Burberry Plcs Business Finance - Coursework Example

QUESTION Burberry Plc is a renowned British luxury brand. The company offers a range of products and services particularly in the domain of fashion accessories and clothing. Burberry Plc has been operating since 1856 and the head quarter of the company is located in London. The brand offers products for both men as well as for women. The company has been improving in terms of revenues and profits with the passage of time and this is showing the continuous growth and success of this international brand. The following image shows the revenues of the company in the last five years and an increasing trend can be identified particularly in the last three years. (Burberry, 2013) The operating profit of the company is showing an increasing trend in the last five years as presented in the figure below: (Burberry, 2013) The company is not only involved in activities such as retailing, but it is also involved in wholesale activities as well as in licensing in different parts of the world. Retailing has been the most important segment of the company as it generates most of the revenues. The retailing revenues have increased by 12% from the last year as presented in the figure below. Total revenue from retail activities is £1,417 million. Revenues from other two segments are also presented in the figure below: (Burberry, 2013) The principle activities of Burberry Plc are in the domain clothing and fashion accessories. Clothing includes leather jackets, bags, formal suits, casual clothing, party wears and a lot more. In the domain of accessories, Burberry Plc offers cosmetics for women, leather bags, leather wallets, fragrance, watches, and even shoes. Thus, with a variety of products to offer, the company has been able to cater the needs of a number of target audiences. Moreover, the quality of the products and the brand name have helped the company in further growing and improving with the passage of time. In the last few years, Burberry Plc has been focusing on expanding its markets and therefore it has been licensing and expanding its products to different parts of the world. This has helped Burberry Plc in increasing its profits and revenues. In the year 2013, Burberry Plc is considered as the 77th most valuable brand as awarded by Interbrands. Thus this highlights the fact that with the expansion of the brand, the company has still been able to manage its quality of products and services. As the company has been growing with the passage of time and it is penetrating in different international markets. The following image shows that most of the revenues the company has generated are from the Asia Pacific market. The company has generated total revenue of £745 million from this market. The second most important market for the company is Europe as this market has generated total revenue of £560 million. The market of America has generated £463 million revenue for the company. The following image shows the revenue breakdown of the company from different geographical regions: (Burberry, 2013) QUESTION 2: Auditor’s report is important as it highlights the fact that the information presented in the report has been checked and audited by an independent auditor. Thus, this builds trust to the users of the report that the information presented and included in the report is free from materialism and it is correct up to the best of the knowledge of the auditor. Philip Bowman is the chairman of the Audit committee. The audit committee has meet thrice in the year in order to make sure that the information of the financial statements of the company are true and do not mislead the users (Burberry, 2013). Philip Bowman believes that the main role of the Audit Committee is to monitor and analyze the financial information and at the same time to provide assurance to the board about the information presented (Burberry, 2013). The outcome of the auditor’s report is that the financial information presented in the annual report is free from materialism and is unqualified. The auditors have presented and audited the financial information up to the best of their knowledge. Auditors monitor and audit the information that has been presented in the financial statements. Auditors are independent and therefore the information or outcome presented in the Auditor’s report is free from biasness. Burberry Group has been operating since 1856 and over the years, the company has become an important organization for investors and shareholders to invest. Therefore the role of auditors is critical in this situation as a number of investors across the world evaluate and analyze the financial information of the company and they make decisions on the basis of financial information presented in the annual reports. The auditor’s report is not only important for the investors and shareholders but the report is also important for the organization as well. This report facilitates the organization as if the information is correct and lucrative, then the organization will be in a better position to take loans from the bank or to raise capital. There are two types of auditors generally that audit and review the financial statements of the firm. These two types are; internal auditors and external auditors. The internal auditors are the auditors that are the employees of the organization. On the other hand, external auditors are independent of the organization and they are not the employees of the organization. The financial information of Burberry Plc. has been reviewed by both these types of auditors. Thus, the information presented is free from materialism and errors according to the best of the knowledge of the internal as well as external auditors. QUESTION 3: The financial ratios of the company have been presented in the table 1 below. Different ratios have been presented in the table and these ratios reflect the improving financial performance of the organization. Calculations of these ratios have also been presented in the table 1. QUESTION 4: Table 2 below presents the percentage changes in some of the important financial factors such as the revenue of the company, operating profits and the share price. QUESTION 5 Financial ratios present the financial performance of the company. The financial ratios are used by investors to make their investment decisions. Financial ratios are helpful in analyzing the trend of the company and its performance (McLaney, 2009). A comparison of the company’s financial performance has been made using different financial ratios. These financial ratios help in identifying the areas that need to be improved as it presents the comparison of the company against the competitors as well as against the performance of the company over the last years. ANALYSIS OF RATIOS CALCULATED IN Q#3 Financial ratios in Question# 3 have been calculated for the current year and the previous year and a comparison has been presented in this report. Financial ratios calculated in the question #3 can be categorized in the following categories: a. Profitability ratios b. Liquidity ratios c. Asset management ratios d. Other ratios Profitability Ratios: Profitability ratios analyze the financial performance of the company in terms of profits. Return on equity is one of the ratios in the category of profitability ratio. Return on equity shows the return that the company has earned on its total equity (McLaney, 2009). Return on equity of the company in the year 2012 was found to be 28.32%. However in the year 2011, this ratio was 29.57%. Thus it is showing that the returns on equity of the company have reduced. Industry average ROE is 19% and it means that Burberry is well above the industry in terms of profits. Gross profit margin is the other ratio in the category of profitability ratio. Gross profit margin shows the ratio of the gross profit to sales (McLaney, 2009). Gross profit in the year 2012 was found to be 72% and in the year 2011 it was 71%. Therefore the cost of production of the company has relatively reduced in 2012 which is a positive sign. Moreover, the industry average is only 10% and it is showing that the cost of production of company is very low in comparison to the overall industry. Net profit margin is the ratio of net profit to the sales of the company. The net profit margin of Burberry was 15% in the year 2012. This ratio was 14% in the year 2011. The industry average is 3%. Thus it is indicating that the net profit of the company has increased in this particular year and increase in sales has resulted in increasing the profits as well. Moreover, the company is performing very well in comparison to its competing firms. Liquidity Ratios Liquidity ratios of the company have also been calculated. Current ratio is the ratio in the category of liquidity ratio. Current ratio shows the ratio of current assets to current liabilities of the company (Ross, Westerfield, and Jordan, 2009). Current ratio of the company is found to be 1.72 and 1.70 in the years 2012 and 2011 respectively. The industry average of this ratio is 1.7 and thus it is showing that the company has sufficient current assets to meet its current liabilities. Asset Management Ratio Inventory turnover period and Payables’ turnover period are the two asset management ratios calculated for the company under study. Inventory turnover period and Payables’ turnover period have improved for Burberry in the year 2012 in comparison to 2011. Thus it is showing that Burberry is better managing its assets. Others Gearing ratio of the company shows the ratio of the debt of the company to the equity of the company. Thus higher gearing ratio shows that too much debt is in the capital structure of the company and it increases the risk. The gearing ratio is found to be 65% in 2012 and in 2011 the gearing ratio is 80%. Thus it is showing that the debt in the capital structure has reduced. Price to earnings ratio of the company has reduced in the year 2012 in comparison to 2011. PE ratio of the company has reduced from 18.98 to 24.3 thus it is indicating that the stock of the company has become cheaper in the year 2012. The industry average PE ratio is 9.0 and thus it can be inferred that the stocks of Burberry are still expensive in comparison to the overall industry. ANALYSIS OF RATIOS CALCULATED IN Q#4 It can be found that the revenue of the company has increased in the year 2013 by 7.62%. Thus it is reflecting the improvement in the performance of the company. The other important financial factor that has been analyzed in question 4 is the operating profit. The operating profit of the company highlights that the profits of the organization has been decreased by 8.25%. The share price of the company has been reduced by 1.31%. This information presents the fact that the company has been growing and the sales and revenues of the company are increasing, however with the increasing sales have not resulted in increasing the operating profits and it shows that the ratio of expenses to sales of the company have increased more in comparison to the increase in sales. Reduction in profits has also made an impact on the share price of the company as the share price has reduced. QUESTION 6: DuPont ratio is used to analyze different factors that influence the ROE of the company. According to DuPont ratio different factors influence the profitability of the company and these factors are: Net Profit margin Asset Turnover Financial leverage (Ross, Westerfield, and Jordan, 2009). So using the above factors, DuPont ratio can be presented as below: The value of these three factors has been calculated and it is shown in the table below: So the above formula can be rewritten as Thus it is showing that the most important role in increasing the ROE is played by net profit margin as the value of net profit margin is the most. Then financial leverage of the company has helped in increasing the ROE. Asset turnover has the least impact on the ROE among these three factors. References Burberry. (2013). Annual Report. Available from http://www.burberryplc.com/documents/full_annual_report/burberry_areport_2012-13.pdf [Accessed 12 December, 2013] McLaney, E. (2009). Business Finance: Theory and Practice, Pearson Education: New Jersey. Ross, S., Westerfield, R., and Jordan, B. (2009). Fundamentals Of Corporate Finance Standard Edition. New York, McGraw-Hill. Read More