Financial Analysis of Damiani Group - Assignment Example

?Financial Analysis of Damiani Activities Performed by the Company: Damiani Group was founded by Enrico Damiani in Italy, back in 1924 aiming to deliver a wide range of jewelry products. The business has developed itself over the years through its prestigious brands; Salvini, Alfieri, St. John, Bliss, and Calderoni. The company has expanded itself into the overseas market by opening international subsidiaries in United States, Japan, Switzerland and few other Asian countries. The Group has 78 points of sale throughout the world and many brands placed on Italian and international fashion streets. It is extensively relied on the notion of “Celebrity Endorsement” to advertise its leading brands. Major events that occurred during the last 4 fiscal years The purchase of Rocca In 2008, Damiani Group acquired “Rocca”, a high end jewelry and watch chain leader in Italy. Rocca will represent as the first distribution brand of Damiani and it will help sell all the leading brands of the company. The acquired company has its strong footprints in the Italian market. Commercial and licensing agreements During the year 2009, the Group has signed commercial and licensing agreements for the creation, design and distribution of jewelry lines with the prestigious brands. Balance Sheet *Balance Sheet (In thousand Euros) 2008 2009 2010 2011 Inventories 94,713 121,192 106,108 96,192 Trade receivables 65,794 54,551 42,971 31,232 Tax receivables 394 5,571 3,661 2,788 Other current assets 14,718 12,619 9,777 11,401 Current financial receivables     - 1,074 Cash and cash equivalents 52,813 9,542 7,332 10,217 TOTAL CURRENT ASSETS 228,432 203,475 169,849 152,904 Goodwill 5,002 5,002 4,984 4,984 Other Intangible Fixed Assets 7,056 9,204 7,504 5,596 Tangible Fixed Assets 14,698 26,626 20,397 17,590 Investments 169 169 167 167 Financial receivables and other non current assets 2,663 4,655 4,479 3,493 Deferred tax assets 12,229 18,552 19,807 19,854 TOTAL NON CURRENT ASSETS 41,817 64,208 57,338 51,684 TOTAL ASSETS 270,249 267,683 227,187 204,588           Current portion of long term financial debt 5,162 9,681 10,040 7,861 Trade payables 65,305 70,923 57,945 54,673 Short term borrowings 16,229 2,593 1,964 5,965 Income tax payables 2,752 8,977 2,399 2,425 O ther current liabilities 5,090 6,350 4,819 4,862 TOTAL CURRENT LIABILITIES 104,675 88,387 77,167 75,786 Long term financial debt 16,631 22,029 34,356 26,316 Termination Indemnities 4,223 4,868 4,693 4,325 Deferred Tax liabilities 2,608 4,227 864 1,131 Risk reserves     649 1,431 O ther non current liabilities 2,441 2,046 431 493 TOTAL NON CURRENT LIABILITIES 25,903 33,170 40,993 33,696 TOTAL LIABILITIES 137,845 114,290 118,160 109,482 Share Capital 36,344 36,344 36,344 36,344 Reserves 102,742 96,691 89,438 71,890 Group net income (loss) for the period 15,127 (4,709) (18,242) (14,525) TOTAL GROUP SHAREHOLDERS' EQUITY 154,213 128,326 107,540 93,709 MINORITY SHAREHOLDERS' EQUITY         Minority share capital and reserves 1,571 1,668 1,513 1,422 Minority net income (loss) for the period 175 (156) (26) (25) TOTAL MINORITY SHAREHOLDERS' EQUITY 1,746 1,512 1,487 1,397 *As on 31 March of each FY Income Statement Income Statement (In thousand Euros) 2008 2009 2010 2011 Revenues from sales and services 164,919 149,289 145,365 143,323 Other recurring revenues 683 502 390 226 Other non-recurring revenues 8,506       TOTAL REVENUES 174,108 149,791 145,755 143,549 Costs of raw materials and consumables (69,898) (71,090) (82,595) (79,476) Costs of services (53,719) (55,847) (50,226) (46,229) Personnel cost (24,249) (28,251) (27,017) (24,821) Other net operating (charges) incomes 2,397 6,518 843 903 Amortization and depreciation (2,503) (4,191) (5,886) (4,884) TOTAL OPERATING EXPENSES (147,972) (152,861) (164,881) (154,467) OPERATING INCOME (LOSS) 26,136 (3,070) (19,126) (10,918) Financial Expenses (3,312) (2,651) (3,065) (2,926) Financial Incomes 2,153 2,277 350 377 INCOME (LOSS) BEFORE INCOME TAXES 24,977 (3,444) (21,841) (13,467) Income Taxes (9,675) (1,421) 3,573 (1,083) NET INCOME (LOSS) FOR THE PERIOD 15,302 (4,865) (18,268) (14,550) Ratio Analysis Growth   2008 2009 2010 2011 Sales - 1 Yr Growth -1.40 -2.63 -9.48 -1.44 Net Income - 1 Yr Growth 20.38 -287.39   7.87 Revenues have been consistently on a declining trend because of the financial crisis that has hit the luxury segment of the industry. The company derives its major chunk of revenue from Italian market where it has built major portion of its operations. Italian market has experienced a significant decline in its revenue growth owing to reduced consumer spending. However, revenue growth in emerging markets helped in offsetting the negative impact resulting from weak local market dynamics. China and other markets provided the impetus for growth and they are believed to have high growths in future. The factors that have particularly affected the jewelry market growth in the past few years include: Lackluster consumer spending in the luxury sector in the past few years. Slow growth in the advanced countries which has slightly been offset by growth in emerging countries. High uncertainty with regard to the actions of central banks to mitigate risks associated with high public debt in certain countries. Growing unemployment in Europe and US. Unfavorable economic conditions in Japan, further penalized by the earthquake, which had a negative impact on foreign markets. Earnings growth has been a volatile figure for the last 4 years mainly as Daimani has experienced losses. The period was characterized by declining margins caused by the continued appreciation in the prices of raw materials under speculative pressures. Net earnings have improved in the last year as gross margins have improved during the last financial year; however, it is still a negative figure and is a point of grave concern for the company. Cost of services which amounted to 46,229 Euros decreased by 8% in the FY 11. This decrease is linked to the cost control and saving actions that the group has achieved in the last year. In addition to that, personnel costs also declined by a margin of 8.1% since the average number of employees were reduced from 619 to 574 during the year. Profitability   2008 2009 2010 2011 EBITDA Margin -4.24 -9.11 0.75 12.21 Operating Margin -7.62 -13.16 -2.06 10.69 Profit Margin -10.13 -12.55 -3.15 9.17 Return on Assets -6.73 -7.37 -1.75 6.21 Return on Common Equity -14.43 -15.47 -3.33 13.21 The last time that the company had recorded positive earnings was in FY 2008 due to a buoyant global economy. However, the global economic crisis has brought recessionary woes curbing consumer spending to a high extent. The luxury sector has faced the greatest hit as consumer preferences have changed in the light of declining income. Operating margins have been lowest in FY 10 at -13.57% owing to a higher cost of production and low sales. However, they have improved in FY 11resulting from lower cost of services and personnel costs. Figure 1: Profitability ratios of Damiani The return on assets and common equity has also been negative over the past 3 years. Year 2008 was a bonanza for the company as it derived positive returns in that year. The bad financial health of the company has caused the return on asset and common equity to be negative. Liquidity   2008 2009 2010 2011 Quick Ratio 0.5469 0.6519 0.6123 1.3419 Current Ratio 2.0176 2.2176 1.9439 2.5845 (Source: Bloomberg) The liquidity position of the company has been excellent owing to a larger amount of liquid assets compared to current liabilities. In all the last 4 fiscal years, the current ratio has been greater than one which implies that there have been enough liquid assets to cater for the short term liabilities. However, quick ratio was lower than one in the last three years signifying that without the impact of inventory, the liquidity position would have aggravated to a large extent. Figure 2: Liquidity ratios of Damiani Efficiency   2008 2009 2010 2011 Accounts Receivable Turnover-Days 94.4862 122.435 147.1171 140.6718 Asset Turnover 0.6639 0.5875 0.555 0.6768 (Source: Bloomberg) Receivable day’s outstanding figure represents the average amount of time that elapses after a sale is made before Diamini collects the proceeds from its customers.The ratio has improved 140.67 in FY 2008 to 94.49 in FY 2011 as a result of better credit management policies. Asset turnover ratio has also increased from 0.55 in FY 2009 to 0.67 in FY 2011 implying that the assets are being used more efficiently. The acquisition of “Rocca” has been a fruitful decision for the company as it has allowed strengthening the sales of Diamiani brands and those in concession. Solvency   2008 2009 2010 2011 Asset Turnover 0.6639 0.5875 0.555 0.6768 Interest Coverage 7.89 -1.16 -6.24 -3.73 (Source: Bloomberg) The company isn’t highly leveraged but still the negative operating margins pose a significant threat to company’s future operations. The leverage factor was close to 2 in all the financial years which is only a cause of concern if the company doesn’t produces positive operating margins. The negative interest coverage ratio does not bode well for company’s sustainability in the near term. Net financial expenses have also slightly reduced because of lower net average debt during the last two fiscal years. Figure 3: Solvency ratios of Damiani Bibliography Damiani, 2011. Annual report 2010-2011. Available from site: http://investorrelations.damiani.com/www/index.php?ctr=getdocument&file=2- BilancioENGCOMPLETO220711.pdf Damiani, 2010. Annual report 2009-2010. Available from site: http://investorrelations.damiani.com/www/index.php?ctr=getdocument&file=Bilancio_Damiani_Ing_2009_10.pdf Damiani, 20009. Annual report 2008-2009. Available from site: http://investorrelations.damiani.com/www/index.php?ctr=getdocument&file=Bilancio__ENG_23.07.09.pdf Read More