thereby being recognized as the world’s largest firm by revenue. The family-owned business is also the most valuable enterprise through its attractive market value.

Being the biggest grocery retailer in the United States, its net income adds up to $14.694 billion even though it has employed 2.2 million people in all its global branches. However, it struggles to get a bigger market share by venturing into the growing and emerging Chinese and another Asian market. Also, they set low prices for their products in order to get a large customer base. Additionally, since the business is the biggest private employer in the United States, its turnover rate significantly affects the unemployment rates. In the same regard, they have faced numerous charges ranging from lawsuits to labor strikes.

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Return on Equity

ROE using the DuPont method = (net income/revenue) * (income/assets) * (assets/equity)

(Net profit margin) * (Asset turnover) * (Leverage)

2016; (3.07%) * (2.40%) * (2.48%) = 18.24%

2015; (3.39%) * (2.37%) * (2.50%) = 20.10%

Businesses that have higher returns on equity are focused on protecting their net income in facing the competition. This is so since they generate more income with little need of reinvesting it yet they have the ability to increase their business value. Still, higher Return on equity means having good business value since the stock prices will appreciate in a bid to trade with the firm’s growing value.

But, is having more shares worthwhile than investing the gained income? In the above recordings, it is clear that Walmart is making god use of their shareholders’ equity in generating more income for the business. However, the generated income is to place the company at the top of their rivals and in the stock market. Fortunately, the Return on equity decreased from 20.10% in 2015 to 18.24% in 2016 due to further reinvestment of their gained earnings.

From the above statistics, it is clear that both Microsoft and Walmart understand the importance of reinvesting their income in profitable ventures rather than having a solid balance sheet. On the other hand, Volkswagen is increasing their Return on equity perhaps to recapture their market position. The firm might also have decided not to reinvest their earnings probably to increase their value and better trading stocks in the stock market.

Company Analysis

Current Ratio

The current ratio measures a organization’s ability to offset its short-term debts or meeting its obligations. It gives the efficiency of a company’s operations to turn the product into cash. This is understood through the fact that businesses that are unable to pay their short-term debts often have liquidity problems.

 It is given as; Total current liabilities/total current liabilities

For the first quarter in 2016;

Volkswagen – 179895.323/177672.61 = 1.01

Walmart – 59097/70282 = 0.84

Microsoft – 128421/44354 = 2.90

(Financials are given in millions)

The higher the ratio is, the more likely a company is able to pay its short-term debt. Therefore, a current ratio that is under 1 means that the establishment is having difficulties in paying off its obligations. Even though this is an indication the firm is not in good financial vigor, it does not inevitably mean that they will go broke (Christensen, Baker & Cottrell, 2014).

This means that Walmart’s first quarter performance is not good since they are having difficulties paying off their short-term debt. However, if the company has satisfying long-term projections, it may be able to borrow and pay off its obligations. In the same sense, Microsoft proves to be most efficient in paying off its short-term liabilities compared to the rest.

Quick Ratio

Though almost similar to current ratios, quick ratios show the practice’s ability to meet its short-term debt through its most liquid assets such as cash. As a result, inventories are excluded since they are less liquid.

For that reason, it is given through;

(Total current assets – portfolio)/ total current liabilities

For the first quarter in 2016;

Volkswagen – (179895.322 – 39936.526)/ 177672.606 = 0.79

Walmart – (59097 – 44513)/ 70282 = 0.21

Microsoft – (128421 – 2450)/ 44354 = 2.84

(Financials are given in millions)

Generally, a low quick ratio is an indication that a company is over-leveraged or is finding it hard to increase its sales, pay bills or is collecting their income slowly. From the other perspective, a higher quick ratio shows that a business is able to meet its financial obligations (Christensen, Baker & Cottrell, 2014). As such, they often have a faster inventory with fast conversion cash cycles. In this regard, Both Volkswagen and Walmart and struggling to meet their financial obligations. They cannot fully pay their current debt. Conversely, Microsoft shows good financial strength in its short term.

Net Profit Margin

Net margin is often used in assessing a company’s profitability and value estimation but is not entirely reliable. This is so because they can be easily manipulated by changing the methods of depreciation or altering the standard accounting practices. They are given through;

Net profit margin – net income/revenue

For the first quarter in 2016;

Volkswagen – 2630.290/56752.784 = 4.63

Walmart – 3079/115904 = 2.66

Microsoft – 3756/20531 = 18.29

(Financials are given in millions)

In this case, Microsoft company is the most profitable firm in the sense has it has the highest net profit margin with Walmart having the least profit margin.  Microsoft is, therefore, ranked as having a net margin higher than 79% of the companies in the global software and infrastructure industry. In the same regard, Walmart was 68% higher in the retail industry while Volkswagen was 83% higher in net margins in the automotive industry.

Asset Utilization

Asset utilization involves the calculation of returns on Assets which measures the efficiency in which a firm uses their assets to generate income (Christensen, Baker & Cottrell, 2014). In short, it shows how well a company uses what it has to generate income. Therefore, it is given by;

Asset utilization – (net income/revenue) * (revenue/average total assets)

For the first quarter in 2016;

Volkswagen – (10521.1581/227011.136) * (227011.136/429031.724)= 2.45

Walmart – (12316/463616) * (463616/199143) = 6.18

Microsoft – (15024/82124) * (82124/180983) = 8.30

Similar to the return on equity, asset utilization can be affected by dynamic business cycles. Due to this, the ratio becomes crucial when looked at in the long-term perspective. Due the many factors such as stock buyback, may make the ROA not reflect the specific earning authority of the assets. ROA and ROE should not be used in the comparison of firms that are in different industries (Christensen, Baker & Cottrell, 2014). Microsoft’s ROA is higher than the rest of the companies even though they are in different industries.

Financial leverage

Financial leverage is recognized as the ability of an enterprise to use its debt in acquiring assets. It is also commonly known as trading on equity. It is given through;

Financial leverage – average of the total assets/average of the total equity

For the first quarter in 2016;

Volkswagen – 429031.724 / 97714.633 = 4.391

Walmart – 199143/77864.5 = 2.558

Microsoft – 180983.5/75793 = 2.388

When the value of assets falls, the financial leverage may fail to be beneficial. They do not guarantee the success of any business (Christensen, Baker & Cottrell, 2014). Volkswagen is, therefore, risking due to its high financial leverage in the event of having a decline in sales. From the above recordings, Microsoft is taking less risky investments of using debt to acquire assets as opposed to Walmart and Volkswagen.

Conclusion

Comparing companies in different industries is not always easy due to the variety of factors that involve the various operations that are undertaken. As stated above, ROE and ROA will not be useful when comparing the companies since they are from various industries (Christensen, Baker & Cottrell, 2014). In the same regard, manufacturing companies will have different accounting methods.

The allocation of resources and elements will be different. The service industry often has little overhead costs that lead to higher revenues that are converted to profit. On the other hand, manufacturing companies have higher revenues due to the variety of products and the costs. It is also to note that the difference in accounting is due to the standards applied. Inventory costs in IFRS are not allowed as opposed to GAAP standards.

Similarly, write-downs are reversed under the IFRS while it is not allowed in under GAAP. The IFRS are based on principles while the U.S. GAAP focus on rules. Therefore, IFRS better present economic transactions. However, all companies have shown efficiency in using their working capital even though they are done in different degrees (Christensen, Baker & Cottrell, 2014). All in all, Microsoft proves to be most efficient and having more financial strength.  

References

Christensen, T. E., Baker, R. E., & Cottrell, D. M. (2014). Advanced Financial Accounting. The McGraw-Hill Companies, Inc.

http://www.gurufocus.com/term/ROE/MSFT/Return-on-Equity/Microsoft-Corp

http://www.gurufocus.com/term/ROE/VLKAY/Return-on-Equity/Volkswagen-AG

http://www.gurufocus.com/term/ROE/WMT/Return-on-Equity/Wal-Mart-Stores-Inc

Hurd, J., Lawman, M., Salkowski, Z., Sampson, H., & Stellato, A. (2014). Wal-Mart Case Study.

Morrow, R. (2016). Corporate Social Responsibility and Corporate Financial Performance: An Empirical Analysis. Available at SSRN.

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PERFORMANCE ANALYSIS OF INDITEX GROUP

PERFORMANCE ANALYSIS OF INDITEX GROUP
PERFORMANCE ANALYSIS OF INDITEX GROUP

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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.2011Year ending 31st Jan. 2012
Sales12,52713,793
Operating Income2,9663,258
Operating Profit2,2902,522
Pre-tax Profit2,3222,559
Net Income1,7321,932
Earnings per share (Euros)2.783.10
   

.

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 ratio2.01
Solvency ratio3.09
Collection ratio14.5
Net profit margin ratio14.2%
Inventory turn over ratio10.8

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

 Annual  Interim
20122011201020092008
Period End Date01/31/201201/31/201101/31/201001/31/200901/31/2008
Stmt SourceARSARSARSARSARS
Stmt Source Date04/02/201203/30/201103/30/201004/01/200906/11/2008
Stmt Update TypeUpdatedUpdatedUpdatedUpdatedUpdated
      
Assets     
Cash ahttp://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gifnd Short Term Investments3,517.443,433.532,420.111,466.291,465.84
http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gifTotal Receivables, Net548.28498.8437.44600.65465.44
Total Inventory1,277.011,214.62992.571,054.841,007.21
Prepaid Expenses0.00.00.00.00.0
Other Current Assets, Total94.5655.5593.67142.2643.11
Total Current Assets5,437.295,202.513,943.83,264.042,981.6
      
Property/Plant/Equipment, Total – Net4,082.873,414.443,306.813,450.783,191.59
Goodwill, Net218.09131.69131.69131.69125.58
Intangibles, Net614.11555.75533.28547.94517.95
Long Term Investments9.58.9215.3914.4236.17
Note Receivable – Long Term0.00.00.00.00.0
Other Long Term Assets, Total597.31512.78404.48367.78252.72
Other Assets, Total0.00.00.00.00.0
Total Assets10,959.189,826.088,335.447,776.657,105.6
      
  Liabilities and Shareholders’ Equity     
Accounts Payable1,838.091,886.671,557.751,540.771,577.94
Payable/Accrued0.00.00.00.00.0
Accrued Expenses178.46145.57133.920.00.0
Notes Payable/Short Term Debt0.00.00.0220.47333.49
Current Port. of LT Debt/Capital Leases0.692.6835.0613.5737.78
Other Current Liabilities, Total685.54639.98578.23616.05508.86
Total Current Liabilities2,702.772,674.912,304.962,390.852,458.07
      
http://cpc.db3.s-msn.com/MSN/sc/i/56/7ea18882ca5be34bbe384a9f52bd78.gifTotal Long Term Debt1.544.175.013.2442.36
Deferred Income Tax182.53172.65172.89213.85110.96
Minority Interest40.7736.9841.3826.8923.92
Other Liabilities, Total616.75551.19482.04410.11277.17
Total Liabilities3,544.373,439.93,006.273,054.932,912.47
      
Redeemable Preferred Stock0.00.00.00.00.0
Preferred Stock – Non Redeemable, Net0.00.00.00.00.0
Common Stock93.593.593.593.593.5
Additional Paid-In Capital20.3820.3820.3820.3820.38
Retained Earnings (Accumulated Deficit)7,312.646,359.815,343.424,722.564,181.55
Treasury Stock – Common0.0-0.62-0.62-0.62-6.93
ESOP Debt Guarantee0.00.00.00.00.0
Unrealized Gain (Loss)0.00.00.00.00.0
Other Equity, Total-11.72-86.89-127.51-114.11-95.37
Total Equity7,414.816,386.185,329.174,721.714,193.13
      
Total Liabilities & Shareholders’ Equity10,959.189,826.088,335.447,776.657,105.61
      
Total Common Shares Outstanding623.33623.11623.11623.11620.96
Total Preferred Shares Outstanding0.00.00.00.00.0

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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