Report area chosen To achieve Oxford Brookes University BSc in Applied Accounting I have chosen the report area topic number 8. I will report on the business and financial performance of X&Y Group over three years ranging from year 2006 to year 2008.In addition I will also have a look on Interim report in the year 2009. In the Annual Report 2008 X&Y Group then CEO Exxxx, Rxxxx commented, ‘. . . we continued to increase our market shares in increasingly competitive markets’ 1 . I will have a look on financial statements and other reports and publications to understand the true financial and business picture of X&Y.
I will apply my knowledge gathered from my ACCA studies and from reading various books, newspapers, magazines, press releases and other publications. This report will give an intensive view from current and prospective shareholders.I will mention ‘X&Y’ as to indicate ‘X&Y X&Y Group’ from now on unless otherwise stated.
I have selected Inditex Group for comparison with X&Y in terms of business and financial performance. 1. 2 Reasons behind choosing this area The financial statements give a picture of how well or bad a business is performing. If you are a bank, or insurance company, or local authority, or prospective shareholder, or supplier, or mere employee and if you want to know if you are safe to get involved with this business the first step is to look at its financial statements. Looking at financial statements i. . the evaluation of financial and business performance of an entity gives the picture of that entity’s management performance.
This is like drawing a portrait of that entity. Mori, Akira once said, ‘You have to know accounting. It’s the language of practical business life’2. I always liked accounting and finance; and looking forward 1 2 Check Harvard Referencing system Check Harvard Referencing system 3 to build up a career in finance sector where number crunching is not everything; where I can use business and financial performance measurement techniques and make effective decisions.I will use this report writing opportunity to practice and practically implement my learning in evaluating business and financial performance of a business which spreads its activities from one continent to another. 1. 3 Reasons behind choosing X&Y For me and for my family’s clothing needs I found X&Y as a better place to buy as it sells better and fashionable cloths at lower price. But, this is not what attracted my attention. I got interested on X&Y because in this time of recession and money crisis while all high street giants struggling to survive I found X&Y continuing to open new stores in different locations in every few months.Not only that, Interbrand ranked in their latest 2009 report X&Y as the world’s 2X no. brand with 11% increasing brand value from last year to 15,375m USD. Last year X&Y was ranked number 2X. X&Y is in the top position as a high street apparel brand. It seems X&Y is becoming more popular hence means greater market. 1. 3. 1 X&Y history Present is the result of history; I always enjoy it so decided to look back where everything really begun. A former Swedish salesman, named Exxx Pxxxx, discovered an amazing clothing retail concept during his trip to the United States.He noticed high turnover can be achieved by lowering the sales price. After came back home; in 1947, he opened a store exclusively for women’s clothing in Vxxx, Sxxx. He named the store ‘X’. Swedish for hxxx. In 1968 Exxx Pxxxx brought men’s concept in his retail store and changed its name to ‘X&Y’. He continued to add new concepts like clothing for children, young people, trendy people and sportive people. To stimulate growth in home and abroad, X&Y went public with a listing in Sxxxx Stock Exchange in 1974.X&Y started its business using concept ‘fashion at low price’ but later developed to ‘fashion and quality at best price’ The Pxxxx family still 4 holding the largest share of the company stock, leaving control securely in the family’s hands. 1. 3. 2 X;Y at present day ‘Before you can really start setting financial goals, you need to determine where you stand financially. ’ – Bach, David X;Y is a rapidly growing business. Every year it is expending its market, i. e. stores, steadily. According to X;Y annual report 2008; by the end of financial year 2008 X;Y Group had 1,738 stores globally.In the year 2008 X;Y opened 216 stores worldwide and entered in five new different markets (Japan, Egypt, Oman, Bahrain and Saudi Arabia). In 2009 X;Y Group planning to open 225 new stores. Though X;Y mainly provide clothing at competitive price but they also have PST range which offers exclusive and expensive clothing collection. Around 73,000 employees helping X;Y to run and grow. Source: X;Y Group Annual Report 2008 1. 3. 3 Business to compare I was thinking around which organisation I shall choose to compare.I browsed through websites of top clothing retailer’s e. g. Primark, Gap, Topshop, and Zara. 5 Then I found Inditex Group (owner of Zara) as the most appropriate business for comparison with X;Y Group as, in terms of revenue, Inditex is the top largest clothing retailer in the Europe and X;Y is the second. Though clothing ranges of Inditex mainly includes high priced items unlike X;Y’s main ranges but both of them highly expended their operation beyond their originate country. Inditex have 4,430 stores in 73 countries while for X;Y the number is 1,738 in 34 countries.Inditex Group includes fashion brands Zara, Massimo Dutti, Pull and Bear, Bershka, Stradivarius, Oysho and Uterque. Zara is the most popular brand among others of Inditex Group. Interbrand, in their year 2009 report, ranked Zara in no. 50 according to brand value (6,789m USD) while X;Y ranked number 2X with 15,375m USD brand value. 1. 4 Aims and objectives The aim of this research and analysis project is to establish an evaluation of the business and financial performance of X;Y Group based on financial reports, comments and projections made by board members and using the views of other stakeholders.My project will evaluate the financial performance of X;Y over financial year-ending 2006 to 2008 and assess its future prospect. Economic decisions taken by stakeholders are highly dependent on the financial performance of the relevant company. Now-a-days stakeholders are getting more and more interested on management’s performance and internal control. Management’s ability in taking effective long-term decisions is very important as taking efficient short-term decisions. Shareholders are concerned about short-term return e. g. ividend and share price but they are also very concerned about managements’ plan on future growth, expansion, roadmap on how to deal with expected or not-expected adverse conditions. I will use various rations e. g. profitability ratios, efficiency ratios, investment rations during my report writing process. In addition, I will do SWOT analysis, as it is a key 6 instrumental framework to assess the overall business position, to identify the strength, weaknesses, threats and opportunities for X;Y. 2. INFORMATION As this report is the first of its kind I am doing so I had to start from the very beginning.I had to understand what type of report I was going to do, what type of format I shall use, how can I gather information and how can I use those in writing this report and on above all of these where will I find relevant information. I discussed about the report writing techniques I shall use and information source I shall use with my senior and fellow students who already wrote this type of report for their university degree. I attended an introductory meeting in …… where Mr …… pointed out possible sources of information.I browsed through websites of X;Y and Inditex. I downloaded and printed out the annual report of last three years. I also read through the Chairman’s report and CEO’s report to understand business and financial performance from their point of view. I also read through newspaper reports on X;Y and Inditex. I used Google search engine and Yahoo Finance to find out news related to these two businesses. 2. 1 Source of information I divided my source of information in two groups; primary source and secondary source.As far as this business and financial performance report concern I really not necessarily had to collect information through primary source. More importantly, the secondary source of information was so strong that it made using primary source insignificant. The main sources I used during preparation of this report are as follows: 7 Published financial statements of X;Y Group and Inditex Group (Year ending 2006, 2007, 2008) I found financial statements as the main source of information as this gives us the financial knowledge of the both companies and very relevant to my chosen topic area.But, more importantly financial statements are audited by independent auditors and provides high level of assurance and great deal of reliability. Chairman, CEO and Directors statements These statements gives information which highlights business performance, i. e. specific areas where the business done well or areas where business is finding difficulties. These statements also give future strategies and plans business willing to and going to adopt and implement. These statements also ensure stakeholders on business plan on how they will adopt or eliminate expected or unexpected risks.Independent reports and reactions I had an intensive look on independent reports and reactions published in various newspapers and magazines. I found these information more reliable and relevant than published accounts as these are the external sources and general stakeholders are highly effected by these reports. Present and potential shareholders investment decision may change based on these reports. Text books and notes To set an appropriate approach towards the report writing I read through ACCA texts, of BPP and Kaplan Publishing, which are relevant to financial and business performance measurement e. . F5-Performance Management, F7-Financial Reporting, F9-Financial Management, P2-Crporate reporting and P5-Advanced Performance Management. I found my ACCA texts very helpful as those covered almost all aspects in measuring performance of a business and these books are very much practical scenario oriented. I also took help from Measuring Business Performance by Andy 8 Neely and Key Management Ratios by Ciaran Walsh. These texts helped me to select appropriate ratios and to make SWOT analysis during this report writing. Newspapers and websites As I mentioned earlier comments on independent publications e. . newspapers has an significant impact on company’s share price as those reveal company’s hidden truth. Newspapers also publish reports on competitors as this helps to understand how the overall business situation on particular business sector. Goodway, Nick reported on high street cloth retailer Next, ‘Shoppers’ passion for fashion sees Next put up profit forecasts again’. (Evening Standard, 04 November 2009). This showed general people’s attitude towards shopping. Though people are still struggling to recover from recent credit crunch but they continued to spend money in fashion. . 2 Methodology used I went through websites, downloaded information, read books and newspaper articles. As I mentioned earlier I used mainly secondary source of information as I found those sufficient enough and very relevant for this business and financial performance report writing. Internet and websites Nowadays the internet became primary and great source for information related to any topic. News from distance past can easily be found by some clicks. As I am writing the report on past three years performance of X;Y and Inditex I found internet a great deal of help.Primarily I downloaded annul reports of X;Y and Inditex for 2006 to 2008 from their websites. I also downloaded and read through chairman’s and CEO’s statement and also had a look on corporate and social responsibility (CSR) statement of both companies. 9 Library Research Though I found most of the business related information from internet and websites but I still had to go to the libraries for specific needs. Initially I needed to refer to some books to understand the report writing process as this is first report of its kind I am writing.I found Barking Library in London is very useful for initial steps of my report writing as I found a number of books on how to write research projects, and how to evaluate business and financial performance of a company. In later steps of this report writing I visited City Business Library in London which has a large collection of books, journals, newspapers, magazines and lot other full of resources. Specially newspaper reports and articles on current economic and business environment was very helpful as that gives an idea volatile is market is and what is going on investors’ i. e. hareholders’ minds. 10 3. PERFORMANCE ANALYSIS 3. 1 Company profile X;Y has enjoyed a substantial growth in recent years. Especially because of recent economic crisis general public are more leaned towards cheaper garments. X;Y operates embedding the business concept ‘fashion and quality at best price’ and that’s what helping X;Y to grab the higher market share. With around 183,000 shareholders X;Y shares were among NASDAQ OMX Nordic’s most traded shares. X;Y was the largest company on the Stockholm Stock Exchange at the end of financial year 2008 in terms of share’s market value. 3. Financial performance analysis Presentation currency for X;Y is Swedish Krona and Euro for Spanish Inditex. As my objective is to analysis business and financial performance of X;Y and for comparison Inditex; I will deal with per cent figures and ratios rather straight financial statement figures. So, I found it irrelevant to translate every financial statement figures of X;Y and Inditex in any other common currency, unless very relevant and very necessary, as that will add no value to my business and financial performance analysis. I will use www. x-rates. com website’s ‘Historic Lookup’ section to identify the relevant exchange rates.Furthermore, financial year of X;Y runs from 01 December to 30 November and for Inditex the range is 01 February to 31 January. For effective comparison between X;Y and Inditex financial and business performance I will deal with financial year ending 2006, 2007 and 2008 for X;Y and for Inditex financial year ending 2007, 2008 and 2009 as those are mostly in similar time range. To simplify the comparison, and as Inditex reported themselves in annual report, I will mention year ending 31 January 2006, 31 January 2007 and 31 January 2008 as year 2007, 2008 and 2009 respectively. 11 . 2. 1 Sales growth X;Y: Year Sales, SEK m Growth from previous year, % 1 SEK to GBP Sales, GBP m 2005 61,262 0. 0715115 4,381 2006 68,400 11. 65 0. 074314 5,083 2007 78,346 14. 54 0. 0762022 5,970 2008 88,532 13 0. 0813499 7,202 NOTE: Rates are as at 30 November or as at next earliest available. Inditex: Year Sales, Euro m Growth from previous year, % 1 Euro to GBP Sales, GBP m 2005 6,741 0. 682267 4,599 2006 8,196 21. 58 0. 662792 5,432 2007 9,435 15. 12 0. 745967 7,038 2008 10,407 10. 30 0. 903351 9,401 NOTE: Rates are as at 31 January or as at next earliest available. 12Sales Growth Comparison 25 20 15 14. 54 15. 12 11. 65 13 10. 3 H;M Inditex 21. 58 % 10 5 0 2006 2007 Year 2008 NOTE: The graph is prepared based on reported actual figures in the financial statements of X;Y and Inditex; not based on the translated figures X;Y and Inditex both had increase in sales every year from 2006 to 2008. In the year ending 2006, X;Y sales were up by SEK 7,138 m which was 11. 65% higher than previous year while top competitor Inditex had staggering increase of 21. 58%. In the year 2006 X;Y lost its position as Europe’s biggest fashion retailer to Inditex.The reason of Inditex’s stunning sales growth in 2006 probably because their growth in commercial area as they opened new stores at an aggressive rate which apparently contributed to this amazing sales growth. Crawford, Leslie and Munter, Paivi reported, ‘. . . Inditex, which opens a new store every day of the year and has target of 4,000 stores by the end of 2009, compared with 2,700 stores at present. ’ (Financial Times, 29 March 2006). Unlike Inditex X;Y kept opening new stores at a steady 10 per cent to per cent every year. X;Y opened 168 new stores in 2006 while for Inditex the number was 439.Another main reason of X;Y’s lower sales growth over 2006 compared to Inditex that X;Y experienced colder weather in its central European market than analysts had predicted. In contrast, Inditex was in more favourable situation as its around 43% sales are in Spain where sun was sunnier. After loosing the top position to Inditex X;Y’s head of investor relations Vinge, Nils commented, ‘For us, it’s not a goal in itself to be the biggest in terms of turnover. Our mission is always to give our 13 customer value for money by giving them fashion and quality at the best price. (Cited by Crawford, Leslie and Munter, Paivi. Financial Times, 29 March 2006). In the following year, year 2007, X;Y and Inditex both had almost similar growth in sales; 14. 54% for X;Y and 15. 12% for Inditex. This year X;Y added new store chain, called COS – Collection of Style, as an effort to find different avenues for growth in its more mature markets. COS products are 40 per cent more expensive than X;Y products and which obviously targeted to wealthier shopper. Retail correspondent Rigby, Elizabeth reported, ‘The move suggests that X;Y may be following Inditex’s lead by developing different sub-brands. (Financial Times, 25 January 2007). In 2008, X;Y had a sales growth of 13% but for Inditex the growth was lowest over last year years as only 10. 30%. This result may be because of the biggest inflationary pressure in a decade in this year. Consumers turned their shopping habituate from expensive range like Zara (main range of Inditex) to more competitive priced items like X;Y’s. 3. 2. 2 Profitability ratio Gross profit margin: X;Y: Year Sales, SEK m Cost of sales, SEK m Gross profit, SEK m Gross profit, % Gross profit growth, % 2005 61,262 -25,080 36,182 59. 6 2006 68,400 -27,736 40,664 59. 45 12. 38 2007 78,346 -30,499 47,847 61. 07 17. 66 2008 88,532 -34,064 54,468 61. 52 13. 84 14 Inditex: Year Sales, Euro m Cost of sales, Euro m Gross profit, Euro m Gross profit, % Gross profit growth, % 2005 6,741 -2,953 3,788 56. 19 2006 8,196 -3,589 4,607 56. 21 21. 62 2007 9,435 -4,086 5,349 56. 69 16. 11 2008 10,407 -4,493 5,914 56. 83 10. 56 Gross Profit Margin 62 61 60 59 58 57 56 55 54 53 2006 2007 Year 2008 59. 45 H;M Inditex 61. 07 61. 52 % 56. 21 56. 69 56. 83 15 Gross Profit Growth 25 20 16. 1 15 H;M Intidex 21. 62 % 10. 56 10 5 0 2006 2007 Year 2008 12. 38 17. 66 13. 84 MacNamara, William mentioned in one of his articles as the, ‘Gross profit margin is the key measure that assesses retailers’ financial health. ’ (Financial Times, 30 September 2008). In the year ending 2006, X;Y had a gross profit margin of 59. 45 per cent and for Inditex the rate is 56. 21 per cent. We have to carefully look at gross profit margin of Inditex as they had a staggering sales growth, unlike X;Y, of 21. 58 per cent in the same period.Though quotas on imports from China gave a negative effect on this year’s gross profit but X;Y still tried and achieved to boost company’s profitability by cutting costs and by introducing well known designer ranges. X;Y sources about 30 per cent of its clothes from China. X;Y had a 61. 07 per cent gross profit margin of SEK 47,847 m in the year ending 2007. X;Y achieved this 17. 66 per cent gross profit growth by switching sourcing of garments to cheaper locations. To keep the cost lowest possible X;Y operates a big in-house design and buying team.Moreover, X;Y splits its buying department into a buying and production unit in this year to bring more efficiency in buying and/or production decisions and process; which may also contributed to put the costs down and profit up. In this year Inditex had a gross profit of Euro 5,349 m which is 56. 69 per cent of sales figure. X;Y had a gross profit margin of 61. 52 per cent in the year 2008 while for Inditex the rate was 56. 83 per cent. But, X;Y and Inditex both faced disappointed gross profit margin growth over previous year on 2008. Production and logistics costs rose 16 n this year in south-east Asia which affected X;Y more than Inditex as X;Y’s 60 per cent supply comes from this region. X;Y was also worried on sales and profit figure as the level of consumptions declined in their end market. But, these adverse affects were offset in some level by less price discounting, better stock control and currency effects. Drop in dollar value over 2008 helped X;Y to show a better gross profit as it hedges currencies six moths ahead and this eventually reduced the cost of the cloths it buys from Asian suppliers. Net profit margin: X;Y: Year Sales, SEK m Net profit, SEK m Net profit, % 2006 68,400 10,797 15. 9 2007 78,346 13,588 17. 34 2008 88,532 15,294 17. 28 Inditex: Year Sales, Euro m Net profit, Euro m Net profit, % 2006 8,196 1,002 12. 23 2007 9,435 1,250 13. 25 2008 10,407 1,253 12. 04 NOTE: Please lookup at appendix 01 for workings. 17 Net Profit Margin 20 18 16 14 12 10 8 6 4 2 0 17. 34 15. 79 12. 23 13. 25 12. 04 H;M Inditex 17. 28 % 2006 2007 Year 2008 Net profit margin of both X;Y and Inditex had a steady level over years from 2006 to 2008. Though Inditex in terms of store number and turnover crossed X;Y in the year 2006 but X;Y managed to achieve higher net profit margin in 2006 and consecutive years by tight cost control.This reflects X;Y’s more mature business attitude. Wrigley, Phil, the executive chairman of New Look, the fashion chain, commented, ‘you have either got to grab market share more aggressively to get the same cash margin or you have got to put prices up’. (Cited by Braithwaite, Tom. Financial Times, 11 July 2008). While Inditex tried to grab the market aggressively by opening more than a store everyday; X;Y tried to grab the market more steadily by continuing opening 10 to 15 per cent new stores every year. In 2007 X;Y saw a sharp rise in the net profit margin to 17. 34 per cent as sales increased by 14. 4 per cent and in the same time better cost control. Year 2008 was not a happy year for X;Y, particularly for Inditex. X;Y’s net profit margin downed from 17. 34 per cent to 17. 28 which is not relatively lower but not better than year 2007. For Inditex the situation is worse as net profit margin downed from 13. 25 per cent to 12. 04 per cent. The main reason of this uncomfortable net profit margin is inflationary pressure was the biggest in a decade. Weakening pound sterling caused an extra problem for this year. Consumer slowdown in spending and offering higher discounts also stimulated the adverse effect.One of the JPMorgan author Chamberlain, Richard reported, ‘we think inflation has come at a bad time, and is another reason to be cautious on the sector short term. ’ (Cited by 18 Braithwaite, Tom. Financial Times, 11 July 2008). X;Y tried to beat the problem i. e. keep the net profit margin high by increasing the end market product price by 10 to 15 per cent. ROCE (Return on Capital Employed): Year X;Y, % Inditex, % 2006 58. 7 43 2007 63. 7 43 2008 61. 1 36 ROCE trend 70 60 50 63. 7 58. 7 43 43 36 61. 1 % 40 30 20 10 0 H;M Inditex 2006 2007 Year 2008ROCE (Return on Capital Employed) is defined as the ratio between the EBIT and the total net average assets. This ratio indicates how efficiently a business is using the funds available (equity and long-term debt) and also measures how much is earned per $1 invested. It is thus a measures of the efficiency and effectiveness with which the managers have made use of the resources available to them. In terms of ROCE X;Y was in better position than Inditex during year 2006 to 2008 as this indicates X;Y made better and wise use of fund available to generate returns. The main reason of X;Y and Inditex’s quite different result is sourcing.While 19 X;Y’s main sourcing are from south-east Asia where costs are relatively lower; Inditex’s main sourcing are from Europe. X;Y enjoyed an increase of ROCE from 2006 (58. 70 per cent) to 2007 (63. 70 per cent) as X;Y did better use of money available by switching garments sourcing to cheaper locations. X;Y also boosted its ROCE by cheaper leasing agreements instead of buying its selling premises. In addition of tight cost control X;Y also split its buying department into production and buying so that more efficiency comes to the operation which gave a better profit margin and eventually resulted a better ROCE.Inditex maintained same ROCE level in 2007 as the previous year of 43 per cent. By the year 2008 X;Y and Inditex both experienced a decline in ROCE as recession and inflation hit all retailers. X;Y’s fixed assets were increased by SEK 5,183 m during 2008 which made the fixed assets 48. 49 per cent higher than previous year. This is also responsible for ROCE downturn. Though Inditex’s fixed assets were increased by only 9. 43 per cent; probably overall slowdown in sales, increased costs and inefficient cost control unlike X;Y led them to ROCE decline. X;Y’s ROCE downed to 61. 0 per cent in year 2008 and for Inditex the rate was to 36 per cent from 43 per cent in previous year. 3. 2. 3 Liquidity ratios X;Y: Year Total current asset, SEK m Total current liabilities, SEK m Current ratio Stock-in-trade, SEK m Quick ratio 2006 27,522 6,996 3. 93 : 1 7,220 2. 90 : 1 2007 31,045 8,834 3. 51 : 1 7,969 2. 61 : 1 2008 35,371 11,879 2. 98 : 1 8,500 2. 26 : 1 20 Inditex: Year Total current asset, Euro m Total current liabilities, Euro m Current ratio Inventories, Euro m Quick ratio 2006 2,148 1,885 1. 14 : 1 824 0. 70 : 1 2007 2,982 2,458 1. 21 : 1 1,007 0. 0 : 1 2008 3,264 2,391 1. 37 : 1 1,055 0. 92 : 1 The current and quick ratios are short-term term liquidity measurement. Both of the ratios measures if the business has sufficient current assets to cover its current liabilities. For calculating quick ratio stock-in-trade/inventories are deducted from total current asset figures as these are assumed as not very liquid. Recommended level is 2:1 for current ratio and 1:1 for quick ratio. X;Y maintained a safe liquidity level during year 2006 to 2008. Its current ratio and quick ratio both are well above recommended level.May be this is because of holding substantive amount of liquid fund, i. e. cash, compared to current liabilities over these years. This high liquid asset indicate that X;Y can invest more in opening new stores and thus increasing sales and profit and eventually maximising shareholders’ wealth. Decline trend in current ratio and quick ratio level over 2006 to 2008 may indicate that X;Y actually investing its liquid asset to open new stores. Inditex is not in a comfortable level as X;Y as their liquidity ratios are below recommended level.Probably this is because Inditex is opening stores in an aggressive rate unlike X;Y (X;Y maintained a steady 10 to 15 per cent new store opening every year) and that’s why using up liquid assets to finance fixed investments. But, Inditex is showing improvements in liquidity level year on year probably because they are not as aggressive as before in fixed investments. 21 3. 2. 4 Risks ratios Financial gearing ratio X;Y: Year Long-term liabilities, SEK m Equity and reserves, SEK m Financial gearing, % 2006 780 27,779 2. 81 2007 807 32,093 2. 51 2008 2,414 36,950 6. 53H;M: Debt to Equity 100 80 60 % 40 20 0 2006 Year 2007 2008 Equity and reserves Long-term liabilities Inditex: Year Long-term liabilities, Euro m Equity and reserves, Euro m Financial gearing, % 2006 387 3,471 11. 15 2007 430 4,217 10. 20 2008 637 4,749 13. 41 22 Inditex: Debt to Equity 100 80 60 % 40 20 0 2006 Year 2007 2008 Equity and reserves Long-term liabilities Financial gearing is used to describe the relationship between the Company’s debt and equity shareholders funds. Gearing is normally calculated by dividing the Company’s long-term liabilities by its equity and reserves.A highly geared company is one where there is a high proportion of debt to equity, and can be considered a risky investment as there is a higher likelihood of the company being unable to pay its large debts. From the table above we can see X;Y maintained a very low financial gearing level all the year under consideration. For Inditex the though the financial gearing level is higher than X;Y’s but still the level is quite low and in safe zone. These low levels of gearing made both X;Y and Inditex very safe place to invest as they are in quite strong position to pay back debts when necessary.This low gearing helps to keep up the share price high for both X;Y and Inditex. In the year 2008 the gearing level was highest in last three years of 6. 53 per cent compared to last year’s 2. 51 per cent and 2. 81 per cent for year 2006. This is mainly because significant increase in long-term liabilities over year 2008; from SEK 807 m in 2007 to SEK 2,414 m. Increase in gearing probably in some extent may present X;Y is becoming riskier investment. 23 Interest cover: X;Y: Year Profit before interest and tax, SEK m Interest expense, SEK m Interest cover, times 006 15,298 -5 3,060 2007 18,382 -5 3,676 2008 20,138 -8 2,517 Inditex: Year Profit before interest and tax, Euro m Interest expense, Euro m Interest cover, times 2006 1,340 -11 122 2007 1,636 -5 327 2008 1,571 -9 175 The interest cover shows whether the company’s profit before interest and tax well enough to pay the interest expenses comfortably. Interest cover ratio is a very important risk ratio as inability to pay interest may lead a company to administration or probably liquidation. According to www. investopedia. com, ‘When a company’s interest coverage ratio is 1. or lower, its ability to meet interest expenses may be questionable. ’ X&Y and Inditex both had unusually high level of interest cover ability during 2006 to 2008. This is because both of them are highly dependent on equity finance and they use their high profit to run the business (from both operational and strategic point of 24 view) other than taking interest bearing loans and liabilities. The situation is unusual but true! 3. 2. 5 Investors’ ratios Earnings per share (EPS): Year X&Y: EPS, SEK EPS, GBP Inditex: EPS, Euro EPS, GBP 2006 2007 2008 13. 05 0. 97 16. 42 1. 5 18. 48 1. 50 1. 61 1. 07 2. 01 1. 50 2. 02 1. 82 NOTE: Please lookup at appendix 01 for workings. EPS indicates how much profit per share available to the company to distribute to the general shareholder. www. investopedia. com explains, ‘Earnings per share is generally considered to be the single most important variable in determining a share’s price. ’3 Financial management of a quoted company always try hard to report an increase of earning per share. X;Y’s earning per share was SEK 13. 05 in the year 2006 and that was increased by 25. 82 per cent for year 2007 toSEK 16. 42 and for the year 2008 reported earning per share was SEK 18. 48 with an increase of 12. 55 per cent from previous. X;Y maintained same amount of shares during 2006 to 2007 of 827,536,000. 3 Check for Harvard Referencing system 25 Though Inditex had more earning per share then X;Y during 2006 to 2008 but they had a lower rate of increase in EPS; 24. 84 per cent to 2007 and 0. 50 per cent to 2008 from previous year. Dividend per share (DPS): Year X;Y: DPS, SEK DPS, GBP Inditex: DPS, Euro DPS, GBP 2006 2007 2008 11. 50 0. 85 14. 00 1. 07 15. 50 1. 26 . 84 0. 56 1. 05 0. 78 1. 06 0. 96 NOTE: Please lookup at appendix 01 for workings. DPS to EPS Comparison 2 1. 8 1. 6 1. 4 1. 2 1 0. 8 0. 6 0. 4 0. 2 0 2006 2007 Year 2008 H;M EPS H;M DPS Inditex EPS Inditex DPS NOTE: DPS to EPS comparison table is based on translated currency. ?/Share 26 Dividend per share indicates how much of profit is distributed to the per share holder. Growing dividend per share signals confidence and can be a sign that the company’s management believes the growth can be sustained. Dividend per share can highly influence share price.X&Y maintained a dividend per share growth from 2006 to 2008 which is obviously a very good news for its shareholders. But, Inditex’s dividend per share remained almost same in year 2007 and in year 2008 after a 25 per cent growth in 2007. Dividend payout ratio: Dividend Payout Ratio 100 80 60 % H&M Inditex 40 20 0 H&M Inditex 2006 88. 14 52. 3 200