Financial Analysis of I.T Ltd.

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Company background
I.T Limited (0999.HK) is an investment holding company based in Hong Kong. It was listed on the main board of The Hong Kong Stock Exchange on 4-March-2005. The company offers a wide range of apparel products. It sells its products as well as offers a variety of national and international brands through its network of retail stores. As of February 28, 2011, it operated 392 stores in Hong Kong and Mainland China.

Objective
To undertake a comprehensive analysis on the financial performance of I.T. Limited. Detailed financial ratio analysis will be performed. An estimation of the firm’s cost of equity capital and weighted average cost of capital will also be provided.

Horizon of analysis
We will focus on its performance in the latest 5 fiscal years.

A) Detail financial analysis
The financial analysis will be conducted in two ways. First, the major accounts on financial statements will be inspected in order to derive a general picture on the healthiness of the business. Second, PERL (Performance, Efficiency, Risk, Liquidity) framework will be used to further analyze the financial performance of the company.

I. Going through the financial statements
We can get a glimpse of the healthiness of the business by looking into the trend of accounting items in income statement, balance sheet and cash flow statement respectively.

Consolidated income statement
(Referring to appendix A - table 1 and 2)
2008/09 was a special year, financial tsunami happened. Therefore there was a huge profitability impact in that year, resulting in a large decrease in operating profit. And since the market recovered in 2009/2010, the profitability suddenly increased a lot in that fiscal year. Other than these two special years, the overall growth trend in sales turnover, costs, and profit is healthy.

(Referring to appendix A - table 3)
Standardizing the income statement can extract extra information. All the accounts are expressed as a percentage of turnover. The company has done a good job in cost controlling, since the cost of sales as a percentage of turnover is in a decreasing trend, hence the gross profit margin is in an increasing trend. On the other hand operating expenses fluctuates at about 50-51% of turnover, but since cost of sales has a greater decrease, the net effect is operating profit is in an increasing trend.

Consolidated balance sheet
(Referring to appendix A - table 4)
In general, total assets experience an increasing trend. This is reasonable since the business is at a growing stage. One notable point is the growth of non-current assets look greater than current assets, especially property, furniture and equipment has a very significant increase in 2010/11, this is probably due to the rapid expansion of retails stores in Hong Kong and China. And as a result, there is a significant increase in inventories in 2010/11 too.

(Referring to appendix A - table 5)
Similar conclusions can be drawn by viewing the same accounts in a standardized balance sheet (all items are standardized by total asset value in the fiscal year). Property, furniture and equipment, and inventories make up most of the total assets.

(Referring to appendix A - table 6)
Liabilities also grow a lot with total assets as the business expands. Notably there is a significant increase in both short-term and long term bank borrowings. In addition the payable accounts also increased more than 100%, meaning that the company bought stocks or services from suppliers on credit more than before. This growth of liabilities is fine as long as the company can generate consistent operating cash flows, as we will see in the next section.

(Referring to appendix A - table 7)
Similar conclusions can be drawn at standardized balance sheet, bank borrowings and payables increased significantly, especially for longer term bank borrowings.

(Referring to appendix A - table 8)
The growth of the business was mainly funded by growing...
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