Financial Comparison of Burberry and French Connection - Research Paper Example

INTRODUCTION They say that accounting is the language of business(Meigs, 1995). Well this is definitely held true when the balance sheet, income statement and the statement of cash flows are used in financial statement analysis with the aid of ratios(Larson, 1995). The following paragraphs compares the financial statement ratios of the French Connection and Burberry companies. BODY A French Connection Current Ratio = 126.96 = 2.30 55.28 When the current assets of French Connection amounting to 126.96 is divided by its current liabilities of 55.28, the result shows that current assets are 2.30 times bigger than its current liabilities. Current liabilities usually include accounts payable, notes payable and the current portion of long term debts or loans. This shows that the company can easily pay all its debts in case of liquidation due bankruptcy or other reasons. Current assets include cash and cash equivalents, accounts receivable and notes receivables, inventory end, office supplies (bond paper, folder and others), furniture and fixtures, office equipment (computers, calculators, adding machines and the like) and many others. Burberry Current Ratio = current assets = 349 = 1.36 current liabilities 256 When the current assets of Burberry amount to 349 is divided by its current liabilities amounting to 256, the result shows that its current assets are 1.36 times larger that its current liabilities. Based on the above current ratio computations, French connection has a better current ratio because its current ratio of 2.30 times is very much larger than Burberry's current ratio of 1.36 times. B. French Connection Debt to Equity Ratio = 53.08 = 0.48 110.46 When the total debt of French Connection amount to 53.08 is divided by its equity amounting to 110.46, the result is forty eight. This shows that its leverage ratio is not good. For, the equity is the difference between the total assets and the total liabilities of the company. Burberry Debt to Equity Ratio = total debt = 286 = 0.74 total equity 387 When the total debt of Burberry amounting to 286 is divided by its equity to the tune of 387, the result is seventy -four percent. This shows that the company does have a good leverage ratio. The leverage ratio is a must analytical tool when borrowing huge sums of money from banks and other credit institutions. Based on the above analysis, Burberry has a better debt to equity ratio because its debt to equity ratio is seventy -four percent. On the other hand, French Connection has a bad leverage ratio because its debt to equity lower at only forty eight percent. The best debt To equity ratio is one hundred percent. C. French Connection Net profit Ratio = 11.08 = 0.05 246.3 When the net income of French Connection amounting to 11.08is divided by its revenues amounting to 246.3, the result is five percent. The company should try to increase its net profit by either increasing revenues or/ and decreasing costs and expenses. Burberry Net profit Ratio = Net profit = 106 = 0.14 Net sales 743 When the net income of Burberry is divided by its revenues amounting to 106 is divided by its net sales or revenues of 743, the result is fourteen percent. This shows that the company should increase its net profit ratio by either increasing its revenues or decreasing its costs and or expenses. Based on the above analysis, Burberry has the better net profit ratio because its fourteen percent net profit ratio is clearly higher than the net profit ratio of French Connection at only five percent. D. French Connection Return on Equity 11.08 0.10 = 110.46 = When the net income of French Connection amounting to 11.08 is divided by its equity amounting to 110.46, the result is ten percent. This shows that its return should increase by increasing revenues or decreasing costs and or expenses. Burberry Net profit 106 = 0.27 Return on Equity = Equity = 387 When the net profit of Burberry amounting to 106 is divided by its equity amounting to 387, the result is twenty seven percent. This shows a high performance. However, Burberry should strive to increase its return on equity further by increasing revenues and decreasing costs and or expenses. Based on the above analytical data, Burberry has a better return on equity ratio because its return on equity of twenty seven percent is much larger than the return on equity of French connection which is only ten percent. E. French Connection Return on Assets = 11.08 = 0.07 163.53 When the net income of French Connection amounting to 11.08 is divided by its total assets amounting to 163.53, the result is seven percent. This shows that the company should improve its current standing by increasing revenues and decreasing cost and or expenses. Burberry Return on Assets = Net profit = 106 = 0.16 Total Assets 672 When the net income of Burberry amounting to 106 is divided by its total assets amounting to 672, the result is sixteen percent. This means that company should double its efforts to increase its revenues or decrease its costs and or expenses. Based on the above analysis, Burberry has a better 2006 performance because its return on assets of 106 is definitely higher than French Connection's return on Assets of only seven percent. MANAGER. A manager must try his best to increase profits and decrease costs and expenses. For the bottom line or the passing grade that a manager must achieve is a net profit(Meigs, 1992). A company in the red ( losses) clearly shows that management did not maximize its assets which were acquired through creditors' help or investments from stockholders. As a manager, I prefer my analysis will shows that French connection has a better current ratio because its current ratio of 2.30 times is very much larger than Burberry's current ratio of 1.36 times. However, Burberry has a better debt to equity ratio because its debt to equity ratio is seventy -four percent for the best debt to equity ratio is one hundred percent. Furthermore, Burberry has the better net profit ratio because its fourteen percent net profit ratio is clearly higher than the net profit ratio of French Connection at only five percent. In addition, Burberry has a better return on equity ratio because its return on equity of twenty seven percent is much larger than the return on equity of French connection which is only ten percent. Lastly, Burberry has a better 2006 performance because its return on assets of 106 is definitely higher than French Connection's return on Assets of only seven percent. As manager of French Connection, I must triple my efforts to achieve the same or even surpass the financial statement performance displayed by Burberry. On the side of Burberry, I must not stop her but continue to increase my sales and decrease unnecessary costs and expenses in order to improve further its current good financial statement performance. LENDER. I would rather lend my hard earned cash to Burberry because this company has shown a better financial statement performance for the year ended December 31, 2006. For, Burberry will be have better prospects of repaying my loan when the loan maturing dates arrive in the next few years. OTHER USER OF ABOVE ACCOUNTING RATIOS. Being any other user of financial statements, I would have the same reasons that the manager and the lender would have for choosing Burberry over the French Connection company(Raiborn, 1993). This is because financial statements are neutrally made. Meaning it does not favor one party to the detriment of another party. This is why generally accepted accounting principles, international accounting standards and other accounting standards have been scrutinized, analyzed and must be implemented. The financial statement users include the suppliers who rely on the financial statements and their ratio analysis to determine whether to continue producing and supplying good to the company or to look for other customers to replace a bankrupt or downhill -moving company. Also, customers are interested in the financial statements and the accounting ratios to determine if the company will last until the next decade. If not, then the customers will start looking for other suppliers of their needs, wants, whims and caprices. Next, the government taxing agencies are interested in the financial statements and their accounting ratios to determine if the company is paying the correct amount of taxes. Further, the labor unions are also interested in the financial statements and the accompanying accounting ratios to determine if the company will be to give salary increases. And, the board of directors are interested in the financial statements and the accounting ratios in order to determine how they will chart the company's future course of actions. These actions include expansion to new and uncharted territories, borrowing large sums of money to buy a much needed factory equipment which will replace an old machine that is obsolete. Companies must innovate rapidly in order to keep abreast of their competitors in terms of quality of products and the speed of delivering such quality products. And, government regulating agencies use the financial statements and the accounting ratios to determine if government statures, laws and state decrees are being implemented to the letter. Lastly, the community where the compound does its business is interested to know the financial statements and the accounting ratios to determine if the company will be able to sustain the community by hiring its residents in its factories and offices. Thus, financial statement users need the accounting ratios for better decision making. CONCLUSION There are many limitations to the use of accounting ratios for this type of analysis. For, financial statements are recorded at cost. Meaning the land and other inventory assets do not show the fair market value which definitely could be lower or higher than the costs recorded in the books. Also, inflation and deflation as well as acts of God are not included here. These acts include hurricanes, earthquakes, famines, diseases and the like. Also, labor union rallies that stop work and the human behavior (attitudes)in organizations are not quantified here. Furthermore, financial statements report the past but do not necessarily reflect future sales, income, expense and other forecasts. Also, accounting ratios could be based on data that was erroneously recorded. These errors could even be the result of ill intentions to window dress the financial statements so that a false financial statement is presented. A very good example is the Enron scandal which brought down one of the former top five auditing firms in the United States, Arthur Andersen(Fusaro, 2002). Another limitation is that the financial accounting ratios use are few. Also, the marketing side is not included in the accounting ratios. For, accounting records past sales events. However, accounting does not encompass future sales. Thus, budgeting will have to complement or help the financial statement ratios. Budgets are the agreed future sales, expenses and costs that the factory worker, the factory supervisor, the factory manager, the marketing personnel, the accounting personnel, the board of directors, and also the stockholders would agree on. For, budgets pertain to the future. But, the future is anchored on the historical accounting records and accounting ratios. For example, if the company has been generating an average sales of $5,000,000 per year in California alone for the past five years, then there is a strong probability that the sales for the next year or two would also be $5,000,000 plus or minus a certain percentage of the actual prior sales figures. Although there are many limitations to accounting ratios for this type of analysis, we must not discard altogether these accounting ratios. For they serve as important factors or influences in decision making. To explain, how would a manager decide whether to hire a new employee or not if he has no copy of the balance sheet, income statement or statement of cash flows. A manager who will blindly hire ten factory workers even though sales have gone down for the past three years because the market has shifted its demand for the competitors' products will surely not last another day in the company. This could happen if the manager does not care to scrutinize the need to lessen expenses and costs of his cost center (production department). In conclusion, accounting ratios are needed by the managers, lenders and other users for their decision making purposes calling for an unbiased presentation of accounting information. REFERENCES Larson K., Miller P., Financial Accounting, Irwin Press, Boston 1995 Meigs et al., Financial Accounting, McGraw Hill N.Y. 1995 Meigs R., Meigs W., Financial Accounting, McGraw-Hill, N.Y. 1992 Raiborn et al., Managerial Accounting, West Publishing, N.Y., 1993 Fusaro, P., Miller R., What Went Wrong with Enron, Wiley Press, Hoboken, NJ, 2002 Burberry financial statements, retrieved Aug 6, 2007 < http://stocks.us.reuters.com/stocks/balanceSheet.aspperiod=A> < http://stocks.us.reuters.com/stocks/incomeStatement.aspperiod=A> French Connection Financial Statements, retrieved Aug 6, 2007 < http://www.frenchconnection.com> Read More