Financial Accounting for Business - Burberry Group - Case Study Example

Financial Accounting for Business Contents Introduction 3 Understanding of the Company Financial ments 3 Analysis of Financial Ratios 6 Analysis of the Share Prices 11 Suggestions / Comments on Company Performance 12 References 13 Appendices 14 Introduction Burberry Group PLC is a reputed British luxury fashion company which is involved in retail selling of fragrance, fashion accessories, clothing, cosmetics and sunglasses. The company has expanded its business operation in major cities around the world through its flagship stores and third party stores. Burberry is a listed company of London Stock Exchange and it is also a constituent of the FTSE 100 index. In the financial year 2013 the company has recorded significant financial result in its business activities. The revenue of this company has increased approximately 17 % than the previous year and profit has increased by 8% than the financial year 2012. At the same time retail and whole sale revenue is increased by 19 % and adjusted operating profit is increased by 17 %. The strength of this performance will help to this company for taking sustainable strategies in the operation of their business and these strategies will also be helpful for the future growth of this company. Management has decided to expand the business operation in Japan market to achieve more amount of revenue and get significant market share in that country. Ralph Lauren Corporation, Kering SA, Hermès International and LVMH Moët Hennessy Louis Vuitton SA are some major competitor of this company in the market place. In this essay comparison of Burberry Group PLC will be done with the Ralph Lauren Corporation which is an US based publicly traded and holding company. The company is also offered products such as women and children’s apparel, fragrance, accessories, home furnishings to its customers in the global market. Retail net revenue is increased by 1%, gross profit is increased by 3.7% and operating income of this company is increased by 0.3% in the current year than the previous year. Understanding of the Company Financial Statements Financial statements of a company generally show the financial situation of the business. Again this can be said that these are formal records of all the financial activities of business. Profit and Loss statement, balance sheet and cash flow statement are three major financial statements that indicate the financial position and financial performance of any organization. Management of any company can understand the present financial situation of business in a better way by using the mentioned statements. According to that they can take corrective steps or appropriate strategies which will be beneficial for the growth of the business activities. In case of Burberry Group PLC, management also can understand the financial position of this company by evaluating financial statements. For example, balance sheet of this company shows the assets, liabilities and ownership equity at a given point of time (Quiry, Fur, Salvi, Dallochio and Vernimmen, 2011). From the balance sheet it can be observed that there is sufficient liquid asset which is enough to meet the current obligations of this business and thus company’s liquidity position is satisfactory in the present year. Management should concentrate on the field of accounts receivable because it will take time for more than 21 days to recover certain amount of recovery. This scenario is not acceptable at all and company should take more initiative to collect the amount of revenue from debtors in more short time. From the income statement, management and investors can understand about the company’s comprehensive income, amount of revenue, expenses, and profit & losses over a period of time. The profit & loss statement stated about the sales amount and sources of various expenses incurred during a financial year (Kimmel, Weygandt and Kieso, 2010). If it is observed that the amount of expenses is more than the amount of income then management can control the amount of expenses to generate more profit in the business. From the current year income statement of this company, this can be analyzed that the company has achieved sustainable amount of revenue from the business activities and at the same time gained a significant percentage of growth. Again financial statements also help to compare the present financial data with the previous years and the trend can be analyzed by this way. From the comparative analysis this is observed that in the current year Burberry Group PLC has achieved more amount of revenue than the previous year. Again the company has incurred major percentage of expenses in cost of goods sold and in income tax expenses. If management will take corrective steps in this regard to minimize such cost factors then the company will achieve more amount of revenue in the future years (Brigham and Ehrhardt, 2011). Statement of cash flow is used to highlight the company’s cash flow activities especially investing, financing and operating activities. In the present scenario of the mentioned company this is observed that cash from financing activities is slightly increased than the previous year due to the changes in accounts receivable, increase in amortization and differed charges, asset underwritten and restructuring cost etc. The company is facing negative balance in cash from investing activities over the last five years but in the year 2014 the negative balance is comparatively low than the previous years and it is a positive sign for business growth. Cash from financing activities is also in a satisfactory situation and finally net change in cash has been increased than the previous two years of this business (White, Sondhi and Fried, 2006). Ralph Lauren Corporation has earned 7, 450 US dollars as revenue of their business which is quite high than Burberry Group [Revenue 3, 889 US dollar]. In the current financial year the company has achieved more amount of revenue than the year 2013. Management of this company has been able to reduce the income tax expenses from 4.88% to 4.30% and for this reason operating income is also increased in the current year. This company has also sufficient liquid asset to meet the current obligations. Management is trying to improve the frequency for recovering accounts receivable than the previous years and condition of accounts receivable is more satisfactory in this company than Burberry Group PLC (McLaney, 2009). But from the cash flow statement of Ralph Lauren Corporation this can be analyzed that cash position of this company is not in satisfactory situation and needs to be improved. Analysis of Financial Ratios Financial ratios are useful indicators of financial situation and performance of an organization in its business field. These are also used to analyze trend and compare a particular organization’s financial condition with other firm in the same market. As per appendix 5 a comparison can be done between the mentioned companies. From the current ratio analysis this is clear that Ralph Lauren Corporation has better liquidity position than Burberry in the year 2012 and 2013. Therefore, Ralph Lauren has more ability to meet the current obligation than Burberry in these two years. From the individual analysis this is observed that current ratio of Burberry is almost same during the two years but current ratio is decreased in 2013 than the previous year in case of Ralph Lauren. So management of this company should concentrate on this fact more carefully. As per quick ratio analysis this is observed that liquidity position of Ralph Lauren is better than Burberry but the ratio has been decreased in both the companies from the year 2012. From this analysis this is clear that Ralph Lauren has more liquid assets to meet the current obligation than Burberry and this liquidity position will help this company to expand the business activities (Bull, 2007). In case of return on assets Burberry is in better position than Ralph Lauren. But the difference between the companies is not huge. Generally return on asset indicates the dollar of earning derived from each dollar of asset. So in this case more dollar of earning can be derived from the dollar of assets in Burberry. Net profit margin of Burberry is also comparatively more than Ralph Lauren and for this reason Burberry will get more competitive advantages in the global market as they can utilize the additional amount of profit for the purpose of betterment in their business activities. This ratio will indicate how much debt can be paid by the company after utlizing the current amount of asset. In this case Burnberry will get the advantages than the other company and it will pay more amount of debt by utilizing its assets (Troy, 2008). In case of debt to equity ratio indicates the proportion of shareholder’s equity and debt used in finance. High debt equity ratio indicates company’s aggressive financing strategy by using debt in business which is sown in case of Burberry. Here this is observed that Ralph Lauren has more ability to generate net sales from fixed asset investment than Burberry. Ralph Lauren has more efficiency to generate revenue from the sale of stocks in a financial year. Ralph Lauren has better present share price compare to it’s per share earnings. In case of dividend payout ratio, this is clear that Burberry is paying better amount of dividend to its shareholders than Ralph Lauren. Analysis of the Share Prices Analysis o share price will focus on some specific factors which are fair value, comparative value offered by a stock, profit target sell price, stop loss sell price, return on investment and price earnings ratio. Here two years share price analysis has been done in respect of the two above mentioned companies. As per appendix 6 this is clearly observed that share price of Burberry is always more than Ralph Lauren and the difference between the share prices of these two companies are quite high. Therefore, obviously the investors of Burberry are getting higher return than the investors of Ralph Lauren. Standard deviation of share price also tries to find out the risk factors of investment and here this can be said that investment in the stocks of Burberry is less risky and more profitable by nature than the investment in Ralph Lauren because standard deviation of Burberry is quite higher than Ralph Lauren. Correlation of monthly stock return between two companies is less than 1 which is not a satisfactory situation the companies are negatively correlated with each other. From the above graph this can be observed that trend lines of both the companies are almost same. Stock price of Burberry was drastically fall during the 3rd quarter in the year 2012 but in the next quarter it was increased. Again the stock price was decreased at the first month of the financial year 2013 and in the next month the price was again increased. Comparatively the stock price of Ralph Lauren was drastically not decreased during the two years period. Suggestions / Comments on Company Performance At the part of suggestion this can be suggested that Burberry should take more initiative in its liquidity position so that it can meet more current obligation by using its current assets. Fixed asset turnover ratio and inventory turnover ratio also need to be improved for getting more competitive advantages from the market. this company has to control the amount of expenses to gain more profit in business and major percentage of this expenses is incurred in income tax and cost of goods sold. In case of Ralph Lauren this can be suggested that the company should concentrate to increase the value per share, debt to asset ratio, debt equity ratio and net profit margin ratio. If net profit will not be increased then the company will lose competitive advantages and cannot expand its business operation in the global market. References Brigham, E. and Ehrhardt, M. 2011. Financial Management: Theory and Practice. Boston: Cengage Learning. Bull, R. 2007. Financial Ratios: How to use financial ratios to maximise value and success for your business. Amsterdam: Elsevier. Kimmel, P., Weygandt, J. and Kieso, D. 2010. Financial Accounting: Tools for Business Decision Making. Beijing: John Wiley & Sons. McLaney, E. 2009. Business Finance: Theory and Practice. New Jersey: Prentice Hall/Financial Times. Quiry, P., Fur, Y., Salvi, A., Dallochio, M. and Vernimmen, P. 2011. Corporate Finance: Theory and Practice. Beijing: John Wiley & Sons. Troy, L. 2008. Almanac of Business and Industrial Financial Ratios. Illinois: CCH. White, G., Sondhi, A. and Fried, D. 2006. THE ANALYSIS AND USE OF FINANCIAL STATEMENTS, 3RD ED. Beijing: John Wiley & Sons. Appendices Appendix 1 Appendix 2 Appendix 3 Appendix 4 Appendix 5 Appendix 6 Read More