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Profitability acounting
1. Financial Ratio Analysis
Foundation In Natural And Build Environment
Basic Accounting (FNBE0145)
Assignment 1
Group members:
Kiing kiu chun 0318727
Lau chin sheng 0317899
Tee hing nian 0316316
2. Content
Topic page
1. Brief history of H&M 1
2. profitability Analysis of H&M ( year 2012-2013) 2-4
3. P/E ratio 5
4. investment recommendation 6
5. appendix 7-8
6. Reference 9
3. H&M
Hennes and Mauritz which mean H&M is one of the famous clothing manufactures in the
world. H&M Company exists in the total of 53 countries and has the capability to hire more than
116,000 of employers in the year of 2013. Therefore, H&M headquarter is located at Sweden,
Stockholm which control the steps of production, from the process of planning to establishing
specifications, and the production is supplies up to 800 hundreds factories in Europe and Asia. H&M
sells several type of clothing including T-shirt, sweater, jacket, stylish dresses and so on. However,
H&M is known as fast fashion clothing for men, women, teenagers and children because the design
of their cloth are always changes and up to date throughout the year. H&M owned five independent
brands which consist of COS, Monki, Weekday, Cheap Monday and other store. However, every
brand is operating in their own ways and they have different specialist and characteristics in their
clothing design.
Travel back to the year of 1947, the adventure of H&M begins when its founder Mr. Erling
Persson opens his first clothing store in Sweden which only sells women’s clothing and the store call
Hennes. After the true hard work of Mr. Erling Persson, he able to slap down most of the women’s
clothing store in Sweden, Stockholm. Therefore, at the year of 1968 he also manages to buy the
hunting and fishing store Mauritz Widforce in Stockholm and he named it as Mauritz. This is how he
started to sale the men’s and children’s clothing which came from the store. As a conclusion, the
brand of H&M is actually the combination of two clothing store name and it was officially born in the
year of 1967 at Stockholm. In the year of 1974 to 2000 H&M grows rapidly and Mr. Erling started to
globalize H&M brand. To success, Mr. Erling has makes an important step which started to introduce
his brand by opening H&M stores at Germany, London and France. In the meantime, he meets Karl
Lagerfeld who is a cloth designer and he started to manufacture his own cloth. As a result in the year
of 1990, he manages to open clothing store and introduce his brand to every corner of Europe
country but the most successful part for Mr. Erling Persson is he had bring his H&M clothing to the
market of America at the year of 2000 which is the strongest economic country at 2000. The vision
of H&M is to makes fair and sustainable fashions affordable and desirable for all which mean all of
their operation are run in a way that is economically, socially and environmentally.
Recently, the United Nations Association of New York had recognizes H&M’s as a long term
sustainability work in Asia and had contribute to gender equality and the empowerment of women
on the international trade which had created more than a million jobs in the textile industry. As a
result, H&M had been awarded as Humanitarian of year award and the chairman of H&M who is
Stefan Persson was very happy and proud that H&M had finally achieve the mission of gender
equality that has been H&M’s mission since its founding in the year of 1947.
4. PROFITABILITY
The table below shows the calculation and interpretation of H&M companies’ PROFITABILITY from
2012-2013 periods. (SEK in Millions)
PROFITABILITY
RATIOS
2012 2013 INTERPRETATION
Return on Equity
(ROE)
(16,867)
(43,835+44,104)
2
= (16,867)
43,969.5
=0.3836 X 100%
= 38.36 %
(17,136)
(43,835+45,248)
2
= (17,136)
44,541.5
= 0.3850 X 100%
= 38.50 %
During the 2012-2013
periods, the ROE has
increased from 38.36%
to 38.50%. This means
that owner is getting
more return from his
capital than last year.
Net Profit Margin
(NPM)
(16,867)
120,799
=0.139 X 100%
= 13.90%
(17,136)
128,562
= 0.133 X 100 %
= 13.30%
During the 2012-2013
periods, the NPM has
decreased from
13.90% to 13.30%.
This means the
business is getting
worsen at controlling
its overall expenses.
Gross Profit Margin
(GPM)
71,871
120,799
= 0.595 X 100%
= 59.50%
76033
128,562
= 0.5914 X 100%
= 59.14 %
During the 2012-2013
periods, the GPM has
decreased from
59.50% to 59.14%.
This means the
business ability to
control COGS has
worsened.
Selling Expenses Ratio
(SER)
46,608
120,799
=0.386 X 100%
= 38.60 %
49878
128,562
= 0.388 X 100 %
= 38.80 %
During the 2012-2013
periods, the SER has
increased form 38.60%
to 38.80%. This means
the business ability to
control selling
expenses is getting
worsened.
General Expenses
Ratio (GER)
3,509
120,799
=0.029 X 100%
= 2.9%
3987
128,562
= 0.0310 X100 %
= 3.1%
During the 2012-2013
periods, the GER has
increased from 2.9%
to 3.1%. This means
the business ability to
control general
expenses is getting
worsened.
5. Financial Expenses
Ratio (FER)
5
120,799
= 0.000041 X 100%
= 0.004%
9
128,562
= 0.00007 X 100 %
= 0.007 %
During the 2012-2013
periods, the FER has
increased from 0.004%
to 0.007%. This means
the business ability to
control the financial
expenses is getting
worsened.
6. STABILITY
The table below shows the calculation and interpretation of H&M companies’ STABILITY form 2012-
2013 periods. (SEK in Millions)
STABILITY RATIOS 2012 2013 INTERPRETATION
Working Capital
(WCR)
37,232
14,010
= 2.658
= 2.658 : 1
39,188
17,397
= 2.256
= 2.256 : 1
During the 2012-2013 periods,
the WCR has decreased from
2.658:1 to 2.256:1. This means
the business ability to pay the
current liability with current
assets is getting worsened. In
addition, it does stratified the
minimum requirement of 2:1
Total Debt Rate
(TDR)
16,338
60,173
= 0.272 X 100 %
= 27.20 %
20,428
65,676
= 0.31 X 100 %
= 31.10 %
During the 2012-2013 periods,
the TDR has increased from
27.20% to 31.10%. This means
the business overall liabilities
has increased but it is still lower
than 50% maximum limit.
Inventory Turnover
Ratio (ITR)
365 /(48,928)
(15,213+13,819)
2
= 365 / 3.37
= 108.3 days
365/(52,529)
(16,695+15,213)
2
= 365 / 3.29
= 110.9 days
During the 2012-2013 periods,
the ITR has increased from
108.3 days to 110.9 days. This
means the business is selling at
a slower rate compare to last
year.
Debtor Turnover Ratio
(DTR)
365/(2,207)
(2,207+2,337)
2
= 365 / 0.97
= 376.3 days
365/(3,107)
(2,207+3,107)
2
= 365 / 1.17
= 312 days
During the 2012-2013 periods,
the DTR has decreased from
376.3 days to 312 days. This
means the business is getting
slower at collecting its debtors.
Interest Coverage
Ratio (ICR)
5+16,867
5
= 3,374.4 times
5+17136
5
= 3,428.2 times
During the 2012-2013 periods,
the ICR has increased from
3,374.4 times to 3,428.2 times.
This means the business ability
to pay its interest is getting
better. In addition, the business
ICR satisfied the minimum
requirement which is 5 times.
7. P/E Ratio
Profit/ Earning Ratio= current share per price
Earning per share
= 294.80/10.36
= 28.5 years
The share price of H&M at November 10, 2014 16.29 GMT is 294.80EUR. According
to the financial report of H&M at the year of 2013, the earning price per share is 10.36EUR.
By using the above formula, we calculate the p/e ratio of H&M was 28.5 times.
As a conclusion, H&M’s share will take 28.5 years which nearly three decades to
recoup back the investment. It was a long period of time for investor who wanted to buy
H&M’s share.
8. Investment recommendation
During the year of 2012-2013, there was a moderately change in the gross profit
margin (GPM). The GPM decreased from 13.90% to 13.30%. This shows that H&M clothing
company has a poor management skill on controlling expenses of the company. Besides that,
there was a slight increase in return of equity (ROE) which is 38.36% to 38.50% and it was
very impressive that H&M clothing company still has the capability to earn more profit from
the investment. As a result, H&M clothing company earned more return in the year of 2013
compare to the year of 2012.
On the stability ratio side, working capital was decreasing from 2.658:1 to 2.256:1.
Hence, both of the ratios did not reach the minimum requirement of 2:1 and this show that
H&M clothing company has a hard time to pay the current liability with current assets.
Therefore, the total debt of company increased from 27.20% to 31.10% but it is still lower
than 50% of the maximum limit. After that, the selling rate of H&M products got slower
which has increasing from 108.3 days to 110.9 days. Other than that, the interes t coverage
of year 2013 had grown from 3,374.4 times to 3,428.2 and also satisfied the minimum
requirement of 5 times. This shows that, H&M clothing company did not have any problem
of paying interest. According to the analysis and the result, H&M clothing company has a
moderate of stability ratio.
As a conclusion, H&M clothing company has shown moderate potential in
profitability ratio and stability ratio in their investment. However, I think it is not wise to
invest in H&M clothing company because it requires 28.5 years for investor to get back their
investment money and H&M clothing company share price is quite high, which is 294.80EUR
per share. Even though H&M clothing company had earned profit but the company has
problems in managing their selling product and controlling expenses.
