Financial Analysis of IKEA Company - Example

Financial Analysis of IKEA Company IKEA is an international organization, which consists of a group of companies. This group of companies is privately owned (Gina Chon, 2013). It engages in the sale of wood based home products such as home furniture, kitchen and bathroom equipments as well as other home accessories. This is due to continuous provision of quality products that have been recognized for their Scandinavian style. Since its conception in Smaland region in Sweden, IKEA continues to develop new product capacities, as well as new business strategies that further increase the organization’s competitive edge and overall support of the organization. This has made the organization to establish operation in over 44 countries including over 30 service offices in over 25 countries. Additionally, IKEA has more than 30 distribution centers, and more than 350 outlets. Analysts have also attributed this growth to online marketing and online trade where more than 470 million individuals visit the IKEA’s website to view about 12000 products are sold or advertised online. The largest IKEA stores are located in Sweden and China. This is due to high demand for products in these countries. Brief history of IKEA The organization was first conceptualized by Ingvar Kamprad, a Swedish native of Smaland the trade name is sourced from the initials of his name the farm in which he grew at (Elmtaryd and Agunnaryd). The organization was fist established as a mail-order sales business; however, the organization started selling furniture within five years. The hard-working reputation of Smaland’s residents provided labor for the organization and currently the organization has more than 135,000 workers internationally (Gina Chon, 2013). IKEA has also played a significant role in improving the international social welfare though comprehensive social programs, intense corporate responsibility, providing eco-friendly products and large donation IKEA’s vision is “to create a better life for many people”. Its core mission is to “offer a wide range of well-designed functional home functioning products at reasonable and affordable prices”. In this regard, the organization marketing statement is “Your partner in better living. We do our part, you do yours. Together we save money”. In order to achieve this IKEA main objectives include; To provide low prices for goods To provide cheaper and affordable products to consumers To maximize resource utilization and promote sustainability of natural resources To improve the living standards to those who are unable to afford expensive products. To ensure customers have easy access to products Unlike other organizations, IKEA is operated and owned by for-profit and not-for-profit companies. Its corporation structure is divided into operation and franchising parts (The Economist, 2011). Major operations of this organization are overseen by INGKA Holding, a Dutch incorporated company. This privately owned for-profit company oversees the management of 301 IKEA’s stores, design and manufacture of products as well as the sales and purchasing. The operations of the remaining stores are run and managed by Delft Company and other franchise organizations. INGKA Holding is not an independent company. It is owned by Stichting Inqka Foundation, a not-for-profit company established and controlled by Kamprad for purposes of tax exemption. Financial analysis of IKEA IKEAs income statement (simplified) 1 IKEAs balance sheet (simplified) 1 IKEAs balance sheet (simplified) 2 According to IKEA’s Consolidated Income Statement for Year Ended 31st August 2013, IKEA’s net profit had increased by 3.1pecent to €27.9 billion up from the previous year. Additionally, the organization’s total revenue (including the rental income from the shopping centers) also increased by 3.2 percent to stand at €28.5 billion in 2013 (Gina Chon, 2013). Approximately 1.8 percent of the increase was attributed to presence of new stores and increased online sales. The gross margin also increased by 1.5 percent to stand at 43.3 percent. This was as a result of improved efficiency in the supply chain department where greater cooperation with suppliers was achieved. The net sales also increased by 3.1 percent to stand at €3.3 billion. Despite harsh economic conditions in Europe, IKEA’s market share also improved in this region as well as Russia and China (OMahony, 2008). There was also significant progress in terms of expansion with more stores opening in United States of America, Poland, with declining sales in key market areas such as Italy and Spain. To solve this problem, IKEA’s management has lowered their prices by 0.2 percent in order to make their products affordable and more competitive. This was achieved by lowering the cost of production and improving efficiency of operation to ensure that the products’ quality is not affected. This was applied throughout the organization ranging from the stores all the way to the distribution centers. Additionally the organization adopted new innovations in materials and products, and new technologies. The company also switched to using paper pallets, invested in re-packaging equipment and ensured direct coordination of suppliers and the store. The operating cost as a percentage of total revenue did not changed due to these improvements. The management attributed increased operating cost to growth of operations, the market hall was rebuilt and new kitchen products were establishment (Hawthorne, 2003). The efficiency within the supply department also enabled the organization to operate lower levels of inventory in 2013 financial year compared to 2012. The direct supply of materials by suppliers also improved from by 3 percent to stand at 58 percent this resulted in high availability of products to meet customers’ orders, less damage of product during transportation, low holding cost and efficiency in ordering goods. Closer cooperation and integration between IKEA industry players and the IKEA Group also improved the organization’s competitiveness and capacity utilization. IKEA’s income tax also increased from €695 million, in the financial year 2012, to €775 million in 2013. This resulted in an effective tax rate of 18.9 percent. (Hawthorne, 2003) This rate is usually based on the financial results of companies controlled by IKEA in their individual countries. Additionally, other taxes amounted to €1,454 Million in the financial year 2013; inclusive of custom and property tax that amounted to €679 Million. In addition, the organization also had €3 billion transferred to Stichting Ingka Foundation. The dividend would then be re-invested back, and part donated to charitable organization throughout the world. The organization’s security portfolio declined to €14.9 Billion (Katarina, 2013). The €81 million decline was attributed to lower currency gains and lower returns on the organization’s securities portfolio. The investment bonds did not suffer credit loss. The organization’s consolidated balance sheet also had a 2 percent decline in the organizations fixed assets to€19,529 million in the financial year 2013 from €19,936 million in the financial year 2012, as well as 10.5 percent decline in the organization’s current assets to €22450 million in the financial year 2013 from €24812 million in the financial year 2012. Additionally, the long-term, short term and current liabilities are also decreasing with the total non-current liabilities decreasing by 16.5 percent to €3465 million in the financial year 2013, while the short term and other current liabilities decreased by 19.2 percent to stand at €9312 million in the financial year 2013. The Group Equity increased by 0.45 percent to stand at €29202 million in the financial year 2013 (OMahony, 2008). This was as a result of heavy investment in expansions programs. An analysis of the profitability ratios indicate that, though the gross margin ratio has increased by 3 percent to stand at 44.6 percent the, net profit margin has decreased by 8 percent to stand at11.58 percent in the financial year 2013. These changes can be attributed to decreased cost of sales (that increases gross profit margin) and increased operation costs to ensure efficiency in the supply chain. Additionally, all other profitability ratios have generally increased by less than 10 percent. This may imply that profitability increases steadily but by a small margin. On the other hand, the liquidity ratios indicate an improvement on the organization’s assets ability to meet its liabilities (OMahony, 2008). However, a decline in the quick ratio indicates that the organization’s rate of proportion of assets that can be quickly converted to cash has declined. Lastly, the debt ratios indicate that the organization’s debts are manageable since the liabilities and assets are equal in both financial years. The Long term debt to equity ratio has decreased by 19 percent to stand at 0.45 in the financial year 2013. A detailed summary of the organizations’ financial performance can be expressed using the following ratios. 1. Profitability ratios Ratio 2013 (Value In Percentages) 2012 (Value In Percentages) Gross margin 44.6 43.09 Profit margin 11.58 11.59 Return on equity 11.31 11.01 Return on net assets 7.87 7.16 Return on capital 7.91 7.084 Return on capital employed 9.75 8.74 Basic earning power ratio 9.74 8.74 2. Liquidity ratios Ratio 2013 (Value In Percentages) 2012 (Value In Percentages) Current Ratio /Working Capital Ratio 2.41 2.52 Quick Ratio 1.75 1.95 Cash Ratio 1.72 1.55 3. Debt/ leveraging ratios Ratio 2013 (Value In Percentages) 2012 Asset turnover 0.679 0.617 Debt Ratio 1 1 Long term debt to equity ratio 0.045 0.056 Presentation of financial records The organization has observed the international accounting standards in the presentation and format of the consolidated income statement as well as the statement of the organization’s financial position (Hawthorne, 2003). This is because the records are prepared at the end of financial period, they are in the right format and they are accurate. Additionally, the content, though difficult for an ordinary person to comprehend, can be easily interpreted by accounting professionals. The financial documents also have observed the accounting principle. The prudence concept has been observed by indicating all provisions for foreseeable losses such as taxes. Additionally, there exist several notes that aid in disclosing vital information. In above financial records there is a note that indicates that the original financial records have been audited. Several notes showing the valuation of assets and liabilities have been included in the original document. By law these notes are important since they provide more explanation on the components or even how the components have been calculated (Gina Chon, 2013). However, more details should be provided on valuation and revaluation of fixed assets as well as how the organization’s franchises are performing the organization was therefore able to further grow in business in accordance to accounting principles. Further analysis of IKEA and Conclusion The continued good performance of IKEA Group of companies can be attributed to its powerful brand name (Katarina, 2013). The product names are of Scandinavian origin as well as other exotic sources such as Norwegian, Danish, Finish, or Swedish names of places, male or female names, or even mathematical geometric or scientific names for household items. IKEA also invests heavily in promotions and advertisements. Additionally, IKEA provides of wide range products and styles and heavy investment in research and design to ensure quality products to consumers. The products range from home furniture, lighting products, textile products, kitchen utensils, children items and service products. The products are often cheap and therefore affordable, and are easy to assemble and transport. IKEA also provides a comprehensive shopping point for all customers’ need (Hawthorne, 2003). The wide range of product, well designed store layout creates a friendly shopping atmosphere. The store also provides unique services such as restaurants, day care center and other recreational facilities within the store. The stores are well supplied with informative catalogues, labels and displays that provide customer assistance. The online shoppers are provided with an easy platform to purchase equipment or seek information on how to assemble it upon purchase. IKEA minimizes operation costs by investing in technologies that ensure efficient use of resources. It also minimizes customer service by selling unassembled packages of furniture where the customers have to assemble these items themselves. They also do not provide transportation services to customers. They have well integrated supply chain system where they source for materials from global supplies and have large warehouses and showrooms. This ensures availability of products to consumers at all times. In spite of continued growth, IKEA Group also suffers several challenges and criticisms. First, the organization’s products are limited to the low income earners and persons who are learned. This is because the products fail to address certain market demand such as the rich who demand for assembled products. The illiterate and feeble people are also not considered since the products have manuals on how to assemble (Katarina, 2013). The organization has also been accused of conducting biased advertising in which witnessed instances of imperialism and disregarding foreign cultures. Secondly, the organization has been criticized for limited stores in some places (such as African and Southern American states) as well as the location of some stores being established where historic buildings were demolished (Gina Chon, 2013). The organization has also restricted establishment of competitive firms as well as going against local legislation of their host nation. Thirdly, IKEA has been accused of price gauging where the Canadian stores would charge double prices for the same items sold in U.S stores despite the two states having similar currency value. In addition, IKEA’s unique Swedish design has failed appeal to some markets and advertisement does not entice the main target market (the youth).the naming of the products and advertising words have been criticized for being obscene in foreign nations with most phrases being used by other competing firms. Over recent years, Economists have criticisms the organization’s complex control has enabled Kamprad to ultimately control the operation, promoted tax evasion and enabled the firm to fail to disclose accurately the profits due to the “other operating expenses” unexplainably high. The economists also describe the donations to charitable organization as too small, since in 2004 Inter IKEA donated 3.5 percent of the entire profits, yet it was incorporated for this purpose only. Additionally, the founder has been accused of being involved in Swedish political movements and causing tensions in Israel. IKEA has also been criticized on grounds of heavy pollution for using harmful materials in production (such as formaldehyde, PCP, cadmium, , PCB, Azo pigments, lead, and  PVC in the 1980’s) in production, and ensuring responsible use of natural resources. (OMahony, 2008) However the organization has taken several environmental policies that includes eliminating the use of those toxic materials, as well as use of recyclable materials, and use of wood that has been sourced from responsibly maintained sources and promoting forest restoration and pollution reduction in America. The organization has also been criticized for using forced labor in the 1980’s and poor treatment of workers with accusation of bullying by senior staff. In 2012, the organization’s risk management head of IKEA operating in France was accused of spying on its workers and customers by illegally accessing police records to determine if they were terrorists or not. The organization has also been criticized for errors and recalls. This was observed in February 2013, where over 17,000 Swedish Meatballs that were allegedly meant to be made of pork and beef were found to have traces of horse meat, later on, the main supplier was forced to cease business. (Katarina, 2013) However, it still was named by Mediacorp Canada Inc as one of "Canadas Top 100 Employers" Works Cited Gina, Chon. "IKEA’s new chairman likes PAX wardrobes, and that’s about all we know". Quartz. Web. 01 October. 2014 < http://qz.com/91159/ikeas-new-chairman-likes-pax-wardrobes-and-thats-about-all-we-know/> Hawthorne, Christopher. "Disposable Architecture". Metropolis. February 2003. Web. 01 October. 2014 < http://www.metropolismag.com/February-2003/Disposable-Architecture/> Katarina, Gustafsson. "Ikea Full-Year Sales Gain 3.1% Helped by Growth in Russia, China".Bloomberg. 14th October. 2013. Web. 01 October. 2014. < http://www.bloomberg.com/news/2013-10-14/ikea-full-year-sales-gain-3-1-helped-by-growth-in-russia-china.html> OMahony, Paul. "Ikea guilty of cultural imperialism: Danes". The Local. Sweden. 20th February. 2008. Web. 01 October. 2014 < http://www.thelocal.se/20080220/10054> The Economist. "The secret of IKEAs success." The Economist. 24th Feb. 2011. Web. 01 October. 2014 < http://www.economist.com/node/18229400> Read More