Lending and Securities Overview

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Table of Contents

Introduction
Presentation of the company and its industry
Financial and common-sized financial statements
Financial ratio analysis
DuPont analysis
Summary and lending decision
References

Introduction

It is a statutory requirement for limited companies to publish audited financial statements. Shareholders, government, employees, community, creditors and other stakeholders use these financial statements. Published financial statements provide the potential users with a narrow insight into the financial strengths and weaknesses of a business. Such comprehensive view on a business entity is important as it influences users’ decisions on whether to continue their relationship with the company or not (Atrill, 2009).

Aim of the paper

The paper carries out a financial analysis of Hugo Boss AG. It focuses on the ratio and the common size financial statements of the company. At the end, the paper will give recommendations on if the bank can lend money to the company.

Presentation of the company and its industry

Hugo Boss AG operates in the apparel industry in Germany. The company was founded in 1924 and trades in the stock exchange. The products of the company range from high-end fashion clothing and accessories to footwear. Currently, the company engages about 10,000 employees in their production line. The apparel industry in Germany has experienced steady growth that is characterised by an increase in value over the years. Hugo Boss faces competition from other multinational companies, such as H&M Hennes. Further, involvement of celebrities in the advertisements of the company’s products has created a positive impact on the sales in the industry. Also, trading over the Internet seems to be common in the industry. Finally, the industry is likely to experience a slow growth due to pricing of products. This can explain the decline in profits experienced in 2012.

Financial and common-sized financial statements

The common-sized financial statements of the company show that there has been a significant increase in the performance of the company over the years. The total assets increased from €1,118 in 2008 to €1,518 in 2012. The main components of the total assets are the current assets as revealed by the common-size balance sheet. The value of total liabilities was quite erratic and high during the period. The value of current liability increased significantly in the year 2012. The value of common equity and retained earnings also raised a lot over a five-year period. The value of common stock increased from €199.6 in 2008 to €613.3 in 2012. In the income statement, it can be observed that the value of net sales increased from €1686.06 in 2008 to €2345.8 in 2008. This contributed to the increase in net income over the period.

Financial ratio analysis

The results of ratios analysis help in making informed decision. Ratio analysis breaks down the financial data into various components for better understanding of the financial strengths and weaknesses of the company. This section will focus on the liquidity, turnover ratio, debt ratios, profitability ratios and DuPont analysis of the company between the period of 2008 and 2012.

Liquidity ratios

Liquidity ratios show the ability of an organisation to maintain positive cash flow, while satisfying immediate obligations, which is the availability of liquid asset to pay current debt. The common ratios that are used to analyze liquidity are current and quick ratios. It is necessary to maintain optimal liquidity ratios since, either low or very high, ratios are not favorable. The liquidity ratios of the company improved significantly between the year 2008 and 2012. The value of liquidity ratio improved from 0.26 to 1.57 times. Similarly, the quick ratio improved from 0.21 times in 2008 to 1.50 times in 2012. Finally, the cash ratio increased from 0.13 times in 2008 to 0.79 times in 2012. The ratios are favorable as they indicate that the company is in a position to meet the immediate financial obligation. This implies that the company will be able to pay back the loan and interest expense (Holmes, Sugden & Gee, 2008).

Turnover ratios

The turnover ratios focus on the internal operations of the company. These ratios show the level of activity in a company to represent how well a company manages resources to generate revenue. Commonly-used turnover ratios are fixed asset turnover ratio, asset turnover ratio, stock turnover ratio, debtor collection period, and creditor payment period. The turnover ratios of the company were relatively high though quite erratic (Brigham & Ehrhardt, 2009). They did not display any trend of increase or decrease over the five-year period. For instance, the asset turnover ratio ranged between 5.00 and 6.10. Further, the receivable turnover ranged between 7.64 and 24.31. Based on the turnover ratios, it may not be possible to predict the efficiency of the company. However, it can be observed that the turnover ratios of the company are relatively high. Finally, the efficiency ratios of the company declined significantly over the five-year period.

Debt ratios

A company’s leverage is explained by the amount of debt financing it holds. The ratios are vital since they demonstrate to an investor the extent of exposure to equity financing. A commonly-used ratio is the debt to equity ratio. A high leverage ratio is not favorable because it reduces returns to shareholders since high ratios imply an increase in interest expense. This reduces the income attributable to shareholders. On the other hand, very low ratios are not favorable since they illustrate that management of the company is not willing to exploit the potentials of the company. The debt ratios of the company were relatively high. The debt ratio increased from 40.52% in 2008 to 69.45% in 2012. Further, the long-term debt ratio increased significantly from 195.21% in 2008 to 218.38% in 2012. The interest earned ratio ranged between 0.01 times to 0.04 at the same period. The leverage ratio of the company was quite high and increased from 0.68 in 2008 to 2.27 in 2012. These ratios indicate that the company is highly geared. Besides, the operating income barely covers the interest expense. It may not be advisable to loan the company based on its gearing level.

Profitability ratios

Profitability ratios give an indication of the earning capacity of an entity. The ratios measure the effectiveness of a company in meeting the profit objectives. They show how well a company manages its resources to generate returns. Commonly-sed profitability ratios comprise of gross profit margin, operating profit margin, net profit margin, the return on asset ratio, and the return on equity (McLaney & Atrill, 2008). From the ratios calculated, it can be observed that there was a general improvement in the profitability of the company. The return on equity increased from 0.59% in 2008 to 1.24% in 2011. Further, the gross profit margin increased from 40.78% in 2008 to 65.42% in 2012. The ratios increased between the 2008 to 2011 years. In 2012, the profitability ratios declined. Reflectively, it can be observed that the profitability of the company is gradually improving.

DuPont analysis

DuPont analysis breaks return on equity into three components. They are asset turnover, leverage factor and profit margin. It is a quick way of checking strengths and weaknesses of a business. Based on the calculations of the return on equity, the ratio increased from 0.59% in 2008 to 1.24% in 2011. However, in 2012, the ratio declined to 0.72%. Further, the return on assets also increased from 0.59% in 2008 to 0.72% in 2012. The asset turnover declined from 6.10 times in 2008 to 5.49 times in 2012. It showed that the amount of revenues generated per unit average asset declined over the period. It can be concluded that the efficiency in the use of inputs to generate profits, use of capital to gain gross revenue, and how the business leveraged debt capital improved over the period (Collier, 2009).

Summary and lending decision

In conclusion, based on the analysis above, it can be observed that the financial position of the company is improving. The profitability of the company raised over the five -year period. Further, the liquidity ratios of the company also improved over the same period. This shows that the ability of the company to pay according to the immediate obligation increased over the period. The gearing level of the company is quite high. This implies that the company has a significant amount of debt in its capital structure. Further, the turnover ratios of the company were quite erratic and unpredictable. This shows that the level of activity of the company is not predictable. Thus, it is not advisable for the bank to lend money to the company. This organisation needs to significantly reduce its leverage level before seeking for external funding.

References

Atrill, P. (2009). Financial management for decision makers. New York, NY: Financial Times Prentice Hall.

Brigham, E., & Ehrhardt, M. (2009). Financial management theory and practice. New York, NY: South-Western Cengage Learning.

Collier, P. (2009). Accounting for managers (3rd ed.). London, Britain: John Wiley & Sons Ltd.

Holmes, G., Sugden, A., & Gee, P. (2008). Interpreting company reports. New York, NY: Financial Times Prentice Hall.

McLaney, E., & Atrill, P. (2008). Financial accounting for decision makers. New York, NY: Financial Times Prentice Hall.

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