Burberry Company Quality of Corporate Governance - Case Study Example

Running Head: International Financial Reporting and Corporate governance International Financial Reporting and Corporate governance Name: Michael S. Dumbuya Company Name: Burberry Institution: Tutor: Steve O’Connor Course: INTERNATIONAL FINANCIAL REPORTING AND CORPORATE GOVERNANCE Analysis of Burberry Company Financial performance Financial performance is the measure of how well a company uses its assets to generate revenues. It is also a measure of a company’s overall financial health over a specified period of time and can also be used to compare similar companies across the same industry (Lee. T. 2007). Financial ratios will be used to measure the financial performance of Burberry Company. a) Liquidity Ratios Current ratio They measure the ability of a company to turn its assets into cash. They include current ratio and quick ratio. Current ratio = Total Current Assets Total current liabilities Financial Year 31-Mar-10 31-Mar-09 31-Mar-08 31-Mar-07 Current Ratio 1139.6 536.1 =2.2: 1 1125.7 581.5 = 1.9: 1 953.2 495.3 = 1.9:1 749.7 396.9 = 1.9:1 Burberry Company current ratio is greater than the acceptable levels of 1:1. This means that the company has enough assets to make payment for its debts and it therefore has a high financial performance. The financial performance of the company seems to increase on yearly basis form 1.9: 1 in 2007 to 2.2:1 in 2010. This means that the company has sufficient assets to be able to cater for its liabilities in case a need arises in future. Quick Ratio It is also known as the acid-test. This ratio expresses a company’s ability to repay its short-term creditors from its liquid assets. It also shows the number of times the quick assets covers short-term liabilities. Ratios greater than 1 mean that the short-term liabilities are fully covered. Quick ratio = Current assets – Inventory Current liabilities Financial Year 31-Mar-10 31-Mar-09 31-Mar-08 31-Mar-07 Quick Ratio 767 - 166.9 702 = 0.85 742.4 – 262.6 709.2 = 0.68 588.4 -268.6 436.2 = 0.73 423.7 – 149.8 330.4 = 0.82 The quick ratio of Burberry Company for the four years range from 0.68 to 0.85 which means that the company’s short-term liabilities are not fully covered. The ratio decreased from 0.82 in 2007 to 0.68 in 2009 and later increased to 0.85 in 2010. Burberry Company has quick ratio of less than 1 which means that it is incapable of catering or covering its liabilities fully. The finances of the company are therefore not able to cater for the liabilities hence not performing well (Richard Bull, 2008). b) Solvency ratios or liquidity ratios This ratio measures whether the total liabilities of a company are too high which indicates that there is a possible dependency on outside sources for long term financial support. Solvency ratio = Shareholders Funds*100 Total Assets Financial Year 31-Mar-10 31-Mar-09 31-Mar-08 31-Mar-07 Solvency Ratio 590.1*100/1139.60 = 51.78 543.9*100/1125.7 = 48.32 495.3*100/953.2 = 51.96 396.9*100/749.7 = 52.94 Burberry Company has average solvency ratios which range from 48.32 to 52.94 in the four year period studied. Average solvency ratios range from 30 to 50 and mean that the company does not depend on outside sources to fund its long-term activities since its finances are able to pay for its long term business activities. The company therefore has a high financial performance. c) Income statement Ratio analysis/ Profitability ratios Return on Assets Ratio (ROA) This ratio measures the efficiency of profits and how the profits are being generated from the employed assets (Richard Bull, 2008) ROA = Net Profit before Tax Total Assets Financial Year 31-Mar-10 31-Mar-09 31-Mar-08 31-Mar-07 ROA 166 1139.6 = 0.15 (16.1) 1125.7 = (0.014) (6) 953.2 = (0.0063) 156.3 749.7 = 0.21 Burberry Company has a low return on asset ratio with a low ratio of (0.0063) in 2008 and (0.014) in 2009. This indicates inefficiency in the use of business assets and hence low performance of the company finances. The company also has a positive but low ratio of ROA in 2007 and 2010. During these two years, the company was in a position to use its business assets effectively. The company financial ratios do not have a particular pattern since they are either increasing or decreasing and this means that the financial performance of Burberry Company is not promising. d) Return on Shareholders Funds They measure the ability of a company to generate adequate profits in relation to the resources which have been invested by shareholders (Richard Bull, 2008). Return on Shareholders Funds = Profit before Tax*100 Shareholders Funds Financial Year 31-Mar-10 31-Mar-09 31-Mar-08 31-Mar-07 RSF 166*100/590.1 =28.13 (16.1)*100/539.3 = (2.99) 195.7*100/495.3 = 39.51 156.3*100/396.9 = 39.38 Burberry had a Return on Shareholders Funds of 39.38 in 2007. 39.51 In 2008, -2.99 in 2009 and 28.13 in 2010. This means that the company was able to generate some profits from the resources invested by shareholders in 2007, 2008 and 2010. During these three years, the company was at a strong financial position. Similarly, the company went at a loss in 2009 since it could not generate income from the shareholders invested resources hence being in a poor financial position. In conclusion, it is evident that the financial health of Burberry Company has not been promising in the period between 2007 and 2010. Form the critical analysis of this company; it is therefore evident that the financial performance of the company has had a cyclical pattern. Financial position/ financial condition It is the relationship between various financial data found in a company’s balance sheet (Richard Bull, 2008). There was an increase in total liabilities from 352.8 million in 2008 to 581.9 million in 2009 and a decrease in the total liabilities from 581.8 million in 2009 to 536.1million in 2010. The increase in current liabilities can be attributed to the increase in borrowing which increased at a rate of 45.2% from 2007 to 2008 and the decrease in liabilities can be attributed to the reduction in borrowing. Current assets increased from 749.7 million in 2007 to 1,139.6 million in 2010 which can be attributed to the increase in current assets like cash at bank and in hand from 131.4 to 468.4 million. Burberry Company was at a strong financial position in the year 2010 where it had a net asset of 603.5 million compared to 396.9 million in 2007 and 495.3 million in 2008. The company was at a higher financial position in 2010 since it had a total assets value of 1,139.6 million which constituted of cash at bank of 468.4, inventories of 166.9 million, trade receivable of 129.1 million, property, plant and Equipment of 256.1 million and Intangible assets of 64.6. This led to a net asset of 603.5 million which is actually a strong financial position. The company had a low financial position in 2007 which led to a net asset of 396.9 million. During that year, the company had a low value of total assets of 749.7 million and a high value of total liabilities of 352.8 million. Financial adaptability This is the organizations ability to sustain, tune its liquidity, its money recycling and its asset liability ratio (Andrew Higson 2003). It is also defined as the ability of a company to be stable in its finances, protect its cash or even change its long term contracts. Burberry Company has sustained its asset liability ratio from 2007 to 2010. The asset to liability ratio in 2007 was 1.9:1 and in 2010 the asset ratio was 2.2:1. It was also able to maintain a close range of its quick ratio from 0.68 to 0.85. This means that Burberry Company had a high financial adaptability over the period of study from 2007 to 2010. Limitations of financial reporting Although Burberry Company seems to have an effective accounting and financial system which provides transparency to the market, investors, regulators and analysts do not exclusively rely on this information as noted by Elliott.B & Elliott. J. (2008). The financial reports reflect an increase in Total equity from 396.9 in 2007 to 603.5 in 2010 which investors can not fully rely on without the audit report. This means that the financial report is not convincing enough to investors and analysts without the accompaniment of an audit report. Financial reporting only provides only a picture of the economic performance and not the effects of macro-economic developments. For example the financial reports of Burberry Company only display the interest rates and not the effects of interest rates in economic development. Financial reports can not be used to communicate or forecast the real value of an enterprise and its performance in future. For example the fact the Burberry Company reflects an increasing rate in total assets does not means that the company will continue to reflect increasing values in future. This means that financial reports can not be used in business forecasting. According to Andrew Higson, (2003), creative accounting techniques are where accountants or those responsible for financial reporting use their knowledge and skills to manipulate the figures in the reported accounts. Financial reports are therefore subject to providing the wrong information due to errors and frauds. For example Burberry Company had a profit for the period as following: 2007 had 110.2, 2008 had 135.2, 2009 had (5.1) and 2010 had 82.2. Considering the fact the income statement does not give a clear guideline towards the achievement of the profits, and then it is possible that the records have been manipulated and hence portraying the wrong information of the company (Elliott.B & Elliott. J. 2008). Creative accounting techniques lead to a manipulated company performance, company position and company adaptability. Burberry Company quality of corporate governance Corporate governance is defined as a system which deals with wielding of power over corporate ethics, outlining the structures and processes associated with strategic decision-making and control within a company and as a result the definition lacks consistency in its usage as argued by Donald H. et.al (2009). Corporate governance of any company mainly describes the kind of relationship that exists between the stakeholders and the goals which govern the company. The statement given the board of governance in the financial year ending 31 March 2010 shows that Burberry Company has complied with the relevant provisions set out in section 1 of the UK Combined Code on Corporate Governance (“the Code”). The size of the Board of governors of the company is ideal since it consists of eight members who include the Chairman, the Chief Executive, the Executive Vice President-Chief Financial Officer and five independent non-executive directors. When the board size is ideal then it means that the board will function effectively and the CEO will not exploit the opportunity of poor functioning to control the board (Lee. T. 2007). The company also formed a board which has independence of management and it’s free from any business relationship which could materially interfere with the exercise of their independent judgment. This therefore means that the corporate governance in Burberry Company is of high quality since independent decisions are made. There has been a great interaction and relation between the audit committee and external and internal auditors together with the board of management which are the contributing factors to the efficiency of corporate governance in Burberry Company towards achieving high quality financial reporting. According to Jill Solomon (2007), strict corporate governance has eased the identification of a corporate governance mechanism and this minimizes the divergence of interest between shareholders and managers (Noel Capon et.al 1996). The presence of non-executives directors and especially those in possession of good practical experience has enhanced leadership roles in Burberry Company. Their presence always improves on decision making and supervisory roles of the board of directors. Good corporate governance has therefore encouraged the company to improve on its performance when there is an efficient accountability system and an effective link rewards and performance hence maximizing performance as noted by Lee. T. (2007). Good corporate governance has also increased the company’s transparency and social responsibility since it increased the investors and public confidence in the organization In conclusion therefore, Burberry Company has quality corporate governance. Recommendations Burberry Company has a good level of corporate governance, acceptable level of financial performance, financial adaptability and financial position. I would therefore advise a presumed client to buy share from the company. Good corporate governance is accompanied by low level of earnings management and high levels of a company’s performance as argued by Noel Capon et.al (1996). This means that since Burberry Company has a good reputation of corporate governance and corporate responsibility, then it is likely that the company will perform high even in the stock market. A cyclical pattern of financial performance experienced in Burberry Company can be quite discouraging to new investors who would like to invest in the company through the acquisition of shares. A cyclical pattern is quite unpromising and many investors do not invest in such a company for fear of uncertainties. I would therefore advise a presumed client to invest in the company or to buy shares from the company but with much caution on the financial performance of the company. Considering that the company has good corporate governance then it is likely that the financial performance of the company will stabilize over time and hence enabling the share bought to earn interest as argued by Donald H. et.al (2009). References Thomas A. Lee, (2007). Financial Reporting and Corporate Governance. John Wiley and Sons. Barry Elliott, Jamie Elliott, (2008). Financial accounting and reporting. Financial Times Prentice Hall. Donald H. Chew, Stuart L. Gillan, (2009). Global Corporate Governance Columbia University Press. Richard Hinz, Rudolph Heinz, Pablo Antolín, (2010). Evaluating the Financial Performance of Pension Funds World Bank Publications. Noel Capon, John U. Farley, Scott Hoenig, (1996). Toward an integrative explanation of corporate financial performance. Springer. Andrew Higson, (2003). Corporate financial reporting: theory and practice. SAGE. Robert Leslie Newman, (1988). Financial position: nature and reporting. Australian Accounting Research Foundation. Jill Solomon, (2007). Corporate governance and accountability. John Wiley and Sons, Richard Bull, (2008). Financial ratios: how to use financial ratios to maximize value and success for your business. Elsevier Science & Technology. International Accounting Standards Board, (2005). International Financial Reporting Standards. Kluwer. Appendix A Income Statement 31-Mar-10 31-Mar-09 31-Mar-08 31-Mar-07 (Millions) (Millions) (Millions) (Millions) Revenue 1,279.90 1,201.50 995.4 850.3 Operating Profit / (Loss) 171.1 (9.9) 201.7 157 Net Interest (5.1) (6.2) (6) (0.7) Profit Before Tax 166 (16.1) 195.7 156.3 Profit after tax from continuing operations n/a n/a n/a n/a Discontinued Operations  Profit after tax from discontinuing operations n/a n/a n/a n/a PROFIT FOR THE PERIOD 82.2 (5.1) 135.2 110.2 Balance Sheet 31-Mar-10 31-Mar-09 31-Mar-08 31-Mar-07 (Millions) (Millions) (Millions) (Millions) Assets  Non-Current Assets  Property, Plant & Equipment 256.1 258.6 177.5 162.7 Intangible Assets 64.6 57.5 150.4 133.6 Investment Properties n/a n/a n/a n/a Investments n/a n/a n/a n/a Other Financial Assets n/a n/a n/a n/a Other Non-Current Assets 51.9 67.2 36.9 29.7 372.6 383.3 364.8 326 Current Assets  Inventories 166.9 262.6 268.6 149.8 Trade and Other Receivables 129.1 204.3 181.2 137.2 Cash at Bank & In Hand 468.4 252.3 127.6 131.4 Current Asset Investments n/a n/a n/a n/a Other Current Assets 2.6 23.2 11 5.3 767 742.4 588.4 423.7 Other Assets n/a n/a n/a n/a Total Assets 1,139.60 1,125.70 953.2 749.7 Liabilities  Current Liabilities  Borrowings 206.4 244.7 191.8 134.2 Other Current Liabilities 495.6 464.5 244.4 196.2 702 709.2 436.2 330.4 Non-Current Liabilities Borrowings n/a n/a n/a n/a Provisions 7.1 10.2 8 10.2 Other Non-Current Liabilities 27.2 24.8 13.7 12.2 34.3 35 21.7 22.4   Other Liabilities n/a n/a n/a n/a Total Liabilities 536.1 581.8 457.9 352.8 Net Assets 603.5 543.9 495.3 396.9 Capital & reserves  Share Capital 0.2 0.2 0.2 0.2 Share Premium Account 186.1 175.9 174.3 167.3 Other Reserves 162.4 164 58.6 21.6 Retained Earnings 241.4 199.2 262.2 207.8 Shareholders Funds 590.1 539.3 495.3 396.9 Minority Interests / Other Equity 13.4 4.6 n/a n/a Total Equity 603.5 543.9 495.3 396.9 Appendix B BURBERRY GROUP PLC (London SW1P 2AW) Horseferry House Horseferry Road Phone : Net Sales (2009, mil GBP): 1,280 London Fax : N.A. Net Income (2009, mil GBP): 81 Date of Incorp. : 30/10/1997 No. of Employees (2009): 5,608 This is a Public, Quoted Company Registered nr. : 03458224 Primary code (UK SIC 2003) 1822 - Manufacture of other outerwear Trade description Design, sources, and markets men"s, women"s and children"s clothing. Non-apparel accessories are marketed globally through a diversified network of retail, wholesale, franchise and digital commerce channels worldwide. Peer group For comparison purposes the financials of this company are compared to the median values of a default Peer Group. This group includes 82 Very Large Companies selected as those having the same UK SIC 2003 code (1822). ILLUSTRATION OF THE EVOLUTION OF THREE KEY ITEMS BALANCE SHEET(mil GBP) 31/03/2010 31/03/2009 31/03/2008 31/03/2007 31/03/2006 12 months 12 months 12 months 12 months 12 months Cons. Cons. Cons. Cons. Cons. ASSETS Current Assets 767 742 588 424 349 Cash & Equivalents 468 252 128 131 114 Receivables 92 147 136 111 89 Other Current Assets 37 58 33 26 19 Fixed & Other Assets 373 383 365 326 323 Tangible Fixed Assets 256 259 178 163 167 Other Assets 10 20 9 5 3 Total Assets 1,140 1,126 953 750 672 LIABILITIES Current Liabilities 502 547 436 330 256 Accounts Payable 62 55 63 57 28 Other Current Liabilities 61 107 37 30 28 Non-Current Liabilities 48 40 22 22 30 Long Term Debt Other Liabilities 27 0 0 10 15 Shareholders equity (incl. minority int.) 590 539 495 397 387 Total Liabilites & Shareholders" Funds 1,140 1,126 953 750 672 INCOME STATEMENT(mil GBP) 31/03/2010 31/03/2009 31/03/2008 31/03/2007 31/03/2006 12 months 12 months 12 months 12 months 12 months Cons. Cons. Cons. Cons. Cons. Net sales 1,280 1,202 995 850 743 Cost of Goods Sold -476 -536 -378 -329 -297 Operating expenses 633 676 416 364 292 Operating Income 171 -10 202 157 155 Financial P/L -6 -13 -12 -6 -2 Taxes -84 11 -61 -46 -51 Extraordinary & Other Items Net Income 81 -6 135 110 106 Number of employees 5,608 6,208 5,660 5,218 4,651 RATIOS 31/03/2010 31/03/2009 31/03/2008 31/03/2007 31/03/2006 Return on Shareholders Funds (%) 28.13 -2.99 39.51 39.38 40.61 Return on Total Assets (%) 14.57 -1.43 20.53 20.85 23.36 Return on Capital Employed (%) 26.03 -2.78 37.85 37.28 37.71 Profit Margin (%) 12.97 -1.34 19.66 18.38 21.13 Current Ratio (x) 1.53 1.36 1.35 1.28 1.36 Solvency Ratio (%) 51.78 47.91 51.96 52.94 57.52 Assets / Employee(mil GBP) 203,210 181,331 168,410 143,676 144,507 Net Assets Turnover (x) 2.01 2.08 1.93 2.03 1.78 MEDIAN VALUES OF THE PEER GROUP 2009 2008 2007 2006 2005 Net Sales (mil GBP) 17 26 35 28 32 Operating Income (mil GBP) 0 0 1 0 0 Net Income (mil GBP) 0 0 0 0 0 Return on Shareholders Funds (%) 15.06 8.29 15.31 14.08 12.93 Return on Capital Employed (%) 13.75 4.29 12.40 11.93 11.82 ILLUSTRATION OF THE EVOLUTION OF KEY RATIOS MANAGEMENT Mr D.A. Tyler Director Mr I.R. Carter Director Mr J.B. Smith Director Mr J.W. Peace Director Mr P. Bowman Director Ms A.J. Ahrendts CEO Ms S. George Director Ms S.L. Cartwright Director Mr M.N. Mahony Company Secretary OWNERSHIP 1. BULK LIST, 3%+ HOLDINGS FROM ACCOUNTS 31/03/2010 435,024,782 ORD 0.05P SHARES 2. AMERIPRISE FINANCIAL, INC 21,771,730 = 5.01% 3. BLACKROCK INC 39,186,967 = 9.03% 4. CAPITAL RESEARCH AND MANAGEMENT COMPANY 20,645,893 = 4.77% 5. FMR CORP 18,315,823 = 4.16% 6. JP MORGAN CHASE & CO 21,578,580 = 4.99% 7. LEGAL & GENERAL GROUP PLC 17,296,785 = 3.99% 8. MASSACHUSETTS FINANCIAL SERVICES COMPANY 25,720,195 = 5.94% 9. SCHRODERS PLC 21,666,352 = 4.99% SUBSIDIARIES 1. BURBERRY (ESPANA) HOLDINGS LIMITED Wholly Owned #0050993 01 2. BURBERRY (SPAIN) FINANCE LIMITED Wholly Owned J 06505504 01 3. BURBERRY ASIA LTD Wholly Owned #0049172 01 4. BURBERRY HAYMARKET LIMITED Wholly Owned J 04868493 01 5. BURBERRY INTERNATIONAL HOLDINGS LIMITED Wholly Owned J 04251867 01 6. BURBERRY IRELAND INVESTMENTS Immediate IE378562 01 7. BURBERRY JERSEY (NO 1) LTD Immediate #0043593 01 8. BURBERRY LIMITED Wholly Owned #0044622 01 9. BURBERRY LUXEMBOURG HOLDINGS LIMITED Wholly Owned J 04458720 01 10. BURBERRY LUXEMBOURG INVESTMENTS SARL Wholly Owned #0062231 01 11. BURBERRY LUXEMBOURG NO 1,NO 2 & NO 3 SAR Wholly Owned #0044452 01 12. BURBERRYS LIMITED Wholly Owned J 00230931 01 13. HAMPSTEAD INTERNATIONAL REALTY SARL Wholly Owned #0048977 01 14. THE SCOTCH HOUSE LIMITED Wholly Owned J 00103819 01 15. THOMAS BURBERRY HOLDINGS LIMITED. Wholly Owned W 03509143 01 16. THOMAS BURBERRY LIMITED Wholly Owned J 04332226 01 17. WOODROW-UNIVERSAL LIMITED Wholly Owned J 00296252 01 18. BURBERRY (ESPANA) HOLDINGS LIMITED Wholly Owned J 05265289 02 19. BURBERRY (N0. 1) UNLIMITED Wholly Owned J 04452028 02 20. BURBERRY (NO. 3) UNLIMITED Wholly Owned W 04638372 02 21. BURBERRY (NO. 4) UNLIMITED Wholly Owned W 04950358 02 22. BURBERRY (NO. 5) UNLIMITED Wholly Owned W 04950359 02 23. BURBERRY (NO. 6) UNLIMITED Wholly Owned W 04950360 02 24. BURBERRY (NO. 7) UNLIMITED Wholly Owned W 04954403 02 25. BURBERRY (NO.2) UNLIMITED Wholly Owned W 04519710 02 26. BURBERRY FINANCE LIMITED Wholly Owned W 05352591 02 27. BURBERRY HOLDINGS LIMITED Wholly Owned J 04251948 02 28. BURBERRY SPAIN (UK) LIMITED Wholly Owned J 04868448 02 29. HAMPSTEAD (UK) LIMITED Wholly Owned W 04771489 02 30. BURBERRY LONDON LIMITED Wholly Owned J 04251951 03 31. BURBERRY TREASURY LIMITED Wholly Owned S 06675641 03 32. BURBERRY (UK) LIMITED Wholly Owned J 04288292 04 33. BURBERRY LIMITED Wholly Owned J 00162636 05 34. BURBERRY ITALY RETAIL LIMITED Wholly Owned J 04362786 06 35. BURBERRY NEW YORK 2005 LIMITED Wholly Owned M 05586663 06 36. BURBERRY NEW YORK UNLIMITED Wholly Owned W 04332223 07 Appendix C RATIOS 31/03/2010 31/03/2009 31/03/2008 31/03/2007 31/03/2006 Return on Shareholders Funds (%) 28.13 -2.99 39.51 39.38 40.61 Current Ratio (x) 1.53 1.36 1.35 1.28 1.36 Solvency Ratio (%) 51.78 47.91 51.96 52.94 57.52 Read More