To: Potential Investors
From: An Accountant
Subject: Analysis of Financial Statements
This report will focus on two representative fashion companies in UK. They are Burberry and Ted Baker. Both of them listed on London Stock Exchange and belongs to personal goods industry. Burberry is a global luxury brand which operates in the luxury goods manufacture, retailer and wholesales segments. The company mainly operates in Europe, Asia, Australasia and Americas and provides non-apparel accessories and clothing for adults and children. Ted baker is a creative global luxury brand. Similarly, Ted Baker also provides accessories and clothing for adults and children. They mainly operating in UK, Asia, Australasia and America. We will evaluate the performance of each of them and give advice to potential investors. In this report, “2009” means the year ended 31 march 2009 in Burberry. “2009” means the year ended 31or 30 January 2009 for Ted Baker.
1. The profitability (performance)
We will use four main ratios to evaluate their profitability. Firstly, the Gross profit margin. During 2009 to 2011, the gross profit margin for both of them has been improved, especially in Burberry from 55.41% to 67.26%. In terms of net profit margin, the performance for Ted Baker has increased stably, but the performance for Burberry fluctuates dramatically as its operating profit is negative in 2009. Although the net profit margin goes up significantly during the period, the average profit margin is still lower than Ted Baker. The Return on equity and return on capital employed of Ted Baker still grew considerably. Although these two ratios in Burberry has improved higher than in Ted Baker, it is more volatile during the period. So, Ted Baker’s average ratios is better than Burberry. In this three years, both companies have up performance considerably. And it is obviously, Ted Bake had been more profitable and stable than in Burberry. But Burberry has higher growth potential and therefore is expected to return more money for investor. Due to its instability, the higher risk will be attached.
2. The efficiency
The same as profitability ratio, we intend to use four ratios to evaluate the efficiency of Ted Baker and Burberry. The Stock turnover of both firms are fluctuating significantly, especially in Burberry. But compared to the figure during these three years, it can been seen that the inventory turnover in Burberry is much lower than in Ted Baker. This may partly suggests that the sales of Burberry is improving faster than in Ted Baker’s. Generally speaking, the higher of inventory turnover figure shows the company holding stock for a shorter time, it reduces the risk of overdraft and company may need to write off some inventory which contain certain obsolete items. The average level of stock turnover days in Ted Baker is around 200 days while it just approximately 170 days in Burberry.
The receivables of Ted Baker has fallen slightly and is much higher than the figure of Burberry. Meanwhile, Burberry has shorten their debtors’ collection period from 44.50 days to 21.55 days. What’s more, the average debtors’ collection period of both company are over 30 days. As for the creditors’ payment period, Ted baker pays out their credits in a longer period, but the creditors payment period of Burberry is just nearly half of Ted Baker. As an investor, we looking for more dividend pay-out, so the better choice is to select a company with longer creditor payment period. Because, if a company has longer payoff period, they generally have the ability to use that cash flow for further investment or earn income from cash flow1. Normally, if a company has longer payoff period, they generally have the ability to use that cash flow without interest charged. However, if repaying debt in a shorter period means the company cannot to earn more profit for paying dividends to shareholder or pay less.
Moreover, the asset...
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