Financial Ratio AnalysisFoundation In Natural And Build Environment

Basic Accounting (FNBE0145)

Assignment 1

Group members:

Kiing kiu chun 0318727

Lau chin sheng 0317899

Tee hing nian 0316316

Content

Topic page1. Brief history of H&M 12. profitability Analysis of H&M ( year 2012-2013) 2-43. P/E ratio 54. investment recommendation 65. appendix 7-86. Reference 9

H&MHennes and Mauritz which mean H&M is one of the famous clothing manufactures in the

world. H&M Company exists in the total of 53 countries and has the capability to hire more than 116,000 of employers in the year of 2013. Therefore, H&M headquarter is located at Sweden, Stockholm which control the steps of production, from the process of planning to establishing specifications, and the production is supplies up to 800 hundreds factories in Europe and Asia. H&M sells several type of clothing including T-shirt, sweater, jacket, stylish dresses and so on. However, H&M is known as fast fashion clothing for men, women, teenagers and children because the design of their cloth are always changes and up to date throughout the year. H&M owned five independent brands which consist of COS, Monki, Weekday, Cheap Monday and other store. However, every brand is operating in their own ways and they have different specialist and characteristics in their clothing design.

Travel back to the year of 1947, the adventure of H&M begins when its founder Mr. Erling Persson opens his first clothing store in Sweden which only sells women’s clothing and the store call Hennes. After the true hard work of Mr. Erling Persson, he able to slap down most of the women’s clothing store in Sweden, Stockholm. Therefore, at the year of 1968 he also manages to buy the hunting and fishing store Mauritz Widforce in Stockholm and he named it as Mauritz. This is how he started to sale the men’s and children’s clothing which came from the store. As a conclusion, the brand of H&M is actually the combination of two clothing store name and it was officially born in the year of 1967 at Stockholm. In the year of 1974 to 2000 H&M grows rapidly and Mr. Erling started to globalize H&M brand. To success, Mr. Erling has makes an important step which started to introduce his brand by opening H&M stores at Germany, London and France. In the meantime, he meets Karl Lagerfeld who is a cloth designer and he started to manufacture his own cloth. As a result in the year of 1990, he manages to open clothing store and introduce his brand to every corner of Europe country but the most successful part for Mr. Erling Persson is he had bring his H&M clothing to the market of America at the year of 2000 which is the strongest economic country at 2000. The vision of H&M is to makes fair and sustainable fashions affordable and desirable for all which mean all of their operation are run in a way that is economically, socially and environmentally.

Recently, the United Nations Association of New York had recognizes H&M’s as a long term sustainability work in Asia and had contribute to gender equality and the empowerment of women on the international trade which had created more than a million jobs in the textile industry. As a result, H&M had been awarded as Humanitarian of year award and the chairman of H&M who is Stefan Persson was very happy and proud that H&M had finally achieve the mission of gender equality that has been H&M’s mission since its founding in the year of 1947.

PROFITABILITY

The table below shows the calculation and interpretation of H&M companies’ PROFITABILITY from 2012-2013 periods. (SEK in Millions)

PROFITABILITYRATIOS

2012 2013 INTERPRETATION

Return on Equity(ROE)

(16,867)(43,835+44,104)

2

= (16,867) 43,969.5=0.3836 X 100%= 38.36 %

(17,136)(43,835+45,248)

2

= (17,136) 44,541.5= 0.3850 X 100%= 38.50 %

During the 2012-2013 periods, the ROE has increased from 38.36% to 38.50%. This means that owner is getting more return from his capital than last year.

Net Profit Margin(NPM)

(16,867)120,799

=0.139 X 100%= 13.90%

(17,136)128,562

= 0.133 X 100 %= 13.30%

During the 2012-2013 periods, the NPM has decreased from 13.90% to 13.30%. This means the business is getting worsen at controlling its overall expenses.

Gross Profit Margin(GPM)

71,871120,799

= 0.595 X 100%= 59.50%

76033128,562

= 0.5914 X 100%= 59.14 %

During the 2012-2013 periods, the GPM has decreased from 59.50% to 59.14%. This means the business ability to control COGS has worsened.

Selling Expenses Ratio(SER)

46,608120,799

=0.386 X 100%= 38.60 %

49878128,562

= 0.388 X 100 %= 38.80 %

During the 2012-2013 periods, the SER has increased form 38.60% to 38.80%. This means the business ability to control selling expenses is getting worsened.

General Expenses Ratio (GER)

3,509120,799

=0.029 X 100%= 2.9%

3987128,562

= 0.0310 X100 %= 3.1%

During the 2012-2013 periods, the GER has increased from 2.9% to 3.1%. This means the business ability to control general expenses is getting worsened.

Financial Expenses Ratio (FER)

5120,799

= 0.000041 X 100%= 0.004%

9128,562

= 0.00007 X 100 %= 0.007 %

During the 2012-2013 periods, the FER has increased from 0.004% to 0.007%. This means the business ability to control the financial expenses is getting worsened.

STABILITY

The table below shows the calculation and interpretation of H&M companies’ STABILITY form 2012-2013 periods. (SEK in Millions)

STABILITY RATIOS 2012 2013 INTERPRETATIONWorking Capital(WCR)

37,23214,010

= 2.658= 2.658 : 1

39,18817,397

= 2.256= 2.256 : 1

During the 2012-2013 periods, the WCR has decreased from 2.658:1 to 2.256:1. This means the business ability to pay the current liability with current assets is getting worsened. In addition, it does stratified the minimum requirement of 2:1

Total Debt Rate(TDR)

16,33860,173

= 0.272 X 100 %= 27.20 %

20,42865,676

= 0.31 X 100 %= 31.10 %

During the 2012-2013 periods, the TDR has increased from 27.20% to 31.10%. This means the business overall liabilities has increased but it is still lower than 50% maximum limit.

Inventory Turnover Ratio (ITR)

365 /(48,928)(15,213+13,819)

2

= 365 / 3.37= 108.3 days

365/(52,529)(16,695+15,213)

2

= 365 / 3.29= 110.9 days

During the 2012-2013 periods, the ITR has increased from 108.3 days to 110.9 days. This means the business is selling at a slower rate compare to last year.

Debtor Turnover Ratio(DTR)

365/(2,207)(2,207+2,337)

2

= 365 / 0.97= 376.3 days

365/(3,107)(2,207+3,107)

2

= 365 / 1.17= 312 days

During the 2012-2013 periods, the DTR has decreased from 376.3 days to 312 days. This means the business is getting slower at collecting its debtors.

Interest Coverage Ratio (ICR)

5+16,8675

= 3,374.4 times

5+171365

= 3,428.2 times

During the 2012-2013 periods, the ICR has increased from 3,374.4 times to 3,428.2 times. This means the business ability to pay its interest is getting better. In addition, the business ICR satisfied the minimum requirement which is 5 times.

P/E Ratio

Profit/ Earning Ratio= current share per price

Earning per share

= 294.80/10.36

= 28.5 years

The share price of H&M at November 10, 2014 16.29 GMT is 294.80EUR. According to the financial report of H&M at the year of 2013, the earning price per share is 10.36EUR. By using the above formula, we calculate the p/e ratio of H&M was 28.5 times.

As a conclusion, H&M’s share will take 28.5 years which nearly three decades to recoup back the investment. It was a long period of time for investor who wanted to buy H&M’s share.

Investment recommendation

During the year of 2012-2013, there was a moderately change in the gross profit margin (GPM). The GPM decreased from 13.90% to 13.30%. This shows that H&M clothing company has a poor management skill on controlling expenses of the company. Besides that, there was a slight increase in return of equity (ROE) which is 38.36% to 38.50% and it was very impressive that H&M clothing company still has the capability to earn more profit from the investment. As a result, H&M clothing company earned more return in the year of 2013 compare to the year of 2012.

On the stability ratio side, working capital was decreasing from 2.658:1 to 2.256:1. Hence, both of the ratios did not reach the minimum requirement of 2:1 and this show that H&M clothing company has a hard time to pay the current liability with current assets. Therefore, the total debt of company increased from 27.20% to 31.10% but it is still lower than 50% of the maximum limit. After that, the selling rate of H&M products got slower which has increasing from 108.3 days to 110.9 days. Other than that, the interest coverage of year 2013 had grown from 3,374.4 times to 3,428.2 and also satisfied the minimum requirement of 5 times. This shows that, H&M clothing company did not have any problem of paying interest. According to the analysis and the result, H&M clothing company has a moderate of stability ratio.

As a conclusion, H&M clothing company has shown moderate potential in profitability ratio and stability ratio in their investment. However, I think it is not wise to invest in H&M clothing company because it requires 28.5 years for investor to get back their investment money and H&M clothing company share price is quite high, which is 294.80EUR per share. Even though H&M clothing company had earned profit but the company has problems in managing their selling product and controlling expenses.

AppendixBalance sheet

Income statement

Reference

Publications. (A.R) H&M clothing company annual report_overview. Retrieved 05 November 2014

http://about.hm.com/content/dam/hm/about/documents/en/Annual%20Report/Annual-Report-2013_en.pdf

H&M market .(ft). market research. Retrieved 10 November 2014

http://markets.ft.com/research/Markets/Tearsheets/Financials?s=HM+B:STO