## PERFORMANCE ANALYSIS OF INDITEX GROUP

### 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;

.

There was growth in each of the above variables, an indication of the company’s good performance.

Question 2

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

(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.

(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.

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)

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.

Question 7

• 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.

• 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).

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

Financial data in EUR

Appendix 2