Introduction
This report sets out to help the chairman of Burberry PLC to identify the users of the company’s financial statements. I will also be using ratio analysis and the financial reports of the last 5 years to determine to whether dealings with the company are worthwhile to the users. Finally, I will give recommendations based on my findings of the company’s performance over the years. Financial reports are used as a way of keeping record, analysing and summarising financial data (ACCA, 2016). Everything summarised will then be put together in a financial statement.
Company History
Burberry PLC is a global luxury fashion brand founded in 1856 by 21-year-old, Thomas Burberry. Burberry is well known for its unique British designs, which all began when Thomas invented a waterproof material called Gabardine. This material goes on to be a phenomenon with many explorers, pilots and military personnel between 1893 and the 1990’s. Their first London store was opened in 1891 and Burberry began trading as a Fashion house. In 2001 Mr Christopher Bailey is appointed as the Design Director and about a year later Burberry is listed on the London Stock Exchange following an initial public offering. A few years later, in 2008 The Burberry Foundation is launched. The foundation is dedicated to helping young people realise their dreams and potential through creativity. 1% of gross profit before tax for charity causes. Burberry is the first luxury brand to join the Ethical Trading Initiative ( (Burberry, 2017).
Users
Investor
An investor is an individual who contributes capital to a business with hopes of gaining a financial return (Gary A. Porter, 2012). Investors typically use technical analysis to decide whether an investment will be profitable. The aim is to minimise risks and maximise returns. Investors are key stakeholders for businesses that have the goal of expanding and becoming leaders of their market. Their main concern when reading over a company’s financial statements are if the company is in a position to give dividends and if the company will be growing at a constant rate in terms of profitability. For example, if an investor has shares in Burberry PLC they would need the financial statements to determine whether they will still hold the shares or sell them.
Lender
A lender (creditor) is usually a private group or financial organisation but can sometimes be an individual. Lenders provide loan capital for various reasons, such as mortgages, car loans, small and big business loans, even loans to fund education. (Drury, 2008). These lenders are usually banks. Qualifying for loans is largely dependent on the company’s financial history (Research, 2013). Financial information is used by lenders to determine whether the company will be able to meet financial obligations and be in a position to manage payments in respect to current employment and income (Mike Bendrey, 2004). The lender uses different ratios like debt-to-income to evaluate the company’s current and new debts compared to the income (before tax).
Suppliers
Suppliers are also referred to as vendors. This is the party in the supply chain that provides the goods and services to the company that the company then sells on to consumers (Mike Bendrey, 2004). The success of the supplier’s business is dependent on the success and growth of the company. Financial information is useful to suppliers when they make the decision to work with a company because they need to know if the company is able to pay for the goods and whether it is a company that will encourage continuity of business.
Owners
Owners are usually the key shareholders of the business. They contribute the initial capital to start a business and as the company expands invite other people to invest. Examples of owners would be sole traders, the partners in a partnership and the shareholders in corporate companies (Kayode, 2015). Owners will use financial information to monitor how the well the company is doing, but the difference with owners and investors is that the owners are more involved in the internal operations of the business. They also look at the sales forecasts, the statements of financial position and they have more of a say in decisions that affect the company.
Management
The managers of the company are what we refer to as internal users. Managements responsibilities are to plan, organise, lead and control the day to day operations and the other employees of the company. They need financial information to be able to plan strategically and effectively, and their review of past financial information helps when trying to control past mistakes from reoccurring (Singh, 2016). The financial information is key to understanding how well the company is doing, helping managers make informed decision that will help the company grow.
Employees
Employees are the people who are hired for a wage, salary, or payment for doing work for the employer. Employees are a huge part of the company and making them feel safe is very important for the sustainability and growth of the business. In a company that relies on its employees it is advisable to make financial information accessible to them as this helps with making them feel at ease. They want to know if there are opportunities for promotions, salary rise, if their job is secure and if the company is in a position to afford their wages (ACCA, 2016).
Ratio Analysis
Analysing is the act of reviewing data and making conclusions based on what you have reviewed. It is important to remember analysis is meaningless if there is nothing to compare it with. The numerical or quantitative relationship between two variables is referred to as ratio. Ratios are used to interpret, compare and contrast data. Ratio analysis takes into account aspect of the financial statement like the income statement, cash flow statement and the balance sheet (Jain, 2007). We use ratio analysis to assess the company’s financial performance and how well the company is operating. We look into aspects of the organisation like liquidity, efficiency, profitability and working capital. The information gathered is then studied to see whether the company is improving or failing. Comparisons are based on a few things:
– the previous year’s revenues and profits.
– the budgeted revenues and profits.
– the revenues and profits of competitors in the same industry.
Profitability
Profitability ratio is used to assess a company’s ability to generate earnings compared to its expenditures and other relevant costs incurred during a specified period of time. It is usually the lenders and investors that are interested in the financial safety of the business along with the owners and managers (Jain, 2007). We can categorise the profitability ratios into two groups
In relation to sales:
– Profit margin (gross and net)
– Expenses ratio
In relation to investments:
– Return on assets
– Return on capital employed
– Return on shareholders equity
Return on Capital Employed (R.O.C.E)
Return on capital employed measures a business’s profitability and how efficiently their capital is used. It is a useful tool for comparing the profitability of two companies in respect to how much capital they use. Investors can use this to determine which companies are worth investing in and the owners can use this to monitor the company’s performance over the years.
ROCE is calculated as:
Earnings Before Interest and Tax
x 100
Capital Employed
Capital employment which is the denominator of the equation can be simplified as (Total Assets – Current Liabilities). A higher ROCE means that the company are using their capital efficiently.
Gross Profit Margin
Gross Profit Margin uses the information from the income statement to assess how efficiently a company can sells its inventory. It tells us which portion of the sales per pound minus production expenses (Pamela P. Peterson, 1999). A high gross profit margin is a good indicator that there will be enough money remaining for operations, debt repayments, expansion, dividend pay-outs and other expenses (Pinson, 2008).
The equation for Gross Profit Margin:
Sales revenue – Cost of Goods
x 100
Sales Revenue
A company that manages to decrease the cost of goods and increase sales revenue will have a higher gross profit.
Net Profit Margin
Net Profit Margin is very similar to the gross profit margin in the sense that they both reflect a company’s financial health. The main difference is that when calculating the net profit margin, one must deduct all expenses including the operating sales, interest and income tax (Timothy J. Gallagher, 2007). Investors review the net profit margin closely because it shows how well a company is converting revenue into profits, which is then paid back in dividends to its shareholders.
The equation for net profit margin is:
(Total Revenue – Total Expenses)
= Net Profit
Total Revenue
Then:
Net Profit
= Net Profit Margin
Total Revenue
Liquidity
Liquidity defines the level of which the company’s assets can be bought and sold in the market without distressing the asset’s price. Even though profitability is important, it is not the only thing that guarantees a company’s survival. Liquidity ratio measures the company’s ability to meet short term debts as failure to meet such obligations can lead to bankruptcy (Timothy J. Gallagher, 2007). Lenders use this ratio to determine whether they can give a larger short-term loan to the company. Investors, on the other hand, use the liquidity ratio to analyse how the company invests in assets.
Quick ratio and Current ratio are the two main types of liquidity ratios.
Current Ratio
This ratio measures the company’s ability to pay short-term and long-term debts with its assets (Clyde P. Stickney, 2009). To find the current ratio one must analyse the current total assets of the company in relation to the company’s current total liabilities. The higher the current ratio, the more capable the company is of paying its debts, as it has a bigger proportion of assets in comparison to the value of liabilities.
The calculation for Current ratio is:
Current Assets
Current Liabilities
Another term for current ratio is working capital ratio.
Quick Ratio
Quick ratio indicates a company’s short-term liquidity. It focuses on the company’s ability to pay off its short-term debts with its most liquid assets. When calculating the current assets, the company’s inventory must be excluded. Even though inventory is a current asset, it is not quickly convertible to pay debts like cash or accounts receivable (Carlberg, 2002).
The formula for quick ratio is:
(Cash & Equivalents + marketable securities + accounts receivable)
Current Liabilities
Or:
(Current Assets – inventory – prepaid expenses)
Current Liabilities
Investors, suppliers and lenders have a particular interest in whether the company has more than enough cash to pay its short-term debts. A high liquidity ratio is a sign of competency and good business performance that can lead to sustainable growth, which is also very attractive to investors, suppliers and lenders.
Efficiency
Efficiency signifies a company’s ability to use the lowest amount of inputs to generate the greatest amount of outputs. Efficiency can be measured by determining the ratio of useful output to total input. It reduces the chances of wasting resources like physical materials, time and energy, whilst effectively achieving the desired output (Anon., 2015).
Inventory Turnover
The inventory turnover is used to measure how quickly the company can turn inventory into receivables or cash through the sale of goods or services. The profitability of the company and the inventory turnover have a direct relationship. The more inventory sold, the larger the chances of making a profit (Bose, 2006). A weak inventory turnover indicates excessive inventory levels, which means the company is not making as much profit as anticipated and this will affect the liquidity position of the firm. This ratio is generally used by investors and suppliers to compare against industry averages.
There are two approaches to calculating the inventory turnover.
1)
Sales Revenue
x 365 (days)
Average Inventory
2)
Costs of Good Sold
Average Inventory
Receivable days
This is a measure of the average length of time taken for debtors to settle their balance. It is preferable that this period is as short as possible as this will be better for the company’s cash flow. The trouble with pressing customers to pay quicker is that it could damage the company’s relationship with its customers. Normally, most businesses request payment from customers within 30 days of the delivery of goods because increases indicate a poorly managed credit control. This is useful for suppliers to evaluate whether the company will be able to pay them on time. If the company has outstanding receivables it may become strenuous on the business which could result in difficulties paying suppliers. Investors, employees, owners, managers, even lenders will benefit from analysis of this ratio for the overall progress of the company.
The formula to calculate Receivable days is:
Trade Receivables
x 365 (days)
Sales Revenue
Payable days
The accounts payable days assesses the number of days the company takes to pay its suppliers. This is useful for determining how efficient the company is at clearing whatever short-term debts it may have. The company must find a balance with the accounts payable days because if they take longer to pay their creditors, the more money they have to use as working capital. If they take too long it may ruin the company’s reputation with the creditors meaning there will be they may offer stricter terms, so it is advisable to pay within the agreed time.
The formula for Payable days ratio is:
Trade Payables
x 365 (days)
Sales Revenue