Inventory and Zara

Topics: Inventory, Generally Accepted Accounting Principles, Financial ratios Pages: 3 (929 words) Published: May 17, 2012
How well does Zara perform compare to its competitors?
In order to see how well Zara perform compare to its competitors, we need to analyze a few financial ratios: Gross Profit Margin, Net Profit Margin, Net Working Capital, Net Working Capital Turnover, Return on book value of Assets, Return on book value of Equity, Return on Fixed Assets and Total Debt Ratio. Gross Profit Margin is financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings. Zara based on Gross Profit Margin has the highest percentage 51.91%, H&M 51.63%, Benetton 43.33% and Gap 29.92%. The average of four is 44.20 indicating that apparel retailers require hefty gross returns in order to cover significant expenses associated with operating their businesses. Zara’s leadership in this industry can be attributed to their quick response system and its ability to drive costs out of the supply chain. Gap having the lowest percentage which indicates that company having problem over their supply chain and high cost of goods sold relative to sales The net profit margin formula looks at how much of a company's revenues are kept as net income. The net profit margin is generally expressed as a percentage. Zara is again a leader by having 10.01%, H&M 9.60, Benetton 7.05%, and Gap -06% Zara’s success again is attributed to its ability to keep its cost of goods sold down around 48% of sales whereas The Gap’s cost staggering 70% of sales Zara is more profitable than the Gap despite its much smaller sales revenue. The problem of Gap shows that it is not well diversified in terms of international sales than Zara which makes Gap to be vulnerable for downward price pressure in the highly competitive US market. Zara’s quick response system keeps inventory levels and expenses at a minimum. Fewer inventories mean less...
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