Analysis Of The Financial Report Of Burberry Finance Essay

Analysis Of The fiscal Report Of Burberry Finance EssayIn this section we ar considering the Annual Report 2009-10 of Burberry and will compare Burberrys execution in this yr with the previous years.When financial year 2009-10 started i.e. April 2009, Burberrys main issues of concerns were weak and exceedingly uncertain consumer spend environment (because of prevalent recession). Fol low-downing which groups main goals were establishedExpense ReductionWorking Capital ManagementIndeed, they succeeded up to a remarkable level under(a) near strategic, operational and financial measures. Performance of Burberry was among the scoop out relative to its peers either public or private.Highlights of Burberrys important strategic and operational decision in 2009-1050 M cost efficiency program-helped in reduction of Cost of SalesUpgrading wholesale distribution and restructuring the operations in SpainTo maximize blunt Margin, continued to fall assortment size across categories-result ing in increased Gross Margin from 52.1 % to 59.7%Improved inventory management- inventory reduced 36% over yearAdded 21 stores with 9% space extensionThese mentioned decisions helped Burberry perform strongly in 2009-10 and resulted in improved financial strength. Key financial strengths during the period areTotal tax revenue growth 7%- Revenue 1.3bn adjust operating do good increased 22% 220M increase weaken adjusted EPS increased 16% to 35.1pFinancial RatiosFinancial ratios are widely used be managers, shell outholders, creditors and analysts for all kind of purposes. Firth (1975) proclaimed that these can be used for cardinal purposes. These areTo compare go withs latest performance with its performance in earlier periodsTo make comparisons with corresponding ratios of other firmsFollowing is an analysis of the smart sets financial ratios and a comparison with the preceding year and its peersProfitability Ratios retrograde on Capital Employed (ROCE)Formula dismiss inte rnet before tax/ (All shareholders fund + long term debt)Significance Profits earned from the two major sources of pay for the keep company that is to say investment by shareholders- shareholders fund and financial institutions mostly- long term debt.The effectiveness of the management in utilising the coin is indicated by ROCE. The return for the FY 2009-10 is 26.03%. It collections a significant reposition when compared to the previous years return of NEGATIVE 2.78%. A quick glance at the operating profit for the closing two years reveals the reason behind such a big leap forward. The company has performed tremendously in the last financial year. From an operating vent of 9.9M for the year ended 31 March 2009 to a significant operating PROFIT of 171.1M for the year ended 31 March 2010, shows the efficient and effective measures the company had adopted over the year. Even if the comparison is made between adjusted operating profits (after considering the exceptional items) for the last two years, we can see a significant difference of 39.1M (219.9-180.8). All of this shows that the demarcation is effectively earning on shareholders fund and long term debt generated.RatioFormulaSignificanceNet marginNet profit before tax/ Total revenueThe net profit percentage on the entire revenue earned for the financial yearGross marginGross profit/ Total revenueThe gross margin percentage on the revenue earned for the financial yearIt is the one of the most comm and used profitability ratio. It shows the net margin with respect to the amount of gross revenue. In 2010 it got increased from -1.34% (2009) to almost 13%. In 2009, Burberry overlayed negative profit i.e. loss. Main reasons behind this wereHigh Cost of Sales in 2009 (12.5 % higher than 2010)Higher operating cost (6.71%)in 2008-09 which was mainly because ofGoodwill impairment in globular market(mainly Spain) 116.2 millionRelocation of headquartersStore impairment and onerous lease provisionsIncrease i n NPM shows that Burberry has controlled its costs effectively in 2009-10. It demonstrates effectiveness of Burberry at converting sales into actual profit.Gross Margin There is an increase from 55.41% (2009) to 62.82%. It shows that Burberry has increased its gross profit by 7.4 p per 1 of turnover. It is because of higher sales and low cost of sales in 2010.Sales GrowthFormula (Present sales- Previous sales) / Previous salesSales increased from 1200M (2009) to 1280M (2010) i.e. an increase by almost 7%.Adapted Burberry Annual Report 2009-10Sales growth is one of the KPIs. The above graph shows the revenue earned by Burberry in the last five years. The boilersuit growth shows the increasing trend followed by the company in spite of its macro-economic conditions. This proves the companys ability to capture the market being a luxury trade name.Liquidity RatiosThey show the companys ability and the ease with which it can lay its hands on liquid cash. In other words, these ratios sign ify the liquidity position of the company. The main components of these ratios are the accepted assets and current liabilities which are also the factors that determine the working smashing of the company.Current RatioFormula Total Current Assets/ Total Current LiabilitiesThis is the one of the best known measures that indicates the liquidity position of the company. There is an increase in Current Ratio in 2010 as compared to 2009 which indicates that Burberry has improved its ability to visit the payment account of its current debts. The change from 1.361 in 2009 to 1.531 in 2010 shows the efficiency in working capital requirements. Having current assets equivalent to 1.53 times of current liabilities shows a moderate approach from the management not being too aggressive by memory less current assets nor too conservative by holding more current assets leading to high opportunity cost.Quick Ratio/Acid TestFormula (Total current assets-stock)/total current liabilitiesIt measu res companys ability to meet short-term provinces with its most liquid assets. An acceptable ratio should be at least 11. However in 2009 it was .87 which is not sufficient. An increase from .87 to 1.2 over a period of one year demonstrates that Burberry has stronger liquidity position than it had before.Shareholders POVCollier (2009) state thatDividends are a decision made by directors on the basis of the residuum of profits they want to distribute and capital needed to be retained in the business to fund growth. (p.114)Shareholders invest in a companys stock with the pauperism of higher returns through dividends or capital gains. The idea of investing in the shares of a company may give higher returns compared to the other secure investments the like bank. However, the risk is also more. The investors measure the prospects of a stock under various scales. Few of them are as followsDividend per share (DPS)Formula Dividends paid/ number of shares frequently DPS is the measure of a companys performance because it indicates how profitable a company is over a period of time. In Burberrys case, its excellent performance is reflected through the increase in the dividend per share paid to shareholders.As at 31st march 2010, Burberry had 435,024,782 ordinary shares, of which 77,215 were held as treasury shares, shares that have been bought back by the issuing corporation and is obtainable for retirement or resale it is issued but not outstanding it cannot vote and pays no dividends. (http//wordnetweb.princeton.edu/perl/webwn?s=treasury%20shares)As per annual report, Burberry has proposed dividend of 45.7M, which is 20% higher than last year (37.7M). This increases its dividend per share to 10.5p from 8.65p. It also increased interim dividend, which is declared and distributed before the calculations of companys annual earnings, per share slightly from 3.35p to 3.50p during year. So, the total dividend per share is 14p for the year ending 2010 giving a 17% increa se from 12p in 2009.Dividend YieldFormula Dividend per share/ market value per shareIt shows the relationship between dividends and market share by expressing a companys dividend as a percentage of its share price. However, dividend yield fluctuates with share price.Burberrys shares price was 276.25 on 27 March 2009 and 725.00 on 1 April 2010. (http//www.google.co.uk/finance?client=obq=LONBRBY) utilise its share price value at financial year end, dividend yield is 1.93% in 2010 and 4.3% in 2009. This need not represent that Burberry has decreased its value in investors eye. This fall is because of 163% increase in share price of Burberry, which made increase in dividend less significant.Dividend Payout RatioFormula Dividend paid / (profit after tax i.e. net income) or the ratio of dividend per share and earnings per share.It helps in predicting how well earnings support the dividend payments. Investors seeking high current income and limited capital growth privilege companies with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. (http//en.wikipedia.org/wiki/Dividend_payout_ratio)For 2010 it is 14/36 = 38.88 % 2009 12/31= 39.2%It is almost similar in both years, which shows that Burberry is maintaining the balance between affaire of shareholders and expansion of business.Earnings per share (EPS)Formula profit after tax or net earnings/ number of sharesBurberry calculates EPS on the basis of both diluted and basic. When all convertible securities such as convertible preference shares, convertible debts, convertible debentures and warrants exercised number of outstanding shares increases. This is called Diluted weighted average number of shares, the basis of Diluted EPS.As number of outstanding shares increases, Diluted EPS is always lower than Basic EPS. It is more accurate to use aDiluted EPS over the reporting term because thenumber of shares outstanding can c hange over time (We can observe this in annual report that Burberry has always mentioned diluted EPS).In 2010, Diluted weighted average number of shares was near 442 million with dilution effect of 9.3 million. In 2009, it was 438.1 million with dilution effect of 6.8 million. Earnings were 81.4 million in 2010 as compared to loss of 6 million in 2009, because of reasons mentioned before. This leads Basic EPS to 18.8p (-1.4% in 2009) and Diluted EPS to 18.4p (-1.4% in 2009).Using details of exceptional items in note 4 of annual report 2009-10, adjusted earnings are 155.2million and 132.1 million for 2010 and 2009 respectively. This leads to Adjusted Basic EPS to 35.9p (30.6p in 2009) and Adjusted Diluted EPS to 35.1 (30.2 in 2009).Increase in Adjusted Diluted EPS by 17 % is mainly because of 17 % increase in adjusted profit as weighted number of shares is almost same. This increase represents better performance of Burberry in 2009-10. terms-Earnings (P/E) RatioFormula Market value per share/ EPSIt is the valuation of companys current share price compared to the per share earnings. This ratio reveals the popularity of a stock because it reflects how much people are willing to pay for it (http//library.thinkquest.org/3298/NoFrames/help/glossary.html).The P/E ratio can be interpreted as number of years of earnings to pay back purchase price, ignoring the time value of property (http//en.wikipedia.org/wiki/P/E_ratio).For 2010 P/E ratio is 725/35.9= 20 and for 2009 it is 276/30.1= 9.2There is almost two times increase in P/E ratio. This is because of increase in share price by 163%. This increase makes Burberrys stock more attractive than previous year.Bottom lineThe above analysis from a shareholders POV leaves an overall substantiative impact on the investors or the potential investors. Considering the shareholders return, profitability, growth rate the company has been maintaining and the increasing trend in the share value, it would be more than likely a wis e decision to invest in the Burberrys stock.Gearing effectTools usedGearing ratio long-term debt/ (shareholders funds + long-term debt)This ratio gives the proportion of funds which is borrowed from outside in the entire capital employed, than from the shareholders (through issue of shares). This is also called the leverage ratio. The method of introducing debts in place of candour is referred to as trading on equity leverageCollier (2009) states thatHigher the gearing, higher is the burden on repaying the debts and the associated interest. Also, if profits turn down, there are substantially more risks carried by the highly adapt business. (p.108)However, there is a relationship between risk and return which is to be analysed. Higher proportion of long term debt signifies two issuesHigher return for shareholders little tax burdenBurberry in 2009 has a gearing of 52.72%. For the year ending 2010, it is 43.06% i.e. 56.94% of equity. This shows that their almost half of the sources o f finance is through long term borrowings. The effect of generating finance through debts than through equity is shown on the return the shareholders are enjoying. It also shows the company has been closely monitoring tax burden. This is because the provision made for the interest obligation/payment is reflected in reducing the profits, thereby a lower tax on lower profits.However, the debts carry with them the interest obligation and repayment payloads. This way the company has been trying to balance between debt and equity. In the financial year 2009-10, the company has reduced its debt content trying to be a little conservative. The capital social organisation can be considered to be moderate.Interest cover Profit before interest tax/ interest payableThis represents the profit available, to meet the interest obligation, in terms of the interest payable (number of times). Higher interest cover leaves less strain on the profits and giving a cushion with profit afterward interes t and before tax.Profit before interest and tax Interest payableFor 2010 171.1M 6.2MFor 2009 (9.9) M Loss 13.4MInterest cover for the year 2009-10 is 27.6 times. This is a highly impressive cover leaving a comfortable position. Considering the loss in the previous year and still maintaining this is very efficient. The decrease in interest commitment this year can be related to the reduction in the debt content of the capital structure (gearing ratio).Financial Risk Management OverviewBurberry deals with variety of financial instruments viz. derivatives, short term and long term borrowings, trade receivables/payables etc. It also combines with variety of financial risks. However, the risk management is carried out by a sacred Group Treasury under the approval of Board of Directors.Guidelines/ ToolsTo reduce the financial risk and ensure sufficient (OPTIMAL) liquidity positionWork closely with the business requirementsUses derivative instruments to hedge certain risk photographsM arket RiskForeign Exchange RiskRisk Multiple foreign currency transactions because of world(prenominal) operationsTools/PoliciesEntering into forward foreign exchange contractsHedge anticipated cash flows in each major foreign currency observe the desirableness of hedging the net assets of the overseas subsidiaries when translated into Sterling for reporting purposes.At 31 March 2010, the Group has performed sensitivity analysis to determine the effect of non-Sterling currencies strengthening/weakening.Price RiskRisk Fluctuations in employers national insurance liability due to movements in the share price.Tools/PoliciesEntering into equity swaps at the time of granting share options.Monitor the fluctuations in the liability on a continuous basis.Cash flow interest rate riskRisk Fluctuations in the interest rates.Tools/PoliciesUse interest rate swap derivatives to manage fixed and floating rate borrowings inwardly limits.Credit RiskRisk Possible bad debts.Tools/PoliciesWholesale s ales only with appropriate credit history/check.Retail sales only through cash or major credit cards.Maximum credit risk exposure is classified separately and attended.Liquidity RiskRisk Maintaining sufficient cash balance.Tools/PoliciesMaturity profile is established All short term creditors, accruals, bank overdrafts and borrowings within one year.Compliance with all the committed banks credit guidelines.Capital RiskRisk Returns to shareholders and other stakeholders Maintain Going concern.Tools/PoliciesMaintain strong credit rating. provide capital structure mix debt and equity.Adjustments according to the economic changes and its strategic objectives.Analysis of the aboveAll of the above represents the measures adopted by Burberry to meet the Financial Risks. The company having a dedicated risk management team in order to face the risks gives a confidence in the minds. However, they should be continuously aware of the fact that a large corporate like Burberry will have to atte nd to growing/new risks by anticipating well in advance. They may include a deeper analysis in the following areasWorking capital cycle Inventory management, EOQ/JIT methods, optimum cash model.Financing needs. Other sources of finance can be study like debt factoring.Capital budgeting decisions before expanding or investing on a project.WACC Weighted average cost of capital is to be considered before deciding the capital structure. Comparisons with the market rate and interest rates prevailing.The overall financial risk management shows the companys ability to address almost all the possible risks efficiently and effectively. closedownWith comparison to most of the essential parameters, it can be concluded that Burberry plc showed a promising performance in the last completed financial year 2009-10. not just with regard to the financial performance, but also in satisfying the shareholders with competent returns. A birds eye view shows the company has made a majuscule comeback th is year with a significant profit. However, a deeper penetration/analysis into the last year financials reveals that the loss made in 2008-09 is because of high cost of sales with a difference of 59.8M compared to the recent year, goodwill impairment charge to the extent of 116.2M, relocation of HQ costing around 7.9M and other expansion charges.Also, the above report shows the companys transparency in complying with the Corporate Governance and commitment in attending to its Corporate Social Responsibility, employees welfare etc. Burberry showed continuous interest in brand integrity, being a true leader in luxury brands, and market growth through expansion. Indeed, highly motivated. All this leads to only reaffirm the companys continued efforts in excelling beyond horizons among its peers financially, ethically, and morally